For the first time, business ATO debts may be reported to the credit agencies (Dun & Bradstreet, Veda, Experian etc) as soon as July 2017.
This is new
As and when this happens, a business’s credit rating will take a major hit. As a result of this, the business will face varying difficulties, as credit scores directly impact the availability and cost of funding, and supplier terms, to name just a few things, all of which are fairly important.
Why now?
As of June 10, 2016, two-thirds of the ATO tax debts is owed by small businesses, with the overall total reaching $19.2 billion. Beyond the big banks, the ATO is probably, although inadvertently, the largest lender to small businesses in Australia. Therefore the ATO wants their money back, and is planning to do so by putting pressure on small businesses to reduce their tax debts.
When?
As of July 1, 2017, the ATO can disclose the relevant information regarding a businesses tax debt to credit reporting bureaus. Initially only businesses with and Australian Business Numbers (ABN) and a tax debt of more than $10,000, overdue by at least 90 days will be affected. However, the ATO has also stated that they will not disclose the tax information of businesses that have engaged in some form of repayment plan.
1. How will debts be reported?
There are three ways that tax debts could feed into the credit bureaus:
- a trade payment that is shown deteriorating each subsequent month; moving into
- a collections action, where the ATO will typically outsource to collections agencies; and then
- final attempts to recover the debt through the courts.
While court action is well understood to feed into credit bureaus, fewer people are aware how trade payments data and collections data are used by the credit bureaus
2. How will it impact business credit scores?
To be put simply, negatively and significantly.
Credit bureaus do not publish how their scores are calculated, however it is clear that deteriorating trade payment data (ie. ageing payables) and derogatory events (collections, court actions, judgements etc) will reduce credit scores. These inputs are some of the strongest indicators of default and delinquency (and that’s what a credit score is trying to predict).
So what do we do about it?
Businesses that have used ‘ATO Bank’ as a line of funding will be alerted by a well placed accountant and/or financial advisers to be aware of the implications going forward.
Advisers can help small businesses deal with this issue by:
- getting tax submissions up to date;
- setting up a payment plan with the ATO (and stick to it);
- identify options to refinance ‘ATO Bank’ debt.
These initiatives should be put in place in the near future to minimise the risk of credit score reduction due to tax debts. Often they can remain on your record record for months or even years.
What We Think.
The ATO is not looking to damage small businesses. We think that come July 2017, the worst offenders will be the first to be impacted by the changes. This involves those that have had outstanding tax debts for a long period of time and have shown little interest in dealing with the issue.
Going forward, the ATO’s actions will be measured in this reporting initiative, and those small businesses which show tax discipline are likely to be treated more leniently than those who don't and get relatively cheap financing from the ATO Bank.