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SMEs owe the ATO the most, are small business owners using the tax office as a line of credit?

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Many small businesses may be using the Australian Taxation Office as a line of credit because they are unaware of alternative business funding solutions or they believe it is too hard to arrange formal commercial finance facilities, according to national SME finance specialist Scottish Pacific.

Scottish Pacific CEO Peter Langham said SMEs may not be aware of how they can use invoice finance not just to help pay their ATO obligations but to grow their business.

Langham was commenting on a recent Inspector-General of Taxation’s report that found the ATO was owed $35.3 billion in 2013-14, up 9.7 per cent on the previous financial year.

It turns out SMEs are carrying the most ATO debt

The ATO figures indicate small businesses are the main offenders for late payment, accounting for 60 per cent of collectable debts (micro businesses with turnovers under $500,000 make up three-quarters of the small business debts).

“It is an astronomical amount the ATO is chasing. Given the size of the debt, the ATO is likely to make it much tougher for small businesses to run up debts in future, so it’s a great time for SMEs to look at better ways to improve their working capital,” Langham said.

Anecdotal evidence that the ATO is ramping up actions to wind up non-payers means SMEs and their directors who delay paying their ATO debts are on a dangerous path.

“Of those SMEs not paying their ATO debt, there are undoubtedly many viable businesses that have just not managed their working capital well,” he said.

“Getting the right commercial finance to support your business – and help it thrive, not just survive – is really not that onerous. There might be a few more forms to fill in, but you’ll end up with working capital to fund business growth.”

SME alternatives to running up an ATO debt

While some businesses turn to overdrafts and loans, invoice finance can provide a more flexible funding solution. Invoice finance can be used as a line of credit linked to and secured by your outstanding accounts receivable, or a more short-term come and go facility, turning invoices in to cash.

“We have seen examples of businesses with tax debts in excess of $1 million, with the ability to borrow $2 to $3 million against outstanding invoices, but have chosen not to arrange a legitimate commercial finance facility.

“Businesses in this situation can raise more than enough working capital to pay down their tax debt and inject further funds into their working capital.

“While SME owners are busy people, the danger of putting things in the “too hard” basket and running up a tax debt until it is called in, puts risk on the business and the business owner could ultimately become personally liable for the company debt.

“We’ve also had cases where clients, before they found a debtor finance solution, were using personal credit cards to cover business expenses because they find that “easier” than spending a day or two seeking a permanent solution. This is really only a stop-gap measure.

“Our message to SMEs is don’t use the ATO for convenience purposes, because while it might seem like a short-term fix for your cash flow problems, it’s just delaying the inevitable and it’s doing nothing to provide your business with the working capital you need to thrive,” Langham said.

Why should SMEs avoid ATO debt?

At a glance, here are the reasons why small businesses should not run up ATO debts.

  • Arrears may be tolerated to a point but it is unauthorised and not legitimate credit
  • Puts you on the ATO radar as a slow/bad payer
  • Creates a debt that directors can become personally liable for
  • Not a reliable line of credit: the debt is repayable on demand with no guarantee that an arrangement will be offered
  • Default rates of interest are applied to the debt
  • Makes the ATO a creditor relationship you have to manage
  • The ATO can and do issue winding up petitions to businesses that build up unauthorised arrears and don’t meet repayment arrangements
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