The use of the Small Business Restructuring (“SBR”) process has been steadily increasing as the impact of debt to the ATO accrued during COVID by small business is no longer manageable. The increased recovery action by the ATO to collect these tax debts by winding up companies and issuing Director Penalty Notices has been a further impetus for small business to consider the SBR process.

Our firm has had much success with relieving small businesses of substantial debt to the ATO however there are a number of matters which the ATO will consider prior to agreeing to an SBR proposal. Small businesses considering commencing the SBR process should consider these factors in advance particularly where the ATO is the only creditor voting on an SBR proposal or where it has the largest value of the admissible debts.

General Considerations

• The company and its Directors and related entities’ compliance history in relation to lodgments of taxation reporting obligations.

• Whether or not the company is currently operating and plans to continue to operate should the SBR proposal be accepted.

• Will the acceptance or rejection of the SBR proposal affect the employment of the company’s employees, if any.

Specific considerations

• Does the SBR proposal provide a greater return to the ATO by comparison to a hypothetical return in a liquidation.

• What are the payment terms of the SBR proposal? If the SBR proposal does not provide for a lump sum payment in a relatively short term and provides for payment over an extended period, the ATO will expect to receive and be able to review a detailed cashflow for the period over which the proposed payments are to be made. This will allow the ATO to consider whether the company’s business is viable and can continue to operate whilst the proposed payments are being made and into the future. These cashflows must be detailed and reasonable.

• Whether or not there have been breaches of the provisions of the Corporations Act.

• Are there debit loan accounts outstanding to the company by its Directors and/or related entities. The ATO does not think kindly of Directors who have drawn funds from the company for personal use whilst the debt to the ATO is increasing. Such loans could of course be repaid prior to the commencement of an SBR. However, it is often the case, where such funds are not available to repay the debt. In these circumstances, the ATO will consider whether such drawings were in lieu of wages and not in addition to salaries drawn by say the Director and/or their spouse or other related entities. A large initial payment provided for in an SBR proposal giving the ATO more certainty will be attractive in circumstances where debit loans exist.

Should you or your client be in financial circumstances where Small Business Restructuring is being considered and the ATO is the only or major creditor (or otherwise), given our experience, we would be pleased to have an obligation free discussion about this or any other insolvency related matter. 

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