ATO court actions hit pre-COVID levels as the tax office chases businesses and individuals for outstanding payments

The number of court actions filed by the Australian Taxation Office has surged above pre-COVID levels, new figures show, as turnaround professionals urge small businesses to grasp the “last olive branch” extended to firms with outstanding debts.

In its latest credit risk report, issued Tuesday, monitoring agency Alares showed the ATO initiated 386 court actions in May 2023.

That figure is more than any month since the start of 2019, covering every jurisdiction but Tasmania.

The overall number is comprised of 94 winding-up orders levelled against companies, the most in any single month since December 2019.

The ATO also pursued eight personal bankruptcy actions, yet the bulk of the ATO’s court actions in May were comprised of efforts to chase down unpaid debts.

Around 95% of those 284 claims reflected court actions against individuals, according to Alares director Patrick Schweizer.

However, the overall consequences for businesses seen in the May figures remain profound.

“In terms of court actions against businesses, this is basically encapsulated within the green bars in the graph,” he said.

“This number has increased significantly month over month in 2023. May numbers were 50% higher than April numbers.”

Source: Alares

The tax office is not the only creditor businesses need to worry about: the figures also show non-ATO winding-up applications have surged to 2019 levels, after three years of subdued activity.

Combined, those actions are all but certain to feed into growing corporate liquidation figures, with data from the Australian Securities and Investments Commission (ASIC) serving as a grim indicator of harsh trading conditions across the country.

There have been 3,861 voluntary liquidations launched by creditors in the financial year to June 5, ASIC states, compared to 3,016 in 2021-2022.

The number of court-appointed liquidations sits at 911 in the financial year to date, compared to 721 last financial year.

The uptick in ATO court actions is stark but not entirely unheralded, as the tax office has long warned small businesses that its standard compliance activities are coming back into effect.

Even so, there are still measures small businesses can take to smooth over their relationship with the tax office before it resorts to hefty penalties and the threat of court action.

The 2023-2024 federal budget introduced a new failure to lodge payment amnesty, covering tax returns and Business Activity Statements that went unlodged between December 1, 2019, and February 29, 2022.

Small businesses that file those outstanding statements between June 1, 2023, and December 31, 2023, will avoid failure-to-lodge penalties, which may have accumulated into a significant financial burden.

Turnaround professionals say the amnesty is one of the last leniency measures small businesses can expect before the ATO fully reverts to pre-pandemic settings.

“Essentially, this amnesty is the ATO’s last olive branch before closing off its COVID support,” said Revive Financial, a restructuring, insolvency, and turnaround advisory group, in a blog post outlining the new provisions.

“After this, it will be gloves off to bring their debt book down and restore normal trading conditions.”

As the amnesty is positioned as a way to re-engage lagging small businesses with the taxation system, businesses hoping to take advantage of the scheme should go in with a genuine plan to pay down their debt.

Simply seeking amnesty may not be enough to keep businesses afloat, Revive Financial said, advising that businesses unlikely to actually pay down their tax debts should consider options like restructuring or voluntary administration — before the ATO launches court action itself.