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ATO chases small businesses for $34b in debt, insolvencies tipped to hit post-global financial crisis levels

The tax office is chasing more than $34 billion worth of debts owed by small businesses and self-employed Australians that were put on hold during COVID, and sometimes using aggressive enforcement action to collect the money, which experts say is sending some businesses to the wall. 

Some experts are predicting that the rate of insolvencies could this year track its highest levels seen since just after the global financial crisis.

Many of those people hitting the wall are in sectors already struggling under a slowing economy, including construction, hospitality and retail.

In many cases they also owe money to other creditors but, in some cases, aggressive debt collection action from the Australian Taxation Office (ATO) is a key factor tipping them over the edge.

While the ATO is not always the main creditor in winding up applications in court, experts say the agency is taking far stronger debt recovery action than it had been against some businesses that are yet to turn a corner, and amid an economy that’s plunged deeper into a per-person recession

These actions include the agency reporting tens of thousands of small businesses with debts to credit reporting agencies, issuing garnishee notices, which can result in the money being taken directly out of a business owner’s bank account, and the agency initiating wind-up applications.

Tony Greco, the general manager of technical policy at the Institute of Public Accountants, fears many small businesses still don’t have the capacity to pay and more aggressive ATO action could send more businesses under.

Tony Greco worries more small businesses will go under if the ATO pursues more aggressive debt recovery action. (Supplied.)

“I think, for a lot of sectors, the post-COVID period hasn’t been all that rosy,” he says.

“If the ATO were to pursue this debt aggressively, you’d probably find a lot of small businesses just pretty much hanging up their shingles and declaring bankruptcy.”

‘Paying tax in Australia is not optional’

Total collectable debt owed to the ATO jumped to $52.4 billion as of December 31, 2023, roughly double the $26.4 billion at the end of 2019. 

Small business debt accounts for $34.1 billion, or 65 per cent, of total collectable debt.

The stronger debt recovery action against small businesses is happening at the same time as the ATO has been reviving old tax debts, leaving many individuals struggling to repay and some at risk of losing their homes. 

An ATO spokeswoman told ABC News most of the collectable debt owed by businesses was self-reported business activity statement debt comprised of tax withheld from salary and wages, GST, and income tax on profits. 

The ATO defines small businesses as including sole traders, companies, trusts or partnerships that operate a business for all or part of the income year and have less than $10 million of aggregated turnover. This includes micro and self-employed businesses and can include those operating in the gig economy.

She says the agency is seeing “more businesses not paying tax on time since before the pandemic began”, and reminds people that “paying tax in Australia is not optional” and the ATO will continue chasing small businesses that owe money.

“The ATO has a range of targeted strategies to address the growth in collectable debt — this includes a renewed focus on formal recovery actions, such as having their debt disclosed to credit reporting bureaus or court-imposed liquidation if a debt remains unpaid,” she says. 

“Businesses cannot use monies held for employee entitlements to manage their day-to-day cash flow.”

‘Mad’ ATO debt recovery action

But Revive Financial head of business restructuring Jarvis Archer says, “the ATO has come into 2024 really mad”.

“Noticeably turning a corner in their approach to taxpayers with non-compliant debts, the options are now black and white: pay, close or restructure your debt,” he says.

A man standing by a plant in his office with his arms crossed.

Jarvis Archer says small businesses are restructuring to avoid the ATO winding them up, and both insolvencies and liquidations have spiked this year. (ABC News: Josh Dye )

More aggressive debt recovery action by the ATO, as well as a slowing economy under higher interest rates, he says, are factors why the rate of company insolvencies in the past financial year is tracking 36 per cent higher than last year and 25 per cent higher than pre-COVID levels. In the past four months alone, they are now 49 per cent higher than last year.

In 2012, following the global financial crisis, the number of companies entering insolvency peaked at 10,757. It’s a figure Mr Archer says is likely to be beaten this financial year.

“If the long-predicted insolvency tsunami is indeed coming, then that time is near,” Mr Archer says.

The intensity and volume of the ATO’s debt recovery action have ramped up since March 2022, he notes, including shorter deadlines for payment and immediate issue of notices to wind a business up after deadlines pass.

Business owners fearing the ATO could wind them up often voluntarily restructure ahead of formal ATO  action.

“The ATO has really come out with a vengeance in respect of its collection activity this year,” he says.

It’s using all of its debt recovery tools, Mr Archer says, including issuing director penalty notices which give a company director 21 days to voluntarily enter into an insolvency appointment, otherwise they become personally liable for their company’s debt.

It is also becoming more common for the ATO to use garnishee notices against small business owners, Mr Archer says.

This practice was highlighted as part of a joint Fairfax (now Nine) and ABC Four Corners investigation that revealed the practice was crippling small businesses and was found to be problematic in a consequent review by the small business ombudsman.

