CONSOLIDATION IS KEY TO MANAGING ATO DEBT

Recent news that the Australian Tax Office (ATO) plans to recover $50 billion in outstanding liabilities may cause alarm for many SMEs. Around two-thirds of the total collectable debt - $33 billion - is owed by small businesses. But for SMEs prepared to engage constructively with the ATO, ScotPac has debt management solutions available to explore.?

Despite a healthy 57% of SMEs forecasting business revenue growth in the next six months, the latest round ScotPac’s SME Growth Index Report found one in three SMEs are projecting revenue decline, the highest negative outlook in a decade of reporting.

Some of the key drivers for this pessimism have been well-canvassed, including higher wage bills, increased operating costs, and 13 interest rate rises since May 2022 – pushing rates to a 12-year high and hammering discretionary spending. However, it is also plausible that the ATO’s renewed focus on debt recovery may have negatively influenced the short-term outlook for thousands of SMEs.

ATO ramps up collection of ‘aged’ debt

In 2019, the ATO was responsible for more company wind-ups than any other entity in Australia. But things changed dramatically from the outset of the COVID-19 pandemic. With its focus shifting to administering stimulus payments, and a well-publicised pivot to ‘lighter touch compliance’, Australia’s biggest corporate creditor was referred to in some circles as the country’s most generous business bank.

This year’s Federal Budget signalled a return to normality. The ATO received an $82 million war chest to target overdue business taxes and unpaid obligations, including superannuation. At the top of the ATO’s hit list are businesses owing more than $100,000, and those with outstanding debts more than two years old. To put some context around that, an estimated 40,000 Australian businesses reportedly owe the ATO at least $4 billion in long-term debt.

The latest insolvency data from ASIC confirms that the ATO has started to follow through on its flagged enforcement drive. Insolvencies in the September quarter rose to the highest level in eight years. In October, insolvency levels remained around 15 per cent above pre-COVID levels, which was consistent with the trend throughout 2023. However, one of the standout features was the significant month-on-month increase in legal recovery actions commenced by the ATO.

?

Key takeouts for SMEs

So, what should SMEs read into the sharp uptick in ATO compliance activity?

First, many of those businesses with long-term unsettled debt were effectively kept on life support during the pandemic, and much of the action being taken now is tying up loose ends to reduce the blowout in total collectable debt.

Second, some of the businesses and directors in the ATO’s sights have failed to comply with superannuation, PAYG withholding and GST obligations. When it comes to fundamental employee entitlements like superannuation, it is important and proper that that the ATO acts swiftly and firmly.

And third, the ATO has made it clear that the decision to commence winding-up proceedings only occurs after businesses have been given ample opportunity to engage with it to address debts.

The takeout message for every business owner or operator is clear - ignoring letters or phone calls will not make the problem go away. Proactive engagement and a workable payment strategy is a better plan than avoidance.

?

Getting on the front foot

Managing tax office debts can be a daunting challenge for SMEs, particularly with numerous other cost pressures business owners are facing. Here are some of the things you can do immediately:

1. Talk with the ATO before payments are due: SMEs should engage with the ATO before debts become due and further interest and penalties are applied. The ATO has stated it is targeting businesses that are avoiding their payment obligations. Timely engagement demonstrates a willingness to resolve outstanding issues and can open the door to more flexible payment plans to assist with cashflow management.
2. Seek professional advice: Enlisting a tax professional to provide guidance on laws and regulations relevant to your situation, and to manage negotiations with the ATO, is strongly recommended. Not only will it provide SME owners with greater clarity to assist with decision making and priority-setting, it will give them back valuable time to focus on the health of their business.
3. Run a finance health check: As wages, interest rates and inflation have all risen considerably in the past 12-18 months, so has the proportion of SMEs reviewing their lending relationships. A comprehensive finance and lending health check, in consultation with a broker, will often identify lending solutions that can free up working capital to help service your outstanding debt. Invoice finance, for example, unlocks the value of customer invoices before they fall due and converts them into a source of readily available funding. ?Pending a review of specific circumstances, it may be possible to consolidate your SMEs debt - including ATO debt - into one easy-to-manage loan facility.

SMEs employ millions of Australian workers which makes them vital to our economy. However, they are often more susceptible to economic fluctuations than their larger counterparts, which can result in cashflow management challenges including ATO debts. These challenges do not have to be faced alone.

ScotPac’s breadth of product capability, scale of funding, and flexible approach enables means we can assist nearly every SME in most situations. We have the tools and expertise to assist brokers and SMEs with regular lending reviews and debt management solutions.

If you are an SME owner or operator dealing with outstanding ATO liabilities, our team look forward to working with you or your broker.