How to Pay Off Tax Debt: Can I get a loan to pay ATO debt?

As a finance expert supporting business owners, I’ve developed the habit of reading blogs from professional services companies, lenders, financial planners and the like. It’s a great way to develop broader knowledge and often provides me with a new way of looking at things. 

Recently I was reading through a liquidator’s blog about a business owner’s options when faced with an ATO debt. One of the first things they espoused was that business owners are unlikely to be able to obtain a loan to pay out their tax debt. The commentary became dismissive about using a loan to payout the ATO and essentially wrote this off as an option. 

Go to your local branch, and you might hear a similar story, “there’s no such thing as a tax debt loan” and “you can’t get a loan for tax debt.” And they’d be totally right — at least about getting a loan from them!

In the broader lending market though, this idea is totally wrong. A loan is absolutely a viable solution to paying off tax debt. It’s a solution that’s utilised all of the time.

How can a loan be used to pay off ATO debt?

While banks and traditional lenders might have issues with lending to business owners with tax debt, there are a number of specialist lenders that are happy to fund loans to payout ATO debt (and other kinds of debt). 

Some of the finance options available for paying off tax debt:

• You can access equity in property, the same way you might take out cash to fund a growth opportunity. 
• You can use any form of line of credit (there are lines of credit that don’t require property security). 
• You can raise capital against equipment, machinery and vehicles. 
• There are unsecured business loans that offer terms more favourable than the ATO. 

Lenders that offer all of these kinds of loans are very happy to support the payment of tax debt (even when your local branch won’t), and they can be much more flexible and cost-effective than entering into a payment plan with the tax office.

While some small business owners may be eligible for an interest-free payment plan for their BAS amounts owed, the eligibility criteria states that they must be unable to obtain finance through other business channels (like a loan). This is only for overdue business activity statement debt. For overdue income tax, superannuation obligations, and any BAS that doesn’t qualify for the interest-free period, entering into a payment plan comes with a general interest charge (GIC) that accrues. Depending on the length of the payment plan, a business owner could pay a significant amount of interest while paying off their debt through the Australian taxation office.

Another issue is if you’re late or miss a payment on your existing payment plan, it will be counted as a payment plan default. Using the right type of business finance can help you manage your cash flow needs so you can keep on top of future tax obligations, while also paying off your old debt.

How do tax debts come about?

A business doesn’t have to be struggling to have accumulated a tax debt. Remember, tax obligations occur because the business has actually been profitable. So any business with a tax debt has been a profitable business at some point in time. But profit doesn’t equal cash flow, and when you’re running a business, the timing of cash flows can mean there are not enough funds to repay outstanding debt — this is where a loan can come in handy when faced with a tax bill.

There are many reasons why a business owner may need a loan to pay a tax debt. Seasonal businesses need to manage cash flow peaks and troughs, and there are finance options available to support this. There are also mistakes; like a client whose relatively new business was growing exponentially, and their accountant had not educated them about payroll tax, so they had made no allowance for it in their budget. 

There are lots of reasons why tax debt can occur, and there are many Australian businesses facing this challenge right now. With the ATO actively engaged in undertaking tax debt collection, now is the time to seek professional advice regarding your options. There are lots of approaches to take to repay your debt and avoid ATO payment plans — and a lending solution is definitely one that could be right for you.

Contact us today to learn how the right business finance solution can help your business get on top of your tax debt obligations.