Last month, the Australian Taxation Office (ATO) released draft legislation that empower them to report a business’s overdue tax debts to credit reporting bureaus. Kelly O’Dwyer, Minister for Revenue and Financial Services, is confident the proposed law will help the SME sector.
However, a growing number of business owners are now concerned that this legislation presents no real benefits for them. Some are even afraid that it might leave them more vulnerable.
At the moment, tax debt information is only made public when the ATO sues and successfully obtains judgement against a particular tax payer. This usually occurs after a long and drawn out legal process.
But with the new proposed law, the ATO will be able to disclose tax information to credit reporting firms in circumstances where:
- a tax debt exceeds $10,000 and has been overdue for more than 90 days
- the business failed to contact the ATO during the 90-day period.
The release of this information is still subject to provisions that protect tax payers. But as soon as credit reporting bureaus get their hands on those details, they are entitled to include them in the credit file of the business concerned.
How this Could Affect SMEs?
On paper, the changes that come with this proposed legislation does sound good. SMEs will have a greater ability to evaluate the creditworthiness of potential clients before doing business with them.
But the problem is that only a small number of small business actually have the ability to run credit checks. Most of them just don’t have enough time for such an evaluation. So even if tax debt information could be helpful in making better financial decisions, SMEs are unlikely to use them.
There’s also the fact that many SMEs don’t have sufficient accounting support, which makes them more vulnerable to tax defaults and other financial issues. If this draft legislation is approved, many small businesses could be negatively affected.
What Can SMEs Do?
Fortunately, there are still some basic steps that SMEs can take to protect their business even if they don’t have time to run credit checks on new customers.
- Have Clients Complete a Credit Application FormBefore granting credit, make sure all your new clients fill out a credit application form first. This way, you’ll have all the details necessary to protect your business in case the customer defaults on their payments.
- Take Caution if the Credit Amount is HighIf a client is requesting for a sizeable credit amount, ask for their accountant’s contact details so you can verify if they are truly capable of repaying the amount. If the customer is reluctant or refuses to provide you with their accountant’s name and number, then that’s a clear red flag.
- Include a Clause for Collection CostsMake sure your credit application also includes a stipulation that if customers default on their payments, they will be responsible for collection costs if you decide to hire a debt collection agency.
- Prepare a Director’s GuaranteeIf you intend to grant credit to another business, make sure you obtain guarantees from that company’s directors first. This important document will give you the assurance that you’ll still be able to recover debts even if the company collapses.
Aside from following these steps, it’s also important for SMEs review their administration processes and ensure they are properly updated. This way, they can successfully protect themselves against bad payers.