Since 1986, Australia’s taxation system has operated under a self-assessment model – a shift that quietly redefined the relationship between taxpayers and the Australian Taxation Office (ATO). While in some ways this improves efficiency and convenience, it also places the burden of responsibility, and even temptation, on taxpayers.
Unlike systems where the government calculates tax, self-assessment places the responsibility squarely on individuals, businesses and other entities to accurately report income, deductions and obligations. The ATO steps back, auditing and reviewing submissions for compliance, but the onus – and risk – rests with the taxpayer.
When signing off on a lodgement, whether directly with the ATO or through a tax agent, the taxpayer declares everything is true and correct. The signature carries weight; misunderstanding the system, or being tempted into misusing it, can result in costly consequences.
The beauty of self-assessment is its efficiency. It reduces administrative load, allowing the ATO to focus on enforcement rather than hand-holding. But for taxpayers, it’s a double-edged sword. Compliance isn’t optional – it’s a high-stakes, persistent burden.
So what does it take to stay on the right side of the ATO? Let’s break it down.
Timeliness is non-negotiable
Firstly, any delay in lodging returns or making payments is a fast-track to trouble. Whether it is a tax return, Business Activity Statement (BAS) or other compliance reports, submitting on time is crucial. Late lodgements trigger Failure to Lodge (FTL) penalties, scaled by entity size and time past the due date.
For small businesses, this could mean hundreds of dollars and potential strain on tight cash flow. But the damage goes beyond fines. The ATO tracks compliance history, with patterns of tardiness raising red flags. Repeatedly miss deadlines and an audit becomes likely – an unpleasant and expensive process.
Post-COVID-19, the ATO’s leniency has waned. Where once pleas for remission of interest or penalty forgiveness found fertile ground, today it tends to fall on deaf ears. The message is clear: get your house in order or pay the price.
Directors beware: Personal liability looms
Company directors face even higher stakes. The ATO wields a powerful tool called the Director Penalty Notice (DPN), holding directors personally accountable for certain unpaid company debts. These include Pay As You Go (PAYG) withholding, Superannuation Guarantee Charge (SGC), and, since 2020, GST.
If your company falls behind, the ATO can issue a DPN, giving just 21 days to act. Remedial options are limited to paying the full amount, negotiating a payment plan (although the ATO might still offset personal tax credits) or facing recovery action against personal assets.
Where there are multiple directors, everyone is on the hook for the same debt. Defending against a DPN is notoriously difficult once issued. Again, the message here is clear – ignore the ATO at your peril because company debts can follow you home.
This hits hard when cash flow tightens. In some cases, businesses have deprioritised superannuation guarantee payments to employee funds, thinking they’ll catch up later. As you might imagine, this is a big mistake.
Netsurplus recently had a client who wasn’t complying with their superannuation and GST obligations. After continuously ignoring many reminders, the ATO issued a DPN, effectively making the director of that company personally liable for more than $700,000 in GST and unpaid superannuation.
Consequentially, the director had to fund the debt out of their personal assets to avoid the risk of personal bankruptcy if they continued to ignore the debt after the DPN was issued. The heartbreaking – and completely avoidable – situation ended with the sale of the family home to stave off bankruptcy.
Falling behind triggers the Superannuation Guarantee Charge: repayment of the full amount plus interest and admin fees. Another clear message is if you are struggling, don’t wait for the ATO to come knocking. Get on the front foot by seeking advice.
Remember, payment plans are available, but they’re a bandage, not a cure. Chronic delays signal deeper issues, which could include taking a hard look at business performance.
The GST confusion
True food cost and sale prices are routinely misconstrued. Most food items are GST-free, but when unprocessed food is turned into consumable product, it attracts GST. The key is fully understanding and getting the right menu costings, with accurate pricing delivering a sustainable margin. Fail here and the gap between raw food and consumable product GST will cause cash flow issues.
Audit risk: Costly and unpredictable
Then there’s the spectre of an ATO audit. No business is immune, and the self-assessment system amplifies the risk. Professional fees for such an eventuality can spiral into tens of thousands of dollars, and favourable outcomes aren’t guaranteed.
Worse, penalties and interest can stretch back years. Forgot a liability three years ago? The consequence could include tax owed, accrued interest and penalties tied to the liability itself.
On this note, now is a good time to check your insurance covers audit costs. If not, you’re rolling the dice.
Navigating the system
There’s a simple general lesson in all of this. The self-assessment system empowers taxpayers but demands diligence and discipline. Keep meticulous records, lodge on time, and pay what you owe or negotiate early if you can’t.
For businesses, prioritise super and tax obligations, even if you’re under pressure. The ATO isn’t there to coddle; it’s there to enforce. Fall behind, and the consequences compound – financially, legally and personally.
This isn’t about fearmongering, it’s about awareness. The system works and will work well for you when clearly understood. Let down your guard and you go from taxpayer to target.
Photo at top: iStock / Phakphum Patjangkata.
