In 2015, the Australian Taxation Office (ATO) pledged tougher tax collection. The tax office estimated $20 billion in tax debts and it was running low on cash. One of the actions proposed by the ATO was lowering the benchmark for legal action to $93,000 from $340,000. Slater Byrne Recoveries warned that ATO’s actions could hamper the debt collection efforts of business owners. When businesses fail to pay taxes, they face severe criminal penalties. The ATO also has the authority to wind up a business if it is unable to pay its taxes. When this happens, businesses pay the ATO before other creditors.
Cash flow and tax collection measures
ATO’s tax collection efforts adversely affect the cash flow of businesses. This was why we recommended that business owners should be more aggressive in their debt recovery methods.
There is a big chance that businesses targeted by the ATO will also face contracting cash flow as they would try to pay the tax office first. Aside from the unpaid taxes, the ATO will also recoup additional charges for late payments.
The ATO can also take the erring taxpayer to court to recover the unpaid taxes as civil debts. Further, the ATO can push the erring company to liquidation. In that scenario, the ATO can take away the assets of the company as payment of taxes and late payment charges.
Unpaid taxes will get paid first over unsecured credit when a company is in liquidation. To illustrate, if your contractor owes you and the ATO $50,000, your contractor will pay the ATO first.
Cash flow and erroneous targeting of businesses
Since the ATO started the crackdown in 2015, there was an increase in the number of small businesses and taxpayers complaining of the tax office’s punitive debt recovery methods. Mistakes by the ATO have crippled small businesses.
To address this, the ATO created an improved oversight giving these businesses greater access to compensation. The ATO will take into account the financial capacity of a taxpayer to respond to an audit or compliance order. In more serious cases, the tax commissioner will step in and arbitrate.
In this step, the ATO applies an independent review process to the disputed claims. As a consequence, the ATO is giving businesses a new right to appeal.
The small business ombudsman suggested the ATO should look into the mountain of tax process already burdening small businesses (e.g. GST, income tax, CGT, BAS) and whether there were changes in the economy that had led to the increased debt burden.
Takeaways
It is difficult for a business owner to get to know the entire financial condition of its contractor. To some extent, it is no longer a business owner’s duty to be appraised of the financial soundness of its business partners. It thus comes as a surprise to business partners when contractors are no longer paying on time because they are struggling to pay their taxes or are placed in liquidation by the ATO. It is stressful for companies to be appraised by their contractor’s financial condition and collect on unpaid debts while continuing to conduct good business.
Take the stress out by hiring a debt collection agency. Unsure how the ATO rules apply, seek professional advice. Debt collection professionals will be the one to learn deeper into your client’s finances and appraise you of its status, including whether the client is having a hard time keeping up with tax obligations or is in liquidation as a result of unpaid taxes. Debt collection professionals will also advise you as to the proper action to take to get maximum recovery from non-payment of debts.
Sources:
Tax Office’s Chris Jordan Pledges Tougher Line as Debt Hits $20b – Suggestions for Improvement are Welcome
Enforcement measures used for the collection and recovery of tax-related liabilities and other amounts
Liam White joined the Slater Byrne Recoveries team in early 2013. He has worked across the credit & dispute resolution industry for a number of years. He is currently working in a Marketing/Head of Sales capacity at Slater Byrne Recoveries.