90% of small business income tax is paid voluntarily or with little intervention from the ATO.
But what happens if something goes wrong, and you end up in debt to the ATO?
What is ATO debt?
SMEs make lots of payments to the ATO, including:
- Company income tax
- Personal income tax for unincorporated business owners
- GST on sales minus GST input tax on purchases
- PAYG withholding tax from employees’ wages or suppliers that don’t quote their ABN
- Fringe Benefits Tax
It can all add up to a very large amount and may easily get mixed up with – and used as part of – your general cash flow. If you don’t have enough cash on hand when payments to the ATO are due, you could end up with an overdue debt to the ATO.
ATO debt can affect your ability to borrow
ATO action related to unpaid tax debt can include charging interest on overdue amounts, possibly referring the debt to a collection agency, perhaps issuing a garnishee notice and ultimately taking legal action.
But long before it gets to this stage, ATO debt could upset your business financing plans, now that the Federal Government has passed a law allowing the ATO to report small business tax debt to credit reporting bureaus. The ATO has said that it will only take this step when a business –
- Has an ABN, and is not an excluded entity
- Has one or more tax debts, of which at least $100,000 is overdue by more than 90 days
- Is not effectively engaging with the ATO to manage its tax debt
- the Inspector-General of Taxation is not considering an ongoing complaint about the proposed reporting of the entity's tax debt information.
Nevertheless, it’s important to recognise that the ATO now has a significant new weapon in its arsenal for enforcing tax payment.
Negative information on your personal or company credit file, will lower your credit score and could prevent you from getting business finance, since lenders will routinely check your credit score and credit report when assessing your loan application.
How to negotiate your way out of ATO debt
The first step is to recognise that the ATO wants to work with you to find ways for repaying the debt before it has serious consequences.
Then make sure you have made it clear to the ATO why you have not paid what they say you owe.
Where there is a dispute about the amount, the ATO will work through the problem with you until it’s resolved. You may be able to get interest charges reduced or remitted.
Temporary cash flow problems could qualify you for an instalment payment plan.
Natural disasters (e.g. drought, fire, or floods) are a special case. You will generally be given extra time to lodge returns and pay.
Stay on top of ATO debt to avoid problems
Following recent legislation, both incorporated and unincorporated small businesses need to regard ATO debt in the same light as any other overdue debt when it comes to assessing the impact on credit score and future borrowing.
If for any reason you can’t pay on the due date, contact the ATO immediately so that you can work with them to avoid having your debt listed with a credit reporting agency.