Call to end loopholes in commercial tax debt disclosure

| January 18, 2018
The Australian Institute of Credit Management (AICM) has welcomed the release of the Transparency of Tax Debt draft legislation by The Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, however it believes the significant loopholes remain.

The AICM lobbied for reform of existing legislation since 2014 and AICM CEO Nick Pilavidis welcomed the new draft as a long overdue change which addresses a ‘glaring gap in the information’ available to other companies to properly assess and mitigate credit risk. 

He warned that such information gaps not only expose other firms to unnecessary risk, but allows firms which avoid their tax obligations to gain an unfair advantage and encourage illegal ‘phoenix’ activity.

Under the current rules, credit providers are regularly frustrated when liquidator reports on a failed company reveal extensive debts to the ATO, many of which have been outstanding for over 12 months.

While the AICM agrees that the draft legislation will improve the situation, it remains concerned that the reforms will create a sufficient deterrent for those that now choose to avoid their tax obligations.  In particular, it is worried that such information will be expunged from credit files if the business subsequently engages with the ATO.

Pilavidis argues that “information of businesses that have had prior breaches reported, but subsequently paid, is highly relevant to all credit providers, as it assists with a comprehensive assessment of credit worthiness.

To remove prior breaches from the file not only reduces the ability for full and complete credit assessments, it also leaves a loop hole for those that intend to avoid their obligations, such as illegal phoenix operators .”

The Australian Tax Office reports that over 95% of businesses pay their tax obligations within 90 days.  However, of the remaining 5%, around 3% have still not paid their dues after 365 days.

Mr Pilavidis says “this clearly indicates that most businesses that fail to pay within 90 days have no intention or capacity to pay and those that do are likely to engage with the ATO within the 21 day warning period.”

Mr Pilavidis believes that “it is highly unlikely” that any business would be surprised if information about a failure to pay their tax bill after a full year was recorded on their credit file.  Tax obligations are common to all businesses, and if firms have outstanding tax demands over 111 days old, they receive a notice with a 21 day warning period.

If bills remained unpaid after a year, the ATO would already have exhausted the options available to them to encourage engagement such as calls, text messages, letters and the engagement of professional debt collection agencies. ”

Extenuating circumstances may create exceptions for a small minority of firms, and the ATO should have flexibility to remove defaults in these circumstances, however Pilavidis warns the overwhelming majority of non-compliant firms would have intentionally avoided their obligations and removing the information from their credit record leaves firms they trade with vulnerable to seeing their commercial bills unpaid.

Mr Pilavidis therefore argues that the facts regarding late payment should not be expunged if the firm eventually settles with the ATO regarding repayment arrangements or enters dispute proceedings.  Such disclosure would ensure the reform measures achieve their goals, protects other firms and reduces the ability for businesses to avoid their obligations.

As it stands however, the continuing loop hole will not only allow those that intend to avoid their obligations to continue to do so but provides incentive for them to repeat this activity. Unscrupulous operators which enter a repayment arrangement to have a credit file cleared could still be tempted to default on the arrangements once a credit provider has extended new credit.

Furthermore a serial illegal phoenix operator will be able to enter a repayment arrangement before winding up the business to give the appearance there were no unpaid obligations.

If the information remained on file but was updated to reflect the current status, such as “paid”, “repayment arrangement” or “disputed”, such loopholes would be closed and credit providers would be able to make further inquiries before extending credit and ensure the repayment can be monitored closely.

Pilavidis therefore urges the Minister and the ATO to amend the legislation to address this loop hole and ensure the new rules increase the transparency of credit assessments, rather than allow rogue businesses and their owners to game the system as they do today.

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