Tax Break Could Cost Companies Dearly

Companies considering taking up the ATO’s offer to defer tax payments due on their next business activity statement or any other statutory obligations, interest-free, should think very carefully given the adverse financial consequences of doing so, according to Interlease director Gary Wilkie.

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

“Companies, and their accountants, need to be aware that banks and finance companies take a very dim view of companies seeking funding that are unable to pay their tax obligations on time,” says Gary.  “Financiers are currently requesting statements of tax payments (tax portals) to verify that tax payments are up to date.

“There is a view in the business arena that tax arrangements are fine as long as the terms of repayment are met. But this is not the view of banks and finance companies. 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.”

Gary says that when assessing an application for funding, financiers look to see if a company’s tax payments are up to date.

“If a company has moved to defer its tax liability, this is seen as a blight on the company’s financial position because banks and finance companies considers not paying due taxes are the worst transgression one can commit,” Gary says.

This may be the sole reason why a funding facility is not approved. 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.

“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.

“Yet, once the tax deferral is recorded on the balance sheet, this will remain on the company’s books for several years, and any financier examining the company’s records in this time period is likely to consider the deferral of payments to the ATO a negative and that the business is not being run effectively.”

Gary says banks, in particular, are more than likely to deny funding to any company that has recorded a tax debt on their balance sheet.

A non-payment of tax will make it necessary for companies to provide, projections, cash flows and full disclosure of the problem when applying for extra funding for the next three to four years.

“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 ability 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.”

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