Tax debts could tank your credit score under new ATO powers

Business owners will need to pay closer attention to their cashflow management heading into EOFY, with new credit bureau reporting laws set to put extra pressure on businesses to pay their tax debts.

Entrepreneurs leaning on the Australian Taxation Office (ATO) like a de-facto bank by slow-rolling the payment of their obligations are being warned to organise their affairs before the laws come into effect on February 21.

Under the laws, passed by the Morrison government last October, the tax office will be able to disclose business tax debts to credit reporting bureaus if the firm owes more than $100,000 in tax that’s more than 90 days late.

The policy, designed to encourage entrepreneurs to pay their bills on time, crack down on black economy behaviour and shrink Australia’s $11 billion small business tax gap, will crimp down on the practice of using the ATO as a “line of credit”, accountant David McKellar says.

“This, for the first time, means that a tax debt could impact your credit rating and your ability to get finance or credit, in both a business and personal capacity,” the Allied Business Accounting chief executive tells SmartCompany.

“A report on your credit file will remain there for five years, so it has long-lasting impacts.”

McKellar says a view the ATO could be used as a de-facto bank arose in the wake of the global financial crisis (GFC) when the tax office was much more lenient and granted long payment arrangements with no interest.

“Many business owners took full advantage,” he says.

But in more recent years, there’s clear evidence the ATO has been seeking to ensure business owners meet their obligations on time, or at least, engage with them to sort out a payment plan.

“We are also seeing the ATO taking more formal and legal action … quicker than we have seen in the past,” McKellar says.

The new policy is set to have a big impact on many business owners, with a Scottish Pacific survey from September last year indicating about a quarter of entrepreneurs believe meeting their tax payments on time would create cashflow difficulties.

Scottish Pacific’s senior executive Wayne Smith said the new policy delivers a clear message to business owners that “the ATO is no longer prepared to be viewed as a line of credit”.

“This action will now likely have an adverse impact on credit ratings and credit insurance limits, making it harder to maintain or extend credit terms with suppliers,” he said in a statement circulated Wednesday.

Business owners who already have more than $100,000 in outstanding ATO debts are encouraged to contact the tax office to organise a payment plan or pay outstanding debts so they fall below the threshold by February 21.

McKellar advises entrepreneurs to consider negotiating with the ATO, or taking steps to manage their cashflow in the months ahead, to ensure their bills don’t pile up heading into EOFY.

“It is better not to get into tax debt in the first place,” Mckellar says.

“The best way to do this is to actively manage your business and cashflow.

“There are many tools available today … that also provide the ability to prepare budgets and forecasts to help avoid issues with cashflow and tax debts.”

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