Business Tax Debt Loans vs ATO Debt Payment Plan
The level of ATO tax debt in Australia is rising. In mid-2019, the level of undisputed tax debt was $26.5 billion. By June 2022, the level of undisputed tax debt had risen to $44.8 billion.
The majority of collectable ATO debt is owed by small businesses. If your business is one of the many Australian SMEs that’s facing ATO tax debt hardship, it’s important to take action now. The solution could be as simple as setting up an ATO debt payment plan but if this isn’t possible, there are alternative solutions out there. Borrowing to pay tax debt is more common than you think in Australia. In fact, most online lenders are more than happy to provide same day financing for businesses seeking ATO tax debt loans. What’s more, business loans tax is partially deductible in Australia too.
Deciding on the best course of action will depend on a number of factors. This will include the level of ATO debt currently held, how long this has been overdue and the profile of your business. In this guide we’ll explain what happens when you owe the ATO money. To learn more and decide when it’s best to use a bank loan to pay tax debt, read on for a complete guide to ATO debt recovery and business tax debt loans in Australia.
Key Figures for Business Tax Debts (ATO Debt)
- Reporting is done on a quarterly basis (the 28th of the next month).
- When a business fails to lodge or pay a BAS or an annual tax return, at this point, an ‘ATO debt’ is due.
- When a deadline is missed, the ATO will automatically add a general interest charge (GIC) to what is owed (and with the RBA base rate increasing, so too is the interest on tax debt).
- If the amount a business owes is under $100,000 it’s possible to set up an ATO payment plan totally online.
- With the Australian Taxation Office now ramping up its activities to chase tax debt, it’s time for businesses to find a solution.
How Much is the GIC Rate for ATO Debts
GIC Rates for 2022–23 Income Year
|Quarter||GIC annual rate||GIC daily rate|
|April – June 2023||10.46%||0.02865753%|
|January – March 2023||10.06%||0.02756164%|
|October – December 2022||9.31%||0.02550685%|
|July – September 2022||8.00%||0.02191781%|
GIC Rates for 2021-22 Income Year
|Quarter||GIC annual rate||GIC daily rate|
|April – June 2022||7.07%||0.01936986%|
|January – March 2022||7.04%||0.01928767%|
|October – December 2021||7.01%||0.01920548%|
|July – September 2021||7.04%||0.01928767%|
With interest rates on the rise, speak to the ATO to understand how your tax payments are allocated. Generally, payments go to clear the oldest debt first which would leave debt accruing at a higher interest rates.
Gearing up for Your 2023 Submission
The End of the Financial Year (EOFY) in Australia is June 30th. This marks the deadline for various financial reporting requirements to the ATO, such as tax returns, financial statements and superannuation contributions.
Key Tax Dates include:
- Sole traders, partnership and small trust income tax returns are due.
- All companies and trusts with June balancing dates who have missed lodgement dates in the past may also need to submit (speak to the ATO asap if this applies to you) but if you didn’t lodge your return for the previous financial year on time, your income tax return for the current financial year is due by 31 October.
- Income tax lodgment date for non full assessment company entities.
- Lodgment due date for income tax returns for companies, and trusts that were taxable medium to large business clients in the prior year and are not required to lodge earlier.
If you’re concerned about the impact of upcoming tax obligations, read on to discover your options.
How to Find Relevant Loan Consolidation Offers for Business Tax Debt?
Types Of Tax You May Need To Pay The ATO
Taxes on Corporate Income
All companies are subject to a federal tax rate of 30% on their taxable income, except for ‘small or medium business’ companies, which are subject to a reduced tax rate of 25%.
Good & Services Tax (GST)
Goods and services tax (GST) is a broad-based tax of 10% on most goods, services and other items sold or consumed in Australia.
Pay As You Go (PAYG) withholding is a system of withholding income tax from an employee or contractor’s salary or wages. The payer of the income therefore, rather than the recipient of the income, pays the tax directly to the ATO on behalf of the employee or contractor.
Fringe Benefits Tax (FTB)
FBT is paid by employers on certain benefits they provide to their employees or their employees’ family or other associates. This could include things like the provision of company cars for private use or discounts on goods. FBT applies even if the benefit is provided by a third party under an arrangement with the employer.
