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ATO and banks take to the courts to claw back debts

Signs appear that directors are being pursued personally for historical company debts, says insolvency specialist

Court actions filed by the ATO and the big four banks are on the rise – and it’s not just current debts in their sights. Business and personal insolvency specialist Jirsch Sutherland says legacy debts are also in the crosshairs, which could put directors – even of wound-up companies – personally at risk.

According to the latest Credit Insights Report from Alares, Court activity initiated by the ATO in October increased significantly following a short lull in September, with winding-up applications and bankruptcy petitions both at their highest monthly level since 2019. The big four banks also ramped up their Court recoveries during October as higher interest rates impacted the serviceability of debt. Overall, winding-up applications have been trending upwards since the start of 2022 and continue to approach historical levels, reports Alares.

Malcolm Howell, a Partner with Jirsch Sutherland, says directors need to take action if they have tax debt – even if it’s for businesses that were wound up years ago. “The ATO isn’t just after current debts; there are also clear signs it is ‘dusting off old files’ to recover company debt from directors personally, where they have the power to do so under the Director Penalty Notice (DPN) regime. For example, the director of a company that was liquidated in 2019 recently advised us that the ATO had issued them with a DPN linked to the superannuation guarantee covering the 2015 and 2016 financial years.”

Patrick Schweizer, Director of Alares, says many of the current ATO Court actions appear to involve legacy tax debts of companies and individuals who were subject to ATO Court actions in 2019. “The data clearly points to the ATO pushing to clean up and collect legacy debts, which may also explain the recent spike in Small Business Restructuring (SBR) appointments, as business owners look for ways to keep their businesses afloat,” he says. “In previous months, the increase in SBRs coincided with a drop in ATO Court activity; however, October saw an increase in both restructuring and ATO activity.”

On SBRs, Howell again urges directors to again be aware the ‘playing field’ is changing. “While in the past the ATO has been somewhat amenable to payment arrangements and reducing debt via a reduction in the level of interest accrued, this appears not to be an option now,” he says.  “Regardless, it’s crucial for businesses – not to mention individuals – who have a tax debt and are facing financial distress to seek advice sooner than later. The longer you leave it, the fewer options there are available.”

Howell adds, the renewed pressure from the ATO and banks will likely see insolvencies continue to rise. “We’ve done forward calculations that indicate appointment external administration numbers will likely hit the 8,550 mark for the 2024 financial year, which is a significant increase on 2023,” he says.

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