`Houses on the line’ as directors face bankruptcy in the ATO’s dash for cash

The ATO’s dash for cash is putting pressure on struggling business owners who have their homes on the line as many edge closer to bankruptcy. SEE THE FULL QLD LIST

Company directors are putting their homes on the line as increasingly tough debt collection efforts by the taxman edge many closer to bankruptcy.

According to indicative Australian Securities and Investments Commission data there were 94 administrations and liquidations in August in Queensland, up 8 per cent from 87 in July and up 4.5 per cent from the 90 notched up in August last year.

Revive Financial director Jarvis Archer said the level of personal liability that business owners had for their company debts was increasingly problematic.

Mr Archer said a campaign by the Australian Taxation Office to target more businesses with director penalty notices had caught many people off-guard as they struggled to recover from Covid-19 shutdowns. Such notices can make the director personally liable for tax debts accrued by the company.

“On top of this, many business owners have turned to unsecured business lending to keep the ATO at bay, or fill the cash flow gap left by rising costs or declining sales,” Mr Archer said. “These loans are almost always supported by a director guarantee.”

Queensland-based DCB Developments and Chelbrooke Homes were among the building firms that went to the wall last month as the construction sector remained heavily exposed to economic headwinds.

Mr Archer said directors can still carry liability for the company’s debts personally even if they deal with the debts through an insolvency process.

“This puts their house on the line, and makes bankruptcy a potential option – which may cause the business to close,” Mr Archer said.

“A company insolvency provides no debt relief in those circumstances, and the director has to look at their personal financial position instead.”

Revive Financial Partner Jarvis Archer is a Queensland liquidator.

He added the ATO’s continuing recovery activities were driving a real increase in insolvency appointments. “The urgency from directors (to appoint liquidators or administrators) has actually been a bit overwhelming,” Mr Archer said.

“Even the ATO seems to be struggling to keep up with the workload.” He said his advice to business owners was “don’t reach for easy cash “which is a Band-Aid in many instances.

Deloitte Australia partner Richard Hughes said insolvencies were returning to pre-Covid levels in line with generally tougher economic conditions.

“The property and construction industry appears to have continuing challenges, as indicated by the insolvency statistics,” Mr Hughes said.

“Fixed price contracts, cost inflation, continued (but reducing) supply chain and labour challenges are all contributing, as well as a higher cost of finance.

“Other areas that appear to be challenging are technology, due to the tighter fund raising conditions, and agriculture due to regional weather events and consequent market conditions.”

Mr Hughes said banks were still supporting customers.

“There are a multitude of options available to distressed businesses to restructure outside of insolvency and I would expect this trend to continue,” he said.

“Offsetting this is increased ATO activity and tighter economic conditions. On balance, this means I would expect insolvencies to remain at current levels, if not elevated.”

Commercial credit reporting bureau CreditorWatch found business and consumer sentiment continues to remain weak, which signalled difficult times ahead, particularly for the retail, and food and beverage sectors.

The property and construction sectors are facing more challenges.

CreditorWatch’s latest business failure rate prediction, which is published in the bureau’s monthly Business Risk Index, has also increased.

By July 2024, it’s forecasting that 5.79 per cent of Australian businesses will have failed over the past year, up from 4.67 per cent today.

CreditorWatch chief executive Patrick Coghlan said that as credit inquiries increase, so too do the risks for lenders in this current environment.

‘’Many Australian businesses are struggling with cash flow and seeking credit to grow as they grapple with high inflation, decreasing demand and declining forward orders,’’ he said.

“To mitigate risk in this volatile economy, it is crucial for lenders to strengthen their credit modelling and credit scoring to ensure they have multi-layered visibility on their loan applicants.”