ATO debt consolidation for business owners

The general interest charge compounds daily on the account balance, and the rate is reset every quarter by the ATO. Nobody should quote you that rate from memory, including us. It is published on ato.gov.au and it moves.

Daily compounding is the part people underestimate. Interest is added to the balance each day, and the next day’s interest is calculated on the new, larger balance. A mortgage reduces every month because a scheduled repayment does the work. A tax account with nothing going into it grows against itself, including on weekends.

The deductibility problem

There is a second difference that matters as much as the rate. Interest on money borrowed for business purposes is generally deductible. The ATO’s own interest charges are treated differently, and the rules on claiming them have tightened. Ask your registered tax agent what applies to your entity and your income year, because the answer changes the real cost of leaving the debt exactly where it is.

An ATO payment plan is an agreement to pay in instalments. It is not credit, and that distinction is where most people get caught.

• Interest keeps running. Entering a plan does not switch off the general interest charge. The balance keeps compounding underneath the instalments.
• It is conditional on everything else. A plan generally assumes future lodgements are on time and new liabilities are paid when they fall due. Fall behind on the next BAS and the plan can fail even though every instalment was paid.
• It can be cancelled. When a plan defaults the full balance can become payable immediately, and recovery action can resume from there.
• The second plan is harder than the first. Each failed arrangement narrows what the ATO will consider next time.

None of that makes a payment plan a bad thing. For a modest balance against real cash flow it is often the cheapest answer available, and we will say so rather than sell you a loan. The problem is the plan agreed at a number the business was never going to sustain.

The ATO is a patient creditor until it is not. The reason to move early is simple: every option below stays open while the debt is still only a debt.

Disclosure to credit reporting bureaus

The ATO can report a business tax debt to credit reporting bureaus where defined criteria are met. Broadly: the business has an ABN, the debt is above the ATO’s published minimum, it has been overdue for longer than the published period, and the business is not effectively engaging with the ATO about it. The ATO must write to you first with a notice of intent to disclose. Those criteria are the ATO’s and they can change, so check them on ato.gov.au or with your registered tax agent.

The phrase that carries the weight is "not effectively engaging". A business that is lodging, talking and meeting a plan sits in a different category to one that has gone quiet. A reported tax debt lands on the commercial credit file, where suppliers, insurers and lenders can all see it.

Garnishee notices

A garnishee notice is issued to a third party who holds money for you or owes money to you. Usually that is your bank. It can also be your own trade debtors, which means your customers learn about your tax position. This is the point at which a debt becomes a cash flow emergency in a single morning.

Director penalty notices

Certain company obligations, including PAYG withholding, GST and the superannuation guarantee charge, can be pushed onto directors personally through a director penalty notice. The notice states its own deadline. If one has arrived, act the day it arrives and call your accountant before you call anyone else.

None of this is written to frighten anyone. It is written because the sequence is predictable, and finance arranged in month two is calmer and cheaper than finance arranged in month nine.

Tax debt does not automatically close a file. Some lenders will not touch it, others price it as ordinary commercial risk. The job is knowing which is which before the application goes anywhere.

The five things a credit assessor looks at

1. 01Lodgement history. Are the BAS and returns lodged and current? An unlodged business is an unassessable one, and getting lodgements up to date is usually step one whatever else happens.
2. 02The story behind the debt. A bad debtor, a trading downturn, an ATO amendment, a partner buy-out or a period of deferred obligations reads very differently to a business that has simply never paid.
3. 03Whether the debt is being cleared in full. Most lenders who will refinance tax debt want it paid out entirely at settlement, paid direct to the ATO, and evidenced. Partial payouts are considerably harder to place.
4. 04Serviceability. Not last year’s tax return on its own, but recent BAS, management accounts and bank statements showing the business trades at a level that carries the new repayment.
5. 05Security and exit. What the property is worth, what sits in front of it, and how the lender is repaid if the plan does not run to script.

What rarely decides it on its own is the size of the tax debt. A large balance against a strong trading business with equity is a far more fundable proposition than a small balance against a business with neither.

Security decides the price, the speed and, more often than people expect, whether the deal happens at all.

The right answer is usually the least drastic security that gets the job done. If an unsecured facility clears the balance, we do not go anywhere near your house.

Refinancing tax debt into a mortgage, into a business loan, and into private funding are three different decisions with three different costs. They are not interchangeable.

The mistake we see most often is the last column with the last row ignored. Private funding is a bridge, and a bridge needs a far bank. The quieter mistake is the first column: rolling a three-year problem into a thirty-year mortgage lowers the monthly number and raises the lifetime cost. Where that structure is right anyway, we split the consolidated portion into its own sub-account so it can be paid down faster.

1. 01

   Day one: the honest picture

   We ask for the integrated client account balance, the lodgement position, a rough list of the other debts and what property is in the picture. Twenty minutes on the phone tells us whether this is fundable, roughly how, and whether it should be.

2. 02

   First week: documents and a shortlist

   You send the document set below. We build the file, write the explanation of how the debt arose, and shortlist the lenders whose current appetite actually matches the situation. Nothing is submitted before that shortlist exists.

3. 03

   First to second week: submission

   One application to one lender, presented properly. If a valuation is needed we order it early, because a valuation is the single most common reason a good file sits still.

4. 04

   Second to fourth week: assessment and conditions

   The assessor comes back with conditions. Usually an updated ATO statement, a management profit and loss, or a clarification on a bank statement entry. We answer them the same day where we can.

5. 05

   Settlement: the ATO is paid direct

   The tax balance is paid straight to the ATO from the loan proceeds rather than through your account. Lenders generally insist on this, and it is also the version that leaves the cleanest paper trail.

6. 06

   After: the part that is usually skipped

   We confirm the ATO account is showing nil or the agreed residual, check the facilities you paid out are actually closed, and set a date to look at the position again. Consolidation is only worth doing once.

Those windows are typical, not promised. A clean full-doc file can move faster. A trust structure, an outstanding lodgement or a lender wanting a fresh ATO printout will add time. Private and second-mortgage funding is measured in days rather than weeks, which is a large part of why it costs more.

First conversation

About twenty minutes

Applications submitted

One, to one lender

The ATO payout

Paid direct at settlement

Usual bottleneck

The valuation

Fastest structures

Private, second mortgage

Cheapest structure

A full refinance

Every item on this list exists because an assessor will ask for it eventually. Sending it early is the fastest route to a straight answer.

If something on that list does not exist yet, tell us. A missing document disclosed on day one is a scheduling problem. The same document discovered by an assessor in week three is a credit problem.

Consolidation does not suit everybody, and saying so early is more useful than an approval you cannot carry.

• The business is not trading profitably. Refinancing a loss does not fix it. It funds it for a while longer, with your house attached to it.
• There is no equity and no serviceable income. There may be nothing to lend against, and the honest conversation is a different one.
• The balance is small and the cash flow is real. A payment plan is cheaper and simpler, and we will say so rather than sell you a loan.
• The right next call is insolvency advice. Where a company cannot trade out, a registered liquidator or a small business restructuring practitioner is the person to see, and seeing them earlier leaves more options open than seeing them later.
• The security on offer belongs to somebody who does not fully understand what they are signing. A guarantor needs their own advice, from their own adviser.

We have seen worse and found the way through. That certainty is the first thing we hand a client.

We would rather have a short conversation that ends in "not this" than arrange a loan that puts a family home behind a business that was never going to recover.