Tuesday 19 May 2015

EXCLUSIVE: ATO in debt assault on SMEs

The Federal budget may be redolent with overtures to small business but figures obtained by Sydney Insolvency News (SiN) show that the Australian Tax Office (ATO) has embarked on a debt recovery jihad against SMEs.

In the past six weeks, wind-up applications issued by the ATO have soared, from around 50 per month in March to more than 100 in April. A wind-up application is the first step in placing a company into liquidation. And the trend suggests wind-ups issued this month will total many hundreds.

On May 15 the ATO issued almost 50 notices to wind-up businesses. Yesterday, a further 32 were added to the snowballing tally. Today another 21.

Figures compiled by specialist business advisory Jamieson Louttit & Associates indicate that this month the ATO is likely to initiate more wind-up actions against non-paying corporate entities than in any other month since July 2014, when it threatened to liquidate non-payers on approximately 225 occasions. 

Insolvency Notices data courtesy of Jamieson Louttit & Associates

Jamieson Louttit told SiN the sudden spike was an acknowledgement that SME's with outstanding tax debts were a legitimate target for a cash-strapped government.

"They've got to collect money. That's where I think it's stemming from," Louttit said today, adding that the winding up notices would galvanise a proportion of the non-payers into compliance.

"A lot of those companies who've been issued wind-ups won't go into liquidation because getting the notice will persuade them to pay.

"There's also the issue of Director Penalty Notices (DPNs) and Garnishee Notices. You don't get to see those because they are not publicly available but insolvency practitioners and lawyers will tell you that there has been a significant increase in those as well," he said.

ATO deputy commissioner Cheryl-Lea Field confirmed the ATO was ratcheting up recovery action, warning that approximately 50 per cent of companies issued with a wind-up notice will be forced into liquidation.

"We took a supportive approach during the GFC and said we weren't going to take small businesses to the wall but I think it's time now for us to recalibrate and address that small number of people that are getting an unfair financial advantage," she said.

"Our first focus is on the majority of people who pay on time. Our second focus is on helping people who get into financial difficulty. Our third focus is to ensure that those people who are getting that unfair financial advantage are getting addressed in a more timely way".

More timely action was a theme flagged recently by ATO commissioner Chris Jordan.

"While the majority of taxpayers voluntarily pay their taxes on time or soon after, collecting outstanding taxes is an ongoing challenge for us. Despite our increased efforts, the amount of debt we have to collect has continued to rise in recent years," Jordan said in a speech to the Tax Institute on May 19, 2015.

"We will be taking legal action earlier when warranted, initiating bankruptcy and wind-up action where there is evidence that a taxpayer is insolvent, and looking to use other statutory powers where businesses have failed to pay employee superannuation entitlements or pay amounts held in trust," he said.

Jordan also hinted that the ATO had lowered the thresholds a taxpayer's indebtedness must exceed before it acts.

"In the past we have waited for a taxpayer’s debt to escalate to on average over $300,000 before initiating bankruptcy proceedings, compared to other creditors who often take action at around an average of $35,000.

"For corporates, we wait for their debt to be more than $340,000 compared to other creditors who initiate action at an average of $93,000."

In its 2013/14 annual report, the ATO said tax debts owed by small business were rising significantly, though a proportion were ultimately the fault of big business delaying payments to suppliers.

"Small businesses continue to account for the majority (around 62.4%) of all collectable debt and are a specific area of focus," the ATO said.

"Research suggests that small businesses are giving a lower priority to tax debts than to trade debts. Also, businesses are taking longer to pay each other, particularly large businesses paying small businesses. This has potential flow-on effects in terms of solvency."

It may be a coincidence but the timing of the ATO's crusade suggests the government wants to clear out non-payers and non-performers as it prepares to dispense largesse to SMEs through the $20,000 asset depreciation initiative announced in last week's budget.

In an interview last week with 2GB's Ross Greenwood, Federal Small Business Minister Bruce Bilson said that the $20,000 accelerated write-off offered to small businesses in the budget was for people who were "fair dinkum in business" and not for those who have an ABN in their pocket.

" .... in terms of the cash flow benefit, if you are not in positive territory, if you have not got black ink that is generating a tax liability, you do not have a whole lot to write the asset purchase off against and you might have to explain what you are up to to other people interested in your business," the Minister said.

When contacted by SiN, Bruce Bilson declined to address questions relating to whether the sudden rise in ATO-initiated wind-ups was related to the small business initiatives announced in last week's budget.

"As part of the 2015-16 Budget, the Government has provided $130.9 million over four years to deliver an improved experience for clients in their dealings with the ATO, " the Minister said.

"This will fund three foundational initiatives to improve the ATO’s digital capabilities and will support the Government’s commitment to reduce red tape."

Initiatives aside, there's no doubting a crackdown on indebtedness is warranted.

Total outstanding debts owing to the ATO rose from $14.5 billion in 2009/10 to $19.5 billion last financial year. More than $12 billion of that is owed by SMEs.

And the ATO’s own numbers indicate that whilst total wind-up applications have been falling since the 2011/12 peak of 1,555 out of a total of 10,818, the ATO’s share is increasing.

By 2013/14, ATO filings had eased to 1,333 but total applications had also fallen, from 11,192 in 2012/13 to 9,916 in 2013/14.

In 2009/10 the ATO - under instruction from then treasurer Wayne Swan to go soft - filed just 493 applications.

Jamieson Louttit believes the sharp increase is budget related. "It happened in July last year after the budget," he said.

"Shortly after June 30 there was a surge in winding up applications from the ATO. It tapered off very quickly though, probably because they realised there were too many.

"The spiralling numbers of wind-up notices are a real pressure point on small businesses which is the sector under pressure at the moment. Big businesses haven't gone belly up in a while."

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