Managing business tax debt

Business tax debt can have serious implications for organisations, including exposure to legal action. Businesses should protect themselves from the potential consequences of unpaid business tax debt by being proactive and acting in a timely and structured manner.

Businesses that don’t pay their tax debt can damage their credit rating, which makes it difficult to access finance in the future. The Australian Taxation Office (ATO) can disclose this information to registered credit reporting bureaus (CRBs). This information remains on file for five years, which means it takes at least that long for the business to be considered a good credit risk again. This can make it difficult for businesses looking to grow.

With such significant ramifications, it’s important that organisations prioritise tax debt payments to avoid adverse outcomes. Nine strategies have been identified for organisations to manage their business tax debt:

1. Assess the organisation’s financial situation

Business leaders need clear and timely insight into the organisation’s debts, payments, and receivables. They should keep their records up to date and closely examine key reports such as cash flow and profit and loss statements.

2. Prioritise tax debt

Some payments are due immediately while others can be paid off or delayed. Business leaders need to create a realistic budget and payment plan to ensure the tax debt stays controlled.

3. Don’t accept slow payments

Non- or slow-paying receivables can slow down payment cycles, making it difficult for businesses to pay their tax debt and expenses on time. Businesses can incentivise customers to pay early with discounts and shorter payment periods, enforcing a fine when customers pay late.

4. Lodge activity statements and returns on time

By lodging activity statements and returns on time, businesses can avoid separate penalties given by the ATO for late lodgment, even if the organisation is unable to pay its tax debt.

5. Communicate regularly with the ATO

The ATO may be more likely to look upon a businesses’ case favourably if it has attempted to fulfill its compliance obligations and has updated the ATO on its financial situation, especially if there are new developments.

6. Establish a payment plan

Organisations can develop a payment plan in conjunction with the ATO to repay their business tax debt. Businesses will be charged interest on the plan and must meet the repayments as they fall due, otherwise the ATO could act to recover the debt. For organisations unable to reach a payment plan, the ATO may consider accepting security, such as registered mortgage or a bank guarantee, in exchange for deferring debt payment.

7. Serious hardship and release

The ATO may consider releasing some or all of an individual’s business tax debt if they are a sole trader who has experienced serious hardship.

8. Refinance business tax debt

Businesses can refinance their business tax debt as an alternative to implementing a payment plan. However, if an organisation falls behind in their payments to the ATO, the full debt amount for the plan becomes due. As with any loan, the organisation needs to be certain it can meet the repayment obligations.

9. Seek expert advice

Obtaining expert advice from trusted advisors including an accountant, financial advisor, or other industry professional is essential to identify shortcomings such as poor cash flow management and unsound business management practices.

Meeting business tax obligations is a key compliance requirement for organisations. Business leaders concerned about paying off their debt need to act quickly to devise a repayment plan. By keeping at ATO involved and seeking expert advice when necessary, organisations can reduce their exposure to the cost of unpaid business tax and remain fully compliant.

Domenic Calabretta, Managing director, Mackay Goodwin

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