Tips to Refinance and Repay Your Tax Debt

From 1 July 2017, the ATO is authorised to register company defaults for tax debts over $10,000.

Small business owners often experience financial ups and downs. Budgeting can be difficult, and calculating exact tax reserves each month presents a challenge. Getting back on track during slow economic periods requires careful planning.

The best approach is always to avoid a shortfall in the first place. Setting aside sufficient funds ensures tax bills are covered when due, avoiding last-minute pressure.

One management strategy is allocating a set percentage of net earnings into a separate account each month. Consulting an accountant is recommended, though 30–40% serves as a common benchmark. Funds can sit in an offset account or an interest-bearing account.

If extra funds are set aside, a surplus remains at the end of the financial year. If a shortfall occurs, having most of the money ready makes the remaining balance far more manageable.

Managing an Expected Tax Shortfall

In an ideal situation, sufficient funds are reserved to pay taxes when due, but circumstances change.

Delaying a tax return until funds are available is a short-term measure. Over time, additional tax and GST obligations build up. Consulting an accountant regarding potential late lodgement penalties is essential.

Payment arrangements can be made with the Australian Taxation Office (ATO), but terms can be short and strict. Meeting these conditions can strain business cash flow and make it difficult to save for the next tax cycle.

Using home equity to clear current tax debt offers another potential pathway. Breaking the cycle allows the business to reset operations with reduced financial stress.

Refinancing via home equity can extend loan terms up to 30 years, often with lower interest rates than short-term repayment plans. This structure allows lower initial repayments, with the option to increase payments as cash flow improves.

While mainstream lenders often exclude tax debt repayment from loan eligibility, specialist lenders operate in this market. Once established, the loan may eventually be refinanced with a major bank as a standard home loan.

Common Tax Debt Scenarios

Scenario 1: A self-employed bakery owner accumulated a $30,000 tax debt due to business expenses and repairs on an investment property. Existing cash flow was insufficient to clear the tax debt.

Solution 1: Providing an accountant's letter confirming income allowed a lender to structure financing that cleared the tax debt and restored cash flow.

Scenario 2: A business owner accumulated $86,000 in debts, including a $45,000 GST liability, alongside an existing $235,000 mortgage. Credit defaults made securing finance through traditional lenders difficult.

Solution 2: A lender consolidated the debts by refinancing the home loan, enabling the tax liability to be paid on time to avoid default with the ATO.