Any organisation with a large overdue tax debt faces the prospect that the ATO will report this to the relevant credit reporting agencies.
The passing of the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No.1) Bill 2019, allows the ATO to provide information around certain tax arrears to credit reporting agencies for publishing.
While the ATO has had this power for some time, the question has been when, or even if, the ATO would use this new collection tool in conjunction with its more traditional methods of debt collection. Perhaps this has been delayed due to COVID-19, however it seems likely there is action looming.
Which businesses are at risk
If your business is not engaging with the ATO to manage its tax debt then your business may be at risk if it meets certain criteria.
The criteria targets businesses with significant outstanding tax liabilities where they have not engaged with the ATO. In addition your business must:
- Must have an Australian Business Number (ABN)
- Must have a tax debt, where at least $100,000 is overdue by more than 90 days
- Are not engaging with the ATO to manage their tax debt
- Don't have an ongoing complaint with the Inspector-General of Taxation Ombudsman.
If the ATO decides to report, the taxpayer will be provided with written notice. This provides the organisation time to take action through various options, including paying the tax debt or negotiating a payment arrangement.
Critics have condemned the move by the ATO on the basis that a COVID-19 impacted economy where vast numbers of Australians are in, or were recently in lockdown, is not the time to be ramping up collection efforts.
In contrast, supporters of the move reference:
- A ballooning ATO collectable debt balance
- Concerns that zombie companies continue to incur debts from the ATO and other creditors with little chance of repayment
- Any action encouraging directors to engage with the ATO should be applauded – and in fact, is well overdue.
The clock is ticking on taxpayers to engage with the ATO and address any arrears.
What businesses need to know
There is a decision to be made by businesses to either:
- Raise capital or seek bank finance to repay the tax debt
- Engage with the ATO and get a repayment arrangement in place
- Risk the impacts of adverse reporting on credit history and ATO recovery actions.
The underlying challenge for businesses with an unfavourable credit report or a repayment arrangement is a black mark against your name if you need to seek finance from your bank. Whilst a director may be able to explain these marks as COVID related events, these credit reports are also publicly viewable by financiers, trade suppliers, competitors and customers.
If you receive notice from the ATO regarding overdue amounts or that your debt is to be reported to a credit reporting agency, a director should:
- Engage with their accountant and ensure taxation lodgements are up to date - If lodgements are not up to date there is a risk that you may already be personally liable for certain taxation debts
- Be aware of their various director duties under the Corporations Act 2001.
Directors should also develop a realistic plan with a qualified adviser that may include a challenging conversation in relation to options. It is important to remember that the ATO only utilises these powers for debts deemed significant. Take note of the risks associated with unaddressed tax debts or ATO repayment plans.
Finally, directors should know that existing financiers will become aware of the taxation arrears as part of ongoing credit review processes, either via notification through ATO Portal reporting or external credit reporting agencies. Engaging early with your existing financier is essential to obtaining the necessary support.
Contact us should you have any queries, or to discuss if your business may be at risk.