Parliament need to protect small business from ATO’s shaky systems

Robert Gottliebsen, The Australian, January 27, 2017:

Over the next few months the Australian Parliament will be asked to agree to greatly widening the power of the Australian Taxation Office which will allow it to put out of business small enterprises that don’t pay their taxes.

The tax office has emailed me with the full details of its proposal and, although I have been highly critical of the Australian Taxation Office over recent blunders, I must praise the Tax Commissioner Chris Jordan for the way he has framed the proposal. It is in line with the guidelines I set when the broad proposal was first outlined in the mid-year economic statement (Australian Taxation Office moves threatens small business bankruptcies, January 9).

But given the vast number of businesses under threat (see below), once the small scale run-in period is over, I do not believe that the Australian Taxation Office has the systems to implement the proposal as set out by Jordan.

Accordingly, it is vital that the Australian Parliament adds protection for small businesses that might be wrongly bankrupted when the fragile ATO systems break down.

First, I need to describe what is happening in the small business community which makes the extra powers necessary and then why the extra protection is needed.

When a small business starts to get into trouble sometimes the ATO pounces on it, but all too often the troubled business does not pay what is owing to the tax office and the bill escalates quickly.

Then the business begins to slow its payments to its suppliers and others in the community. The emergence of the CreditWatch group has improved the knowledge of the small business community of the identity of slow or bad payers. Members of the CreditWatch system report their slow payers including a tag with amounts that are overdue.

CreditWatch has taken the work of groups like Dunn and Bradstreet a lot further. But the weakness in the CreditWatch protection system is that when a small business falls over what is suddenly often revealed is a massive tax liability, which swamps the amounts that are owed to suppliers that are recorded in the CreditWatch system.

Inevitably, such collapses send many perfectly sound businesses to the wall.

For years people have bemoaned the fact that if only the tax office had told them that big sums were owed, they would never have been caught.

So the ATO has emailed me the details of their plan. The full email can be read here but this is the key proposition:

“Under the measure, the ATO will have discretion to disclose tax debt information to credit reference agencies. The measure does not oblige the ATO to disclose this information.

“We understand that from time to time taxpayers have cash flow issues and we work with them to repay debts, for example using payment arrangements.

“Taxpayer debts will only be reported to a credit reference agency if a taxpayer remains disengaged after the ATO has exhaustively pursued pre-litigation procedures to collect the overdue debt.

“Debts genuinely in dispute will not be reported nor will debts under payment arrangement. Taxpayers who are working with the ATO to resolve their debt will not have it reported.

Debts will only be reported where:

  • The debt is for a taxpayer that has an ABN
  • The debt amount is over $10,000 and unpaid for over 90 days
  • The debt is not in dispute
  • No payment plan has been established or an existing payment plan has defaulted.

“The ATO will notify a business that it intends to refer its tax debt to a credit bureau before it passes on the information”.

I couldn’t improve on that set of guidelines. But as we have seen in the Douglass case and in aspects of the Gold debacle (Tax office in stunning U-turn on gold tax fraud, January 11) and (Chris Jordan’s last shot at righting a wayward ATO, November 29) there are grave deficiencies with the ATO’s systems.

In both Douglass and gold, it wasn’t until I set out what was really happening that the Commissioner took action. I can keep publicly briefing the Commissioner on new Douglass and gold situations but we need to address the underlying problem.

When the Tax Commissioner names a business, immediately suppliers will stop supplying and banks will stop lending. Most enterprises will simply go out of business.

The ATO has confirmed to me that there is $12.5 billion owed to it by small enterprises excluding amounts in dispute. Small business represents two thirds of the $19bn owing in total.

These are massive sums involving vast areas of the small business community. If the fragile ATO systems fail, businesses will be wrongly bankrupted.

I believe that the way to make sure that we don’t have Douglass situations arising is to make it clear that where a business has been named incorrectly all tax liability is abolished and the tax office must pay at least twice the amount owing in damages.

The group who will decide whether the ATO published incorrectly should be the Inspector General of Taxation. And the Inspector General could enforce bigger penalties against the ATO if required.

Once that protection is inserted by the Parliament, it will provide the ongoing discipline on the shaky ATO systems. That’s a minimum step.

What the Parliament should really do is disband the power-corrupted internal tax review systems and replace them with the Inspector General of Taxation and give his people the power to adjudicate without lawyers and without appeal. We would then bring fairness into the system and restore confidence. Confidence in the system is now breaking down and no taxation system will work without confidence.