Disclosure of Business Tax Debts: What Do You Need To Know
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The Australian Tax Office (ATO) is now empowered to share business tax debt information with registered Credit Rating Bureaus (CRBs), after the relevant legislation received royal assent on 28 October 2019.[1]
As access to credit is crucial to the survival of many small businesses, this unprecedented power will have significant impact on how tax arrears need to be handled. So, what is the new measure? And what do you need to do to be on the safe side of the law?
What is the disclosure of business tax debts?
In essence, the legislation allows the ATO to disclose to CRBs the tax debts information of a business which satisfies the following criteria:
- Has an Australian Business Number (ABN) and is not an ‘excluded entity’ (i.e. a deducible gift recipient, registered charity, a government entity, and a complying superannuation entity);
- Has incurred a minimum tax arrears of $100,000 that is overdue for more than 90 days;
- Is not effectively engaging with the ATO to manage its tax debts; and
- The Inspector-General of Taxation is not reviewing an ongoing complaint submitted by the business.
If the above criteria are fulfilled, the ATO will issue a written notification to the concerned business, who then has 28 days to respond and engage with the ATO to devise a plan forward.
Only when all of the above mechanisms have been exhausted would the ATO disclose business tax debts information to registered CRBs. Such reporting would adversely affect the business’ credit rating, rendering it harder and more costly to obtain finance and credit.
What is the purpose of this measure?
The policy objective of allowing the ATO to report business tax debt information is threefold. The ATO states that the measure would foster greater transparency in the business community by making substantial overdue tax liabilities more visible, and reduce the unfair advantage enjoyed by businesses that do not promptly pay their tax. But perhaps most importantly, the severity of this punitive measure compels businesses to engage with the ATO to manage their tax arrears.
Previously, ATO’s repertoire to encourage compliance was rather limited. Mechanisms such as penalty for failure to lodge or general interest charge have little tangible impact on a business’ ability to operate, while the last resort of instituting legal proceedings is expensive hence not cost-effective in most cases. As such, tax liabilities were often ignored and placed at the bottom of a business’ payment priorities when the going gets tough. The system’s deficiency is evident in that, during the 2018-2019 financial year, small businesses owed a total of $16.5 billion of collectable debt to the ATO.[2]
The new measure imposes a powerful deterrent to such ‘burying your head in the sand’ behaviour. A credit default report has immediate and lasting ramification to the day-to-day operation of the business, as it not only endangers the availability of credit in the future but also may induce existing trade or financial creditors to withdraw support. The devastating effect this could have on a business is self-evident. As such, disclosure of business tax debts aims to compel businesses to promptly pay tax or manage tax arrears, or if unable to do so, at least to engage with the ATO in a more cooperative manner.
What do you need to do?
Given the magnitude of the potential repercussion, it is now more important than ever to comply with your tax obligations. To do so, effective management of your business’ cash flow is critical, and this can be achieved by:
- Make sure your management accounts are up to date, maintain and review them on a regular basis;
- Plan ahead and have a projection of future cash flow;
- Monitor and review your accounts receivable to assist with timely collection of trade debtors; and
- Prepare tax-related items diligently and incorporate tax payments as an integral part of planned expense.
These methods will help you to more accurately monitor the health of your business’ cash flow and fiscal outlook, and be prepared for upcoming tax payments.
However, there may still be times when prompt payment of tax is simply unrealistic. In such circumstances, it is important to remember that ignoring your tax obligations is no longer feasible under the new scheme. To avoid the catastrophic consequences that flows from disclosure of tax debts, active engagement with the ATO to manage overdue tax liabilities is now a must.
The team at Collins Wentworth are experienced in business financial matters. If you have concerns about the financial position of your business and wish to know more about how we can assist you, contact us today.
[1] Disclosure of business tax debts, Australian Taxation Office; accessed from https://www.ato.gov.au/General/New-legislation/In-detail/Other-topics/Disclosure-of-business-tax-debts/
[2] Appendix 6: Debt management, Commissioner of Taxation Annual Report 2018-19, Australian Taxation Office; accessed from https://www.ato.gov.au/uploadedFiles/Content/CR/Downloads/Annual_report_2018-19/n0995_2018-19_Annual_Report.pdf
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