SMEs using the ATO “as a bank” by not paying tax commitments on time face new risks, national business funder Scottish Pacific has warned.
Many business owners are still unaware of laws passed late last year that would allow the ATO to reveal SME’s tax debt to credit reporting bureaus, according to Scottish Pacific senior executive Wayne Smith.
He said trusted advisors, accountants and brokers play a key role in making business owners aware of the implications.
Based on the new rules, the ATO can report an SME to credit rating agencies if the business owes over $100,000 in tax; has an ABN; is over 90 days in arrears; lacks or is not negotiating a payment arrangement.
The new law provides businesses with even more incentives not to rack up debts with the ATO, said Smith.
“Traditionally, many SMEs have used the ATO almost like a ‘line of credit’ by not paying their commitments on time,” he said
“It’s not the best option but if a business is tight for cash, they often make a decision to pay other creditors and delay paying the ATO, thinking they will eventually put a payment arrangement in place.
“This action will now likely have an adverse impact on credit ratings and credit insurance limits, making it harder to maintain or extend credit terms with suppliers,” he added.
Reining in leniency
Based on Scottish Pacific’s most recent SME Growth Index, research revealed that 27.8% of SMEs said being prompt in meeting tax payments would create cash flow difficulties for their business.
According to Smith, during the GFC years, the ATO showed leniency in allowing businesses to run up tax obligations because they didn’t want to be looked upon as the reason SMEs went out of business in a tough economic environment. The leniency is now being systematically reined in.
“Years ago, the ATO had one blunt instrument – if you don’t meet obligations and there was no payment arrangement in place, the only option was to wind up the business,” said Smith.
“Then the Directors’ Penalty Notice was introduced, effectively making directors personally liable for unauthorised company tax debts. Now, with this new initiative, the message is clear: the ATO is no longer prepared to be viewed as a line of credit.”
He added, “With forecasts for a poor economic outlook in 2020, if ever there was a time to make sure you have a sustainable funding structure in place for your business, that time is now.”
Smith encouraged business owners to take the post-Christmas, pre-February BAS time as an opportunity to evaluate their cash flow management and working capital arrangements, as well as to consult their broker or funder, whether it be bank or non-bank, to determine the most appropriate form of funding for their business situation.
Cash flow solution: Invoice finance
According to Smith, invoice finance is one funding option that works for many Australian and New Zealand SMEs.
Also known as debtor finance, invoice finance offers a credit line linked to and secured by outstanding accounts receivable. Businesses can use this funding as needed or as a long-term working capital solution.
Invoice finance provides a stand-alone facility that can sit alongside other business borrowings such as overdrafts, term loans and asset finance, said Smith.
“As your business grows, the facility you’ve put in place grows with it, and unlike a traditional bank overdraft there is generally no need for real estate security,” he added.
“There are no capital repayment requirements, and the facility helps you grow your business and increase purchasing power through improved cash flow.”