Understanding the implications of tax debt is crucial, especially for startups that are still trying to solidify their position in their industries. This guide discusses how tax debt, particularly with the Australian Taxation Office (ATO), can influence your credit score and borrowing power, impacting your small company’s financial future.
Key Takeaways of How Tax Debt Affects a Startup’s Credit Score
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ATO’s Policy on Disclosure of Business Tax Debts
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The ATO can report a company’s business tax debts to CRBs, affecting its credit ratings. Key criteria include having an ABN, tax debts over $100,000 overdue for more than 90 days, and lack of engagement with the ATO. Exemptions apply for businesses with active IGTO complaints or in exceptional circumstances.
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Consequences of Tax Debt & Credit Reporting for Startups
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Tax debt reporting can lower a startup’s credit score, reducing borrowing power, deterring investors, affecting supplier relationships, and impacting long-term financial stability. Understanding ATO’s reporting practices is crucial for compliance and strategic financial planning.
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What Can Startups Do?
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Engaging with the ATO can prevent tax debt reporting. Affected businesses can seek credit repair services or explore financing options like tax debt loans or unsecured business loans.
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ATO’s Policy on Disclosure of Business Tax Debts
The ATO has the authority to report certain business tax debts to credit reporting bureaus (CRBs) like Equifax. This measure aims to encourage businesses to engage with the ATO to manage their tax debts and avoid having them disclosed & impact their credit ratings. Here are the key points of ATO’s policy for reporting business tax debts:
- Businesses with an Australian Business Number (ABN) (and not classified as an excluded entity) are subject to this policy.
- Businesses with accumulated tax debts of at least $100,000 overdue by more than 90 days, without active engagement with the ATO to manage the debt, may be reported.
- Businesses with an active complaint with the Inspector-General of Taxation Ombudsman (IGTO) regarding the intent to report tax debt information are exempt.
- The ATO may consider not reporting tax debt information in cases of exceptional circumstances outside a business’s control, such as family tragedy, serious illness or impacts of natural disasters.
- Tax debt information will be removed from a CRB’s credit report once the business no longer meets the reporting criteria, either by paying the debt in full or effectively engaging with the ATO to manage the debt.
Businesses effectively engaging with the ATO to manage their debts will not have their information reported, even if the debt is $100,000 or more. What does effective engagement mean? It may involve having a tax debt payment plan and complying with its terms, applying for release from the tax debt, having active objections or reviews against taxation decisions related to the debt or having an active complaint with the IGTO.
What can you expect from the ATO if you have at least $100,000 overdue tax debts by over 90 days and not engaging with them? The ATO will send a written notice to disclose your business’s tax debt, outlining the intent, criteria met, information to be reported, steps to avoid disclosure and a 28-day window to take necessary action.
Consequences of Tax Debt & Credit Reporting for Startups
Credit Score Impact:
Less Borrowing Power:
Lack of Investor Confidence:
Investors often assess a small company’s financial health before committing funds. A poor credit score due to tax debt can deter potential investors, affecting the company’s ability to raise capital.
Impact on Supplier and Partner Relationships:
A good credit score is essential for maintaining trust and securing favourable terms in business collaborations. Tax debt affecting credit scores can strain relationships with suppliers and partners or result in them refusing to supply on any form of credit terms.
Impact on Long-term Financial Stability:
Understanding and managing tax obligations effectively is crucial for long-term financial stability. Startups that are proactive in handling tax debts can avoid future financial complications.
Regulatory Compliance Issues:
Awareness of the ATO’s reporting practices ensures that small and new companies remain compliant with tax laws and regulations, avoiding potential legal issues and penalties.
Impact on Strategic Financial Planning:
Knowledge of how tax debt affects credit reporting helps startups in strategic financial planning. It enables them to make informed decisions about debt management, investment opportunities and business expansion.
What Can Startups Do?
If you want to mitigate the impact of ATO business tax debt on your company’s credit rating, the first thing you should do is contact the agency. As mentioned, your business debt may not be reported if you’re engaging with the ATO. Moreover, the agency may be willing to work with you to build a payment plan that allows your startup to address its tax debts gradually.
Has your business’s credit rating already been affected? Consider working with a credit repair agency to help improve your company’s financial situation. You also have several options to pay down your tax debts. These include acquiring a tax debt loan, an unsecured business loan or any fast business financing solution. The right financing solution will help your startup pay tax debts and plan for future expenses.
Once your business pays its tax debts in full or effectively engages with the ATO through a payment plan or other viable ways, your startup’s tax debt information will be removed from a CRB’s credit report. Just be sure to implement strong financial management practices moving forward to keep business tax debts from recurring.
Need expert guidance in securing tax debt loans in Australia? Contact darkhorsefinancial.com.au today. Our finance experts are here to point you in the right direction.
Dark Horse Financial neither provides tax advice nor is this page intended to provide advice of any kind. This page is intended to summarise general information only that is available in the public domain. The information on this page is subject to change and should not be relied upon for any reason or purpose.
You should always consult a professional before making any decisions that could impact you or your business or relate to tax information.
