Often businesses do not realise the effect that a payment arrangement with the Australian Tax Office (“ATO”) can have on their ability to obtain finance.
A typical case we are seeing is where a business is travelling well, although cash flow is tight, and they have fallen into arrears with the ATO. Their accountant then suggests that they enter into a payment arrangement with the ATO to pay down the arrears in instalments. The accountant mentions that there is a General Interest Charge of around 9% per annum, but that this is an affordable way to make payments and it is easy to arrange. The business owner agrees and enters into a payment arrangement with the ATO, and the debt due becomes simply another creditor on the balance sheet.
Whilst this option may appear attractive on the surface, it does come with some risks that are often not taken into consideration.
In our experience, financiers treat tax obligations in arrears as a sign a business is failing, even though this may not be the case. The general view taken is that if a business cannot meet its tax obligations, then a financier should not be lending to them.
This can have the following flow-on effects:
- If a business requires any future finance, or when its existing facilities are due for renewal with its core bank, having an ATO payment arrangement in place will in most cases impact upon the ability to renew facilities and/or increase limits.
- If a business needs to borrow funds from another financier (not their core bank), such as for the financing of equipment purchased, these financiers will also not generally approve borrowings if an ATO payment arrangement is in place.
Most financiers require a clear Tax Portal from the applicant (borrower) to demonstrate that payments to the ATO are up to date before releasing funds. In some cases, financiers are also asking for an Integrated Client Account that shows tax payment activity over the previous twelve months. If there have been any ATO payment arrangements over the period, the application will automatically be declined..
If you are in a situation where your business cannot meet its tax obligations due to a short term cash flow issue, there are other options available. These can include:
- Approaching your core bank for an increase in short term funding (such as an overdraft)
- Applying for an unsecured business loan or debtor finance facility
- Reviewing all of your financing facilities and making sure they are suitable for your ongoing cash flow requirements.
If you need assistance now or in the future, we are happy to discuss the above options with you and tailor a plan to address your individual circumstances.