Navigating business debts as the ATO ramps up collection activity

The ATO’s tougher approach to debt collection means businesses must review their management of debts and look for alternative financing options.

With the Tax Office recently shifting its approach to tax debts following the end of the pandemic, businesses are now being forced to rethink how they manage these debts, according to specialist credit provider Global Credit Investments (GCI).

Since the middle of last year, the ATO has accelerated its activities with debt collection following a more relaxed and supportive approach during the COVID-19 period. It has also warned tax professionals and businesses to readjust expectations around payment plans as the ATO seeks to claw back $52 billion in tax debt, based on data from April.

ATO assistant commissioner, lodge and pay, Sylvia Gallagher says some tax practitioners still have expectations for three-year payment plans with quite minimal repayments for their clients.

Out of the $52 billion on the ATO’s debt book, small businesses make up the majority of that at around 90 percent.

“We do want to make sure that we can help businesses get back on track,” Gallagher says.

GCI managing director Hugh Selleck says many companies are only really starting to take action on these liabilities now.

“The ATO is really ramping up the pressure on companies and their directors,” Selleck says.

“The Tax Office has some really powerful tools in its arsenal to collect the money including garnishee notices where the ATO can essentially tell your customers not to pay the company and to pay the ATO instead.”

The ATO also revealed in late March that it had already issued 18,343 director penalty notices relating to 13,454 company liabilities in the 2023–24 income year.

Selleck says there is also now a much higher interest rate attached to liabilities associated with tax debts.

“When you combine the higher interest rates with ATO repayment plans that are on much more aggressive terms and needing to be repaid in a much shorter amount of time, that’s where there’s an opportunity for firms like ours to help borrowers,” he says.

Acting early

While the ATO has tightened up on the types of repayment plans it is offering to businesses with tax debts, engaging early is still critical, according to Selleck.

“If an accountant can see a liability building, then they should be encouraging the company to engage with the ATO to at least buy some time,” he says.

“The ATO is triaging the businesses that owe money and those that engage with them and make an effort to deal with the situation and the liability will be treated better than those who just didn’t listen.”

Once the business has bought itself a small amount of time, Selleck says that’s where a finance specialist can step in to help the business by reshaping the repayment profile to give the business some more time to restructure its operations or finances and then pay it back over a longer period.

With many ATO payment plans now spanning 12 months or 18 months maximum, Selleck says this can quickly drain a business’s cash flow.

“That’s where the business may want to seek out an alternative form of finance that can immediately pay out that ATO liability and put it on a different amortisation or repayment profile,” Selleck explains.

“That’s where the business may want to seek out an alternative form of finance that can immediately pay out that ATO liability and put it on a different amortisation or repayment profile,” Selleck explains.

This may enable the business to pay 50 per cent of the loan down over three years, for example. After those three years, the business may be in a position where it can be refinanced by the likes of a bank or lower-cost financier, he says.

Risks of waiting

With the backdrop for small and mid-sized businesses likely to get worse before it gets better, locking in a longer-term financing arrangement now is likely to put businesses in a stronger position than waiting six months, according to Selleck.

“For businesses that already have an ATO liability or a debt they can’t jump over now, I encourage them to deal with it now rather than kick the can down the road and beg for forgiveness down the track because that may not be forthcoming,” he warns.

Selleck says while dealing with these debts now may require the business to use a higher-cost financing solution, this is a better option when the alternative is losing the business altogether.

In some cases, businesses may be delaying seeking out solutions for their debts in the hope that interest rates drop in the short term, he says.

Selleck says there has been a shift in sentiment among economists and commentators in recent weeks which suggests that there is unlikely to be a material reduction in interest rates this year, if anything it could get worse.

“Offshore the US interest rates look likely to stay on hold and the sentiment here has changed. We’re definitely in this for longer,” he warns.

ANZ recently revised its forecast for interest rates and is now predicting that the Reserve Bank of Australia won’t cut the official cash rate until next year at the earliest.

ANZ head of Australian economics, Adam Boyton, says while the major bank originally expected the first rate cut to be in November this year, it now forecasts the first cut to be in February.

Selleck says it’s also important that accountants and businesses dealing with debts are aware of the wide range of financing options available beyond the banks.

“There are a whole range of different alternatives available, particularly if they’ve got some form of asset,” Selleck explains.

“You don’t necessarily need to be bankable to get a financing solution that works for you.”

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