New black mark on credit ratings to leave substantial smudge.
The Australian Taxation Office (ATO) can now disclose business tax debt information to registered credit reporting bureaus. This law has been in the making since 1 July 2017; on the government's agenda from 2014; and received royal assent on 28 October 2019.
This is a new and unprecedented power for the ATO. And is a measure under the government's strategy to reign in overdue tax and improve transparency and visibility; and to encourage businesses to engage with the ATO about its taxation debts. It also aims to:
"Reduce the unfair advantage obtained by businesses that do not pay their tax on time and do not engage with the ATO in managing their tax debts."
The ATO's criteria for business debts being disclosed to creditor reporting bureaus is as follows:
- The business has an Australian business number (ABN) and is not defined as an 'excluded entity' (a deductible gift recipient, registered charity, a government entity, and a complying superannuation entity).
- The business's tax debts—one or more—with a minimum of $100,000 and overdue by 90 days plus.
- The business is not considered to be 'effectively' engaging with the ATO to manage its tax debt.
- The business is not subject to the Inspector-General of Taxation considering a compliant made about "the proposed reporting of the entity's tax debt information".
However, the mechanism for reporting is not automatic. The ATO must notify the business in writing and give them 28 days to engage with the ATO to manage its tax debt.
Notably, the ATO will only provide tax debt information to registered credit reporting bureaus that have an agreement with the ATO detailing the reporting terms and are also compliant from tax perspective. The ATO is also implementing the measures in phases to "ensure systems, safeguards and processes are robust" and for business community to become aware. In due course the measures will extend to other entity types such as partnerships, trusts and sole traders.
Why is this measure relevant?
The rising level of debt, particularly in small business, presents a constant challenge for the ATO as it is faced with managing the delicate balance of collecting tax arrears without (where possible) suffocating business cash flow.
Compounding this challenge, the current consequences for failing to pay the ATO have no real tangible impact on the day-to-day business operations. Failure to lodge and general interest charge penalties, and in some instances imposing personal liability on directors, do not typically influence a business continuing to trade. This means that ATO debt is often pushed to the back of the queue and will be allowed to accumulate—often until the ATO pursue legal proceedings.
However, that landscape is now changing, as defaults will be recorded on a taxpayer's commercial credit file, which will have immediate and lasting consequences for a defaulting taxpayer. A credit default is a black mark that lasts for five years and creates an environment where support from financiers may be withdrawn and supplier credit stopped.
Given the potential ramifications for small businesses in particular, it is evident that policy implementation must be carefully considered and managed to avoid potentially imposing irreversible damage on thousands of small businesses. And as we speculated in our article in 2017, it also remains to be heard or seen how the ATO will wield this new power when it comes to debt that is in dispute.
Clearly, there has never been a more important time to engage with the ATO to manage unpaid tax, and the strategy of buying more time by 'burying your head in the sand' is a thing of the past.
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