Release of Debt Owed to the ATO
Release of Debt Owed to the ATO — What You Need to Know (From an Advisor Who’s Seen It All)
When tax debt gets out of hand, most people hit that overwhelmed stage — the ATO letters keep coming, the bank balance doesn’t move, and the whole thing feels impossible. I’ve sat across the table from more business owners in that position than I can count.
One option that doesn’t get talked about properly is the Release of Debt. It’s not a magic wand and it’s not an “easy way out,” but when used in the right circumstances, it can genuinely give someone their life back.
This blog explains how it really works — based on law, ATO guidelines, and the practical reality I see every day.
First Up — What Debts Can Actually Be Released?
A lot of people assume “ATO debt is ATO debt” and all of it can be wiped. Not true.
The law only allows release on certain income-based tax debts for individuals.
Debts that cannot be released include indirect taxes like GST. So if your debt is primarily GST, the release provisions don’t apply to that portion.
Most people have a mix of eligible tax debts (income tax, penalties, interest) and ineligible debts (GST). You can only apply for release on the eligible part.
---
The Core Requirement: Serious Financial Hardship
Before the ATO wipes a cent, the Commissioner must be satisfied you’d suffer serious hardship if you had to pay the tax.
Serious hardship means paying the debt would leave you without essentials — food, clothing, medical needs, accommodation, education for your kids, and basic requirements according to normal community standards.
On the flip side, missing out on dinners, entertainment, streaming services, holidays, or other luxuries is not serious hardship.
Even if you meet the hardship criteria, the Commissioner still doesn’t have to grant the release. It is fully discretionary.
---
How the ATO Assesses Hardship
The Commissioner uses three formal tests:
1. Income and Outgoings Test
They review your entire household income, your necessary living expenses, and what surplus (if any) remains.
2. Assets and Liabilities Test
They assess equity, property, vehicles, savings, investments, and any assets that could be accessed.
3. Other Relevant Factors Test
This considers health issues, family breakdown, business collapse, unemployment, compliance history, or anything that affects your ability to pay.
---
What the ATO Looks For
The ATO expects to see:
- Genuine hardship, not lifestyle hardship
- Transparent bank statements
- No luxury spending
- Evidence that you’ve attempted realistic repayment options
- A long-term issue, not just a temporary dip
- That paying the debt would make life unmanageable
---
Who Can Apply
Eligible:
- Individuals
- Sole traders
- Directors with personal tax debts
Not eligible:
- Companies
- Trusts
- Partnerships
- Anyone trying to wipe GST debt
---
The Application Process
Expect to provide:
- 3–6 months of bank statements
- All sources of income
- Full living expense breakdown
- Asset and liability details
- A detailed explanation of your situation
---
My Straight Advice
Release of Debt can be a powerful reset — but only when used properly. If the numbers don’t support it or if GST is the main issue, you need a different strategy.
If you’re not sure where you stand, reach out to professional that will give you a clear view of your options without any judgement.
Disclaimer
This blog is based on my professional experience working with clients facing ATO debt and serious financial stress. It is general information only and not legal or financial advice. Every situation is different, and advice should be tailored to your circumstances.
