When running a small business it's important to keep on top of paying the people your business owes money to, otherwise known as ‘creditors’, whether it be suppliers, employees, or covering fixed overheads like rent or equipment costs or other working capital requirements.
One of the most important (and overlooked) creditors is the Australian Taxation Office. After a long list of pressing creditors, it can be easy to ignore tax debt notifications, but the earlier you deal with them the more options you are likely to have. That's where the ATO’s Payment Plan comes in.
What is an ATO Payment Plan?
A payment plan is a formal arrangement between your business and the Australian Taxation Office that allows your business to pay back its tax debt, preventing a large lump sum payment which may not be possible due to working capital requirements or cashflow issues.
Like other kinds of payment arrangement, a payment plan consists of an agreed repayment period and is likely to include interest on the amount payable.
How do I know if I need a Payment Plan?
If you find cash flow in your business is tight and you're unable to pay your tax obligations in full by the due date, you may need a payment plan. They are a great tool for small businesses to help manage their payment obligations and can be an effective way to obtain finance.
How do I qualify for a Payment Plan?
To qualify for the payment plan, the ATO may require you to demonstrate that your business is able to repay the debt. They may request to see your business’s profit and loss report or other financial statements to determine this. Some of the things they may look for include:
Your business’s gross margins
Assets and liabilities
Any current debt arrangements
Availability of funding
It is also important that all of your small business's tax returns are up to date. On top of this, all financials will need to be lodged for the current financial year, even if your tax debt relates to a specific financial year other than the current financial year.
What interest rate does the ATO charge on a Payment Plan?
The General Interest Charge Rate is the amount you pay in interest on the debt owing and can vary from quarter to quarter. The interest charge rate is currently very close to 7.0%. To learn more about current rates as well as historical ones, have a look at the ATO’s website here.
What is negotiable in an ATO Payment Plan?
Depending on your circumstances – more than you might think! The variables in payment plans are the size of your business, your lodgement and payment history, and the size of the tax debt.
For example, if you operate a small business with less than $2 million annual turnover and have an activity statement debt of less than $50,000, you may be able to negotiate an interest-free payment plan over 12 months, provided the tax debt has not been owing for a period of greater than a year.
In short, interest-free payment plans are available for activity statement debt for eligible tax payers.
Is interest tax deductible?
Any interest you pay is tax deductible, however the interest rate the ATO offers may be higher than what you could get elsewhere, so it’s important to talk to your accountant and consider all your options. The duration of the payback period is also variable.
How long does the ATO give you to pay?
The payment period can vary; however, 12 months is common. The maximum duration of a payment plan is currently 24 months. The amount payable varies depending on how frequent the payback periods are. You can use this calculator provided by the Australian Taxation Office to plug in different payment periods and it will calculate the amount payable. The ATO can also increase your payment plan's terms under certain circumstances.
How do I set up a Payment Plan?
There are three ways to set up a payment plan with the ATO.
You can apply for a payment plan online via your MyGov account, provided you are a sole trader, or your tax debt is under the $100,000 threshold. You will need to first link your MyGov account to the Tax Portal if you have not done so already. To learn more about how to do this, click here.
Call the ATO
If you don’t want to go down the MyGov route, you can call the ATO's automated phone service to set up your payment plan, however, make sure you have your Tax File Number (TFN) and Australian Business Number (ABN) handy.
You will have to call the ATO if your tax debt exceeds $100,000. If your debt exceeds $100,000, but not by a meaningful amount, you may be able to pay a one-off upfront payment to become eligible for the payment plan.
Remember, the Australian Tax Office wants you to pay back the debt, and the payment plan is designed to help you, so be as transparent and proactive as you can be.
Use a registered Tax Agent
The third option is to have your accountant register the payment plan on your behalf via the Tax Agent Portal. If you don’t currently have an agent, please connect with us today.
Does a Payment Plan affect my credit rating?
Historically, ATO tax debt did not affect your credit rating, however, since 1st July 2017, the ATO tells Credit Rating Bureaus about businesses that have not “effectively engaged” with it about their tax debts.
What if I already have an existing Payment Plan?
It isn't possible to have multiple payment plans because one of the conditions of payment plans is that you pay all future amounts as they fall due. Another reason is because payment plans are attached to specific accounts, such as Income Tax 551, not on the assessment itself, for example, activity statements and tax income. If you have an existing payment plan you will need to renegotiate a new payment plan.
How important is it that I stay on top of my payments?
It’s important you stay on top of your taxes as not being able to pay them can be considered a sign your business may be headed for insolvency. It can make it harder for your business to obtain a bank loan or credit extension if it has a large tax debt outstanding.
Unlike other creditors, the ATO has direct access to your business’s income tax account and can pay off your tax debt by deducting payments directly from a tax refund owing to your business without your consent. A payment plan allows you to take back control and, within the negotiable limits, to set your own terms regarding payback of the tax debt.
The key is to ensuring you obtain a suitable payment plan that is able to be serviced while also meeting your business's other cash flow needs.
What happens if I default on my Payment Plan?
If you do enter into a payment plan with the ATO it is important that you are not late in making your instalment payments as this will result in an automatic default on your payment plan. Defaulting on your payment plan will be bad for your payment history and can make it more difficult for you to negotiate a similar payment plan in the future.
Not lodging future activity statements and tax returns on time and paying them in full by the due date will also automatically default an existing payment plan. You can view your activity statements using the online services for businesses portal here.
In summary, it is common for small business owners to find themselves struggling to pay tax debt at some point, however if the debt goes undealt with there can be serious ramifications for you and your business. The ATO can take legal action by referring the debt to an external collection agency or issuing garnishee or director penalty notices (DPN).
In the worst-case scenario, the ATO may issue a bankruptcy notice and commence with winding up your business. What’s important is that you take control of your business’s tax debt and the ATO Payment Plan is one great way to do this.
Can I be released from my tax debt?
You may be able to be released from tax debt under some circumstances, however, you would need to show that paying the debt would cause you serious hardship.
The requirements to meet the ATO policies for serious hardship would be: you wouldn't be able to provide food and accommodation for your family. In this circumstance, selling your home would not necessarily constitute an inability to provide accommodation.
Payment plans are a great tool for managing your business's tax obligations. It is important that you are aware of everything that is available and that you reach out and seek professional advice if required.
If you need to set up a payment plan but you haven't done so before, a registered tax agent is the perfect professional to help. Not only can a registered tax agent help you set up the payment plan, they can help you manage your ongoing obligations by supplying you with cash flow forecast statements and make sure that you stay on track with your payments and assist with any future payment plans that may be needed. For example, every time you lodge a new Business Activity Statement or Tax Return you will need to negotiate a new payment plan.
Causbrooks gives you a client manager supported by a team of knowledgeable small business experts. We’re here to take the guesswork out of running your own business.
Get in touch with us to set up a consultation, or use the contact form on this page to enquire whether our services are right for you.
Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.