ATO’s new credit rating crackdown pushes small businesses to pay tax debts

The Australian Taxation Office (ATO) is cracking the whip on small businesses who haven’t been keeping up with their tax payments by posing a threat to their credit ratings.

Thanks to laws passed last year, the ATO can now reveal small businesses’ tax debt to credit reporting agencies should the business meet the following criteria: 

• The business has more than $100,000 in tax debt 
• The business has an ABN 
• The business is more than 90 days in arrears
• The business hasn’t set up a payment arrangement or negotiated one 

And according to national business funder, Scottish Pacific, many business owners don’t know about it.  

“Traditionally, many SMEs have used the ATO almost like a ‘line of credit’ by not paying their commitments on time,” said Wayne Smith, Scottish Pacific’s Senior Executive.

“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." 

Smith went on to say the new laws will give Aussie businesses a bigger push to avoid accruing tax debt with the ATO. 

“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.”

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But will coughing up funds for paying tax on time disrupt businesses’ cash flow?   

Over a quarter of Aussie businesses think yes.

In Scottish Pacific’s most recent SME Growth Index, it found that 27.8% of respondents said meeting tax payments promptly would create cash flow issues in their business. 

But Mr Smith warns that the new laws are a clear message from the ATO that businesses must stop viewing it as a line of credit. 

“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.” he said. 

What options are there to fund my business and improve cash flow? 

There are plenty of ways to help your business financially so you can see it prosper and grow. Here’s a handful of financial products you could consider:

• Business loan: As the most popular option for Aussie business owners, business loans offer flexibility with a range of borrowing limits and loan terms. It’s worth comparing various lenders to find a competitive rate, as well as minimal fees and any bonus features on offer. 
• Merchant cash advance: This can be an alternative to a loan, as a lump sum cash advance payment you’ll receive from a lender upfront. Over time you pay down your loan amount and the lender receives an agreed upon percentage of the business transactions. Keep in mind though, there is generally a fee associated with this option.  
• Invoice finance: When it comes to maintaining cash flow, this could be an option to help it. Invoice finance allows businesses to receive up to 95% of an invoice amount from a lender straight off the bat, then the remaining amount once the invoice comes through (minus a fee or charge).  
• Lines of credit: If you need a funding option to have at your disposal on an ongoing basis, this could be a good alternative to a standard business loan. With this option you can dip into the funds when you need it, and you’ll only pay interest on the amount you actually drew on.     

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Ready to start reviewing your business’ funding? Check out our business loans comparison table or head over to our guides page for more handy tips on all things small business finance.