Rising Corporate Insolvencies & the ATO’S ‘Firmer Action’ Approach
The Australian Securities and Investments Commission (ASIC) has released final statistics on corporate insolvencies for the 2010/2011 financial year.
The figures show an overall increase nationwide of almost 6% in the number of companies entering external administration during the year. Of particular note was the large increase in appointments in the month of June which pushed the numbers up – from a 4.4% overall increase in insolvencies in the 11 months to May.
In Australia overall, the increase has been in liquidator appointments with a decline in the number of appointments of controllers (receivers and receiver/managers) and voluntary administrators. In NSW, the statistics show an increase in total insolvencies of significantly less than the national increase – at 3.5%. However, the NSW statistics do reflect the national trend - with liquidations increasing by 7% and appointments of controllers and voluntary administrators down by 6.6% and 6.8% respectively.
ASIC reports feedback from insolvency practitioners that the increase in activity in the SME sector may be due to a tightening up on debt recovery action by the Australian Taxation Office (ATO). This comment reflects our own observations on the ATO’s ‘firmer action’ approach to debt collection.
‘Firmer action’ is the use by the ATO of its suite of enforcement options to recover taxation debts. These include tax garnishees, writs for seizure of property, the payment of bonds to secure underpaid tax liabilities, bankruptcy or winding up proceedings against taxpayers and the pursuit of company directors personally via the director penalty regime.
Last December, the ATO released a Fact Sheet outlining its ‘firmer action’ approach and when it will be utilised. According to this Fact Sheet, ‘firmer action’ will be taken in circumstances where a taxpayer refuses to co-operate, repeatedly defaults on payment arrangements, has an escalating tax debt or has engaged in ‘phoenix’ activity.
Anecdotal evidence suggests that the ATO is also using its enforcement tools in conjunction with payment arrangements to ensure compliance. Our recent experience has been that the ATO has become less willing to enter into payment arrangements - with significant initial contributions required by the taxpayer (up to 50% in some cases) before the ATO will agree to accept repayment of a tax debt by instalments. In some instances, the ATO has almost contemporaneously issued tax garnishees or director penalty notices to facilitate adherence to the repayment program.
The ATO’s tightening of its enforcement processes has been aided by legislative changes which have enhanced its recovery options. Changes to the tax laws from 1 July 2010 gave the ATO the power to demand security deposits from businesses, in the form of cash, a bond, a mortgage over property or a guarantee, in order to secure their tax obligations. And as we have reported in previous issues, there is also proposed legislation in draft form expected to be introduced later this year which will alter the director penalty regime to include personal liability of company directors for employee superannuation and which will impose personal liability without notice.
The ATO’s ‘firmer action’ approach to debt collection may have been a factor in the increase in corporate insolvencies for the 2010/2011 financial year. Don’t be one of next year’s statistics!
The ATO’s own policies outline situations in which ‘firmer action’ may be deferred. Lawler Partners’ Business Recovery and Insolvency team can provide advice and assistance to taxpayers subject to the ATO’s ‘firmer action’ approach or who may require our expertise in negotiating with the ATO on their options.
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