Having trouble paying your business tax debt? The right loan could help – here's what you need to consider.
Covering a tax debt, no matter what size your business is, can have a damaging impact on your cash flow and your operations. If you have a large tax debt that you can’t pay upfront, the Australian Taxation Office (ATO) should be your first point of call to see if a payment plan can be arranged. If you don’t qualify for one of these plans or want to consider your other options, tax debt loans are available.
What is tax debt and how can a loan help?
Your options will depend on your level of tax debt and whether it relates to business activity statements or income tax:
- Individuals with tax debt of less than $50,000 can use ATO’s online service to set up payment plans
- For activity statement tax debt or income tax debt less than $25,000, individuals and businesses can set up payment plans over the phone
- For activity statement tax debt exceeding $25,000 or income tax debt over $50,000, you’ll have to speak to an ATO representative over the phone to discuss your options.
If you want to pay your debt off in its entirety rather than opt for an ATO payment plan, consider a tax debt loan.
A number of financial institutions across Australia provide tax debt loans, and these may still be available to you even if your business’ credit history is less than perfect.
Business lenders you can compare
What should you consider when looking for a loan?
Finding the right loan to cover your tax debts depends on your specific requirements. Comparing the following aspects should help you choose:
- Should you apply for secured or unsecured?
While you can potentially get a tax debt loan without providing any security, a secured loan will potentially mean longer loan terms and lower interest rates.
- What is the interest rate?
Secured loans typically charge lower interest rates compared to unsecured loans, but remember that interest rates will vary from one loan offering to another.
- What fees and charges are involved?
Fees and charges associated with your tax debt loan will have a noticeable effect on how much you end up paying over the course of the loan, so make sure you review the fee structure before you apply.
- Can you make extra repayments and early payouts?
This is a convenient feature and one that can help you save on interest, but early repayments may attract fees.
What are the loan options available to business owners for settling tax debt?
When working out payment plans with the ATO is no longer an option, business owners can apply for loans to pay off outstanding tax debt. Before you become personally liable for your business’s tax debt, you may want to explore loan options to ease the financial pressure.
The following loan types may be an option to consider if you need help paying off your tax debt.
Tax debt loans
Tax debt loans are short-term financial solutions specifically tailored to assist small to medium-sized businesses settle outstanding tax debt. Funds can also be used for:
- Employees’ wages
- Day-to-day expenses
- Settling unpaid bills
Repayment terms are also usually more flexible, allowing business owners to set the pace at which they reimburse the loan.
Invoice financing involves selling outstanding invoices to a financier in order to bring the payment forward. If you’re waiting on payment from invoices that could help you pay your tax debt, this could be an option to consider. Depending on the invoice financier, you could borrow up to 85% of the total value of your invoices to settle your tax debt.
Advantages of this finance include:
- Fast approval
- More accessible than other loan types
- No real estate security necessary
Unsecured business loans
Unlike secured business loans, unsecured loans are granted without property or other valuable assets needed for collateral. Instead, the overall state of your business is evaluated and the loan is granted if the lender feels you can honour your repayments. The terms differ depending on the lender, and repayment periods vary between three and 12 months.
- How long you’ve been in business
- The business’s turnover
- Cash flow
- Your personal and business credit history
You can apply for this loan to cover tax debt even if you’re making repayments on existing loans, but it’s essential that you don’t default on payments and that your business maintains a positive credit history.
The arguments for and against tax debt loans
What are the good and the bad points of getting a loan for your tax debt?
- Get help in difficult circumstances.
If you can't arrange a payment plan, a tax debt loan will help your business to continue operating.
- Keep your personal assets risk-free.
Clearing your business’ tax debts is always a good idea -- you will be held personally liable by the ATO if you don’t pay.
- Get a professional to liaise on your behalf.
Some tax debt loan providers offer you a representative who will negotiate a payment agreement with the ATO on your behalf.
- Fees and charges.
Some lenders charge unreasonably high fees for providing tax debt loans and related services, so make sure to check what costs apply.
- Compounding debt.
Taking on another loan to cover outstanding debts can be risky – you could potentially start a cycle of debt that is difficult to break.
Can you avoid taking out a tax debt loan?
If you’re going through serious hardship you may qualify for a release from paying part of or all you tax liabilities – which is why chatting to the ATO should always be your first step. You can also ask the ATO for additional time to lodge returns without incurring penalties in the event of a natural disaster like a bushfire, drought or flood.
Frequently asked questions about tax debt loans
Can anyone apply for a tax debt loan?
Yes, although lending criteria will vary between lenders.
Can I use proceeds from a tax debt loan for other purposes?
Some lenders allow you to use proceeds from a tax debt loan for other purposes, such as paying for business expenses, covering wages and bills and purchasing supplies.
How long can the loan term be for?
This will depend on the type of loan you are approved for. Generally, loan terms are available for period from a few months up to seven years.
DISCLAIMER: The comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information applicability to their own particular circumstances.