Insolvency sector urges ATO to speed up debt collection activities

The ATO is slowly ramping up debt recovery activities in three states, but insolvency practitioners want firmer and faster action to weed out zombie companies.

Australian Restructuring Insolvency and Turnaround Association chief executive John Winter. Picture: Jane Dempster

Insolvency practitioners are urging the ATO to take a heavier hand to companies not paying their taxes, despite recent signals from the tax office that it was stepping up activities in three states.

The ATO recently circulated a statement confirming debt recovery actions would recommence in NSW, Victoria and the ACT “after a general pause during lockdowns”.

The ATO said that, under a “tailored approach”, business taxpayers with larger debts and outstanding superannuation payments would be prioritised, followed by others in the new year.

However Australian Restructuring Insolvency and Turnaround Association chief executive John Winter said the move didn’t go far enough.

“What we are seeing is the ATO making quiet signals to the market – most of the commentary about this seems to have come from accountants in public practice where their clients have started to get reminder letters about debt obligations,” he said.

“There’s a very big difference between getting reminder letters and formal debt recovery actions – what we are not seeing is the ATO using its ultimate tool which is winding up companies.

“It’s really important at a social consequence level that the ATO does get back in and demand people pay what they owe. The messaging is definitely out there at the moment that you don’t have to pay the ATO.”

The ATO paused its debt collection activities during the onset of Covid-19 in early 2020, to avoid penalising businesses dealing with temporary lockdowns and enforced trading restrictions.

Since then debts to the ATO have soared, reaching a record $55bn by June this year.

The recommencement of “lodge and pay activities” is seen as the first small step towards a return to normal debt collection activities for the ATO, which is widely tipped to hold back on more aggressive enforcement until after next year’s federal election.

Mr Winter said the ATO had a responsibility to act sooner.

“I think they will ratchet up the pressure to start to recover what is an exploding debt book for them, but I don’t think we’re going to see much in the way of wind-up activity until mid next year,” he said. “I think there’s no doubt that in the unprecedented times government has said we don’t want to be the people forcing businesses over the line – it’s not politically sustainable and to some extent at a macro level it’s not economically desirable, but it still creates an enormous moral hazard. There’s a great quote that says capitalism without insolvency is like Catholicism without hell. If you’re out there racking up debts without consequence it means you send other people broke – you’re sending your creditors broke, you’re sending your staff broke, because they’re the ones carrying the can while you waltz off into the sunset.”

Mackay Goodwin chief executive Domenic Calabretta said it was time for the ATO to return to its pre-Covid debt collection activities and bring to an end the so-called “zombie companies”.

“At present, there’s an uneven playing field where we see tax compliant businesses unable to compete with other players in their industry, which have not paid their taxes due to the ATO’s complacency to date,” he said.

“If the ATO were to sit on the sidelines, businesses would continue to accumulate unmanageable tax debt, including interest on the debt. It would also wrongly signal that it’s acceptable to be complacent to tax debt.

Worrells partner Con Kokkinos said fears that an escalation of ATO debt recovery activities would result in a “tsunami” of insolvencies were overblown.

“A lot of companies have reassessed their operations and adjusted to accommodate Covid – they’ve revisited their business operations, they’re leaner and a lot of them are in a better position moving forward,” he said.

“Those that were always going to fail will fail, but we don’t envisage a tsunami.

“However the building sector is one area of concern – if there are more collapses in that area it could have a flow on effect.”