Do Tax Debts Affect Your Credit Rating?

Previously, it was an offence punishable by 2 years imprisonment for a tax officer to disclose protected information, such as information relating to a particular taxpayer’s tax debt. There was no exception in the legislation which allowed the disclosure of tax debt information to credit reporting agencies, and as such, tax debts were not factored into the credit ratings of businesses.

According to the government, there was some evidence that this discrepancy allowed businesses to prioritise other debts ahead of tax debts leading to a depletion of government coffers. It is hoped that putting tax debts on an equal footing with other debts will act as an incentive for businesses to make timely payments of their tax debts. Alternatively, it might encourage businesses to engage with the ATO to work out a debt payment solution and avoid having their credit worthiness or ability to obtain finance affected.

The minister for Revenue and Financial Services, the Hon Kelly O’Dwyer said:

“Improving transparency by making overdue tax debts more visible will provide businesses and credit providers with a more complete assessment of the creditworthiness of a business”, which will also “reduce the unfair advantage obtained by businesses that do not pay overdue tax debts, and encourage businesses to engage with the ATO to manage their tax debt”.

The proposal only applies to businesses that meet the following requirements:

• registered on the Australian Business Register;
• has a tax debt and at least $10,000 of the debt is overdue for more than 90 days;
• is not a deductible gift recipient, not-for-profit entity, government entity, or complying superannuation entity;
• is not effectively engaging to manage their tax debt; and
• the Commissioner of Taxation has taken reasonable steps to confirm that the Inspector-General of Taxation does not have an active complaint from the entity.

Businesses are not considered to be effectively engaging to manage their tax debt unless the following conditions are met:

• has entered into an arrangement with the Commissioner of Taxation to pay their tax debt by instalments;
• has objected against a taxation decision to which the tax debt relates; or
• has applied to the Administrative Appeals Tribunal for review of, or appealed to the Federal Court against, a decision made by the Commissioner of Taxation to which the tax debt relates.

As an additional protective measure, any disclosures to credit rating agencies will also only be permitted if the Commissioner of Taxation has notified the taxpayer at least 21 days before the proposed disclosure. The notice will set out the steps for the business to take to be excluded from disclosure, including ways to manage their tax debt. However, the conditions of notifying the taxpayer at least 21 days before the disclosure and consulting with the Inspector-General of Taxation do not apply for disclosures to update, correct or confirm information previously disclosed. Even though this proposal will not apply until the legislation is passed, it may be wise to get on top of any tax debts now.