The revelation that small businesses owe $16 billion in taxes was staggering. But how big does this blowout have to get before the government acts on the factors causing SMEs to fall so far behind?
The ATO revealed the outstanding tax liabilities of various groups as part of its annual report to the government for the 2018–19 financial year.
Small businesses were by far the most indebted, collectively owing the Tax Office $16.5 billion, with more either in dispute or tied up in insolvency. And almost one in five — more than 800,000 of them — had entered into payment plans during the financial year to try and pay off these debts.
Accountants in particular talk about some businesses relying on the “unofficial ATO bank” and, at first glance, such a huge tax debt owed by Australian SMEs would seem to justify this notion. And perhaps it’s true of some businesses. But there are (at least) two core factors at play that make such a belief about SMEs as a whole quite unfair and short-sighted.
Asking for help can bring more trouble
Firstly, there are intense commercial sensitivities around payment plans for outstanding debts. Any business facing cash flow problems is going to be understandably reluctant to seek out payment plans with suppliers. This is effectively admitting to the open market that, “Hey, I’m struggling, I’m in financial difficulty”.
Any business on the receiving end of such a request — unless it is a trusted, well-established supply partnership that has been through peaks and troughs before — is going to have serious question marks about whether to continue supplying goods to a struggling client.
Which is why seeking payment plans for tax debts instead becomes a naturally more attractive option. It’s a deal brokered between the individual business (and perhaps their accountant) and the ATO — no one else necessarily knows about it. So, the business can keep trading as normal, and (hopefully) get back on track financially.
Secondly is the most basic issue: why is the business struggling to pay the tax bill in the first place? Sadly, bad management does happen, as do unforeseen external factors that can warrant hardship provisions: illness, natural disasters etc. Also are one-offs that can legitimately warrant a payment plan for a business that has otherwise regularly met its obligations on time.
But to what extent are late payments contributing to cash flow problems within the nation’s small and medium businesses?
Much of the corporate sector has clearly been leaning — and heavily so — on the “unofficial small business bank”.
They have done so by insisting on payment times that are well outside of what is fair and reasonable. Three months, six months or longer just doesn’t cut it.
I can’t tell you the number of times I’ve heard of well-known corporations — even ones that publicly spruik themselves as being friends and supporters of small business — taking months to pay their suppliers.
Even some of the big media companies and their affiliates reporting on these tax debts are themselves (or at least have in the past been) part of the problem, taking well over 30 days to pay freelance contributors.
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has explored this very issue, and received reports of countless iconic brands bleeding their suppliers dry by failing to pay in a timely fashion.
Its official report into payment times, published in March this year, confirmed that this remains a major problem for many SMEs — and that late payments “accounted for a 43 per cent downturn in cash flow”.
Nine corporations flatly refused to even provide copies of their standard form contracts as part of the inquiry.
Add to that the recent assertions about reverse factoring, where corporates effectively force SMEs to cough up just to have their invoices paid in a timely fashion.
So, how can SMEs realistically meet their tax liabilities — on top of employee wages and super, essential operational costs like utilities and so forth, which surely have to take priority — with such a drag on incoming revenues? If the money doesn’t come in, it simply can’t go out again. It’s blood out of a stone.
We all ultimately pay the price
While SMEs have the most visibility and direct channel of owing tax dollars, surely the corporate sector has at least indirectly to accept part of the responsibility for this shortfall in the public purse. And as a result, the nation loses out.
Think what that $16.5 billion could pay for...
Sydney’s NorthConnex motorway, which is due to open mid next year, cost around $3 billion. Another five of those, with change to spare. Or the already opened Royal Adelaide Hospital, which reportedly cost $2.4 billion to build. So, almost seven of those.
Regulation is rarely a word that the business community, and SMEs in particular, like to hear. But it’s about time — indeed, well overdue — we had an end to the scourge of late payments on SMEs, and the damaging flow-on effects this has for the wider economy.
Time and again, business owners tell me they don’t want special treatment. They just want a fair go.
Surely, a $16.5 billion hit to its revenues should be worrying for any government. Legislative action on late payments — alongside meaningful tax reform — to create a fairer competitive playing field for SMEs would be a huge win for business owners, for government coffers and ultimately the country as a whole.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.
Ask the Experts: Does automation stack up financially?
By Christopher Overton
Opinion: How bad do things have to get?!
By Adam Zuchetti
Business lessons from the All Blacks
By Steve Stanley