ATO tax debt – what can my business do about it?

Recent media headlines about increasing numbers of businesses with ATO tax debt defaults becoming insolvent or voluntarily closing may be confronting, however, there are options available to small business owners before it gets to this stage. In this blog, I will outline the steps you can take to protect your business.

ATO tax debt default disclosures on the rise

The ATO has had the power to disclose SME tax debt to credit reporting agencies since 2019, however, the COVID pandemic and a necessary ‘light touch’ to debt collection meant that the ATO did not start acting on its powers until April 2022. The number of disclosures however was negligible until October 2023 when over 10,000 were lodged and since then between 2,000-5,000 per month have been lodged, totalling over 32,000 lodgements to end of July 2024.

CreditorWatch is a leading credit reporting bureau in Australia. You can read more about the increase in disclosures here: Thousands of businesses close after racking up massive tax debts | CreditorWatch

Will the ATO disclose my business tax debt?

The ATO has several conditions before it will consider disclosing a tax debt:

·         The debt must be more than $100,000

·         The debt must be more than 90 days overdue

·         The business must have failed to engage with the ATO despite their attempts

This excludes business tax debt that is under a payment plan or where the business has genuinely asked for support and assistance, or there is an active dispute or complaint regarding the amount owed.

Even when these conditions are satisfied, the ATO will send a warning notice of their intent to disclose, giving the business another 28 days to engage with them or make payment.

Why are the ATO being so hard when economic conditions for small businesses are so tough?

At a recent webinar, hosted by CreditorWatch, the link for which is here (Understanding ATO tax debt disclosures | CreditorWatch), Anita Challen, Assistant Commissioner Frontline Risk and Strategy, ATO, outlined that the ATO’s role is to effectively manage and shape the tax, superannuation and registry system. They do this adhering to the following four objectives:

·         Protect the revenue for Australia and the retirement funds for Australians

·         Make it fair for business owners doing the right thing

·         Assist businesses before they build debt they can’t pay

·         Prevent debt accumulating, as this can impact other creditors

As of 31 March 2024, the ATO had $51.4b of collectable debt of which $34.3b is due from small businesses. This has more than doubled since the pre-COVID position of 2019. It’s not surprising that they need to make more concerted efforts to recover this revenue.

Ms. Challen also made the very valid point that most Australian small businesses do the right thing by lodging and paying their taxes on time. It is not a fair playing field if some businesses are allowed to dodge their responsibilities and gain an unfair competitive advantage.

She also noted that the ATO several programs and policies to help small businesses before they build up to a level of debt that they cannot afford to pay. It is only after exhausting these avenues that the ATO considers disclosure of tax debt and other measures.

The reality is that the ATO is now back to their ordinary debt collection processes from before COVID and businesses need to understand that.

My business has an ATO debt that I cannot pay. What should I do?

1.   Engage early

Do not wait for the ATO to contact you, be proactive. Do not ignore those escalating warning letters. These are all part of the ‘help and assist’ part of the ATO approach to debt collection.

Engagement is so important – the ATO does not operate with a one size fits all approach to collecting debt. They need the best business information they can get to make the appropriate decision on recovery. The taxpayer may have better or more recent information that could assist their case. However, speak to the ATO first and explain that you are actively producing this information. This will buy you some time.

Actions taken by the ATO consider the level of current engagement and historical behaviours. If you have a history of lodging and paying on time, this will be taken into account when considering options.

2.    Understand your future cash flow position

Seek help from your accountant, or if they are not skilled enough to assist, consider hiring an outsourced CFO, who will be able to ensure your financial records are accurate and build a business cash flow forecast which will allow you to make an informed business decision about how you can repay your tax debt.

You will need this cash flow forecast and any other budgets and forecasts of your future financial position before engaging with the ATO about a payment plan.

3.    Speak with a SBR expert

From 1 January 2021, the government made changes to the insolvency framework and introduced a small business restructuring (SBR) process for eligible small businesses. The process allows financially distressed small businesses to access a single, streamlined process to restructure their debts, whilst allowing the owners to remain in control of their business. To be eligible, a business must be:

1.      Incorporated under the Corporations Act

2.      Have total liabilities which do not exceed $1m at the date of appointment

3.      Has completed and lodged all BAS and income tax returns

4.      Has paid all outstanding employee entitlements, including superannuation

5.      Willing to resolve that the company is insolvent or likely to become insolvent and that a small business restructuring practitioner should be appointed.

More details on this relatively unknown option for small business owners to reduce debt can be found here - Simplified Debt Restructuring Factsheet.

My business ATO debt has already been disclosed – what now?

Again, engagement with the ATO is key. Encouragingly, they do remove up to 2,000 default notices per month relating to those businesses that subsequently engage with the ATO. When the default is removed, there is no footprint left.

This is yet another ‘get out’ clause for businesses offered by the ATO. If your business is in this situation, revert to the section above, points 1 and 2, will get you back on track.

What happens if I do nothing?

First and foremost, your ATO debt will not go away. Every time you withhold PAYG from wages and lodge your business activity statement (BAS), you are adding to your debt.

In addition to this, the ATO is adding a general interest charge (GIC) at a rate of 11.36% per annum (rate for July-Sept 2024) which is compounding daily. The ATO is no longer a cheap source of finance for most small businesses.

It is this accumulation of debt and interest that becomes problematic. With a quarterly BAS being most common, this only gives a 90-day window before the accumulation process begins.

Recovery action is the next step – director penalty notices, disclosure of tax debt to credit reporting bureaus, direction to pay super guarantee charge (SCG), and garnishee notices are all tools in the toolbox.

The ATO issued the following number of director penalty notices, numbers that are expected to increase over time.

• 2022-23 17,500

• 2023-24 16,700

The final step in the collection process for the business is a bankruptcy notice or wind-up action or other legal action.

Why you must act now

The ATO issued 41,000 Intent to Disclose notices between July 2023 – March 2024. Of those:

• 76% business tax debts were disclosed to credit reporting agencies

• 2% paid their debts in full

• 9% entered into a payment plan

• 4% business has ceased

• 9% other

The 9% that had entered into a payment plan by March 2024 had risen to 29% by June 2024, highlighting the success of the disclosure program in getting taxpayers to engage with the ATO. Remember that these businesses will have had their tax debt disclosures removed completely from credit reporting agency databases.

Having a default notice on your business credit reference can impact your ability to win new customers, obtain credit from suppliers and raise business finance. It can also lead to pressures on your team if they think that their employer is not a viable business.

Seek professional help in assessing your financial position and understanding your future cash flow projections. Only when you have this information can you make the appropriate business decision regarding your ATO tax debt.

Reach out to the team at GearChange Business Advisory today for a no-obligation conversation about what an outsourced CFO can do to help your business through these tough times.