Many business owners allow the tax debt to creep up on them. We say that there is no such thing as a tax debt problem, a tax debt is the result of a business problem that needs to be solved. If a tax debt is occurring in a business, then the fundaments of the business, the amount of funds a business owner is taking or the way the business is trading has a problem.
Understanding how a tax debt works
If you have a tax debt – paying the tax debt will create a tax debt if you pay it out from your business. Future payments of tax debt are not tax deductions, they are paid out of profit, which is then taxed. In a company, when you are paying of a tax debt, you are paying 28% on that tax debt.
Once you have a tax debt there is a lot to deal with.
As a business owner, you are essentially given the job, by the Government to be tax collectors. You collect GST, and claim credits when you have paid GST when billed by creditors. You need to collect PAYG from your employees, pay their super, manage their insurance and report to the government on subcontractors. At the end of the year, you must report on yourself and your structure – and you must find the resources and the time to do this.
AND – if you don’t the penalties and fines are considerable.
Non lodgement and non-reporting is actually a criminal offence, so when you are chased for non-lodgement this is critical to know. We have had to help many cases when businesses owners feel that if they don’t tell the Australian Taxation office what they owe them, they won’t get chased. The end result of a criminal conviction for non-lodgement is worse.
So, you either are all behind, because your clients and customers need attention or you leave it to someone else. We believe that you get the best value by leaving tax to the specialists, but only after you fully understand how all the tax and compliance costs works. One of the most important things in controlling tax and tax debt, is for the business owner to actually understand how the system works, and can ask questions and check if it’s all done properly.
At night, a business owner is often too busy writing quotes or finally spending time with their family.
When dealing with the Australian Taxation Office over a tax debt
They aren’t going to be too interested in a payment plan unless all accounts are completed and lodged.While the case manager at the Australian Taxation Office is keen to collect money from you, they also want to close a file on your tax debt, if seeing that all your accounts are up to date and paid.
Accept that they are looking to be paid back within 18 months, and they usually want a decent deposit to start with. There are no “well into the future” plans that are on offer. They see you in business and so you should be able.
That current and new BAS and income debt must be paid on time, or the deal is off and they can and often will demand that all debt is paid immediately.This is hard, as you adjust your business and cash flow to pay your tax debt, you find that the next BAS is due, and there is no let of here, you need to have that paid on time as well.
We can never say what the timing is of the Australian Taxation Office to chase your tax debt, and this may lull you into a sense of comfort, you are ignoring their are endless coloured demand letters and you think that they are ignoring you. But once a file lands on a human’s desk at the Australian Taxation Office, they will chase you for your tax debt.We have seen the Australian Taxation Office call people after one late BAS, we also have seen them do nothing but fire computer letters off to business, and complete no real chase until the debt is well over $300,000 or more. It’s totally random. Don’t get caught out thinking they won’t chase you – they eventually will.
You can buy time when you negotiate your tax debt, as long as you are actively doing something, such as getting the accounts up to date to lodge the balance of what’s owing, making plans to find the finance or seeking advice about your business. In our programs of negotiating tax debt for clients and or looking at the businesses’ ability to pay, we ask the Australian Taxation Office for time to complete accounts, so we can examine the business and by being clear about what we are doing and giving them an end date. Almost every case are given the time to complete the work. It’s not the time to ignore the tax debt.
If you have a tax debt, but you are not under any pressure to pay, start the journey yourself by beginning to make regular payments that will be more than what your next BAS will be. Divide your average BAS by 13, and add an amount that would pay your debt in 18 months. You are better off if you can pay your tax debt without an agreement with the Australian Taxation Office, then you can manage payments that are from the old debt and making provisions for the new debt. If you are on a payment plan, then you need to corral money for the upcoming BAS.
The Bank of The Australian Taxation Office is very expensive – the interest rate is near 9% compounded and being late with the lodgements, means that many business owners don’t realise in most cases that their tax debt has doubled in a short period of time. You can negotiate your interest and penalties, but this really depends on how the payment plan is put together and how quickly you pay.
