ATO to Crackdown on Small Business Delaying Tax Payments to Prop up Cash Flow

The exterior of the Australian Government Taxation Office in Sydney, Australia, on May 28, 2012. AAP Image/April Fonti

The Australian Taxation Office (ATO) has warned that it will take action to address an increase in the number of small businesses delaying tax and superannuation payments to prop up their cash flow.

The warning comes as companies struggle in the current economy with the country seeing the highest rate of business closures in the past four years.

In a speech to the Financial Review CFO Live summit on Nov. 28, ATO Second Commissioner Jeremy Hirschhorn provided an update on the tax situation of public and multinational companies in Australia while revealing what areas authorities will focus on in 2024.

The second commissioner stated that small business now accounted for two-thirds of the $50 billion (US$33 billion) of collectible tax debt on the ATO’s record.

After the ATO resumed normal debt collection activities following the COVID-19 pandemic, the tax authority noticed a change in the priority of paying tax and super among small businesses.

“We are concerned with an increased reliance on unpaid tax and unpaid super to prop up the cashflow of some businesses,” Mr. Hirschhorn said.

The second commissioner warned that the ATO would actively go after these businesses.

“While we are seeking to engage with these businesses, we are also taking action to protect employees, clients, and customers,” he said.

At present, the ATO can disclose debt information of businesses that do not engage with the ATO and meet tax criteria to credit reporting bureaus.

Such action will make debt visible on the companies’ credit rating checks, which could negatively affect their ability to obtain loans and conduct business.

Since July 1, the tax authority has reported over 10,500 businesses with overdue tax debts of at least $100,000.

To boost small businesses’ compliance, the ATO has plans to establish a “digital-first ecosystem” that moves tax reporting (or payment) closer to actual payment dates.

Sharp Increase in Businesses Closing Down

According to data from the Australian Bureau of Statistics, 386,392 businesses closed in the 2022-2023 financial year, up from 305,085 in 2021-2022, and the highest level recorded in the past four years.

Meanwhile, the number of new businesses entering the market dropped significantly from 472,731 in 2021-2022, to 406,365 in 2022-2023.

People eat at a beach restaurant in Melbourne, Australia, on Jan. 26, 2023. Alexi J. Rosenfeld/Getty Images

Micro-enterprises (with one to four employees) were the hardest hit, experiencing a drop of 25,292 businesses, followed by small to medium enterprises (with 20 to 199 employees) at 5,204, and large enterprises at 362.

Among the jurisdictions, Victoria was the only state to suffer a net loss of enterprises (7,606), as business exits surpassed business entries.

Luke Achterstraat, the CEO of the Council of Small Business Organisations Australia, said small businesses were struck by a “perfect storm” of high input costs caused by inflation and rising interest rates.

“These figures really emphasise the reality of how difficult it can be for businesses, particularly small businesses, to remain viable and to remain open to trade,” he said, as reported by news.com.au.

ATO Continues Crack Down on Tax Avoidance

Mr. Hirschhorn said 52 percent of the top 100 taxpayers in Australia had an overall high assurance rating in 2023, which indicated that they had provided the ATO with objective evidence that they were paying the right amount of tax.

However, the second commissioner noted that some large businesses and multinationals still engaged in profit shifting and tax avoidance.

Mr. Hirschhorn then revealed that the ATO was on track to hire a 3,000-strong tax avoidance task force to scrutinise compliance.

“The ATO now has a proportionately bigger large business division relative to the size of the economy than almost any other tax administration,” he said.

As such, Mr. Hirschhorn warned that profit shifters and tax-evading companies would not escape from the ATO’s investigation in the coming period.

“Our ability to invest our resources to scrutinise the affairs of these businesses only intensifies as more and more taxpayers demonstrate high levels of compliance,” he said.

“For businesses operating in this space, it’s not a matter of ‘if’ you will be subject to investigation, rather when.”