ATO to tighten business viability rules

Tax officials will use a new assessment tool to identify businesses that are not viable, singling them out for tougher action as the tax office seeks to recover a $15 billion debt.

Speaking at a small business summit yesterday, Commissioner of Taxation Michael D’Ascenzo said the Australian Taxation Office will continue to empathise with businesses facing genuine financial problems.

However, with debt ballooning in the economic downturn – by 12% in 2009 and 21% in 2010 – the ATO has been left with no choice but to chase the debt of businesses that are not viable.

“To ensure a fair and consistent approach to assessing business viability, we have developed an assessment tool to maximise a rigorous evidence-based approach,” D’Ascenzo said in his speech.

D’Ascenzo said the tool operates similarly to the models used by banks in making decisions on the provision of finance or credit.

“It uses the business’ and/or the individual’s financial information for the current and previous years to provide a comprehensive assessment of the taxpayer’s viability and repayment capacity, in particular [their] ability… to pay outstanding debts and meeting ongoing commitments,” he said.

“We also consider non financial aspects of the taxpayer’s individual circumstances.”

The ATO will focus on businesses that under-report income and business owners that engage in phoenix activity, which occurs when directors transfer the assets of an indebted company into a new company.

D’ Ascenzo said the Tax Office can now target businesses using its data-matching capabilities rather than the old “random approach to audits”.

Once the ATO has assessed the viability of a business, the next step will be to grant a payment arrangement, usually subject to interest.

“However, where there are clear indications that a business is not viable and does not have the capacity to repay its debts and meeting ongoing commitments, we will advise the taxpayer of this and suggest they seek professional advice as to their options,” D’Ascenzo said.

In 2011-12, the ATO will continue to offer payment arrangements to businesses that have a good compliance history and can demonstrate their ongoing viability and ability to pay.

The Tax Office has published eligibility information online around the criteria and conditions of payment arrangements for the benefit of businesses and their advisers.

One poor business practice the ATO is starting to see more often is where new contractors enter the tax system as a business and fail to budget properly by not putting money aside for their tax bill.

“These are often young tradespeople who find themselves in the situation where they lodge their first return some 18 months after commencing their business and receive a tax bill for their first year of operation, which they cannot pay,” D’Ascenzo said.

“Around the same time, they receive a pay-as-you-go installment, which they also cannot pay.”

D’Ascenzo said one of the most important things a business owner can do is to keep their financial situation in front of mind, including current and future tax obligations.

“If an operator thinks things might be slipping or there could be trouble ahead, they should not wait for it to eventuate,” he says.

“The temptation for many is to be in denial about how things really are… Early contact [with the ATO] can make a big difference to how things pan out.”