Tradespeople, cleaners, taxi drivers, farmers, doctors and lawyers could be inadvertently caught up by a proposed law that would allow the Australian Taxation Office (ATO) to report alleged debts to credit reporting agencies, according to submissions to a federal inquiry.

Key points: The Federal Government has proposed a law that allows the ATO to disclose small business tax debts to credit reporting agencies

The Federal Government has proposed a law that allows the ATO to disclose small business tax debts to credit reporting agencies A number of watchdogs and lobby groups told a Senate inquiry there were not enough safeguards to protect taxpayers

A number of watchdogs and lobby groups told a Senate inquiry there were not enough safeguards to protect taxpayers An adverse credit rating, which can last up to five years, may stop a person running a business from being able to borrow money

The Federal Government wants to allow the ATO to disclose small business tax debts to credit reporting agencies, but its proposal has faced criticism from the tax ombudsman, small business ombudsman, and a number of lobby groups, who fear the legislation is being rushed through and that there are not enough safeguards to protect taxpayers.

The proposed law, which comes as tax debts to the ATO hit almost $24 billion, would apply to businesses with Australian Business Numbers and tax debts of more than $100,000 that are at least 90 days overdue.

A number of submissions to a Senate inquiry into the proposed law raise the concern that people's livelihoods could be destroyed if they get a black mark on their credit rating.

An adverse credit rating, which can last up to five years, effectively stops a person running a business from being able to borrow money and/or set up basic services such as a mobile phone account.

Given it is difficult to have the default removed once it is added to a person's file, and the irreparable damage it can do, a raft of submissions to a Senate inquiry into the proposed law call for greater transparency about how the law will apply, and how taxpayers will be protected.

Policy expected to claw back $30m

The Federal Government's policy, which first surfaced in 2016, is expected to net about $30 million over the forward estimates, based on the assumption that the ATO will be able to claw back tax debts due to the policy change.

The plan was initially to allow the ATO to report tax debts as low as $10,000, but following consultation was amended to increase the threshold to $100,000.

Assistant Treasurer Michael Sukkar has said the law was aimed at people who were not effectively engaging with the ATO to manage their tax debts.

He said it would "reduce the unfair advantage obtained by businesses who do not pay their tax debts".

Despite the amendment to lower the reporting threshold, the Labor party still has reservations.

In late July, the proposed law — known as the Treasury Laws Amendment (2019 Tax Integrity And Other Measures No. 1) Bill — was referred to a Senate inquiry, with Shadow Assistant Treasurer Stephen Jones noting "significant stakeholder concerns".

Mr Jones said at the time that Labor supported the policy intention but wanted to see safeguards that ensured data was removed once debts were paid, and for privacy protections to be embedded in the law.

"It's worth careful consideration by all parties before we jump into it," Mr Jones said.

In a public hearing on Monday, Senator Rex Patrick asked the ATO and Treasury why the Government had "put the cart before the horse by asking the Parliament to pass legislation when you haven't settled on what the declaration will be that describes how it will be administered".

ATO Second Commissioner Jeremy Hirschhorn said the legislative design was a matter for Treasury and Government but noted that trying "to hard code everything into the legislation" could mean you "end up with a very long piece of paper", resulting in delays and amendments.

Mr Hirschhorn said the ATO would take care in the way it applied the proposed law.

"We have no incentive to incorrectly or unfairly disclose a small business's debt to a credit agency," Mr Hirschhorn said.

Clarify law so individuals are not hit: Law Council

But watchdogs and lobby groups say that while they appreciate the ATO's verbal indications that the agency will not misuse the power it is handed under the proposed law, the Government needs to enshrine extra safeguards in the law to eliminate the risk that might happen.

The Law Council of Australia fears that despite the increase in the threshold from $10,000 to $100,000 as a way to ensure that individuals are not affected, many people who hold an Australian Business Number (ABN) could be hit.

These include tradespeople, cleaners, taxi drivers, farmers, doctors and lawyers, who could be at risk of losing access to credit to fund personal expenses such as credit cards and home loans, its submission said.

The Law Council's national chair of its taxation committee, Clint Harding, told the inquiry on Monday that someone running his or her own building construction business through their own name rather than through a company or a trust, which tends to be common, could rack up $100,000 in tax debts.

"And, because they've got an ABN, they would fall within these measures," he said.

The Law Council said the designation of an entity as a "credit reporting bureau" should be subject to direct review by the Parliament, and the circumstances in which a tax debt will not be reported should be made clearer in the proposed law.

For example, the debt should not be reported if the taxpayer has lodged an objection to the debt (either within the ATO or externally via the tax ombudsman or the courts), and the ATO has agreed to a deferral of payment time, or a release of the debt due to serious financial hardship grounds.

