By Robyn Erskine and Adrian Hunter*
A Christmas present for the credit profession
In the days leading up to Christmas as part of its Mid-Year Economic and Fiscal Outlook (MYEFO) the Government quietly announced that from 1 July 2017 the ATO will be able to disclose to Credit Reporting Bureaus (CRBs) the names of certain taxpayers who have unpaid taxation liabilities. This is a huge win for the Credit Profession who have argued for many years that this type of information should be publically available given the significant impact unpaid tax debts have on the assessment of a customer's ultimate credit risk.
Countless credit professionals have voiced their frustrations in liquidation creditor meetings about being unaware of the true financial position of the company due to the undisclosed and in many cases not insignificant debts owed by the company to the Australian Taxation Office ('ATO'). Many of these credit professionals would never have extended credit had they known the true position of the customer. Despite having undertaken all possible searches and gathered all information available to them to conduct their assessment whether a customer was credit worthy or not, the lack of transparency surrounding a customer's taxation affairs meant many credit professionals found themselves in the unenviable position of having recently extended credit, to then have to explain to management why the debt was now unrecoverable due to the company's liquidation.
Fortunately those days may soon be in the past due to the Government's pre-Christmas announcement. From 1 July 2017 the ATO will be able to tell Credit Rating Bureaus ('CRBs') about businesses that have not "effectively engaged" with the ATO about their tax debts.
The ability to report these non-engaging businesses will initially be limited to those with ABNs who have tax debts of over $10,000 which have been outstanding for at least 90 days. This appears to be a fairly low threshold. What is unclear at this stage is what notifications the ATO is required to give, if any, to the taxpayer before it reports them to the CRBs and how quickly the ATO will adopt this new reporting regime. The AICM is currently liaising with the Government and the various Credit Reporting Bureaus on the logistics on how this new initiative will be rolled out.
Increasing tax debt – enough is enough
It appears that the ATO has had enough of being the unofficial financier of many businesses. Since the GFC in 2008 the debt owing to the ATO particularly in the Small to Medium Entity (SME) sector has been steadily increasing. For many in the credit industry this comes as no surprise as most credit professionals know too well the tight market and the struggle many SME businesses face on a daily basis.
The ATO's 2016 Annual report disclosed that the ATO has collectable debt outstanding to it of $19.2bn. Collectable debt has been steadily increasing over the years. In 2010/11 collectable debt was $14bn. Collectable debt is defined as debt that is not subject to objection or appeal or to some form of insolvency administration. Further, while collectable debt has been on the increase, the funds estimated to be received by way of taxation collections has failed to reach initial forecasts since the GFC and each year has had to be revised down. If these trends were applied to any other business, e.g. inability to meet collection targets and a building debtors book, one would be very concerned. These trends goes a long way to understanding the rationale that has driven this recent announcement.
When you drill down further into the 2016 ATO results small business makes up $12.5bn of the collectable debt. Of note is that in FY16, the ATO entered into more than 950,000 repayment arrangements. The number of arrangements was 17.2% higher than for FY15. This in itself indicates a significant uplift in businesses being unable to pay their debts as they fall due.
The Government hopes that by taxpayers being aware of the ATO's ability to report them for non-payment, it will result in businesses paying their taxation debts in a timelier manner to avoid affecting their credit rating.
What will these new initiatives mean for the credit industry?
It will mean that credit professionals should review all of their major customers once this information starts to be released by the ATO to the CRB's. It cannot be assumed because the customer has always paid on time and is within credit terms that its tax affairs are in order. As experienced insolvency practitioners, we know for a fact that in most insolvencies the ATO is if not the largest creditor at least one of the largest creditors, with the trade creditors and the banks being relatively modest in comparison. Often the company has exhibited no signs of impending insolvency before sliding into liquidation or administration as they have been within terms with their suppliers and have not been in default with their bank. They however been amassing and for some over a number of years, a significant taxation debt which ultimately leads to their failure. For this reason a review of all major customers should be undertaken to ensure the credit risk assessment previously in place is still relevant.
This re-assessment could lead to a number of suppliers reconsidering a customer's terms of trade or deciding to cease supply. The ATO understand this could lead to some businesses failing as obviously if supply is limited or cut off a company will not be able to continue. The ATO have for some time been publicly saying it is not their intention to force businesses into liquidation however businesses that do not pay their taxes either intentionally or simply because they are not viable, are making it harder for businesses who do pay their taxes. They see the businesses who do not pay their taxes as having an unfair advantage. For the ATO this is not only about collecting taxes which is vitally important for our country's financial wellbeing, but also creates a level playing field for complying businesses. For this reason alone the pre-Christmas announcement should be applauded.
The release of this information by the ATO is a real game changer. Will it see a spike in the number of insolvencies particularly in the SME sector? Well only time will tell. For the seasoned credit professional however the release of this information is another tool to add to the credit manager's tool box and in the words of one former Prime Minister a time to be "alert but not alarmed".
*Both Robyn Erskine and Adrian Hunter are Registered Liquidators within the practice of Brooke Bird – Restructuring, Turnaround and Insolvency Specialists.
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