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The ATO’s ramp-up of debt collection activity on small businesses shows up in the figures for July.
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120 DPNs a day drive insolvencies back to pre-pandemic level
09 August 2022
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12 minute read
Business insolvencies are back to pre-pandemic levels with the ATO firing out 120 director penalty notices a day as it ramps up debt collection to full speed.
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July recorded 674 businesses being wound up or entering administration, line-ball with the comparable figure for 2019–20 after two years running at half that level.
The impact of the ATO’s activity was hitting more quickly than expected, said chief executive of the Australian Restructuring Insolvency & Turnaround Association, John Winter, and there was little chance of a slowdown now.
“This is the first time we’ve seen a month of statistics that line back up to that pre-COVID base level,” Mr Winter said about the ASIC figures released on Monday (8 August).
“We thought – based on what we know about the ATO activity levels as at the end of June – we would see a bigger lag between their return to the market and when numbers started to pick up.
“If you think back to what happened in the GFC, there was a 12 to 18 month lag before insolvency numbers started to pick up. This is a quick return and what’s driving it is the sheer volume of the ATO’s activity.”
The office confirmed Monday (8 August) that it had accelerated its debt recovery program on the back of 52,319 warning letters about imminent DPNs sent out from early April.
“In relation to companies with outstanding obligations we have issued over 7,000 DPNs which continues to increase with 120 DPNs currently being issued daily,” it said.
A DPN alerts a company director that the ATO intends to recover debt incurred by the company in relation to PAYG withholding tax, the superannuation guarantee charge and GST.
The daily DPN rate has risen fourfold since mid-May and Mr Winter believed the figure might already be hitting 150 a day.
In addition, the ATO confirmed it had issued 1,500 intent-to-disclose notices following 29,552 warning letters sent out from April, with 50 clients owing $100,000 or more already referred to credit reporting bureaus “and we expect that number to increase”.
Mr Winter said most of the wind-ups so far were initiated by company directors confronting “an absolute reality that they’ve been trading a zombie company for some period”.
“The ATO is doing very aggressive signaling. In the last week, we’ve seen the first few ATO wind-ups hitting the courts – it’s only a few, less than 10,” Mr Winter said
“So the ATO has not fully returned to actually shutting the businesses down. What they’re doing is coming on so strongly that directors are making the decisions themselves. They’re realising that their business isn’t viable, that they don’t have a hope of paying back the ATO.
“That will then be backed up by the ATO having to come in and start its wind-up process as well.”
Mr Winter said government stimulus had postponed the day of reckoning for about 10,000 businesses that would otherwise have gone broke but the pressure in the economy from inflation and supply chain issues was also starting to bite.
“I think we’re going to see an additional group of businesses that become well aware that they’re in genuine financial distress,” Mr Winter said.
“Given the other positive indicators in the economy, I don’t think we’re going to see a sustained, high level of insolvencies but I do think we’re going to see a bit of frenetic activity for a little while.”
He said the insolvency rate was now on track for a return to its pre-pandemic average with some sectors more vulnerable than others.
“About 10,000 a year is the sort of longer term average pre-COVID – I definitely think we’re going to sit at or above that level for the foreseeable future,” Mr Winter said
“The indications are that we’re seeing quite a bit of activity in the construction sector and we are definitely seeing pressure in retail, hospitality and transport too.
“It is typically around small business at the moment and we are seeing for the first time, some interest in the newer Small Business Restructuring regime, which allows directors to stay in charge of their business to some extent.
“That’s still a very clunky process, unfortunately, and we hope the new government will look at fixing that up.”
He said small business, with its large share of tax debt, was clearly the ATO’s focus.
“We’re not seeing big businesses coming under as much pressure right now, I think that’s one of the central messages. It’s SME driven right now,” Mr Winter said.
“We’re getting lots of inquiries coming into insolvency practitioners. I meet with dozens of practitioners each week and they’re all saying that while they’re not busy in terms of formal appointments yet, the inquiry level from directors and individuals in distress is definitely getting busier and busier.
“That means that the flow is only likely to continue.
“It’s in the SME space that they [the ATO] tend to overlook the reporting and the payments for longer periods of time. And so that’s where those warning letters have been going – unquestionably to SMEs.
“We know that accountants in public practice are dealing with it more and more on a daily basis because they’re the key referrers of insolvency appointments to liquidators.”
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