There are lenders that will consider ATO debt
All Australians are required to lodge a tax return each financial year, but for the self-employed, this is complex and time-consuming, so it often doesn’t get done on time.
In addition, many people make mistakes on their tax returns which can come back to bite them years later.
Have you got a large debt with the tax office? Read on to find out how you can refinance your tax bill and consolidate your mortgage.
Can I refinance my tax debt?
Yes, you can.
You probably already know that most banks will not approve a loan to refinance an outstanding tax bill from the Australian Taxation Office (ATO).
However, we can help you borrow up to 90% of the value of your property (90% LVR) with a specialist lender if you meet the following criteria:
- Security: You must already own real estate, which can be used as security for the loan.
- 85%-90% LVR: The tax debt plus your current mortgage must be less than 90% of the value of your property when combined. One of our lenders can do a 95% LVR tax debt refinance; however, the lending criteria are stricter.
- Late repayments: If you are overdue with your repayments or have a bad credit history, then you must have a reasonable explanation.
- Income evidence: You must be able to prove that you can afford the new mortgage using payslips, BAS, tax returns, bank statements and/or an accountant’s letter. Low doc loans are available on a case by case basis.
What are the benefits of refinancing your tax debt?
Paying your ATO tax debt off by refinancing allows you to:
- Avoid high-interest rate debts such as business loans.
- Manage your finances and cash flow better by consolidating your tax debt and other debts (if any) by rolling them into a single mortgage repayment.
- Keep your credit file clear since overdue ATO tax debt now appears on your credit file. Having an adverse listing on your credit file can also make it difficult to qualify for good interest rates in the future.
- Save on interest paid on the ATO tax debt. The interest rate paid on your tax debt is the general interest charge (GIC), which stands at 7.01% p.a. for April – June 2021. Generally, home loan interest rates even with specialist lenders, are significantly lower than the GIC rate.
However, taking out a tax debt loan has some disadvantages:
- There are fees and charges associated with taking out a tax debt loan.
- You are taking out another loan to cover the outstanding debt.
Tax debts can now be recorded on your credit file!
The Australian Taxation Office (ATO) announced that it would start recording tax debt defaults on the credit files of business owners from 1 July 2017.
Tax debt affects thousands of Australian businesses, so this a major change!
Having a tax debt default recorded on your credit file can reduce your borrowing power or ability to qualify for a home loan in the future as it will stay on your credit file for 5 years.
At the moment, the ATO will only disclose tax debt information to credit reporting agencies like Equifax (used to be Veda Advantage) if a business:
- has an Australian Business Number (ABN);
- has a tax debt in excess of $100,000; and
- has a tax debt that is at least 90 days overdue and the business hasn’t contacted the ATO to manage the debt.
Having a tax default registered on your credit report can significantly reduce your credit rating, which in turn reduces the number of lenders who will consider your loan, and may mean you pay a higher interest rate.
For this reason, it’s always best to stay in contact with your accountant and the ATO and try to meet the obligations of any payment plan that you have made with them.
Discuss your situation with your accountant so you can maintain communication with the tax office.
If refinancing your tax debt is an option, speak to our mortgage brokers about it so we can help find you a solution.
Managing your tax debt with the ATO
Interestingly, ATO is considered the fifth-largest SME (small and medium-sized enterprises) bank in Australia because small businesses have utilised their tax debt as a form of working capital over the years.
Many SMEs are managing their cash flow by delaying payment of their tax bill and entering into ATO’s payment plan.
SMEs with an income tax bill or business activity statement amount of $100,000 or less can enter into ATO’s payment plan via their online services.
You can do this by logging in using your myGov account linked to ATO (available for Individuals/sole traders only) here.
Generally, SMEs entering into ATO’s payment plan will need to:
- pay at least 10% of their tax debt within 7 days from the start date of your payment plan
- payout the debt plus interest within 2 years
- pay the general interest charge (GIC) rate on their tax debt. The GIC rate for the for April – June 2021 quarter is 7.01% p.a. This rate is reviewed quarterly.
The ATO payment plans differ according to your level of debt and your business structure.
Please visit ATO’s website to keep updated with the latest GIC.
What was the reason for the tax debt?
Lenders may view your situation differently depending on the cause of the tax debt. Some possible causes include:
- Accountant error: In this case, more lenders will be accessible to you since this shows irresponsibility on someone else’s part and not yours.
- Tax returns not lodged: If you have not lodged your tax returns on time then banks will perceive you to be less reliable with your commitments and will take this into consideration while they evaluate your loan application.
