CreditorWatch’s latest data has revealed that thousands of Australian businesses that have defaulted on their Australian Tax Office (ATO) tax debt have collapsed over the past 12 months after failing to address these debts.
According to the data, 33.6 per cent of businesses with ATO tax debt defaults (1,715 out of 5,097 in total) —defined as debts exceeding $100,000 that are over 90 days overdue—have either become insolvent or voluntarily closed during the past year.
Businesses in the Electricity, Gas, Water, and Waste Services sector experienced the highest failure rate, with 40 per cent of businesses defaulting and eventually collapsing in the past 12 months. Food and Beverage Services come close at 39.7 per cent, followed by Information, Media and Telecommunications (37.5 per cent), Retail Trade (36.0 per cent) and Manufacturing. (34.3 per cent)
Reasons for business failure cited
CreditorWatch has attributed the defaulting and collapse of these businesses to combination of challenging economic conditions, rising operational costs, and declining retail trade per capita has left many businesses struggling to manage large tax debts. Even in stable economic times, repaying debts exceeding $100,000 has been cited as a formidable challenge.
The data also noted that the varying rates of failure among industries may also reflect how far along each sector is in its economic downturn. For instance, industries like Information, Media, and Telecommunications have been grappling with disruption for years due to the shift toward digital media. Meanwhile, the education sector, which currently has a failure rate of just 10 per cent among businesses with tax defaults, may face mounting challenges as new caps on international students take effect next year.
Leniency during the pandemic contributed to the defaults
It must be noted that during the pandemic, the ATO adopted a lenient approach to debt enforcement, leading to a surge in outstanding tax liabilities, which now total approximately $52 billion. Of this amount, around $34 billion is owed by small and medium enterprises (SMEs).
In response, the ATO has significantly intensified its debt recovery efforts in the post-pandemic period, employing measures such as disclosing business tax debts to credit reporting bureaus, issuing garnishee orders, and serving Director Penalty Notices.
CreditorWatch CEO Patrick Coghlan has supported the ATO’s stricter stance, noting the importance of holding businesses accountable for their tax obligations.
“The ATO is simply trying to collect the tax that all companies are obliged to pay,” Coghlan said. “While I sympathise with businesses grappling with such large debts, it’s crucial that businesses abide by these obligations.”
“A tax debt of $100,000 or more is a substantial burden, especially for SMEs, which represent the majority of businesses with tax debt defaults and can seem overwhelming. Entering into a payment plan with the ATO is an important and necessary first step in resolving these issues,” he added.
