By Liyan Tay and Murray Daniel
From 1 July 2017 unless a company has engaged with the ATO to manage their debts, their debt information will be passed onto credit agencies where the following applies:
- Businesses with an ABN;
- Tax debts exceeding $10,000 and overdue for more than 90 days;
- Debts that are not in dispute; and
- A payment plan is not in place or an existing plan has defaulted.
This measure has been implemented in order to reign in overdue tax debts and improve debt transparency.
SME’s currently owe the ATO around $13 billion with the total level of collectable debt as at 30 June 2016 being $19.2 million. As a result the ATO has been under pressure to move swiftly to recoup mounting tax debts.
Current arrangements to manage tax debts by the ATO include imposition of penalties and general interest charge. However, past experience has indicated that taxpayers have treated their tax debt with less priority to other forms of debt. With SME’s paying their staff, landlord and suppliers before the ATO and then entering into payment plans with the ATO.
Small businesses make up the majority (65.2%) of tax payers with debts and the ATO has made it a focus area since only 72.3% of SMEs remit their tax liability on time.
The ATO will attempt to work with businesses and notify taxpayers of their intentions before passing on debt information to credit agencies. The ATO believes that this measure will provide confidence to suppliers.
The ATO has been lamented as slow by suppliers to react to taxpayers that have large debts and if the suppliers were aware of the tax debt they would never had traded with particular SMEs.
The ATO has stated this measure is also about protecting other small businesses / suppliers that start trading with a particular business only to find out that the ATO has commenced winding up proceedings.
Impact of disclosure:
- This change will make it very difficult / impossible for some businesses to access credit;
- Potentially have adverse impact on future dealings with suppliers;
- The impact of an adverse credit agency report can be severe for small businesses resulting in a financiers potentially withdrawing support or supplier credit being stopped resulting in the business being unable to trade; and
- A credit default leaves a black mark on the business’ credit history that lasts for 5 years which creates a suboptimal environment for obtaining finance.
The impact of this new disclosure of information will have huge ramifications on small businesses and will need to be executed with care. SMEs may find it difficult to obtain future finance and credit which could be vital to a viable business trading through a difficult time.
It is therefore imperative for businesses to engage with the ATO and deal with their tax debts sooner rather than later. Businesses will no longer be able to bury their heads in the sand since they will now receive timely, firmer action from the ATO if their debt is not dealt promptly.
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