ATO sounds warning over “untrustworthy” insolvency advisors, as more SMEs consider selling or closing

Insolvency advisors

As more Australian business owners consider selling, restructuring or winding up their businesses, the Australian Taxation Office has issued a timely reminder for those businesses to watch out for unqualified and “untrustworthy” pre-insolvency advisors. 

Recent research from ScotPac showed almost a third of SMEs are contemplating selling or winding up their businesses as the end draws near on what has been the most disruptive year to business in recent history. 

The ScotPac SME Growth Index surveyed 1,252 SMEs in September and October, and found smaller businesses are even more likely to be considering selling or closing their doors.

Two out of every five businesses with between $1 million and $5 million in annual turnover are considering exiting by April 2021 if economic conditions don’t improve, according to the survey.

For businesses with between $5 million and $20 million in annual turnover, almost a quarter are considering selling or closing in the coming months. 

This timeframe lines up with the end of key government support programs, with JobKeeper wage subsidies due to stop entirely in March next year. 

At the same time, the federal government’s plan to overhaul Australia’s insolvency regime is well underway, with legislation entering parliament last week ahead of a planned January 1 start date. 

The ATO says this is prime time for businesses to be targeted by pre-insolvency advisors offering inappropriate and unqualified advice, including illegal phoenixing activities. 

In an update published on its website this week, the ATO said tax advisors should warn their clients about this risk, and ask them to “check they’re seeking or receiving advice from qualified professionals, such as an accountant, lawyer, registered liquidator or registered trustee”. 

ATO assistant commissioner George Montanez also told attendees at the Accounting Business Expo this week that the ATO is preparing for a spike in “untrustworthy advisors” recommending illegal phoenix activities to business owners.

“Phoenix activity normally follows economic activity,” he said, reports Accountants Daily.

“Unfortunately, we’re anticipating an increase in untrustworthy advisors hitting the market to encourage these businesses that are struggling to do the wrong thing.

“They are out there in normal times, but with the number of businesses that are expected to be in trouble as a result of COVID-19, we’re anticipating and we’re preparing [for an increase].”

In its update, the ATO published a list of some of the “common red flags of untrustworthy advisers”, which are:

  • Cold-calling with offers of advice;
  • Unsolicited correspondence after court action by a creditor;
  • Advice to transfer assets to a third party without payment;
  • Refusal to provide advice in writing;
  • Suggestions they have a sympathetic liquidator who will protect personal interests/assets;
  • Advising that certain records be withheld from the bankruptcy trustee or liquidator; and 
  • Suggestions they deal with the liquidator or trustee on a business’ behalf.

“If your client needs to wind up their company, refer them to a registered liquidator or registered trustee,” said the ATO. 

An insolvency guide for directors is available from the Australian Securities and Investments Commission website here.

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