‘Insolvency Tsunami’ of Small Businesses Could Be Coming as ATO Aggressively Chases Debt

The sign of an Australian Taxation Office shopfront is seen in Canberra, Australia, on May 9, 2014. AAP Image/Lukas Coch

Australian small businesses are becoming insolvent at a rate faster than what was seen during the global financial crisis, as the Australian Tax Office (ATO) aggressively pursues billions of dollars of debt.

As a result, call volumes at the Small Business Debt Helpline have surged by 82 percent compared with last year. That compares with a 17 percent rise for the broader-focused National Debt Helpline.

The reason is clear: the rate of small business failure has already increased by 34 percent this financial year.

In 2012, following the global financial crisis, the number of companies entering insolvency peaked at 10,757, with many experts predicting that the total could end up higher this year.

While struggling businesses often also owe money to other creditors, aggressive debt collection action from the ATO is being cited as a key factor in pushing them into insolvency.

Many businesses facing insolvencies are typically ones that are already struggling under a slowing economy, including construction hospitality and retail.

General manager of technical policy at the Institute of Public Accountants Tony Greco says many small businesses still can’t pay and that more aggressive ATO action could send more of them to the wall.

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

“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.”

Before COVID-19, the ATO was winding up about 40 companies a month in court, but this February it filed about 130 winding-up applications.

Businesses Facing ‘Black and White’ Options

The aggressive ATO tax collection strategy has been described as “mad” by Revive Financial’s head of business restructuring Jarvis Archer.

Mr. Archer told the ABC that the ATO had “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.”

Everything was “back on the table” post-COVID and it was taking a damaging personal toll, he said.

“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 said.

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

He said the ATO was using all of its debt recovery tools including issuing director penalty notices, which give a company director 21 days to voluntarily enter into an insolvency arrangement, otherwise they become personally liable for their company’s debt.

The tax office was also setting shorter deadlines for payment and was immediately issuing notices to wind up a business after the deadline passed—a practice that was found to be problematic in a review by the small business ombudsman, who said it had a “crippling” impact.

Another review by the inspector-general of taxation found the notices could be “very significant and take the form of substantial emotional, reputational, and financial harm.”

How Much Is Owed?

The ATO is owed $52.4 billion as of Dec. 31, 2023, roughly double the $26.4 billion outstanding at the end of 2019. Small business debt accounts for 65 percent of that figure, or $34.1 billion.

An ATO spokeswoman said most of the money owed by businesses was comprised of tax withheld from salary and wages, GST, and income tax on profits.

“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 said.

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

She said that while the ATO is often a major creditor in wind-up cases, it was only a “minor initiator of insolvency.”

“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 said.

Unfair Examples

However, Mr. Archer said he’s seen many unfair examples of small businesses being targeted, including one company that was waiting to repair its business that had been damaged by the Brisbane floods.

The owner received a director penalty notice giving him 21 days to respond but because he 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.

The ATO has a very broad definition of what constitutes a small business—it includes sole traders, companies, trusts or partnerships that operate a business for all or part of the income year and have less than $10 million in turnover.

Therefore, a manufacturing business with several employees bringing in a high six figures is classified as a small business, alongside self-employed people and those working in the gig economy.

In terms of what businesses were being targeted by the ATO, Domenique Meyrick, CEO of Financial Counselling Australia, said, “You’re not talking about great big powerful companies. You’re talking about micro-businesses, small organisations that are part of everyone’s daily life and part of our community.”

In the 2021/22 tax year, more than 800 large companies paid no tax in Australia through claiming tax offsets or reporting accounting losses, a 2023 ATO report revealed.