New credit laws need to be strengthened

 The Australian Institute of Credit Management (AICM), alongside the Australian Restructuring Insolvency and Turnaround Association (ARITA), the Australian Finance Industry Association (AFIA) and the Australian Retail Credit Association (ARCA), welcome the passage through parliament of the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Bill 2019.

 

AICM and other industry bodies have long advocated for the introduction of laws that ensure critical historic information is available to allow businesses to understand whether the entities to which they extend credit have the capacity and character to service repayment of their debts. We provided a joint submission to the federal government during the consultation paper that clearly sets out our position on this.

 

We would now like to see the law go even further to ensure the small number of businesses that don’t pay their tax debts are not given an unfair advantage, and to ensure businesses are fully informed when making credit decisions.

Under this amendment to the tax integrity laws, the Australian Taxation

Office can disclose businesses’ tax debt information to registered credit reporting bureaus (CRBs) under certain criteria. The business must have an Australian Business Number (ABN), it must have one or more tax debts of at least $100,000 overdue by more than 90 days. Also, the business must not be engaging with the ATO to resolve the debt. It’s important to understand the ATO would only disclose this information as a last resort, after unsuccessfully seeking to engage the business over a lengthy period.

 

As the legislation stands, tax debt information will be removed from the record if they do engage with the ATO. On a practical level, this means businesses with a tax debt could repay a very small amount, even $20, and be removed from the record. They could also lodge a dispute with the tax office regarding the nature of the debt and also be removed from the record, which seems to be counter to the spirit of the legislation.

 

Additionally, if a business’s tax debt is disclosed and the information is subsequently removed, it’s not safe to assume the debt has been cleared. The entity may have entered into a payment plan or lodged a dispute.

Also, just because a business has a clear credit file, this does not necessarily mean it has met its tax obligations.

 

While we consider this legislative amendment to be a good first step, we believe it should be reviewed and amended to make it more effective and achieve its intended outcomes. We urge the federal government to drop the $100,000 threshold to $10,000 and to keep information about businesses that have accrued a tax debt on the record for a period of five years.

 

Taking this step would:

  • Help all credit providers make fully-informed decisions when extending credit to entities that have or have had a tax debt.
  • Reward businesses that comply with their tax obligations and incentivise them to continue to do so.
  • Reduce risk in the business sector by lessening the likelihood of a business suffering a loss as a result of unknowingly extending terms to a business that has or has had had a tax debt.
  • Ensure businesses are not inadvertently engaging with an entity that is essentially trading while insolvent as a result of not settling an undisclosed tax debt.
  • Give the business sector more confidence when trading with small entities, which are presently considered to be high risk when it comes to providing credit and, as a result, stimulate activity in the small business sector.
  • Assist credit providers to identify new entities associated with a phoenix company given information about businesses with a tax debt will remain on the record.
  • Deter unscrupulous business owners manipulating the shortfalls of the legislation from avoiding their tax obligations.
  • Encourage businesses with tax debts to engage with the ATO.
  • Ensure businesses have access to appropriately-priced credit.

 

Commenting on the new laws, John Winter, chief executive officer, Australian Restructuring Insolvency and Turnaround Association, notes it will mean credit managers have greater access to information to assess counterparties’ creditworthiness.

“For too long, businesses have been able to hide what amounts to illegitimate borrowing by not paying their tax. Initiatives that lead to the disclosure of a counterparty’s true debt position are in credit managers’ best interests and will create a more level commercial playing field,” he says.

 

“It’s disappointing the $100,000 limit was set so high. In the future, we may go back to the federal government with evidence to show setting the bar this high means businesses face undue losses by running the risk of providing credit to entities with tax debts below this amount,” he adds.

 

Mr Winter recommends credit managers keep a record of instances in which they believe a counterparty has been unable to meet its obligations as a result of an undisclosed tax debt. “This will give us the evidence we need when we go back to government in the future and ask for changes,” he says.

 

Helen Gordon, AFIA’s chief executive officer, says its members support federal government policies that give credit providers access to information so they can more accurately assess credit risk. This aligns with AFIA members’ objective to finance Australia’s future by enabling small businesses to access finance at a price that appropriately reflects the risk to which they are exposed.

 

“We believe lowering the $100,000 threshold would better achieve the policy’s objectives to enhance credit decisions for the benefit of customers and credit providers. It would also encourage businesses to continue to pay their taxes. Importantly, it would minimise the risk of credit providers extending further credit to entities already facing financial difficulties evidenced by the non-payment of their tax debt,” Ms Gordon adds.

 

Mike Laing, ARCA chief executive officer notes under the legislation, the ATO can use the disclosure of information and the credit reporting system as a bargaining chip. “Allowing information about tax debts to disappear is contrary to the way the credit reporting system operates in Australia and around the world. This limits the usefulness of the legislation,” he says.

In light of the legislation’s limitations, to reduce the risk of non-payment, it’s essential for credit managers to continue to perform full credit assessments and continue monitoring creditors for signs of insolvency.

 

Businesses should be aware information will start to be reported following royal assent, after the legislation passed through the Senate on 16 October

 

Nick Pilavidis, CEO,
Australian Institute of
Credit Management

 

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