Crunch time: ATO crackdown to put pressure on zombie companies

The ATO is becoming more aggressive in its debt collection which will send more companies to the wall. See the list of the Australian companies that went bust in May.

The ATO is focusing on a firmer debt collection strategy.

A looming crackdown by the taxman is expected to spark a rise in insolvencies, especially for so-called zombie companies that have managed to afloat during the Covid-19 pandemic.

ASIC records show liquidators or voluntary administrators were appointed to 433 Australian companies in May, up from 382 in April, a more than 13 per cent increase.

New South Wales had 173 liquidations or voluntary administrations in May, an almost 9 per cent increase, while in Victoria the number jumped 26 per cent to 121, in Queensland by 7 per cent to 64, 18 per cent to 40 in Victoria and 100 per cent to 22 in South Austrlia.

Revive Financial head of business restructuring and insolvency Jarvis Archer says builders continue to dominate headlines with one in every four company insolvencies being in the construction industry.

He said the wet weather has only added more difficulty to the existing challenges in the construction industry.

The ATO is focusing on a firmer debt collection strategy.

One of the highest profile casualties was Gold Coast-based Pivotal Homes – which has built 1500 homes in during its 15 years operation before being put into receivership.

Also under pressure were the food and beverage sector which continues to suffer from staff shortages.

Over the past two years insolvencies have been below the average rate in Australia but that will change with a shift in the Australian Taxation Office’s (ATO) go softly strategy to debt collection.

WCT Advisory partner Andrew Weatherley said he expected a surge in insolvencies as the ATO shifts to a firmer debt collection strategy after assisting businesses during the pandemic.

“We have already been approached by clients who have received warning letters (from the ATO) and were proactive enough to realise time was running out to mitigate personal liability for an old tax debt,” he said.

“However, the number of notices that have actually been issued and the number of DPNs (Director Penalty Notices) being issued has even surprised us.”

The ATO has said its preferred approach was always to work with taxpayers to resolve their situation through engagement rather than enforcement.

However, where taxpayers don’t engage, the ATO will take firmer action including garnishees (issued to third parties), recovery of director penalties, disclosure of business tax debts, and legal actions including summons, creditors petition, wind-up and insolvency action.

WCT Advisory partner Andrew Weatherley.

According to trade credit insurance firm Atradius 2022 and 2023 will mark the return to normality for general insolvency levels in many markets, led by zombie companies at the

outset.

Atradius predicts insolvency levels in Australia will still be high at the start of 2023 and will progressively normalise throughout the year, leading to a high insolvency level for the full year.

Mr Weatherley said his firm has received feedback about businesses who have weathered the Covid storm and were back on track, with all suppliers and finance commitments up to date. “However, there is still a substantial tax liability that has been sidelined due to the ATO not doing anything about it … until now it seems,” he said.

“Little thought has been given to the options available other than (these companies) trying to ignore the issue of negotiating unsustainable payment plans – somewhat encouraged by the ATO’s approach during Covid.”