When dealing with a case manager at the Australian Taxation Office, remember to always stay well mannered. They do get it wrong, they can demand outside of their authority, they also may be allowing you extra time and its best to stay on their side and not have them file note that you are rude, are using foul language and are abusive. If the conversation is too hard, then say so – say you will hang up, calm down and call back. We can write a book about dealing with the humans at the Australian Taxation Office. But patients and transparency, plus when we have a true story to tell, have demonstrated remarkable results for our clients.
Don’t ignore the Australian Taxation Office when they are calling and chasing you. Even if you have nothing immediately to say, answer the call, acknowledge them and give them a time frame for you to get back to them. If you don’t – then they have a lot of statutory power to chase you.
Don’t make a promise you can’t keep. Nowadays, making promises that appear impossible to a case manager at the Australian Taxation Office will be rejected, unless you can demonstrate that you can make the payments.
Throwing money at the problem won’t solve your tax debt problem:
Once a business owner is under pressure with a tax debt the usual action is to look quickly to solve the problem by borrowing money elsewhere. This is fine, if you have figured out how to manage paying taxes in the future, as well as paying staff, contractors and other creditors. But borrowing money and throwing it at the tax debt – only solves the pressure off for a little while, because what caused the tax debt will continue to grow in your business.
Solve the problems that caused the tax debt before throwing money at the tax debt. Sort out cash flow, catch-up with collecting money that is owed to you, look at all your expenses and see what changes you can make. This means in the future you don’t have a tax debt, and you have a way to deal with it now.
Watch out for the “short term” high interest and supposedly unsecured business loans that are available. These are replacing one problem with another. There are a lot of these around and they bury themselves into the businesses, looking to be paid weekly, with interest rates from hell and this just swaps one problem for another. They seem to always lend you a little more, and before you know it, you are just working for them.
Watch out for factoring companies that can get in and control your debtor’s ledger. Usually under contract these factoring means they control and charge you for all your debtors, including its expensive and you can lose control. This is quite different from invoice financing, this new form of finance will fund one invoice at a time and help you move money forward to pay debts when required. Often if growth has been the issue that a business has a tax debt, and that this is reflected in the debtors ledger then this can be solved, once you have examined the business and it doesn’t affect the profit.
Borrowing money to pay your tax debt
If you have examined your business and now know that the business can move forward, we will advise that we negotiate and pay the debt from an asset, such as your home. Many business owners and their partners hate this idea, but the interest on a home mortgage is far less than the interest at the ATO on a payment plan, and remember, in repaying a tax debt from your business, you do pay tax on the income you earn to pay the tax debt.
Banks aren’t too keen to lend money for a tax debt. They need to see that you have the ability to repay, so your accounts and your plan needs to be up to date.
Second tier lenders can be reasonable and will reduce their rate once they see you are a good payer and the risk is reduced.
When you are left with paying off tax debt through the business cash flow, remember it’s a hard haul, and you must be very careful about getting what appears to be easy outside money.
What to do
Tax debts can build up in your business without the Australian Taxation Office chasing you OR they may chase you right from the start (They are not that organised)
Even if you aren’t being chased by the Australian Taxation Office, start the journey of dealing with tax debt. You may be able to manage it, and then pay it down without being chased by the taxman.
There isn’t a tax debt problem, there are problems in the business that caused the tax debt.
Get on top of the business. Manage budgets and cash flows, collect money from debtors and make sure the business is profitable by charging the right amount and controlling costs.
Watch out how you finance tax debt
There are a lot of high interest offers, that could exchange on your current problems for another. Make the changes in your business first.
Dealing with the Australian Taxation Office has become very formulated, however by staying polite, asking for time and being transparent you can get a lot of help.
This doesn’t always work that way, but usually asking for time and getting back to the Australian Taxation Office by being clear about what you can do is a great starting point (of course if you can pay the debt down by yourself, all the better).
If you have your business under control and you have solved the issues that created the tax debt, then we recommend that you use your assets to settle the debt.
By settling the tax debt, you become the creditor to your company. If you have come through a period of losses, you can repay the debt to you without paying taxes, or you may leave it in the business and take it at a later date.
You should also read this document, along with our nature of tax.
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