Got an ATO default assessment? What it means, and how to fix it

What is an ATO default assessment?

A default assessment is the ATO deciding what you owe because you haven’t told it. When a tax return or activity statement is overdue and letters and calls haven’t produced it, the ATO can raise the assessment itself, from whatever information it has.

There are two kinds (ATO):

• Income tax. An assessment of your taxable income for a year with no return lodged.
• Activity statements. An assessment of the net amount for a period with no activity statement lodged.

Before it issues one, the ATO normally sends a warning letter to you or your tax agent. It sets out the proposed assessment and a date to lodge by. Lodge by that date and the default assessment usually doesn’t go ahead. The ATO says it may skip the letter where it sees a risk of assets being moved or money going offshore, or where time is short.

Most of the owners we talk to who get one weren’t hiding anything. The books fell behind because the cash fell behind, the accountant’s emails went unanswered, and the warning letter landed in a week that was already going badly.

How the ATO works out the figure

A default assessment is an estimate, not a calculation from your records. The ATO says it looks at:

• Your history. Returns and activity statements you lodged in earlier years.
• Third-party data. Income reported by banks and government bodies, and wages reported by employers.
• Growth. It may apply the GDP growth rate to your earlier figures to estimate income and expenses for the missing period.
• Benchmarks. Small business benchmarks and annual tax statistics, where actual amounts aren’t available.

The ATO also says its estimates are getting sharper as it gets more transaction and payment data. So don’t assume a default assessment will be wildly wrong.

But it can be wrong in either direction. It knows nothing about the bad year, the lost contract or the expenses you never got round to claiming. If the real figure is lower, the real return is your evidence. If the real figure is higher, the gap will surface when you lodge, so plan for it now rather than being surprised twice.

The 75% penalty, and what else comes with it

The number on the notice is rarely the whole bill.

• An administrative penalty. The ATO says a penalty of 75% of the tax-related liability may apply to each default assessment, and it can rise to 90% for a pattern of non-compliance. In plain terms, the bill can be close to double the tax itself.
• A failure to lodge penalty. A separate penalty may also apply for lodging late.
• Interest. Once the payment date passes, the general interest charge runs on whatever is unpaid, compounding daily.
• The lodgement is still overdue. A default assessment doesn’t lodge the return for you. The ATO can issue a final notice requiring you to lodge by a set date, and failing to lodge is a criminal offence that can lead to prosecution (ATO).
• Collection tools. Once it’s due, it’s a tax debt like any other. Left alone, it can lead to a garnishee notice on your bank account and, where PAYG withholding, GST or super is unpaid, a director penalty notice for company directors.

Add those together and a quiet backlog of paperwork becomes the most urgent problem in the business.

Your options, side by side

There are really only five things you can do. Here is what each one does, and what it doesn’t.

In practice the best answer is usually a mix. Lodge the real figures, object where the estimate is wrong, and pay or plan the part you genuinely owe.

Fixing it: the order that works

1. Read the notice properly. Note which years or periods it covers, the tax, the penalty and the payment date.
2. Get your tax agent on it today. If you no longer have one, find one. This is not a do-it-yourself job when penalties are on the table.
3. Pull the records together. Bank statements, invoices, payroll reports and receipts for each missing period. Your bank feed and accounting software usually hold more than you think.
4. Lodge the real figures and object. The ATO says you must state in detail why you disagree and be able to back it up with evidence. Ask your agent to object to the penalty in the same breath.
5. Watch the time limit. For income tax, most individuals and small and medium businesses get 2 years to object, and other taxpayers 4 years (ATO). Act in weeks, not years.
6. Deal with the money while you wait. Objecting generally doesn’t change the due date. The ATO says it usually doesn’t take recovery action on a disputed debt until the objection is finalised, but interest still applies once payment is overdue (ATO). Pay or plan the part you agree with.
7. Stay current. Lodge every new return and activity statement on time from here. Nothing helps your case, or a lender’s view of you, more.

When a loan is the wrong answer

Don’t borrow to pay a default assessment you think is wrong. If the real figures will cut the bill, get them lodged and objected first. Paying an inflated estimate with borrowed money means paying interest on tax you may never have owed.

Don’t borrow if a payment plan will do the job. If the ATO will accept instalments you can actually meet, and nothing else is pressing, a plan is usually the cheaper path.

And don’t borrow if the business is losing money every month with no change in sight. A loan buys time; it doesn’t fix a business that can’t pay its way. If that sounds familiar, talk to your accountant, or an insolvency adviser, before you sign anything.

When borrowing does make sense

A loan earns its place when the debt is real, the clock is running and the business underneath is sound. A garnishee has frozen the account the wages come out of. A director penalty notice has arrived. The ATO has refused a plan, or the plan it offers would strangle cash flow. Or several years of assessments have landed at once and clearing them in one go is the only way to start fresh.

• You own property. A property-secured business loan is assessed on the equity and the exit, from $20,000 to $5M. ATO debt is considered, and overdue lodgements don’t stop it. That matters here, because the lodgements are the problem. With no financials or tax returns needed, you aren’t stuck waiting for the paperwork you are already behind on. Our guide to paying an ATO debt with property equity walks through how it works.
• No property. A cash-flow loan needs an active ABN, at least six months of trading and business bank statements through a read-only link. Expect questions about the tax position, so have the notice and your agent’s plan ready.

For the wider picture, see getting a business loan with an ATO debt and our page on funding ATO tax debt. Across 5,626 loans funded since 2012, 61% of our borrowers had already been declined somewhere else, so a tax mess on its own doesn’t rule you out.

Assessment landed? Find out where you stand

Start with your tax agent and the real figures. Then, if the debt has to be cleared before the ATO’s next step, tell us what you owe, what the deadline is and whether there is property behind the business.

Our 60-second eligibility check makes no credit enquiry and costs nothing, and it will tell you which lane fits before you commit to anything. If the account is already frozen, our emergency business loans page shows how fast each lane can fund. Or call 1300 863 711 and talk it through with someone who reads ATO notices every week.

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