Covid hangover: 5097 businesses owe ATO more than $100K

The number of Aussie businesses collapsing due to a ballooning tax debt has soared, as owners cling to hope for one thing that can turn their fortunes around.

Aussie businesses are increasingly feeling the strain of ballooning tax debts and a lack of consumer spending as businesses cling onto hopes of a rate cut in February.

CreditorWatch research reveals a third of businesses owing the Australian Taxation Office more than $100,000 have closed their doors in the last 12 months.

The overwhelming tax obligations have forced 1715 of the 5097 businesses that owe more than $100,000 to the tax man to either become insolvent or go into voluntarily closure. 

At the same time, these businesses lack the customers needed to pay off this large tax bill.

CreditorWatch CEO Patrick Coghlan said business failures are above ‘normal’ levels and could continue to rise until we see one to two interest rate cuts.

“Our forecast is for business failures to continue to increase across much of 2025,” he said.

“We don’t expect the trend to reverse until we see a turnaround in consumer spending, and this won’t happen until the effects of a couple of rate cuts have been felt in the hip pockets of consumers.”

Hospitality businesses are struggling due to rising tax obligations. Picture: NewsWire / Kelly Barnes

Mr Coghlan said businesses relying on household spending will remain at risk until there are enough interest rate cuts to spur on spending.

“The sectors that are struggling the most at the moment are those exposed to discretionary spending, such as hospitality.

Households have very few levers they can pull to cut costs but reducing their spending at restaurants, cafes and pubs is one,” he said.

At the same time, these businesses who need more customers to walk through the door are facing a hefty tax obligation.

A surge of outstanding tax liabilities to the tune of $52bn emerged as a result of the ATO’s leniency during the pandemic, as the government tried to get businesses through Covid.

Fast forward to the end of 2024, and small-to medium-sized enterprises still owe $34bn.

In response, the ATO said in November it would aggressively pursue these unpaid debts, including disclosing business tax debts to credit reporting bureaus, issuing garnishee orders and serving director penalty notices.

Mr Coghlan supports the ATO’s stricter stance, noting the importance of holding businesses accountable for their tax obligations.

“The ATO is simply trying to collect the tax that all companies are obliged to pay,” he said. “While I sympathise with businesses grappling with such large debts, it’s crucial that businesses abide by these obligations.

Weak conditions are pushing more businesses into administration. Picture: NewsWire/ Gaye Gerard

Mr Coghlan said even in stable economic periods paying back $100,000 could be a formidable problem, with the challenging economy adding to the pressure businesses face.

“A tax debt of $100,000 or more is a substantial burden, especially for SMEs, which represent the majority of businesses with tax debt defaults and can seem overwhelming,” he said.

“Entering into a payment plan with the ATO is an important and necessary first step in resolving these issues.”

According to CreditorWatch, businesses in the electricity, gas, water and waste services are most at risk, with 40 per cent of these companies defaulting on significant tax debts in the last 12 months.

Businesses in food beverage services, information, media telecommunications, retail trade and manufacturing all experience a higher than average failure rate.

“The varying rates of failure among industries may also reflect how far along each sector is in its economic downturn. For instance, industries like information, media and telecommunications have been grappling with disruption for years due to the shift toward digital media,” Mr Coghlan said.

“Meanwhile, the education sector, which currently has a failure rate of just 10 per cent among businesses with tax defaults, may face mounting challenges as new caps on international students take effect next year.”

Originally published as Covid hangover: 5097 businesses owe ATO more than $100K