Date posted: 1/12/2016 5 min read

Government agencies grappling to recover growing SME tax debt

Both New Zealand and Australian small businesses owe billions of dollars of tax. But how tough should the taxman get?

In brief

  • In Australia, small business tax debt is growing at about a billion dollars a year
  • The ATO has been issuing record numbers of wind-up notices so people can move on and start again
  • NZ’s IR is trying to get people to act sooner, and prevent and assist SME owners falling into debt

By Tony Malkovic

The media have lashed Australia’s Tax Office in recent months for “getting tough”, “getting aggressive”, “cracking down”, going “on the warpath” and conducting a “blitz” on small business. But there’s nothing small about the amount of tax small businesses owe in Australia and New Zealand.

The Inspector-General of Taxation in Australia, Ali Noroozi CA, reported earlier this year that small businesses owe about A$12.45b in tax — about 60 per cent of all collectable tax.

Noroozi said the ATO had admitted that its previous debt collection approach had been “random and ad hoc” and he made some 40 recommendations to improve tax debt collection procedures.

They’re needed: small business tax debt is quickly getting bigger, it’s growing at about a billion dollars a year.

Chartered Accountants ANZ’s Audit and Insolvency Leader Liz Stamford FCA says Australia and New Zealand have been tackling small business tax debt at two joint workshops this year, one in each country.

“I think it’s recognised in both countries that the tax debt has got a little out of control,” says Stamford.

“I think that’s what both Australian and New Zealand tax offices have been struggling with.

“That was the basis behind running the workshops. It’s an honest attempt on their behalf to see how these issues can be remedied.”

She says small businesses often struggle with cash flow.

Getting on top of tax obligations might be as simple as getting professional help from a CA and striking an agreement to manage the debt.

“So that the Tax Office has confidence they will get the money, and so that it works for the SME as well,” she says.

“Because nobody wants them to go out of business unnecessarily.

“I think that’s where the insolvency practitioner comes in because their skill is in looking at situations where re-structuring might be required.”

She says the risk of businesses shutting up shop is one of the areas highlighted in a recent Productivity Commission inquiry on Business Set-up, Transfer and Closure.

The commission’s draft report has been released and looks at the barriers to setting up or closing a business in Australia, along with the costs of complying with government regulations and bureaucracy.

“One of the reasons entities perhaps don’t look for specialist advice is because, if they do, it may be an indication that the company — if it’s a small company as opposed to a sole practitioner – is trading while insolvent, which has a strict Corporations Act penalty.

“Therefore, they either don’t seek advice or, if they do, they think it might turn into that [trading while insolvent] and the advice is to liquidate as opposed to trying to work it out.

“That was something the Productivity Commission was exploring.”

Fail quickly

There’s also an emphasis on improving attitudes to risk and innovation to encourage start-ups in Australia, and whether risk taking should be appropriately rewarded and mistakes not excessively penalised. It is almost the Silicon Valley approach of businesses being nimble enough to “fail quickly”.

“In fact, that’s what the Productivity Commission was looking at: how can we make the law suitable so that if people aren’t going to make it, it can be recognised quickly with limited impact so they can move on and (perhaps) start another business, which might be more successful,” Stamford says.

It seems the ATO is helping some of those businesses move on. Commissioner Chris Jordan AO FCA has indicated that the ATO had already got the tax debt message.

“We will be taking legal action earlier when warranted,” Jordan warned.

“This means initiating bankruptcy and wind-up action where there is evidence that a taxpayer is insolvent.”

True to his word, the ATO has since reportedly been issuing record numbers of wind-up notices to businesses.

As a profession, we need to be seen as being more helpful, and able to assist in terms of restructuring to turn businesses around rather than insolvency professionals who clean up the mess at the end.
Shaun Adams KPMG Partner

Financial gravity

An insolvency practitioner and Managing Director of Meertens Chartered Accountants in Adelaide, Austin Taylor FCA, says the ATO is on the right track if it’s having to hand out wind-up notices, especially if they’re going to chronic non-payers.

“Absolutely, no doubt about it,” says Taylor, “What’s been happening on the coalface is that quite a few of these winding up applications are being paid up on the steps of the court.

“We had one the other day, somebody found A$300,000 at the eleventh hour and paid it out.

“I think by applying pressure, they’re actually forcing compliance from people who wouldn’t otherwise voluntarily comply.”

He says another consideration is that there are businesses that perhaps don’t deserve to be in business.

“If they can’t pay (their tax debt), there’s one view that they shouldn’t be allowed to run around and still trade, because if they owe tax debt they’ll also unquestionably owe superannuation to their employees for example – which is just reprehensible,” says Taylor.

“I think it’s a good thing that these people who can’t pay are being put out of business.

“If they can’t pay their tax debt then they’re probably not paying a whole pile of other creditors. Ultimately, the laws of financial gravity will intervene and these companies will collapse anyway.

“Well over 90% of people in Australia pay their tax in full, on time.”

The 10% or so who can’t pay, he suggests, need to talk with the ATO.

“They should have a tax agent who can act as an intermediary,” he says.

“They should keep their lodgements up to date. Even if they can’t pay, they should keep lodging the forms — because there’s a direct correlation between people who don’t lodge forms and don’t have tax agents and the difficulties the ATO has in recovering these debts.

“All I can do is suggest people engage with the Tax Office, don’t treat them as the enemy, be open and forthright and I think you’ll get a considered hearing.

“If you’re an SME and you’ve got troubles, you’ll get a decent hearing.”

