Why Trying To Pay Your Tax Debt Down Yourself Could Harm Your Business Even More

That sounds like a good idea, right? If you’ve got debt and you focus on paying it off, then you’ll be debt-free at the other end. However, this can actually do more harm to your business than good. Many of the people who come to Emergency Accounting have found themselves in this hole, and it’s often a lot of desperate work to make the business viable again. 



Why can aggressively targeting debt repayments be a problem?

The first big reason is that aggressive repayment can actually cause business challenges is the cash flow problems that it can cause. Cash flow is the lifeblood of any business, and every dollar that you’re paying into debt repayments becomes a dollar less to your cash flow. This could lead to a vicious cycle where the business incurs more debt from lenders to keep operations running while you pay the tax down, thereby exacerbating the initial tax debt problem.

Secondly, and related to the cash flow issue: An aggressive repayment strategy could mean missing out on growth opportunities. If all available funds are directed towards paying off tax debt, there may be little left for investing in new projects or expanding operations. Especially in the current economic climate, it’s critical to be growth-orientated, and to do that you need to have money available for investment.

Finally, focusing too much on tax debt could divert attention away from other important aspects of running a business. Every minute on the phone with the ATO is a minute less time you have to plan business strategy, make sales outreach, or speak to partners. The more time and energy that you spend on dealing with the tax debt, the more your business gets left in the background. 



Why managing your tax debt yourself is not the best approach

A tax debt might seem like a simple matter of making a number that the ATO sends you go down, however, it’s rarely that simple. Tax laws are complex and constantly changing, and without a thorough understanding of these laws, businesses could end up paying more than necessary or even incur penalties for non-compliance.

It’s also worth noting that one of the biggest mistakes you can make is to assume that the tax debt that the ATO sends you is the final number. The ATO is motivated by two things: compliance (making sure that tax returns are handed in), and extracting tax while keeping Australia’s businesses healthy. They don’t want to see businesses close because of tax debt, because that means unemployment and, at a wider scale, slows down the Australian economy. 

Because of this motivation, the ATO does have programs in place to help businesses manage and even reduce their tax debt, and you may well be eligible for them. These can include payment plans, temporary deferrals, or even debt forgiveness in some cases. To explore these options you need accountants that are familiar with ATO negotiation, but by not exploring these options, you could miss out on opportunities to reduce their tax burden.

Again, don’t ignore the tax debt. Not only will it not go away, but if the ATO believes that you’re deliberately trying to escape notice and not pay the tax debt, your negotiation position will be weakened. It’s critical for business owners to take their tax obligations seriously and in good faith make efforts to pay off their debt. The key is to do so in a way that is sustainable and doesn’t jeopardise the health of the business.

This is where EPAS can help. We are experts in auditing businesses to understand what burden of tax debt they can handle, and then negotiating with the ATO to gain the best outcome for our clients. And then we’ll help you structure your business so that tax debt will become a thing of the past. Contact us today for more information!