What Causes Tax Debt?

A tax debt occurs when your business owes the government money. This can happen for any number of reasons, and it can be highly stressful when the ATO starts calling those debts in. When it gets to a certain point - $100,000 and greater than 90 days overdue without a payment solution in place – the ATO will now also report the debt to reporting agencies, affecting your business’ ability to access credit into the future.

The basic reason that a business ends up with a tax debt is that it is failed to pay enough tax through the year. Some of the common root causes include:

1) Inconsistent cash flow – Many small businesses struggle with this. They’ll go through a period where the invoices are flowing through nicely, but fail to put aside enough for tax and, during a slower period, they find themselves struggling to pay bills and employees first, let alone the growing ATO debt.

2) Poor tax compliance – Organisations that are slow to submit their tax forms (or neglect to do so entirely), can end up with a large, multiple-year tax debt at once.

3) Mixing business and personal finances – Smaller businesses and sole traders in particular are at risk of that one. Many don’t have separate business bank accounts. This makes it very difficult to monitor cash flow, which exclude the money from several tax benefits that might otherwise apply to both personal and/or business income and can increase your personal liabilities. When you set up a business, you should always set up a separate business bank account and pay yourself a set salary out of that.

4) Ending up as a creditor – This is related to cash flow, but many small businesses have invoices that go out to customers that go unpaid. Either they need to chase their customers to get payment, or their customer goes out of business or declares bankruptcy themselves, leaving the small business in the position of being a creditor owed money that they’re unlikely to see paid in full. But of course, the business has already paid for the staff and materials required to complete the job, leaving them with a big hole in the budget. Typically, that ends up becoming tax debt as the business opts to continue paying staff and its own bills first.

What to do when you’ve accumulated tax debt

When you’ve got tax debt it’s critical that you speak to experts, such as the team at EPAS, to develop a plan to present to the ATO. The ATO will not report your business to credit agencies as long as there is a plan, and their goal is to help your business recover, so you will be able to negotiate a debt payment plan that will allow you to re-establish a healthy cash flow and recover your business to a position of strength.

We are here to help! From diagnosing the underlying challenges that put you in the position to have tax debt, to building a recovery plan so that it won’t happen again, EPAS is your ideal pathway to business health. Contact us today! 

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