Above the waterline in NZ

KPMG partner Shaun Adams says New Zealand’s Inland Revenue is on the right track in its efforts to follow up SME tax debt.

“Their success rate in getting agreements in place and doing deals with debtors is reasonably good,” says Adams, a partner with KPMG who leads its restructuring and insolvency team in New Zealand.

“Generally, I think one of the key problems society has — and we see this in a lot of the cases we deal with on a liquidation basis — is there is a view by certain directors, proprietors and others that tax is a burden that they’re not responsible for paying,” Adams says.

“For them, there is no correlation with government providing schools and the like on the back of tax collections.

“So you get a number of people who won’t even contemplate having to pay unless they really are forced to do so.

“And then you get a whole raft of people who are just too busy on a day-to-day basis.

“Think of a hairdresser, or someone who works in the logging industry or whatever. They’re working 10- or 12-hour days maybe, and they have little or no energy to deal with their tax when they get home at night.

“They struggle to raise invoices, they struggle to pay people, with the administrative burden they have they don’t have the energy to deal with it.”

He suggests simplifying NZ’s tax system for small business — perhaps expanding the withholding tax system — and that small enterprises could perhaps pay tax monthly rather than a standard three instalments a year.

There’s another hitch, involving the way people regard insolvency practitioners.

“Unfortunately we’re still stuck with this perception that we’re just gravediggers who bury everything that comes through our door,” Adams says.

“That is far from the truth. But unless we get in there early enough to help, that’s what we end up doing.

“As a profession, we need to be seen as being more helpful, and able to assist in terms of restructuring to turn businesses around rather than insolvency professionals who clean up the mess at the end.

“That’s an industry perception that we have to address.”

Titanic struggle

According to Inland Revenue, New Zealand has some 75,385 SMEs (businesses with a turnover of more than NZ$1m but less than NZ$80m) with a tax debt of about NZ$865.9m — out of a total collectable tax debt of NZ$2.1b.

Like Australia, New Zealand puts in a lot of effort into helping businesses manage their tax debt.

“Essentially we’ve adopted a prevent/assist/recover/enforce model, which has been in place for the past five years,” says David Udy, the Group Manager of Collections at Inland Revenue.

“Over the past couple of years we’ve been moving more and more into the prevent and assist phase,” Udy says.

“So we’re doing a lot more advertising and trying to get people in touch with us a lot earlier, before they have major problems.

“That allows us to work with people to try to get them back on to being compliant and solving any issues with them.”

So is there a blitz on small business?

“The New Zealand Government’s probably not a lot different from the Australian Government in that since the GFC there has been a focus on making sure that all revenue is collected as best we can,” Udy says.

“So over the past four years, the government has given us extra funding to do more work in terms of collecting outstanding tax, so there’s been a concerted effort if you like to address the whole continuum of recover and enforce.

“While we have shifted focus to the early part of the debt cycle, we are still taking action at the recovery and enforcing (stages), and enforcement could include winding the company up at an appropriate time.”

In New Zealand, 3,664 companies were placed in liquidation during 2014-15 according to Insolvency and Trustee Service figures.

Udy says there’s been no demonstrable change in wind-up notices.

“The last time we answered a parliamentary question in that regard, last year, the commissioner’s only the petitioner in about a quarter of all applications for liquidation or receivership,” he says.

Udy says Australia and New Zealand have a strong trading relationship and in some ways the joint tax debt workshops are part of that.

“It’s more about sharing knowledge and experience and where things are at,” he says.

“I would say we are on the same course. We are probably ahead on some of the ‘prevent’ activities, and the Australians are probably ahead of us in some of the analytical work they are doing.”

Michael Turner FCA says there’s an adage that sums up the bulging small business tax dilemma.

“If someone owes you a small amount of money, that’s their problem,” he says. “If someone owes you a large amount of money, that’s your problem.

“That’s sort of the position Inland Revenue is in, I think.”

Keeping afloat

Turner is a taxation partner with Polson Higgs in Dunedin and works with SMEs.

He’s a long-time advocate of SME tax reform in New Zealand and delivered a paper at Chartered Accountants ANZ’s Tax Conference last year looking at how SME tax regimes could be simplified to reduce the compliance burden.

He also attended the joint Australian/New Zealand SME tax debt workshop earlier this year in Wellington.

“One of the key things from our perspective is that Internal Revenue understands business better,” he says.

“That businesses have variable cash flows, the economic times are more challenging now than they have been in the past and just because someone gets into a tax debt doesn’t mean they should get a big black mark forever.

“I think, as a government organisation, Inland Revenue’s slower to see the real world than we as practitioners or businesspeople are.”

He says small businesses sometimes have a head in the sand attitude to tax debt where a small tax debt quickly becomes a big debt, given NZ’s hefty penalty and interest regime: 27 per cent in the first year, increasing to more than 50 per cent in the second.

He says one of the keys to tax debt is to get on to it early, and that tax authorities should shift their thinking on recovery.

“The reality is the debt’s always been there to a degree, it’s just that the government hasn’t needed the cash to run its books,” he says.

“When the government says ‘we’re short of cash’, it seems obvious there’s a big pile of it sitting there that someone should collect and give to the government to spend, and that’s where the focus on tax debt comes in.

“My proposition is that the focus should be there in the good times because that’s actually when you can get the money out of people.”

Tony Malkovic is an award-winning freelance journalist.

This article was first published in the December 2015 issue of Acuity magazine.

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