Examining Interest Rates and Cash Flow Implications
Introduction
Every business and individual taxpayer in Australia faces the challenge of managing their tax liabilities to the Australian Taxation Office (ATO). At times, meeting these obligations can strain cash flow, particularly during economically challenging periods.
Borrowing money to pay ATO tax liabilities emerges as a strategic option to consider, but it comes with its own set of implications, particularly concerning interest rates and cash flow impacts.
ATO Penalty Interest Rates, A Double-Edged Sword
One of the most contentious aspects of the ATO’s debt recovery process is the imposition of high penalty interest rates on outstanding debts. These interest rates are designed to encourage timely payment of taxes and to compensate the government for the time value of money.
However, for small businesses already struggling with financial difficulties, these penalty rates can exacerbate their challenges.
Borrowing to Pay Tax Liabilities
One option to manage tax liabilities is borrowing money to make timely payments to the ATO. This approach can help avoid the immediate penalties and interest charges associated with late payments. Loans can be sought from various sources, including banks, credit unions, and private lenders. Each option has its own terms, interest rates, and repayment schedules, which need to be carefully evaluated.
Advantages of Borrowing
• Immediate Relief: Borrowing ensures that tax liabilities are paid on time, avoiding penalties and additional interest charges from the ATO.
• Deletes Forced Sales: Borrowing allows better cash flow, potentially allowing sales to occur during more favourable market conditions.
• Maintaining good records: Positive Business profiles are managed with the ATO via meeting required scheduled Tax payments.
• Cash Flow Management: Spreading out the repayment of a loan over a period of time can ease the immediate burden
on cash flow, dealing with a commercial lender rather than the ATO!
• Credit Rating: Maintaining timely tax payments can positively impact credit ratings, Business viability, which
is beneficial for future borrowing needs.
Disadvantages of Borrowing
• Interest Costs: Loans come with their own interest rates, which can add to the overall cost of managing tax liabilities.
• Repayment Obligations: Borrowing creates a new financial obligation that needs to be met, which can impact cash
flow and financial stability.
Interest Rates Charged by the ATO
When tax liabilities are not paid on time, the ATO charges interest on the overdue amounts.
This interest is known as the General Interest Charge (GIC).
The GIC rate is reviewed and updated quarterly and is typically higher than standard lending rates from financial institutions.
Current GIC Rates
Current GIC rates for 2024-25 year is quoted by the ATO is 11.42%, (90 Day Bank Bill Rate Plus 7%)
https://www.ato.gov.au/tax-rates-and-codes/general-interest-charge-rates#ato-
This rate is subject to change (quarterly) and is one of the highest rates applied to overdue payments by the ATO.
This high rate underscores the importance of managing tax liabilities effectively to avoid the compounding effect of interest over time.
Comparing Borrowing Costs vs. ATO Interest Charges
When considering whether to borrow money to pay ATO tax liabilities, it is essential to compare the interest rates of potential loans against the GIC charged by the ATO.
Loan Interest Rates
Interest rates on loans can vary widely depending on the lender, the borrower’s creditworthiness, and the loan terms. Generally, loan interest rates vary from lender to lender and are risk-based.
Simply meaning, the lower risk you/or your business present, the lower the obtainable rate. On the other end of the risk scale, ‘normally’ equates to a higher applicable interest rate.
That said, it is best practice to avoid the ATO GIC in the first place and have an action plan in place well before your name is up in lights at the ATO!
Cost Analysis
By comparing the potential cost of borrowing to the cost of ATO’s interest charges, businesses and individuals can make an informed decision.
For example:
– If a lending institution offers a loan in the single digits rather than double digits, then obviously, you are in a better position than the ATO’s GIC rate of 11.42% per annum.
– Over a year, borrowing from an independent Lender could save money compared to accruing GIC on overdue tax liabilities, additionally, your profile with the ATO and a better sleep each and every night!
Strategic Considerations
Deciding whether to borrow money to pay ATO tax liabilities requires a strategic approach. It involves analysing cash flow, the requirement of flexibility, understanding the cost implications of different options, and considering the long-term financial health of the business or individual.
Financial Assessment
Conducting a thorough financial assessment is essential. This includes:
• Evaluating current cash flow and future projections.
• Assessing the ability to meet loan repayment obligations.
• Comparing the total cost of borrowing versus the cost of ATO’s interest charges.
Professional Advice
As Mortgage Motion are not a registered Tax adviser, seeking advice from your registered and Licenced Accountant is imperative!
Your trusted accountants can provide valuable insights and help in making the best decision. They can offer tailored strategies and highlight any potential risks involved and come up with plan to avoid the repeat event in the new financial year.
Conclusion
Borrowing money to pay ATO tax liabilities can be a viable option to manage financial obligations and avoid the high interest rates charged by the ATO for late payments. However, it is essential to carefully consider the implications on cash flow and overall financial health. By conducting a thorough analysis and seeking professional advice, businesses and individuals can make informed decisions that align with their financial goals and ensure compliance with their Personal and or Business Tax obligations.
Discuss your Tax Lending options,
Go to https://mortgagemotion.com.au/contact/
info@mortgagemotion.com.au
Or contact Peter Koelmeyer 0418 343 779
Peter Koelmeyer is a License Credit Representative# 564211
Mortgage Motion Finance Pty Ltd
ACN 681059414 is Authorised under LM Broker Services Pty Ltd ACN 632 405 504
Australian Credit Licence Number 51719
Disclaimer;
This Article is intended for general informational purposes only and does not constitute tax or Financial advice.
Ensure to consult your licensed Tax Agent and Financial Adviser for tailored advice.
