16/09/2010 - 00:00

Soft stimulus leaves a sting in its tail

16/09/2010 - 00:00

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An unseen form of stimulus was a soft and flexible tax office, but that is changing this financial year.

What the government giveth, the government can taketh away.

Much of the past election campaign was dominated by debate on the economy and, specifically, the impact of the federal government’s $43 billion stimulus package, which Labor claimed saved 200,000 jobs.

From the early days of that stimulus, I have been critical of the both the scale and direction of it. I suspect that less than half of what was spent was required to keep the economy ticking over and I believe the government missed an opportunity to deliver on its election promises, instead it found new and wasteful things to throw stimulus at.

Nevertheless, there was spending and the economy sailed through the global financial crisis – a correlation that is indisputable.

What isn’t often discussed is the soft stimulus – bank and tax office leniency – which also took place during this period and which is gradually unwinding.

Many readers might question my view that banks were lenient because new finance or refinancing became very tough and remains so. However, there is plenty of evidence that banks have resisted putting many existing clients into receivership when they breached loan to value ratios.

Clearly banks were acting in their own best interest in resisting the urge to foreclose in areas such as property development because of the resulting price impact (which can trigger further LVR covenant breaches) and bad PR. This is especially the case with federal government guaranteeing their deposits and stopping the possibility of a consumer run on the banks.

Anyway, no matter how dubious my call on that is, the Australian Taxation Office has definitely taken a softly-softly approach during this period, especially for small business.

In 2009, the federal government’s commissioner of taxation Michael D’Ascenzo announced several measures aimed at providing immediate assistance to viable small businesses experiencing genuine short-term difficulties during the global financial crisis. These included a 12-month interest free payment arrangements and the deferral of activity statement payment due dates.

“There are currently almost 100,000 interest free payment arrangements in place worth $1.5 billion and over 6,600 deferrals of activity statement payment due dates have been granted,” Mr D’Ascenzo said in July this year.

The numbers also show that ATO-initiated bankruptcies dropped from nearly 6 per cent of the national total in 2008 to just 2 per cent last year.

This makes some sense. The GFC was an aberration so why put small business people and their employees on the dole queue just because they have a short-term cash flow issue. Some might suggest that a deferment of $1.5 billion in tax debt was a far cheaper way of saving jobs (at least 100,000 the numbers would suggest) than splashing much more to allow people to by plasma TVs.

But, global conditions notwithstanding, the GFC has passed and we are already in an environment of upward interest rates and falling unemployment. If the Reserve Bank and federal government can call the crisis over then so can the ATO. So expect to see insolvencies (see graphic) and bankruptcies to continue at as high a level as they are.

And that is what I am hearing. Insolvency experts at the SME level say they are expecting another busy year, partly because the tax office is ramping up activity at the small business level to scoop up those who, nearly 18 months after the GFC, don’t appear to be able to pay their debts.

In July, the tax commissioner hinted this was the case. He said that despite saying that the leniency policy was extended for 12 months, there’s a sting in the tail for those already taking advantage of it.

“In balancing our assistance and support for those who are willing to engage with us, we are taking firmer action with those taxpayers who demonstrate an unwillingness to work with us, have escalating tax debts or who are unable to meet their outstanding tax or superannuation guarantee debts,” Mr D’Ascenzo said.

Those few words suggest to me that anyone who has been a beneficiary of a soft approach from the ATO during the GFC amnesty must now pay up or go under.

And that is exactly what is now taking place. For the past six weeks, my sources tell me, the ATO has got busy sending cases to insolvency experts and lawyers that specialise in this type of work.

The ATO traditionally gets busier in the first quarter of each financial year because that is when it has full year accounts to review, but this time it is apparently much more hectic than last year.

The fact that an election is out of the way may also be part of the logic, although it may be unfair to suggest the ATO delayed action until it wouldn’t impact on the vote.

It is equally plausible, that the impending wave of ATO action was just one more reason to bring the election forward. I guess we’ll have to wait and see how big it is.

The tax issues that arise are the obvious ones: PAYG (including superannuation) and GST obligations that arise in the normal course of business.

Exacerbating this is the fact that bank leniency since the GFC has not extended to helping SMEs cover tax debts. Where, I hear, banks would readily provide finance to meet tax obligations two years ago, these days such a request from a small business is not only likely to be turned down but may also flag the client as a high risk.

One area that is also experiencing tax angst, from what I hear, is the unusual impact of GST on SME property developers. Not only are many of the property developers clients finding it hard to finance loans to settle on commitments made pre-GFC, but there is also a special tax issue linked to GST and falling property values.

The GST gives property developers a cash-flow bonus during construction because they received the GST back on their inputs without having any to pay until the settlement.

The problem in this instance is property development is particularly hard hit by the GFC and property developers are being forced to lower their prices, which means the GST may often represent all or more than their margin – making it tough to pay off the debt owing on that asset.

• mark.pownall@wabusinessnews.com.au.

 

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