Business collapses down 40% on pre-pandemic levels: Have we dodged the insolvency cliff?

Business collapses are down by more than 40% compared to before the pandemic, casting doubt over whether changes to COVID-19 restrictions and business support will lead to a dramatic insolvency cliff.

Tax office and Treasury data confirmed by SmartCompany show there has been a 40% drop in external administrations this year compared to the same period in the year before the COVID-19 crisis.

Between September 2020 to September 2021, 4219 companies entered external administration, while 7552 companies entered external administration between September 2018 and September 2019.

But John Winter, chief executive of the Australian Restructuring Insolvency and Turnaround Association (ARITA), says while small businesses may have dodged the insolvency cliff for now, there will be an uptick in company closures next year.

“[Insolvencies] are not going to get back to those pre-COVID levels until quarter two, maybe quarter three next year,” he says.

The federal government’s emergency support measures, such as JobKeeper and the Cashflow Boost, ended at the start of the year, evolving into a mixture of state and federally funded packages in response to Delta outbreaks in NSW and Victoria.

Meanwhile, the temporary moratorium on insolvencies came to a close and insolvency reforms kicked in from January, allowing businesses with under $1 million in liabilities to continue trading while restructuring debts.

Winter says a tidal wave of insolvencies was expected in October last year, following the end of the “extraordinary amount of stimulus” the government injected into the economy.

When prolonged lockdowns in NSW and Victoria continued this year, he adds, governments, banks and landlords extended support for small businesses.

“So all of the impact that we foresaw being all at the same time has been smoothed out quite radically,” Winter says.

Tax office easy on debt collection

Treasurer Josh Frydenberg told Today this morning that “economic recovery is on track”, with jobs ads increasing and unemployment at a 12-year low.

“Job ads are 30% higher than at the start of the pandemic and today we have new Treasury and tax office data that shows that insolvencies are 40% lower year-on-year,” Frydenberg said.

Insolvency experts say a major contributor to low rates of small business collapses is the Australian Taxation Office (ATO) lenient debt collections efforts over the past 18 months.

“The ATO has effectively not wound up more than a handful of companies since the beginning of the pandemic, and it’s normally in the hundreds that they do every month,” Winter says.

And without the ATO actively collecting business tax debts “nobody’s pushing businesses to look at their solvency”, Winter adds.

Steven Kugel, owner and founder of the Sydney-based The Insolvency Experts, agrees the ATO’s reluctance to collect outstanding tax debts from businesses is the main factor driving low rates of insolvencies.

“The long and the short of it is that administrations are down about 40% because there has been no debt collection effort by the tax department whatsoever,” Kugel tells SmartCompany.

“There will be a tidal wave [of administrations] and that can be linked to the ATO restarting debt collection efforts.”

Kugel expects the tax office to ramp up debt collection efforts after the next federal election, which is expected to take place early next year.

“At that point in time, you might find that there will be a tidal wave of insolvencies,” he says.

SmartCompany has contacted the ATO for comment.