‘Hammer is about to drop’: ATO debts driving insolvency spike
Research from Alares suggests the spike in business insolvencies is being driven primarily by tax debt.
Outstanding debts owed to the Tax Office are pushing a growing number of Australian businesses into voluntary administration in hopes of preventing a collapse.
Tax debt is the primary driver behind the growing number of business recovery activities engaged in by businesses of all sizes, according to Jirsch Sutherland.
Last month, ATO tax commissioner Rob Heferen said taxpayers owed over $50 billion in collectable debt, nearly two-thirds of which was owed by small businesses. In June 2019, tax debt owed to the ATO was $26.5 billion, representing a near 100 per cent increase over five years.
As the tax debts owed to the ATO have grown, so too has the rate of businesses engaging in rescue programs, including small business restructuring and voluntary administration for larger businesses.
“Since the start of the (calendar) year we have experienced a noticeable uptick in small business restructuring (SBR) plans and voluntary administrations (VAs) to resuscitate or restructure businesses across a wide range of industries,” said Andrew Spring, partner at Jirsch Sutherland.
“Tax debt is the primary reason, but higher operating costs are also pushing businesses to or over the edge.”
By way of business tax relief, the federal budget revealed on Tuesday evening offered little support for most Australian businesses.
While smaller businesses will continue to have access to the extended instant asset write-off scheme, mid-market and larger companies not involved in the green transition were overlooked.
In April, insolvencies remained 50 per cent higher than pre-pandemic levels. Small business restructures and voluntary administrations each made up 14 per cent of insolvency appointments in April, while court administrations made up 19 per cent.
According to the research from Alares, court liquidations are increasingly common as the ATO and big four banks look to pursue these kinds of arrangements more aggressively.
Non-ATO-initiated winding-up applications were slightly down compared to March, reflecting the outsized role played by the ATO, according to Patrick Schweizer, author of Alares’ Monthly Credit Risk Insights report.
Spring said the ATO is becoming less tolerant of operational behaviours leading to the evident rise of business financial distress.
The ATO is “placing an even higher level of scrutiny on historical compliance when considering a proposal for restructuring. Anecdotally we’re hearing this is also the case with pre-insolvency discussions regarding ATO payment plans,” said Spring.
“As an involuntary creditor, the ATO doesn’t have the option to withdraw credit from a business – nor does it automatically know they’re even in a trading relationship until the liability is self-reported. As such, a high importance on reporting compliance is required to allow an effective and efficient tax system,” said Spring.
“During the last few ‘pandemic years’ the ATO appeared to move away from this position, and for those that have become delinquent with their lodgment activity, the hammer is about to drop. If a business has fallen behind with their statutory compliance, it’s crucial to act now.”
Heferen said nearly three-quarters of tax debt owed by small business is related to activity statements, meaning a significant amount of the debt is likely GST collected from consumers or PAYG withholding, deducted from employee’s pay.
“We are seeing an increasing number of businesses fall behind on these types of payments, from which point it is very difficult for businesses to get back on top of their obligations and remain viable,” he told a small business summit in April.
He added that the ATO learned a “very hard lesson” last year and that its ability to waive taxpayer debt was “very narrow.”
The Australian National Audit Office disapproved of the agency’s approach to debts on hold, where it ceased offsetting uneconomical sums against returns or credits for taxpayers.
Vivek Chaudhary, ATO deputy commissioner, said last year that the growth in collectable debt, 90 per cent of which was owed by businesses, had become “unsustainable.”
“Too many businesses have accumulated unsustainable levels of debt. We want to guard against our payment culture turning from consistently paying on time to paying late,” he said.
