The ATO will soon be reporting outstanding ATO debts to credit reporting agencies, which will impact on a business and business owner’s ability to borrow. This change was first highlighted by us back in March 2014 and has been mentioned in the past three federal budgets. The last budget indicated the implementation of this measure by the second half of the calendar year 2017, however there have been delays with draft legislation only being released early this year.
The implications for businesses and business owners will mean their credit file will have outstanding ATO debts reported where the ATO debts meet certain requirements. Having additional marks on your credit file will result in having to pay higher interest rates or potentially being declined for credit. As a business owner, or someone thinking about starting a business they would certainly need to consider ATO debt management as a priority issue. Overdue debts which appear on your credit file usually stay on your credit file for 5 years, however can stay on your file for up to 7 years. This is a significant period of anybody’s working life especially during the early years of a young family. Being unable to borrow to purchase a family house could severely impact a family’s future lifestyle and ability to generate wealth.
So how do the ATO determine what is reported to credit agencies?
The draft legislation outlines the credit agencies will be notified of outstanding ATO debts if ALL the following conditions are met (our commentary is provided in blue):
– registered on the ABR; Only those with an ABN will be affected. Individual taxpayers could potentially be caught if they have dormant businesses and ABN and are receiving quarterly ATO instalments. A review of all ABN’s will need to be reviewed with any dormant ABN’s removed from the ABR.
– has a tax debt and at least $10,000 of the debt is overdue for more than 90 days; Businesses will need to monitor their debts very carefully. It is unclear when the 90 day period commences and this will need to be clarified. For example if a business has a debt of $8,000 for over 90 days and fails to meet the payment of their next BAS of $3,000 it is unclear if this would be reported as there is a debt outstanding for more than 90 days which is over $10,000. It is also unclear if each outstanding amount is treated seperately. Further clarity will be need for this step.
– is not a DGR, not-for-profit entity, government entity, or complying superannuation entity; This will only impact business registered on the ABR with the exception of DGR’s, not for profits, government entities and complying superannuation funds. Note the inclusion of “complying” superannuation funds.
– is not effectively engaging to manage their tax debt; and In summary this is where a business has arranged a payment arrangement with the ATO or have objected to the amount assessed (further details on this below).
– the Commissioner has taken reasonable steps to confirm that the Inspector-General of Taxation does not have an active complaint from the entity. This is where the a business has complained to the IGT about dealings with the ATO.
In the event all the above conditions have been satisfied, the ATO will be required to contact the taxpayer and/or their agent and advise them they will be reporting of the outstanding ATO debts to credit agencies in 21 days. The notice will outline the steps for taxpayer to be excluded from the disclosure.
The 21 day notice period only applies to new outstanding ATO debts being reported to credit agencies and does not apply to the ATO updating, correcting or confirming information previously disclosed to credit agencies.
Effectively managing your ATO debts.
Apart from maintaining your ATO debt balance below the $10,000 threshold, effectively managing your ATO debts (see above) becomes the easiest way to keep your credit file clean.
The official statement for a taxpayer to be satisfactorily managing their ATO debts is where:
– The business has entered into an agreement with the Commissioner to pay their debt by instalments;
– has objected against a taxation decision to which the tax debt relates; or
– applied to the AAT for review or appealed to the Federal Court against a decision made by the Commissioner to which the debt relates.
What is not clear at this stage is, where existing ATO debts are being paid by instalments and if there is a default of that arrangement, whether this would automatically trigger the 21 day notice.
Practically we also experience differences where payment arrangements are allowed or disallowed and invariably most of the time relies on the person we are discussing the matter with at that time. The ATO should provide clear guidelines of normal circumstances of where a payment arrangement would be satisfied. In our experience we have had instances where payment arrangements were not entered into because the ATO employee was requesting a large upfront payment which the taxpayer could not afford, only for us to discuss this matter with a different ATO employee the next day who accepts the payment arrangement without any large upfront payment. We have also had circumstances where we have received payment arrangements for the ATO where we have not entered into payment arrangements as we needed to discuss this with the client, only to have the documentation sent to us confirming a payment arrangement being entered into.
The granting of prior payment arrangements and conditions for paying ATO debts have been lenient in the past. Without a framework provided by the ATO of the parameters of acceptable payment arrangements we could see future negotiations of payment arrangements with the ATO being tightened up significantly with the taxpayer having to accept onerous conditions to accept payment arrangements to avoid their credit report being tarnished.
Bramelle Partners continues to monitor this closely and will advise further once the legislation has been finalised and will be offering active ATO debt management review and service to our clients. We will be in contact to advise on our offering and how we can assist you in this new development.
This article was featured in our March 2018 newsletter publication.