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Accountants' SME clients with tax arrears should refocus where their cash flow is going to get the tax man off the table during an apparent garnishment crackdown.
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Garnishment crackdown: get the taxman off the table
14 November 2014
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Banks are noting an increase in the number of garnishee notices they are receiving from the ATO in recent months, which makes dealing with outstanding debts even more of a priority for Australian SMEs.
At FactorONE we have certainly noticed an increase in the usage of factoring to overcome the threat of garnishments and to help solve cases where garnishments have been issued.
Section 260–5 of Schedule 1 of the Taxation Administration Act 1953 allows the ATO to make garnishments against parties that owe money to the ATO. This can include:
- Banks
- Other finance institutions
- Debtors of a business
- An employer
- Another party such as the purchaser of a property This action is clearly an aggressive stance, as it creates a great deal of anxiety and confusion for the tax creditor and puts the party who has received the garnishment in a difficult situation.
The reported increase in the number of ATO garnishment notices may be part of a cycle or it may be a sign of a more aggressive stance being taken by the ATO.
Given the uncertainties around economic growth, this is clearly a concern for any business already under pressure.
There are steps SMEs and their accountants can take to handle the situation to avoid – or best handle – a garnishment situation.
Many SMEs unfortunately fail to lodge BAS and IAS returns because they have insufficient funds to meet the consequent payment obligation. On time lodgement is essential, as it makes subsequent negotiations with the ATO much easier.
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So, businesses unable to meet tax commitments must lodge their statements on time and should engage specialised tax experts to interact with the ATO in order to arrange a repayment program.
Once a repayment program is established it is highly unlikely that a garnishment will be issued if the repayment program is up to date.
Any business must always look at ways to enhance cash flow and ensure that there is a sensible and organised plan in terms of which creditor receives priority payment.
Negotiating longer payment terms with suppliers and being more proactive in debtor collections are two basic, but effective ways to enhance cash flow and keep the ATO onside.
Invoice finance, or factoring, is the most effective and efficient way of freeing up cash flow. Given the ATO's current approach it may be timely for those businesses out there with tax arrears to consider factoring.
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