The dreaded Tax Office is about to strike again. There wasn’t much to excite small business owners in the recent Federal Budget but there is one big change that is imminent that the government slipped through a few months ago.
The Australian Taxation Office (ATO) will have the ability to lodge a default notice with the credit reporting agencies from 1 July 2017 if you are in the following position:
- You have an Australian Business Number (ABN)
- You owe more than $ 10,000
- The debt has been outstanding for more than 90 days
- You haven’t made contact with the ATO to arrange payment
The problem with this is that the default notice will stay on your credit report for five years, effectively crippling your ability to borrow money as banks don’t like to see any default notices on the reports. Loans have been knocked back based on a default notice from a telco. The banks’ will run a mile if the default notice is the ATO.
The issue the government has been having for many years now is that businesses have effectively been borrowing from the ATO by delaying payment of their tax debts whilst using available funds to pay other bills, wages or drawings for themselves when in fact the business is in financial difficulties.
These rules will apply into the future and aren’t just relevant for debts outstanding at 1 July 2017.
The expectation is that these rules will be widened over time to encompass all types of tax debts. In the meantime though, if you currently “qualify” you need to take some urgent steps to address the matter before 1 July.
Option 1. Pay Off The Tax Debt
This is the preferable option for a number of reasons, not the least of which is that you won’t need to worry about paying it off. If you have the ability to use existing or borrowed funds to pay off your debt, do so. The ATO interest rate, currently 8.78%, may well be higher than the interest rate on a borrowing. So in effect, borrowing the money to pay off the ATO will save you money.
Option 2. Partially Pay Down The Debt
If you can’t pay off the debt in full, consider paying down the debt below $ 10,000 so as to fall below the qualifying requirements. In this way, your credit rating won’t be impaired with a default. Although, you will still have to find the money to pay off the balance and make an agreement with the ATO for that (see Option 3).
Option 3. Request A Payment Arrangement
If you are unable to pay off the debt in full and even if you’ve managed to pay down the debt below $ 10,000, contact the ATO to put in place a payment arrangement. But before you do that, carefully consider how much you will be able to pay each month.
The ATO has a few rules that they generally apply to payment arrangements:
- Payment term is no more than 12 months.
- All new upcoming ATO debts have to be paid when they are due (e.g. ongoing Business Activity Statements or BAS payments).
- You have to pay on or before the due date or you will automatically have defaulted on the payment arrangement.
- Interest will apply to the outstanding balance until it has been paid in full.
- In order to agree to the payment arrangement, the ATO may ask for details of your income and expenditure, a cash flow projection and other financial information so it’s essential that your accounting records are up-to-date.
After you’ve made the phone call to the ATO you will receive written confirmation of the payment arrangement. Make sure that you have that before 1 July, don’t leave this to the last minute.
The good news is that I’ve rarely seen the ATO deny a payment arrangement that falls within their terms.
If in the future, if you have a tax debt that you can’t pay on or before the due date and it is more than $ 10,000, don’t put it off. Call the ATO straight away and talk to them about a payment arrangement.
Once you have the payment arrangement in place, I recommend setting up a separate bank account to accumulate money to pay the ATO debts. Work out how much you need to put aside each week to cover the payment arrangement and work out how much you need to put aside each week to cover the ongoing BAS payment amounts. Then, make sure you transfer those funds into the separate bank account every week before you pay any other bills.
By taking these steps, you will eliminate the stress of worrying about how you will find the money to pay the ATO payments. And if this makes your cash flow even more challenging than it was before, have a good hard look at your business, your income and your expenses then work on increasing income and reducing expenses.
There isn’t a lot being said about this change but be careful, be very careful and don’t fall foul of the ATO with outstanding debts and cripple your credit rating.