New data from CreditorWatch reveals that thousands of private Australian businesses have failed in the past six months after defaulting on massive tax debts.
Its latest data on ATO tax debt defaults – debts with the tax office of more than $100,000 that are over 90 days late – shows that 34 per cent of these private businesses, 7,003 in total, have become insolvent or voluntarily closed in the six months that CreditorWatch has been tracking the data.
The ATO’s outstanding debt blew out during the pandemic, when it took a ‘hands off’ approach to debt enforcement, and now sits at approximately $52 billion (around $34 billion of that is owed by SMEs).
The tax office has significantly ramped up what it calls ‘firmer actions’ in the post pandemic period in an attempt to reduce the size of this debt. These actions include business tax debt disclosures to credit reporting bureaus, garnishee orders and Director Penalty Notices.
CreditorWatch CEO, Patrick Coghlan, says it is appropriate that the ATO ramps up its debt enforcement program with such a huge amount outstanding.
“The ATO is simply trying to collect the tax that all companies are obliged to pay,” he says. “I truly sympathise with the situation that these businesses are in, with such a huge amount of tax owing, particularly in the current economic climate. A tax debt of $100k or more is a huge drag on a business, particularly SMEs, which make up the largest cohort of businesses with tax debt defaults.”
Industry breakdown
Looking at the numbers by industry, it is the Information, Media and Telecommunications sector that has seen the highest rate of failures due to overwhelming tax debts. More than half of businesses (55 per cent) with a tax debt over $100,000 and more than 90 days late have failed over the past six months.
Electricity, Gas, Water and Waste Services registered the next highest failure rate (47 per cent) followed by Food and Beverage Services (46 per cent) and manufacturing (39 per cent) rounding out the top offenders.
Data source: Australian Taxation Office (ATO) direct link; private companies – registered for GST and not registered for GST
CreditorWatch Chief Economist, Anneke Thompson, says that holding a large outstanding tax debt in the current economic climate would put any business in an extremely challenging situation.
“Even in good trading conditions, paying off a debt of over $100,000 is hard enough,” she says. “Combine that with retail trade that is falling on a per capita basis, very low levels of new housing starts, and continued rising utilities and insurance costs, and it is sadly not surprising that many businesses with a tax default disclosed do fail within a short period of time.
“While there are large variations in the rate of failure by industry for those businesses with a tax debt, it may have more to do with how far along the ‘downturn’ cycle these industries are. Information, media and telecommunications has been dealing with industry upheaval for many years now, as so much news is now sourced through social media and other free channels.
“It is likely that these businesses are in a far more precarious position than the education sector, which is at the other end of the spectrum. So far, only 10 per cent of businesses in the education sector with a tax default have failed, but this is likely to increase as the international student caps kick in next year.”
ATO tax debt disclosures to credit reporting bureaus
Since April 2022, the ATO has been disclosing the details of business tax debts to credit reporting bureaus under the following conditions:
- Debt at least $100,000 and more than 90 days late
- The business has failed to engage with the ATO – not responded to two attempts to reach out and a notice of disclosure.
- CreditorWatch and other credit reporting bureaus are required to remove the tax debt records of a business once it engages with the ATO by paying the outstanding debt or entering into a payment plan.
CreditorWatch, holds 27,194 ATO tax debt default records, as at 31 July 2024 – 19,439 from private companies.
Data source: Australian Taxation Office (ATO) direct link (all companies)
Tax debt records by volume and industry
On a state-by-state comparison, all states are forecast to experience an increase in the average failure rate. Queensland is expected to see the highest average rate of business failure over the next 12 months of 6.00 per cent, with Western Australia predicted to experience the largest average increase in business failures. Meanwhile, Tasmania has the lowest forecast average failure rate of 4.76 per cent.
Queensland and Western Australian businesses are being hampered by lingering price increases, particularly in the construction sector. This is despite their respective state governments being in a strong fiscal position. In some ways, this strong fiscal position makes the task of getting inflation under control harder, as state-government spending fuels price increases, particularly in the construction and healthcare sectors.
Data source: Australian Taxation Office (ATO) direct link (all companies)
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Head of Media & Communications
Michael joined CreditorWatch in July 2021. He has more than 20 years’ experience in business journalism, marketing and communications strategy and digital content development. He is passionate about communicating to the business community how CreditorWatch’s product suite can help them grow and protect their companies.
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