ATO starts reporting business tax debt to credit agencies
Legislation has been passed this year empowering the Australian Tax Office to begin reporting details of unpaid business tax debts to credit reporting agencies and enabling such information to be included on business credit reports. While this has caused some consternation in the business community over possible negative consequences for small businesses, others have argued this will actually benefit small businesses.
The new powers granted to the ATO are designed to both provide greater transparency regarding businesses’ financial health, as well as encourage businesses to engage with the tax office in order to manage their tax bills. The tax office currently has a collectable debt book of approximately $19 billion, of which 70% is made up of debt owed to it by small to medium enterprises (SMEs).
Under the new legislation, the ATO will have the discretion (though not the obligation) to report those Australian businesses owing the ATO amounts of more than $10,000 that is more than 90 days overdue.
According to the Sydney Morning Herald, not everyone believes this is great news for small business. The small business ombudsman Kate Carnell, for example, is quoted as warning of the potential dangers of the ATO’s new powers and the possible negative consequences for small businesses which have been reported to credit agencies over unpaid tax debts. Making the tax circumstances of small businesses visible to third parties could have major repercussions for those small businesses, she said.
For example, a negative credit agency report can lead to immediate freezes on the bank accounts or credit facilities of small businesses, threatening their ability to trade. Ms Carnell also warned that banks often have default clauses in contracts whereby the simple act of entering a payment arrangement can trigger a default mechanism, even if the small business is meeting their obligations to the lender, and paying off their tax bill by arrangement with the ATO. However, the ATO has reassured small businesses that it will not report debts that are under payment arrangement (nor will it report disputed debts).
The ATO has further stated, “Providing transparency of taxation debts owed by some disengaged taxpayers will influence taxpayer behaviour and remove an unfair advantage for businesses that do not pay their tax debts on time. It will also help to provide visibility of tax debt information to other businesses and credit providers.”
Given the importance to small businesses of being able to make an accurate risk assessment of customers in order to decide payment terms or whether to engage in business with them, it will be useful for them to discover if their potential client has unpaid tax debt. The impact of bad debt on a small business is significant, affecting cash flow and the ability to trade; therefore, heightened transparency around bad tax debt could prove very reassuring for small businesses and help them avoid doing business with probable high risk entities. More visibility regarding risk can help provide more confidence to small businesses and therefore the new measures may well be a positive to SMEs.
The danger for small businesses is that due to their own cash flow problems typically caused by slow payers or non-payers, they may themselves fall foul of their tax bill obligations, leading to their tax debt being reported to credit agencies by the ATO.
As such, it has never been more important to ensure your accounts are brought up to date and cash flow problems are reduced. Late payments, often by larger businesses, can dramatically affect small businesses and their own ability to pay tax arrears. If it is difficult for your small business to obtain timely payment of accounts, it can be extremely helpful to engage a professional debt collection agency to take the reins. Professional debt collectors are an affordable way to regain control over your slow or non-paying customers, and have the experience and tools to enable them to achieve high rates of success in recovering business debt.