Managing ATO debt has become a growing challenge for small business owners in Australia. The Australian Taxation Office (ATO) is taking a stricter approach to debt collection, making it harder for businesses to access or maintain payment plans. With rising interest rates, tighter eligibility requirements, and upcoming changes to tax laws, it’s crucial for businesses to understand their options.
Payment plans are no longer the only solution, especially when they come with high costs and strict repayment terms. Small business owners must consider alternatives that offer better cash flow flexibility, lower interest rates, and less risk of financial strain. Below are key insights into ATO debt, its impact on businesses, and smarter strategies to manage it.
Why Managing ATO Debt is Getting Harder
Small business debt to the ATO has reached record levels. Businesses are facing more scrutiny, and it’s become harder to secure or maintain a payment plan. The current ATO collection approach is more aggressive, driven by a growing tax liability issue that the ATO is under pressure to reduce.
Here are the current figures to give you a clearer picture:
- Total ATO Liabilities: $76 billion (including debts not yet due)
- Outstanding ATO Liabilities: $50.2 billion (collectable debts only)
- SME Share of ATO Debt: $33 billion, affecting over 500,000 small and medium-sized businesses
- Debt Concentration: 42,000 businesses owe one-third of the SME debt, with each owing more than $250,000 on average
The situation has become more challenging due to increased debt growth rates. Before COVID-19, ATO debts were growing at 11% per year, but this jumped to 17% annually after COVID-19. Businesses with unpaid taxes or late lodgements are being targeted more aggressively.
The Problem with ATO Payment Plans
Payment plans have historically been a popular way for businesses to manage tax debt. But recent changes have made them less appealing.
Here’s what’s changed:
- Higher Interest Rate: The ATO’s General Interest Charge (GIC) is currently set at 11.36%, significantly higher than typical business loans.
- Stricter Eligibility Requirements: Businesses must now provide 2 years of financial records and forecasts to be considered for a payment plan.
- Default Consequences: If you miss a payment, the ATO can cancel the plan, and the full debt becomes payable immediately.
- Upcoming Law Change: From July 1, 2025, the interest on ATO payment plans will no longer be tax-deductible.
These factors make it riskier and more expensive for businesses to rely on payment plans as a long-term solution.
How the ATO Assesses Payment Plan Applications
If you decide to pursue a payment plan, it’s essential to know what the ATO requires.
For Debts Under $200,000:
- Process: Streamlined approach
- Requirements: Online questionnaire, upfront payment (minimum 10% of debt), and confirmation of payment method
- Loan Term: Up to 24 months
For Debts Over $200,000:
- Process: Manual credit assessment
- Requirements: 3 years of financials, 12-24 month forecasts, and potential security against company or personal assets
- Additional Risk: If you’ve previously defaulted on an ATO payment plan, your application for a new plan may be denied.
This process shows that the larger the debt, the more complicated it becomes to secure a plan, especially when collateral or personal guarantees are required.
5 Alternative Options to Tackle ATO Debt
Since payment plans have become more difficult and costly, small businesses should consider other strategies to manage ATO debt. Here are some practical alternatives:
Option 1: Refinance or Finance Equipment
If your business owns valuable equipment, you can use it to secure finance. This involves using equity in existing equipment to secure a loan or refinancing current equipment loans. The funds from the refinance can be used to pay down ATO debt.
Benefits:
- Interest on equipment finance loans is tax-deductible.
- The interest rate on equipment finance is typically lower than the ATO’s 11.36%.
- You can free up cash flow while still using the equipment.
What to Watch For:
- Ensure the loan structure is tax-efficient.
- Check for any fees or early repayment penalties.
Option 2: Refinance or Leverage Real Estate
If you own commercial or residential property, either personally or through your business, you may be able to access equity to reduce ATO debt. Refinancing allows you to draw funds from the property and use them to clear tax liabilities.
Benefits:
- Property loans typically have much lower interest rates than ATO charges.
- You can consolidate ATO debt into a longer-term, lower-cost loan.
What to Watch For:
- If the property is held in a personal name, work with an accountant to ensure the debt structure is tax-effective.
- Watch for valuation and loan approval delays.
Option 3: Sell Unused or Underutilized Equipment
If your business owns equipment that’s no longer essential to operations, you may be able to sell it to raise cash for ATO debt payments.
Benefits:
- Immediate cash flow to reduce debt.
- Avoid ongoing maintenance costs on unused equipment.
What to Watch For:
- Be mindful of capital gains tax (CGT) or other tax consequences of selling business assets.
- Work with your accountant to ensure you don’t trigger unexpected tax obligations.
Option 4: Seek Business Finance (Loans, Overdrafts, or Unsecured Loans)
Instead of relying on the ATO, consider securing business loans or an overdraft. These loans can provide working capital to pay down tax debts.
Benefits:
- Bank loans and overdrafts have lower interest rates than the ATO’s GIC rate.
- Loan terms are often longer, allowing for smaller, more manageable payments.
What to Watch For:
- Many banks will check your ATO debt status before approving loans.
- If the bank sees ATO interest in your Profit & Loss statements, it may raise red flags with credit assessors.
Risks of Ignoring ATO Debt
Ignoring ATO debt can have serious consequences. The ATO is one of the most aggressive creditors and has the power to issue Director Penalty Notices (DPNs) or wind-up notices.
Key Risks Include:
- BAS Refunds Withheld: The ATO can hold back GST refunds or credits until debts are paid in full.
- Legal Action: If the ATO believes a business is avoiding payments, it can issue a statutory demand or a wind-up notice.
- Director Personal Liability: Directors can become personally liable for PAYG withholding, GST, and superannuation debts.
The ATO’s ability to take such strong action makes it critical for businesses to manage tax debts carefully.
When Should You Seek Professional Advice?
If you’re dealing with large ATO debt or have missed payments on an existing plan, it’s wise to seek expert advice. Accountants and financial advisors can help you:
- Identify the best option for managing debt.
- Structure alternative finance options for tax efficiency.
- Minimize risks related to ATO penalties or legal action.
Final Thoughts
Relying on ATO payment plans is becoming riskier and more costly for small business owners. Interest rates are high, eligibility criteria are stricter, and upcoming tax law changes will make repayment even more expensive.
Alternative solutions such as refinancing property or equipment, selling underutilized assets, or securing bank finance provide more flexible options. These methods often have lower costs, longer repayment terms, and fewer risks than an ATO plan.
If your business is struggling with ATO debt, take action early. By exploring these options and seeking professional advice, you can reduce costs, improve cash flow, and avoid the risks of missed payments.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.
