Fears many Aussie businesses could collapse as ATO pursues legacy debts

Experts warn that there could be a “surge” in businesses collapsing as the ATO continues to go after mounting debt.

Many businesses are scrambling to keep debt collectors at bay, as the ATO begins chasing down money owed following the pandemic.

The ATO and other creditors currently pose the greatest ‘threat’ to cash-strapped small and medium-sized businesses, says Insolvency Australia, which has just released its latest Corporate Insolvency Index.

It comes as a popular West Australian business Barretts Bakery, this week was put into administration after it owed the ATO $2 million.

Administrators were given control of the string of bakeries, which first opened in Perth in 1998, on July 27, according to a notice published on the ASIC website.

Popular West Australian business Barretts Bakery has gone under owing the Australian Taxation Office $2 million. Picture: Supplied

There’s been an increase in the number of businesses that have gone insolvent in the last financial year. Picture: NCA NewsWire / Nicki Connolly

The annual Corporate Insolvency Index revealed there was a 57 per cent increase nationally in the total administration appointments made to help businesses dig themselves out of a financial hole in Q4 of the 2022-23 financial year.

The report, which is produced by Insolvency Australia and sponsored by G & H Financial, found there 3,008 businesses had been appointed an administrator compared with the previous corresponding period, which saw only 1,921 were assigned.

Insolvency Australia member and Partner at PKF, Petr Vrsecky said many businesses across the country are at risk of falling into legacy debt problems.

“They are either in the form of so called ‘zombie’ companies that have ceased to operate but not addressed their winding up,” Mr Vrsecky said.

“Then there are others that are still operating and trying to make ends meet but struggling to get on top of their finances.”

He added that more directors will also be forced to “face the music” if companies are unable to pay their debts, with the ATO having the ability to issue director penalty notices to claim the unpaid amount owing.

Mr Vrsecky said the pandemic measures enforced by the federal and state governments meant many businesses became reliant on financial support to become stable during a difficult time.

Insolvency Australia member Petr Vrsecky says more companies are likely to face mounting debt post pandemic. Picture: Supplied

“Through the pandemic there was so much support in various forms that it became a bit of an addiction to sugar,” he said.

“That is, the Job-keeper payments and inability for creditors to pursue debt collection allowed some organisations to get through without necessarily pivoting or making the necessary changes or improvements to come out the other side ready for the new challenges.

“Hence the legacy debt.”

NSW saw the highest amount of collapsed businesses in the 2022-23 financial year, 1,169 corporate insolvencies.

Meanwhile, Tasmania recorded the greatest percentage increase to 133 per cent, after 21 businesses folded compared to the nine collapsing in the previous financial year.

There were 889 businesses which collapsed in Victoria, while Queensland saw 539 businesses go insolvent in 2022-23.

South Australia saw 111 businesses go insolvent, while only 54 collapsed in the ACT

The number of insolvencies in the Northern Territory remained unchanged from the previous year, with 10 businesses going bust.

Insolvency Australia Director Gareth Gammon said many other business could be facing insolvency in the coming months, as the ATO continues to its bid to recover any and all debts owed.

“It’s been a tough year, with a significant increase in winding-up applications and ATO-initiated court recovery, particularly over the past quarter,” Mr Gammon said.

Insolvency Australia Director Gareth Gammon says more businesses could become insolvent by the end of 2023. Picture: Supplied

“Over the past year there’s been plenty of discussion in the sector about the incoming insolvency wave.

“It started with a trickle and it’s now become more of a surge as economic pressures and the ATO’s debt collection activities combine to create the perfect storm.

“Beyond this last quarter, we’re now seeing an increase in court wind-ups by the big four banks, which means the next few months could well be equally challenging.”

Many businesses are facing insolvency issues across Australia. Picture: NCA NewsWire / Sarah Matray

Mr Vrsecky said the ongoing impacts of the pandemic will last at least another 12 months for many businesses.

“I think the pandemic changed the way people work and the supply and labour constraints certainly made it much more difficult for many businesses,” he said.

“No-one was allowed to chase overdue debts so there is no doubt a lot of legacy debt.

“The challenge is to maintain profitable business operations whilst addressing the legacy debt in some meaningful way.

“We are probably another 12 months away before one could say we’re beyond pandemic related legacy debt.”

Excluding the Northern Territory, every other state and territory saw an increase in the number of insolvent businesses compared to the previous financial year.

Jirsch Sutherland Partner and insolvency expert, Chris Baskerville, said he expects insolvencies to continue to increase in the back half of the 2023 calendar year.

Insolvency expert Chris Baskerville says the ATO is pursuing debt at a rapid pace. Picture: Supplied

“The rise in insolvency appointments can be directly attributed to the increase in ATO enforcement action,” Mr Baskerville, who, is a member of Insolvency Australia, said.

“Its enforcement of outstanding debts is reaching, if not surpassing, pre-pandemic levels

“The ATO appears to be less amenable to payment arrangements, especially those that propose greater than two years.”

John Morgan, a Director and founder of the boutique insolvency company BCR Advisory, warned the recent struggles many businesses have faced as a result of the Reserve Bank of Australia’s decision to increase interest rates will continue play a large impact on their financial constraints.

he Reserve Bank of Australia has warned it might increase interest rates once again. Picture: NCA NewsWire / Jeremy Piper

“The number of insolvency appointments will continue to increase as businesses struggle with the impact of the RBA’s interest rate hikes and the expected increase in collection pressure from the ATO,” Mr Morgan said.

“The construction industry is in a very poor state as the cost of money and materials continues to increase, and we have also seen an uptick in the number of cafes and restaurants looking for insolvency advice.”

The RBA on Tuesday decided to keep the official cash rate on hold at 4.10 per cent for the second consecutive month.

Despite experiencing 12 rate hikes since May 2022, households should brace for future rate hikes after the RBA confirmed it can’t rule out further increases.

A legacy debt refers to debt that is above what could have been expected in relation to GDP and inflation behaviour.

Originally published as Fears many Aussie businesses could collapse as ATO pursues legacy debts