Tax office debts being called in for Australian companies owing money as business insolvencies rise

As the “soft touch” approach on calling in tax debts during the pandemic fades, more and more Australian companies are being liquidated.

So-called “zombie” companies – artificially kept alive by pandemic support and a pause on debt collection by the tax office – are now increasingly being wound up, new figures show.

Underperforming businesses who kept trading over the past two years but owed money are now facing a ramped up push by the Australian Taxation Office (ATO) to call in their overdue debts.

About 120 director penalty notices are being sent out by the ATO every single business day.

Insolvency experts say that for many companies, a “soft touch” on debt collection has simply “kicked the proverbial can down the road and they’re now having to face reality”.

And they are warning that if a correction does not occur quickly, there is a risk continued support will “infect performing businesses in a domino effect” – harming otherwise healthy companies.

Many companies that would have gone bankrupt during the Covid pandemic have remained trading but now debts are being collected by the tax office.

Figures from the Australian Securities and Investments Commission show just 4912 businesses went into external administration during 2021-2022, compared to 8105 before the pandemic, in 2018-19.

But now, figures have jumped during the first half of this year, with insolvencies for the week of August 5 up 69 per cent on the same time last year.

More Australian firms are becoming insolvent after a pause during the pandemic. Picture: Thomas Morgan

Construction firms are the worst hit, with 164 insolvencies in June and 153 in May.

The ATO is owed a staggering $39.9 billion in collectable debt as of December 31 last year – mostly owed by small to medium enterprises.

In March they wrote to about 45,000 businesses saying they were considering issuing director penalty notices to collect business debts.

While more than half of the companies are now working with them to pay up, they have since followed up with than 7000 director penalty notices and 1600 “intent to disclose” notices – which means credit reporting bureaus are told.

Oracle Homes has collapsed leaving of customers and suppliers not paid. Picture: Steve Pohlner

“We expect that number to increase,” an ATO spokeswoman said. “Initially the disclosure program was only disclosing company debts.

“We have now expanded the program to include trusts, partnerships and sole traders.”

Insolvency expert Andrew Spring, a partner at Jirsch Sutherland, said the ATO was aware of the economic risks that were created by the “soft touch” approach of the past two years, “which is why their collection activities have ramped up dramatically since February 2022”.

“Anecdotally, accountants recount to me the barrage of documents and phone calls they are receiving from the ATO seeking to engage with their clients with a tax debt,” he said.

“We certainly have seen a number of incidences where companies have remained trading because they were ‘buoyed’ by the federal government’s pandemic support packages.

He said in ‘normal’ times, many struggling and unviable companies would have been wound up – particularly the zombie companies.

“Unfortunately, for some businesses this simply kicked the proverbial can down the road and now they’re having to face reality.”

Equifax General manager commercial and property solutions Scott Mason said their data showed insolvencies were up 20 per cent in June this year versus the same month from last year.

“The increase in insolvencies has been particularly clear in the construction industry, which has acted as a ‘canary in the coalmine’ – construction insolvencies grew 69 per cent in June 2022 vs June 2021.”

“The food services and accommodation industry also experienced a high level of insolvencies in June.”

Originally published as Tax office debts being called in for Australian companies owing money as business insolvencies rise