Buying a Business That Owes the ATO: How the Finance Is Protected

Key takeaways

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  When you buy a business that owes the Australian Taxation Office (ATO), buying the company's shares means the company keeps its own tax debt, while buying only the business's assets generally leaves the debt with the seller.
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  A new director of a company that owes the ATO can be personally liable for its unpaid withholding, goods and services tax and super guarantee charge from before their appointment, unless within 30 days the company pays in full or takes one of three other steps.
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  The ATO can send a garnishee notice to anyone who owes the seller money, including a buyer still to pay the purchase price, requiring that money to be paid to the ATO instead of the seller.
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  The simplest protection for a buyer is for the seller's ATO balance to be paid out of the purchase price at settlement, with the sale contract requiring it, which your solicitor can ask for.
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  A private loan from Secured Lending gives your company the money for the purchase and is secured by a mortgage over property owned by your company or a director, never by the business you are buying.
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  A private loan from Secured Lending starts from $250,000, is decided within hours in most cases and can settle within 24 hours, so your company can complete the purchase on the seller's settlement date.

If the business you want to buy owes the Australian Taxation Office, that debt does not automatically become yours. Where it sits after settlement depends on whether your company buys the company that runs the business or buys the business's assets, and two ATO powers can affect a buyer: the rule for new directors and the garnishee notice. Both are set out below, with what your solicitor can do about each.

We would be glad to help your company complete the purchase. A private loan backed by property is a good fit here, because the loan is secured by property your company or a director already owns, not by the business being bought. We value that property, not the business. We lend our own funds, in most cases we decide in hours, and we can settle within 24 hours, so a vendor's ATO problem does not have to push your settlement date back.

Does the ATO debt come with the business?

As a general rule, a company's tax debts belong to that company. If your company buys the shares in the company that runs the business, it becomes the owner of a company that still owes the ATO, and that company has to pay it. If your company buys the business's assets from the vendor, such as the goodwill, stock, plant and fit-out, the ATO debt generally stays with the vendor. The risk to your company then is the part of the price it still owes the vendor, covered further below.

Which structure applies to your deal, and what the contract should say about the vendor's tax debt, is for your solicitor to confirm. We are a lender, not a solicitor or tax adviser, and we do not advise on how a purchase should be structured.

The ATO reports a business's tax debt to credit reporting bureaus where at least $100,000 is overdue by more than 90 days and the business is not engaging with the ATO to manage it. A business that is engaging with the ATO is not reported, even with a balance of $100,000 or more, so a clean credit report does not prove the vendor has no ATO debt. Ask for the figure in writing.

Buying the shares: a new director has 30 days

If you become a director of the target company at settlement, the ATO's rules on director penalties apply to you from your appointment. They cover a company's unpaid pay as you go withholding, goods and services tax and superannuation guarantee charge, and a new director can be personally liable for amounts that fell due before they joined the board. The ATO's director penalty regime page sets out the way to avoid that:

"As a new director, you will not be liable for a director penalty that was due before your appointment if, within 30 days of your appointment, you ensure the company does one of the following:"

The four steps on that list are:

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  the company pays the amount outstanding in full
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  the company appoints an administrator
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  the company appoints a small business restructuring practitioner
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  the company is wound up.

Resigning as a director inside the 30 days does not end the exposure. The ATO says a director who resigns within that period may still be liable for the unpaid amounts that were due before their appointment.

For a buyer who intends to run the business, the first step on that list is the one that matters. Plan with your accountant, before settlement, how the company will pay its ATO balance in full within 30 days of your appointment. Our tax debt loans are made to a company so that it can pay an ATO balance in full, backed by property owned by the company or a director, and we can still lend after a director penalty notice has been issued.

Buying the assets: the ATO can claim part of the price

In an asset purchase, the vendor's ATO debt stays with the vendor, but the money your company owes the vendor can still be paid to the ATO. The ATO can issue a garnishee notice to businesses or individuals who owe the vendor money, and to solicitors, real estate agents or purchasers involved in the sale of property the vendor owns. A garnishee notice requires the person who receives it to pay the ATO instead of the vendor. The ATO's wording on this is plain: "The recipient is legally required to follow the notice."

So if a notice is issued between exchange and settlement, part of the price your company owes the vendor goes to the ATO, and the vendor receives less. That changes the figures for a settlement that both sides had planned around the full price. The ATO sends the vendor a warning letter before it issues a garnishee notice, so your solicitor can ask the vendor directly which ATO letters it has received.

