Using The ATO As An Overdraft

Over the years, some accountants have accepted and in a number of cases condoned and promoted the use of paying off ATO tax debts as a way of increasing a company’s cash flow.

The advantage to the company / client is that no security is required, interest rates applied by the ATO are less than you would pay with your bank on an overdraft and repayment arrangements are generally acceptable to all parties as long as they are strictly adhered to. Sounds good, but banks hate these arrangements for two reasons.

Reason 1:

Clients, when given the option of not paying an account, will elect to do just that or postpone it for the maximum time available. If allowed to continue the amount outstanding will continue to grow with the eventual pay back being required. This pay back will reverse the positive effect the arrangement initially had on cash flow.

Reason 2:

The authority / power of the ATO is substantial and when wielded by officers of the ATO will have all other creditors (employees excluded) placed as second ranking creditors in the case of a company wind up. Banks dislike being pushed down the ladder as creditors for obvious reasons.

Why do lenders ask for a copy of the Tax Portal. (this is the ATO’s formal document which shows if your taxes are up to date or if an arrangement is in place)

When your financials show that there is ATO interest and when you are looking for a larger amount to borrow the lender, in 90% of cases will ask for a copy of your latest Tax Portal. If it shows arrears or an arrangement is in place most lenders will reject you application.

The Pitfalls of Company Liquidation

Sometimes during the course of a business life, debts get out of hand and there appears to be only one way to go and that is to liquidate the company and shut it down.

Unfortunately over the years I have seen a number of accountants (not the reputable ones) encourage clients / company directors to close up a company to avoid ATO debts. In genuine cases this is and can be the only way out for a director to retain personal assets and sanity.

However, when used just to avoid tax this is immoral, illegal and disliked by all lending institutions even if those institutions do not suffer any losses.

So if your advisers suggest it is a good idea to wind up your company and the next day start a new company doing the same thing, here are a few tips to maybe get you to think again or perhaps assist any genuine people to cover a few bases first before you proceed with the wind up.

• – Companies set up like this may be known as “Phoenix Companies”. Lenders will in a vast majority of cases want to see at least 2 years full financials on the Phoenix style of Company before they even consider lending to that entity
• – The ASIC guidelines confirm that Phoenix company activity is illegal and is punishable by law and may result in imprisonment. See the attached the ASIC web site for clarification http://asic.gov.au/for-business/your-business/small-business/compliance-for-small-business/small-business-illegal-phoenix-activity/
• – Any lender that suffers a loss because of the wind up will not lend to you or a company you are a director of again. Computers have long memories
• – Before you wind up / Liquidate ensure the new entity is established first and get all equipment finance transactions into that new company FIRST
• – Why – because once the old company is wound up, lenders will in most cases want to repossess the equipment because the entity they have the contract with no longer exists regardless of the strength of the directors and their want or ability to pay (this is when you should speak to your broker. At Hunter Business Finance we may be able to assist ( if in a genuine situation) and put your case to the most appropriate lenders before you are in breach of your contractual arrangement with current lenders)

To summarise, if you need to liquidate your company, get all your “ducks in a row” first and make 100% sure it is the right thing to do and you are not in breach of the law.

Remember, accountants are there to look after your taxation planning and to benefit you in that endeavour. How others, banks and creditors react to your wind up / liquidation will depend on how much planning you have done first and whether or not the liquidation of your old company is illegal or not.

Posted: 5/05/2016 4:46:08 pm by Hunter Business Finance | with 0 comments