Credit reporting of tax debts – one measure among many

From 1 July 2017, the Government has announced that it will allow the Australian Taxation Office (ATO) to disclose to Credit Reporting Bureaux the tax debt information of businesses that “have not effectively engaged with the ATO to manage these debts”.

This was announced in the Mid-Year Economic and Fiscal Outlook (MYEFO) on 17 December 2016. 

The measure will initially only apply to businesses with ABNs and a tax debt of over $10,000 that is at least 90 days overdue.

As MYEFO says, the ATO does not currently provide this information, indeed it cannot, it being a fundamental aspect of our tax system that tax information is confidential: s 16 Income Tax Assessment Act 1936.

However this measure appears to respond to an increasing amount of unpaid SME tax debt that is proving to be intractable. Partly that is the result of the tax regime itself, which leaves payment of the debt in the hands of what is often the taxpayer employer.  Single touch payroll, discussed below, has the potential to change that.

The measure seems worthy to the extent that it takes a different approach to the usual “increase penalties and powers” mantra and responds to those of us who see non-legal remedies as being more or as effective. 

The Research of the Universities of Monash and Melbourne

The Universities of Monash and Melbourne have consistently said this in their research into unlawful phoenix activity, with their focus being on the need for a series of disruptors to those engaged in such activity, in particular through the creation of commercial transparency.

The idea of giving tax information to credit reporting agencies, in effect the whole world, is one that would, it is assumed, cause disruption in business’ access to finance, and cause lenders to be more strategic about those to whom they lend.  This information asymmetry between borrowers and lenders is one focus for attention discussed in the Productivity Commission’s (PC) draft data report of November 2016.

The Melbourne academics (Professors Helen Anderson and Ian Ramsay, Melbourne Law School, and Associate Professor Michelle Welsh, Department of Business Law and Taxation, Monash Business School, Monash University) made an initial submission to the PC (May 2016) in favour of this approach but it was not mentioned in the PC’s draft November 2016 report, perhaps as not being within what the PC sees as its remit.

The May 2016 submission of the Melbourne academics noted that the 2015 Senate Economics References Committee’s Construction Insolvency Report recommended that privacy provisions be reviewed to facilitate improved information sharing. In the phoenix context, their submission says that while the Interagency Phoenix Forum (IAPF) had a genuine commitment to the disruption of illegal phoenix activity, information between the agency members of the Forum does not flow freely. For example, while the IAPF is now a prescribed task force, which allows the exchange of tax information within the forum, this did not appear to occur. 

The submission referred to the wish of credit managers in particular to see information about prior tax defaults by companies seeking credit, with a survey showing over 96% of credit managers agreeing that ‘[h]aving the ATO list all unpaid tax by commercial entities would significantly enhance my credit approval/declining decision making”.

As the Melbourne academics say, and as insolvency professionals know,

“unpaid taxes are often an early sign of the precariousness of a company and its likelihood of defaulting on other debts. If credit rating agencies could include this sort of information in [their] advice to prospective lenders and trade creditors, one significant incentive towards phoenix activity – its invisibility – might be undermined”.

Other measures

Disclosure to creditor agencies is but one measure, and not necessarily the most effective.  The Melbourne academics list a number of measures that are needed, in particular the director identification number (DIN), whereby persons seeking to become directors of companies must obtain an identification number after establishing their identity through the customary ‘100 points of identification’ process.

Other measures suggested are that the company incorporation process should be online, with drop down boxes requiring, or displaying via an auto-populated form, the past corporate histories of prospective directors, and the extent to which they were unable to pay their debts. The Report as to Affairs (RATA) prepared by directors upon a company’s liquidation should be revised, although this has been “under review” now for the past several years. Liquidator reports to ASIC should require more meaningful information on phoenix activity.

And, to “assist the public in its self-protection, data held by ASIC about companies and their directors should be available for no cost and be easily searchable”. 

The government should also “review the practical and legislative impediments to the sharing of data about companies and their directors amongst government agencies, to maximise the likelihood of appropriate enforcement action being taken”.  

The DIN is the most significant recommendation, with the Productivity Commission having endorsed it, along with various Senate reports, and it is under active consideration in New Zealand.  “Countries as diverse as India and Estonia have implemented director verification procedures”.

Singe touch payroll?

My only addition to these measures is perhaps what I see as the most effective, to extend the new single touch payroll law extend beyond reporting, to actual recovery of tax at source.  The professional and business resistance at interference with business’ “cash flow” only serves to support the need for this measure, fundamental as it is to how businesses and their accountant advisers have unfairly come to operate.  Other changes in commercial payment systems may prompt this and other changes in any event.

All this also serves to support a view of mine expressed some years ago, that the agency with any real potential and power to regulate and limit insolvent trading of companies and corporate insolvency misconduct is the ATO, not ASIC: The ATO as an Insolvency Regulator, (2007) A Insol J 24. 

Coming up

Murrays Legal the younger will look at this further when the law to facilitate this change is introduced.  It may be complex, with tax, privacy and credit reporting laws needing attention and with measures needed to ensure that unfair reporting, for example of disputed tax debts, does not occur. 

Meanwhile, see these comments on our approach to law reform.