Tax debt is a problem, and it won’t just go away

Like any business, the tax office is keen to be paid any money it is owed – but unlike us, the taxman has more regulation on his side. By TERRY HAYES of Thomson Legal & Regulatory.

By Terry Hayes

Small-business tax debts are now so big that the Australian Taxation Office has indicated it is happy to offer flexible repayment solutions to business owners with tax problems.

“The tax debt problem in Australia is significant, and growing … and micro-business debt is a particular compliance management problem for the ATO,” according to a recent report from the federal Auditor-General.

To put the issue in perspective, the Australian National Audit Office (ANAO) says total tax debt at June 30, 2006, was $18.78 billion, of which about $10.23 billion is classified by the ATO as “collectable”.

Micro-businesses (turning over less than $2 million) accounted for 67% of the total; and SMEs for 12%. In the five years to June 30, 2006, there was a 116% increase in the number of tax office debt collection cases. The problem is not “small beer”!

In 2004, the tax office ran a special tax debt collection exercise in which it offered some concessional payment arrangements for debtors who agreed to a direct debit plan. Interest was waived for those who paid within six months and was reduced for those who paid within 12 to 18 months.

The ATO took firmer action on taxpayers who did not respond or who defaulted on their payment agreement. That offer has expired and the ATO does not have a deal like this on the table right now, but won’t rule out offering something like this again.

We all have to pay our tax, whether it’s weekly through a paypacket or for businesses, less frequently through their regular BAS returns. Tax debt is certainly not new, but it seems that many businesses are finding it harder to manage these days. And tax debt doesn’t just mean income tax: it means regular superannuation payments and, where relevant, payroll tax.

Many SMEs are cash flow dependent, so effective planning to meet all debts, including tax, is essential. Managing debtors to ensure timely receipt of moneys owed to the business is critical, and it can be tempting for businesses to postpone paying tax obligations to help smooth out cash flows. That is a dangerous step to take.

The tax office is there to collect revenue and to administer the tax laws. Those laws provide for penalties when taxes are not paid on time and the tax office will apply those penalties, which can be severe enough to inflate a small debt into a big debt.

Tax debt, particularly micro-business tax debt, can also distort business competitiveness, given its effect on cash flow and resultant business efficiency and profitability. It needs to be managed well.

The ANAO report said debt collection, particularly in relation to micro-business debt, “requires continued, focused attention by the ATO, to secure payment compliance, maintain community confidence and promote the sustainability of the tax system”.

However the ANAO considered that to reduce the level of collectable tax debt over the long term, it may be necessary for the ATO to expand its debtor research and analysis and, if necessary, use its findings “to provide further advice to government for targeted changes to the administrative design of the tax system”.

The ANAO and the tax office are keenly aware of the tax debt problem, so business should consider itself on notice that there will be changes to way those debts are pursued.

There might not be a repeat of 2004’s special arrangements, but the ANAO and the ATO highlight how businesses might better manage such debts. Direct debits to bank accounts, while ensuring the tax office gets its money, effectively force businesses to manage their finances.

The problem of course, is that business are often reliant on their debtors to pay on time, enabling them to manage their income flows and so pay such bills as tax.

The ATO understands the importance of business efficiencies. Particularly for micro-business, it has implemented measures to promote good record keeping and sound cash flow management. In addition, it proposes to undertake research into why businesses fall into debt, and stay in debt and, as the ANAO report noted, “to reinvigorate its consideration of incentive and punitive measures to encourage tax debt compliance”.

You can’t hide!

Being able to trace and contact a debtor is fundamental to the ATO’s ability to collect a tax debt. At June 30, 2006, it had more than 71,500 micro-business collectable debt cases that were untraceable, including many without useable phone numbers. The ATO is seeking to find better ways to maintain current contact details and to trace debtors, which could mean outsourcing the task to the private sector.

It is possible that such tracing activities could include liaison with other Commonwealth agencies, such as the Child Support Agency and Centrelink. The ANAO said the Child Support Agency considers that it has good quality location data on its “clients”, all of whom should be ATO “clients” as well. The ANAO suggested that the Child Support Agency might assist the ATO by providing contact details for “clients of mutual interest”.

Don’t get caught

Don’t get caught out with tax debt. If a doubt arises about paying tax on time, the simplest (but often seen as the most difficult) thing to do is contact the tax office. If the circumstances warrant, a payment arrangement may be able to be worked out that will see the tax debt paid within a period that is acceptable to the tax office while allowing the business to keep trading and to manage its cash flows. The tax office’s use of private sector debt collection agencies also highlights the need for businesses to get their tax debt payments organised.

It might also be worth considering offering incentives to debtors to get them to pay on time, such as by offering an early payment discount.

The tax office has a long memory, so don’t assume a tax debt unpaid is a tax debt forgotten!