You have an ATO payment plan. What does that do to your sale?
The tax office is pursuing more than $50 billion in collectable debt and has hardened its approach. Here is what an arrangement does to a business sale, and what it does not.
General information only, not financial, legal or taxation advice. Tony Pope holds Queensland Office of Fair Trading licence 4963575.
The short version
- An ATO payment plan does not stop you selling. It changes the settlement arithmetic and it has to be disclosed.
- The debt is almost always paid out at settlement from the proceeds, so it comes off your price rather than off the deal.
- What damages a sale is not the debt. It is a debt the buyer discovers, or one that has already attracted a director penalty notice.
- Get the current balance and the arrangement terms in writing before you go to market, not when a buyer asks.
The tax office is chasing more than $50 billion in collectable debt, and a meaningful share of it is owed by small businesses. Its approach has changed. Arrangements that were tolerated a few years ago are now attracting garnishee notices and director penalty notices.
If you are one of the businesses with an arrangement in place and you are thinking about selling, the question is fair: does this stop me?
Almost always, no. But it changes some arithmetic, and it changes what you have to say and when.
What actually happens at settlement
A tax debt is a liability. So is a chattel mortgage on a truck, an equipment lease, an outstanding supplier account and a bank facility. Every business sale involves working out which liabilities transfer, which are discharged, and out of whose money.
In the ordinary case, an ATO debt is paid out at settlement from the sale proceeds. The buyer does not inherit it. You do not have to find the money beforehand. The solicitors deal with it in the settlement statement alongside everything else.
Which means the practical effect is simple. It comes off what you walk away with, not off the deal.
If your business sells for $900,000 and you owe the tax office $110,000, you have sold a business for $900,000 and you will receive less than that. That is the whole mechanic in the ordinary transaction.
Where it does cause trouble
Three situations, and they are worth separating because they are not equally serious.
The debt is bigger than the equity. If what you owe approaches or exceeds what the business will sell for, the sale stops being a sale and becomes something else. That is a conversation for an accountant and possibly a restructuring adviser before it is a conversation for a broker.
The lodgements are not up to date. A payment arrangement on a known debt is one thing. Unlodged business activity statements or unlodged returns are another, because nobody knows the number, including you. A buyer cannot price an unknown liability and will not try. They will wait, or they will discount heavily, or they will go elsewhere.
There is a director penalty notice. This makes you personally liable and it usually signals the debt is old, or relates to unpaid superannuation or PAYG withholding that was never reported. Get advice on this before doing anything else. It does not necessarily prevent a sale but it materially changes your position and your options.
Why disclosure timing decides the outcome
Here is the pattern I keep seeing, and it has almost nothing to do with the size of the number.
A seller who mentions in the first proper conversation that there is an arrangement in place, that the balance is roughly this much, that it is current and here is the ATO correspondence, gets treated as a person running a business through a rough patch. The buyer prices it, the solicitors handle it, everyone moves on.
A seller who does not mention it, and whose buyer finds it in week five when their accountant asks for an integrated client account statement, gets treated as somebody who was hiding a liability. The buyer then goes back through everything else with fresh eyes, and the questions get harder, and the price gets softer, and sometimes they stop returning calls.
The debt was the same in both cases. The difference was who said it first.
What to have ready before you go to market
Four things, and none of them takes long:
- A current integrated client account statement showing the actual balance rather than your memory of it.
- The arrangement terms in writing, including the instalment amount and the end date.
- Confirmation that all lodgements are up to date. If they are not, that is the first job and it comes before anything else.
- Your accountant's view on how the debt is treated at settlement given your structure, because a company debt and a personal liability are handled differently.
The part nobody says out loud
Having a tax debt does not mean the business is bad. Plenty of solid, profitable businesses have one, usually because a quarter went sideways, or a large customer paid late, or the owner made a decision to fund a piece of equipment out of cash flow and the timing did not work out.
Buyers know this. They have run businesses. What they cannot get comfortable with is not knowing.
So the advice is unglamorous. Get the number, get it in writing, and say it early. It is a smaller problem than you think, right up until the moment you let somebody else discover it.
Common questions
Can I sell a business that owes the ATO money?
Yes, and it happens regularly. Tax debt is a liability like any other and is normally discharged at settlement out of the proceeds. What matters is that the amount is known, the arrangement is current, and the buyer is told early enough that it forms part of the price rather than arriving as a surprise.
Will a buyer walk away because of a tax debt?
Rarely because of the debt itself. Buyers walk away when a liability appears that they were not told about, because it makes them wonder what else they have not been told. A disclosed and quantified debt is a number. An undisclosed one is a character question.
Does a director penalty notice change things?
Considerably. A director penalty notice makes a director personally liable and it usually means the debt is old, unlodged or both. That is a different conversation and it needs your accountant and your solicitor before it needs a broker.
Keep reading
All notes on selling a business · All seller guides · What is my business worth?
Check it yourself
Primary sources, none of them affiliated with me and none of them endorsing this site. Where anything here differs from an official source, the official source is right.
Links open on external government and industry websites. The full list sits on licensing, registers and official sources.
Ask what it is worth
Free, in writing, and nobody finds out you asked. Tell me the trade and the suburb and I will do the rest.
Nobody finds out you are selling. This goes to me only, into my own database in Sydney. I will not contact your accountant, your landlord, your bank or your staff, ever, unless you ask me to.
If you would rather not put anything in writing yet, ring 0431 124 128. Prefer to pick a time yourself? Book a time in my diary.
Thinking about selling?
Thirty minutes, on the phone or in person, at a time that suits you including evenings. You will get a straight read on where the business sits today and what would move the number. It costs nothing, there is no obligation, and nobody finds out you asked.