When a small business is having cash flow problems, the owner may stop making payments to the Australian Taxation Office (ATO) so they can pay the other creditors within their required terms By paying the other creditors first, the business can keep trading as normal, and then once the situation improves they hope to catch up on their ATO payments.

Which is why small business makes up around $12.5 billion of the almost $20 billion in ‘collectable debt’ owed to the ATO.

So far, the ATO’s policy has been not to release information about debts owed by taxpayers to the public. It’s a decision that has frustrated creditors, who often don’t find out a business has a large tax debt (and has had one for some time) until it goes into liquidation. Had they known about the debt beforehand, the creditors may have stopped trading with the business altogether, or insisted on cash up front or cash on delivery.

However, from July 1, 2017 the ATO may disclose the debts of any taxpayer with an ABN where:

1. The debt is more than $10,000, and more than 90 days overdue

2. The debt is not subject to dispute
3. The debt is not subject to a payment arrangement
4. The taxpayer hasn’t satisfactorily engaged with the ATO to manage the debt;
5. The ATO has notified the taxpayer that it intends to do so.

Note: All five conditions must be met before they can proceed.

How it will affect small businesses

Once the ATO discloses a business’ tax debt, anyone will be able to get hold of the information from credit reporting bureaus and other information providers for a small fee.

This ABN disclosure will become a major headache for business owners. It will not only affect the relationships they have with their bank, financiers, and trade creditors, it will also make it difficult for them to obtain new loans, finance or goods on credit from suppliers.

Any business that isn’t paying its tax within 90 days is likely in financial difficulty. Making its tax debts publicly available could affect the business’ ongoing viability, and even lead to a future insolvency appointment.

How to help your clients minimise the risks

Here are five ways you can help your clients deal with these proposed new measures (and the ATO in general):

1. When you’re talking to your clients, consider their overall financial position, including whether they’ll be able to pay their outstanding and future tax obligations. If necessary, suggest business strategies that will help them improve cash flow and/or reduce costs and expenses.
2. Ensure all their tax lodgements are up to date. The ATO won’t even consider a request for a payment arrangement until this is done.
3. If your clients have overdue debts, contact the ATO and arrange for them to be put on a payment arrangement. The ATO won’t release tax debt information or take any other form of recovery action against a business that’s complying with a payment arrangement.
4. If your client believes they have grounds to dispute the debt, inform the ATO of the dispute as soon as possible. The ATO isn’t supposed to take any adverse action against a taxpayer with a genuinely disputed debt while the dispute is being dealt with.
5. If the creditor reporting bureaus are informed of a debt that is subsequently paid, you need to ensure the business’ credit file is updated accordingly. However, at this stage we’re not sure what the process will be for doing this.

(For other debt types, the credit reporting bureaus will generally update their records to show the debt has been paid. But they won’t remove the event of default.)

If any of your clients are having problems paying debts to both the ATO and their other creditors, the most important thing is for them to be proactive. Often the solutions available to these problems will only work if they ask for advice early and put the appropriate strategies in place.

We have a lot of experience communicating with the ATO and making payment arrangements with them. If you need a hand dealing with the ATO or coming up with appropriate strategies, don’t hesitate to get in touch with us.