03 Aug 2021

Everyone is required to lodge a tax return at the end of the financial year, but for self-employed people it can be a more complex and involved undertaking. Unfortunately, mistakes can be made, or the amount owed be more than anticipated, resulting in a large tax debt.

So, can you refinance an ATO debt into your home loan?

The short answer is “Yes” but the reality is it is not as simple as your standard debt consolidation scenario. It’s probably best to avoid getting one in the first place, but sometimes things just happen.

Unfortunately, the lender options available are narrow when looking to refinance an ATO debt. You can forget a major lender, as none are willing to consider this type of application. You are more likely to be considered by a non-conforming lender, albeit at a relatively high interest rate. That being said, it’s likely to be more cost effective than the General Interest Charge incurred by the ATO which is currently more than 7%.

What you need to provide when refinancing your ATO debt:

Equity –You must have sufficient equity in your property, ideally less than 80% loan to value ratio.

Conduct – Your conduct must be exemplary with all other liabilities in order with no evidence of late repayments or delinquency.

Income – Your capacity to repay the loan is strong, supported by up-to-date evidence.

Reason for ATO Debt – There must be a sound reason for the debt such as:

An accountant’s error will likely satisfy as a reason as this assigns the responsibility with another party.

Returns not being lodged may be acceptable as an excuse if other mitigating reasons can be advised such as an illness or other life upheaval such as relationship breakdown.

Large Capital Gains Tax bills because of a property sale is probably the most favorably viewed reason as it’s a one-off event not due to any error or misconduct.

Why banks are not fans of refinancing tax debts

Poor Character – Tardiness with lodging a tax return or paying a bill may be indicative of their money management capability in general – or at least the bank may see it this way.

Financial Distress -The bank may view your need to refinance this debt as a signifier of an overall unstable position potentially meaning an inability to meet your obligations.

Repeat Offender – Banks are aware that statistically those with outstanding tax debts are more likely to have ongoing tax debt issues or other financial problems.

Security Concerns – In the event of the security being sold, the ATO may insist on claiming the proceeds first before the bank. The ATO may also choose to lodge a caveat on the property to ensure their interests are protected.

Life after an ATO debt refinance

If you do choose to refinance your tax debt into your home loan, there may be a light at the end of the tunnel. If you can maintain good conduct on the new loan along with your other commitments and your income position remains sound, there may be the provision to refinance to a conventional lender down the track and secure a competitive rate to help pay down the debt faster and put it behind you.

For more information about this or anything to do with your home loan contact the Blackburne Mortgage Broking team today.

 

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