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03 May 2021

What clients must consider when considering an ATO repayment plan


3 min

Cheap, cheap credit—or is it?

Many advisors would be aware the Australian Taxation Office (ATO) has taken a very cautious approach to debt collection since the global pandemic’s start. We could go as far as suggesting the ATO is being very accommodating.

While on the face of it, an ATO payment arrangement may look appealing, several reasons urge us to caution your clients from immediately appealing to the ATO for extended repayment arrangements. In years gone by, we would often muse, why wouldn’t you enter into a repayment arrangement with the agency often affectionally labelled the 5th major bank? After all, in those years, the interest rates were reasonable, no application forms or guarantees were required, and usually “the deal” was not that hard to do—and the ATO did not require real property security. Suffice to say, much has changed.

Circling back to present day in the post-COVID-19 economic environment, let’s think about the client who may require funding in the future from a mainstream bank. They hit an unexpected cash crisis in the business, and then urgently need funding from the bank to fix cash flow. Most major banks will not entertain extending further credit to an entity burdened with tax debt. This may force the client to go to a second- or third-tier lender with much higher rates attached to any loan.

Another issue with clients entering into ATO repayment arrangements is clients must agree to keep their tax lodgments up to date. Alas any failure to lodge may in fact mean that the deal comes tumbling down, and the entire debt may become repayable immediately.

And as mentioned above, in previous years the ATO’s interest appeared to be reasonable. The general interest charge (GIC) rate (which applies to most taxes i.e., income tax, fringe benefits tax, GST, and PAYG) for the current quarter is set at 7.01%—hardly a bargain in the current low-interest-rate environment.

Lastly, another key issue clients must be acutely aware of; if they are going to enter into an ATO repayment arrangement, the provisions of section 588FGA of the Corporations Act 2001 may apply. These effectively provide that if the ATO is forced to disgorge a preference to a liquidator (think of these as the repayment amounts your client makes under their agreement with the ATO), then the ATO may seek indemnity from the directors. This indemnity may translate to personal liability for those amounts in a liquidation scenario. So, these provisions and the director penalty regime is tantamount to effectively replacing personal guarantees for the ATO!

While at first glance gaining “credit” from the ATO may seem cheap and easy: clients must be aware that what looks good now may ultimately not be a great result for them long term.

At Worrells we are well-versed in tax debt matters and the full gamut of other financial pressures on businesses, large and small. Contact your local Worrells partner for a no-obligation chat about your clients’ circumstances. In matters of insolvency, early and proactive discussions are key to having a range of solutions on the table for clients. We’re here to help.

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