How Do I Pay Off My ATO Tax Debt? How Megan and Adam Cleared $80,000 in a Year
Give the tax money its own bank account, move money into it on set days every week, and get your prices to where the business can afford to do it. That's how Megan and Adam Walters, from John Dale Motors in Morisset, New South Wales, paid off their debt to the tax office, and the same changes stop the next one building. Twelve months ago they owed the ATO $80,000. Now they owe nothing.
If you run a mechanics workshop and you're carrying a debt to the ATO, or to the IRS, HMRC or IRD if your garage is somewhere else, I know how heavy it sits. It's rarely because you're careless. The tax money, the wages money and the parts money all land in the same account, and the tax bill is the one that can wait.
Where Megan and Adam started
Megan didn't come to us with a spreadsheet. She came to us burnt out.
"My cup had finally filled up being a business owner," she says. Someone she'd known for a while walked into the shop, took one look at her and said, "You don't look the best. What's going on?" That conversation was the first time she heard of The Workshop Whisperer.
Here's how she describes the days before it:
"The stress that you'd see me go through, and then you'd be walking on eggshells trying to keep everything calm, trying to keep the money coming in, working your backside off, and get nowhere."
And here's the line I keep coming back to:
"I think if we hadn't have made the decision to go with you last year, I would be really surprised if we were still in business at this time."
That's where a tax debt takes you. The shop is busy, everyone is working flat out, and the business is still going backwards.
What they actually changed
They learned to read their own numbers. "It really gave me the confidence to look at the figures and to know what I was looking at," Megan says. Before you can pay down a debt, you have to know what the business earns, what it owes and when. Most auto repair shop owners were never taught that. As Megan and Adam put it: "We all go to TAFE to learn how to fix these stupid cars. It's the same working with you to teach us how to make it work."
They gave the tax money its own account. This is the change that cleared the debt. Megan set up a separate account and moves money into it every Tuesday and every Thursday.
"I don't miss it. It's not a small amount of money, but it's transferred twice a week, and I know when the balances are due, the money's there."
Notice when she does it. "Every Tuesday, Thursday, it's out of the account before I even check the balance." The transfer happens before she can talk herself out of it. Nothing is decided on the day, so a tight week can't quietly push it back.
Here's the important part, in her words:
"It's habit. It's not discipline, it's just habit."
That's why it held up through the tight weeks. She isn't deciding each time whether the business can afford it.
They put their prices up. This is the one Megan fought hardest. "As you know, I struggled with, 'I can't put my price up. I can't do that. I can't do that.'"
Her verdict now: "We should've done it years ago."
A separate account only works if there's enough money flowing in to fill it. If your prices don't cover your costs, your tax and a profit, every transfer comes out of the wages or the parts bill instead, and the debt simply moves somewhere else.
They started tracking their numbers. "You should see my KPI graphs. They're freaking awesome." Checking the numbers every week means a bad week shows up while you can still do something about it, not months later when the accountant rings.
Where they are now
Here's the before and after, in Megan's words.
"This time last year, we had an $80,000 tax debt, and as of 9:00 this morning, it's zero."
When she told Dean on our team, it brought her to tears. Twelve months from "I would be really surprised if we were still in business" to a zero balance with the tax office.
The rest of the shop moved with it. There are now four techs on the floor and two in the office. "There's money in the bank, bills get paid, our staff are doing the jobs that they're being paid to do and being accountable."
They also built the life they wanted around the business. A four-day week for the team didn't work for their shop, so they asked a different question: why can't it work for the owners? Adam has every Friday off. Megan works in the shop on a Monday, usually until after lunch, works from home Tuesday to Thursday, and they both have Fridays off.
"We're the ones that carry the stress of it, so why can't we have the lifestyle business?"
And the line that sums up the year:
"If you'd said to me 12 months ago, this is where you're going to be in 12 months' time, I would've laughed in your face."
What this means for your shop
Every change Megan and Adam made has a matching article, so you can work through them in the same order they did.
- Learn to read your own numbers. Start with the numbers an auto repair shop owner should check every week. A handful of figures checked every week tells you more than the annual tax return does.
- Move the tax money out of reach. How do I fix cash flow in my auto repair shop? walks through the separate accounts for GST, tax and super, and what to do first when money is tight.
- Change the order you pay things in. Why isn't my auto repair shop paying me? shows how setting aside tax, profit and your own pay first leaves the business to run on the rest.
- Fix your prices. How to raise your labour rate without losing customers covers the step-by-step rise that Megan wishes they'd made years earlier.
This is the work we do with auto repair shop owners in The Engine Room, with a business coach alongside you while the habits take hold. You can start every one of these steps on your own tonight.
Questions auto repair shop owners ask about tax debt
How long does it take to pay off an ATO debt?
It depends on the size of the debt and what your business can afford each week. Megan and Adam cleared $80,000 in about twelve months. Another of our clients in Western Australia came to us with $450,000 of tax office debt and cleared all of it in four years. In both cases the debt fell because the money for tax was moved out as it came in, on a set rhythm, every week.
How much should I put aside for tax each week?
Enough to cover what falls due, and the next bill as well as the old one. Start with the GST, because it was never your money. Then sit down with your accountant, work out your income tax and any instalments from last year's figures, and divide by the weeks. Megan moves hers twice a week, so the money's already sitting there when the balance is due.
Should I raise my prices to pay off tax debt?
If your prices don't cover your costs, your tax and a profit, the debt will keep coming back however disciplined you are. Megan was sure she couldn't put her prices up. Twelve months later she says, "We should've done it years ago." When you do put your labour rate up, don't announce it to your customers. Put the new rate in and carry on.
Where to start tonight
Log in to your business bank account and open one new account. Name it Tax. Then set up two recurring transfers into it, on fixed days, the way Megan does on Tuesdays and Thursdays. Pick an amount you can hold, and set it to go out before you'd normally check the balance.
You don't have to solve the whole debt tonight. Booking the first transfer is the step that matters, because that habit is how Megan got to "as of 9:00 this morning, it's zero."
Related questions:
- Why Am I Busy but Not Making Any Money?
- What Is a Healthy Profit Margin for an Auto Repair Shop?
- Markup or Margin: How Should I Price Parts?
See what changes for the people who do this work. On our Our Clients page, auto repair shop owners, named and on camera, tell you what actually changed in their shops and their numbers.
More on this topic: all Money & Profit articles.
Whenever you're ready, here's how we can help.
- Not ready to spend anything yet? Start free with Shop Talk, a 30-day reset for auto repair shop owners on our YouTube channel, and our free resources for auto repair shop owners.
- Over $50,000 a month and ready to clear the debt for good? The Engine Room changes how the whole business runs, from your numbers to your team, delivered online with one-on-one coaching on demand from a business coach who is a current or former auto repair shop owner.
- Running a mechanics workshop under $50,000 a month? Auto Superstars Academy builds the foundations, with one-on-one coaching on demand from a business coach who is a current or former auto repair shop owner.
