Can your business leverage the Small Business Restructure process to clean up old debt?

In support of businesses under pressure, the Australian Tax Office (ATO) has encouraged taxpayers to lodge their returns on time to receive stimulus payments, such as Jobkeeper, even if the taxpayer couldn’t pay the underlying tax debt. As such, the ATO recently reported that business tax debt has ballooned from $24.9b (30 June 2020) to $53.8b (30 June 2021 – pre Omicron).

The Small Business Restructure (SBR) process was introduced to enable eligible businesses to compromise their debts with their creditors’ agreement to maximise the chances of trading viably in the future. Unlike any other insolvency procedure, under the SBR process, business owners remain in control of their business during the restructure.

While the ATO scaled back its debt recovery actions for much of the pandemic, it has recently taken a more assertive approach with an expectation that businesses address tax debts, usually by way of repayment plan, in some instances up to three years. The SBR is a viable alternative to a repayment plan. It can also be used to prevent directors from being individually liable either for Insolvent Trading or if they received a Director Penalty Notice from the ATO to personally repay the entirety of the company’s tax debt.

John McInerney, Partner - Financial Advisory at Grant Thornton, said: “While a repayment plan may appear attractive to a debt riddled business owner, there is often a failure to adjust the underlying business model, in which case the business may end up collapsing with a heavier debt burden.

“As businesses find their feet in the new normal, advisors will be called on more than ever to assist clients deal with legacy debts, including the ATO in many cases. The ATO was a major creditor in 70 per cent of SME insolvencies pre-COVID, and is now likely over-represented in the creditor pool as result of the growth in ATO business debt during the pandemic.”

Throughout the SBR, creditors are prohibited from taking action against the business to recover money and/or property, including terminating contracts and formal debt recovery proceedings. Directors are assisted through the SBR by a restructuring practitioner, who must be a registered liquidator.

“Based on our recent engagement with the ATO, they are supportive of the new SBR process introduced 1 January 2021 to manage the predicted tsunami of insolvencies. To date there has been an approximate 90 per cent success rate for businesses who have undertaken the Small Business Restructure, which is a high success rate,” continued McInerney.

Which companies are eligible for a Small Business Restructure?

• Liabilities – Total debts must not exceed $1m.
• Tax affairs – All lodgements must be up to date.
• Employee entitlements – All employee entitlements that are due and payable must be paid in full (including superannuation).
• Limitation on time period – The company and its directors (current or in the previous 12 months), must not have engaged in a Small Business Restructure or Simplified Liquidation process in the past 7 years.