ATO tax break could cost companies dearly

Companies considering taking up the offer by the Australian Taxation Offer to defer tax payments due on their next business activity statement should think again, according to Gary Wilkie, Director of Austrailan finance company Interlease.

As part of a measure to help ease the tax obligations of small businesses with a turnover of less than $2 million, the ATO introduced a tax-free repayment arrangement in June 2009 that extends to the end of June 2011.

But an offer that seems too good to refuse is likely to result in your business being refused finance by the banks.

Mr Wilke advises business owners to think very carefully before taking up the ATO proposal and believes there are adverse financial consequences for those who choose to go ahead.

“Companies and their accountants need to be aware that banks and finance companies take a very dim view of those who seek funding yet are unable to pay their tax obligations on time,” Mr Wilkie says.

He cites banks, in particular, as more likely to deny funding to any company that has recorded a tax debt on their balance sheet.

“From a cash flow and business point of view, being able to defer your tax liability and not having to pay interest charges with the blessing of the ATO may sound a perfect opportunity,” he says.

“However, once the tax deferral is recorded on the balance sheet, it remains on the company’s books for several years and any financier examining your records over this period is likely to consider the ATO deferral as indication that the business is not run effectively.”

Mr Wilkie says that when financiers are assessing an application for funding, they look to see if a company’s tax payments are up to date. If a company is found to have deferred its tax liability, this is seen as a blight on their financial position.

According to Mr Wilkie, banks and finance companies consider a company not paying taxes on time the worst transgression and may even be the sole reason why a funding facility is not approved.

“There is a view held in business that tax arrangements are fine as long as the terms of repayment are met,” he says.

“But this is not the view of banks and financiers. Once a company has gone down the path of deferring their tax debt, which is then recorded as an outstanding liability on their balance sheet, they are effectively warning their financiers that they are having cash flow difficulties.”

Both banks and finance companies require a full explanation from the company’s accountants as to why and how the deferral arrangement was entered into and this may appear in the company accounts for two to three years.

While the ATO’s tax debt relief may sound appealing to companies struggling to manage their tax payment obligations in this economic climate, by deferring their tax payments they may be digging themselves into a financial hole.

“Financiers are currently requesting statements of tax payments (tax portals) to verify that tax payments are up to date.

“Interlease strongly recommends that companies should not make arrangements with
their accountant to defer their tax liability without taking into account that this decision could detrimentally effect their credit rating and their abaility to obtain future funding.

“Making an arrangement with the ATO should only be considered as a last resort in full knowledge that future funding may be compromised,” he says.

For further information, contact:
Gary Wilkie
Ph: 03 9429 4299