Changes to the ATO debt reporting process

The Federal Government has announced that from 1 July 2017 the Australian Taxation Office (ATO) will be given the power to disclose to a credit reporting bureau (CRB) the tax debt information of businesses where those debts have been outstanding for more than 90 days and where the taxpayer has not effectively engaged with the ATO in managing their debts. The Government announced this change in its Mid-Year Economic & Fiscal Outlook 2016-17.

This power may have significant consequences and all business taxpayers should be aware of the potential ramifications should they fail to effectively manage their ATO tax debts.

The ATO has approximately $19 billion in outstanding or overdue tax owing, with almost $13 billion relating to small to medium enterprises with a turnover of less than $2 million.

Up until now, there have been privacy provisions in place to restrict the ATO from disclosing a taxpayer’s tax debt to any third party. The introduction of these new powers is arguably an attempt to strengthen the debt recovery muscle of the ATO, as the exercise of these powers is likely to put commercial pressure on recalcitrant taxpayers.

The Federal Government’s rationale for the proposed new powers is to:

  1. reduce any unfair advantage which may currently exist for businesses that do not pay their tax on time;
  2. provide information to credit providers and other businesses to allow them to assess the risk of extending credit or terms of trade to taxpayers with unpaid tax debts; and
  3. provide taxpayers with a strong incentive to engage with the ATO to address outstanding tax issues.
When will the ATO report a tax debt?

The ATO will have a discretion whether or not to disclose an unpaid tax debt to a CRB. It is not obliged to disclose that information. The ATO has indicated that it understands that taxpayers will have cash flow issues from time to time, and has acknowledged that it will not report unpaid tax debts that are genuinely in dispute or where the taxpayer has entered into, and complies with, a payment arrangement.

Further, the ATO has indicated that it will only use its powers if a business taxpayer has failed to properly engage in relation to the process. While the ATO is yet to confirm the specific grounds, it suggests that tax debts will only be reported where:

  • the taxpayer has an ABN;
  • the debt is over $10,000;
  • the debt has been unpaid for 90 days;
  • the debt is not in dispute;
  • the taxpayer has not entered into an effective payment plan; and
  • the taxpayer has not effectively engaged with the ATO.
The taxpayer will be notified

Before the ATO discloses information to a CRB, it will notify the taxpayer of its intention to do so. The period of notice is unclear at this stage. It is likely that they will be required to give the taxpayer “reasonable” notice and it is important that clients remain engaged with the ATO.

How will this affect businesses?

The reality is that the moment the ATO reports a client’s unpaid tax debt to a CRB, this default or black mark will be recorded on the taxpayer’s credit file, and will remain there for five years. Historically, it has been difficult to remove such black marks from such credit files. Usually, this would only be removed if it can be shown that it was wrong and should not have been recorded on the file. That may take many months to establish. In addition, even if the unpaid tax debt is later paid, the default will remain on the credit file for 5 years.

How to avoid the problem

The ATO suggests that business taxpayers should engage early to address any outstanding tax issues and take the following steps:

  • ensure all accounting data entries are up-to-date;
  • make sure all BAS & IAS are lodged by due dates;
  • if a business has an overdue debt with the ATO, contact the ATO immediately to discuss a payment plan;
  • if a tax debt is in dispute, endeavour to communicate with the ATO to resolve the dispute; and
  • if a tax debt is not dispute, engage with the ATO to enter into a payment arrangement.
A warning to small business owners and directors

Should the ATO report an unpaid tax debt to a CRB, that is likely to have a significant negative impact on the reputation of that small to medium enterprise and its directors, which may prove fatal. It will almost certainly impact on the ability to obtain goods on credit from suppliers and may result in financiers’ withdrawing their support.

It is likely to make it very difficult for defaulting businesses to access funding from banks or other lenders. Even if financiers agree to lend money to businesses in these circumstances, it is likely that it will do so at higher interest rates.

This new regime is likely to cause many businesses to go broke, which may well be appropriate in particular cases. This will often have personal consequences to small business owners and directors.