Who do you think is the biggest low doc lender to business in Australia? I will give you a clue – its main line of business is arguably the world's second oldest profession, and it is now being spruked by Kevin Rudd. Look away now and think – who could it be? Did you guess “the ATO”? If you did, I think you are spot on.
Here is how ATO Bank works: as an employer, you have certain statutory financial obligations. One of those is to withhold GST, your employees super and income tax, and to remit this money to the ATO and super fund. If you have monthly sales of say, $200,000 and a payroll of say, $100,000, you could easily be accruing $50,000 in these statutory commitments every month. After a six months (not uncommon according to my insolvency contacts) you can accumulate yourself an nice little overdraft of $300,000. Sorry, an unsecured overdraft, with no application process required, and no bothersome business performance kpi's attached.
Eventually the ATO will get on to you, but that’s OK. As long as you don't have “form” for breaking arrangements, they will agree to a payment plan. Sure they might charge penalty interest (negotiable), but what a great way to fund business growth (disclaimer – my day job is working as a cash flow lender, so forgive me for working over my largest competitor).
Why is this a problem? For starters, it’s not fair. I have seen businesses struggle with their cash flows while their competitors power on courtesy of money “borrowed” from ATO Bank.
And, it can be a problem in the event of insolvency. The ATO is usually much better informed as to the financial position of its debtor (the business) than the other unsecured creditors. Particularly if it has demanded financial information before agreeing to a payment plan. The proof of this statement is the fact that it is not uncommon for liquidators to sue the ATO for payments it has received under tax arrangements deemed to have been “preference payments”. Payments received by the ATO when it knew, or should have known, the business was insolvent.
Which brings me to the Prime Minister's invitation to small businesses to ask for payment arrangements from the ATO. My view is that if the PM wants to get in to the banking business, then he should open a bank – staffed with people skilled in assessing loans and managing repayments. I know that the current financial environment is dire for SME's – I have been writing about that for weeks. Many good profitable businesses will strike trouble through misfortune and absolutely deserve the ATO's clemency and support. Occasionally businesses however become insolvent because they are not profitable and should succumb to the law of the business jungle. The ATO will soon have a queue outside its door a mile long of small business looking for an ATO Bank loan. Is the ATO equipped to sort the morally eligible from the ineligible?
This article first appeared on www.businessspectator.com
