Small businesses warned of looming tax change

Who would want to be a small-business owner right now? 

Although they’re an undeniably resilient bunch, cash flow pressures and access to funding remain significant challenges for SMEs, forcing nearly half to delay strategic decisions or business opportunities in the past year. 

To top it all off, the Australian Taxation Office (ATO) has well and truly put the relatively lax COVID-era enforcement days behind it, with collection activity shifting into overdrive thanks to replenished government funding. 

Like other lenders, Pepper Money’s head of retail broker Siobhan Williams (pictured) has seen tax enforcement shift up a few notches in recent times. As a result, Williams said there’s a lot more “urgency” among small-business owners to get their taxes in order. 

“By percentage of total application flow, we’re seeing a significant increase in customers looking for cash flow improvement and a solution to their debt-consolidation problems,” said Williams. 

The GIC issue: A huge change coming

Williams said that some small businesses may have potentially been using the ATO as a sort of overdraft facility. 

Rather than paying off tax debt as a lump sum, SMEs have been paying the debt off slowly over time, all the while accruing a general interest charge (GIC). 

Here’s the kicker: As it currently stands, GIC is tax deductible, meaning SMEs can claw back a fair chunk of these charges in their tax return; but not for long. Despite making little song and dance about it, the government will no longer allow GIC to be tax deductible from 1 July. 

The change is no small beer for small business, but despite being announced way back in December 2023, the looming change has received little to no attention. 

“Coupled with the increasingly aggressive approach to recovery of outstanding tax debt, including defaulting customers’ credit files, it's becoming a rather uncomfortable situation for many small businesses,” said Williams. 

Without the benefits of the tax deduction, businesses could also potentially find themselves in a higher tax bracket. 

Shock to the system 

The implications of the removal of GIC tax deductibility, while sounding like a peripheral issue, should not be underestimated. 

“I think that it will be a shock for those that aren't aware and that aren't being proactive,” said Williams. “If tax debt has been something a small business is consistently seeing, this is going to change the way it operates for them.” 

SMEs will need to consider other options, with one viable option being getting rid of their entire tax debt in bulk. 

Additionally, non-bank loan options are available that allow SMEs to consolidate their ATO debt. This consolidation can enable them to incorporate the debt into their balance sheet and potentially claim tax deductions. 

Whatever the solution, the GIC changes should serve as a rallying cry for SMEs to seek out professional advice about their circumstances. 

“I think it's absolutely time for small businesses to have that chat with their accountant or their planner to better understand what's a more long-term opportunity for them that will set them up for success,” said Williams. 

Non-bank flexibility 

“Self-employed Australians have always been the lifeblood of Australia, and a huge focus for us when it comes to our commonsense approach to lending,” said Williams. 

She highlighted the flexibility that non-bank lenders like Pepper Money can provide SMEs, particularly when it comes to alternative income-verification processes. “Even if it's an old tax debt and they don't have their tax returns up to date, that's not a problem for us… We can look at alternative ways to verify income, even if their tax returns aren’t up to date.” 

In Williams’ experience, some of the major banks and first-tier lenders tend to steer away from any customer that has an outstanding tax liability as it is not within their risk appetite. 

“We do see a lot of brokers coming to non-banks because they are being turned away by mainstream lenders,” she said. 

And while brokers can’t typically advise on tax matters, they can play a crucial role in ensuring their clients are up to date with all major legislative changes on the horizon. 

“First and foremost, I think it's really important that brokers jump on the front foot proactively and talk to their existing customer base,” Williams said. 

“If they have segmented their self-employed customers, I think it'd be a great opportunity for them to highlight the legislative changes and how that might impact them and encourage their clients to review their finances.” 

Williams’ comments speak to the increasing level of trust and confidence that borrowers have with brokers, as evidenced by the near-80% share of the home loan market, and increasing influence in the commercial finance space.  

“I think that Australians have voted with their feet, which is why the broker channel sees considerable and significant year on year growth in their share of wallet compared to the direct-to-bank customer channel,” said Williams. 

But while brokers “have always been proactive in providing regular reviews of their clients,” she worries that the looming GIC tax change has flown under the radar. 

“There's a lot of talk around what's happening with interest rates, what's happening with the election, what's happening with cost of living, and all of those key buzzwords that sort of tie into the themes that we've seen played out in the electoral campaigns,” she said. 

“So despite the fact that brokers are on the front foot… I think specifically it is important to highlight this legislation.”