The existing regime is ineffective dealing with record insolvencies
Record and still rising insolvencies, due largely to intensifying Australian Tax Office (ATO) debt recovery activity, underlines need for legislation that will more effectively enable management of the process.
The 2023-24 fiscal year’s record high of 11,053 insolvencies was exceeded last month, despite Reserve Bank of Australia (RBA) rate cuts.
Furthermore, Commissioner of Taxation Rob Heferen forecasts “insolvency debt, driven by an expected rise in insolvency appointments, will continue to increase and make up a larger portion of a $52b total outstanding tax debt”. (And insolvency debt is already 16% of total debt, the highest since the 20.1% of 2017.)
The Federal Government’s balance sheet discloses half taxes receivable aren’t recoverable – a situation exacerbated by insolvency practitioners’ increasing disinclination to accept work that companies forced into liquidation by the ATO often cannot afford to pay for.
This heightens the need for a review of outdated legislation now serving nobody well – neither taxpayers, the insolvency system, nor the ATO.
It’s Macks Advisory’s understanding insolvency debt remains on the ATO’s books until an external administration is finalised.
Finalisation for solutions like Small Business Restructuring (SBR) or voluntary administration, generally means conclusion of the SBR plan (all monies having be paid to creditors under the approved plan), fulfilment of a Deed of Company Arrangement (DOAC), or completion of a liquidation.
Commissioner Heferen says costs for winding up small businesses are “circa $5,000 in legal fees alone, which the ATO rarely recovers”.
Meanwhile Business Reset restructuring practitioner Jarvis Archer warns that as the ATO ramps up its post pandemic debt recovery campaign and begins activating a new plan to intervene in early stages of companies’ current financial difficulties, insolvency numbers are on track to exceed 15,000 before the end of next month “as small businesses face mounting pressures”.
The back story
According to the Australian Securities and Investments Commission (ASIC) there have been 11,162 insolvency appointments between 1 July 2024 and 6 April this financial year, a 44.1% increase on the same period last year.
Overwhelming tax obligations have resulted in 1715 small businesses with tax debts of more than $100,00 being forced either into liquidation by the ATO, or to voluntarily close their doors.
CreditWatch CEO Patrick Coghlan says business failures are likely to increase this year, at least until there are one or two interest rate cuts and more consumers have more disposable income.
The government’s massive and largely indiscriminate financial assistance and the pausing of many provisions of insolvency law during the pandemic, enabled many unviable businesses to continue operating. However, since cessation of this support, thousands of these so-called “zombie” companies have collapsed, and the ATO has forced them into liquidation trying to recover at least some of more t than $52b of tax debt.
Hospitality businesses have been devastated by insolvencies. The most recent statistics we’ve seen reveal 1845 have already collapsed this financial year, a figure expected to rise to about 2000 by June 30 -- which would be an increase of close to 60% on the previous financial year.
The construction industry is the largest sector of the economy to be stricken by insolvencies, although the growth rate for collapses has moderated to 24% from 34.1% between 2023 and last year.
In the same period retail insolvencies have risen 17.5%.
The education sector, currently with a failure rate of only 10% among businesses with tax defaults, seems however likely to be afflicted with a much higher rate when new caps on international students take affect in the next financial year -- when, according to CreditWatch, businesses most at risk will be those in the electricity, gas, water and waste services sector, 40% of which companies have defaulted on significant tax debts in the past 12 months.
It’s also a system failure
Businesses are failing at a record rate within a system that’s failed to cope with the problem. The impairment allowance (or “bad debts’ allowance) in the Federal Government’s accounts, has increased 300% in the past six years to the extent that it now exceeds net taxes receivable.
Half taxes receivable is no longer recoverable, most of the debt being attributable to small businesses, and under current legislation the ATO can’t write off core tax debt for small businesses.
It can voluntarily allow for remission of general interest charge (GIC) – which it’s increasingly reluctant to do – but that’s the limit of the Commissioner’s discretion.
The only way to compromise core tax debt is through a formal insolvency process, which tends not to happen if the expense of this yields no upside for either business owners or insolvency practitioners.
Some 57% of tax debt is what the ATO rates as “high priority” for recovery – stemming as it does from superannuation guarantee, pay as you go (PAYG), and goods and services tax (GST). Expect to see a rapid increase and intensified efforts by the ATO to recover PAYG and superannuation components of tax bills, money tax officers say should be held safely on behalf of employees and not used by businesses for their own purposes.
Newsletter readers, still with us at this point, may well be wondering how and when taxes they’ve paid will be better used, how and when the ATO will be able to recover more of squandered tax payments for proper use.
At present only 20 to 40 cents in the dollar are being returned to creditors by tax debtors who have been assisted under the SBR program referred to earlier. Liquidations are resulting in little or no returns to the ATO.
Clearly there is a strong case for legislative improvement in the tax recovery process and insolvency law relative to it.
