SME tax debt has massively accumulated across Australia. The amount of outstanding tax today – in Australia, in total – is $52.4 billion. And $34.1 billion of that debt is owed by SMALL business.
It’s surprising to many – but that’s the sad truth. The majority of business tax debt in Australia today is owed by small businesses – not big corporations.
Most SME tax debt today is COVID-based
Having a tax debt in 2024 is NOT a sign of business failure or financial incompetence – it’s primarily an all-too-common symptom of “SME long COVID” – the long term impact of shutdowns and industry disruption and subsequent cost increases.
Having a large tax debt you don’t know how to pay can seem like a terrifying, overwhelming problem. The very human consequence of this overwhelm is that many SME operators are still waiting and hoping that they’ll last “until things get better” – hopefully before the ATO shows up.
Five reasons to act on tax debt now
- The ATO amnesty is over. Collecting outstanding tax debt is now the ATO’s top priority in their current corporate plan. They are bringing in very strict debt recovery and compliance measures.
- The ATO has a substantial arsenal of debt recovery tools. Some that every SME should be aware of are:
o Directors Penalty Notices
o Credit Reports to Ratings Agencies
o Statutory Demands – which can have 21-day timelines for response. - The annual Australian cash flow “black hole” is fast approaching – and SME insolvencies are at record levels. So even if you think you’re OK, ask yourself what will happen if you get hit with a key customer failure?
- There’s little likelihood of business costs going down in the short term – latest indications are that interest rates may not shift downwards until mid-2025. Money is likely to stay tight for a while yet.
- A debt ignored is a debt multiplied. When any debt continues to accumulate, it is dangerous. If you don’t monitor it and manage it strategically, it can potentially be catastrophic.
What’s the good news about tax debt?
There are more solutions than most SMEs know – AND preemptive action today can not only resolve your tax debt stress – it can ALSO help you take the next step in growing your business.
Part of the solution is getting the right advice – along with specialist support.
Another part of the solution is developing a good Working Capital strategy that will ensure your business continuity.
But the fundamental step that will make the difference is getting started on building a strategy and making a plan for negotiating a Tax Debt Payment Plan.
If your small business is carrying an unaddressed tax debt, it’s time to act – BEFORE the ATO adds further pressure with penalties and deadlines.
It’s time to take a deep breath, acknowledge your anxiety and take action anyway.
An important and necessary disclaimer
I’m not a qualified tax professional OR accountant – and I’m not qualified to give any financial advice. This article is to be used as general information ONLY.
Before taking any uninformed action in relation to your business tax debt, I strongly recommend that you seek the advice of a qualified professional in one of these areas.
But I DO know business. Where my expertise adds great value is in helping you FUND the resolution of your tax debt AND grow your business AT THE SAME TIME. That’s my business financing “super power”.
Five steps to making a Tax Debt plan that works
The overall process of addressing and negotiating your Tax Debt is straightforward – AND YOU DON’T HAVE TO DO IT ALL YOURSELF!!!
You do need to start now! It’s a bit like making a bushfire survival plan – you want to put that plan in place BEFORE YOU NEED IT.
(That doesn’t necessarily make the job easy – but you WILL feel better once you’re in action.)
1. Know your obligations
If you’re not sure what you owe or what your obligations are, then you need to consult a tax professional to find out.
Tax regulations are complex and full of legalese – so you may need a specialist tax law advisor, not just an accountant.
Why? Because there are harsh financial penalties for NOT meeting your obligations – and those penalties can make your situation MUCH worse.
If you’ve missed something, or something has changed, then you want to know about it BEFORE the ATO tells you about it.
2. Work out what is affordable and what will work for your business
Think about how to craft a payment plan to pay off your debt over time – not just in one lump sum.
While a significant up-front payment will be required to demonstrate your accountability – you can negotiate a payment plan to pay off the majority of your debt over time.
Your goal is to repay your obligations AND and to keep operating sustainably for the repayment period – not just to “get it over with” at the price of crippling your business.
3. Develop a funding strategy
Put together a funding strategy – with the help of a working capital strategist if necessary – so you can source the money you need to make your plan viable.
Very few businesses with significant tax debt have the cash reserves to pay their tax debt up front. That means that you need to look at borrowing in order to comply with your tax debt payment plan.
However, you will want to borrow ENOUGH to ensure that you can run your business effectively through the repayment period – so you need to look at your cash flow projections and sales forecasts in detail.
Resist pressures to borrow additional funds against your personal assets. The banks will want you to do that. Some unscrupulous lenders have been pressuring small business operators to take out expensive caveat loans and second mortgages.
However, with today’s range of smart FinTech financing tools tailored to SME needs, that should be your last option – NOT your default.
