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How to Avoid the ATO Killing Your Credit Rating

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How to Avoid the ATO Killing Your Credit Rating

There are new rules coming into play on the 1st July, 2017 which will impact business that owe money to the Australian Taxation Office(ATO). These will specifically apply in the following circumstances:

  1. You have a business with an ABN.
  2. You owe more than $10 000 to the ATO.
  3. Your debt has been outstanding for more than 90 days.
  4. You haven’t got a payment arrangement in place with the ATO.

If this applies to you, you need to take urgent action to sort out your financial position. The ATO will have the power from the 1st July, 2017 to lodge a default notice to credit agencies. But what does that really mean:

  1. The default notice stays on your credit report for five years.
  2. Even if you pay off the debt, the default will stay on your credit report.
  3. Banks don’t like lending money to anyone or entity with a default notice. I’ve heard of people being unable to get a loan over a small default notice from a Telco.

Having a default notice on your credit report has always been a problem when seeking new finance. In many cases in the past, this has been able to be dealt with and the banks have allowed the loans to be approved.

The banks have for some time now required ATO Portal Reports which show the amounts you owed to the ATO together with payment amounts and dates. As long as the report had a nil balance, the bank would proceed with the loan application. Now, with an ATO default on the credit report, the bank may simply stop the application process immediately when they get the credit report and deny you the loan.

In the event, that you fall into the circumstances that will allow the ATO to lodge a default notice, you have until the 1st July, 2017 to get your situation in order. This means taking the following steps:

  1. Make sure your accounting records are up-to-date.
  2. Ensure that all outstanding returns are lodged with the ATO.
  3. Identify the exact total amount that you owe the ATO.
  4. Work out a payment plan to pay the outstanding debt bearing in mind that you will have to pay all ongoing ATO commitments in full when they are due. I recommend that you seek the assistance of your bookkeeper, accountant or a virtual CFO to help you prepare cash flow projection to assist in identifying how much you can reasonably afford to pay each month whilst at the same time putting money aside to fund the ongoing ATO payments. Note that the ATO prefer that payment plans don’t extend beyond 12 months.
  5. Contact the ATO yourself or make sure your accountant does to apply for a payment plan. The ATO will confirm the payment arrangement in writing. Make sure you receive this as proof that you have the arrangement in place. So don’t leave contacting the ATO until the last minute. You will want to have called by mid-June to make sure you have the letter from the ATO before the 1st July, 2017.
  6. In the event, that the debt is more than $25 000 the ATO may request additional financial information including details of monthly revenue and expenses.
  7. Make sure you make the payments each month as agreed with the ATO.

Although this step by the ATO is draconian, it may just be a blessing in disguise. A few years ago, a business owner sought my assistance. He had a good business with regular recurring revenue, however, due to a relationship breakdown, he had got significantly behind with his accounting and ATO lodgements. He knew he owed money to the ATO but wasn’t sure exactly how much. With the help of his bookkeeper, we got the records up-to-date and lodged the outstanding returns.

We then contacted the ATO and put in place a payment arrangement which was for a 24-month period. This was unusual at the time and we provided the ATO with full financial information to support the request for 24 months rather than the ATO’s preferred 12 months. For two years, he diligently went about his business, living off a minimum salary, with the business expenses cut to the bone and he paid the monthly ATO payments plus all his ongoing commitments. At the end of the two years, he not only had paid back the ATO in full, but he now had surplus cash flow which he used to increase his salary. He now has a healthy business that is thriving.

Once the 1st July, 2017 has come around, if you find yourself with a business debt to the ATO of $10 000 or more that you can’t pay in full when it is due, make sure you contact the ATO immediately and put in place a payment arrangement.

Take action to talk to the ATO if you have an outstanding debt. Don’t give the ATO the ability to lodge a default notice as it will kill your credit rating for five years.

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