A Strategic Approach to Managing ATO Debt

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As of 1 July, a significant change has come into effect that impacts business owners across Australia. The interest charges from the Australian Taxation Office (ATO) on unpaid tax debts are no longer tax deductible. This change is particularly important for those who run a business either personally or through a corporate structure.

In contrast, interest costs incurred with other third parties to pay off tax debts remain tax deductible. This means that borrowing funds to clear ATO debts can now offer a more advantageous financial strategy compared to setting up a payment plan with the ATO.

In light of this change, understanding and leveraging concepts like debt recycling and debt in offsets becomes crucial for managing business finances effectively.

What is Debt Recycling?

Debt recycling is a strategy that involves converting non-deductible debt (such as a home loan) into deductible debt (such as an investment loan). This is done by borrowing funds to invest in income-producing assets, such as property or shares, while simultaneously using the income from these investments to pay off the non-deductible debt.

For business owners facing ATO debts, debt recycling can be a smart way to manage their liabilities. By borrowing from a third party to pay off ATO debts, the interest on this new loan can potentially be tax deductible, unlike the interest on a payment plan with the ATO.

How Does Debt in Offsets Work?

Debt in offsets refers to using an offset account to reduce the interest payable on a loan. An offset account is a transaction account linked to a loan, where the balance in the account offsets the balance of the loan, reducing the amount of interest charged.

For businesses, this can mean setting aside funds in an offset account linked to a business loan or mortgage. By doing so, you reduce the interest on the loan, which remains tax deductible, while also keeping funds accessible for operational needs or emergencies.

Why Should Businesses Consider These Strategies Now?

The key benefit of using debt recycling and debt in offsets is the potential for significant tax savings.

With the new ATO ruling, any interest charges incurred on unpaid tax debts are no longer deductible, making it more expensive to hold ATO debt over time.

By paying off ATO debts with borrowed funds, businesses can shift from non-deductible interest payments to potentially deductible ones, optimising their tax position.

Moreover, these strategies also provide flexibility and financial management tools that can help businesses navigate other financial challenges.

• With debt recycling, businesses can simultaneously manage their tax liabilities and invest in growth opportunities.
• Meanwhile, using an offset account helps businesses reduce their loan interest costs while keeping funds liquid.

Next Steps

For business owners, it’s essential to reassess your financial strategies in light of these changes. By proactively managing your tax liabilities and optimising your debt structure, you can enhance your business’s financial health and reduce unnecessary costs.

Contact us today to discuss your options and create a plan that reduces unnecessary costs and aligns with your financial goals.