GIC isn’t deductible any more: The conversation to have with clients carrying ATO debt

1. Is this a timing problem or a profitability problem?

If the business is profitable but cash is tied up in debtors, stock or a seasonal dip, the debt is a timing issue and there are ways to solve it. If the business is losing money, borrowing to pay the ATO only moves the problem somewhere else, usually somewhere with security attached. That client needs a different conversation, and I’d rather hear that from the accountant than find out halfway through an application. 

2. What does the ATO already offer?

Sometimes the best answer isn’t finance at all. A standard payment plan generally holds off further ATO recovery action while it’s kept, although GIC keeps accruing. Eligible small businesses (turnover under $2 million, activity statement debt of $50,000 or less overdue for up to 12 months, and a good lodgment and payment history) may qualify for an interest-free plan, where GIC is remitted as long as the plan is kept. One of the ATO’s criteria is that the business can’t get finance through normal channels, so it’s worth checking that before a client applies for a loan.

3. What’s at stake beyond the interest?

Two things tend to get overlooked. First, unpaid PAYG withholding, GST and super guarantee can become a director’s personal problem through director penalty notices. Second, the ATO can report a business’s tax debt to credit reporting bureaus where at least $100,000 is more than 90 days overdue, and the business isn’t engaging with it. Once that listing appears, the finance options narrow quickly. Timing matters: the conversation is easier, and the options wider, before the debt reaches that point.

Where finance fits, and where it doesn’t

For a viable business with a timing problem, the options generally fall into three groups: an unsecured or secured business loan to clear the balance, drawing on property equity for a business purpose, or a cash flow facility such as debtor finance that helps fund future BAS and tax obligations so the debt doesn’t rebuild. Each comes with costs, fees and, in some cases, security, including the family home. None of them is automatically cheaper than the ATO, and that’s not the point. The point is to compare the full cost and the risk side by side.

That comparison is where the accountant matters most. Whether interest on any new borrowing is deductible depends on what the funds are used for and on the client’s circumstances. That’s your call, not the broker’s.

Making the referral work

When an accountant refers a client with ATO debt, a few things make the difference between a quick answer and a stalled application: lodgments up to date, a current ATO account statement, recent financials, and a candid note on what caused the debt and whether it’s one-off. Lenders look closely at the story and the trend, not just the size of the debt. 

The removal of GIC deductibility is a good prompt to review every client carrying an ATO balance. Some will be best served by an ATO plan, some by finance, and a few by a harder conversation about the business itself. Getting the right answer starts with the accountant asking the question.

Gary Gipp (pictured) is managing director of TPC Finance (trading as TPC Money), a national finance broker working with business owners and their accountants. He has worked in finance since 2009.

General information only, not financial or tax advice. Finance is subject to lender approval. TPC Money Pty Ltd CRN 555594 is a credit representative of TPC Finance Pty Ltd ACL 507248.