Why managing ATO Tax Debt is crucial for your business’s future

When businesses fail to meet their tax obligations on time, they will incur penalties and interest charges, further increasing their debt burden. Managing and clearing ATO tax debt is crucial for maintaining financial stability and avoiding severe consequences. As of December 2023, small businesses in Australia owed approximately $34.1 billion in tax debt, accounting for 65% of the total collectable debt.

Small-to-medium sized businesses in Australia primarily accumulate debt with the ATO due to:

• issues managing cash flow
• underestimating tax liabilities
• complexities of tax compliance
• struggling with timely payments of GST, PAYG withholding, and income tax

Two other ways businesses can accumulate tax debt are if they treat withholding tax as revenue for the business or there is fraud committed by employees.

The COVID-19 pandemic exacerbated the tax debt issue, as businesses deferred tax payments to manage immediate financial pressures. Some businesses may also inadvertently over-claim deductions or omit income, further increasing their tax liabilities.

Olga Koskie, Director at Tax Assure, notes “Many businesses underestimate their tax liabilities, leading to significant accumulations of debt. It’s crucial for business owners to maintain a proactive approach to their tax obligations.”

Certain business types may be more susceptible to accumulating ATO tax debt, including, construction, retail, wholesale and manufacturing. These sectors typically have fluctuating income streams, making it challenging to maintain consistent tax payments. Moreover, businesses with complex supply chains or those heavily impacted by economic downturns are also at greater risk of falling behind on their tax obligations.

Recent changes in the ATO’s approach have made it more critical than ever for businesses to address their tax debts promptly. During the COVID-19 pandemic, the ATO may have been more flexible with tax debt collection, often allowing some businesses to defer payments to stay cash flow positive.

“While these measures were necessary during difficult times, they have created long-term issues with tax debt that require our immediate attention,” Olga emphasises.

However, with the ATO resuming its normal debt collection activities, timely tax payments have become essential for maintaining financial health. Olga also highlights the urgency of addressing these issues: “Recent changes in the ATO’s debt recovery efforts underscore the importance of addressing tax debts promptly. Businesses cannot afford to ignore their tax obligations, especially with intensified recovery actions now in place.”

Some of the ATO’s recovery actions include:

• Reporting businesses with outstanding debts to credit reporting agencies
• Issuing garnishee notices, allowing the ATO to directly withdraw funds from a business’s bank account

Antony Resnick, Partner at dVT Group, states “The ATO has also increased the issuance of Directors Penalty Notices (DPNs), which hold company directors personally liable for unpaid tax debts.”

DPNs are a tool used by the ATO when a company fails to meet its tax obligations and are issued to the directors requiring them to pay the outstanding amounts. There are two types of DPNs:

1. Standard DPNs – Directors have 21 days to repay the outstanding sum or enter administration, liquidation or small business restructuring. “In addition, a non-lockdown DPN comes into effect when the BAS is lodged but remains unpaid after more than three months,” notes Antony.
2. Lockdown DPNs – Directors are automatically liable for the debt if it remains unpaid, or BAS returns are not lodged, after three months and cannot be remitted even after winding-up proceedings.

“It is better to submit your BAS on time, than to lodge it late, even if you cannot afford to pay the amounts due in terms of the BAS,” offers Antony. “If a DPN is then issued, it is a non-lockdown DPN and there are remedies available, including borrowing funds to pay the debt and get your business back on track.”

The issuance of a Lockdown DPN can have severe implications for a business. It can trigger insolvency proceedings, leading to the liquidation of the company. This not only affects the business’s operations but also impacts the directors’ personal finances and creditworthiness.

“A non-lockdown DPN, if not addressed in a timely manner, will become a personal liability of the director and could lead to insolvency of the director and puts in jeopardy personal assets such as the family home,” explains Antony.

The increase in DPNs has contributed to a rise in business liquidations in Australia, highlighting the importance of addressing tax debts promptly. In 2023-24, over 26,000 DPNs were issued by the ATO, an increase of 50% on the previous year.

To manage these cash flow challenges, businesses can benefit from working capital finance solutions. 

Octet offers a tailored Term Loan product, as part of the Debtor Finance and Trade Finance facilities, that can support businesses to repay ATO debt. Whilst the ATO offers repayment plans for tax debt, the current (October-December 2024) General Interest Duty for late payments is 11.38% (compounded daily).

Octet’s Term Loan is a flexible financial solution that provides the necessary funding to:

• Clear tax obligations and avoid penalties
• Enhance cash flow
• Improve creditworthiness
• Focus on growth and operational efficiency

Addressing ATO debts promptly not only helps maintain financial stability but also ensures that businesses can continue to thrive in a competitive market. “By securing tailored financial solutions, businesses can clear their ATO debts and focus on what they do best – growing their business,” says Olga.

Beyond repaying ATO debt, Octet’s Term Loan can be used for various other business needs:

• Invest in assets, plant, and machinery: Grow your business by securing additional space or investing in equipment.
• Manage operational costs: Cover everyday expenses such as payroll, inventory, rent, and utilities.
• Retire existing debt: Improve cash flow and creditworthiness by paying off new and existing debts.
• Consolidate loans: Simplify repayments, reduce interest, or decrease monthly payments with competitive rates.