How Tax Debts Impact Your Ability to Borrow

For many individuals and business owners, tax debt is often overlooked when applying for a loan. However, lenders take tax liabilities seriously, and outstanding tax debts can significantly impact your ability to secure financing. Whether you are looking to buy a home, expand your business, or refinance an existing loan, understanding how tax debt affects borrowing power is crucial.

In this article, we’ll explore how tax debts influence loan approvals, what lenders consider, and how to improve your chances of securing finance despite tax liabilities.

1. Do Lenders Check Tax Debts?

Yes, lenders assess tax debts when reviewing loan applications. If you owe money to the Australian Taxation Office (ATO) or another tax authority, this could signal financial instability, making lenders hesitant to approve your application.

Key Considerations for Lenders:

  • Size of Tax Debt: Large outstanding debts raise red flags.
  • Payment Plan Status: A structured repayment plan with the ATO is preferable to an unpaid tax debt.
  • Credit History: Tax debt that has gone to collections can severely damage your credit score.
  • Financial Position: Lenders assess income, expenses, and liabilities to determine if you can afford repayments.

2. How Does Tax Debt Affect Loan Approvals?

Unpaid tax debts can negatively impact loan approvals in several ways:

Home Loans:

  • Banks view tax debt as an ongoing liability, reducing borrowing capacity.
  • If the ATO has placed a tax lien on your assets, lenders may refuse finance.
  • Tax debts can lower your credit score, affecting approval chances.

Business Loans:

  • Lenders assess business tax compliance to determine financial health.
  • Unpaid Business Activity Statement (BAS) obligations or payroll tax debt may limit funding options.
  • High tax debt signals potential cash flow issues, making business loans harder to secure.

Personal Loans & Car Loans:

  • A tax debt in collections will likely disqualify you from most unsecured loans.
  • Even with good income, outstanding tax liabilities may reduce your borrowing limit.

3. Understanding the General Interest Charge (GIC)

The General Interest Charge (GIC) is applied by the ATO to unpaid tax debts. It accrues daily on outstanding balances until the debt is paid in full.

How GIC Affects Borrowing:

  • Increases total debt obligations, making it harder to qualify for loans.
  • Signals financial mismanagement to lenders, reducing approval chances.
  • Compounds over time, creating long-term financial strain.

Reducing GIC Impact:

  • Set up a payment plan with the ATO to avoid further accrual.
  • Request a remission if experiencing financial hardship.
  • Pay down tax debt as quickly as possible to reduce extra costs.

Example:

  • Michael owed $20,000 in tax debt, and over two years, GIC increased his total amount due to $25,000. By setting up a structured repayment plan, he reduced his overall interest cost and improved his loan eligibility.

4. Options for Funding Tax Debts

If you have tax debt and need funding to pay it off, there are several options available:

1. Business or Personal Loans

  • Some lenders offer business loans or personal loans specifically designed to help borrowers pay off tax debt.
  • Non-bank lenders may be more flexible in approving loans for those with tax liabilities.

2. Tax Debt Loans

  • Specialised lenders offer ATO tax debt loans, which consolidate your tax debt into a structured repayment plan.
  • These loans typically require proof of income and repayment ability.

3. Refinancing Existing Loans

  • If you own property, refinancing your mortgage or business loan can help free up cash to pay off tax debt.
  • This is often a more cost-effective way to manage tax liabilities compared to high-interest loans.

4. ATO Payment Plans

  • The ATO offers tailored repayment plans for those struggling with tax debt.
  • Setting up a structured payment plan can prevent additional interest and penalties from accruing.

5. Line of Credit or Overdraft

  • If you have an existing business line of credit or overdraft facility, this can be used to cover tax obligations.
  • Interest rates on these facilities may be lower than standard loans.

6. Debt Negotiation or Settlements

  • In some cases, engaging a tax debt negotiation service can help reduce the total amount owed or set up a more manageable repayment structure.
  • This is often an option for businesses facing financial hardship.

5. Can You Get a Loan If You Have a Tax Debt?

It is possible to secure financing with tax debt, but lenders prefer borrowers who have resolved or managed their liabilities.

Ways to Improve Loan Approval Chances with Tax Debt:

✅ Set Up a Payment Plan: Lenders are more likely to approve loans if you have an active ATO repayment arrangement.

✅ Show Consistent Repayments: Demonstrating regular tax debt repayments proves financial responsibility.

✅ Improve Cash Flow: Strong financials and income stability can offset concerns about tax debt.

✅ Provide Supporting Documents: Some lenders may approve loans with evidence of a structured debt management plan.

✅ Use Specialist Lenders: Alternative lenders or non-bank lenders may be more flexible with tax debt situations.

Example:

  • John, a self-employed builder, owed $30,000 in unpaid taxes. His home loan application was initially rejected. However, after setting up a formal repayment plan with the ATO and demonstrating consistent payments for six months, he successfully secured a mortgage with a non-bank lender.

6. Will Tax Debt Affect Credit Scores?

If a tax debt is unpaid or escalates to collections, it may be reported to credit agencies, negatively affecting credit scores. While the ATO does not report unpaid tax directly to credit bureaus, serious tax debts may lead to:

  • Court judgments, which impact credit ratings.
  • ATO debt disclosure for businesses that owe over $100,000 in tax for more than 90 days.
  • Debt collection agency involvement, lowering credit scores significantly.

7. Seeking Help from a Finance Broker

Navigating tax debt while applying for a loan can be challenging. A finance broker can help by:

  • Assessing loan options suited to your tax situation.
  • Negotiating with lenders for flexible borrowing terms.
  • Advising on tax debt management strategies to improve loan eligibility.

8. Take Control of Your Finances & Borrowing Power

Tax debt doesn’t have to stop you from securing a loan, but proper management is key. If you’re concerned about tax liabilities affecting your borrowing power, our finance brokers can help you explore loan options tailored to your situation.

🔹 Book a consultation today to discuss finance solutions that work for you.

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The Team at The Accountants and The Finance Brokers are here to help you navigate your cash flow requirements in your business. We offer complimentary cash flow reviews and assist you in understanding your finance needs.