The ATO has just released its 2011 annual report which discloses a clear increase in the amount of insolvency debt outstanding, and increased collection activity.
The report states that ‘insolvency debt’ (the ATO term) has increased by 35.8% from just under $4 billion in the 2009-2010 financial year, to about $5.3 billion in the last financial year. This, it states, reflects “the ongoing effects of the economic downturn”. The figures are supported by our own observation of increased tax related insolvencies combined with a trend to larger amounts being involved.
It is obvious to industry observers that the ATO has stepped up its collection activities. ATO initiated bankruptcies (personal insolvencies) have increased by over 16% (from 397 to 462) over the last year. On the corporate side, the ATO report that their winding up applications have increased by a whopping 116% (493 to 1,066). Worrells partners have certainly seen a definite rise in the amount of consents requested in both personal and corporate insolvencies and an increase in the numbers of people seeking insolvency advice in reaction to notices received from the ATO.
While these the ATO initiated insolvencies have increased, they are still not the major driving force in the increased number of insolvencies. Overall the ATO initiated only about 2% of the total personal bankruptcies and about 11% of corporate wind-ups. We certainly have experienced a rise in creditor initiated insolvencies (particularly in the corporate area) and in the number initiated by the ATO. But notably we have also seen a rise in debtor initiated insolvencies. Some of these would have been commenced by the debtor or director because of the activities of the ATO, so it is difficult to determine whether the percentages outlined are actually a true reflection of the insolvencies ‘caused’ by the ATO’s activities.
To ensure that the ATO is acting reasonably in pursuing delinquent taxpayers, or perhaps more correctly not over-reacting, over the last few years they have engaged external consultants to “conduct regular independent reviews of its management of cases where taxpayers have been declared insolvent”. They report that the reviews indicate that their actions “have not led to premature bankruptcy or wind-up”.
In general it is our view that far too many businesses treat the ATO as a lending bank which requires no application for funding. Should the ATO fail to apply reasonable collection procedures there is a real risk that the business will continue to take advantage of the position to the long term detriment of other creditors and competitors.
ATO also says that it continues to focus on the evasion of tax and superannuation guarantee through the “deliberate, systematic and sometimes cyclic liquidation of related corporate trading entities”. In 2010-11 ATO finalised 133 phoenix cases and raised $70.7 million in taxes and penalties
Paul Nogueira – Partner Worrells Sunshine Coast