Potential Wave of Small Business Insolvencies as ATO Intensifies Debt Recovery Efforts

Potential Wave of Small Business Insolvencies as ATO Intensifies Debt Recovery Efforts

The Australian small business landscape is facing a potential wave of insolvencies as the Australian Tax Office (ATO) ramps up its efforts to recover billions of dollars in debt. The ATO’s aggressive approach has led to a surge in calls to the Small Business Debt Helpline, with volumes up 82 percent compared to last year. This increase far surpasses the 17 percent rise in calls to the broader-focused National Debt Helpline.

The alarming rate of small business failures, which has already increased by 34 percent this financial year, is reminiscent of the global financial crisis. In 2012, the number of companies entering insolvency peaked at 10,757, and experts predict that the figure could be even higher this year. While struggling businesses often owe money to multiple creditors, it is the ATO’s aggressive debt collection actions that are pushing them over the edge into insolvency.

Various sectors, including construction, hospitality, and retail, are particularly vulnerable to insolvencies as they struggle under the weight of a slowing economy. Tony Greco, General Manager of Technical Policy at the Institute of Public Accountants, warns that many small businesses simply cannot pay their debts, and the ATO’s more aggressive tactics could lead to an increase in bankruptcies.

Prior to the COVID-19 pandemic, the ATO was winding up approximately 40 companies in court each month. However, in February of this year alone, the ATO filed around 130 winding-up applications. Jarvis Archer, Head of Business Restructuring at Revive Financial, describes the ATO’s tax collection strategy as “mad.” He explains that taxpayers with non-compliant debts are left with no options but to pay their debts, close their businesses, or restructure their debts.

The personal toll of these actions is significant. Directors become personally liable for their company’s debts, which can often amount to hundreds of thousands or even millions of dollars. This level of liability is usually unthinkable for directors, leading them to opt for insolvency appointments.

Jarvis Archer warns that if the long-predicted insolvency tsunami is indeed approaching, it is imminent. The ATO is utilizing all available debt recovery tools, including director penalty notices that hold company directors accountable for their company’s debt if they fail to enter into an insolvency arrangement within 21 days.

The ATO’s outstanding debt stands at a staggering $52.4 billion as of December 2023, with small business debt accounting for 65 percent of that figure. Most of the owed money is related to tax withheld from salary and wages, GST, and income tax on profits. The ATO aims to address this growing debt through targeted strategies, such as formal recovery actions and credit reporting disclosures.

However, critics argue that the ATO’s approach is unfair and disproportionately impacts small businesses. Unfortunate cases, such as a company awaiting insurance payout to repair flood damage but being unable to meet the 21-day response window for a director penalty notice, highlight the challenges faced by struggling businesses.

The definition of a small business by the ATO is broad, encompassing not only sole traders and self-employed individuals but also manufacturing businesses with high turnovers and multiple employees. This means that micro-businesses and small organizations, which are integral parts of communities, are among those targeted by the ATO.

In contrast, a recent report revealed that more than 800 large companies in Australia paid no tax in the 2021/22 tax year by claiming tax offsets or reporting accounting losses. This raises questions about fairness and balance in the ATO’s approach to debt recovery.

As the ATO intensifies its debt recovery efforts, small businesses across Australia are feeling the pressure. The potential wave of insolvencies looms large, and the impact on communities and individuals is significant. Urgent action is needed to address the challenges faced by struggling businesses and ensure a fair and balanced approach to debt recovery.