Another review by the inspector-general of taxation found the impact of garnishee notices on small business owners “can be very significant and take the form of substantial emotional, reputational and financial harm”. 

Independent MP Andrew Wilkie is also worried that the ATO’s current approach to debt recovery could send more small businesses to the wall.

A middle-aged man wearing glasses, a suit and tie, sits in his office looking at the camera. An australian flag is behind him.

Andrew Wilkie does not think the ATO is being ‘sensible’ in some cases of debt recovery against small business.(Four Corners: Craig Hansen)

“I don’t think they [the ATO] are being sensible at the moment,” Mr Wilkie argues.

The ‘damaging’ personal toll on company directors

Mr Archer says now, post-COVID, “everything is back on the table” and it’s taking a damaging personal toll. 

“There are businesses that will get caught up in that that may not get the outcomes that are fair or reasonable for them,” he argues.

Mr Archer says while the ATO can’t leave “zombie companies” operating, he’s seen some unfair examples of small businesses targeted, including one company that was waiting to repair its business that had been damaged by the Brisbane floods.

closed sign hangs on the inside of business's glass door

Businesses are being wound up as they struggle to pay back debts to the ATO and other creditors in a slowing economy. (UnsplashEvan Wise/CC licence)

Mr Archer says this business owner received a director penalty notice giving him 21 days to respond. But because the owner was awaiting an insurance payout, he couldn’t rebuild his business within the 21-day window and he had to become personally liable for the company’s debts, risking personal bankruptcy. 

He says, in another case, the taxpayer’s funds were garnished and he too lost everything. 

“Becoming personally liable for your company’s debts, which are regularly more than $200,000, and sometimes in the millions, where there are debts across multiple group companies, is usually an unfathomable option and therefore the director’s only option is to make an insolvency appointment,” he explains.

Kate Conneely, another insolvency and restructuring adviser and a partner at Cor Cordis is also seeing stronger debt recovery action being used by the ATO including director penalty notices, garnishees over bank accounts and wind-up applications in court.

But she says such action is mostly reserved for cases where taxpayers “put their heads in the sand” and ignore their responsibilities.

A lady in a dark suit looking worried at her computer desk.

Kate Conneely says typically the ATO takes strong action against businesses that refuse to engage. (ABC News: John Gunn)

Ms Conneely agrees that often small business directors have put personal assets on the line and such action “can be very personally damaging”.

“I completely understand that it does create a huge impact both probably physically, mentally, and emotionally on those directors, but the ATO only takes what some people may say is the heavy-handed action after it has tried to engage with the taxpayer,” she says.

“Unfortunately sometimes it does take [a more heavy-handed approach] for a director or a taxpayer to sit up and say, ‘I actually have a problem, and I’d like to do something about it.'”

She also notes that businesses facing insolvencies are typically ones that are already struggling under a slowing economy including construction hospitality and retail.

She says while the insolvency tsunami has been talked about for a few years now, “what we’re actually seeing is a return to pre-COVID levels of insolvency”.

“We might get a little bit of a spike … but the reality is that the insolvency levels that we’ve seen for the past few years have been quite subdued,” Ms Conneely says.

More companies are being wound up in court action

If a company doesn’t voluntarily enter into insolvency, it could be forced to act.

Pre-COVID, the ATO was winding up about 40 companies a week in court.

But this February alone, Mr Archer notes the ATO filed about 130 winding-up applications.

Ms Conneely also forecasts an uptick in liquidation activity this year, both because of ATO winding-up action as well as general creditors taking action for non-payment of debt.

Australian Taxation Office

The ATO says it cannot waive debts, but that it would still “reserve help and assistance for those who genuinely need it”. (AAP: Tom Compagnoni)

An ATO spokeswoman told ABC News that while the ATO is often a major creditor in wind-up cases, she said “it is only a minor initiator of insolvency”.

From July 1 to December 31, she said the proportion of ATO-initiated corporate wind-ups was 2.8 per cent — “this is well below the historical pre-COVID levels of around 16 per cent”.

She says the agency will continue to act against businesses that don’t engage and fail to meet their tax obligations.

“Whilst we understand some taxpayers are having difficulty paying on time and we take a supportive approach to help these taxpayers get back on track, we also see a proportion of small businesses that have capacity to pay but are choosing not to,” she says.

It will support “those who are doing the right thing and paying on time, whilst taking strong and deliberate action to deal with those who ignore their obligations and refuse to engage with us to pay their outstanding amounts”.

The ATO would still “reserve help and assistance for those who genuinely need it, including payment plans and General Interest Charge remissions where appropriate”.

“Those businesses who are struggling to recover from debts accrued during COVID should seek advice on their options going forward, including insolvency options,” she says.