Much has been said about the benefits SMEs will see from new draft legislation recently proposed by the Federal Minister for Revenue and Financial Services authorising the Australian Taxation Office to disclose business tax debts to credit reporting bureaus.
While the stated aim is to “help the SME sector”, in reality SMEs will be largely unaffected by these changes or, in some instances, will actually be worse off.
Currently the only tax debt information which becomes public is when the ATO sues and obtains judgment against a tax payer. This is usually after a long, protracted process.
The aim is to now disclose information to credit reporting agencies in the following circumstances:’
- A tax debt must exceed $10,000
- It must be overdue for more than 90 days
- The business must have failed to communicate with the ATO during that period
Subject to certain provisions to protect tax payers, this information will then be released to credit reporting agencies, which will then be entitled to (and most likely will) record such information on the credit file of the affected business.
Why this won’t help SMEs
In theory, this legislative change provides SMEs with a greater ability to assess the reliability of a potential client before granting them credit.
The problem is that very few SMEs are equipped to actually carry out proper credit checking on potential customers. Most small business owners simply don’t have the time to run a credit check on every new client before doing business with them so while the tax debt information could be useful in guiding whether they should grant credit to a potential client, most aren’t going to actually use it.
Conversely, the businesses that will benefit from this information are larger companies which have a credit and collections department. Those businesses with proper credit-checking process will have information about potential tax defaults by future customers and they may also use the information to cut back on credit to existing customers.
On balance, the SME sector will potentially be hurt by this change because, despite the safe-guards incorporated, invariably information will be released on some businesses when there is a valid reason why the tax debt is outstanding.
For example, a large number of SMEs do not have adequate accounting support, many business operators lack proficient English skills and many will even lack basic IT skills. It’s easy to unintentionally fall foul of the ATO and these businesses could be severely affected.
What should SMEs do?
You may not have time to run credit checks on potential customers but there are still some basic steps you can take when advancing credit.
The simplest step is to have customers who you intend granting credit to complete a credit application form.
This form will capture all the relevant information you’ll need to protect yourself if the client defaults on their repayments. The most important element to include in your form is a provision that, should they default on their payment, they are liable for all collection costs if you refer the debt to a collection agency.
If the amount of credit is significant, the best credit check you can carry out is to call the customer’s accountant and ask the simple question: “Do you believe that customer X is good for credit of $Y?”
If the customer is not prepared to give you the name of his accountant and authorise you to call, this should ring warning bells with you.
If you are providing credit to a company, your default position should be that you obtain guarantees from the directors of the company. A director’s guarantee will ensure that you are able to recover debts from the director(s) of a company, even if the business collapses.
Whilst it is commendable that the government is looking at ways of helping SMEs, on balance I do not believe that this change will help the SME sector at all and is likely to cause more harm than good.
For SMEs looking to better protect themselves against bad payers, the most important thing is to get their administration processes in place and be proactive.
About the author
Roger Mendelson is CEO of Prushka Fast Debt Recovery Pty Ltd, which acts for over 55,000 SMEs, and is principal of Mendelsons National Debt Collection Lawyers Pty Ltd. He is also the author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival, both published by New Holland Publishers.