In recent times, we have experienced several clients becoming frustrated when applying for finance due to outstanding ATO debts. Many clients view the ATO as a quick and easy form of unsecured finance, therefore it’s timely we explain the potential consequences of adopting this approach.
Consequences are simply, the banks don’t tolerate ATO debt. ATO debt normally results in banks declining your finance application even if arrangements are in place and being honoured. In some circumstances, we can get a deferred approval pending full clearance of the ATO position.
As an example, a client recently had an arrangement with the ATO and was comfortable their cash flow would allow the debt to be repaid over a 12-month period. Their finance application was declined pending the ATO position being cleared in full. The client did not think they were doing anything wrong as an arrangement was in place and being respected.
The existence of ATO debt is about to take on a new and potentially more severe meaning. From 1 July 2017, the Government will allow the ATO to disclose to Credit Reporting Bureaus the tax debt information of businesses that have not effectively engaged with the ATO to manage these debts. This measure will initially only apply to businesses with ABN’s and tax debt of more than $10,000 that is at least 90 days overdue.
A further example of how this has impacted a client recently is as follows. A client had not lodged a BAS and it was more than 90 days overdue. In future, this could be captured under the “no engagement rules” and could be listed on the client’s credit report as being a default. The consequences of this would automatically mean that most main stream funders would decline any finance applications.
The implications may become far more reaching. If the ATO log the arrears on your credit report this could also impact your ability to raise credit with suppliers. Generally suppliers will complete credit checks as part of their application process however they are unlikely to request copies of your ATO portals and would have been oblivious to ATO debt. This will now change.
Defaults remain on your credit report for up to 5 years and will continue to impact your ability to raise credit even if settled. Whilst third tier lenders who specialise in lending to clients with defaults exist, the downside is in the interest rates and fees they charge. As an example, we have recently organised home loan finance for a client with a paid default from 2013. Main stream banking would lend to an owner-occupied home loan at 4.1%. Due to the default, specialist lenders charged 7.50% with additional upfront fees. The difference in monthly repayments is substantial, on their loan of $500,000 it equalled approximately $900.
Another trap for small businesses can result when banks complete their annual reviews. It is common for the banks to seek ATO portals and statutory declarations or compliance certificates confirming that ATO and all other statutory payments are up to date. If they are not up to date this can have a significant impact on the bank’s willingness to renew your facilities. Further, the banks will generally not lend you money to repay the ATO.
The key take out for clients is they need to understand the implications of ATO debt and how financiers and now suppliers will react to this. Before entering arrangements with the ATO I would recommend you have a discussion with your advisors on the basis that if you will be seeking finance in the future you need to address the clearance of the ATO before jumping into an arrangement. The clear message is options to borrow money to clear the ATO debt are best sourced before the ATO debt is created.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.