How Debt Could Affect Your Personal or Business Credit Rating

Categories: Debt, Tax
22 April 2015

Small and medium sized enterprises are the engines that keep the Australian economy moving in the right direction. But doing that means that thousands of business owners, managers and employees work long hours, go the extra mile for their clients and customers, and don’t stop until the job is done.

Of course, the side effect to all of that is a reduced amount of time to read newspapers and keep up to date with the latest news and policy developments that might affect them. One of these possible developments is of particular importance for small businesses, as it may affect your ability to borrow money, and the interest rate you are charged.

Parliament Hearings

The Australian parliament routinely conducts hearings to get a better understanding of specific issues. The topics can range from agriculture to technology stocks to taxation. The aim is to get a broad understanding of an industry and all the participants before any laws are made that might affect them.

Those invited to these hearings include industry professionals, community representatives, interest groups and government agencies, like the Australian Taxation Office (ATO).

Tax Debt

At a recent hearing about government debt and taxation policy, a second commissioner (broadly equivalent to an assistant manager) of the ATO suggested that one way to reduce debt owed to the country was to include tax debts in credit ratings.

The current system keeps all debts between the ATO and the person who owes the debt secret, by law. The proposal would see this information declassified in very specific circumstances, such as when a loan over a certain dollar amount was sought by a customer of a bank.

The Problem

The problem that the ATO is trying to fix is the $18 billion bill of tax debt owed to the government. Of that, over $10 billion is owed by small businesses and enterprises across the country. The problem with this situation is that it places unfair higher burdens on those businesses that do comply with all of their taxation obligations.

A flow on problem is that the government has less money flowing into the national budget, which limits how much can be spent on infrastructure, healthcare and education.

The Current System

Currently, there are no changes to your credit rating, either personally, or for your business, if you have a debt with the ATO. This is unique, as all other debts and balances are assessable by financial institutions who might offer you a loan, through your credit score.

This credit score helps banks, credit unions, and building societies to determine how risky you are as a customer. With this information, they then adjust the interest rate they charge you to ensure they get an accurate payment to match how risky a loan to you or your business would be to them.

The system evolved this way to ensure that those borrowers with good credit histories did not have to pay higher costs because of others in the “system” who were more likely to not repay their loans. That would be like people who live in the high country being forced to pay a fishing levy, even though they did not own a boat or use the waterways.

Business Reaction

Understandably, small businesses and their representatives are wary of the proposal. Their concerns include the fact that some small businesses who had a one-off bad year could have their creditworthiness affected, even though the issues they faced were only short term.

There is also some perception in the small business community that the ATO has become somewhat stricter on small business than it had been in the past.

However, other professional associations like the Institute of Chartered Accountants have been more supportive, arguing that all debt should be treated equally, and that it didn’t make sense to hide one particular type of debt from credit rating assessments.

Learn more about how Scott Partners can help you to stay on track with your payments to the ATO, keep your accounts up to date, or help formulate a realistic business plan, by phoning or emailing our friendly and helpful team today.