How Tax Debt in Australia Works
For most SMEs in Australia, business activity statements and the corresponding tax for the period is due quarterly. If annual GST is below $20 million, tax is due quarterly at the following dates:
|July, August and September||28th October|
|October, November and December||28th February|
|January, February and March||28th April|
|April, May and June||28th July|
If your GST turnover is $20 million or more, you must report and pay GST monthly and lodge your BAS online. The due date to lodge and pay your monthly BAS is the 21st day of the month following the end of the taxable period. For example, a January monthly BAS is due on 21st February.
Voluntarily registered for GST and turnover is under $75,000 ($150,000 for not-for-profits) – The due date to lodge and pay an annual GST return is 31st October.
When a business fails to lodge or pay a BAS or an annual tax return, at this point, an ‘ATO debt’ is due. If it’s just a short term working capital issue, an ATO payment arrangement should be easily agreeable so that more tax is paid next month/quarter or later in the financial year. If you can, it’s best to speak with the ATO prior to the deadline being missed.
Tax Debt Release in Australia vs ATO Payment Plan
First things first, it should be noted that only individuals can apply for tax debt release. When it comes to individual ATO debt, the ATO will take into account your household’s income, expenditure, assets and liabilities to determine if you are facing serious ATO tax debt hardship. If it’s decided that paying tax could seriously impact your ability to provide basic services to you and your family (such as food, accommodation and education) you may be eligible for tax release.
Companies, trusts and partnerships cannot apply to have tax debts released. If your business is experiencing ATO tax debt hardship and is unable to pay tax on time, there is other support available.
What Happens When You Owe The ATO Money
When a deadline is missed, the ATO will contact a company on their MyGov account, and possibly by email, text and phone. The company will receive an ATO overdue tax debt letter.
Any future tax refunds or tax credits will be used to repay the ATO debt which is overdue. The ATO will automatically add a general interest charge (GIC) to what is owed. Interest is then calculated on a daily compounding basis on the amount of ATO debt that’s outstanding. It’s added to the tax statement periodically and the debt will continue to grow each day until the debt is repaid.
Prior to April 2020, the ATO worked with a number of debt collection agencies in order to recover selected debts on their behalf. However, as of June 2023, debt cases are currently no longer actioned by external debt collection firms.
If the amount a business owes is under $100,000 it’s possible to set up an ATO payment plan totally online. The figures are automatically calculated and there is no need to speak with anyone on the phone and negotiate an ATO payment arrangement.
The ATO will try to support SMEs who are doing the right thing and proactively engaging with them to repay their debts. The ATO’s preference is always to offer ‘help and support’ and to resolve ATO debt in a soft manner, without having to escalate the matter in hand. However, if a business continues to default on its ATO debt payment plan or shows no willingness to work with the ATO in order to resolve their overdue amounts, stronger action will be taken. There are two main tactics that will be employed:
Disclosing your debt to credit agencies
This has become an increasingly popular avenue for the ATO whilst they have been reluctant to close businesses down. If a business meets the following criteria:
- ATO debt is at least $100,000
- The amount has been due for over 90 days
- Not actively engaging with the ATO to resolve ATO debt
They may receive a ‘notice of intent to disclose’. This is one of a variety of ATO overdue tax debt letters that might be sent. The notice informs of a 28 day window to engage with the ATO and look to resolve ATO debt so that it won’t be reported to credit rating agencies. An ATO report in 2021, made available by a freedom of information request by ABC, explained “The program has been very successful. We commenced in August this year, and to 30 September have issued 70 notices of intention to disclose to clients. As a result of their engagement, we have made no disclosures and 69 clients have re-engaged with us in managing total debt worth $6.5 million.” As long as businesses are effectively engaging with the ATO to make an ATO payment plan, they will not report it, even if it is $100,000 or more.
Taking legal action
The most common legal action taken by the ATO will be to issue a Director Penalty Notice. A director penalty notice gives a business 21 days to either repay the debt or go into liquidation in order to prevent the directors being personally liable to repay the ATO debt. The ATO may also send a statutory demand, a creditor’s petition and a bankruptcy notice. If businesses are unable to pay the debt or engage with the ATO to set up an ATO payment plan within 21 days, the directors will be deemed bankrupt and the ATO will apply to the federal court to wind up the company.
It goes without saying but these actions can have serious repercussions for the directors. It will severely impact their credit profile, preventing them from accessing loans in the future and could prevent them from becoming a director again in the future. A default can remain in your credit history for 5 years whilst more serious credit penalties such as a bankruptcy or insolvency remain in place for 7 years. Before you become personally liable for the tax debt of your business, you may just want to review the range of tax debt loans available to you in order to relieve the pressure.
