A tax debt was weighing on Luca and Jian’s business. Chartered accountant GAIL FREEMAN shares some sensible solutions to lightening the load.

Business partners Luca and Jian have been struggling with the tax payments for their business over the last few months.

They entered into a payment arrangement with the Australian Taxation Office (ATO), which has about 18 months to run.

“We have found this really helpful because, like many other small businesses, we’ve been struggling since covid and this payment arrangement has just eased these difficult times,” said Luca.

“I have just heard that we will not be able to claim interest on our tax repayments in the future and I’m rather concerned about this, what’s the story, Gail?”

I replied that he was correct that both general interest charge (GIC) and shortfall interest charge (SIC) will not be deductible from July 1.

“Just for clarification GIC is a penalty for late payments of tax, whereas SIC is interest charged on tax underpayments due to errors in tax returns,” I said.

“The current rate of GIC is 11.42 per cent while SIC is 7.42 per cent. So you are paying 11.42 per cent on your payment arrangement currently.

“As you can see this is a very high rate and it is only the tax-deductible nature of it that makes the rate remotely palatable.

“Once it becomes non-deductible it is a very high rate for you to be paying. At present interest on borrowings whether from the ATO or other lenders is tax-deductible for businesses but not for non-business taxpayers.”

I told Luca and Jian that I had a few suggestions which may make it easier so that they’re not in this situation in the future.

“Firstly, we should come up with a budget for estimated tax payments and their due dates.

“Then I recommend you save this amount out of your takings each week so that you have the funds on hand when you need them. I realise that your business is seasonal and there are times of the year when its cash flow is not as good as others so perhaps in the easier times you should aim to save more so that you always have money available to meet your future tax debts.

“Looking at the past debt, the first comment I have to make is that 11.42 per cent non-deductible is too high. It may be that you can claim interest on money you borrow to pay your tax, or that could be changed so I suggest that you borrow from an alternative lender the amount you need to pay off the debt and then if you need to borrow in the future you are not borrowing for a tax debt.

“As you’re saving money for tax, you will actually be borrowing for working capital and to meet your regular commitments. The interest on those borrowings should be deductible under the current tax laws.”

Jian liked the idea, saying he’d rather be indebted to the bank than to the ATO.

I said: “Not only that, but you could be borrowing from an alternative lender at a rate somewhere between 5 per cent and 8 per cent, which would be far easier for you to handle.

I should add that if you get yourself in difficulty in the future in paying your tax debts, let me negotiate with the ATO on your behalf as soon as you are aware so that we can minimise anything that needs to be done.

“It is really important that you keep on top of this so that it is not an ongoing problem. We have until June 30 to effect the changes I have suggested.”

Luca and Jian were pleased with this strategy, saying: “Monitoring it with you should make it easier going forward.”

If you have any small business concerns or tax debt concerns contact the expert team at Gail Freeman and Co Pty Ltd on 02 6295 2844, email info@gailfreeman.com.au or visit gailfreeman.com.au

Disclaimer
This column contains general advice, please do not rely on it. If you require specific advice on this topic please contact Gail Freeman or your professional adviser. Authorised Representative of Lifespan Financial Planning Pty Ltd AFS Lic No. 229892.