ATO crackdown on business debts leads to doubling of court-ordered wind-ups

A crackdown on debts owed to the Australian Taxation Office (ATO) has led to the number of companies facing court-ordered wind-ups more than doubling in the first half of FY24, according to Insolvency Australia.

The latest Corporate Insolvency Index released by the insolvency comparison site has revealed that court wind-ups increased 133 per cent in the six months to the end of December compared to the same period a year earlier.

Insolvency Australia members also have warned of tough times ahead in 2024 with the retail, hospitality and construction sectors the most at risk as consumers tighten their belts to manage cost-of-living pressures and due to skills shortages prevailing.

Taking a broader perspective of business failures, the Corporate Insolvency Index has revealed that external administrator and controller appointments nationally rose by 24 per cent during the half year with NSW the nation’s hotspot as insolvency appointments hit 3,141 – more than the combined total of insolvencies in Victoria and Queensland.

Victoria recorded 1,564 appointments and Queensland 1,092, followed by Western Australia (397), South Australia (182), the ACT (135), Tasmania (23) and the Northern Territory with seven.

Voluntary wind-ups accounted for the majority of appointments (2,308), followed by court-enforced wind-ups totalling 1,076 which was more than double the figure from a year earlier.

“The ATO and the banks, in particular, are using all the tools in their arsenals to recover monies owed – and that includes long-term, legacy debts from COVID and pre-COVID years,” says Insolvency Australia director Gareth Gammon.

“However, the number of businesses opting for the small business restructuring (SBR) regime also continued to rise, which shows that directors are acting earlier to address their debt issues.”

Entities with debts of less than $1 million qualify under the SBR provisions of the Corporations Act.

Scott Andersen, principal of Worrells in Geelong says that apart from an easing of enforcement action during COVID, the ATO ‘has always been a key driver of insolvency appointments’.

“I don’t expect this to change,” he says.

“They have a debt book of $50.2 billion which they are trying to collect, and they have significant tools at their disposal, such as issuing director penalty notices and garnishee notices.

“But what we have seen is that the ATO is receptive to considering an offer via an SBR. These proposals are subject to criteria eligibility and while we are not aware of any secret formula, the ATO typically views a proposal more favourably when there has been a good history of tax obligation compliance and there are no large outstanding related party asset loan accounts.”

Business News Australia last week revealed that, under the SBR process, the ATO accepted 22.5c in the dollar for a $2.11 million debt collectively owed by companies within Gold Coast-based Artesian Hospitality Corp.

Insolvency Australia member and founding partner of Perth’s Auxilium Partners, Bob Jacobs has forecast another increase in insolvencies in 2024.

“Given the cost-of-living pressures and increased interest rates, we are of the view that retail is a major at-risk sector, as it is largely discretionary spend,” says Jacobs.

“Hospitality will face ongoing pressure because discretionary consumer spend will reduce as mortgage and rent increases bite into household budgets, which means customers decrease and business owners are squeezed in the middle by high wage costs and low availability of labour.

“Similarly, the construction sector will continue to face pressures, due to labour and material costs and availability, increased funding costs and tightening of available capital to support work in progress and guarantees required on construction contracts.”

Jacobs sees the shortage of skilled and unskilled labour as a key issue driving insolvencies, arguing that this impacts business profitability and viability. He adds that tighter capital markets and the higher costs of borrowing funds further increased cost pressures for businesses.

“While we expect to see an increase in insolvencies (in 2024), we believe if directors act early there will be many opportunities to restructure their affairs through formal insolvency process and preserve livelihoods for their businesses and employees if proper professional advice is sought,” says Jacobs.

“Conversely, there are a lot of businesses that need to be ‘ended’ because they are no longer viable and have legacy debts no longer supported by the crown creditors. This return to a normal economic cycle will pave the way for new entrants and business ideas in the market.”