December 10, 2019

Disclosure of Business Tax Debts Under New Reporting Laws

On the 22 October 2019, the Government passed new reporting laws permitting the ATO to release tax debt information of businesses to registered credit reporting bureaus (CRBs). The law received royal assent on 28 October 2019.

Under the law, tax debt information of a business may only be released by the ATO provided the business meets all the following criteria:

  • “it has an Australian business number (ABN), and is not an excluded entity;
  • it has one or more tax debts, of which at least $100,000 is overdue by more than 90 days;
  • it is not effectively engaging with the ATO to manage its tax debt; and
  • the Inspector-General of Taxation is not considering an ongoing complaint about the proposed reporting of the entity’s tax debt information.” *

If a business meets all the criteria, they will be notified in writing and provided with 28 days to liaise with the ATO. During this time the business can take steps to avoid having their tax debt information reported. Only CRBs registered with the ATO and have entered into an agreement detailing the terms of the reporting will be provided information.

By passing this legislation, the Government aims to:

  • “encourage businesses to engage with the ATO to manage their tax debts and, where a business is unable to pay a tax debt in full by the due date, enter a sustainable payment plan that is agreed between the ATO and the business;
  • support more informed decision making within the business community by making large overdue tax debts more visible; and
  • 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.” *

What are the likely implications?

  • Tax defaulters will be “outed”.
  • This will impact their ability to obtain credit.
  • Suppliers may stop accounts or place them on COD.
  • Bankers may tighten lending criteria and call in overdrafts, etc.
  • I dare say, public reporting of this nature may well accelerate the demise of a business.

It will be interesting to see how the ATO uses this power.

ATO tax debts and the black economy

These introductions follow as the ATO continues to crackdown on the black (cash) economy in a pursuit to recover unpaid tax debt and superannuation, particularly from small to medium businesses. During the financial year 2018-19, net tax collections totalled $426.0 billion (an increase of 7.4% on the previous year) and superannuation income tax collections totalled $11.3 billion (an increase of 4.3%).

From March 2019 the ATO has increased powers to recover unpaid superannuation for company debts from directors under the Director Penalty Notice (DPN) Regime. Unpaid superannuation amounts must be reported within 28 days of the end of each quarter and not the former three (3) months from the due date for the Director to have any opportunity to avoid personal liability.

As of 30 June 2019, the ATO was owed a record $26.6 billion on collectable debt with $16.5 billion relating to small businesses. The ATO will continue to use its resources and debt recovery tools, with visits rolling out to 10,000 businesses per year across Australia over the next three (3) to four (4) years.

In late 2019, the ATO has been on a publicity campaign (as seems to be the de rigueur these days for Government Organisations) to stamp out activity in “the black economy”, that is, essentially small business dealing in unreported cash transactions.  The campaign has been conducted in conjunction with a “dob-in a tax avoider” hotline set up by the ATO.

Type “ATO to Visit” into Google and you will see:

  • Sept 26, 2019 – ATO to visit 400 businesses in Teneriffe, New Farm and Fortitude Valley.
  • Oct 21, 2019 – ATO to visit 400 businesses in Bankstown.
  • Nov 4, 2019 – ATO to visit 300 businesses in Bega (really?) and the far south coast of NSW.
  • Nov 6, 2019 – ATO to visit 800 businesses in Frankston and Croydon.

The message is becoming clearer and clearer….businesses that avoid tax or don’t pay their tax will be caught!  And sooner than ever before.

ATO Tax debts and insolvency

The ATO can be the largest and sometimes only unrelated unsecured creditor during insolvency. The inability of the company or individual to pay their taxation liabilities can lead to the formal appointment of an insolvency practitioner; despite the ATO not making the application to court to initiate the appointment.

During the 2018-19 financial year, approximately 11,000 companies were placed in some form of external administration and roughly 32,000 individuals entered into a personal insolvency arrangement. During this same period, the ATO initiated 20% of all company liquidations and 4% of all bankruptcies.

Further to this, the ATO used firmer action for taxpayers who were not dealing with their tax debt, issuing garnishee powers in approximately 1.1% of all business and individual debt cases.

Short-term cash flow issues can make it harder for a small business to pay on time. When dealing with creditors, in particular the ATO, communication is paramount. The ATO takes firmer action when tax debt is not being dealt with and having an awareness of all options may assist in preventing a formal insolvency appointment.

What can you do to help your clients?

Clients who have tax problems usually have “head in sand” syndrome.  As their advisor, you can implement a system that ensures they are complying with the many ATO and super deadlines to ensure they:

  1. lodge on time,
  2. pay on time, or if they don’t, they communicate with the ATO to obtain extended terms,
  3. in particular meet the “100 day rule”, and
  4. keep you informed of (a) to (c).

As the expert in this field, implementing a simple tax checks and balance system will aid significantly in protect your client’s business.

*Australian Taxation Office 2022, Disclosure of business tax debts, Australian Taxation Office, 7 June 2022.

Article Written by David Stimpson, Executive Director, Brisbane

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