Financing Tax Debt

With statistics saying that up to one third of small businesses are under some form of ongoing tax debt with the ATO, the uncertainty of these arrangements and the issues they can potentially cause when companies apply for other finance with mainstream lenders, it is encouraging to see that a number of property financiers are now assisting companies with debt financing tax.

These property financiers are assisting with tax debt loans through providing additional funds against residential and commercial properties at levels up to 75% of market value and at interest rates of 6.5% or less.

These refinancing structures not only provide the ability to finance tax debt at substantially lower costs than ATO rates, these financiers provide debt financing help over much longer terms. The longer-term structures substantially reduce pressure on existing cash flows and by doing so provide the ability to finance tax debt in a much more stable environment, minimising the chances of the ATO taking action against the company.

Even where there is insufficient equity in the properties to cover the entire tax debt, this partial refinancing in concert with assisted ATO negotiations has often lead to a substantially improved arrangement with the ATO, including reduced penalties and interest as well as a more sustainable payment arrangement with the ATO for the balance of outstanding tax debt.

Below are two recent case studies which gave our clients the debt financing help they needed.

It is important to note that in both cases, the tax debt financiers who were different companies were BOTH prepared to advance funds whilst our clients were and continue to be under ATO Tax Debt repayment schemes.

Debt Financing Case # 1.

A member of the legal fraternity had a tax debt of $3.9million and was committed under an exchanged contract to settle on the purchase of a residential investment property in the amount of $800,000.

Finlease arranged a facility of $5million (secured against their $6.5mil residence and $800,000 investment property) which repaid the ATO $1.5million of the existing tax debt, settled the purchase at $800,000 and refinanced his home loan of $2.7milion. The ATO remitted/forgave $900,000 in interest and penalties and put an arrangement in place to repay the balance of the $1.5million tax debt over a 24-month period.

Total funding was $5million, financed on a variable interest rate of 6.29% at a loan to value ratio against the properties at 70%.

Debt Financing Case # 2.

A civil contracting business needed help with a tax debt of $600,000 which was under a repayment plan with the ATO. Their bank withdrew support and called in their commercial loan as it had matured and they were not prepared to extend their facility.

Finlease arranged the refinancing against the client’s commercial property and in doing so, cleared the bank out completely and raised an additional $300,000 which was in essence a tax debt loan which reduced the overall tax debt by 50%. Negotiations are underway to restructure the balance of the tax debt with the ATO for the balance to be repaid over a 24 month term.

Total funding was $1,240,000, (secured against a $1.650mil commercial property) at a variable interest rate of 6.50% at a loan to value ratio against the property at 75%.

Other alternatives to debt financing:

Finally, it is important to note that there are other ways to finance tax debt even where there isn’t sufficient equity in company owners’ real estate assets.

Tax debt finance continues to be provided through a combination of selected debtor discounting facilities in concert with interest only loans against unencumbered plant & machinery.

Many companies who require debt financing help are often cash poor and asset rich with a significant amount of wholly-owned items of equipment which can provide excellent security for tax debt loans.

Although this process is slightly more expensive than property secured facilities, it is an excellent short to midterm way of financing tax debt and in doing so both removing the uncertainty of being faced with unexpected ATO action, as well as ensuring a company’s access to low-cost mainstream financiers for future equipment and property finance needs.

For more information about debt financing, please contact Finlease on 1300 346 532. We have 13 offices Australia-wide and have been looking after business owners in capital intensive industries for over 25 years.