My strong (strong, strong, strong, strong) recommendation is that – if you have no cash reserves in your business – then you should look at borrowing against your business assets.
Look beyond your bank for financing solutions
The FinTech cash flow lenders in the market today have a range of tax debt financing tools available. They look at funding tax debt as a regular loan – not anything special or a sign of failure or incompetence.
Typically, FinTech lenders will fund up to 8% or 10% of your turnover. This varies based on several factors – like how strong your business is, the industry it’s in and your ability to service the debt that you’re going to take on.
These loans are typically unsecured, which means they don’t need the backing of your private assets.
Another benefit is that their application process is relatively simple – and relatively quick. One week is about all you need to put a solution in place.
The trade-off is in cost. Less security and larger borrowing capacity means higher interest. The interest costs are going to be somewhere between 16% and 22%.
However, the right FinTech tax debt loan – tailored to your business goals and needs – could be the difference between closing your doors and staying in business.
If you DO choose a big bank – act early and do your homework
The banks are starting to fund tax debt. If you have a good strong business and the bank has plenty of security, it’s quite possible that your bank will enable an advance so you can settle with the ATO.
However, banks by their nature are conservative. Tax debt makes the ATO a preferential creditor, so banks are likely to seek extra personal assets as security.
Check carefully for any all monies mortgage clause – because that gives the bank the right to enforce their debt collection under ALL mortgages they hold over your property. (Regardless of whether it’s documented as a business or private asset.)
The loan application process with the big banks can take six to eight weeks – and sometimes as long as twelve weeks. You won’t know if you’ll get the money you need until you get that answer.
At the moment, the banks appear to be prepared to lend between 3% to 5% of current turnover in order to fund tax debt. And costs from the big banks are currently in the 9% to 14% range.
While meeting the bank’s application requirements can be hard work and VERY time-consuming – particularly in delivering the extensive paperwork and information they require – the interest rate may make it worth the effort.
However, it could become a problem if the ATO decides to hit you with a 21-day statutory demand.
4. Develop a negotiating strategy for dealing with the ATO
You are going into a negotiating process with a powerful government agency who feels they ha9ve right and might on their side – a negotiation for an agreement that you want to enable you to pay your debt off over a given timeframe without crippling your business.
Often people will find they’re pressured by ATO salaried employees to make ridiculous payments that will eventually send their business broke. Unless you’re a VERY skilled financial and legal negotiator, consider getting help.
The first place to start is with your accountant. Accountants regularly deal with the tax office, and I find that accountants can generally put something together.
However, if you have a situation that’s complex – and especially if you’ve started to incur penalties – then you may need “the big guns”.
I’ve referred a number of customers and clients to Tax Assure. They are a specialist tax debt negotiating agency. They are basically a team of lawyers that specialise in tax matters.
Tax Assure’s expertise is both in the law and in negotiation – which means that they can typically negotiate better terms and longer repayment periods than the average accountant. In some cases they can actually get removal of penalties and interest!
5. Plan your process, then work your plan
Take it step by step – the important thing is to get started then keep moving. That way, you’ll be less likely to panic in the face of an ATO demand.
Get expert help where you need it. Start the inquiry process – because it may not be as costly as you think. It will certainly be LESS costly than a panic response.
Is FinTech finance more risky than bank finance?
Interest rates are all basically built around risk, and if you have security, the risk is less. If you have less security, the risk is greater.
The FinTechs tend to take a higher interest margin, but they have a different credit criteria – and can be much more accessible, more quickly than bank finance. They lend money to business based on the value of the business.
They lend to businesses that super-conservative banks would consider “too risky” – which is NOT necessarily how you and I would categorise risk. So they charge a higher interest rate to service that risk.
And – while FinTech sounds like a “new and untested” industry – most providers are actually funded by major trading banks anyway, so in a way they are another arm of bank lending.
Don’t wait till the ATO comes knocking at your door
If you are an Australian SME and you have a significant tax debt with no payment plan then your business is at risk.
The ATO has debt recovery written into its current corporate plan. You will be getting notices from the tax office if you’ve got any tax debt.
Sadly, I still find small business people are taking the ostrich approach – putting their head in the sand and hoping it will all go away. It won’t.
It’s a lot easier to deal with these matters head on – now, today. Face your liability and manage it.
Do you need help to even work out where to start?
If you’re not sure where to start, get help. Talk to your accountant or some other trusted business advisor. Their costs today will likely be a whole lot less than the cost of dealing with your tax debt when it scales up from being an annoying toothache to an abscess requiring root canal surgery.
If you know what your tax debt is – but what you don’t know is how to fund it – then what you may need is a Working Capital Specialist. In that case book a call with me today.