Taxpayers should get compensated for errors

The tax ombudsman, Inspector-General of Taxation Karen Payne, has raised with the inquiry 17 recommendations for change that would boost safeguards for taxpayers.

The inquiry heard from lobby groups that her office — which currently has limited resourcing and small number of staff — needs greater funding to be able to deal with potentially tens of thousands of complaints that may come its way if the law is passed.

Her recommendations include more stringent requirements for the ATO to tell the IGT about each and every case they want to report to a credit reporting agency, and for it to also tell the taxpayer's adviser.

"There's also no requirement that you also notify any representative or agent on behalf of the taxpayer, which seems a little surprising," Ms Payne said.

The law should also include provisions for "specific compensation to taxpayers who are adversely affected by erroneous, inaccurate or inappropriate disclosures", she said.

Currently a taxpayer's only avenue for remedy is to launch legal action to sue for damages or seeking compensation under the Scheme for Compensation for Detriment Caused by Defective Administration (CDDA Scheme).

Court action was "lengthy and costly", while the CDDA Scheme was at the discretion of the ATO and the burden of proof for taxpayers may be too high, she said.

Ms Payne suggested that the Government either amend the proposed law to include specific compensation schemes or to empower her office to award compensation up to specific limits.

Such a power would by similar to those given to the Australian Information Commissioner for certain breaches of the Privacy Act 1988.

CPA Australia's head of policy and advocacy Dr Gary Pflugrath also suggested that compensation be made available where there has been a "misuse of information".

He also raised the concern that businesses who wish to pay off tax debts to prevent disclosure credit reporting agencies, especially where the ATO is unwilling to enter into a payment arrangement, would be vulnerable to predatory lenders.

"This may compound, rather than resolve, small business liquidity challenges leading to a greater number of insolvencies than may otherwise be the case," he warned.

Credit agencies should face penalties

Australian Small Business and Family Enterprise Ombudsman Kate Carnell said during consultations with the ATO that there were "various understandings reached" about certain conditions and safeguards, but that these were not reflected in the legislation.

Ms Carnell said if a tax debt at any time was disputed, a payment plan was entered into, or a correction to the tax debt was made and reported to the bureau, there should be an obligation on the bureau that it "corrects the data and permanently expunges references in its systems to the previously reported tax debts".

She said it was also important for small businesses to have the ATO notify them of each and every change to data reported to a bureau.

"Small business taxpayers should not carry the burden of checking on the ATO and the bureaus to ensure that data has been appropriately corrected and/or expunged," Ms Carnell said.

Institute of Public Accountants general manager of technical policy Tony Greco said how the ATO was going to monitor a third party (the credit reporting agency) was crucial and should be enshrined in the law.

"Those important safeguards are not - I'll repeat: are not - in the legislative framework," Mr Greco told Monday's hearing.

"We want to see penalties or we want to see compensation."

Dr Pflugrath said CPA Australia was also worried that there was a "distinct lack of clarity" about how credit reporting bureaus would manage, use and be accountable for the information the ATO gives them.

He said credit reporting agencies should subject to the Privacy Act, and to a "legally enforceable obligation" to remove tax debt information once the debt is paid, and face penalties if they don't.

Give taxpayers time to respond before debt is disclosed

The Bill allows 21 days before a notice of disclosure is issued.

Both the tax ombudsman and the small business ombudsman want this timeframe extended.

Ms Carnell said this was "insufficient for a small business to receive, take advice and respond appropriately to a disclosure notice", and recommended that this be changed to at least 45 days' notice.

"We are submitting that it needs to be clear in the legislation that, before the tax office runs off to the credit bureau and discloses any information, they need to come back and check with us," Ms Payne said.

"There needs to be a process where the tax office has to, firstly, consult with us and, secondly, having notified the taxpayer, again check back in with us. That's what we would like to see clarified on the face of the law."

Most groups also want to ensure that if a disclosure is made about a taxpayer, that taxpayer is informed in writing by registered post.

Mr Greco also said "21 days may not be sufficient for some taxpayers, especially given that their intermediaries aren't also notified in writing".

"If you accept that the consequences for this are quite severe — that is, not being able to access finance — I think, as a minimum, it [the ATO] should go to their intermediary and, secondly, it should be by registered mail so there's none of this business of, 'I didn't get it'," he said.

Dr Pflugrath said CPA Australia wanted the Government to consider increasing the 90-day threshold to 120 days, given the small businesses were often only paid 60 or more days after an invoice for their goods or services was issued, and this impacted their ability to pay tax liabilities.