ATO crackdown on tax debts leads to 50pc spike in insolvencies above pre-COVID levels

ATO crackdown on tax debts leads to 50pc spike in insolvencies above pre-COVID levels

Photo credit: Towfiqu Barbhuiya via Unsplash

Tax debt has emerged as one of the biggest drivers of corporate insolvencies over the past year, with the latest data from Alares Insights showing April tracked at 50 per cent higher than pre-COVID levels.

According to Patrick Schweizer, author of Alares Monthly Credit Risk Insights, there has been a sharp increase in the number of companies seeking small business restructuring and voluntary administration since the beginning of this calendar year, following an aggressive push by the Australian Taxation Office (ATO) to recover the record tax debt owed by businesses.

The uptick was noted by Schweizer in February when insolvencies jumped 50 per cent in the highest ever monthly increase recorded by the report. Insolvencies peaked in March and despite easing back in April, they remained at their second-highest levels of the past three years.

“Non-ATO initiated winding up applications were slightly down compared to March, which again points to the ATO currently being the key driver for insolvencies,” says Schweizer.

According to the Alares report, small business restructuring accounted for more than 14 per cent of all insolvency appointments in April, which was level with voluntary administrations which accounted for almost 14 per cent.

Court liquidations were more than 19 per cent of the total, with the Alares research noting that the ATO remained active in direct court recoveries and the big four banks were “vigilant”.

Insolvency and business turnaround firm Jirsch Sutherland says more business are turning to rescue programs to save their operations as the ATO tightens the screws on tax debt.

“Since the start of the (calendar) year we have experienced a noticeable uptick in small business restructuring (SBR) plans and voluntary administrations to resuscitate or restructure businesses across a wide range of industries,” says 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.”

Spring says the creditor community “is becoming less tolerant to operational behaviours that may have contributed to a business’s financial distress”.

“And the ATO is again at the forefront of this changing creditor position,” he says.

“It’s 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.

“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.”

Spring says that during the last few “pandemic years” the ATO appeared to move away from this position.

“For those that have become delinquent with their lodgement activity, the hammer is about to drop. If a business has fallen behind with their statutory compliance, it’s crucial to act now.”

Spring says that more businesses are taking advantage of business rescue solutions amid the crackdown.

“We have some of the most advantageous legislation in the world,” he says. “It’s both quick and commercially focused, but it shouldn’t be a last-minute or enforced decision.”

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