ATO Debt Holiday is cancelled. Now Pay Up!
The ATO is now back in full swing, seeking to collect tax debt that accumulated during the covid-19 outbreak and devastating lockdown measures. In the first two months of 2023, the ATO said it had already dispatched 3,350 DPNs to directors with respect to 2,462 companies. It is sending DPNs at a rate of about 100 a day – a continuation of a similar amount sent in the second half of 2022.
Ultimately, cash which ought to have been collected, hasn’t. Given this, the ATO is ramping up its collection activities in 2023 and beyond. For many SMEs, legacy debt has not been paid down and now there’s new debt which is more difficult to pay as a consequence of the financial implications that flowed from COVID and responding government measures.
Interest Rate for ATO Debt Payment Plan
SMEs that owe ATO debt which is only relevant to activity statement amounts may be able to make interest-free payments over 12 months.
Small businesses will need to meet the following criteria:
- has an annual turnover of less than $2 million
- has recent amounts owed from an activity statement of $50,000 or less that has been overdue for no longer than 12m
- has good payment and lodgment history including no more than one ATO payment plan default within the last 12m
- no outstanding activity statement lodgments
- is unable to obtain finance (such as a loan) through normal business channels
- is able to demonstrate ongoing viability.
One of the crucial points here is ‘unable to obtain finance through normal business channels’. A business tax debt loan from an online lender is certainly an avenue SMEs with overdue ATO debt will want to consider.
If a business does not meet the above criteria, a general interest charge (GIC) is applied (as per the GIC rates stated in this guide). For many SMEs, the annual GIC rate for 2021/22 is likely to prove cheaper than the rate achieved through a business loan, but with the ATO’s GIC rates increasing, it may prove preferable to clear an ATO payment plan with a business loan. Getting the ATO off your back might prove a strong enough reason for many businesses to consider a business loan to pay ATO debt too.
Avoiding Tax Debt to ATO
Looking at the ATO debt payment plan with GICs at an annual rate of 10% or more currently, combined with the risk of a director penalty notice or that your government business debt will be referred to a credit bureau… you’ll want to consider ways you can clear it as soon as possible.
How to Manage ATO Debt?
What Are Business Tax Debt Loans?
Business Tax debt loans, sometimes referred to as tax debt relief loans, are small business loans for tax debt. Aimed specifically at assisting SMEs. When business loans are taken out for the purpose of paying tax debt the repayment terms can sometimes be a little more flexible, granting the business slightly longer to repay the loan.
As a lot of the loans are general purpose small business loans you may be able to borrow money for other working capital requirements, in addition to paying your ATO tax debt. General purpose loans can be either unsecured or secured business loans.
Tax Debt Loans: The Base Figures
|Loan Type||Securities||Terms||Avg Loan Size||Estimated Interest Rate|
|Secured Loan (Generic)||Secured||1-10 years||$100,000||3%-12.5%|
|Unsecured Business Loan||None||1 month – 36 months||$30,000||5%-20%|
|Business Overdraft||Secured or Unsecured||Ongoing||Varies||5%-20%|
|Caveat Loans, Second Mortgages, Commercial Bridging Loans||Secured against Land||1-12 Months||Varies||12%-18%|
Why Refinance Government Debt with Tax Debt Loans?
There are both positive and negative factors to consider when you’re agreeing to business loans to pay off tax debt, so it’s best just to keep these in mind as you advance your search.
Advantages of Tax Debt Loans
- Fast turnaround to resolve late ATO debt immediately.
- Avoid entering into an ATO debt payment plan which can impact future/current borrowing.
- Get professional help – some tax debt loan providers have a specialist tax contact for advising on tax debt.
Disadvantages of Tax Debt Loans
- Fees and charges may be higher for a small business loan when borrowing to pay tax debt.
- Just like with debt consolidation you are in essence taking a tax debt consolidation loan – ensure you can afford the repayments.
- It’s not always possible to receive two business loans at the same time so if you take a tax debt loan, consider the impact on other financing opportunities.
