Tradies with ATO debt: why it builds and what to do

Why the debt builds

• Paid gross. An employee tradie has PAYG withheld from every pay. A subbie invoicing on an ABN gets the whole amount, and the income tax on a year's work lands as one bill after the return goes in. The money looked like yours for twelve months.
• GST at $75,000. Most full time subbies clear the GST registration threshold in year one. From then on roughly one eleventh of every invoice is GST, reported on a quarterly BAS, less credits on materials, fuel and tools. Spend the GST on the ute repayments and the BAS debt starts.
• PAYG instalments after the first good year. Once you lodge a return with business income and tax to pay, the ATO puts you on instalments for the current year. Year two means last year's bill plus this year's quarterly instalments, often while you are still waiting on a builder's progress payment.
• Cash flow and slow payers. Builders paying at 60 or 90 days, retentions, a job that went bad, a big tool or trailer purchase. Suppliers cut you off if you do not pay. The ATO does not, so it goes last, and GIC at 11.43% a year builds quietly on the balance.
• The ATO already knows your income. Builders and head contractors report what they paid each subcontractor to the ATO every year under the taxable payments reporting system. Unlodged returns get matched to those reports and can end in a default assessment with no deductions.

What to do, in order

1. Lodge everything first. Every missing BAS and return. The ATO will not set up a plan around unlodged periods, and your real figure with deductions is nearly always lower than any estimate. A bookkeeper can rebuild a year from bank statements and supplier invoices faster than you think.
2. Get the real number. ATO online services, balance split into tax, interest and penalties.
3. Set up a payment plan. Under $200,000, online, no phone call needed. Base the instalment on a quiet month, not a flat-out one, because two defaulted plans in 12 months closes the online channel. The payment plan guide explains what the ATO accepts and how to negotiate above $200,000.
4. Ask for interest and penalties to be remitted. A builder collapsing owing you money, injury, a flood, a family crisis: these are the kinds of circumstances the ATO considers. Start with GIC remission and ask about penalty remission for late lodgement at the same time.
5. Vary instalments if this year is worse. PAYG instalments are based on last year's result. If work has dried up, vary them down rather than let unpaid instalments join the debt.
6. Check hardship release for the income tax part. Sole traders can apply for release of income tax and PAYG instalments in serious hardship. It does not cover GST or PAYG withholding, so the BAS part stays.
7. Fix the leak. A separate account, with GST plus a fixed slice for income tax moved in the day each invoice is paid. That habit is the difference between a one-off debt and a permanent one.

If you run a company or employ people

The picture changes if you have set up a company or have apprentices and staff. Unpaid PAYG withholding, super and GST in a company can become your personal debt through a director penalty notice, and late super attracts the super guarantee charge, which the ATO does not release for hardship. A payment plan for the company does not remove a director penalty. As a sole trader, though, none of that applies: the debt is already personally yours, and the sole trader guide sets out honestly what the ATO can and cannot do about it, including garnishee notices to the builders who owe you money if the debt is ignored.

What to do next

1. Get every outstanding BAS and tax return lodged, using bank statements, supplier invoices and the builders' payment summaries to rebuild the figures.
2. Log in to ATO online services, write down the balance, and set up a payment plan online at an amount you can keep in a quiet month.
3. Call the ATO on 13 28 66 to ask for interest and late lodgement penalties to be remitted, and vary your PAYG instalments if this year's work has dropped.

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