Is your business really OK?

Monday August 23, 2021

Currently, Darwin, the ACT, NSW and Victoria are all subject to restrictions due to the COVID-19 – some 19 months since the first case was reported in Australia. Even New Zealand, which had seemingly eliminated the virus completely is now subject to Stage 4 restrictions.

When the first national lockdown occurred in Australia last year that lasted from late March to May banks, finance companies, the ATO and the respective State Revenue Offices all implemented either COVID hardship programs or put a halt on any collection activities. Further the Federal Government also implemented the Job Keeper subsidiary program and other grants, with each State Government following suit with varying COVID grants or support payments. Legislation was also introduced to prevent landlords from commencing eviction proceedings for tenants (either commercial or residential) who fall behind in their rental payments.

During this time, banks allowed business owners to suspend payments or interest on overdrafts, lines of credit, equipment finance loans and chattel mortgages, property mortgages and even suspend payments on their personal home loans.

Importantly, the ability for the ATO or any other trade creditor to issue a Creditor’s Statutory Demand and proceed to wind up a company or to issue a Bankruptcy Notice against a sole trader was stayed for many months.

During this time, and especially when they were receiving Job Keeper and other advanced funds, businesses on the surface thought they were travelling well financially. But when we analyse their financials, what we’re finding is that the reason they thought they were travelling well was because they weren’t paying their statutory obligations such as GST, Payroll tax, BAS, nor were they paying any finance obligations. They were advised that collection activities had been suspended and that businesses were essentially being left alone. In fact, the ATO have said that no collection letters were issued in 2020.

With Victoria, or Melbourne specifically now having been in lockdown for a total of 200 plus days in this 19 month period, and Sydney looking like they will be subject to serious restrictions for a number of months yet, we are now finding that the attitude by all the parties listed above is changing. Naively, some business owners thought the “grace period” would continue indefinitely, however this was never going to be the case.

An article in the Accountants Daily on 17 August 2021 stated that businesses (both corporate and sole traders) with debts over $100,000 have begun receiving collection letters from the ATO warning them of the ATO’s intent to list the businesses tax debt information to credit reporting bureaus if they don’t start addressing the debt. This listing will with have a dire impact on the ability to raise additional funds or to refinance current lending facilities.

Some may argue that by openly offering all these measures to support businesses and then to proceed with hard collection activities without notice is duplicitous in nature. However, it was always said by the Federal Government that the relief measures were temporary and that they couldn’t continue forever.

Adding to the complexity of the credit listing is that banks and/or finance companies have either requested that the suspended payments need to paid, or they have capitalised the arrears and not increased the time period of the facility; meaning a higher amount needs to be paid in order to repay the loan within the original approval term. For businesses that are unable to meet the increased payments, we are finding that due to being heavily geared and having personal property with a high loan to value ratio or (LVR), they are unable to refinance. This is because of ATO listing on their credit file and the amount owing on their property is in some cases higher than the value of the property.

Further, during several months last year, COVID-19 loans were being offered by banks to businesses with very favourable terms. By nature these loans were unsecured, because the Federal Government agreed to guarantee 50% of the value of the loan. These loans were also guaranteed personally by the director or sole trader – but to a rate of 100%. Payments on these loans have started to be required and on top of the other finance, statutory and trade creditor obligations, businesses may not be able to cope in the current environment. Hence, we expect many of these loans to fall into arrears and demand be made on the guarantor – another personal financial headache for business owners.

So with all this financial pressure, what do business owners do? How do they get themselves through all the issues and complexities that they are facing… The answer is speak to de Jonge Read as soon as possible. Do not put it off. We will be able to provide a clear pathway to a resolution.

Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies. Contact us now on p. 1300 765 080 | ua.mo1721810279c.arj1721810279d@ofn1721810279i1721810279

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