There is no doubt that from a COVID-19 perspective, ‘normal’ has never felt closer to returning to our way of life. The examples from around the world and from our neighbours over east suggest that we are not far away from putting the pandemic behind us and recent restriction easing announcements from the Premier were welcome news last Tuesday as our soft landing continues.
We know that locally, business activity is positive, but challenging for various reasons. Some of our observations are below:
- Thanks to global supply chain pressures and labour shortages, pressure is building in the construction industry, resulting is some well publicised residential builder failures in recent weeks.
- The upcoming removal of capacity restrictions is welcome news to the hospitality sector; however they still face difficulties in attracting staff, particularly in the regions, despite borders opening up.
- We know that the ATO is ramping up its debt collection activities which will place pressure on SMEs, as indicated by some 50,000 warning letters being issued by the ATO to directors of companies with overdue tax debts including threats of Director Penalty Notices (DPN) being issued unless payment plans were entered into.
- The national and international stock markets have been unstable in recent weeks thanks to various inflation and interest rate outlook announcements and the conflict occurring in the Ukraine.
- Our own CPI (all groups) to March 2022 was 5.1%, which is likely to result in the first interest rate increase in 10 years when the RBA meets on Tuesday, 3
So what could be expect to see play out in the second half of 2022 and beyond from an insolvency perspective?
We could learn a thing or two from the UK, who is ahead of us in terms of its economic recovery from the COVID-19 pandemic.
Towards the end of 2021, the HM Revenue & Customs said it had a record breaking level of debt of £65B. Like us, this debt came about following tax deferrals and stimulus measures during the height of the pandemic to assist businesses navigate the choppy waters. Also like us, with their economy now stabilising, the HMRC embarked on a debt recovery drive towards the end of 2021, something we should expect to see from the ATO after the federal election and into the new financial year.
The ATO has said publically that it will work with tax payers to address overdue debts; but how generous will payment plan terms be? I would suggest that payment plan terms will look somewhat different than they did during the pandemic. The HMRC has done the same thing; however it has not held back enforcing debts through the courts, resulting in a dramatic increase in the number of court liquidation appointments in late 2021. In fact, the UK recorded the highest number of insolvency appointments in the March quarter since 2017. In Australia, we haven’t even returned to normal insolvency rates as yet, let alone exceed the five-year peak.
The ATO also has the DPN regime at its disposal and we expect to see many issued in the coming months as an efficient and cost-effective way for the ATO address outstanding debts, noting that sending out a DPN is far cheaper than issuing a Creditor’s Statutory Demand and embarking subsequently on a winding-up application through the Courts.
The UK has also experienced recent periods of inflation and increasing energy costs, making it challenging to trade, let alone address overdue tax debts. The reduced spending power and cost of living problems facing the public in the UK is also creating pressures for their economy. We too have the similar issues coming into play.
Our medium term future will be interesting to see unfold. The federal election is just around the corner; however it is difficult to see how the major parties will address the situation we face in relation to rising inflation. We should expect interest rates to rise in the short term (even as early as May), which will be hard news to accept for people who borrowed big recently, with the RBA saying as recently as October 2021 that the cash rate would be on hold until 2024.
We should also expect to see increasing pressure from the ATO on the debt collection front throughout the second half of 2022, despite the continued challenges faced by businesses around supply chain and labour shortage issues.
The one thing we can say with relative certainty is that there will not be any further generous government financial support or protections like the measures implemented at the start of the pandemic back in 2020.
With the ATO undoubtedly coming back on line with force in relation to debt recovery, the ‘wait and see’ option is unlikely to be in play for much longer. As advisors, you are likely to have clients that will need assistance to help them face the reality that they find themselves in. We can assist you and your clients with a frank and objective assessment of their situations and can assist with guiding them towards the best option for the way forward. Get in touch with me any time for a confidential and cost free discussion.
About the author
Greg Quin is a Partner and Registered Liquidator at HLB Mann Judd Insolvency WA and has been with the team for 12 years. Greg oversees the daily operations of the many insolvency appointments managed by the HLB Insolvency team and looks after the operations of the practice.
If you have any queries about insolvency matters, please feel free to contact Greg on 08 9215 7900, 0402 943 091 or via email to gquin@hlbinsol.com.au.
