A payment plan the practice could not sustain

A suburban medical practice, two principals and a handful of sessional practitioners. A fit-out overrun and a slow year had left roughly $310,000 owed across BAS, PAYG withholding and income tax. A twelve-month payment plan had been entered into, and it had been met every month.

Meeting it was the problem. The instalments were being covered by deferring equipment maintenance, delaying a locum they needed and drawing less from the practice than the principals could reasonably live on. The plan was being serviced by hollowing out the practice, which is a strategy with a shelf life.

What a payment plan does and does not do

• It sets a schedule for paying an existing balance. It is not a settlement and it does not reduce what is owed.
• The general interest charge continues to accrue on the outstanding balance while the plan runs.
• Current obligations still have to be met on time alongside the instalments. That is usually what makes a plan fail.
• A defaulted plan can make the next arrangement harder to obtain and can affect how the position is viewed.

The arithmetic was the honest bad news. Instalments sized to what the practice could just manage were making slow progress against a balance that was still compounding daily underneath them. Nobody was doing anything wrong. The structure simply was not going to finish the job.

The tax agent confirmed the balance from the integrated client account and confirmed that all lodgements were current. That second point matters more than borrowers expect. Lenders assessing a file with tax arrears want to see a business that is up to date on its obligations and behind only on payment, because that is a different risk to a business that has stopped lodging.

The practice itself did not own its premises. The principals held an investment property between them with meaningful equity in it, which is the security that made a mainstream structure possible.

Replacing the plan rather than supplementing it

The structure was a refinance secured against that investment property, sized to clear the ATO balance in full and to fund the deferred equipment maintenance in the same transaction. Paying out the balance in full is the point. A partial payment leaves a plan running alongside a new loan, which is two commitments where there should be one.

1. 01

   Step one — confirm the position

   Registered tax agent confirms the balance and that all lodgements are current before any lender sees the file.

2. 02

   Step two — present the practice properly

   Practice financials, billings by practitioner and the sessional arrangements set out so a credit team can read a medical practice rather than guess at one.

3. 03

   Step three — select on policy

   Lenders that read professional practices and accept tax arrears as a payable item rather than an automatic decline.

4. 04

   Step four — payout figure on the day

   The balance moves daily, so a payout figure is obtained for the settlement date rather than relying on last month’s statement.

5. 05

   Step five — pay the ATO directly

   Funds are applied to the balance at settlement, and the plan is closed out rather than left running.

In this scenario the balance is paid in full at settlement, the plan closes, and the general interest charge stops accruing on it. The practice moves to a single scheduled repayment on ordinary commercial terms over a term it can carry without deferring the things it needs to operate.

The maintenance is done, the locum is engaged, and the principals draw properly again. That last item is not a luxury. A practice funded by its owners underpaying themselves is a practice with an undiagnosed problem, and it usually surfaces in the next slow quarter.

• ATO balance cleared in full rather than partially, so the plan closed instead of running alongside a new loan.
• Deferred equipment maintenance funded in the same transaction rather than left for a later application.
• Current BAS and PAYG withholding met from current trading, with provisioning set up monthly.
• One scheduled repayment on commercial terms, over a term the practice can genuinely service.

The trade-offs are real and were put on the table before anything was signed. The principals’ investment property now carries the debt, and a business liability has become secured against a personal asset. A longer term can mean more total interest paid even where the rate is lower. Whether any of the interest is deductible depends on the structure and the purpose, and that is a question for the registered tax agent, not for a broker.

And where there is no equity and no security, this structure does not exist. In that case the conversation should be with the tax agent about what arrangements are available, and, where the position is genuinely unmanageable, with a qualified insolvency practitioner. Saying so early is more useful than arranging finance that only postpones the same conversation.