I started my year with a scary experience. While ocean swimming early one morning with friends beyond the breakers, I lost my form — and then my nerve. With my friends out of sight and shouting range, I decided to make my way back to the safety of the beach. However, to do so meant battling through a churning, dumping swell. I felt totally out of my depth.
When, finally, I made it unsteadily to the shore, I was shaking, heaving and questioning my choice of hobby. Fortunately, it was just one bad day at the beach for me. I could chalk it up to experience and I was back in the water two days later. I am one of the lucky ones.
While listening to a recent podcast on Accountants Daily about small business tax debt, I had a flashback to that experience for an entirely different reason.
Adam Zuchetti reported that a staggering 20 per cent of Australian small businesses are currently on an ATO payment plan. That’s some 800,000 small businesses who are financially overwhelmed, many of whom are drowning in debt.
One of the more shocking revelations from the piece is the comparative level of SME (small to medium enterprise) tax debt when compared to corporate Australia. The former cohort owes a whopping $16.5 billion, with $1 billion contested. Meanwhile, their corporate counterparts owe just $1 billion and are locked in disputes for six times that amount.
This points to the glaring discrepancy in resources between the two segments and the ability of the big guys to fight back, while the little guys are often forced to roll over and get carried out to sea. Moreover, it hints at the ongoing role corporates play in stretching payment terms to SMEs, thereby contributing to SMEs failing to meet their tax commitments.
It also highlights the pervasive fear of retribution small businesses feel towards the ATO. This fear is now exacerbated by harsher penalties for missing tax payments, Single Touch Payroll and new laws allowing the ATO to disclose tax debts to credit bureaus as part of comprehensive credit reporting. You may even have read recent press reports of harsh treatment on calls by outsourced “assistants”.
Daily, we also see a lack of understanding and education about the role the ATO does provide in easing the burden of tax debt — such as payment plans.
Often SMEs mistake this for some form of back-door, inexpensive funding, which, of course, it is not.
The ATO is not a quasi-bank. This cocktail of fear, misunderstanding and concern about being sucked under, contributes to murky and scary waters for SMEs who are struggling to meet their tax commitments. It can get in the way of proactively putting in place a plan to better manage debts by matching asset and liabilities, and using recurring income to service longer-term, fully amortising debt.
I have started several small businesses myself and empathise with how easy it is to go a little off course and get sucked in out of your depth. Suddenly you are fighting the rip, rather than working your way clear. Progressively exhausting yourself and depleting your resources, unable to find a route to swim clear. We understand that an ATO payment plan is a sign of a struggle and that the struggle is real for small business.
Sometimes small business just needs someone to give them a break; throw them a life ring or give them financial support until they can catch their breath.
There’s no shortage of new fintech lenders who have plunged into the market, particularly in the vacuum left by larger lenders. Some offer fast access to cash, but beneath the surface their interest rates are so high they will inevitably cause an already weakened swimmer to drown under the additional debt burden.
Have they helped the problem? Almost certainly some have, certainly in terms of addressing short-term cash flow needs.
Are they solving the problem? Not really. The core issue of late payments will have to be addressed by the government and regulators in due course.
The ATO will need to do more to educate small business about how they can help. In the meantime, the role of advisory services and prudent lenders in educating their clients about funding their businesses in a sensible way is more critical than ever.
As we swim out and greet 2020, will you be swimming responsibly between the flags or are you already a little out of your depth?
Tips for small businesses and managing finances
Ensure you have a bookkeeping solution in place that suits your purposes. Ask a finance professional for help if you’re unsure of what product to use.
Decide on prudent payment terms and types. Invoice customers in a timely way and be clear on payment terms. Setting up a direct debit or other automatic payment system can minimise the need to chase payments.
Prepare a budget and manage your cash flow. Forecast and track your income and plan your expenses so you know you will have the money to pay your bills.
Don’t go it alone. Seek out advice and support from an experienced business adviser.
Who can help?
The ATO website has a raft of tools and resources for small businesses to help them manage their tax and super obligations including payment plan estimators. They have also created an excellent Tax Time Toolkit for small business featuring a series of fact sheets.
Specialist lenders can assist by providing access to funding for small business using recurring revenue as security.
There is also no shortage of business communities and networks on LinkedIn.
Jeff Zulman, founding managing director of TrailBlazer Finance, a specialist financial services lender
Maja Garaca Djurdjevic is the editor of My Business.
Maja has an extensive career as a journalist across finance, business and market intelligence. Prior to joining Momentum Media, Maja spent several years unravelling social, political and economic intricacies in Eastern Europe.