Does a Part 9 debt agreement cover tax debt?

How a debt agreement works with the ATO

You work with a registered debt agreement administrator, who prepares a proposal to pay creditors a set amount over a period, usually up to three years, or five if you own a home. AFSA sends it to creditors, and it passes if creditors holding a majority in value of the debt who vote say yes. The ATO votes on the same basis as everyone else. If the agreement passes, the ATO must stop collection on the included debt, accept its share of the payments, and write off the rest when you complete the agreement.

The ATO's stated approach is to support a proposal that returns at least what bankruptcy would, within a reasonable time, from someone whose lodgements are up to date and who has arranged to pay future tax as it falls due. Where the ATO holds most of the debt, its vote decides the outcome.

Who qualifies

• You cannot pay your debts as they fall due.
• Your unsecured debts are under the indexed cap (in the range of $140,000 to $150,000 at the time of writing; AFSA publishes the current figure and updates it in March and September).
• Your divisible property and your expected after-tax income for the next 12 months are each under their own indexed caps.
• You have not been bankrupt, or in a debt agreement or personal insolvency agreement, in the last 10 years.

Large sole trader debts often fail the debt cap. In that case a personal insolvency agreement has no caps, and an ATO payment plan may still be available for debts well above the cap.

What a debt agreement costs you

Proposing a debt agreement is an act of bankruptcy. It is listed on the National Personal Insolvency Index and on your credit file for five years or until it ends, whichever is later, and you must disclose it when seeking credit above the indexed threshold. Administrator fees come out of your payments. Unlike bankruptcy or a PIA, it does not stop you being a company director.

It only covers debts in your own name. A company's tax debt cannot go into your debt agreement; that is a liquidation or restructuring matter. A director penalty that has become your personal debt can be included, as long as it does not push you over the cap.

What to do next

1. Add up your unsecured debts, including the full ATO balance with interest, and compare the total with AFSA's current debt agreement cap.
2. Get all returns and BAS lodged, because the ATO will not vote for a proposal while the debt figure is unknown.
3. Speak to a free financial counsellor before a paid administrator, so you hear about payment plans and hardship release as well.

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