How Small Businesses Can Tackle ATO Debt: Options Beyond Payment Plans

Payment plans have historically been a popular way for businesses to manage tax debt. But recent changes have made them less appealing. Here’s what’s changed:

• Higher Interest Rate: The ATO’s General Interest Charge (GIC) is currently set at 11.17%, generally higher than typical business loans.

• Stricter Eligibility Requirements: Businesses must now provide 2 years of financial records and forecasts to be considered for a payment plan.

• Default Consequences: If you miss a payment, the ATO can cancel the plan, and the full debt becomes payable immediately.

• Upcoming Law Change: From July 1, 2025, the interest on ATO payment plans will no longer be tax-deductible.

These factors make it riskier and more expensive for businesses to rely on payment plans as a long-term solution. The loss of tax deductibility from July 1 would make ATO payment plans a very expensive option for Australian businesses.

Smarter financing alternatives like business loans that act like a line of credit, invoice finance, or asset or equipment refinancing, will be a superior cash flow solution for many businesses. Unlike the ATO’s General Interest Charge, the interest payable on the full range of loans from will remain tax-deductible after July. They are also likely to have longer repayment terms and more competitive interest rates, giving businesses more chance to get on top of their debt and keep the doors open.

Four Alternative Options to Tackle ATO Debt

Since payment plans have become more difficult and costly, small businesses should consider other strategies to manage ATO debt. Here are some practical alternatives:

Option 1: Refinance or Finance Equipment

• If your business owns valuable equipment, you can use it to secure finance. This involves using equity in existing equipment to secure a loan or refinancing current equipment loans. The funds from the refinance can be used to pay down ATO debt.

Benefits:

o Interest on equipment finance loans is tax-deductible.
o The interest rate on equipment finance is typically lower than the ATO’s 11.36%.
o You can free up cash flow while still using the equipment.

What to Watch For:

o Ensure the loan structure is tax-efficient.
o Check for any fees or early repayment penalties.

Option 2: Refinance or Leverage Real Estate

• If you own commercial or residential property, either personally or through your business, you may be able to access equity to reduce ATO debt. Refinancing allows you to draw funds from the property and use them to clear tax liabilities.

Benefits:

o Property loans typically have much lower interest rates than ATO charges.
o You can consolidate ATO debt into a longer-term, lower-cost loan.

What to Watch For:

o If the property is held in a personal name, work with an accountant to ensure the debt structure is tax-effective.
o Watch for valuation and loan approval delays.

Option 3: Sell Unused or Underutilized Equipment

• If your business owns equipment that’s no longer essential to operations, you may be able to sell it to raise cash for ATO debt payments.

Benefits:

o Immediate cash flow to reduce debt. o Avoid ongoing maintenance costs on unused equipment.

What to Watch For:

o Be mindful of capital gains tax (CGT) or other tax consequences of selling business assets.
o Work with your accountant to ensure you don’t trigger unexpected tax obligations.

Option 4: Seek Business Finance (Loans, Overdrafts, or Unsecured Loans)

• Instead of relying on the ATO, consider securing business loans or an overdraft. These loans can provide working capital to pay down tax debts.

Benefits:

o Bank loans and overdrafts have lower interest rates than the ATO’s GIC rate.
o Loan terms are often longer, allowing for smaller, more manageable payments.

What to Watch For:

o Many banks will check your ATO debt status before approving loans.
o If the bank sees ATO interest in your Profit & Loss statements, it may raise red flags with credit assessors.

Note: This information is general in nature and is not intended as financial advice. Business owners with an ATO payment plan or a looming tax debt are urged to talk with their key advisors about available options ahead of these new rules coming into effect on July 1.