- Large Capital Gains Tax (CGT) bill: A borrower with a debt due to a CGT event (i.e. tax on profit resulting from the sale of a property) is viewed more favourably than those who have not attempted to pay the tax at all. It is usually a one-off event as opposed to an on-going issue, and thus the lenders are more forgiving.
We’re here to assist! Call us on 1300 889 743 or enquire online and one of our mortgage brokers will be in touch.
Can you prove your income or do you need a low doc loan?
We find that many people with an outstanding tax debt do not have up to date tax returns, which makes it more difficult to apply for a mortgage.
If you are self employed, then some of our lenders will allow you to provide alternative income evidence such as your BAS, bank account statements or an accountant’s letter. This is known as a low doc loan.
If you cannot provide any evidence of your income at all, then we may be able to get a no doc loan for you. See our no doc loans page for the specific qualifying criteria.
Has the ATO lodged a caveat on your property?
Depending on the size of your debt and whether or not you have missed repayments, the ATO may move quickly to lodge a caveat on your property.
A caveat can be placed on commercial or personal property by anyone who has an interest in the property but is not necessarily an owner. This is the ATO’s method of making sure that you cannot sell your property without repaying the tax that you owe.
Some of our lenders will refinance your loan despite a caveat from the ATO. In other words, your tax debt does not have to be paid off by you prior to the loan application.
Is the ATO taking legal action against you?
The ATO can be quite aggressive with taxpayers who have had a bad repayment history or who have not communicated with them. It is wise to let the ATO immediately know if you cannot fulfil your obligations. The more you ignore the responsibility, then the more severe the actions you might have to face.
If the ATO takes you to court, it may result in a court writ or judgement being recorded on your credit file. On top of that, some of our major lenders will not accept future loan applications from you because they will consider you to be a high-risk client.
Even if a court writ is paid, it will remain on your credit file for four years, whereas a judgement will remain on your credit file for five years.
On the bright side, we can still help you if you have gone to court with the ATO! We know specialist lenders who can refinance your mortgage and pay the full debt including the General Interest Charge (GIC) and legal fees.
Please call us on 1300 889 743 or enquire online to speak to a broker who specialises in refinancing tax debt.
Have you made a payment arrangement with the ATO?
If you have been successful in making timely instalments, then this shows your intention to repay the debt and will help in getting you a competitive interest rate with a specialist lender.
If you can provide printouts from the ATO portal showing that you have made your repayments on time for the last six months, then your application will be viewed more favourably.
Why don’t banks like refinancing tax debts?
Almost all Australian banks have a strict policy that they will not refinance a loan for someone if they have an outstanding tax debt. Why is this the case?
- Sign of bad character: If you don’t lodge their tax returns with the ATO or fail to make the payments on time, it can indicate a lack of intention to repay their debts in general.
- Sign of financial distress: Applying to refinance your tax debts already signifies an unstable financial position. Banks are concerned that you may be experiencing financial hardship and you won’t be able to repay your debt to them.
- Repeat problems: Banks have learned that people with tax debts have a higher chance of having another tax debt in the future or other financial problems.
- Security concerns: If a property is sold, then the bank’s mortgage will normally be repaid before the tax debt. However, there are some instances when the ATO may make a claim from the sale proceeds of a property and take payment before a bank. In this case, the bank may make a loss.
Tips to help you pay off your tax debt
Are you trying to negotiate with the ATO to pay off your debt without refinancing? Follow these tips and also seek your own legal and financial advice.
- If you owe money to the ATO, then always stay in contact with them and your accountant.
- Follow your accountant’s advice as they will have seen similar situations with other clients.
- Try to make your instalments on time until we can refinance your debt.
- Try to avoid the ATO taking legal action against you or lodging a caveat on your home, as this can prevent us from using some of our lenders.
Do I have to pay off the full tax debt with the refinance?
Most lenders prefer that you pay off the full tax debt with the refinance; however, doing so is not a necessity.
Please note that keeping the ATO tax debt will limit your lender options and reduce your borrowing power. E.g. if you’re keeping the ATO tax debt and have entered into a payment plan, then your full monthly payments will be used as a liability when calculating your borrowing power.
How do I apply for a tax debt refinance?
Talk to one of our specialist mortgage brokers who can help you refinance your tax debt into your mortgage at a lower interest rate.
Call us on 1300 889 743 or fill in our short assessment form. Let us do the work for you!