What does the ATO mean by capacity to pay?

What the ATO looks at

For debts up to $200,000 set up online, the ATO does not ask. Its system suggests instalments based on what has worked for similar taxpayers and accepts your figures within limits. Capacity to pay becomes a live question when you phone 13 11 42 because the debt is larger, you have defaulted before, or you need more than 2 years.

On the call, the officer will usually ask about:

• Income. Wages or drawings, business turnover, and whether it is steady or seasonal.
• Expenses. Living costs, rent or mortgage, wages, suppliers, loan repayments.
• Assets. Property, vehicles, equipment, cash at bank, money owed to you.
• Liabilities. Other debts and their repayments, especially anything secured.
• Access to finance. Whether a bank or lender would fund the debt. The ATO does not see itself as a lender of first resort.
• Ongoing obligations. Can you pay the instalments and the next BAS or PAYG instalment in full at the same time?

For a business, this is wrapped up in the word viability. The ATO wants to see that the business can trade its way out, not that it is borrowing time before an inevitable collapse.

Why capacity cuts both ways

People assume the ATO only tests whether you can pay enough. It also tests whether you are offering too little. If your figures show a surplus of $4,000 a month and you offer $800, the officer will push back and may ask for an upfront lump sum or a shorter term. If you have equity in property or a business asset you could borrow against, expect to be asked why you have not.

The reverse is more dangerous. A plan the ATO accepts because you inflated your capacity is a plan that defaults within months. The ATO's own material describes a plan as spreading the debt over the shortest possible fixed period, but the word possible matters as much as shortest. Offer what you can hold in a bad month.

How to show capacity to pay

For a larger or negotiated plan, having evidence ready shortens the conversation and improves the outcome. Useful items include:

• A simple monthly cash flow for the last 6 months and the next 6, showing the instalment and ongoing tax both covered.
• Recent bank statements and a current list of debtors and creditors for a business.
• A short statement of what caused the debt and what has changed (lost contract, illness, a client who did not pay).
• Evidence that finance was declined, if it was.
• Any proposed upfront payment, because it signals commitment.

For debts over $200,000 the ATO will often ask for this in writing. See payment plans over $200,000 for what a submission looks like, and how to negotiate for the conversation itself. If the honest answer is that you cannot pay the debt in 2 years even with everything cut back, that is a signal to look at rescue options rather than at a plan.

What to do next

1. Write down your worst month's income and expenses from the last six, and work out the surplus after ordinary tax.
2. Gather bank statements, a debtor and creditor list, and a short explanation of what caused the debt.
3. Propose an instalment from that surplus, with an upfront amount if you can, and be ready to explain why the ATO should accept it.

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