Using the Tax Office as Your Business Overdraft Facility: Why It’s Not a Good Idea Anymore

In the past, many businesses in Australia have relied on the tax office (the Australian Taxation Office, or ATO) as an unofficial "overdraft" facility, delaying tax payments or using the funds collected for taxes to cover short-term cash flow issues. While this may have been an option for businesses in years gone by, this practice is increasingly problematic, and there are far too many risks involved to consider it a viable option today. From stricter enforcement to mounting interest and penalties, relying on the ATO as a source of short-term liquidity is no longer something business owners should be doing without careful consideration.

Why We Thought It Was a Good Idea in the Past

• Interest charges were cheap: General interest charges from the ATO pre-COVID were almost below 7%. Obtaining a loan from the bank was highly unlikely to be that cheap, even if you put your house up as security.

• Interest charges were deductible: Just like a bank loan or similar, any fees or interest accrued against a business debt with the ATO were deductible.

• No approval process and no personal assets as collateral: It was as simple as making your lodgements, not paying the bill, and at the right time getting your accountant to set up a payment arrangement over a few years. No need to apply, be asked what collateral you had to put up, and best of all, no chance of being declined!

• No pressure from the ATO: In the post-COVID hangover, the government and the ATO took a very soft stance, and in a lot of cases rightly so, as it had been a tough ride at times for certain industries. But the ATO applied a blanket stance to all businesses and arguably created a rod for their own back as smart business people with rapidly growing businesses tapped the bank of ATO for one thing that has typically been hard to find for growing businesses – cash flow!

So What’s Changed and Is It Still a Good Idea?

Over the last few years, the ATO has shifted its outlook and mindset on tax debt for a number of reasons:

• Tax debt is at an all-time high: In the ATO’s annual report for 2024, it showed Australians owed in excess of $52bn, with around $34bn of that attributed to small businesses. This number is only exacerbated when the debt subject to objection/appeal and the insolvency debt is added (a combined total of $86.1bn). Extreme motivation for them to act!

• A “Progressively firmer approach” taken by the ATO: In his first annual report, Commissioner of Taxation Rob Hefernan set a clear tone – “Paying tax is not optional”. In the two to three years following the COVID pandemic, the ATO took a ‘hands-off’ approach which seemingly changed Australians' attitudes towards lodging and paying on time. The evidence is clear with not only the levels of tax debt but the drop in on-time lodgements.

The Firmer Approach Is Playing Out

In the past 2 years, the ATO has begun to wield its powers, targeting larger debts, businesses that won’t engage or respond to their requests to make arrangements, and using tools to cause action. New measures are continuously coming into play.

Director Penalty Notices (DPN)

A DPN is a notice from the ATO to a company director, holding them personally liable for certain unpaid taxes and superannuation. There are two types: a standard or ‘non-lockdown’ and a lockdown DPN. The standard DPN provides 21 days for the director to pay the debt or enter into administration or restructure, and in some cases, liquidate the company. The lockdown DPN is issued when the company has failed to report its tax obligations within the required timeframes and immediately (no 21 days notice) makes the director personally liable for unpaid amounts.

Reporting Debts to Credit Reporting Bureaus

The ATO can report unpaid tax debts to credit reporting bureaus if the debt exceeds $100,000 and has been overdue for more than 90 days. This can significantly impact a business's credit rating, making it more difficult to secure financing and affecting relationships with suppliers and customers. The ATO's reporting can serve as a strong deterrent against using tax debts as a form of short-term liquidity.

Garnishee Orders

The ATO holds the power to enforce garnishing of funds from personal tax returns, financial institutions operating in Australia, and a business's trade debtors. This means the ATO can directly take money from your bank accounts or intercept payments owed to you by your customers to satisfy the tax debt. This can severely disrupt a business's cash flow and operations, making it a risky strategy to rely on the ATO for short-term funding.

Recoveriescorp Appointed by the ATO

To assist with the efforts, and when businesses avoid engaging with the ATO, they will pass on your debt to a collection agency. These agencies are private companies paid to collect the debt, and while they may not send an unsavoury character to your doorstep, it won't be pleasant having them chasing you relentlessly for payment.

Removal of Tax Deductions of GIC Against Income (FY25)

A law amendment put forward by the government that is currently under Senate review proposes to cease the ability for a business to claim the GIC and SIC incurred by tax debt. This serves as a further disincentive to holding tax debt when other means of debt are available.

ATO GIC Charges Aren’t That Cheap Anymore

The current GIC annual rate for the March 25 ending quarter is 11.42%.

So the Answer Is NO, and Here’s Why

While you may feel as though you can avoid some of the more extreme measures mentioned above, if your tax debt exceeds $100k and has been overdue for more than 90 days, you are firmly in the crosshairs of the ATO. The reality is you may not be the first cab off the rank, but they want what is due, and they are showing time after time that they will use the powers afforded to them to make it happen.

Compelling Reasons to Rethink Your Position

• Tax Deductibility: It is crucial to seek professional advice from your accountant and financial advisor. It is very likely that any fees and interest charges associated with borrowing money to clear tax debt are fully tax-deductible. If the new law is passed prior to the 2025 Financial Year, the net interest expense to a business, according to Grant Thornton, could be in the vicinity of 16.32%. There are many viable funding options below that.

• Credit Is Very Accessible: In my 25 years in the finance industry, I have never seen so much access to credit in the market. Gone are the days of going cap in hand to your bank manager, long complicated forms, and long waits only to find out you are declined. Not to say your bank isn’t the answer, it sometimes is, but there are many other options, and they are much more commercial. They are all aware that tax debt exists and have clear policies around what they deem acceptable. Some don’t require tangible assets for security, and when they do, there are many options available that weren’t always around. It’s not just your family home.

• Freedom to Grow: While in the past, the ability to access credit while holding a tax debt may have been possible as it was not always visible to funders, this is almost never the case now. Holding tax debt is increasingly becoming a burden when accessing credit, and if the ATO has chosen to apply a mark against your credit file, then it is essentially impossible unless we are working with a lender to extinguish the tax debt. Dealing with it swiftly and in an orderly fashion allows a clearer path for future lending and growth.

How Can We Help You?

If you have tax debt hanging over your business but your business is otherwise healthy, then let’s connect about how we can restructure your debt facilities to clear the tax burden, minimise costs, and ensure the structure enables you to grow your business.