Tax Office warned against aggressive pursuit of small business tax debts

While the ATO faces a $35.6bn tax bill from small business, the industry boss warned the agency against ‘biting off the hand that feeds it’.

COSBOA chief executive Luke Achterstraat. Picture: Martin Ollman

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The Australian Taxation Office’s aggressive pursuit of small business debts risks “biting off the hand that feeds it”, industry advocate Luke Achterstraat has warned, as the agency’s attempts to recover unpaid debts results in an insolvency surge.

While the ATO afforded taxpayers more flexibility during the pandemic, implementing an enforcement freeze on small businesses and sole traders, it has since implemented additional enforcement measures to claw back tax arrears, including director penalty notices and court orders.

However, Mr Achterstraat, the chief executive of the Council of Small Business Organisations Australia, argued that the move risked “pivoting too dramatically in the other direction”, as the agency works to pursue $35.6bn worth of collectable small business tax debts.

“They need to pull their socks up in terms of their customer service and just understand that they’re dealing with human ­beings and dealing with real people,” he said, pointing to challenges small businesses had faced in contacting the ATO. “You don’t want the ATO throwing the baby out with the bathwater by sending a lot of these small businesses broke at a time when the economy is pretty fragile.”

Mr Achterstraat’s comments echo similar concerns raised by Teal MP Allegra Spender, who has argued that small businesses are struggling to comply with the ATO’s “heavy-handed” compliance approach, demanding a more proportionate response.

Their calls come amid a sharp rise in insolvencies, with the Australian Securities & Investments Commission reporting 12,405 businesses entered administration in the year to November.

Despite the increase, business entries and exits data released by the Australian Bureau of Statistics shows that in the 2023-24 ­financial year, the number of new businesses outstripped those that shuttered by more than 73,000.

The Coalition has criticised Labor over the rise in business failures and on Thursday released forecasts projecting an additional 10,000 businesses would enter ­insolvency by the May 17 cut-off date for an election.

But recent analysis authored by the Reserve Bank claims the rise has been driven by a “catch-up” effect following the pandemic when the JobKeeper subsidy and temporary ATO amnesty held insolvency numbers low.

“As these measures have been unwound over the past two years and economic conditions have become more challenging for small businesses, a cohort of unprofitable businesses have depleted buffers and entered insolvency,” the research stated.

The RBA also found that while at a record high in absolute terms, their share of total businesses entering insolvency still remains typical of historical standards at less than 0.15 per cent.

John Park, the Australian head of corporate finance and restructuring for FTI Consulting, a global management advisory firm, said a number of so-called “zombie” firms that had relied on pandemic-era government support were still yet to collapse.

“Obviously, a lot of them are being worked through, particularly by the Tax Office,” Mr Park said. “The balance of the clean-out of those companies will come to a natural conclusion through the first half of this year.”

However, he predicted insolvency numbers would continue to remain elevated even when that process was complete.

“We still see there’s going to be a very active restructuring market through 2025, but the back half (of 2025) of it won’t show those record numbers that we’ve seen the last 18 months,” he said.

While acknowledging that most small businesses do the right thing, an ATO spokesman said the agency was committed to ensuring businesses that did not comply with their obligations did not receive an unfair competitive advantage over other businesses who did pay on time.

“We are now focusing on businesses that refuse to engage with us and continue to ignore SMS and letter reminders.”