Businesses are feeling the pinch of increased interest rates, operating costs and tax debt collection from the Australian Taxation Office (ATO). The Australian Financial Security Authority’s (AFSA) latest data shows a 17% increase in business-related insolvencies since January. This is a stark reminder for company directors that the corporate veil provided by the company structure cannot protect individuals against tax debt — directors can and will be held personally liable for tax debt of their company.
With proposed changes to taxation legislation of ATO debt on the horizon, as well as the continued pressure from the ATO regarding debt collection, it’s important to understand the finance options available to help repay tax liabilities.
Financing tax debt
General Interest Charge
In the past, many business owners have been happy to leave their tax debt with the ATO and pay the general interest charge (GIC), treating the debt as if it were a loan from a bank. With the tax deductible GIC hitting a low of 7.01% in 2021, there was less urgency for people to repay their debt or take out a business loan to pay it off.
With the GIC sitting at 11.34% for the June ‘24 quarter and the ATO proactively chasing debt, businesses are looking for a finance option to repay their tax liability. Adding to the reasons for financing tax debt, the Government unveiled plans within the 2023–24 Mid-Year Economic and Fiscal Outlook (MYEFO) in December 2023, outlining proposed alterations to tax laws from 1 July 2025. The intended amendment seeks to prevent individuals from claiming tax deductions for the GIC.
Business finance
Depending on the type of business finance used, it’s possible to achieve rates of less than 11.34% (the general interest charge). A cheaper rate is a prime factor to consider when weighing up debt options, not to mention the fact that business finance comes with a tax deduction for the business too, and the added peace of mind of not needing to worry about the ATO chasing the debt.
Compare the following options:
Option One:
- Tax debt
- GIC of 11.34% pa
- Does not attract a tax deduction
Option Two:
- Business finance with an interest rate of 7.99% pa
- Tax deductible debt
- Able to support more comprehensive cash flow needs
If a business pays $10,000 in interest charges per year, and they pay the company tax rate of 30% on their assessable income, they will be eligible to claim a tax deduction, reducing their tax liability by $3,000 — pair this tax liability reduction with the interest expense savings that come with a lower interest rate and it becomes clear that Option Two is a more commercially viable approach.
Business finance options for tax debt
Invoice Finance
Invoice Finance allows businesses to unlock cash from unpaid customer invoices. Rather than waiting for customers to pay the invoices, which can be on payment terms of 30 days or more, Earlypay advances up to 85% of the accounts receivable value upfront, which may be used to manage cash flow and clear ATO debt.
Working as a line of credit, the facility can be accessed whenever needed, which means interest is not charged on a lump sum amount like it is with a term business loan. Interest is only paid on the amount drawn down, which is repaid as customers pay their invoices.
Equipment Finance
Equipment Finance can help turn non-liquid business assets (like equipment or machinery) into cash, while the business retains the asset, ensuring business operations are not interrupted. The cash unlocked from an Earlypay Equipment Finance agreement may be used to help repay ATO debt.
To learn more about how Earlypay helps businesses manage their tax debt, please get in touch with us today.
If you'd like to learn how Earlypay's Invoice Finance & Equipment Finance can help you boost your working capital to fund growth or keep on top of day-to-day operations of your business, contact Earlypay's helpful team today on 1300 760 205, visit our sign-up form or contact [email protected].