Experts have warned that a sharp drop in the number of official insolvencies has more to do with the lenient stance taken by the Australian Taxation Office and the banks than any improvement in economic conditions.
Data from the Australian Securities and Investment Commission shows 733 companies when into external administration in August, down from 876 in July and 765 in August last year.
Insolvency numbers are now well below the peak of the 1,095 hit in March.
But insolvency specialist Michael Fingland from Vantage Performance says the figures mask the true state of the market, as struggling companies have been protected by the Government’s stimulus package, the ATO’s liberal use of payment plans for tax debts and the banks unwillingness to send too many companies to the wall.
“The companies that would have normally dropped into a VA scenario in July, August and September haven’t done so because of those circumstances,” Fingland says.
“Those SMEs that sought the ATO relief would have been one or two quarters behind in their Business Activity Statement. That’s given them a three-to-six month free kick.”
But Fingland is still tipping a rise in the number of small and medium companies headed for insolvency, as struggling firms start defaulting on their payment plans in the first quarter and second quarter of next year.
The pressure from the worried banks is unlikely to stop. “Their workout teams are busier than ever, although they are not going to the next stage of appointing receivers – they are holding back.”
This point is reinforced by Cliff Sanderson of insolvency specialist Restructuing Works, who points out that Australia’s banks reported a staggering $10.8 billion worth of bad debts in the June quarter – around 10 times the level of average quarterly bad debts level over the past decade.
“It’s genuinely huge,” Sanderson says. “I had expected this number would start dropping after it hit $8 billion in the March quarter.”
While he doubts the value of bad debts will grow in the coming quarters, he agrees with Fingland that the number of companies going under is likely to rise, particularly as the ATO starts to wind back its lenient tax relief measures.
“The ATO has turned into a bit of a powder puff. It is really easy to get a deal out of the ATO at the moment, but in the last few weeks we’ve heard from some clients that the ATO is starting to put pressure on again.”
Fingland is also seeing the ATO increase the pressure on struggling companies. Three months ago, these underperforming firms could get two-year tax debt payment plans over the phone; now the taxman wants to see a written submission justifying the payment plan, and a 12-month plan is the best a battling company can hope for.
“The next quarter is going to be very telling,” Fingland says.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
