There are three critical steps that small- to medium-sized enterprises (SMEs) can take to manage their Australian Taxation Office (ATO) debts effectively.

As the ATO intensifies its debt collection efforts, following a period of leniency during the COVID-19 pandemic, an increasing number of SMEs are feeling the pressure of outstanding tax obligations.

An increasing number of businesses have sought loans from Banjo in the past three-to-six months to help manage their tax debts.

There are three essential strategies to help SMEs navigate their tax burden and emerge stronger:

Proactive engagement with the ATO

Businesses need to demonstrate integrity and strong management skills by proactively engaging with the ATO. Ignoring the situation is not a viable strategy. Whether it’s the SME director or their accountant, actively communicating with the ATO to negotiate a solution is always better in the long run.

Realistic planning and monitoring the financial situation

It’s crucial that businesses don’t commit to repayment plans they can’t realistically meet. Understanding your cash flow and having a deep knowledge of your business is essential to entering a plan that’s appropriate and achievable.

Leveraging professional relationships such as your accountant or broker to prepare various cashflow scenarios is important. We’ve seen cases where overly ambitious repayment plans have backfired, putting the business in an even more precarious position. It’s about finding that balance – ensuring the plan is both realistic and sustainable.

Collaboration with lenders

If a business foresees any difficulties in meeting its obligations, it’s vital to communicate with us early. Giving us a heads-up allows us to help address potential issues before they escalate.

We’re here to support businesses, but we can only do that effectively when there’s open communication. If we know what’s happening, we can explore alternative solutions together, rather than reacting to a crisis.

At present it’s estimated that Australian SMEs owe between $30 to $40 billion in tax debt. Some of the key strategies of ATO debt collection that SMEs are encountering include:

  • Director penalty notices: For certain tax debts, the ATO can hold company directors personally liable if an SME fails to repay its outstanding debts.
  • Repayment plans: If the SME is proactive with the ATO, they may be able to set up a repayment plan. For debts up to $200,000, directors may be able to arrange a repayment plan online if the repayment term does not exceed two years.
  • Garnishee orders: The ATO may issue garnishee orders to third parties, such as a company’s bank or clients, to recover funds directly from the business’s account or amounts owed by others.
  • Legal action: The ATO can pursue legal action in court to recover debt, which may lead to enforcement measures such as property seizure or asset liquidation.
  • Credit reporting: In certain circumstances, the ATO may report significant tax debts to credit reporting agencies, potentially harming a business’s credit rating and its ability to secure future financing. If the SME is effectively engaging with the ATO, the risk of reporting the tax debt will be reduced.

The ATO is clearly encouraging businesses to confront their tax obligations head-on. Delays or failures to lodge returns can severely impact an SME’s ability to access finance or capital in the future.

Timely lodgement of BAS/IAS returns, even if some payments are still outstanding, is critical. The ATO is far less accommodating when returns are not lodged, making it difficult for them to determine the exact debt or tax liability.

Proactively entering a payment plan with the ATO can be good practice. If SMEs can demonstrate their commitment to maintaining these payments, lenders may still consider lending to them.

In the current economic climate, SMEs are facing a myriad of challenges, but addressing tax issues promptly is essential to avoid more severe consequences down the road.

Andrew Ward is chief risk officer at Banjo Loans.