Getting out of Tax Debt isn’t easy

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Let's look at the reasons why it's hard to get out of Tax Debt

What is causing your tax debt, and why is tax debt so hard to get on top of? When looking for the issues which are causing your business to be unable to afford its tax debt, there are some that, if fixed, can have a large and immediate effect on your business’ available cash and ability to repay its tax debt.

Others, though, take longer to see the improved cash flow in your business.

We covered the “Quick Fix” issues in our previous blog, Why not to enter into a payment arrangement to fix Tax Debt

In this blog, we want to look at the “Slow Burn” issues of Tax Debt and how to fix them. 

They include:

Lack of Profitability

When a business is not profitable for any period, cash problems inevitably follow, and tax is one of the first things to fall behind. 

If your business isn’t profitable every month, you urgently need to determine what the issue is and fix it. 

Issues that could be affecting your business’ profitability include:

  • Incorrect pricing (e.g. your costs have all increased, but you haven’t increased your prices)
  • Over-staffing (e.g. a tradie keeping his crew together even when there is not enough work)
  • Job inefficiency (e.g. if you budget a certain number of hours to do a job but it takes significantly longer than that, causing you to lose the profit margin on the job)
  • Expenses too high for the level of turnover
  • Simply not enough work or sales to cover the expenses of the business

Determining why your business isn’t profitable and fixing that issue can sometimes be easy but is quite often difficult.  

This is often because, as a business owner, it can sometimes be hard to see the wood for the trees. In other words, it can sometimes be hard to get out of the business trenches and critically look at the potential issues and make the necessary changes to fix them. 

However, it must be done quickly if your business is to survive.

Irresponsible Spending of Business Cash

Many small business owners manage their business’ cash flow via the “Bank Account and Gut Feel” method.

This is where you mentally take the amount of money in the bank and adjust that for what you think will come in and what you can remember you need to spend to determine if you have enough money.

This method can work for a sole trader with no employees and little to no fixed costs, but the problem is that this method is, at best a very rough estimate and can only predict out about a month at the most.  

Given BAS, super, and income tax debts arise outside of that monthly timeframe; the “Bank Account and Gut Feel” method will get your business into trouble every time.

As Parkinson’s Law outlines, if there is “unallocated” money in the bank, we will either find something to spend it on or stop pushing as hard, and tax debt issues inevitably occur.

The solution to this issue is to budget your business properly (i.e., there is a real skill to this) and consistently compare your business’ performance and financial position with what was budgeted.

By doing this, you will be aware of what cash flow your business needs months into the future to allocate your business’ available cash flow responsibly.

Owner Lifestyle Issues

This is where the business owner's lifestyle is more than the business can afford. In other words, the business owner draws more than the business’ profit which obviously leads to a lack of cash in the business and, inevitably, Tax Office debt.

This is one of the most difficult issues to fix because doing so often involves selling expensive cars, taking kids out of private schools, or moving to a less expensive house, all of which are very tough decisions.

Lifestyle is very quick to increase with an increase in earnings but typically very slow to decrease when earnings decrease.

As a part of implementing a business budget, include a wage figure i.e. regardless of whether you take it as a wage or a drawing for yourself that your business can afford and adjust your lifestyle to that amount of money.

These issues are usually deeply ingrained problems and can take a lot of time and soul-searching to fix, but it is absolutely worth doing.

If you can fix these problems, you will have gone a long way toward ensuring that not only you get out of Tax Debt but that your business will be successful for many years to come.



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