Stay safe. Stay up to date.
It almost goes without saying that the easiest way to avoid the crackdown is to keep your taxes up to date. The ATO’s website details all business tax lodgment dates and contains a lot of useful information on lodging and paying your BAS. You can check out all the lodgment dates here – these can vary for tax agents.
What if you can’t pay on time?
Still lodge your tax return on time. Just because you can’t pay on time, doesn’t mean you shouldn’t lodge on time. In fact, by not lodging on time, you’re incurring penalties and making your financial position even worse. One of the biggest mistakes business owners make is not lodging because they can’t afford to pay at that time. It’s better to lodge on time and call the ATO to discuss a payment plan than not lodge at all. The ATO (and credit agencies) look more favourably on businesses that lodge even if they can’t pay immediately.
Be proactive and everyone wins
The ATO requires you to submit outstanding returns before a payment plan can be arranged so lodging on time will actually save you time and money. You may even be able to arrange an extension so you don’t waste any money on penalties.
The ATO isn’t out to get small businesses, and can be quite accommodating to business owners who are willing to work with them. Communication really is key here. If you’re concerned you won’t be able to pay tax on time, be proactive and call them to set up a payment plan before they need to chase you. This saves them resources and can save you paying penalties. In fact, it’s this proactive communication that can help you avoid receiving a garnishee notice or legal proceedings.
What a payment plan means for your tax debt
If you are able to arrange a payment plan with the ATO, it is important to keep in mind that all subsequent BAS payments are due in full and on time. If you miss these, then the ATO can cancel the payment plan and the full debt becomes due. In this instance, they may issue a garnishee notice.
Initially, your tax debt will accrue interest (regardless of whether or not you have a payment plan in place) and the ATO will apply any tax refunds you are due to reduce your debt.
Penalties for not paying
The ATO doesn’t want to shut down your business – then they wouldn’t get any more tax from you at all. In fact, an external review of the ATO revealed that ATO debt recovery initiated bankruptcy in 0.04% of debt cases.
It’s not in the ATO’s interest to collect tax debts to the point where it hurts businesses. That being said, they are definitely coming down much harder on businesses that are racking up and not paying off their tax debt. On the ATO website, it says: ‘We’re committed to supporting taxpayers who want to do the right thing and preventing those who don’t pay from gaining unfair financial advantage.’ The ATO will attempt to contact you via SMS, messages in MyGov, letter and by phone. If you don’t answer or respond, they may use a collection agency to recover amounts owed or use any future refunds or credits to repay any amount you owe. If you don’t engage with the ATO to show you are willing and able to repay your tax debt, they may issue a garnishee notice or a director penalty notice.
Garnishee notices and collection agencies
Without a payment plan in place, the next step the ATO may take is referring your debt to external collection agencies like Milton Graham and Collection House. This can have a negative effect on your credit score and undermine business loan applications in the future. If you want to find out more about exactly what the ATO can do with your tax debt information, read our blog on ATO tax arrears.
The ATO’s ‘stronger actions’
They may also use what they call ‘stronger actions’, which include garnishee notices and director penalty notices. One of the most important takeaways from this is that the ATO will only do this with business owners who:
- are unwilling to work with them
- repeatedly default on agreed payment plans
- don’t have the capacity to pay and don’t take steps to resolve their situation
- have been subject to an audit where deliberate avoidance was detected and payment avoidance continues
- appear to be engaging in phoenix activities (using liquidation to avoid financial obligations without risking assets and with the intention of resuming business operations through a new entity).
The ATO’s deputy commissioner of small business, Deborah Jenkins, released a statement outlining the ATO’s processes for small business tax recovery. The information pack reaffirms that the ATO only uses garnishee notices when the business owner doesn’t engage with the ATO to address outstanding tax debts.
How to handle your tax debt
Aside from getting your tax submissions up to date and keeping on top of your cash flow throughout the year, dealing with existing tax debt can be a bit tough. The ATO do offer payment plans for businesses looking to settle their tax debt; however, these aren’t always suited to SMEs.
Another option is refinancing your tax debt into manageable fortnightly repayments. One way to do this is using a business loan to pay out your tax debt to avoid the financial and mental stress of snowballing tax debt and potential legal proceedings. Instead of trying to pay off $50,000 of ATO debt in a lump sum, which will decimate even the most robust cash flows, you can refinance it with Moula. For some businesses, it’s cheaper to take out a business loan, pay off the ATO debt and manage the fortnightly repayments with Moula.
Moula specialises in working capital loans for SMEs and offer flexible finance options for small businesses to pay off ATO debt. We’ve already helped heaps of businesses get on top of their tax debt and in control of their cash flow.
If you want to see if refinancing your tax debt is right for your business, you can get started online or chat to one of our Melbourne team weekdays, 8am-7pm on 1300 88 58 93.