Growing number of small businesses turn to restructuring as ATO zeros in on tax debt

Businesses being chased by the ATO for tax debt are increasingly turning to rescue programs to save their companies from financial ruin, latest data shows.

The Australian Taxation Office is tightening the screws on debtors.

An increasing number of Australian businesses are being driven to business rescue programs to save their companies as the Australian Taxation Office seeks to claw back tax debt.

Alares Monthly Credit Risk Insights author Patrick Schweizer said the ATO was working through a record amount of outstanding tax debt of more than $50bn and this was driving small businesses into Small Business Restructuring plans (SBR) and larger businesses into voluntary administration.

“Our April report shows that insolvencies remained 50 per cent above pre-pandemic levels, reinforcing the long anticipated catch-up in insolvencies from the pandemic lows,” he said.

According to the Alares report, in April creditors’ voluntary liquidation accounted for 53 per cent of all insolvency appointments (552) – down just over 10 percentage points from January.

Filling the gap was a rise in SBRs to 14.3 per cent (149) of all insolvency appointments, voluntary administrations accounted for 13.7 per cent (143) and court liquidations 19.1 per cent (199).

The report said the ATO was active in direct court recoveries and the big four banks were “vigilant”.

Insolvency and business turnaround specialist Andrew Spring from Jirsch Sutherland said tax debt was the primary reason but higher operating costs were also pushing businesses close to, or over, the edge.

“It’s obvious that out of necessity, an increasing number of businesses are discovering the benefits of Australia’s business rescue solutions,” he said.

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

Jirsch Sutherland partner Andrew Spring.

The Australian Securities and Investments Commission’s latest insolvency data for the nine-month period from July 1, 2023, to March 31, 2024, showed 7742 companies entered external administration, which was a 36.2 per cent increase on the previous corresponding nine-month period.

Out of these external administrations, construction (2142), and accommodation and food services industries (1174) represented the greatest number of company failures, accounting for nearly 27.7 per cent and 15.2 per cent respectively.

Mr Spring said the creditor community was becoming less tolerant of operational behaviours that may have contributed to a business’s financial distress, and the ATO was at the forefront of this changing creditor position.

“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,” he said.

“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. During the last few pandemic years the ATO appeared to move away from this position, and 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.”

Mr Spring said having a strong business rescue framework, such as the SBR and voluntary administration regimens, provided an opportunity for those businesses which have encountered some form of extraordinary distress – like bad debts, weather events or pandemic influences – to not be forced to close, preserving greater value for creditors and stakeholders.

“A robust insolvency framework has many advantages, including recycling underperforming resources such as labour and equipment assets, into viable business ventures,” he said.

“It also provides a balance between the debtor and creditor relationship, as well as giving confidence to markets that anti-competitive behaviours by unscrupulous players in the market will be investigated and held accountable.”