Every start-up business owner will inevitably ask themselves “How do I make a payment arrangement with the Tax Office”?” And while such a question is a natural, often logical, step for the founder of a family business there is a few steps to consider before you start to talk to your Perth tax accountant about creating a tax payment arrangement with the ATO.
A payment arrangement is an indicator of insolvency
As a director of a private business you have an obligation to pay your tax debts as and when they fall due. And a payment arrangement is an initial indicator (but not the only indicator) that you are unable to pay your debts when they are due for payment.
Importantly, a payment arrangement does not cause a tax debt that was payable to no longer be payable. This is important when considering whether or not your business is solvent and is often seen as a first step towards insolvency.
A payment arrangement is difficult for the banks
If you enter into a payment arrangement with the Tax Office: and you are considering about extending your finance facility with your bank you might find the process difficult. Banks will typically look at a business with a tax payment arrangement with the Australian Tax Office as a much higher risk of lending and will typically take a much more conservative approach to engaging with a potential Perth family business if they have multiple tax debts with the ATO subject to a tax payment arrangement.
How do I make a payment arrangement with the Tax Office
The first thing you need to do before you start to make a payment arrangement with the ATO is to have a clear idea of what you can and what you cannot pay over a period of time. So the starting points include
- Having a clear and logical basis for why you could not pay the initial tax debt
- How much of the debt you are prepared to make as an initial upfront payment as an act of good faith to the ATO
- Evidence that you are treating the ATO with the same respect as you would do to any other creditor or bank that you are requesting extended payment terms
- Proof that these debts can be made together with the ongoing and future tax debts being made in full on time (so that the tax debt will not continue to grow even if the payment arrangement is met)
- Evidence showing how you are unable to pay the tax debts as they arrive
What increases my chance of success with getting a payment arrangement with the Tax Office?
If you attempt to get a payment arrangement with the Tax Office the following factors will significantly help you get a successful outcome:
- You will need your tax file number and a document identification number on hand when you call the Australian Tax Office?
- A higher upfront payment makes a significant contribution towards how receptive the Australian Tax Office are towards granting a payment extension
- A history of prompt lodgement of tax returns and subsequent payment will significantly contribute towards your chances of success
- A higher monthly (or fortnightly) payment to reduce your payment term of the tax debt
- A cashflow statement for your business showing how you can afford to continue trading and fund the payment of the past tax debts and your future tax debts
- A statement of your net assets showing why you cannot fund the tax payments through accessing bank funds or liquidating personal assets
If my payment arrangement is a lower balance do I need to be concerned?
If you attempt to make a payment arrangement with the Tax Office for amounts less than $100,000 you will deal with an automated system with the ATO to pay your tax debt over a period of time. And while it is better to pay your tax debts on time every time: the provision of an automated system by the ATO towards tax debts of this lower level of magnitude gives an indication of how often tax payment arrangements for this lower level tax debts.
Clear red lights when trying a make a payment arrangement with the ATO
If you are attempting to make a payment arrangement with the Tax Office the process will be notoriously difficult if:
- You have failed your previous commitments (even if these were created and failed by your bookkeeper)
- You proposed to pay less than 10% or the tax debt upfront as a deposit
- You propose to fund the payment arrangement for more than 12 months
- You submit false and misleading information to the ATO
- You have an order against the business calling for it to be wound up
- The course of events creating financial difficulty was avoidable (like being “busy”)
What about safe harbour provisions?
You will not be personally liable for company debts if you, as a director, took a course of action that was reasonably likely to lead to a better outcome for a company to pay its debts. And to enjoy this protection the company:
- Must continue to meet your employee entitlements (including superannuation) and tax lodgement obligations
- Be able to assist your external administrator when requested
- Start developing a course of action that will likely lead to a better outcome
However when consider using the safe habour provisions against insolvent trading when dealing with the ATO it is important to remember that many tax debts are personally due for payment by the directors: regardless of whether the company was insolvent or not. For example – superannuation guarantee charge, goods and services tax or Pay-As-You-Go-Withholding are personally due by company directors – regardless of whether the company was insolvent or not – so safe harbour provisions for these type of debts are not helpful.
What else should I know before I start?
If you are in Perth and you want to make a tax payment arrangement with the ATO for a tax debt it is important to know that this does not make you a “bad person”. Many entrepreneurial founders of a business have had cashflow issues and making a payment arrangement is part of the course as some parts of life cannot be managed despite our best intentions.
If however your payment arrangement has all come of a bit of surprise – because the tax debt was unexpected or your cashflows where not fully in control – then a Perth tax accountant should be engaged so that you ultimately know the cost of a decision before you make it. And this is where Westcourt shine – giving our clients certainty is a cornerstone service offering of our practice and you simply cannot run a business in Perth without certainty in your forward cashflows. At Westcourt we are an independent firm with a single focus on helping privately held family owned business – we are not attempting to refer you to a range of finance brokers or liquidators so you will get unbiased advice on how to best position yourself. And as we have created our own business (not a big franchise business) we truly understand what it is like managing cashflows and getting a handle on how your business is travelling. And with our deep international connections allowing us to help you expand offshore and manage your tax debts in other countries we are a logical safe choice for many – so why not give us a call?