Taxman wields axe on small business
It is a scary trend that is expected to accelerate, according to one of the country's leading debt collection agencies, Prushka.
It comes as the federal government is cracking down on business and using the ATO as a weapon to claw back revenue to help plug the federal budget deficit.
Data crunched exclusively for Fairfax Media shows that in July 2008 there were 184 wind-up applications served on companies and the ATO was behind 27 per cent of them. Five years later, in July 2013, the ATO was behind 51 per cent of an estimated 613 wind-up notices. When state government entities are added to the mix, the percentages of government-initiated wind-up notices balloon to more than 65 per cent.
Given the rising unemployment, the decision by the RBA to cut official interest rates to record lows and the clunky transition of the economy as the mining boom bubble bursts, it is no surprise that more companies are going under.
The big surprise is the banks are small players in wind-ups, representing less than 5 per cent, and companies supplying services and products are also bit players.
Prushka said given the parlous state of the economy, all efforts should be made to work with struggling companies.
Prushka's Roger Mendelson says once a company is liquidated, the business is finished. "We have found that working with defaulting companies produces a far greater recovery than winding them up, provided that the business is viable and there is genuine goodwill shown by the directors to trade out of the situation," he said.
The ATO sees it differently. The commissioner of taxation, Chris Jordan, said recently: "We do cop a bit of flak about how we manage small business debt. But, again, it's about fair play on a level playing field. If we don't get the right balance, those who are not paying their tax may get an unfair advantage."
An ATO spokesman said the ATO took legal action, including wind-up proceedings, to collect debts where taxpayers were unwilling to work with the ATO, continually defaulted on agreed arrangements, or did not have the capacity to pay and did not take steps to resolve their situation.
The spokesman also contested the figures and percentage of company wind-up notices initiated by the ATO. "In 2008-09 (you quoted July 2008 figures of 27 per cent) we initiated 8 per cent of wind-ups and, based on preliminary figures, we are on track for a similar result in 2012-13 (you quoted February 2013 of 41 per cent and April 2013 figures of 47 per cent)."
Companies recently in the ATO's firing line include NSW-based Lollita Corporation, which says on its website that a wind-up order was "commenced by the plaintiff Deputy Commissioner of Taxation on 18/06/2013". Others include Konnectv, which received a wind-up application from the ATO on June 17.
Other statistics reveal two companies a day in the construction and building-related sector are collapsing, as late payments from creditors worsen, activity dries up and banks put the squeeze on funding.
Behind the statistics and companies failing lies a fascinating story. The fact that the ATO is becoming more aggressive in issuing wind-up notices to companies - 593 in the months of May, June and July - is a reflection of underlying insolvency as some have probably not paid their BAS, many wouldn't have paid their PAYG tax for their employees and it is likely they haven't paid super on behalf of employees.
As Mendelson says, there is a long time lag between a company being insolvent and then facing liquidation, so it is reasonable to presume that this is the front-end of an underlying trend of increasing SME insolvency.
The figures from Prushka show that in April 2013 417 companies received wind-up notices, with the ATO representing 47 per cent, other government entities 30 per cent, the banks 4 per cent and other 27 per cent.
July was the worst month, with a whopping 613 applications, with the ATO responsible for 51 per cent, government agencies 18 per cent, banks 6 per cent and other 25 per cent.
What is chilling is most of the wind-up notices will be fruitless, with minimal recovery. The banks worked it out during the GFC by adopting careful lending policies to businesses. They also secure loans with mortgages on properties and personal guarantees - both of which are low-hanging fruit in terms of recoveries.
The figures show applications by businesses are low because the costs are too high to liquidate a company. According to Mendelson, most businesses are prepared to go to the statutory demand stage but few are prepared to fund a wind-up. "This is because the official figures don't represent the full scale of insolvency but are just the tip of the iceberg," he said. Given the time lag involved, all will be revealed in the fullness of time.
Twitter: @Adele_ferguson
Frequently Asked Questions about this Article…
An ATO wind-up notice is a legal action started by the Australian Taxation Office to force a company into liquidation to recover unpaid tax debts. Everyday investors should care because a rise in ATO wind-up activity signals growing small business distress and SME insolvency, which can affect suppliers, lenders, employment and local economic activity.
According to data cited in the article, ATO involvement in wind-up applications has risen sharply. Prushka’s figures showed April 2013 had 417 wind-up notices with the ATO behind about 47% of those, and July 2013 was even worse with 613 applications and the ATO responsible for roughly 51%. Over a recent three-month span the ATO was behind nearly half of about 1,365 notices.
The construction and building-related sector is particularly affected — the article says roughly two construction companies a day were collapsing due to late payments, falling activity and tighter bank funding. Small service and product suppliers and other SMEs are also facing pressure as the mining boom eases and unemployment rises. Specific businesses mentioned include NSW-based Lollita Corporation and Konnectv, which received wind-up applications.
The ATO says it pursues legal action, including wind-ups, when taxpayers are unwilling to work with the ATO, repeatedly default on agreed arrangements, or lack the capacity to pay and don’t take steps to resolve their situation. The ATO frames this as enforcing fair play so non-payers don’t get an unfair advantage.
The article shows banks are relatively small players in wind-up applications. Banks accounted for a low single-digit percentage (around 4–6% in the cited months), while the ATO and other government entities initiated a much larger share. Banks, however, tend to secure loans with mortgages and personal guarantees, which can make recoveries easier for them.
Prushka, represented by Roger Mendelson, recommends working with defaulting companies when the business is viable and directors show genuine goodwill to trade out of trouble. They say negotiated arrangements often produce far greater recovery than immediate liquidation, because once a company is liquidated the business is effectively finished.
Key warning signs noted in the article include: missed BAS lodgements or payments, unpaid PAYG tax and unpaid employee super, worsening late payments from creditors, drying business activity, difficulty securing bank funding, and directors not taking steps to resolve debts. These can signal underlying insolvency before formal wind-up proceedings begin.
The article warns that most wind-up notices may be fruitless with minimal recovery. Recoveries tend to be higher where secured lending exists (for example banks with mortgages and personal guarantees). For many small unsecured creditors, liquidation often produces little return, which is why negotiated solutions can sometimes produce better outcomes.
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