Recent figures show trends in insolvencies in Australia – nothing too significant at a macro level though distressing at a personal level. But perhaps they could or should be higher?
- in 2023-2024, personal insolvencies totaled around 11,600 compared with 37,000 15 years ago.
- corporate insolvencies totaled about 11,000 out of 3.4 million companies, slightly higher than prior peaks seen in 2011–13 but in respect of only 2 million companies in 2012.
- with levels of collectable tax debt almost doubling since 2019 – $26.5 billion to over $50 billion now, it is surprising that there are not more insolvencies;
- in fact the ‘insolvency armageddon’ is said to be “all hype”, rather the numbers might best be seen as “the adjustment we had to have”.
Statistics
To start with, note that insolvency statistics in Australia are maintained separately, a past recommendation for a joint statistics unit having been ignored.[2] That may change given the Parliamentary Joint Committee report in 2023 which made recommendations for a more comprehensive review of both personal and corporate insolvency for which data is to be collected to allow that review to proceed. [3]
Personal insolvency
According to the personal insolvency regulator AFSA,[1] personal insolvencies had risen steadily for almost 40 years from 1972 to a peak of 37,000 after the GFC in 2008.
They have dropped significantly since then, to around 11,600 for 2023-2024.
AFSA attributes this to low unemployment, changed creditor behaviour after the Hayne Royal Commission, and changed debtor behaviour since the pandemic.
They continue to plateau at a low level, with a small decrease in August 2024 (1,119) over July (1,157), with the construction industry continuing to feature, although still at a low level.
AFSA predicts an increase in personal insolvencies for 2024-2025, to 14,850, or around 1,237 per month, but averaging 1,138 so far. Well below the 37,000 of some years ago.
AFSA’s 2022-2023 statistics show that around 85% of bankruptcies produce no dividends to creditors. Average dividend payments are 2.19c/$. AFSA does not release its annual statistics until later in the year, usually Christmas eve.
Corporate
ASIC has released its separate annual corporate insolvency data, which shows 11,053 companies entered external administration during the 2023–24 financial year of a total corporate population of around 3.4 million.
While this is slightly higher than prior peaks seen in 2011–13, it is proportionately much smaller given the 3.4 million companies in Australia compared with around 2 million in 2012.
On that basis, corporate insolvencies would exceed 18,000 today.
Reserve Bank
The Reserve Bank notes[4] that the rise in company insolvencies represent a catch-up from the exceptionally low levels during the pandemic period. Most continue to be small businesses with little debt, limiting the impact on lenders.
The increase flows from the removal of the significant government financial support measures put in place during the pandemic; more challenging trading conditions as the economy has slowed; and the Australian Taxation Office resuming enforcement actions on unpaid taxes.
Nevertheless, on a cumulative basis, insolvencies remain below their pre-pandemic trend.
Perhaps they should be higher.
Tax non-compliance
Corporate insolvencies in particular have to be seen in the context of many small businesses not paying taxes.
The levels of collectable tax debt have almost doubled since 2019 – $26.5 billion to over $50 billion now, the highest ever. Put another way, elements of small business have not been lodging, fully reporting their income, reporting cash wages and contributing super for their staff.
The ATO sees its obligation to try to enforce a level playing field by ensuring that the tax that is owed under the law is collected – in particular GST, employee tax moneys withheld, and superannuation.
Compliant businesses face unfair tax competition when their competitors are not tax compliant. Many would be trading while insolvent. The ATO says that tax non-compliance can also be indicative of broader non-compliance extending beyond tax and super to general creditors, and other regulatory laws, further unfairly prejudicing compliant businesses.
Hence it has been said that the ‘insolvency armageddon’ 4A is all hype, that concern about the record number of company failures is not only overblown, but the surge in businesses going bust is probably a good thing. [5]
Indeed the numbers might best be seen as “the adjustment we had to have”, a “sign that natural selection is back in play in Australia’s economy”, and therefore good news for sound companies with sensible management,[6] who can complete on a fairer basis, untainted by non-compliant competitors.
While liquidations may not much recoup unpaid tax – low dividend returns in liquidations are comparable with those in bankruptcy – the insolvencies serve to restore a fair competitive market by removing inefficient business from the market, promoting efficiency and productivity.
It is perhaps surprising that there is not more of them.
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[1] AFSA Chief Executive speech at the 2024 Financial Counselling Australia NSW Conference | Australian Financial Security Authority
[2] The Senate Economics References Committee’s 2010 report – The regulation, registration and remuneration of insolvency practitioners in Australia: the case for a new framework, September 2010, rec [17].
[3] PJC Report, July 2023.
[4] Resilience of Australian Households and Businesses | Financial Stability Review – September 2024 | RBA
4A And other populist claims; see for example a politician, Angas Taylor.
[5] The ‘insolvency armageddon’ is all hype, Michael Read, AFR 16 September 2024.
[6] Insolvencies Are Well-Above Pre-COVID Levels and Rising – What Precautions Should You Take? John Park, FTI Consulting, 24 June 2024
