One of the best ways to start 2025 is to ensure you are well-placed to meet your tax obligations.

The Australian Tax Office (ATO) is pursuing over $35 billion in unpaid taxes from small businesses and has promised to get tougher in its collection activities.

If you can’t pay your tax debts, the ATO may burden you with penalties, interest charges and legal action. Steps taken by the ATO can also damage your credit score, affecting your ability to get finance and making it harder to grow your business.

According to the Corporate Insolvency Index, total insolvency appointments surged 39% nationally in the 2024 financial year (FY24) to 11,049.

This jump, however, comes as no surprise to Gareth Gammon, a director of Insolvency Australia, who says the ATO has gone into overdrive to collect debts, particularly from small businesses.

“It has resulted in a surge in court-initiated windings-up, but conversely, it has also prompted more directors to take action to save their businesses,” he says.

Insolvency Australia reveals that one in four companies opted to restructure to survive in FY24 compared to just one in five companies in FY23.

However, the insolvency platform warns that businesses aren’t out of the woods yet as the ATO continues to work through its debt book to restore a compliant tax environment after taking a more relaxed approach during COVID-19.

Indeed, the ATO says it is changing how it deals with businesses that refuse to engage with it and that ignore its SMS and letter reminders as it chases unpaid debt, including GST, pay-as-you-go (PAYG) withholding and employee super.

The consequences of NOT responding

The ATO says it will move faster against those who don’t respond to its approaches and take firmer actions.

One action it can take is to issue a garnishee notice, a legal document sent to third parties that may hold money for you now or in the future, instructing them to pay this money to the ATO.

Another is to issue a Director Penalty Notice, which allows the ATO to recover debts by issuing garnishee notices, offsetting any of your tax credits against your director penalties or initiating legal recovery proceedings.

If you don’t pay your tax debts on time, the ATO will automatically add a general interest charge to what you owe. This means your debt will grow each day your debt remains unpaid.

The ATO is also required by law to use any credits or refunds you are entitled to pay off the debt. In some cases, it can also use credits you receive from other government agencies to pay off your debts.

If you don’t respond to a pre-referral warning letter it sends you, it will refer you to an external debt collection agency called Recoveriescorp.

The ATO can also issue employers with a direction to pay outstanding super guarantee charge (SGC), or estimates of SGC, within a specified period. Failure to comply with this direction is a criminal offence and can result in penalties or imprisonment.

In addition, the ATO can report your tax debt to registered credit reporting bureaus or take legal action against you. It can also issue a statutory demand for payment of the debts. If you don’t comply with this demand, the ATO may use the non-payment as evidence that you are insolvent and apply to wind up your business.

Preventing tax debts

As you can see, it’s vital to avoid any tax debts by adopting good cash flow habits that ensure you are always ready to meet your tax obligations. This can be done by:

  • Using digital tools and software to automate and streamline your business operations and provide you with calculations of your live tax position.
  • Setting aside your GST, PAYG withholding and super from your cash flow (perhaps in a separate bank account), so the funds are available when needed.
  • Understanding your cash flow so you know when money will come in or go out and can better budget for ATO payments.
  • Getting help from a tax professional or accountant.

If you can’t pay

  • Don’t ignore your situation.
  • Reach out to the ATO early for help.
  • Communicate openly and honestly with the ATO about your situation.
  • Discuss a payment plan. If your debt is less than $200,000, you can set up a payment plan online through the ATO’s online services for business.
  • Consider deferring payment due dates and interest remissions if you are experiencing genuine financial hardship.
  • Review your cash flow cycle, invoicing processes and payment terms to ensure your new deadlines.
  • Reassess your operations to ease your underlying financial challenges, perhaps by restructuring, cost-cutting or introducing new revenue streams.
  • Speak to your financial adviser or broker network about seeking financial solutions to help to manage, remove or reduce tax debt.

Seeking financial support

ScotPac CEO Jon Sutton says businesses that seek professional financial guidance when dealing with ATO debt will be best placed to recover.

“In the current high-cost environment, businesses are understandably nervous about disruptions to their cash flow and supply chains, particularly those operating on thin margins,” he says.

“The good news is that unprecedented support and guidance is available to businesses, starting with their brokers and key advisors.”

Sutton says ScotPac has over 35 years of expertise in helping businesses optimise their cash flow and manage ATO debt obligations.

“ScotPac’s leading Invoice Finance and Boost Business Loan are two solutions that can provide businesses with rapid cash injections to help manage both anticipated and unexpected events,” he adds.

Financial facilities to improve cash flow

If you’re looking to ensure your business’s success in the current economic climate, the importance of cash flow cannot be underestimated. With the ATO currently focused on recovering small business debt, it’s a good time to explore your options – and there are several funding solutions designed to help businesses remain stable and grow, even in challenging economic conditions.

Ease cash flow concerns with ScotPac

ScotPac has been helping Australian businesses survive and thrive with fast and flexible finance solutions for decades. Our commercial funding options include:

All our facilities are designed with the needs of Australian business owners top of mind. Plus, they’re all completely customisable, so you can benefit from a tailored funding solution that suits your business’s needs.

To find out more about our Invoice Finance, Trade Finance, Asset Finance or Business Loan solutions or to discuss your goals for your business, get in touch with ScotPac’s lending specialists today.