In response to COVID, all layers of government provided significant financial stimulus and a part of this support was (limited) flexibility with respect to taxation.

We saw businesses defer their tax payments, either legitimately as part of the government’s support packages, formally with the ATO by entering payment plans, or informally by simply not making tax payments.

Financiers have been far more accepting of this, noting that often businesses had the cash to pay the tax but were enjoying the benefit of the government support while the cost and consequences of non-payment were marginal.

What has changed?

In recent months, the ATO has been more vocal about stepping up its enforcement efforts for mounting tax debts. In May it purportedly wrote to 70,000 businesses, focussing on those that had not responded to calls and letters regarding their outstanding tax obligations.

While we only have anecdotal evidence of businesses facing actual enforcement efforts from the ATO, what is clear is that financiers have also hardened their stance to businesses with tax debts.

I believe we are back to the position we were at prior to the COVID pandemic.

What are we seeing?

Historically all the major banks and most tier 1 lenders would not contemplate lending where tax arrears were present. Only under exceptional circumstances would this be tolerable.

For the last two years all lenders have been quite open to the discussion, although they would seek to understand the reasons why the tax liability was still in place. In 2022 we have seen most lenders take a slightly firmer approach and progress with new finance if all historical tax debts were under a payment plan, but all current obligations were being met.

Now, we are seeing the lenders’ views tighten further, where any tax debt now becomes a significant roadblock.

What are the options?

There are still some options available to a business in relation to its outstanding tax liabilities.

If the remaining tax debt is reducing and is manageable to repay, I would recommend you repay any outstanding obligations as soon as possible, and before making your application for new finance.

For those unable to repay large tax debts, there are still financiers who will lend but note this pool is shrinking and you should expect to see a much higher rate of interest and fees. Bear in mind you have a much great chance of obtaining finance if your tax debts are under a repayment plan, and you are meeting the repayments.

If your business is profitable, but debt is difficult to secure, you may need to consider other arrangements such as raising equity or selling assets.

BDO’s team of experts are well equipped to help you to secure debt facilities. Reach out to our Debt Advisory and Finance Solutions team for a discussion on your options.

This article is a version of one first published at bdo.com.au on 29 August 2022.

Darren Stacey is an authorised credit representative 519653 of BDO Corporate Finance Ltd (ACN 010 185 725) Australian Credit Licence 24551
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