CreditorWatch data reveals that more than one-third of Australian businesses with significant tax debts have shut down in the past year, underscoring the financial challenges facing private enterprises.
The analysis shows that 33.6% of businesses with Australian Tax Office (ATO) tax debt defaults—defined as debts exceeding $100,000 and over 90 days overdue—have either become insolvent or voluntarily closed. This amounts to 1,715 closures out of 5,097 businesses affected by such debts in the last 12 months.
Tax debt challenges post-pandemic
During the COVID-19 pandemic, the ATO adopted a lenient approach to tax debt enforcement, leading to a significant accumulation of unpaid liabilities. As of now, outstanding tax debts total approximately $52 billion, with small and medium enterprises (SMEs) responsible for around $34 billion.
In response, the ATO has intensified its debt recovery efforts, utilizing measures such as disclosing business tax debts to credit reporting bureaus, issuing garnishee orders, and serving Director Penalty Notices. Commenting on the situation, CreditorWatch CEO Patrick Coghlan emphasized the importance of businesses meeting their tax obligations.
“The ATO is simply trying to collect the tax that all companies are obliged to pay,” he said. “While I sympathize with businesses grappling with large debts, it’s crucial that they abide by their obligations. A tax debt of $100,000 or more is a significant burden, especially for SMEs. Entering into a payment plan with the ATO is an essential first step in resolving these issues.”
Industries struggling the most
The data reveals significant disparities in business failure rates across industries. The Electricity, Gas, Water, and Waste Services sector has experienced the highest rate of closures, with 40% of businesses with large tax debts shutting down over the past year. Other sectors with above-average failure rates include:
- Food and Beverage Services: 39.7%
- Information, Media, and Telecommunications: 37.5%
- Retail Trade: 36.0%
- Manufacturing: 34.3%
Economic pressures amplify the risk
The combination of rising operational costs, challenging economic conditions, and declining retail trade per capita has left many businesses struggling to manage large tax debts. Even under stable conditions, repaying debts exceeding $100,000 can be a daunting task for SMEs.
Variations in failure rates by industry may also reflect the differing stages of economic downturns across sectors. For example, industries like Information, Media, and Telecommunications have long been grappling with disruption from digital transformation. Conversely, sectors such as education, which currently report lower failure rates (10%), may face increased challenges as new caps on international students take effect next year.
Transparency in tax debt reporting
Since April 2022, the ATO has been disclosing business tax debts to credit reporting bureaus under specific conditions:
- The debt exceeds $100,000 and is over 90 days overdue.
- The business has not responded to two outreach attempts or a notice of disclosure from the ATO.
Credit reporting agencies, including CreditorWatch, are required to remove records of tax debts when businesses engage with the ATO by either paying off their debt or entering into a payment plan. As of November 30, 2024, CreditorWatch holds records on 28,700 ATO tax debt defaults, 18,319 of which involve private companies.
Industry rankings for tax debt defaults
The Food and Beverage Services sector leads in the number of tax debt defaults, followed by the Construction and Transport, Postal, and Warehousing industries.
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