ATO’s Disclosure of Business Tax Debts to Credit Reporting Bureaus
Businesses with significant tax debts will have their information reported to credit reporting bureaus; credit scores will be impacted.
1. Tax Debt Information Disclosure
What is the Taxation Administration (Tax Debt Information Disclosure) Declaration?
In the future, businesses with significant overdue tax debt will have their information become public. When the Taxation Administration (Tax Debt Information Disclosure) Declaration 2019 comes into effect the ATO will be releasing their tax debt information to registered credit reporting bureaus (CRBs), including CreditorWatch.
In the 2016-2017 Mid-Year Economic and Fiscal Outlook, the government announced its intention to allow the ATO to report tax debt information of certain entities to CRBs. On 19 December 2019, the declaration was made official and the legislation will come into effect later this year.
Currently, the ATO is not authorised to report any tax debt information under the Confidentiality of Taxpayer Information provisions. This means that credit reports currently do not factor in existing tax debt and provide a limited overview of an entity’s creditworthiness.
With this legislation, there will finally be transparency over businesses that have excessive tax debt and have not engaged with the ATO to manage their debts. The default would be visible on a commercial credit report and could negatively affect an entity’s credit score.
2. Transparency of Tax Debt Information
Problems with the lack of transparency
The lack of transparency about significant tax debts is detrimental to:
- Wider community and industry
- Government & economy
When suppliers are unaware that an entity has significant tax debts, they enter into a situation without getting a full picture of that entity’s financial position. It can be detrimental for them to make decisions about providing credit while being oblivious to an entity’s staggering debts.
Currently, a creditor often only realises that their debtor has an overdue tax debt when the ATO takes legal action to recover it and ultimately winds up the debtor. This could result in a domino effect, where the creditor faces cash flow problems themselves as their debtor is forced to shut down leaving the creditor out of pocket.
When an entity is wound up due to its overwhelming tax debts, its employees often don’t receive their entitlements and/or end up losing their jobs suddenly. While this can result in emotional and financial hardship, it could also have been avoided if there had been more warning signs or transparency regarding the tax debt.
Government & economy
As of the 2018-2019 financial year, small businesses owe the ATO about $16.5 billion in debt. Tax evasion through illegal phoenix activity is estimated to have an annual direct impact between $2.85 billion and $5.13 billion. When an entity fails to pay their employees, this responsibility falls onto the government (via the Fair Entitlement Guarantee or FEG), which in turn affects all taxpayers. The government and economy suffer when tax debts are unpaid.
Benefits of Tax Debt Information Disclosure
Having more visibility over overdue tax debts will help address these issues.
Businesses, financial institutions and credit providers will be able to make more informed decisions about the entities they engage with and make more accurate assessments about their creditworthiness. This legislation will empower creditors to take more preventative measures instead of recovery actions and will help to reduce the risk of the domino effect.
The risk of being exposed places extra pressure on entities with excessive tax debt. They will have to take appropriate actions to avoid being reported by the ATO. This will hopefully encourage entities to engage with the ATO earlier to manage their tax debts. (More on effective engagement in Section 4.)
This legislation will create a fairer playing field between entities that do not comply with their tax obligations and those that do. Companies that ignore their tax obligations operate from a lower cost base and can therefore undercut competitors. Once reported, these companies will face sanctions beyond the ATO – loss of investors and suppliers, significantly reduced credit score, and more.
Economy & Government
There will be greater transparency in the supply chain, making it harder for illegal phoenix activity or tax evasion to occur. Ultimately more tax revenue will be returned to the government and less public money paid out via FEG.
3.Releasing Tax Debt Information*
Who will receive this information?
In order to receive tax debt information, the CRB must:
- Be registered with the ATO
- Enter into an agreement with the ATO about reporting terms
Which entities will be reported?
The ATO can only disclose this information when the following criteria are met:
- It has an ABN and is not an excluded entity (i.e. deductible gift recipient, registered charity, government entity, or complying superannuation entity)
- It has one or more tax debts, of which at least $100,000 is overdue by more than 90 days
- It is not effectively engaging with the ATO to manage its tax debt
- The Inspector-General of Taxation (IGT) is not considering an ongoing complaint about the proposed reporting of the entity’s tax debt information
What information will be reported?
If the entity meets the above criteria, the ATO will report to CRBs the following information:
- Unique identifiers like their ABN and legal name
- Balance of overdue tax debts at the time of initial reporting
- Regular updates on the balance of the overdue tax debt until the entity no longer meets the reporting criteria
- Notification when the entity no longer meets the reporting criteria
When will this information be reported?
The ATO will give the entity a 21-day notice period before releasing their tax debt information. At the end of the 21 days, if no action has been taken by the entity, the ATO will attempt a final phone call to help the entity address their debt. If this is futile, their information will then be officially released to registered CRBs.
4. How to Prevent Your Business From Being Reported - Effective Engagement with the ATO*
If your business is facing a significant tax debt, as long as you effectively engage with the ATO, they won’t be allowed to disclose your tax debt information. To do this, you may either enter into a payment plan or dispute your tax debt.
To avoid or manage existing debt:
- Enter a payment plan
o The ATO will work with you to create a custom payment plan tailored to your individual circumstances, including your capacity to pay the proposed amounts. Together, you will agree on a plan which can be managed sustainability and address ways to mitigate risks. You must be compliant with this plan, otherwise you could still be eligible for reporting.
To stop a report from going through, consider one of the following:
- Raise an objection and request a review or appeal
o Dispute your taxation assessment, determination, notice or decision by lodging a Part IVC objection.
o Then, if you are still dissatisfied with the objection outcome, request a review of that decision.
- If you have an active review with the Administrative Appeals Tribunal (AAT) or appeals to the Courts, you will not be reported by the ATO.
- Lodge a complaint with the Inspector General of Taxation (IGT) about your tax debt and the fairness of the ATO’s approach in their dealings with you.
- Contact the ATO to claim and demonstrate exceptional circumstances
o The ATO considers exceptional circumstances impacting your ability to pay your debts and you may be able to claim temporary reprieve. This includes family tragedy, serious illness, natural disaster impacts and other circumstances.
Did you know? In 2018 – 2019…
· The ATO received 19,826 complaints (inclusive of IGTO complaints)
· The ATO resolved more than 26,000 objections (up from 24,350 objections the year before)
· There were 441 applications for review or appeal to the AAT or other courts
CreditorWatch has been working with the ATO since 2014 to plan and design this legislation. We are proud to see it come into effect and are confident in its ability to assist companies to better assess credit risk and reduce bad debt. If you have any questions about how this legislation will affect your business, get in touch with us today on 1300 50 13 12 or at https://creditorwatch.com.au/contact/.
*The ATO is currently in the design phase so the above information is subject to change. CreditorWatch will continue to provide updates as it progresses.
*Patrick Coghlan MICM
Ph: 1300 50 13 12