Knowing that a business doesn’t pay their bills is incredibly important for anyone in the position of providing trade credit; it is the sole reason that thousands of businesses access credit bureaus in an effort to mitigate risk and safeguard their cash flow. The question is why should knowing that a business has defaulted on tax debt be treated as any lesser risk?
Last December, Treasurer Scott Morrison announced in the Mid Year Economic and Fiscal Outlook (MYEFO) that the Australian Taxation Office would disclose businesses with unsettled tax debts over $10,000 that are 90 days overdue, who have not effectively engaged with the ATO.
According to the ATO, 62.5 per cent of taxpayers with debts are small businesses, making up a significant part of the total collectable debt of $19.2 billion, as of 30 June 2016.
There are genuine concerns relating to the initiative, particularly the rollout of information following the recent ATO outages. What hasn’t been effectively discussed however, is the benefit the initiative will have to the wider business community.
Since the announcement was given media attention early in the year, Australian credit bureau CreditorWatch has been inundated by customers asking when, and how, they can get access to the information.
CreditorWatch has over 40,000 customers, many of which are SMEs accessing commercial credit reports to be accurately informed of adverse information that could potentially impact their ability to get paid on time.
When a company is wound up by the Tax Office, the questions I hear all too often from affected creditors are: “Why didn’t the Tax Office take appropriate action earlier?” and “why didn’t we know about this tax debt?”
The feedback we’ve received from customers in the past indicates that some businesses believe the ATO should be held accountable with the common question: “How could the Tax Office allow this business to accumulate so much tax debt and continue to let them operate for so long?”
I’m hoping these questions will be less asked from July 1, 2017 when the tax default information will become available.
Many businesses unequivocally agree that they would benefit from the full disclosure of their customer’s financial position. Having the ability to see whether a customer or prospect hasn’t previously defaulted on tax debt allows them to feel more comfortable in extending credit.
This is a major win for all businesses providing credit terms that want to operate without the impact of a greater risk to their business.
We know the majority of businesses that cannot afford to pay their tax debts after 90 days or past their arrangement date will unfortunately and inevitably collapse.
This is the harsh reality of running a business, however what is often overlooked is the flow-on effect.
We see this time and again, the domino effect that a failing business has on the other businesses within their network and supply chain. The sooner creditors are aware of a failing business, the less impact there will be on those unknowingly extending trade credit.
The ATO has made it clear it is not going after those who pay their bills, or even those that are on payment arrangements. Businesses need to maintain communication with the ATO, especially when they feel they cannot meet their requirements. They shouldn’t simply bury their head in the sand and hope for the best.
I am empathetic to struggling businesses but this initiative will ensure the majority of those who meet their obligations are not blindsided by an easily identifiable risk.
Colin Porter is the managing director of CreditorWatch.