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How tax arrears can affect your finance

Updated: Feb 21, 2022

Falling behind with your tax is never a good idea. Staying on top of your tax and cash flow throughout the year will help you feel in control and place your business in good stead which is especially important come June 30.

Consequences of tax arrears

Getting into tax arrears can threaten the future of any business. In fact, it is the number one cause of many liquidation cases managed by The Australian Taxation Office (ATO). A late tax bill can make it tricky to apply for financing – including the financing needed to pay off arrears. Even if your finance is approved, it’s likely to be at a higher rate compared to what you would have paid under normal circumstances.

What if I fall behind?

It’s important to settle a tax bill sooner rather than later, either through the sale and leaseback of assets, or by looking for other areas of spending that can be deferred over time.

You can work out a repayment plan with the ATO if you’re hit with an unexpected large tax

bill. A structured repayment plan is much better than going into arrears.

It's all about the cash flow

Many businesses become unstuck when they receive their second-year provisional tax bill. Money is often spent investing in start-up costs, the running of equipment, and payment of staff and often there may be no further funds available to pay the steep tax bill that comes after a full year’s profits are realised.

Too many new business owners don’t realise the importance of having cash on-hand and may be blinded by the idea of owning equipment, rather than financing it.

Cash flow is the primary driver for maintaining a healthy business in its initial years. Using financing can help protect your cash reserves, with the idea that you avoid paying cash for equipment that’s going to deliver its value over time. Instead, the use of financing can help to spread the cost over time.

Always balance the benefit (i.e. revenue) delivered by owning a piece of equipment against the expense of owning it.

Structuring finance

Getting the right financing structure can tick a number of boxes, including acquiring an asset, maintaining cash reserves and bringing in an income.

Consider, for example, if you have a hole-digging business. You dig 10 holes per week and charge $1,000 for each. If you need a new digger, buying one for, say, $30,000 up front makes little sense, as you’d need it to pay you back $1,000 per week for 30 weeks before it started making you any money.

Another option could be to implement a finance plan where it might cost you $500 per week. That way your cash flow is positive from the start. You can also structure your payments to account for seasonality - for example by making larger payments during your busy season and smaller ones when you know business will slow down.

Ultimately, getting your tax in order means getting your cash flow under control. And that means understanding your financing options. Talk to your broker, accountant or finance provider if you need to know more.

Original post by Bank of Queensland



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