For a while, the ATO had been sympathetic about uncertain cash flows and made some changes to its normal practices, such as suspending its normal collection strategy. But this is now changing, and it’s revealed it’s now using a rule that was passed in 2019 by the federal government to crack down on businesses that fail to pay their tax debts.
Under the rule, the debts of businesses can be disclosed to credit reporting agencies by the ATO to allow them to measure or update creditworthiness. The information can only be disclosed when certain conditions are met, including that at least $100,000 of the debt is overdue for more than 90 days.
Already, businesses with tax debts of more than $100,000 are receiving letters from the ATO, with a warning that if they don’t make an effort to manage their debts within 28 days, the ATO intends to disclose their tax debt information to credit reporting bureaus (CRBs). It is the first time the ATO is using its powers under this law. But if you or your clients have engaged with the ATO about their tax debts, then they won’t be reported to the CRBs. That’s why it’s time to get talking to clients who you think or know are struggling.
Challenging times remain for businesses
This move is indeed a turnaround for the ATO, which has been supporting businesses throughout the pandemic over the past 18 months – getting businesses back on their feet has been one of its key aims. However, with Australian businesses now owing more than ever – in 2020, the budget recorded $36 billion in uncollected taxes – this support had to eventually end.
Still, it remains an extremely challenging time for businesses with much of the country still under severe restrictions, and those that have received a warning letter from the ATO, entitled “Act now or your tax debt will be reported to credit reporting bureaus” can lodge a complaint to the ATO if they want to dispute it. More information on this can be found here.
Engaging early offers more options
Cash flow continues to be a major pressure point for businesses. Thanks to COVID-19, cash flow has become inconsistent and unreliable, and this is having a huge impact on when and how a business can meet its tax obligations. The lockdowns and restrictions have caused both businesses and individuals to struggle, and rising tax debts serve as a reminder to seek help.
The ATO debt attributed to SMEs was $21.4 billion at financial year 2020. Such a high amount shows that a significant number of SMEs have been affected by the COVID-19 disruptions. Of particular concern is that one-third of the SME ATO debt is housed in the construction industry, which has traditionally accounted for a disproportionately high level of insolvency appointments. Our fear is that these potentially terminal businesses may “infect” their directors, owners, employees and stakeholders if action is not taken to address the financial imbalance.
Initiating conversations early with your clients makes it easier to find options to help with cash-flow issues. Engaging with the ATO to actively manage your clients’ tax debts is always the best solution but acting quickly is crucial. There’s no point waiting to see how things go if a client is in financial distress now – especially as the ATO has ramped up its enforcement activity. The problem with waiting is that fewer options become available. If your client’s business is struggling, you might also consider working with insolvency professionals to help determine the best available options.
Business rescue solutions
We believe Australia has some of the best business rescue legislation in the world, being both quick and commercially focused. Some of the options include:
- Payment plans: These are a useful tool for managing short-term illiquidity, but more decisive options should also be considered for businesses that have been severely affected and are carrying significant debt (including ATO debt) on their balance sheets. This is even more relevant today, due to the continuing uncertainty surrounding economic conditions and business forecasts.
- Voluntary administration: This regime is Australia’s business rescue program. It provides an opportunity to not only defer payment, but to also compromise the amount of the payment to a level that the business can afford.
- The Small Business Restructuring Process (SBRP): This was developed in response to the pandemic and provides another option to financially restructure and save a distressed business. Not only can you defer payment, but you can also negotiate the amount of the payment.
Both voluntary administration and the SBRP provide an opportunity for the total liability of a company to be reduced and deferred. But it’s also crucial in your discussions with your clients to advise them to look to the future and not just consider what’s happening today. It’s important for your clients to understand what their cash-flow situation is now as well as what it’s likely to be 12 months down the track, as planning needs to incorporate both the immediate and short-term.
Glenn Crisp, managing partner VIC, Jirsch Sutherland