An increasing number of Australian businesses are being driven to business rescue programs such as the Small Business Restructuring (SBR) and Voluntary Administration (VA) to save their businesses from being declared insolvent due to tax debts.
This finding comes from the latest Alares Monthly Credit Risk Insights report which stated that SBRs accounted for more than 14 per cent of all insolvency appointments in April, while VAs accounted for almost 14 per cent. Furthermore, court liquidations were over 19 per cent as the ATO has remained active in pursuing direct court recoveries while the big four banks have remained “vigilant”, according to the report.
“Since the start of the (calendar) year we have experienced a noticeable uptick in Small Business Restructuring plans and Voluntary Administrations to resuscitate or restructure businesses across a wide range of industries,” Andrew Spring, Partner at Jirsch Sutherland, said. “Tax debt is the primary reason but higher operating costs are also pushing businesses to or over the edge.
“It’s obvious that out of necessity, an increasing number of businesses are discovering the benefits of Australia’s business rescue solutions,” Spring added. “We have some of the most advantageous legislation in the world: it’s both quick and commercially focused, but it shouldn’t be a last-minute or enforced decision.”
And with insolvency figures still remaining well above pre-COVID levels, Jirsch Sutherland is urging business owners to overcome their fear and shame of being found to be insolvent and give their business the best chance of survival by availing SBR and VA measures.
“As the ATO continues to work through the record amount of outstanding tax debt, it’s increasingly driving small businesses into SBRs and larger businesses into Voluntary Administrations,” Patrick Schweizer, author of the Alares Monthly Credit Risk Insights report, said. “And our April report shows that insolvencies remained 50 per cent above pre-pandemic levels, reinforcing the long anticipated catch up in insolvencies from the pandemic lows. “Non-ATO initiated winding up applications were slightly down compared to March, which again points to the ATO currently being the key driver for insolvencies.”
Spring pointed out that the creditor community is becoming less tolerant to operational behaviours that may have contributed to a business’s financial distress, and that the ATO is again at the forefront of this changing creditor position.
“It’s placing an even higher level of scrutiny on historical compliance when considering a proposal for restructuring,” Spring warned. “Anecdotally, we’re hearing this is also the case with pre-insolvency discussions regarding ATO payment plans.
“As an involuntary creditor, the ATO doesn’t have the option to withdraw credit from a business – nor does it automatically know they’re even in a trading relationship until the liability is self-reported,” he added. “As such, a high importance on reporting compliance is required to allow an effective and efficient tax system. During the last few ‘pandemic years’ the ATO appeared to move away from this position, and for those that have become delinquent with their lodgement activity, the hammer is about to drop. If a business has fallen behind with their statutory compliance, it’s crucial to act now.”
Spring also shared that having a strong business rescue framework (such as the SBR and VA regimes) provides an opportunity for those businesses that have encountered some form of extraordinary distress – such as bad debts, weather events or pandemic influences – to not be forced to close, thus preserving greater value for creditors and stakeholders.
“A robust insolvency framework has many advantages, including recycling underperforming resources such as labour and equipment assets, into viable business ventures,” he said. “It also provides a balance between the debtor and creditor relationship, as well as giving confidence to markets that anti-competitive behaviours by unscrupulous players in the market will be investigated and held accountable.”
