Like all good things, the government’s Covid-19 support payments and the Australian Tax Office’s (ATO) easing of debt collection activities are coming to an end. This means that how businesses manage their finances now will determine their future survival…
Since the first diagnosed Covid-19 case in Australia on 25 January, 2020, the economy has been barraged with new laws and restrictions and caused businesses to be stretched to the financial limit. In a desperate effort to “flatten the curve” and slow the spread of the virus, the state and federal governments imposed strict social distancing rules, venue capacity limits and even curfews; affecting every industry. As a result, relief payments such as JobKeeper were introduced to keep businesses and the economy afloat.
While the extra economic stimulus supported businesses that under normal circumstances would have performed well, it also kept alive thousands of businesses that ordinarily would have ‘gone under’; coining the term “zombie businesses”. This, combined with the ATO’s suspension of debt collection activities has resulted in the annual number of business insolvencies declining by nearly 50%. According to ABC News, “the 10-year average of companies going into administration is 9,300 a year”, however just over 10,500 companies entered administration between 2020-2022; equating to an average of only 5,250 companies annually.
Now that government support is ending and the ATO has announced they will be resuming their usual debt collection processes, these figures will inevitably change. Although it may be a slow-burn process, unviable and insolvent companies will eventually be revealed by the ATO.
The good news is, if businesses take action now to manage their finances, they can formulate a plan to survive without the extra government support; potentially avoiding being one of the many companies predicted to become insolvent altogether. Recovery strategies like business restructuring, debt negotiation and payment plans all offer viable solutions.
Another increasingly popular and effective recovery strategy is invoice factoring. Invoice factoring is a business finance tool by which a business assigns their invoice to a factoring company for funding. In exchange, they receive an advance against that invoice (generally about 80% of the value of the invoice). Once the customer pays the invoice within normal trading terms, the factoring company releases the balance to you. The invoice factoring company charges fees or interest which generally add up to between 1% – 3% of the total invoice value. This allows businesses to maintain strong cash flow; arguably the most critical aspect of a business’s survival.
Next to invoice factoring, the other vital thing businesses must do to avoid facing tough ATO debt collection tactics is to keep an open line of communication with them.
Acting assistant commissioner of the ATO, Sylvia Gallagher, advised that the Tax Office’s primary focus will be on those who have ignored initial warnings or are suspected of tax avoidance.
Fundamentally, ignoring correspondence from the ATO will not get rid of a tax debt; rather, it will make it worse. Outstanding debts have the potential to attract penalties and high interest rates that compound daily. This reinforces the critical need for businesses to take action now, before debts grow and place them in an unsalvageable financial position.
References
- Ziffer, D. ‘Australia’s Insolvency Drought Might End With An Unwanted Flood’, ABC News, Online, 2022, https://www.abc.net.au/news/2022-05-16/not-enough-companies-are-going-bust-and-that-is-bad/101059118?utm_campaign=Brokers%20List%20with%20StepC&utm_medium=email&_hsmi=222206779&_hsenc=p2ANqtz-8O6L2nWJCzro7DbprylsFmdsJhWrCxCDFIa6MZcpe9pCmm50_z2dcNFfCc5jIgPJ3nZ9moYT_g9bRcdhk928Fd7nX0Gg&utm_content=222206779&utm_source=hs_email (Accessed 11 August 2022)
- King, P. ‘COVID Compliance Holiday Coming To An End, Says ATO’, Accountants Daily, Online, 2022, https://www.accountantsdaily.com.au/tax-compliance/16751-covid-compliance-holiday-coming-to-an-end-says-ato (Accessed 11 August 2022)
- Statista Research Department. ‘Number Of Business Insolvencies In Australia 2014-2021’, Statista, Online, 2022, https://www.statista.com/statistics/1116795/number-business-insolvencies-australia/#:~:text=Number%20of%20business%20insolvencies%20in%20Australia%202014%2D2021&text=The%20annual%20number%20of%20business,the%202020%2F21%20financial%20year. (Accessed 11 August 2022)
