A tax debt could destroy your credit rating
By Michael Mekhitarian
While most of us small business owners have been recovering from the end of the financial year, and getting ourselves prepared for the new one, the Federal Government has been quietly introducing a law into Parliament that would allow the ATO to disclose small business tax debts to credit reporting agencies.
In essence, the proposed law, which comes as tax debts to the ATO hit almost $24 billion, would apply to all businesses with an ABN, and tax debts of more than $100,000 which are 90 days overdue.
This particular piece of legislation has been in the works since 2016. It was reintroduced to Parliament in the past few weeks.
By way of background, the ATO has been given extra powers and extra resources by the Federal Government over the past couple of years to stamp out Australia’s black economy, and various measures have been introduced (such as STP reporting) and numerous laws have been proposed (such as the $10,000 cash payment limit.)
And by and large these measures make sense, but this latest piece of legislation, included in the Treasury Laws Amendment (2019 Tax Integrity and Other Measures) bill has alarm bells ringing for me.
As far as I can see, it has been formed with no real understanding of the challenges facing small businesses across the nation, particularly the problems around cash flow, and being able to secure adequate funding.
Tradespeople, cleaners, taxi drivers, farmers, doctors and lawyers could be adversely affected by this law. And this is a real issue. Because a bad credit rating can last up to five years, and it can effectively stop someone from running a business, or from being able to borrow money, or set up basic services such as a mobile phone account.
I’ve been an accountant for many years, working predominantly with small business and I can honestly say that for the most part, Australian small businesses want to do the right thing by the ATO. And, in fact, the vast majority pay their taxes on time. Full stop.
Cracking down on the ‘black economy’
However, from time to time, small businesses do get themselves into financial difficulty – because managing the ups and downs of cash flow can be a real issue, and finding access to adequate funding has long been recognised as a problematic inhibitor of growth.
Plus, for many Australian small businesses, tax is one of the largest payments they make over the course of the year. As an example, BAS, (Business Activity) of course, is linked to income and it’s not always predictable. When you’re a growing business you’re investing in your business growth, but your income is also increasing. Therefore, BAS payments increase in line with income too. It can be inherently difficult to manage cash flow around this.
We need laws which better support SMEs
The Federal Government needs to better support SMEs. Laws such as this, really don’t.
In it’s current form if passed, this law could mean that businesses who want to pay off tax debts quickly to prevent disclosure to credit reporting agencies, especially where the ATO won’t enter into a payment arrangement, would be vulnerable to predatory lenders. This would then only compound their financial problems.
Thankfully, this particular law won’t pass without a lot of scrutiny. The tax ombudsman, small business ombudsman, and a number of lobby groups believe there are simply not enough safeguards in the legislation at this point in time.
Simplifying the tax regime makes economic sense
And while there is a still a lot of debate to be had, I keep coming back to the headline grabbing tax debates in the lead up to the Federal Election earlier this year when both the major parties were promising tax reform, without either side having any kind of clear strategy.
The sheer lack of vision and strategy within Federal Treasury means that we end up with laws such as this – which just add to the cumbersome tax regime that already exists. A decade ago, a report by the Federal Public Accounts and Audit Committee confirmed what most Australians already knew: Australia’s tax system is too complicated. In fact, according to the report, ours is the third-most complex tax system in the world. Fast forward to 2018 and a report by PwC found that Australia has more than 125 taxes at a state and federal level, but 90 per cent of revenue is raised through just 10 of them.
While yes, it’s critical to crack down on the black economy which costs us all, there are other ways to do so, then to keep making the business environment more onerous and precarious for small business.
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