Tax arrears to impact credit scores

For the first time, business ATO arrears may be reported to the credit agencies (Dun & Bradstreet, Veda, Experian etc) as soon as July 2017.

This is new

As and when this happens, a business’s credit rating will take a major hit. In turn, life will be much more difficult for that business, as credit scores directly impact the availability and cost of funding, and supplier terms, to name just a few (pretty important) things.

Why now?

As of June 10, 2016, tax debts to the ATO had reached $19.2 billion, about two-thirds of which was owed by small businesses. Beyond the big banks, Moula thinks that the ATO is probably, inadvertently, the largest lender to small businesses in Australia. Clearly, the ATO wants their money back, and are putting pressure on small businesses to reduce their tax arrears.


Within the Mid-Year Economic and Fiscal Outlook (MYEFO), Treasurer Scott Morrison announced that as of July 1, 2017, the Australian Tax Office can disclose the tax debt information of businesses to credit reporting bureaus. This measure will initially only apply to businesses with Australian Business Numbers and tax debts of more than $10,000 that are at least 90 days overdue. To their credit, the ATO has also stated that they will not disclose the tax information of businesses that have engaged in some form of repayment plan.

1. How will arrears be reported?

There are three ways that tax arrears might feed into the credit bureaus:

  1. as a trade payment that is shown as ageing/deteriorating each subsequent month; moving into
  2. a collections action, where the ATO will typically outsource to collections agencies; and then
  3. final attempts of recoveries pursued through the courts.

While court action is well understood to feed into credit bureaus, fewer people are aware how trade payments data and collections data are used by the credit bureaus.

2. How will it impact business credit scores?

The answer is significantly and negatively.

While credit bureaus do not publish how their scores are calculated, it is very clear that deteriorating trade payment data (ie. ageing payables) and derogatory events (collections, court actions, judgements etc) will materially reduce credit scores. These inputs are some of the strongest indicators of default and delinquency (and that’s what a credit score is trying to predict).

So what do we do about it?

Forewarned is forearmed.

Accountants and financial advisers are well-placed to alert business owners that have used ‘ATO Bank’ as a line of funding to be aware of the implications going forward.

Some of the things that advisers can help small businesses do to deal with the issue are:

  • get tax submissions up to date;
  • set up a payment plan with the tax office (and stick to it);
  • identify options to refinance ‘ATO Bank’ debt

These initiatives should be put in place in the near future to minimise the risk of credit score reduction due to tax arrears – an impact that can remain on credit records for months or years.

What we think

It is not in the interest of the ATO to blow up good businesses. We think that come July 2017, the worst offenders – businesses that have had material outstanding tax arrears for a long period of time and have shown little effort/interest in dealing with the issue – will be the first to be impacted by these credit reporting changes.

Going forward, we expect the ATO’s actions will be measured in this reporting initiative, and those small businesses which show tax discipline (including sticking to payment plans) will be treated more leniently than those businesses that try to game the system and get relatively cheap financing from the ATO Bank.

Need assistance with financing your business?

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Article courtesy of Moula Money.