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How do tax arrears affect my business?

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Last editedMar 20232 min read

It’s often a difficult topic to deal with, but there are a number of ways in which tax arrears can affect your business, meaning they should be taken seriously. Tax arrears are usually unplanned, which can therefore have an unexpected and detrimental effect on your business cash flow.

Fortunately, there are also ways to deal with the negative impact of tax arrears. For example, the tax treatment of lump-sum payments can be a good way to avoid these detrimental effects. Keep reading to find out more about the tax arrears meaning, its effect on business credit score and how you can deal with these situations.

Recap: what are tax arrears?

Tax arrears are taxes that are placed on or added to a tax roll that have not been paid by January 1st of the following year. In other words, they have not been paid within the time frame that was laid down in tax law, and therefore can be considered tax debts.

The Australian Taxation Office is in charge of your tax payments, and since the law changed in 2018, they can share this information to Credit Reporting Bureaus (CRBs). This can in turn have an effect on your efforts to build your business credit score.

How are tax arrears reported to credit bureaus?

As previously mentioned, the Australian Taxation Office can report your tax debt to credit bureaus. This may occur in three main ways:

  • A trade payment that will be shown as deteriorating from month to month.

  • This moves into a collection action, in which the Australian Taxation Office generally outsources to collection agencies.

  • Finally, there will be attempts at recoveries of taxation debt that will be made through the courts.

How do tax arrears affect business credit?

If you have tax arrears, this will have a negative effect on your business. For this reason, it’s a good idea to avoid them whenever possible by paying your taxes in a timely manner.

In 2017, it was announced that the Australian Taxation Office would be able to disclose tax arrears information to credit reporting bureaus. This only applies to business with Australian Business Numbers, and they have also stated that they will not share the tax information of those businesses which have taken up some form of repayment plan.

It’s not clear precisely how tax arrears will have an impact on business credit, as credit reporting bureaus do not publish their calculations publicly. What is clear, however, is that a low credit score will affect your ability to get finance and refinance other loans. It can also lead to higher interest rates on credit cards.

Tax treatment of lump-sum payments

One way that you can avoid some of the negative effects of tax arrears is by making use of the unique tax treatment of lump-sum payments. This is known as the lump-sum payment in arrears tax offset.

A lump sum payment in arrears is a payment that is made for products or services that were provided in previous income years. The tax offset is designed to ensure that you don’t overpay tax for years in which you receive these kinds of payments. For example, you may overpay tax due to being in a higher tax bracket than when you actually earned the lump sum.

To receive this tax offset, you will need to include any lump sum payments in arrears amounts in your tax return for the year in which you received payments. You should also provide a breakdown of the payment for each income year.

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