Settling a personal debt

An accountant we know, recently referred us a client who owed over $230,000 in personal income tax. The accountant had attempted to negotiate a payment arrangement including a reduction of the tax debt. However, negotiations had been unsuccessful.

Background information and our engagement

We obtained the following general information regarding the client and her tax debt:

  • The client was 52 years old and had three dependent children.
  • She was born overseas and English was not her first language.
  • The client had never been employed in Australia. However, she had received payments and distributions from entities her husband controlled.
  • Our client had been entirely reliant on her husband to manage her taxation affairs.
  • As a result of the above, the client was unaware she had failed to lodge tax returns for a number of years and had accrued a significant unpaid tax debt.

The ATO subsequently identified that the client had failed to lodge tax returns and had carried out an audit. Our client and her husband had been fully compliant with the ATO audit, however, a significant debt to the ATO resulted which including interest and penalties was currently approximately $232,000.

Further debts were owed in respect of unsecured loans and credit cards which totalled approximately $45,000. She also owned a property which had approximately $180,000 equity in it after taking into account a secured debt.

Core tax debt

Our client’s core tax debt was approximately $158,000. Whilst she had paid approximately $40,000 towards this debt after the ATO audit, because of interest and penalties included in the debt it was currently $232,000. Our client was unable to pay this amount to the ATO.

Settlement negotiations with the ATO

The only option for our client in order to avoid bankruptcy was to negotiate a reduction of the ATO’s debt and enter into a long-term payment arrangement for a reduced balance of the debt. We were engaged to assist with this.

We summarised our client’s financial position for the ATO and advised the ATO that our client could not pay them and if no settlement could be agreed to she would have to file for bankruptcy. Cactus Consulting also provided the ATO with an estimate of what we considered they would receive if our client went bankrupt, which was significantly less than the core debt they were owed.

The agreed payment arrangement 

After various negotiations, the ATO agreed to settle the claim against our client on the basis that:

  • The ATO would remit interest and penalties totalling approximately $114,000 which left our client owing the remainder of her core tax debt of $118,000.
  • Our client would pay the debt of $118,000 to the ATO by way of a payment arrangement of $5,000 per month for approximately two years. The payments were to be made by our client but they would ultimately to be paid from profits from her husband’s business.

This was a great outcome for our client as it meant her tax debt was reduced by $114,000. She was able to pay this amount over two years and she could ultimately avoid bankruptcy and keep her house.

Contact us for assistance

If you are struggling with debts we can help. This may include helping with settling debts which you or your business owe to creditors including the ATO. So, don’t delay things any further and get in touch with us on 1300 906 966 or send us an email at mail@cactusconsulting.com.au to arrange a free confidential initial discussion.

Posted on 25-06-20 in Debt Agreements, Personal Debt Solutions, Personal Debts.