Recently, an accountant commented on social media that borrowing from the ATO at 9.1% is a good deal. This struck us as a very risky approach to business finance.
The ATO is different to other creditors. The ATO has the right to demand tax debt and take money from you without proving its debt in court. It also has the power to demand and take security deposits for future debts even before they exist. They can turn a company tax debt into the director’s personal liability and take the director’s house. The tax office is a very powerful creditor that demands careful handling and negotiation.
During the 2015 financial year, the amount due to the ATO totalled approximately $34 billion, of which some $26 billion was 90 days or more overdue, up $2 billion on FY14. It is estimated that 60% relates to SMEs. So it is a widespread problem for Australian businesses and the ATO is being much more pro-active in tackling arrears.
The ATO will, on occasion, allow directors to negotiate a payment arrangement allowing the ATO debt to be repaid in smaller amounts without interest or penalties over time.
However, you should be very careful in agreeing a payment arrangement as:
- 50% of payment arrangements entered into with the ATO end in default
- Directors can be made liable at any time for unpaid tax if their company defaults and
- Once an arrangement has been negotiated, it must be adhered to
Sometimes, the better solution is to restructure your business or look at finance options to clear the arrears and fix underlying working capital issues. Growth inevitably leads to cashflow pressures so finding a solution is critically important.
The good news is that there are many new sources of growth funding available these days. So ask your accountant or trusted advisor and have a good look around to find a strong finance partner.