In 2018, legislation was passed that empowered the Australian Tax Office (ATO) to start reporting unpaid business tax debts to credit reporting agencies (CRA) making it possible for such information to be included in business credit reports.
Up until 2024, this weapon in the ATO’s armoury was not used very often.
However, it has recently been dusted off, and its use has significantly increased.
The ATO claims that this move aims to support debtors in making more informed decisions, encourage director engagement with the ATO to manage tax debts effectively and minimise any financial advantage gained by delaying tax payments.
Criteria for Reporting Tax Debts:
The ATO will report the tax debt information of businesses that meet specific criteria to CRAs. To be eligible for reporting, a business must:
• have an Australian Business Number (ABN)
• possess one or more tax debts of which at least $100,000
• tax debt is overdue by more than 90 days
• not be actively engaged with the ATO in managing their tax debt.
Businesses ‘actively engaging’ with the ATO to manage their tax debt will not have this information reported to CRAs.
The ATO considers a taxpayer to have ‘actively engaged’ with it when they:
• have a payment plan in place and are meeting the terms of the payment plan
• have an active objection against a taxation decision to which its tax debt relates
• have an active review with the Administrative Appeals or to the Court against a decision
• have an active complaint lodged with the Inspector-General of Taxation about the tax debt that is, or could be, the subject of an investigation.
This reporting mechanism is not automatic.
Businesses will receive an “Intent to Disclose” notice from the ATO, which serves as a final opportunity to engage with the ATO within 28 days to manage its tax debt.
Potential Impact:
When a taxpayer defaults, it gets recorded on their commercial credit file. This has immediate and long-lasting consequences. A credit default is a negative mark that lasts for five years and can limit access to financial support. Many lenders and credit providers look at a business’s tax compliance and tax debt management as a major part of their credit assessment. Reporting tax defaults can severely impact a business’s ability to receive finance or credit and may cause it to lose supply.
An illustration:
A recent client had a $600,000 tax debt. They had a payment plan in place but defaulted on it. Rather than communicating with the ATO about the debt, the company chose to ignore it. As a result, the ATO sent the company an intent to disclose notice, and after 28 days, the tax debt was reported to various CRAs. This company provided manufacturing and installation of high-end joinery and cabinet making for the commercial sector. Within four days, its suppliers of wood, aluminium and veneers had revoked their supply on terms. All of these accounts were within terms. None were overdue.
From now on, it was strictly COD to deal with these suppliers
The reason provided by these suppliers was that their trade insurers would not cover their business if they continued to supply the company on terms. Therefore, it was necessary to switch to COD.
This had a devastating impact on cash flow, especially since the business’ own trading terms with builders were 30 days after the end of the month.
We have seen this exact scenario on four occasions this year.
Recently, ATO Assistant Commissioner Jillian Kitto said that paying or engaging with the ATO is the only way to stop a business’s tax debt from becoming visible in credit rating checks.
“While we do not take disclosures lightly, consequences will apply to businesses who refuse to pay or engage with us.”
The number of businesses currently listed with reportable tax debts sits at more than 27,000.
It might pay to consider, what are the odds are that one of your clients may meet this criterion.
If you have such a client, then we can help. Options are available beforehand to prevent this action from happening.
Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies. Contact us now on p. 1300 765 080 | ua.mo1725738212c.arj1725738212d@ofn1725738212i1725738212
Did you know?
Phoenixing is another name of business restructure. Read more about business restructures and when this can be an option for you.
