Author
David HillChief Operating Officer
Fulfilling tax obligations ranks at the top of business compliance priorities, but it’s not always easy to keep on top of your business tax. Business tax debt has serious implications when left unpaid, so every business should be proactive in managing this type of debt.
Implications of unpaid business tax debt
Unpaid business tax debt can cause serious issues for your business and expose you to legal action.
Disclosure to credit reporting bureaus
The ATO can disclose your tax debt information to registered credit reporting bureaus (CRBs). CRBs can include this information in credit reports. This means that when your business is seeking credit, a poor tax debt history could hinder your application with banks and lenders. This can happen if you have at least $10,000 in tax debt that’s overdue by 90 days or more, where you’re not engaging with the ATO to manage the debt. Once it’s on your credit file, it will stay there for five years.
Debt collection
The ATO can refer unpaid business tax debt to external collections agencies, leaving you to deal with collections actions. As with disclosure to CRBs, this can impact your ability to secure business financing.
Penalties and other actions
If your debt accumulates and you leave it unpaid, the ATO can initiate insolvency proceedings and take other types of action like issuing you with a statutory demand, garnishee notices, and director penalty notices.
To avoid these penalties, follow our steps to manage your business tax debt.
Strategies for managing your business tax debt
Act in a timely manner to manage your debt, and prioritise it as a business goal.
1. Assess your financial situation
Take stock of what’s happening in your business, and look at what you owe, and what’s owed to you. Keep your records up to date and review key reports like cash flow statements and profit and loss statements. Talk to your accountant to get a clear picture of your business’s finances.
2. Prioritise your tax debt
Work out what you can pay now and what you can pay on an ongoing basis. Consider all your outflows and review what payments you can delay. Set up a budget to identify how you’ll put aside the funds to pay your business tax debt.
3. Make sure you’re getting paid on time
Non-paying and slow-paying receivables can slow down your payment cycles, making it a challenge for you to pay your business tax debt and expenses. If you have slow-paying customers, incentivise them to pay early with discounts. Shorten your payment terms, and apply a fine when customers pay late.
4. Lodge your activity statements and returns on time
Make sure you lodge your activity statements and tax returns on time, even if you can’t pay. The ATO has separate penalties for late lodgement, so keep your lodgements up to date even as you negotiate your payment terms.
5. Communicate with the ATO
Stay in contact with the ATO, especially if you can’t pay your business tax on time. The ATO is more likely to look upon your case favourably if you’ve made an attempt to fulfil your compliance obligations and keep them updated on your situation. Return the ATO’s calls and keep them notified of any new developments.
6. Set up a payment plan
You can set up a payment plan with the ATO for your unpaid business tax debt. Review your finances and consider what a realistic payment plan might look like, and discuss this with the ATO. You’ll be charged interest on the plan, but ideally, the periodic repayments will be manageable. If you can’t reach a payment plan with the ATO, the ATO could consider accepting a security (registered mortgage or bank guarantee) in exchange for deferring payment of your debt.
It’s important to note however, you need to meet your repayments as they fall due under the payment plan, or the ATO could take action to recover the debt.
7. Serious hardship and release
If you’ve experienced serious hardship and you’re an individual (sole trader), the ATO could consider releasing you from some or all of your business tax debt. Along with income tax, other types of tax debt like PAYG instalments, and fringe benefits tax could be released.
8. Refinance your business tax debt
An alternative to implementing a payment plan is refinancing your business tax debt. If you fall behind in a payment to the ATO, the entire debt amount for the plan becomes due. In contrast, taking out a business loan to pay off your tax debt will ensure you’re up to date with your repayments without worrying about the ATO contacting you for repayments. However, as with any loan, you’ll need to be certain your business can meet the repayment obligations.
9. Get expert advice
Obtain advice from trusted advisors, including your accountant, financial advisor, and even other experts like insolvency and business turnaround professionals. These experts could support you in better understanding what’s happening in your business finances, so you can make smarter decisions.
If you’re finding it hard to meet your business-tax obligations the problem could be due to poor cash-flow management, unsound business management practices, or other business-related issues. Turnaround experts could help you identify these shortcomings and devise a plan for getting your business back on track.
When will the ATO pursue wind-up proceedings?
In recent years, the ATO has taken a tougher stance on unpaid business taxes, filing more wind-up applications and adopting what it calls a “timelier and stronger” approach to enforcement to maintain fairness among taxpayers.
Debts as low as $100,000 are now being actively pursued, putting businesses without a repayment plan at higher risk of wind-up action.
Importantly, there’s no set minimum for ATO enforcement. Any unpaid tax debt, including GST, superannuation, or PAYG, should be treated seriously and addressed promptly.
When deciding to recover debt through wind-up applications the ATO will consider:
- Asset position
- Type and size of debt
- Your future income
- Risk to revenue
- Possibility of liquidation
The ATO Step-by-Step Recovery Process
- ATO Issues Statutory Demand: If your company has outstanding tax debt, the ATO may issue a statutory demand. This is often the first formal step in debt recovery.
- 21-Day Response Window: You must either:
- Repay the full debt within 21 days, or
- Enter into a payment agreement accepted by the ATO.
- Failure to Respond: If you don’t act within 21 days, the ATO can apply to the Federal Court to wind up your company.
- Court Hearing: A hearing date is typically set 21–28 days after the 21-day demand period ends. If the court approves the application, a liquidator is appointed.
- Liquidation: The liquidator will sell company assets and distribute the proceeds to creditors, including the ATO.
- Avoiding Wind-Up: If you repay the debt or enter an approved payment plan within the 21-day period, the ATO will not proceed with wind-up action.
What if the wind-up notice has already been filed?
Once the wind-up notice is filed by the ATO, your options are much more limited. For example, you won’t be able to start a creditors’ voluntary liquidation, though you can still pursue voluntary administration.
The ATO might be willing to consider a genuine attempt to enter into a Deed of Company Arrangement, so as to give your company the best chance of continuing with business, and/or creditors get the best possible outcome.
However, it has to be shown there’s a real possibility that voluntary administration will deliver results for the company and creditors, or the court might rule for the wind-up to go ahead anyway.
When will the ATO consider a settlement?
As a general rule of thumb, the ATO will opt to settle disputes relating to tax or superannuation debts if the costs of continuing exceed the benefits.
These costs can include:
- Internal and external legal costs
- Costs and risks of collecting the debt from your company
- Your company’s financial position
- The position of any related entities
- What would it mean to be effective and efficient in using the ATO’s resources
The ATO will also consider any future compliance issues, whether there are any contentious points of law, and whether it’s in the public interest to litigate. If a company has avoided compliance by behaving in a certain way, and the ATO thinks there’s a need to send a strong message, then it might well choose not to settle.
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