An Update on Debt Collection Activity
After a long hiatus over the pandemic period debt collection activities across the economy are slowly starting to return to normal levels. While the number of corporate insolvencies, bankruptcies and wind-up notices remain well below historical levels, they are slowing increasing. Here’s a quick update about what I am seeing and hearing around the industry.
The ATO
The ATO broke their silence on their debt collection activities last Friday, confirming that they are ramping up debt collection activity while still focusing on providing support and assistance to those with overdue debts. The ATO advised that they would be continuing to use a collaborative approach with most taxpayers and, for the moment, firmer action would only be taken where taxpayers aren’t receptive to communication.
The ATO confirmed that they have issued 29,552 awareness letters for disclosure of business tax debts and 52,319 awareness letters about the use of Director Penalty Notices (“DPNs”). Word on the street is that the ATO has identified around 150,000 small businesses that require compliance attention and that they intend to issue a further 50,000 DPN warning letters through the end of the financial year.
While this is a definite step up from where the ATO was during the pandemic, this still represents a very soft approach to debt collection and is a long way from the ATO’s stated goal of ensuring that there is no unfair advantage to non-payers.
In my experience that ATO has remained very open to doing deals to compromise tax debts that accrued through the pandemic, especially through formal processes like Small Business Restructuring or Voluntary Administration. However, I am also hearing that their patience is running out, and in particular, several clients have been told that the current payment plan will be the last that the ATO is willing to offer them.
I expect the ATO will slowly ramp up activity over the next 18 months, progressively increasing their compliance activities as time goes by. That being said, now is the time to do deals, before the ATO moves from the current support setting and starts focusing more on collecting outstanding tax debt.
Landlords
I’m seeing landlords start to take action to recover rent that was deferred during the pandemic period. I suspect this is going to be a bit of a balancing act for landlords for a while, as the desire to collect deferred rent conflicts with a desire to hang onto existing tenants in a relatively weak rental market. This will especially impact landlords holding retail, hospitality and commercial office space.
Like with the ATO, I am seeing a general willingness from Landlords to do deals to compromise deferred rent. In particular, now is a great time for businesses to proactively reach out to their landlords and seek to negotiate a settlement on any deferred rent. I’ve seen some great results from this approach.
Institutional Creditors
There are also starting to be signs of debt collection action from institutional creditors. Some companies are starting to take steps to return to a more normal debt collection setting, including instructing agents and selling debt books for collection. I’m also hearing that some of the major institutional creditors are starting to talk about lifting the bans they placed on ‘firmer action’ during the pandemic period.
Banks and Mortgages
Except in extreme circumstances, I’m not seeing a lot of movement from the major banks either on business debt or mortgages with arrears. I expect the major banks will be the most conservative of the creditors and the slowest to restart their normal debt collection processes. Particularly with mortgage debt, the banks have built up significant LVR buffers with most clients and overall mortgage stress remains low, meaning something significant will have to change for the banks to risk the political fallout from a round of foreclosures.