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…
Recent statistics in the article show the Australian Taxation Office (ATO) has been behind nearly half of the 1,365 companies served with wind‑up notices over a recent three‑month period. For investors this signals rising small business insolvency risks: more companies facing wind‑up notices means higher chances of supplier defaults, reduced recoveries on unsecured claims and potentially weaker performance from SME‑exposed investments.
The article notes the federal government is cracking down on business to claw back revenue and help plug the budget deficit, and the ATO says it takes legal action — including wind‑up proceedings — where taxpayers are unwilling to work with the ATO, continually default on agreed arrangements, lack capacity to pay or don’t take steps to resolve their tax debts. The ATO frames this as ensuring fair play on a level playing field.
According to data cited, ATO‑initiated wind‑up notices have been a large share of recent action: for example, in April 2013 the ATO was attributed with about 47% of wind‑up notices and in July 2013 about 51% of 613 applications. Other government entities, banks and private creditors make up the remainder. (The ATO has disputed some of the percentage figures.)
The article says banks are relatively small players in issuing wind‑up applications — generally representing under 5% (recorded about 4% in April 2013 and around 6% in July). Banks tend to achieve better recoveries because many business loans are secured by property mortgages and personal guarantees, whereas tax or unsecured creditors often face minimal recoveries.
Investors should watch SME‑exposed sectors and signs of distress highlighted in the article: construction and building‑related businesses (noted as collapsing at roughly two companies a day), late payments from creditors, drying activity, funding squeezes from banks, and businesses failing to pay BAS, PAYG tax or employee superannuation — all indicators of underlying insolvency risk.
The article warns most wind‑up notices will be largely fruitless with minimal recovery for creditors. Prushka and insolvency practitioners say recoveries are often low because many insolvent companies lack assets or the cost of liquidation can exceed recoverable funds; secured creditors (like banks with mortgages) generally recover more than unsecured creditors or tax authorities.
Prushka’s Roger Mendelson argues that, where a business is viable and directors show genuine goodwill, working with defaulting companies can produce far greater recoveries than winding them up. He also cautions that once a company is liquidated 'the business is finished,' so consensual solutions can sometimes protect value for creditors and investors.
Yes. The article names NSW‑based Lollita Corporation — which states a wind‑up order was commenced by the Deputy Commissioner of Taxation on 18/06/2013 — and Konnectv, which received a wind‑up application from the ATO on 17 June 2013, as recent examples of firms in the ATO’s firing line.
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