What is ATO Tax Debt & How to Fix it

During Covid, the ATO relaxed its stance on delayed or missing tax payments by Australian businesses.

Unfortunately, many businesses are still facing ongoing difficulties due to reduced demand, shortage of staff and difficulties obtaining goods.

With tax debts having reached an estimated $34 billion, the ATO, which is Australia’s largest creditor, has recently resumed its pursuit of these unpaid debts.

What are the consequences of having ATO Debt?

ATO debts are the personal responsibility of the director of a company if the business cannot pay them and lenders be able to see your outstanding tax debt.

If you have outstanding tax debt and have not made arrangement with the ATO, they may choose to send your business details to a Credit Reporting Bureau (CRB).  If this occurs, then your debt will appear on your company’s credit file. 

There are multiple criteria to having your debt reported to a credit reporting agency with the most common being:

  • You have an Australian business number (ABN),
  • one or more tax debts of at least $100,000 is overdue by more than 90 days, and
  • you are not engaging with them to manage your tax debt.

Subsequently, every time a credit check is completed such as during a loan application (for business or personal finance), the tax debt will appear.  Unpaid debt on a credit file can significantly lower your company’s credit score, making it difficult (or, in some cases, almost impossible) to obtain credit.  Any directorships you hold are listed on your personal credit file and lenders will then investigate the credit files of those businesses.

This can make it difficult to achieve your future business plans that rely on borrowing.

 

Managing ATO debts

To prevent an impact to your business credit file, if you owe ATO tax money as a business, it’s vital that you contact them to discuss repayment arrangements.  The ATO will provide you with a “Notice of Intent to Disclose” letter and provide you with 28 days from the date of the letter to contact them with repayment plans.

The ATO won’t refer your debt details to a credit agency if you get in touch with them to make repayment arrangements.  They state that if you “are effectively engaging with us to manage your debt, we will not report it, even if it is $100,000 or more.”

While “effectively engaging” can be satisfied numerous ways, the most common is having a payment plan that you are actively complying with.

 

What if my company can’t afford to pay the tax bill and owes more than $100,000 in tax

If your company doesn’t have the liquidity to meet your tax obligations (including any negotiated repayment plan), then a business loan or refinance of your property from a suitable lender may be a solution.

Your tax debt has a General Interest Charge (GIC) that the ATO calculates and updates each quarter.  As interest rates rise, the GIC will increase, leaving the possibility that your tax debt can become expensive quite quickly.  For this reason, a refinance of existing secured property (such as your owner-occupied property) can result in the tax debt being repaid at a lower rate than the GIC.

If you satisfy certain qualifying criteria, then you may be able to engage in business debt negotiation with the ATO.

 

What are the advantages of refinancing your tax debt?

  • You won’t need to rely on a business loan, which is likely to have a higher rate than the GICS
  • You will be able to manage your cash flow easier with one consolidated repayment
  • Avoid having your credit file affected with an adverse listing, which could impact future lending needs for up to 5 years
  • Save on interest vs the GICS interest rate charged by the ATO
  • Avoid the requirements of an ATO repayment plan. Specifically, the requirements to pay up to 10% of the outstanding debt within 7 days and clear the debt within a set timeframe (usually 2 years).

 

Conclusion

Tax returns for the self-employed can be complex and time consuming, particularly when you are focused on running your business.  You may not have lodged for multiple tax years, you or your accountant might make a mistake, or you may have incurred a large capital gains tax bill.   These reasons can return to haunt you after several years. 

Whatever the reason for incurring an ATO tax debt, it is best to reach out to the ATO as quickly as possible to engage with them.  This will potentially protect your credit file.  Then, give a lending specialist like Moneybright a call to assess your options in terms of refinancing the ATO debt (or engaging in debt negotation) so you can focus on getting back to business as usual.