Over the past few years, many small businesses have been treating the tax office like a bank – but it’s a stop-gap measure, warns national Small-Medium Enterprise funder. Rather than run up ATO or credit card debt, there are smarter solutions for SMEs.

Is the ATO a good line of credit?

Many small businesses may be using the Australian Taxation Office as a line of credit and delay or de-priotisie paying off their tax debt.

There can be many reasons why an SME might avoid paying off the money owed to the ATO. Some may be unaware of alternative business funding solutions or they believe it is too hard to arrange formal commercial finance facilities, according to national SME finance specialist ScotPac.

Some may just be used to the relative leniency the ATO has been showing to the billions of dollars owed by 40,000 businesses across Australia. Either way, that’s about to change.

The ATO is chasing SME debt like never before

Businesses with debt owed to the ATO of $100,000 and that is more than 2-years overdue sit atop the tax office’s hit list. The ATO is looking to recover the ballooning debt owed to them by businesses who don’t prioritise paying it off promptly.

For small and medium sized enterprises this can pose a problem. Companies with tight cash flow or restricted access to working capital can find themselves facing a sticky situation when the ATO comes knocking.

Getting ahead of tax debt with ScotPac

ScotPac CEO Jon Sutton said SMEs may not be aware of how they can use invoice finance not just to help pay their ATO obligations but to grow their business.

Mr Sutton comments are even more pertinent with the ATO’s increasing concern of the $50.2 billion owed to them over the past four years.

Recent ATO figures indicate small businesses are the main offenders for late payment, accounting for almost 80 per cent of collectable debts (micro businesses with turnovers under $500,000 make up three-quarters of the small business debts).

“It is an astronomical amount the ATO is chasing. Given the size of the debt, the ATO is likely to make it much tougher for small businesses to run up debts in future, so it’s a great time for SMEs to look at better ways to improve their working capital,” Mr Sutton said.

The Australian Tax Office has also indicated that the remission of interest and penalties will also now be far less generously allowed for. This means that SMEs who delay payments are on a dangerous path moving forwards. 

“Of those SMEs not paying their ATO debt, there are undoubtedly many viable businesses that have just not managed their working capital well,” he said. “Getting the right commercial finance to support your business – and help it thrive, not just survive – is really not that onerous. There might be a few more forms to fill in, but you’ll end up with working capital to fund business growth.”

Financial solutions to prevent running up ATO debt

While some businesses turn to overdrafts and loans, invoice finance can provide a more flexible and customised funding solution. This financial facility is similar to a line of credit which is linked to and secured by your outstanding accounts receivable. It means no need for collateral and simpler eligibility criteria. Alternatively, invoice finance can be used as a short-term come and go facility, turning invoices into cash when and however you need it.

“We have seen examples of businesses with tax debts in excess of $1 million, with the ability to borrow $2 to $3 million against outstanding invoices, but have chosen not to arrange a legitimate commercial finance facility. Businesses in this situation can raise more than enough working capital to pay down their tax debt and inject further funds into their working capital,” Mr Sutton said.

“While SME owners are busy people, the danger of putting things in the “too hard” basket and running up a tax debt until it is called in, puts risk on the business and the business owner could ultimately become personally liable for the company debt.

“We’ve also had cases where clients, before they found a debtor finance solution, were using personal credit cards to cover business expenses because they find that “easier” than spending a day or two seeking a permanent solution. This is really only a stop-gap measure.

“Our message to SMEs is don’t use the ATO for convenience purposes, because while it might seem like a short-term fix for your cash flow problems, it’s just delaying the inevitable and it’s doing nothing to provide your business with the working capital you need to thrive,” he said.

Why you should speak to your local ScotPac office today

  • The ATO is cracking down on SMEs who owe $100,000 or more.
  • Directors can be personally liable for ATO debt.
  • Tax debt is not a reliable or long term line of credit.
  • Default rates of interest and the possibility of penalties exist.
  • Managing the creditor relationship with the ATO can be tricky.
  • The ATO can and does issue winding up petitions to businesses with unauthorised arrears build ups or those who don’t meet repayment requirements.

Get ahead of tax debt with our specialists

We work with SMEs around Australia to help ​​unlock additional working capital with fast approvals and no need for property security. This way, the businesses can pay down their ATO debt and fuel ongoing growth.

Contact us today to find out more about any of the following alternative lines of credit:

Selective invoice finance – This is a great way to release locked up funds and access working capital with all the flexibility and control you need.

Invoice finance – There’s no need for collateral in the form of real estate security as the invoices act as the collateral.

Overdraft – This common form of funding is available for SMEs able to provide real estate security with sufficient equity to support the required limit.

Trade finance – Available both secured or unsecured, this facility allows businesses to establish domestic and/or international trade.