- About Us
- What We Do
- Sector Expertise
- Contact Us
Corporate advisory and consultancy in Australia, South East Asia and India.
In my last blog I highlighted the circumstances that have led to the Australian Taxation Office becoming a default bank for many Australian Small Medium Size enterprises. To recap the numbers, in 2009, the ATO issued some public statements that said that they had 706,000 SMEs with a total of $6.5 billion. Since then the level of outstanding ATO tax debt has subsequently increased by 21%, for FYE 2010 and all indications is that it continues to increase.
Because of the size of the debt, this has the ability to derail the economy. This is not just in terms of the businesses that are impacted by their own tax debts but also in terms of their overall stakeholders. By stakeholders I mean the business’ employees, suppliers and the rest of the economy.
So what are some of the ways that Australia can intelligently deal with this challenge that has the ability to be a major source of derailment of future economic growth?
Joining me in this discussion for some additional commentary is Suelen McCallum of dVT Consulting, a chartered accountant and corporate turnaround expert.
Lindley Edwards: I believe that it is important that the ATO come up with what I would term ‘a middle way’ for SME debtors. Clearly these companies have or are experiencing cashflow difficulty and therefore need an opportunity to turn themselves around, with the co-operation of the ATO. Of course this would require that SMEs take the hard courses of action that include changing business models, reducing costs and managing cashflow tightly. To turnaround a business requires that the existing creditors engage in a terms payment arrangement for all past debt, which would need to include the ATO.
Of course the ATO has allowed terms arrangements in the past, but what I am proposing is more extensive as it includes all creditors and requires a holistic and realistic review of the business and what is required under a restructure. Several times lately I have seen businesses with an ATO terms arrangement, but this arrangement is unable to be adhered to because it (a) was not structured with a realistic assessment of the business’s cash position in mind and (b) the business has not done the hard work of restructuring which includes eliminating costs, reducing debtors, managing creditors and reviewing pricing and profitability margins per segment.
I would propose that the ATO do the following:
a) Allow a business to register as one undergoing restructuring; and
b) Give a registered business three months time frame to put in place the restructure. In that time allow the existing payments to go into standstill as long as all tax payments that are current remain up to date; and
c) Register the repayment scheme with the ATO and if adhered to all penalties and interest removed.
Suelen what are your comments on this issue? What comments have you got in relation to both the SME tax arrears and to what I am suggesting?
Suelen McCallum: There is no doubt the ATO is getting tougher – we are seeing more and more SME’s going into formal administration as a result of not being able to pay the tax debts. But is that necessarily a bad thing?
As you have pointed out previously, business often uses the ATO as a lender of last resort, and generally to the detriment of companies who don’t go down that path. In fact, the ATO by not acting quickly enough against dilatory taxpayers, is effectively not only propping up inefficient players in the industry for a very long time, but putting the position of otherwise efficient players at risk. Businesses who don’t pay (and in some cases have no intention of paying) tax liabilities have that much more free cash flow and can undercut compliant competitors. Even if the lag in paying taxes is temporary, it is still a relatively cheap form of unsecured debt, and one that doesn’t require the borrower to jump through loan application hoops!
Let’s keep in mind that the businesses we are talking about are SME’s and in particular micro businesses – and for many of those businesses finances are often just too difficult. This is not helped by the fact that the business owners often don’t have the training and qualifications to understand all the processes, and their financial advisors are usually too preoccupied with compliance work and aren’t able to work with the business on their day to day needs. To put it bluntly, business is doing what they need to do to survive from day to day perspective, but doesn’t understand the concept of working capital and how it affects their viability. This is not limited to unprofitable businesses – even those doing well may use the ATO’s “easy credit” from time to time when cash flow issues arise. Cash flow could be just as a big an issue for profitable companies as it is for unprofitable ones.
So the best way is to look at realigning or restructuring inefficient businesses to get them away from this addiction to “easy credit”. We have to make it easier for them overall so that they continue to contribute positively to the economy.
My comment really has two arms – firstly, why are businesses inefficient (that’s mainly because they are undercapitalised and poorly managed) and, secondly, why are they able to use the credit facilities so easily (and that’s because the ATO has a critical lack of due diligence in making these business accountable on a timely basis).
Overriding these reasons, is also the clear fact that the tax and accounting burden on SME’s are disproportionate – business is expected to be able to correctly account for and substantiate its transactions regardless of their size, and this comes back to the resources that are available to small businesses. Small business already contributes to taxation revenue in various ways, for example PAYG, payroll tax, GST and a host of other indirect taxes, but not as much as larger business – so in this way they are also burdened disproportionately with compliance issues and not advantaged by the accounting system which better suits big business.
So how can these issues be resolved? Small business could acquire this knowledge and skills, but often don’t have the resources (or time) to do so, and it becomes a practical burden. Experienced external advisors are crucial in helping small business comply with their obligations and run their businesses efficiently, but not every business can afford to have those advisors on tap. The rule of diminishing returns then comes into consideration.
Another option might be for small businesses with revenues of less than $5 million, reverting to accounting on a cash basis, not accruals. Of course this will pose some additional questions, like how do you treat creditors and movements in stock? Do we maybe have different tax rates for cash treatment, or do we tax on the basis of turnover or cash left at the end of the year? But I believe it’s an idea well worth exploring.
We keep coming back to cash flow, and for good reasons. Understanding cash flow and the effects it has on all business is crucial. We will be discussing some of the major aspects of cash flow accounting and ideas for effective management in our next blog post. The question is, does an all encompassing tax and accounting system work for all business or do we need to help small business by becoming more realistic as to the information they can provide and the way they are taxed?
What do readers believe could be some of the solutions that the Government should consider?
About the authors:
Suelen McCallum is the CEO of dVT Consulting (www.dvtconsulting.com.au) a member of the de Vries Tayeh group. dVT Consulting specialises in corporate strategy and turnaround management, particularly in the SME sectors, as well as due diligence, litigation support and business succession.
Lindley Edwards is the Group Managing Director of AFG Venture Group (www.afgventuregroup.com) and its various subsidiaries. The Group undertakes corporate advisory work which involves merger, acquisition, divestments, strategic consulting, fund raising and licensing for its client base of public and private companies based in Australia and in Asia. Lindley also is a non executive director of Asialink, Asia Society and University of Western Sydney Foundation, is a trustee of the Centennial Park and Moore Park Trusts and is a committee member of the Co-operative Research Centre Program.