How the vendor's ATO debt is paid at settlement

The simplest protection for your company's money is for the vendor's ATO balance to be paid out of the purchase price at settlement. Your solicitor can ask for the vendor's ATO balance in writing, and for the contract to require that amount to be paid from the price at settlement, with the vendor receiving the rest. The vendor's debt is then cleared as the business changes hands, and nothing is left owing that a garnishee notice could later redirect. How the price is divided, and the settlement directions that carry it out, are agreed between the solicitors.

Our part is to make sure your company has the purchase money on the settlement date. A bridging loan from us settles before or on the purchase settlement date. The loan funds are paid to your company, which then pays the price at settlement.

The loan can pay for the goodwill, stock, plant and fit-out your company is buying, and for working capital from day one. None of those secures the loan. What secures it is real property: a home, an investment property, or commercial or industrial property, held by your company or a director, including property already held in an existing company or trust. If one property does not have enough equity, a second property can be added, as long as total borrowing stays within 70% of the combined value.

One exit is bank acquisition finance after settlement, once the bank can assess the business under its new owner. If the settlement date is only days away, our page on urgent finance for a business acquisition covers how we fund a purchase on a short timetable.

What your solicitor and accountant check before settlement

These are the checks a buyer's advisers usually run when the vendor owes the ATO. They are a starting point for that conversation, not advice.

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  The vendor's ATO balance, confirmed in writing as close to settlement as possible.
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  Any ATO letters the vendor has received, such as a warning letter, a director penalty notice or a garnishee notice.
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  The business's financial records for the past three to five years, which business.gov.au suggests buyers examine, including its business activity statements.
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  Whether there are debts owing on assets registered on the Personal Property Securities Register, which have to be released at settlement.
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  A business credit report, keeping in mind that an unlisted business can still owe the ATO.
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  Whether the price reflects what the assets are worth, which matters if the vendor company is wound up after the sale.

Case study: $750,000 on a second mortgage to buy a business from a liquidator

A client wanted to buy a business from a liquidator and needed $750,000 for the purchase and for working capital.

We made the funds available on a second mortgage over the client's existing investment property in New South Wales. The business being bought was not the security. The loan was backed by property the client already owned.

Frequently asked questions

Can the ATO take the purchase money before the vendor receives it?

Yes, it can. The ATO can issue a garnishee notice to a purchaser involved in the sale of property the vendor owns, or to anyone who owes the vendor money, and the person who receives it must pay the ATO instead of the vendor. Ask your solicitor to deal with the vendor's ATO balance in the contract before settlement.

Can my company still borrow if the business has an ATO debt on its credit file?

Yes. We value the property that will secure the loan, not the business your company is buying, and a tax debt listing on its own is not a reason we decline.

What secures the loan?

A first or second mortgage over residential, commercial or industrial property owned by your company or a director. The business, its goodwill, stock and plant are what the loan pays for, never what secures it.

Who is the borrower?

The borrower is always a company, which can include a company acting as trustee. We lend to companies, not to individuals or sole traders, and a director's home or investment property can back a loan made to the company.

How quickly can the purchase be funded?

In most cases we decide within hours of receiving the details, we issue a letter of offer as soon as terms are agreed, and we can settle within 24 hours. Our in-house team values the property, so nothing waits on an outside valuer.

How Secured Lending Can Help

We would be glad to help your company buy a business that owes the ATO without letting that debt hold up the deal. Our loan gives your company the purchase money on the vendor's settlement date, secured by a first or second mortgage over property your company or a director already owns. Your solicitor can arrange for the vendor's ATO balance to be paid out of the price at settlement, and your company then repays us through the exit agreed at the start, such as bank finance once the business is yours.

A private loan suits a purchase like this because it is quick and because the loan is secured against property. We lend our own funds and value the property ourselves, so the assessment does not wait for the vendor to pay its tax debt or for a bank to value the business.

We provide secured loans backed by real property. If you would like us to look at your purchase, it helps to have these to hand:

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  The sale contract or heads of agreement, and the settlement date.
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  What you know of the vendor's ATO balance, and any ATO letters the vendor has shared.
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  The property that could back the loan, its estimated value and any existing loan on it.
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  How your company plans to repay the loan, and roughly when.

You are welcome to call us on 1300 795 175 to talk it through, or send the details through and we will come back to you. In most cases, we can tell you within hours whether we can help.

Gino Tabila

Associate Director

Mark Hutchins

Managing Director