Vicious ATO-led hunt to recover $33bn risks economic destruction

Commissioner of the Australian Taxation Office Chris Jordan is leading a campaign to collect some $33bn the ATO claims to be owed from years ago. (AAP Image/Lukas Coch)

February 28 has been the date that cash-strapped Australian enterprises have been fearing since Christmas.

It’s the day business activity statement (BAS) payments were due.

My phone has been running hot because an increased number of enterprises have not paid their bills on time and their suppliers were relying on that money coming in to pay the Australian Taxation Office.

There is a cash squeeze of considerable magnitude taking place around the nation.

It could be that many enterprises have stopped paying their bills so that they can pay the tax office. Alternatively, they have failed to receive money from others making it impossible to pay both the tax office and suppliers.

There was always going to be a February 28 squeeze but the collapse of frozen food transport giant Scott’s Refrigerated Logistics, plus rumours swirling around the building community that another big one is about to go under, have raised alarm around the nation.

Just as the destruction of Scott’s enterprise will likely boost the cost of frozen foods, inflation and interest rates – any further widespread carnage in the home building industry will reduce the nation’s capacity to build homes which will inevitably lift the cost of Australian housing.

My hope is that the February 28 fear factor; the Scott’s collapse and the building industry crises will be a wakeup call to all those involved led by the Australian Taxation Office.

The ATO is conducting a vicious campaign to collect some $33bn it claims to be owed from years ago – most of it from middle and smaller corporations, with a concentration on the building and property industries.

But it is not just the ATO that is causing the cash squeeze. Among the others that may not realise the significance of their actions are banks, insurance companies, supermarkets, subcontractors and local councils who do not understand of the combined impact of what they are doing. And I haven’t mentioned the Albanese government and the Reserve Bank’s interest rate rises.

Let’s start with Scott’s. The ATO pressure on Scott’s frozen food operation was not the cause of its failure, but like the ATO building /property attacks, its thrusts came at a time when Scott’s management was under severe pressure from supermarkets who have kept the lid on prices, flood delays, energy cost rises, labour shortages, Covid-19 interruptions, higher interest rates and a host of other forces.

Scott’s will now either go out of business or be taken over but the end result will be a higher cost of frozen foods.

The crisis in the building industry is even deeper than frozen foods with a whole series of forces combining to make a bad situation worse.

There is still a rump of homes where completing the contracts involves big losses. But the banks are still demanding that new home building contracts be fixed price because it suits their mortgage book.

These contracts have step payments that are too far apart.

The Australian Taxation Office is seeking to recover $33bn. Picture: Supplied

The contracts require that a certain amount of work must be done to trigger payments from customers and the bank. But many builders can’t reach the targets because subcontractors who have been mauled are becoming wary and are demanding cash and/or lowering their work loads so delaying builders ability to perform enough work to trigger payments under the contract.

At the same time the bank credit squeeze on home borrowers is slashing orders for new houses so deposit cash coming through to door on new homes is way down.

Adding to the squeeze on builders are long council approval delays and a host of other forces.

And then there is a potential king hit. Suppliers of building materials insure the solvency of their builder customers with QBE and others. It is quite common for a supplier to obtain a QBE guarantee of 85 per cent of the amount owed by a builder.

Suddenly in some areas QBE is cutting back in its exposure to this sector which is making suppliers more nervous which, in turn, compounds the problem of undertaking enough work to trigger an instalment.

Then on top of all those pressures comes the ATO and its campaign to collect $33bn in past assessments where hard-pressed company managers are forced to try and prove these old ATO claims wrong.

The ATO, of course, must chase those who are playing the tax game badly but to try and recover $33bn of tax bills that were levied years ago often on a very dubious basis at a time when there is a severe cash squeeze in the community is irresponsible. But its not just the ATO that must wake up.

Government, councils, banks, subcontractors, insurance companies must understand that what they are doing in combination will create carnage, particularly as the large builders system is based on high-volume mass production.

Enterprises that have good relations with their banks and a good explanation of why they are cash strapped will get help. Others are against the wall.

The CBA has always stated that if interest rates go to levels above 4 per cent then the carnage will be monumental, yet that’s what the market expects.

The February 28 cash squeeze is a warning sign. These are dangerous times.