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Paying your ATO Tax Debt with a loan

Written by

Shaun McGowan

Businesses and sole traders in Australia are required to pay tax at the end of each financial year. The ATO offers payment plans for tax debt up to $100,000, however where the amount owed is greater, or a payment plan is unsuitable, various types of short-term business finance can be used to repay the debt.

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  • Borrow from $5,000 to $500,000
  • Fixed or variable interest rates
  • Repayments to suit your budget
  • Terms from one month to five years
  • Secured & unsecured options
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Who is eligible?

  • Own a business and have an ABN
  • Business is GST-registered
  • Permanent Citizenship or Residency
  • Minimum business-operating time of six months
  • Can provide business bank statements
Minimum requirements for a business loan

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What is a Tax-Debt Loan?

Tax-debt loans are used to repay overdue tax to the Australian Taxation Office (ATO) when a payment plan is either unavailable or unsuitable. If you own a business or operate as a sole trader, you are required to submit an end-of-year tax return, and not paying your tax can damage your credit score.

Lenders assess loan applications based on the risk level of the borrower. There are various reasons you may find yourself with significant tax debt to repay, and the cause for your debt may affect how lenders assess your application. For example:

  • If your tax debt is the result of not lodging your return - Lenders may consider you a high-risk borrower due to concerns of reliability in repaying the loan amount.
  • If your tax debt is the result of an accounting error - Lenders may look on your situation favourably if the accounting error is a random occurrence and not reflective of your reliability as a business owner.

If your tax debt is due to Capital Gains Tax (CGT) - Lenders are more likely to approve a tax-debt loan as the situation is often a one-off occurrence and generally not reflective of your risk as a borrower.

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How to choose a Business Loan for Tax-Debt ?

Top 3 business loans for tax debt in 2021:

Short-term Secured Loan

Short-term secured business loans are often used by businesses to cover sudden expenses - such as a tax debt. However, you can also use this form of business finance for various purposes, such as:

  • Paying employees
  • Securing stock
  • Settling unpaid bills
  • Covering day-to-day operating expenses

Repayment terms are often flexible to suit the borrower and, If you are applying for less than $150,000, non-bank lenders may offer same-day approval when applying online.

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Invoice finance

Invoice finance could be used to repay your ATO debt if you operate a business that invoices its customers. As invoice finance is not a loan but an advance of cash on your business invoices, you won’t be paying high rates of interest as you would on an unsecured business loan.

Invoice finance offers unique benefits over standard loans, such as:

  • Fast approval - often the same day
  • Does not require security
  • No repayments as the finance is not a loan
  • No interest to repay
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Unsecured Business Loans

Unsecured business loans can be used to repay your ATO debt without risking your personal or business assets. Interest rates will typically be higher than secured business finance, and lenders will assess your application based on the strength of your business cash flow and ability to repay the loan.

Lenders may consider the following factors when assessing your application:

  • Operating time of the business
  • Current business turnover
  • Trends in turnover
  • Personal and business credit history

If you are self-employed, you may be asked to provide a personal guarantee on an unsecured business loan.

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What happens if you don’t pay your business tax

Not paying your business tax can negatively impact your business credit score. From October 2019, The Australian Taxation Office (ATO) can legally disclose a business's tax debt information to credit bureaus, which can affect a business's credit rating and make it harder to gain approval on finance.

If the ATO does refer your debt to a credit bureau, lenders may view you as a high-risk borrower when applying for loans or credit in the future. A poor credit score may result in:

  • Higher interest rates
  • Shorter repayment periods
  • Lower borrowing limits
  • Only having access to bad credit business loans

The ATO is likely to refer business tax debts to creditors in the following situations:

  • The tax debt is greater than $100,000 and has remained unpaid for over 90 days
  • The business is not in the process of disputing the tax debt
  • The business has not arranged a payment plan with the ATO

If a business does not meet the above reporting criteria, the ATO will often contact the business and provide a notice period of 28 days before reporting its tax debt.

Tax-debt loans for small businesses

Businesses in Australia are required to lodge an end-of-year tax return. However, it is more likely that a Business Activity Statement (BAS) will be the reason small businesses seek loans to repay tax debt.

Businesses are required to lodge their BAS with the ATO at various frequencies, depending on their GST turnover:

  • Quarterly - If GST turnover is below $20 million
  • Monthly - If GST turnover is $20 million or higher
  • Annually - If you are voluntarily registered for GST, and your GST turnover is less than $75,000

The majority of businesses will lodge their BAS quarterly. The ATO provides specific due dates for lodging your BAS, and failing to lodge your BAS may incur a penalty.

Quarterly dates for lodging BAS

Business financial quarterDue date for lodging BAS

July, August, September

28 October

October, November, December

28 February

January February, March

28 April

April, May, June

28 July

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What to do if you can’t pay your business tax

If your business has a large tax debt that you can't pay, you should first call the ATO to see if you can arrange a payment plan.

You cannot ignore your tax debt with the ATO, and a pragmatic approach to the situation is often the best way to avoid ongoing debt and maintain a healthy credit score.

Business owners who contact the ATO to manage their tax debts will be looked upon favourably, and setting up a payment plan ensures tax debt information is not reported to credit bureaus.

Interest-free tax repayment options

The ATO offers an interest-free repayment solution to small businesses in certain situations. The small business must be able to clear its tax debt within 12 months, and eligibility is dependent on specific conditions:

  • Annual turnover of less than $2 million
  • Recent business activity statement (BAS) debt of $50,000 or less
  • Overdue BAS debt does not exceed 12 months
  • Maximum of one payment plan default in the previous 12 months
  • Clean history of lodging BAS with the ATO
  • Does not qualify for business finance to cover the debt
  • Business turnover indicates continued revenue and capability in repaying the debt

To apply for an interest-free payment plan, you will need to contact the ATO directly.

Here are the most popular questions people are asking about business tax-debt loans:

Do I need to lodge a Business Activity Statement (BAS)?

If your business is registered for GST, or you are personally registered for GST and operating as a sole trader, then you will need to lodge a BAS with the ATO. The frequency you are required to lodge your BAS will depend on the GST turnover of your business.

What is my GST turnover?

GST turnover is defined as your total business income. This is calculated as your total gross income, minus any GST included in sales to customers and sales made outside of Australia.

When do I need to lodge a BAS and tax return?

If your business generates an annual GST turnover of less than $20 million, you will be required to lodge a BAS with the ATO each quarter. Your yearly tax return will need to be lodged by 31 October following the end of the previous financial year (1 July - 30 June).

Will the ATO penalise me if I can’t pay my tax debt?

If you cannot pay your tax debt, you need to contact the ATO. Avoiding your tax or BAS obligations will only incur penalties, and possibly cause the ATO to refer your debt to a credit agency. If you contact the ATO as soon as possible, they will work with you to establish a payment plan, which in some cases may be interest-free.

About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

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