From ATO aggression to payment defaults: The factors that led to Australian insolvencies climbing in 2016

A greater number of Australian companies were placed in the hands of external managers during the 2016 financial year and insolvency experts say each Australian state and territory has a different set of external risk factors that contribute to the long-term viability of companies.

However, these experts say too often businesses fail to get on top of process issues and resolve these before administrators need to be called in.

Speaking at the Institute of Public Accountants’ National Congress last week, insolvency experts from Worrells Accounting drew the audience’s attention to big name brands that have recently fallen on hard times, including Pie Face and Pumpkin Patch.

According to records from the Australian Securities and Investments Commission, there were 9,848 insolvencies in the 2016 financial year. This is up from 9,177 in 2014-15. When asked by fellow accountants why seemingly stable Australian brands were suddenly making headlines by appointing administrators, Worrells’ partners said there were a number of factors, including unique economic conditions in each region.

“In South Australia, there’s a subset of retail where we’re seeing a lot in the hospitality industry,” said Nick Cooper of Worrells SA.

“This arose from the very hefty penalty rates for weekend work, and a lot [of businesses] defer paying debts to pay their staff.”

Meanwhile in Queensland, the mining downturn has had a significant impact on businesses in regional areas. In the 2016 financial year, 2,045 Queensland businesses entered external administration, according to ASIC.

“Where we’re really seeing the flow on effect from the mining industry scaling back,” said Chris Cook, a partner at Worrells’ Brisbane office. Cook commented that the number of flights in and out of regional centres showed up the slowdown of consumers entering the region.

In Victoria, while the economy is chugging along, the building and construction sector could face problems in coming years, said Ivan Glavas from Worrells’ Melbourne office.

“Over the next couple of years because of the number of apartments, we’ll see an increase [in insolvency cases],” he said.

Read more: Payless Shoes collapses into voluntary administration 

The ATO’s aggression on wind-ups

One major trend over the past year has been the swell of activity from the Australian Taxation Office applying to wind-up companies that are failing to meet their tax debts, say the Worrells team.

In March 2015, Tax Commissioner Chris Jordan gave an address at the Tax Institute’s national convention in which he outlined a new approach to chasing businesses who were not repaying debts.

“We will be taking legal action earlier when warranted. This means initiating bankruptcy and wind-up action where there is evidence that a taxpayer is insolvent,” Jordan said.

“For corporates, we [have waited in the past] for their debt to be more than $340,000 compared to other creditors who initiate action at an average of $93,000.”

In May 2015, the ATO was lodging more than twice as many wind-up applications as it had the previous July. At the time, insolvency practitioner Jamieson Loutitt told SmartCompany, the tax office had filed around half of the notices they would lodge on average over a typical 12-month period.

Insolvency practitioners also witnessed a “significant” increase in the ATO’s use of garnishee and director penalty notices against Australian firms in the second half of last year.

The ATO told SmartCompany that while the preference was to help companies address their tax debts in the first instance, it would move in on companies that didn’t address unpaid debts in due time.

“For the minority of companies that don’t promptly address their tax debt, we take timely stronger action. This can include wind-up proceedings,” a spokesperson says.

The tax office indicated that up to October 31, 2015, it filed 1,438 wind-up applications against companies. In 2014-15 it lodged 2,456 applications, which compares with 1,983 in 2013-14.

The Worrells team point out that while there does seems to be less activity in this space than there was 12 months ago, business owners need to understand that the tax office is now a more sophisticated tracker of individual debts – and company directors need to be aware that depending on the situation, they may be personally liable for failing to pay those debts.

“[Wind up applications] have dropped a little bit from that, but there’s still a more aggressive tone,” said Chris Cook.

Separately to wind-up orders, the tax commissioner has been forced to defend the ATO this week to The Australian newspaper in response to claims the tax office had recently been bankrupting thousands of SMEs through challenges to tax returns on fraud and evasion charges.

“This is an incorrect assertion that is not borne out by our case analysis,” the commissioner said.

The impact of payment defaults

Another piece of the insolvency puzzle is payment defaults. Credit bureau CreditorWatch has tracked default payments from SMEs over the past 12 months and found in the 2015-16 financial year, the number of payment defaults increased by 90% in the second quarter of 2016, and by 63% in the third quarter.

“Compared with ASIC’s annual result of 9,848 national insolvencies, [this] otherwise suggests that bad debt exists on a larger scale, when the unaccounted segment of the market is taken into consideration,” the CreditorWatch team said in a recent report.

This trend of bad debts is accompanied by long delays in small businesses receiving payments for services, particularly when they are owed money from other small providers. CreditorWatch analysis of the average days clients say they waited for payments over the most recent financial quarter indicate that while the it takes SMEs 43 days on average to settle an invoice and pay a larger corporate, it takes them 56.1 days to pay an invoice from another small business.

Read more: Small business ombudsman to look at the “one thing that would change lives” for SMEs

“The time it takes for individual businesses to pay their suppliers is a valuable insight, given deteriorating payment behaviour is a leading indicator of credit risk,” the report states.

The long lag in payment times has been an ongoing concern, with groups calling on both the government and small business community to enforce a voluntary code on payment times to reduce concerns over cash flow.

In November, Small Business and Family Enterprise Ombudsman (ASBFEO) announced an enquiry into payment times aimed at identifying key problems that are reducing the viability of the Australian SME Community.

“Cashflow problems for small businesses involve more than just a lack of customers,” ASBFEO Kate Carnell told SmartCompany earlier this month.

A matter of processes

While there are a range of potential factors that can lead to insolvency, it’s worth remembering that many company collapses come about through problems that mount gradually, says Chris Cook.

“I’ve done businesses in the past where it’s just an older generation – where the books and records are lacking and things like that and they’re just not keeping up to date,” he said.

While international competitors are also playing a role in eating away at the profitability of local businesses in sectors like retail, the Worrells team said it is worth remembering companies can also run into major issues when problems with basic processes aren’t resolved early on.

“Eventually they get to a point where they don’t even realise they’re not making enough money,” Cook said.

SmartCompany attended the Institute of Public Accountants National Congress as a guest of the IPA. 

*This piece was updated on December 1, 2016 at 3:40pm to include comments from the ATO.