Heads up: If you’re a small business owner with an outstanding tax bill now is the time to pay up, or speak with the Australian Tax Office (ATO) about going on a payment plan.
If you don’t, the consequences could be disastrous for you and your business.
As of 1 July 2017, the ATO is changing how it manages and reports small business tax debt. Whereas in the past this debt was contained from the public record, the ATO now has the power to share this information with credit agencies. In other words, tax debt will be treated like any other unpaid bill and can severely impact a business credit rating and its ability to borrow and trade.
Running a small business can be hugely complex and challenging; between managing staff, clients, services, marketing and equipment, tax can sometimes be put on the backburner. With many of our clients being small business owners, we want to ensure you understand the new policy and how it could impact you and your business.
Why have the rules changed?
By its own admission, the ATO has been fairly lenient in its dealings with small businesses, allowing companies to accumulate hundreds of thousands in back taxes before taking legal action.
In the past, if a business owed tax it was penalised through general interest charges, but was otherwise free to continue day-to-day operations. This meant that ATO debt was often a lower priority for business owners and allowed to accumulate – in many cases until the ATO pursued legal proceedings.
According to small business specialist accountant Chris Wheatley, many businesses took advantage of the ATO’s hands-off approach.
“Most small businesses do have some tax debt because they knew the ATO wasn’t chasing,” he says.
“Many were going on official payment plans or delaying payment until business picked up. The ATO was a nice free little credit card.”
The government claims the ATO is owed approximately $12.5 billion in overdue tax from small businesses with a turnover under $2 million. The ATO wants to recoup this money and any future debts by making it harder for businesses to ignore their tax debt.
I think my business owes tax! What can I do?
Businesses with tax debt of more than $10,000 that is at least 90 days overdue and haven’t engaged with the ATO will be immediately subject to the tough new reporting policy.
However, Chris advises that any business which owes less than $10,000 in tax should also address the issue immediately.
“The ATO comes down very hard on businesses that have debt and don’t engage with them,” he warns. “It doesn’t matter if it’s $2,000 or $20,000, they hate it when you ignore their letters and don’t engage with them.”
What if I can’t settle the debt right away?
The ATO offers payment plans for small businesses that allow tax debt to be paid gradually and over a certain period of time, typically 12 to 24 months.
Chris says this is generally the best option and should still allow a business to borrow funds from a bank or other lender for equipment, insurance etc.
“As long as the ATO doesn’t change their conditions for payment plans, this is your best bet,” he says. “The plans can be generous, and as long as you do the right thing and stick to the plan, they will do the right thing by you.”
“If you seek credit from a bank while you are on an ATO payment plan the bank will ask about it, but most of the time it isn’t an issue,” Chris says.
It’s worth noting that any interest you are charged by the ATO on tax debt is also tax deductible.
Worst-case scenario, what if my business is reported to credit agencies?
If the ATO reports your business tax defaults to commercial credit agencies the consequences are immediate and long lasting.
A credit default is a black mark that lasts for five years, and makes it very difficult for a business to obtain loans and credit. Any existing credit the business has could also be cancelled. It also affects your personal credit rating and borrowing, including home mortgages and personal credit cards.
Speak up, and ask for help if necessary.
If you are a small business owner struggling to lodge and pay taxes on time, there are a number of things you can try to make your life easier and avoid overhanging tax debt.
Budgeting is essential. Work with your accountant or tax adviser to plan for payment of your periodic taxes. Using your accounting package (e.g. Xero, MYOB) you can set up a cash flow forecast and measure budget to actual on a regular basis.
Be selective and smart with what your business pays for upfront. You may want to consider financing other items in your business to free up cash to pay taxes on time, for example, financing insurance (premium funding) or capital equipment like vehicles.
The ATO’s new reporting powers may prove a shock for some businesses, but as Chris says, for most it’s a gentle reminder that taxes are unavoidable but can be managed for impact on cash flow and operations.
“Ultimately this shouldn’t change your approach to how you manage your ATO debt. If you had your head in the sand previously you were always on their radar, now the ATO just has more teeth.”
Rather than your stereotypical accountant, Chris is someone you can have a normal conversation with and use as a sounding board. As a chartered accountant, tax compliance is his bread and butter, but he is also passionate about other areas like advisory work for small businesses who want someone hands on and practical.
07 3103 6158