Minnows use taxman as a bank

THERE are strong reports coming out that small business debts to the ATO have ballooned in the last 12-18 months.

This is as a result of a mix of financial pressure on companies and a government-sanctioned Australian Taxation Office policy to go easy on slow payers by rescheduling repayment terms.

One unproved story has it that SMEs’ share of June 30 indebtedness, which normally runs between $2 billion and $2.7bn, ran out to break the $8bn mark this year for the first time.

The ATO wouldn’t comment on that number and hasn’t yet got publishable statistics for June 30, 2010, but it does say that overall indebtedness to it at June 30 rose from $10.23bn in 2006 to $12.2bn at the same date in 2009, which is now 14 months ago.
We may not be comparing apples with apples here, but there’s certainly a trend, and the news for the solvent taxpayers among us isn’t that good.

As we’re running a deficit, every extra billion that isn’t sitting in Treasury’s consolidated revenue column will need to be borrowed at the market rate, or whichever expenditure program it’s been allocated to won’t be financed.

PPB insolvency specialist partner Mark Robinson says: “It wouldn’t surprise me in the least that there’s been a significant increase in the amount of tax owed by SMEs as a consequence of the more conciliatory repayment schedules entered into (by the ATO) following the global financial crisis.”

Commissioner Michael D’Ascenzo told a small business summit on June 10 last year that the 2009 May budget had allocated “$100 million over four years to the ATO to assist small businesses and other taxpayers experiencing financial distress to stay in business.

This mainly involves early intervention and the provision of payment arrangements aligned with the taxpayer’s cashflow”.

What was left unsaid was that the Australian taxpayer’s interest bill (that’s the rest of us we’re talking about now) on the delayed payments forgone is going to be a lot more than the $25m a year the ATO is getting to manage tax laggards.

But what’s even more ominous is that the kinder repayment schedules, in some cases, have been used by lender banks to get themselves higher up the repayment queue and as one insolvency specialist noted, “it’s actually a false economy because it’s interfering with the credit market”.

“It’s not good policy and credit providers are very unhappy that some borrowers are concealing their debts to the ATO,” he says.

He says that some stretched small business borrowers are using the ATO “like a bank” in a way that’s already widespread in Britain, where the tax office has been granting interest-free reprieves of up to 18 months.

“They get to a point there where the banks are telling borrowers to ask the tax office for some leeway,” he says.

Other sources say that lenders in Australia have taken to demanding to see clients’ ATO “integrated client account”, which records the state of the client’s indebtedness to the ATO. “Any lender who’s not doing that is in a danger zone,” says one expert.

At the summit last March, D’Ascenzo said that about 706,000 micro-businesses in Australia, with a turnover of less than $2m, owed the ATO $6.5bn and that the number of “debt cases”, where repayments were being specifically managed, had jumped by 13,000 or 7 per cent to 200,000.

“We have a community-first approach to debt which is about supporting the taxpayer in meeting their obligations and remaining viable,” he said.

“The earlier we engage with taxpayers, the better the chances of finding a suitable solution. When a debt arises, we try to intervene early and contact the taxpayer as soon as possible.

” In the first 10 months of the 2008-09 financial year we have had almost 580,000 conversations with taxpayers,” he said, applying a new nuance to the word “conversation”.

So, is this softly, softly approach to slow payers a bad thing? It’s a least worst situation, where everyone knows that the alternative is administration and possible liquidation, which would see the businesses even less able to pay the tax owed.
But overdue tax has a way of snowballing, even with the interest holidays of up to 12 months that the ATO began granting on June 1 last year.

The worst news for directors of stretched small businesses is that the ATO’s systems are reportedly under so much pressure from all the additional delayed payment work that the ATO is hoping to stop having to issue Director Penalty Notices, that ominous document that warns the company directors they could be personally liable for unpaid tax. “The ATO is saying it’s taking too long to generate a notice,” we are told.

“If that happens, directors will become automatically liable for debts without knowing it,” continues the same expert, who, like many in the field, deals regularly with the ATO and thus doesn’t want to be identified as a critic.

What we’ve also been reliably informed is that the ATO is understandably very keen to get the outstandings down as soon as possible by ramping up recoveries, and it’s taken the unusual step of farming out part of its its debtor ledger to commercial and mercantile agencies: in other words, professional debt collectors.

“There’s clearly desperation within the ATO to turn the situation round,” one veteran concludes. Let’s hope it can walk the very challenging tightrope of lifting recoveries while avoiding a material rise in the number of corporate failures.

Article by A Main