ATO tax debts lift insolvency risk for Australian firms

Australian businesses with ATO tax debts above AUD $100,000 recorded an average insolvency rate of 21.9% over the past year, according to CreditorWatch. That was 31 times the national average of 0.7%.

The June Business Risk Index found 35,361 businesses had tax debts above the disclosure threshold at the end of June. More than half, or 19,024, were sole traders, which the report identified as more exposed because of tighter cash margins and smaller cash buffers.

The findings point to a gap between current insolvency numbers and other signs of strain. Overall insolvencies fell 3.9% in FY26 from FY25, but tax debts and trade payment defaults both rose, suggesting stress is building again in parts of the economy.

CreditorWatch linked the lower insolvency count to earlier income tax cuts and a period of interest rate relief that supported business cash flow. Even so, the improvement was uneven across sectors and did not extend to several consumer-facing and transport-related industries.

Retail Trade insolvencies rose 18% over the year, while Transport, Postal and Warehousing increased 14%. Mining posted the largest rise, up 35%, likely reflecting pressure on smaller operators and exploration activity rather than large established groups.

By contrast, Accommodation and Food Services recorded a 15% fall in insolvencies and Construction dropped 4%. Despite that decline, both sectors still carry higher structural risk than much of the wider economy, with hospitality insolvency rates at around three times the national average.

Construction also remains under pressure from elevated input costs, labour shortages and uncertainty over future project pipelines. The report said the sector's recent improvement may reflect temporary relief from earlier cost pressures rather than a deeper recovery in trading conditions.

Within sectors, the data showed widening differences between subsectors. In Retail Trade, insolvencies increased in Department Stores, Non-store Retailing and Pharmaceuticals, while Recreational Goods and Motor Vehicle Parts and Tyre Retailing recorded declines.

A similar split appeared in manufacturing. Insolvencies rose in Structural Metal Products, while Basic Ferrous Metal Products Manufacturing continued to post insolvency rates around four times the national average.

Early warnings

The report placed particular emphasis on trade payment defaults as a leading indicator of future failure. Even one payment default lifted the likelihood of insolvency to more than 10 times the national average over the following 12 months, with multiple defaults increasing that risk further.

Defaults surged in May and remained high in June, suggesting businesses were beginning to absorb the combined effect of higher interest rates and fuel costs.

The tax debt data told a similar story. The number of businesses with ATO debts above AUD $100,000 has risen in recent months, with four consecutive months among the highest readings since the tax office resumed collections activity after the pandemic.

Some firms were also removed from the tax default register, which may indicate repayment arrangements with the ATO. Even so, the broader relationship between large tax debts and insolvency remained clear, with insolvency rates above 20% across most industries for businesses carrying debts at that level.

Patrick Coghlan, Chief Executive Officer of CreditorWatch, said the credit indicators were now painting a more cautious picture than the headline insolvency data.

"The insolvency picture is improving, but the credit data tells us risk is quietly rebuilding. Rising tax debts and payment defaults are often the earliest signs of financial distress, and we're seeing both move in the wrong direction. In today's environment, success isn't just about growth - it's about visibility. The businesses making decisions based on timely, reliable risk intelligence will have a significant advantage over those relying on hindsight," Coghlan said.

Regional divide

The index also highlighted a sharp geographic split in business risk. Adelaide's inner metropolitan areas ranked as the lowest-risk locations among regions with at least 5,000 businesses, led by Norwood-Payneham-St Peters with a score of 80.4 and Unley with 80.1.

They were followed by Ballarat, Pittwater, Ku-ring-gai, Yarra Ranges and Toowoomba. At the other end of the scale, seven of the 10 highest-risk suburbs were in Western Sydney, including Bringelly-Green Valley and Merrylands-Guildford, both associated with default rates near 7.9%.

Outer Melbourne locations including Tullamarine-Broadmeadows and Melton-Bacchus Marsh also ranked among the weakest areas, along with Ormeau-Oxenford in Queensland. Major CBDs were not immune, with Sydney Inner City, Brisbane Inner and Melbourne City all sitting in the index's increased-risk band.

Year-on-year movements showed some sharp swings. Pittwater and Leichhardt recorded the strongest improvements, while Banyule, Knox and North Sydney-Mosman posted the largest deteriorations.

CreditorWatch said higher interest rates, fuel prices and wage pressures were hitting mortgage-belt suburbs hardest, while older and wealthier regions were proving more resilient. The report also pointed to pressure from energy market disruption, supply chain volatility and a widening divide between sectors benefiting from AI-related investment and those struggling with rising costs and weaker consumer demand.

For FY27, the index pointed to three main risks: elevated payment defaults, rising tax debts and ongoing cost pressure from rates and fuel.

Among the starkest figures in the report was the concentration of tax debt exposure among the smallest operators, with sole traders accounting for 53.8% of businesses carrying ATO debts above AUD $100,000.