A large ATO tax debt can cause significant cash flow problems for small businesses that do not plan for and appropriately manage this risk. If you’re going through it for the first time, here’s what avenues are available to help keep your business afloat.
First and foremost: “don’t panic”, says Sabin Sahar, Principal and Tax Agent at Taxviser Accounting & Bookkeeping Services.
The first thing to know, she says, is that payment plans can be set up with the ATO. “This will help in removing the need to pay the amount in a lump sum.”
Sean Hegarty, Partner at MSI Taylor, stresses that it’s vital not to ignore the tax bill. Instead, aim to get onto the front foot.
“The best course of action is to keep communication open with the ATO on your position,” he says.
In addition to being prompt and proactive in communicating with the ATO and getting in touch with them early, Hegarty suggests considering whether you can obtain finance to pay the tax debt.
“This could be through an overdraft facility of the business, debtor funding, funds from the owners externally (such as borrowing against your home) or via a specialist small business lender,” he says.
How to choose the strategy for you
Cash flow is king in small business, says Hegarty, so the strategy you choose to tackle your tax debt should fit into the expected cash flows of your business.
“Many small businesses don’t have budgets or cash flow forecasts but they are necessary,” he says. If you need one, you can download Prospa’s cash flow forecast template here.
Hegarty adds that understanding and preparing your forecasts enables you to see where difficulties could arise with your cash flow and your ability to meet tax payment commitments.
“Perhaps your business is seasonal and payments need to be adjusted during seasonal times, or you need to put aside funds during better trading months to cover leaner months,” Hegarty says.
Sahar adds that bookkeeping software like Xero or Reckon can offer a real-time solution to help your business determine its financial position and obligations at any given time.
“A quick glance at business profitability helps small businesses set aside funds for upcoming obligations,” Sahar says.
The consequences of ignoring your tax debt
First and foremost, Hegarty says, any debt with the ATO accrues general interest charges, currently at 7.98% in January 2020. Generally, he says, penalties won’t apply if a tax return has been lodged on time.
He also adds that in some circumstances the ATO can remit in full, or partially, the interest on your tax debt.
“Generally, this may be permissible where your inability to pay your debt was caused by matters such as divorce, a death in the family, medical conditions or natural disasters,” Hegarty says.
However, he says if you choose to ignore the debt and don’t communicate with the ATO, the ATO may begin to undertake actions to recover the debt.
This can include garnishee notices being issued to your bank or to your customers.
“The garnishee notice directs the recipient to send a fixed amount or percentage of funds to the ATO rather than to the business,” Hegarty says.
“This can cause severe reputational damage.”
Sahar adds that unpaid taxes can be forwarded to debt collectors and adversely affect your business’s credit rating, making business borrowings and credit terms hard to negotiate.
“Your business structure can also be de-registered through ABN cancellation by the ATO,” Sahar says.
Communication with the ATO is key
Given these potential consequences, and regardless of how you approach paying down a tax debt, Hegarty says the most important thing is that you talk with the ATO, early and often.
“As long as you are open and honest in communications, provide information they request in a timely manner, and make your agreed payments on time, the ATO is generally open to a variety of options to repay debt,” he says.
