Newton’s third law suggests that for every action, there is an equal and opposite reaction.
This applies quite aptly in the science space, but it’s also relevant in other sectors as well – not least of which is finance.
While nationally the health and safety effects of COVID-19 are beginning to trend downward, we are now finally beginning to get a clearer picture of what the epidemic has done to the economy.
And with the end of financial year around the corner, it’s leaving businesses with a very important decision to make – when do I settle my debt with the tax man?
There is a school of thought that suggests paying the ATO last is the most financially prudent. After all, tax office payment arrangements are the cheapest form of debt, so rushing to ensure your tax is up to date isn’t the most pressing concern.
However, as our friend Isaac Newton found out, forces come in pairs and this action, I fear, has the potential for a reaction that causes much long-term pain.
The devil here lies in the detail. When a business makes an arrangement with the ATO, the ATO therein has the power to dissolve the company at its discretion should they default or be late on payments in accordance with that arrangement.
While most would be secure in their ability to keep ahead of this, in my opinion you’d be hard pressed finding a traditional lender who is confident in providing cashflow to a business that is effectively working with a noose around its neck – proven record of making repayments on time or not.
The fact that banks are likely assessing ways to regain lost earnings and strengthen their balance sheets against further challenges only adds more fuel to this fire.
This could have a serious knock-on effect with business models reliant on debt, and the overall access to and availability of funds.
All of a sudden, your ability to borrow new money is severely compromised. All of a sudden, lenders are demanding higher margins to offset what is considered a higher risk.
I’m looking at this with a big picture view – everyone should assess their financial situation on merit as no two cases are the same – but it’s something to consider when it comes time to make good on your debts.