Jon Sutton – CEO | ScotPac Business Finance
Australian businesses are about to face a perfect storm. On July 1, as the Super Guarantee rises to 12 per cent of ordinary time wages, the Australian Taxation Office (ATO) will implement new payment plan rules that could push struggling companies over the edge. The most significant change? Interest charges on ATO payment plans will no longer be tax-deductible.
The warning signs for stressed Australian businesses are already flashing red. Fresh data from the Australian Securities and Investment Commission (ASIC) shows business-to-business invoice payment defaults have surged 42 per cent compared to last year, while insolvencies jumped 17 per cent year-on-year in March after a brief end-of-year respite. The payment default numbers are particularly worrying as they reliably serve as a key predictor of future insolvencies.
Cost-of-living impacts are hitting consumer-facing businesses especially hard. Six of the top seven industries for recent business closures depend heavily on discretionary spending. Failure rates are exceeding pre-COVID levels. The hospitality sector has most affected with a staggering 9.4 per cent of food and beverage businesses closing their doors in the past year – nearly double the all-industry average of 5.3 per cent. Administrative services (6.4%), arts and recreation (6.3%), retail (5.8%), construction (5.7%), and accommodation (5.4%) are also showing alarming closure rates as cost pressures mount and consumer spending remains tight.
ATO Debt and Insolvency Rates Closely Linked
Against this backdrop, the removal of tax deductibility on ATO interest charges might sound like a minor tweak. However, its impact could be devastating for thousands of businesses already walking a financial tightrope. The ATO’s General Interest Charge currently sits at an imposing 11.17%. With the imminent loss of tax deductibility, these payment plans will become one of the most expensive financing options available to Australian businesses, equivalent to average credit card rates.
So how many Australian businesses are likely to be affected?
According to CreditorWatch’s March Business Risk Index, around 30,000 businesses have a tax debt default with the ATO of over $100,000. This has been a large contributor to insolvency rates in the past 12-18 months, even before the change in tax treatment status, with a third of business in this position becoming insolvent or voluntarily closing. In the past financial year, court-ordered liquidations doubled, and the ATO issued 27,000 Director Penalty Notices worth $4.4 billion in outstanding payments as part of its efforts to recoup total collectable of $53 billion.
The data is backed up by recent ScotPac research that reinforces the current state of business vulnerability. According to our SME Growth Index Report, a quarter of Australian SMEs believe they would face insolvency if they lost just one key client or supplier. Half said they would suffer severe cash flow problems or face negative financial impacts lasting three months or more. And just one in five felt confident they could weather such a loss without financial damage.
Non-banking Alternatives offer Tax Deductibility
This situation should serve as a wake-up call for Australian businesses about the importance of proactive financial management. The days of using the ATO as a de facto bank through payment plans are coming to an end. While the tax office showed some flexibility during and immediately after the COVID-19 period, it has since returned to more stringent enforcement of tax obligations, and there are no signs of it slowing down.
So what alternative finance options are available to businesses managing a tax debt?
Business loans, invoice financing, and equipment refinancing options not only retain their tax deductibility, but they often come with more competitive interest rates and longer repayment terms that the ATO offers. These alternatives, offered by specialist non-bank business lenders like ScotPac, are an opportunity to put better financial structures in place and build stronger foundations for the long-term. In the short-term, they can provide businesses with the breathing room they need to manage their tax obligations while optimising available cash flow.
For those already in trouble, small business restructuring has proven remarkably effective. Of the 573 companies that entered formal restructuring after January 2021 and completed their plans by July 2024, an impressive 89% are still operating today.
Business Owners Should Act Now
The countdown to July 1 has well and truly begun, so the key for businesses with a tax debt is to act now before the new rules take effect. SME owners should be sitting down with their financial advisors to review their current arrangements and to explore suitable options.
For more than 35 years, ScotPac has assisted thousands of businesses with flexible and sustainable business solutions in just about every situation, including tax debt management. Our team of experts are on standby to work with business owners and brokers who want to explore restructuring their tax debt with financing options to better to weather whatever economic challenges lie ahead.