Best Lenders for Business Tax Debt Loans
- Business Loan or Line of Credit
- Daily, weekly or fortnightly repayments to match cash flow
- Loans from $5k – $500k
- Rated 4.9 / 5 – ‘Excellent’ on Trustpilot
- Multi award-winning provider (no lender has won more than Prospa)
- Track record of providing business tax debt loans
- Transparent loan calculator and repayment schedule
- SMART box member – easily compare loan offers in standardised format
- Loan based primarily on revenue as opposed to security
- Secured business tax debt loans up to $250k
- 3-6 month loan terms
- Property required
- Fixed rate starting at 1.5% per month
- Paid defaults OK
- Pay ATO with a Shift trade account (like invoice finance)
- First 14 days interest free, borrow up to 26 weeks
- 100% online registration
- Multi-award winning fintech lender
Business Tax Debt Loan – A Case Study by Moula Finance
Business finance specialist Moula Business Loans is one alternative lender that can assist small businesses struggling with overdue tax debt.
Moula was able to assist a freight company which needed to purchase a new business truck and trailer for $600,000, but wasn’t able to access traditional bank funding due to outstanding tax debt.
In a two-part move, the freight company first took an unsecured loan from Moula to pay off the tax debt. With no outstanding tax debt, the firm was then able to secure business finance from a traditional bank in order to purchase the truck and trailer, saving thousands in interest (bank funding is usually cheaper than alternative lenders due to cheaper access to capital, more stringent lending terms and less risk appetite).
The company was also able to use a GST rebate from the truck purchase to pay out the loan with Moula early. There were no early repayment penalty fees charged by Moula, nor was interest charged beyond when the loan was paid out.
What Do I Need to Consider Before Agreeing To a Tax Debt Loan?
No matter the purpose of the loan, businesses should consider the same factors ahead of agreeing to small business loans to pay off tax debt:
- Interest rate. This will always vary from lender-to-lender and on a case-by-case basis but ensure you know how much in total you’re set to repay over the course of the tax debt loan, whether your provider utilises interest rates or factor rates.
- Fees and charges. How do they stack up against the fees and interest rates set by the ATO for late payment? Is it worth paying more for a loan to pay tax debt to avoid being in arrears with the ATO and the potential knock on implications this could have on your business?
- Security. Would you prefer to take an unsecured loan to pay tax debt? Thus reducing the risk to your business if you are unable to repay. Or would you prefer to provide security? In which case you may achieve more preferential interest rates and longer repayment terms. The chances are you will be granted an unsecured loan if you’re looking to borrow below $100,000.
Will Tax Debt Impact My Ability To Get A Loan?
Most businesses are unaware that if they enter into an ATO payment arrangement with the tax office or other government agencies for previously unpaid tax debt it may adversely affect their future financing arrangements. Before entering into an ATO payment plan, it might prove better to resolve the tax debt with the ATO early in one lump sum with ATO tax debt loans supplied by a bank or alternative lender.
Ongoing business tax debts, which have had a knock on impact to your credit score, will certainly impact your chances of getting a loan in the future.
Tax Deductions on Small Business Loans
Businesses can claim tax deductions for all interest payments. This includes interest paid on small business tax debt loans or other financial products. Specifically, the business loan interest expenses that you can deduct from your tax bill are:
- Interest accrued on business loans not paid by June 30th.
- Interest accrued by business owners for personal loans and personal credit cards used to fund their businesses. Tax deductions can be claimed in personal income tax filing.
Ensure that your business maintains a good record of all interest payments made by your company on business loans. No matter the purpose – whether it’s business tax debt loans or equipment finance loans. If you don’t do this it will result in a failure to process your tax claims.
Paying the ATO from Overseas
In addition to ATO tax debt incurring interest, the actual payment process to clear your debt can be expensive if you are located overseas as business credit cards issued abroad can have hefty foreign exchange fees. This guide on how to pay the ATO from abroad can help you save a good amount of money on the actual payment.
Final Word on ATO Tax Debt Loans
In summary, there’s a lot to consider prior to agreeing to a business loan to pay tax debt. We’ve explained what happens when you owe the ATO money, when an ATO payment arrangement might be best and when it’s better to consider boring to pay tax debt. Whether your business is suitable for business tax debt loans? Only you will know and this will be based on a number of factors; your future income projections, how severe your ATO tax debt is, and how your relationship is with the Australian Tax Office. Is there a chance the ATO may contact credit agencies?
Could agreeing to an ATO debt payment plan with the tax office scupper your chances of receiving a small business loan in the future? Be sure to compare your small business loan options and make an informed decision with all of the information available.