ATO is chasing debts as lockdowns continue, but is it making a bad situation worse?

Australia’s latest lockdowns pose a challenge for the Australian Tax Office: start collecting the business debts outstanding from 2020 and risk putting companies under further pressure, or allow those debts to continue to grow. 

The news this week that businesses with over $100,000 in tax debts have begun receiving letters from the Australian Tax Office, has highlighted the risk to the economy as — right now — the relatively low rate of business collapse is being funded on the back of ATO largesse. 

As long as the tax office holds off on pursuing the $34.1 billion in collectable debt that has accumulated, much of that money is available to businesses to keep other creditors at bay. 

If the ATO is too anxious to claw back what is owing to it, it risks setting off a domino run of collapses, as businesses in debt turn to the biggest creditor in the room, and leave smaller creditors out of pocket. 

The drama can be see playing out in the latest round of insolvency figures released from the Australian Securities and Investment Commission. 

The tsunami of insolvency anticipated in early 2021 has failed to eventuate. 

In fact, the number of companies entering external administration in 2020-21 represented just 58% the number in 2019-20 and 52% the number in 2018-19. 

In total, just 4,235 businesses entered administration last financial year — and the last time the figures were that low was last century. 

To put the figure into context, when the world entered the global financial crisis in 2008-09, more than 10,000 businesses collapsed and subsequent years were almost as high.

The decline in administration is chiefly the result of Australia’s biggest creditor pressing pause on pursuing debts, but it’s a situation that can’t last. 

How much do businesses currently owe the ATO? 

In an ordinary year, about 3% of tax debt goes unpaid for more than 365 days after it falls due — known as collectable debt — but 2020 was no ordinary year. 

Thanks to a comprehensive review of ATO debt released in July, we know that in 2019-20, 4.2% went unpaid for 365 days or longer.

The ATO also granted more than 12.9 million lodgement and payment deferrals, which don’t count as collectable debt until they fall due. 

While small businesses make up only a quarter of the taxpayer population, they are responsible for 62% of collectable debt. Privately owned companies and wealthy groups (just 1% of the taxpayer pool) produce another 21%.

Dig into the numbers and the pressure on the ATO to claw back this debt becomes clear. 

The average debts in both groups are small, but at the top end add up quickly. 

Some $2.5 billion is collectively owed by fewer than 2000 small businesses, while about 2200 private wealth groups owe a collective $3.5 billion. 

With Sydney’s lockdown alone costing between $150 million and $250 million a day, that would be useful money to have in government pockets. 

But the ATO can’t recoup debts in a vacuum. 

The flow-on effect

For every business entering external administration due to tax debts, there are usually creditors who don’t get paid in full and employees who lose their jobs. 

While these outcomes can occur anyway, the combination of the ATO pause last year and JobKeeper to pay the wages bill gave struggling owners breathing room to pay other debts as they fell due.

In other words, the restaurant might have owed the tax office, but it could keep paying the chef and the butcher, and negotiate a discount with the landlord, so the doors stayed open. 

Now, though, the protective measures that kept businesses rolling on have been stripped away. 

JobKeeper is gone and in most cases, rents are back up.

Laws that extended the time companies had to respond to statutory demands by creditors and gave temporary protection for directors whose companies traded while insolvent have expired. 

A much-touted new plan that allowed owners to appoint a small business restructuring practitioner with fewer powers than a traditional administrator as a way for owners to manage their way out of debt has also been a fizzer. 

ASIC figures show just 12 appointments between January and June. 

So what now for the ATO? 

Eight months in to 2021, the insolvency rates are ticking higher, and as many as two-thirds of Australian businesses are operating under lockdowns. 

Collectable debt is growing sharply, as lodgement and payment deferrals expire. 

And the pressure is on the tax office to reduce the size of a debt book already three times as big as that after the GFC. 

But chasing that debt has consequences, and is likely to make a bad situation worse for tens of thousands of businesses barely holding on.