An ATO balance that had grown quietly for two years

The business was a civil contractor with a small plant fleet and a steady book of subcontract work for two builders. It was profitable. That is the part people find hardest to believe about ATO debt: the businesses carrying it are very often the ones that are working.

What had happened was ordinary. A slow quarter two years earlier meant the BAS was lodged but not paid. The next quarter covered part of it. Then a builder took ninety days to release a progress claim, and the next BAS went the same way. Income tax joined it. By the time anyone stopped to add it up, roughly $240,000 sat on the integrated client account, and the business was paying it down out of trading margin while the balance kept adding to itself.

Why the balance would not come down

An ATO balance does not sit still. The general interest charge compounds daily, and it is not deductible the way a business loan’s interest usually is. That is the whole problem in one sentence. Paying tax debt out of margin means paying it with after-tax money against a charge that is compounding faster than a quiet quarter can absorb.

• The GIC compounds daily on the outstanding balance, including on the interest already charged.
• Business tax debts over $100,000 that are more than 90 days overdue can be reported to credit reporting bureaus where the business is not effectively engaged with the ATO. Once that appears, ordinary trade credit gets harder.
• Every dollar of margin used on the arrears is a dollar not spent on plant, wages or the next tender.
• Two lodged-but-unpaid quarters look, to a bank credit team reading it cold, like a business in trouble rather than a business with a timing problem.

The first step was not an application. It was a page: every balance, the ATO position confirmed from the integrated client account, the plant commitments, the home loan, and what the business genuinely earned across the last two years rather than what the last quarter suggested.

The second step belonged to somebody else. The lodgement position and the tax treatment are a registered tax agent’s work, not a broker’s. WeL’nd does not give tax advice and does not negotiate with the ATO on a client’s behalf. What WeL’nd does is arrange the finance that pays the balance out, and that works properly only when the tax agent has confirmed what the balance actually is and that everything is lodged.

The structure

There was equity in the owner-occupied property, built up over a decade and largely untouched. The structure was a refinance of the existing home loan with the ATO balance absorbed into it, secured by a first mortgage, with the outgoing lender refinanced out at settlement.

That is the plainest version of what this cluster of work does. It moves a compounding penalty charge onto a secured facility on ordinary commercial terms, over a term the business can actually carry. It does not make the debt disappear. It changes what the debt costs and how long there is to pay it.

1. 01

   Week one — the true number

   Balances confirmed from the ATO account, not from memory. Trading position assembled from two years of returns and six months of business banking. Equity position estimated against recent comparable sales.

2. 02

   Week two — lender selection

   The file goes to the lenders that will read a self-employed applicant with tax arrears on the file, not to whichever bank happens to hold the current mortgage. Valuation ordered.

3. 03

   Weeks three and four — assessment

   Full assessment and conditional approval, with conditions almost always including a current ATO balance letter and evidence that all lodgements are up to date.

4. 04

   Weeks five and six — payout and settlement

   A payout figure is obtained for the settlement date, because the balance moves daily. The ATO is paid directly at settlement rather than funds being released to the borrower.

In this scenario the balance is cleared in one movement and the arrears stop compounding. The business goes back to paying current BAS out of current trading, which is the only sustainable version of it, and the margin that had been going backwards into the arrears goes into the business instead.

The honest caveats belong here rather than in the footer. Securing a previously unsecured debt against a home moves the risk onto the house, and that is a real decision, not a technicality. The total interest paid can be higher over a longer term even where the rate is lower. Whether the interest is deductible depends on the structure and the purpose, and that is a question for a registered tax agent.