A report by the Inspector-General of Taxation into the debt collection
practices of the Australian Taxation Office toward small business
provides an insight into one of the more notable financiers of the
business sector, and also helps raise questions about credit quality
trends in a segment of keen interest to banks.

The
report, published on Tuesday, suggests that a surprisingly large
proportion of small businesses is either in default to the Australian
Taxation Office over ageing tax debts, or paying off debts under a
payment plan.

And the scale of these debts is $6.9 billion –
significantly larger than the business banking portfolios of some
second tier banks, and larger than the unsecured loan portfolio of some
big banks.

It is all too easy for any small business that’s too
slack, too crooked or too incompetent to use the Tax Office as their
banker and supplier, in effect, of working capital. The interest rate
charged by the ATO is 12.6%, which is high by the standard of some
overdraft and unsecured personal loan rates charged by banks.

The
headline of this article states that eight per cent of SME businesses
are in default to the ATO on their tax debts. That ratio is true both
of micro businesses, and of SME businesses.

The statistical
highlights of the Inspector-General of Taxation into the debt
collection practices of the Australian Taxation Office include:

  • Of “collectable tax debt” from small business sector of $6.69
    billion at June 2004, only $1.25 billion of this was covered by a
    payment arrangement. Another $1.1 billion had been subject to payment
    plans, but the ATO’s creditors defaulted on those plans.
  • Of the approximately 960,000 small businesses debt cases with the
    Tax Office as at 30 June 2004, only approximately 89,000 were in
    payment arrangements.
  • Of these, 84,000 were in the micro business segment – defined as businesses with annual turnover of less than $2 million.
  • Another 5,000 reported turnover of between $2 million and $100
    million (and thus includes plenty of businesses in what banks would
    regard as the middle market).
  • Another 105,000 small businesses had defaulted on payments
    arrangements (that is, business that had failed to honour prior payment
    plans with the Tax Office fully).
  • 51,000 small business taxpayers owed the ATO more than $25,000
    (the threshold at which taxpayers can work out payments plans at
    discounted interest rates with minimal dealings with ATO officers). The
    average tax debt of businesses in this category was $78,800.

The Tax Office hardly ever takes the big stick to businesses that don’t
pay their debts. The Tax Office only initiated bankruptcy or wind-up
proceedings in 771 cases, with 273 bankruptcies and 478 wind-ups, or
less than 0.5 per cent of cases.