ATO cash grab could spark further insolvencies

While the ATO’s “preferred approach” is always to work with taxpayers to resolve their situation through engagement rather than enforcement, the government body said where taxpayers don’t engage, “the ATO is taking firmer actions”.

These actions include garnishees, recovery of director penalties, disclosure of business tax debts, and legal actions, including summons, creditors petition, wind-up and insolvency action.

As ongoing supply chain issues, declining consumer confidence, rising interest rates, inflation and labour shortages batter the economy, the added pressure from the tax office could spark an increase in business insolvencies, according to CreditorWatch.

The July 2022 CreditorWatch Business Risk Index (BRI) revealed that external administrations and court actions have risen 50 per cent since April and are up 46 per cent year on year, while court actions are up 54 per cent year on year.

The uptick comes after a significantly reduced period of business insolvencies, according to the Australian Securities & Investments Commission (ASIC), which reported around 10,500 businesses closed their doors between March 2020 and May 2022 (over a two-year period), compared to 9,300 companies a year (on its 10-year average).

Nonetheless, as the hands-off approach to debt collection adopted by the ATO and many lenders during the pandemic is clearly over, CreditorWatch chief executive Patrick Coghlan said the “massive rise” in external administrations is a “disturbing trend”.

“Our data shows that court actions are back to pre-COVID levels and the ATO has also stated that it is ramping up legal action for outstanding debts,” Mr Coghlan said.

“With business and consumer confidence declining and inflation and interest rates on the rise, this doesn’t bode well for businesses, particularly SMEs whose cash reserves were depleted during the pandemic and are now operating on much tighter margins.”

Given that the Reserve Bank of Australia (RBA) does not expect high inflation to abate until 2023, businesses will have to expect worsening cost pressures going forward and “need to be prepared”, the credit bureau said.

SMEs caught in debt

As more than 50 per cent of SMEs are in some form of debt, according to the Australian Banking Association, broker Neil Tunstall and managing director of Thane Financial said there had been an increase in clients coming forward to service new mounting debt.

Mr Tunstall said that while the tax office has issued letters and warnings to customers, many have not taken proactive steps, and the ATO has become “more active”.

Given the cash flow for SMEs can be relatively inconsistent, as they wait for invoices to be paid off, Mr Tunstall said the majority of his clients have some form of ATO debt, and concerns were escalating.

“Particularly for SMEs, majority of those will be funded by a traditional overdraft, the overdraft particularly at the moment, has a fair amount of hardcore debt which is built into it [and] exacerbated by having a growing tax debt that sits there,” he said.

Mr Tunstall said that while brokers can be proactive to help find finance solutions today, looking ahead was important.

“[Impacted businesses] really need to be talking to [brokers] that are going to help them through and provide some foresight,” he said.

“Where are they going to be in four years and how are they going to get there.

“Unless you address some of those underlying issues and get a structure in place that is going to work structural issues in place ... [the broker] is going to be helping that client for a long time.”

For example, brokers need to look for solutions that are going to help clients make their ATO obligations but also provide ongoing working capital to allow the business to grow and prosper.

“Quite often what will happen is they will just go to their accountant, [who] may not have a great relationship with the ATO and it may not be the best arrangement that could be put in place for them.

“The other issue is that the big traditional banks may have some issues, within their process, about working with clients that have an ATO debt in terms of providing additional capacity.

Given this, “specialised providers” can step in and help borrowers service their debt, when other lenders can’t.

Non-bank sees spike in calls

Invoice finance lender Apricity’s CEO Linden Toll said that while it was obvious that the ATO was going to have to do something at some stage, the warnings should have been a bit more “pronounced”.

The lender specialises in invoice finance (or debtor finance), which it said helps close the gap between the time businesses invoice customers and get paid, assisting to deliver consistent cash flow to help meet the ATO debt repayment obligations, amongst other creditor payments.

“When you make an arrangement with the ATO based on a past debt, you still have to continue with your regular BAS payments plus statutory requirements,” Mr Toll said.

With businesses facing large debt to pay back, Mr Toll said the arrangements could affect banking relationships over time and make lending “even more” difficult.

He said services such as invoice finance could help clients get on top of the debt by having the surety of cash flow to budget and forecast for what they need.

“The non bank sector has grown in size and maturity, and certainly product offering over the last few years massively. There are other propositions out there that might be more appropriate to small businesses,” he said.

Mr Toll said that while the tax office is firm on collecting its debt, it is not out to hurt people. However, businesses and individuals need to come forward to make arrangements, and brokers have an opportunity to be proactive and support clients.

‘Don’t stick your head in the sand’: ATO

Deputy Commissioner Vivek Chaudhary said there is a range of support and assistance measures available.

“What is critical is that taxpayers or their representatives talk to us and respond to our calls,” Mr Chaudhary said.

Mr Chaudhary explained debt collection activities prioritise those taxpayers who represent higher risks and refuse to engage.

“We understand that a lot of people — especially small businesses — have done it tough through COVID and may now have a tax debt. Our message is — don’t stick your head in the sand — even if you can’t pay the full amount owed straight away, please contact us or your registered tax professional to discuss and we will work with you to set up an appropriate payment arrangement,” he said.

“We cannot help taxpayers who do not engage with us.”

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