14 May 2019

Managing an ATO debt when applying for a commercial loan

We have noticed an increase in the number of clients managing an ATO debt when applying for full-doc commercial bank financing. Until they have interacted with an experienced broker or banker, few business owners realise that carrying an ATO debt at the time of application can greatly decrease the chances of their loan being approved. In some occasions, it is a ‘deal breaker’.

The reason for this is simple. Conventional lenders view ATO debt as a mark on your “character”, throwing into question your willingness and ability to repay the loan. If you are unable to pay stay on top of your taxes which are owed once a year, how are you going to manage the repayments on a loan which are due once a month?

We have managed many instances of this before, and our top tips for self-employed clients and their accountants are as follows:

1. Request and check tax portals first – Before you submit your loan application, make sure your banker or broker checks your ATO portals BEFORE you submit the deal to credit. For some channels and products, tax debt can auto-decline a loan.

2. Request a conditional approval subject to paying out ATO Debt – If you have the funds to pay out the ATO Debt, you can request paying out the ATO Debt as a condition of Formal Approval. Even most specialist lenders are happy to condition a loan based on paying out residual ATO Debt.

3. Prove you can service the ATO debt – Most ATO Debts are on a 12 month payment plan. If you can demonstrate that you can afford the loan AND repayment of the tax debt on an ongoing basis, a lender may be happy to approve the loan without you having to close the tax debt.

4. Explain why the ATO Debt occurred and why it was one-off – In combination with Tip 1 and 2, a reason should be provided as to why and how the Tax Debt arose e.g. Did you buyout another shareholder? Was income used to pay for a growth opportunity too good to be missed? Was the money used to buy a family home?

5. Use equity to pay it out the ATO Debt – If you have enough equity in a property, you may wish to avoid these questions raised altogether, by choosing to refinance a loan and seeking additional borrowings to close out the Tax Debt prior to a loan submission.

6. Prevention is better than cure – Finally, it’s better to not have an ATO Debt in the first place, whether or not your are applying for a loan. You should work closely with your accountant and bookkeeper on routines, processes and systems to set income aside specifically for the purposes of managing BAS Payments every quarter and annual tax bills.

At the end of the day, managing an ATO Debt is not interest free, and the ATO has charged between 8 – 15% on outstanding tax liabilities. This is something something you want to avoid if you can. In other words – ATO debt is expensive in addition to the problems it can cause for your loan application!