An ATO payment plan against a refinance

People talk about a payment plan and a refinance as though they are two prices on the same shelf. They are not. A payment arrangement is an agreement with the creditor you already have, to pay the same debt over a longer period. A refinance brings in a different creditor who pays that debt out in full, leaving you owing a lender on contracted terms instead.

One changes the schedule. The other changes who you owe. Knowing which problem you actually have is most of the decision, and it is why the comparison below is set out by mechanism rather than by which one sounds cheaper.

For smaller balances, a business or an individual can often set up an arrangement through ATO online services or an automated phone service, without speaking to anyone. Larger balances go to a case officer, and the ATO will want to understand the financial position before agreeing to anything.

• An upfront payment is commonly requested, with the remainder by instalments, usually by direct debit.
• Every lodgement has to be up to date, and it has to stay up to date for the life of the arrangement.
• Future obligations must be paid on time as they fall due, on top of the instalments.
• The general interest charge keeps accruing on the reducing balance for the entire term.
• A missed instalment can cancel the arrangement, at which point the full remaining balance is payable and recovery action can resume.

That last point is the one to sit with. A payment arrangement is not a settlement and it is not protection. It is a conditional agreement not to escalate, and the ATO does not have to renegotiate if it falls over.

There is no facility that transfers a tax debt to a bank. What actually happens is simpler and less exotic than the phrase suggests. A lender approves a loan, usually secured against property. At settlement, part of the proceeds is directed straight to the ATO against a payout figure. The integrated client account clears, GIC stops accruing on the amount paid, and you now have a loan with a rate, a term and a repayment schedule.

The ATO is not a party to this and does not need to approve it. It is being paid in full. What it will want is for the payment to arrive, and what your lender will want is an account statement dated close to settlement, because a payout figure moves daily while GIC is running.

It is worth saying plainly, because a broker has an obvious incentive not to. If the balance is modest, the business is trading profitably, and the arrangement will genuinely clear it inside a short window from operating cash, then the payment plan is the right answer. A refinance in that situation is an unnecessary expense and an unnecessary charge over your property.

• No security is given, so the family home stays out of it.
• Nothing is paid to arrange it, and there is no valuation and no establishment fee.
• It can be in place today, which matters when a due date is close.
• Borrowing capacity is preserved for something else, provided the arrangement is met.

The failure mode is almost always the same, and it is not dramatic. A business agrees to an arrangement on an old balance, and then the next quarter’s activity statement falls due. Now one cash flow is funding two liabilities: the instalments on the old debt and the full amount of the new one, on time, as a condition of the arrangement.

Most businesses can do that for a quarter. Fewer can do it for a year. The arrangement gets renegotiated, then renegotiated again with a longer term and a smaller instalment, until the instalment is close enough to the daily accrual that the balance stops moving at all.

Three signs the arrangement has stopped being a repayment

1. 01The balance today is close to what it was twelve months ago, even though nothing has been missed.
2. 02The arrangement has been renegotiated more than once, each time with a longer term.
3. 03It is only affordable if nothing goes wrong: no late debtor, no equipment failure, no quiet month.

None of that is a moral failure. It is what a compounding, undeductible, unamortising debt does to a working business. The mistake is waiting for the arrangement to default before looking at the alternative, because a defaulted arrangement makes the finance conversation harder rather than easier.

1. 01

   Establish the real number

   Integrated client account statements for every account, plus anything that will fall due before settlement. Half of all files start with an owner who is wrong about the balance by a material amount.

2. 02

   Confirm lodgement status

   Unlodged activity statements stop most lenders and they have separate consequences under the director penalty regime. This gets fixed first, whether or not the money is there to pay.

3. 03

   Test the security position

   What is owned, what is owing against it, and where a valuation is likely to land. This determines which lenders are open to you before anyone submits anything.

4. 04

   Match to a lender, not to a rate

   A panel of more than forty lenders exists for a reason. The cheapest lender that will decline the file is worth nothing, and a declined application leaves a mark on your credit file.

5. 05

   Submit with the explanation attached

   How the debt arose, what has changed, and what the business looks like now. An assessor who has to guess will guess unfavourably.

6. 06

   Settle and direct the funds

   Proceeds are directed to the ATO against a current payout figure, not into the business account. Lenders require it, and it removes any question about purpose.

Timeframes depend on the lender, the security and the valuation. We do not promise a settlement date, and we tell you early if a file is not going to work rather than letting it run for six weeks.

First document

ICA statements

Lodgement

Must be current

Where the funds go

Direct to the ATO

Payout figure

Dated, moves daily

Lender panel

40+ lenders

Timeframe

Lender dependent