What is tax debt and how it affects your business

ATO tax debt is a significant issue in Australia, with SMEs collectively owing over $35 billion in outstanding taxes [1]. This highlights the widespread issue among Australian businesses and underscores the importance of managing tax obligations carefully.

In this article, we'll explain what tax debt is, how businesses get into debt with the ATO, the consequences of not addressing it, and how you can manage tax debt effectively.

What is tax debt?

Tax debt is money that your business owes to the ATO for taxes that have not been paid on time. The most common types of tax debt for businesses include:

• GST (Goods and Services Tax)
• PAYG (Pay As You Go) withholding
• FBT (Fringe Benefits Tax)
• Income Tax

Tax debt typically arises from unpaid taxes, but it is important to note that it is not simply due to a failure to submit your BAS (Business Activity Statement) or income tax return for the current quarter or year. Rather, tax debt occurs when payments due to the ATO are not made within the required timeframe.

How do businesses get into tax debt?

Businesses may find themselves owing money to the ATO for several reasons:

• Cash flow problems: When cash flow is tight, businesses may struggle to pay their BAS or tax bills on time, leading to unpaid taxes.
• Poor record-keeping: Inadequate or disorganised bookkeeping can cause businesses to miss tax deadlines, fail to account for tax obligations, or miscalculate tax liabilities.
• Deliberately not submitting tax returns: Some businesses may choose to delay their tax return submissions, knowing that they have some leeway. They may reinvest the money back into the business rather than pay their tax obligations.
• Inability to pay GST or PAYG withholding: GST and PAYG withholding tax obligations can be difficult for some businesses to manage, particularly when revenue is inconsistent or cash flow is low.
• Disputes with the ATO: Businesses may find themselves in conflict with the ATO over tax assessments, which can delay payments and lead to accumulating debt.
• Underestimating tax obligations: Some businesses underestimate their tax obligations or fail to plan for them, leading to missed payments or unexpected tax bills.
• Increased ATO audits: Frequent audits from the ATO can uncover discrepancies in financial records, resulting in unexpected tax liabilities.
• FBT (Fringe Benefits Tax): Businesses that offer employee benefits like cars or health insurance may face FBT obligations, and failure to pay this tax can contribute to tax debt.

Consequences of ATO tax debt

If a business does not address its debt, several consequences can follow. For one, unpaid taxes incur penalties and interest, which can quickly escalate the amount owed to the ATO. The ATO can also take legal action to recover the debt, such as garnishing wages, seizing business assets, or even pursuing liquidation.

There can also be damage to your business's reputation, with the debt negatively affecting credit ratings, making it harder to secure financing, and potentially deterring customers.

Lastly, if tax debt is large and unmanageable, it can lead to bankruptcy, resulting in the collapse of the business.

Why some businesses choose to keep ATO tax debt

While it may seem risky to keep debt on hand, some businesses may choose to do so for strategic reasons:

• Cash flow priorities: Businesses may prioritise cash flow for immediate operational needs and delay tax payments to keep their business running.
• Strategic delay: Some businesses may choose to delay tax payments until a better time of year when cash flow is more favourable.
• Interest and penalties are manageable: In certain situations, the cost of interest and penalties may be considered manageable, and businesses may prefer to delay payment for short-term relief.
• Payment plans: The ATO offers payment plans, which allow businesses to pay off tax debt over time, making it easier to manage.
• Short-term debt relief: Businesses may choose to reinvest in operations or new opportunities rather than pay down tax debt immediately.
• Tax debt as a last-resort liability: Some businesses treat debt as a last-resort liability that can be managed if needed.
• Perceived low risk: Businesses may perceive the risk of tax debt as low, especially if they have no history of major ATO issues.

Why should you care about ATO tax debt?

Tax debt can affect your business in several ways. It can affect cash flow and business plans, as accumulating tax debt can hinder your ability to manage day-to-day cash flow, making it difficult to plan for the future.

Tax debt can also increase default risk. This means that if your business falls behind on tax payments, you may face difficulties obtaining loans or lines of credit. This can prevent you from securing additional financing when needed.

Lastly, owing money to the ATO is also likely to negatively impact lender relationships, not only limiting your access to them but also increasing interest rates.

Ways to manage your ATO tax debt

If your business is facing tax debt, there are several financing options to help you resolve the issue:

• Business loans: Working capital loans can help you pay off debt, giving you the financial flexibility to clear your obligations.
• Invoice financing: If you have outstanding invoices, you can use them as collateral to secure funds and pay off your tax debt.
• Asset-based financing: You can secure a loan by using business assets as collateral, allowing you to pay off the ATO and relieve the pressure of tax debt.
• Debt consolidation: Consolidating multiple debts, including ATO tax debt, into one manageable loan with a lower interest rate can help simplify repayment and reduce financial strain.

Why refinance ATO debt through a business loan this EOFY

From July 1, 2025, the General Interest Charge (GIC)—which businesses pay on overdue taxes to the ATO—will no longer be tax-deductible. This will eliminate a tax benefit that, for many businesses, reduced the real cost of interest by 25%.

Given this change, business owners may seek more cost-effective alternatives, like short-term business loans. Unlike the GIC, the interest on business loans remains tax-deductible.

Refinancing your ATO debt with a loan can not only offer greater flexibility but also ease the burden of high-interest debt. Plus, it can improve your cash flow stability, since you can manage the repayments over a longer period or at a rate that suits your financial situation.

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References

1. https://www.afr.com/politics/federal/ato-patience-runs-out-as-small-business-tax-debt-hits-35b-20241106-p5koaw