Australia faces a 'tsunami' of insolvencies, but does it actually matter?

After historically low insolvency numbers during the height of the COVID-19 pandemic, business closures are on track for record highs this year.

A cost-of-living crisis has combined with high interest rates, lingering supply chain chaos and a construction slowdown to send thousands of businesses across several sectors of the economy into administration.

But perhaps the biggest catalyst for the growing - and often high-profile - closures is the Australian Taxation Office, which has emerged from its pandemic hibernation to pursue an enormous pile of unpaid tax.

Business conditions are the toughest they've been in years, according to CreditorWatch chief economist Anneke Thompson.

"Effectively everyone's run out of cash reserves," Ms Thompson said.

Most operations built up a cash buffer during COVID, but sky high inflation and interest rates have whittled that away, leaving businesses no option but to call in their debts.

"Last month we saw a record number of trade defaults lodged from one business to another," Ms Thompson said.

Insurance costs had also gone through the roof.

"The monthly insurance CPI just came out and it's running at 8.6 per cent and it's not going down," Ms Thompson said.

"That's having a massive impact on the construction industry."

But while businesses are calling in their debts, so is the tax office.

The amount of collectable tax owed to the ATO has exploded in recent years, growing from $20.9 billion in 2017 to $50.2 billion in 2023.

Much of this growth happened during the pandemic, when the tax office had an effective moratorium on calling in defaults.

The latest ATO annual report showed small businesses owned $33.4 billion of the $50.2 billion total. It also revealed $31.9 billion was activity statement debt, which is mainly unpaid GST.

That figure has tripled since 2017 and Ms Thompson said the ATO was keen to get it back under control.

"We are seeing thousands of tax defaults lodged every month now, so the ATO has basically said enough is enough, time's up, if you can't pay this debt or at least come to an arrangement with us about how to pay it then you are in big trouble," she said.

"We're only at the start of this post-COVID wave of closures."

During COVID there were fewer than 5000 insolvencies per year. Last year the figure was nearly 8000, and this year is on track for more than 10,000.

But Australian Restructuring, Insolvency and Turnaround Association chief executive John Winter said insolvency practitioners "weren't that busy right now".

"The one thing the numbers from ASIC don't show you is the number of businesses in Australia grows quite dramatically year on year, so there's far more start ups than there are exits," Mr Winter said.

"So when you look at it in pure percentage terms we're coming back towards a long-term trend, but it's nothing overly dramatic right now."

Mr Winter did concede some sectors were seeing a spike in closures.

"There are a couple of sectors like construction where there's a lot going on, they're struggling a lot and we're increasingly seeing it in hospitality and tourism," he said

But he said he didn't understand people calling the ATO's pursuit of those businesses a "crackdown".

Mr Winter said it wasn't harsh or unreasonable for the ATO to claw back its unpaid GST.

"Anytime the ATO's sending a letter to somebody who is overdue on their tax, it's not unreasonable," he said.

"A lot of the time the ATO is the more lenient of creditors, and it's important to remember this is money they are actually owed, it's our taxpayer money that these businesses are sitting on.

"The ATO has really not been sufficiently aggressive and fair in enforcing what's due."

Mr Winter said the decision to let unpaid debt levels grow so big in recent years had created "huge strain and risk" in the economy.

"Take an example of two restaurants where one is paying its taxes and the other isn't," he said.

"This restaurant's other creditors don't know that it's racking up this possibly enormous tax bill and so when that when the business falls over all the other creditors are sitting there going 'crikey, I thought I was the only one you owed money to. I didn't realise you owed the ATO $3 million and there's nothing left for me'.

"So that creates a risk for every other creditor in the environment as well."

Mr Winter said if a business couldn't, or wouldn't, pay up when the tax office came calling, it usually wasn't worth saving.

"The point is that if they can't pay it back, they're not a good business anyway. When you've got a business not paying the ATO you have to also ask who else are they not paying," he said.

"And the answer is they're not paying a lot of other people. So when those businesses fall over, what they do is risk creating other insolvencies in the perfectly good and honest businesses that were supplying them and that's the problem. That's the scourge."

Mr Winter said those kinds of businesses needed to be shut down "for the betterment of the economy and their employees". But he said business closures in general were crucial and necessary economic events.

"The OECD did a study showing the efficient shutdown of a business did more for the economy than the start of a new business," he said.

"So there is a necessary level of insolvency. What we want to steer away from is where you get a significant human and societal toll from those shutdowns."

Dozens of major construction, hospitality and retail businesses have already closed in 2024. Mr Winter said the trend would only increase over the coming year.

He said the key question would be whether there would be closures significant enough to have an "economy-wide impact".

"The next 12 to 24 months are going to be an unstable period," he said.

"We are going to see some significant businesses close, but -at the moment at least - there aren't major signs that we'll see an unhealthy level of business shutdowns."