We recently completed a small business restructure that delivered a successful outcome for a regional Queensland business.
The outcome was positive, but the path to get there highlighted a clear shift in the current small business restructuring landscape.
We were introduced to the director of a roofing business based in Gympie, Queensland. The company was facing significant ATO pressure, and the director had recently received a director penalty notice.
That notice created urgency. The director needed to act quickly to avoid the risk of becoming personally liable for the company’s tax debts.
Through the small business restructuring process, we were able to assist the company to avoid liquidation, continue trading, and protect its QBCC licence.
However, the matter was not straightforward.
The company owed the ATO approximately $284,000. At the same time, the director owed a substantial loan account to the company of approximately $325,000.
Our investigations indicated that, in a liquidation scenario, the loan account may have been recoverable by a liquidator, including through the available equity in the director’s home.
That changed the commercial position entirely.
For any SBR proposal to be credible, creditors needed to receive a return that was better than they would likely receive in a liquidation. Given the director loan account, the hypothetical liquidation return was high. As a result, the SBR proposal needed to offer creditors a return of 100 cents in the dollar.
Without that loan account, a reduced return may have been achievable.
This is an important point for directors and advisers.
An SBR is not simply about offering creditors a discounted compromise. The proposal must be assessed against the likely liquidation outcome. If related party loans or recoverable claims exist, they can materially change what creditors may expect to receive.
A changing SBR environment
In the early stages of the SBR regime, proposals offering returns of 25 to 30 cents in the dollar were not uncommon. That environment has shifted. We are now seeing proposals that may have been accepted 12 to 18 months ago being rejected. In many cases, the ATO is the largest creditor, and its vote will determine whether the proposal succeeds or fails.
The ATO is taking a more active and considered approach. It is asking more questions, reviewing compliance history more closely, and focusing heavily on whether the business is genuinely viable.
This does not mean SBRs are no longer achievable. They remain a powerful tool for viable businesses.
But the quality of the proposal matters.
What made this SBR worthwhile?
Although the creditors were ultimately offered 100 cents on the dollar, the SBR still delivered real benefits.
The company avoided liquidation. It retained its QBCC licence. It continued trading. The director avoided the immediate consequences that may have followed liquidation, including the potential crystallisation of personal liability issues.
The company also avoided the ongoing accrual of significant non-deductible interest on the outstanding ATO debt.
In short, the SBR gave the business a structured pathway to deal with its debt while preserving enterprise value.
That is often the real value of an SBR. It is not always just about reducing the debt. Sometimes it is about buying time, preserving licences, protecting goodwill, and allowing a viable business to trade through its difficulties.
What makes a strong SBR proposal?
The bar for acceptance is rising. That makes preparation critical.
A company can only propose one SBR plan within a seven-year period, so there is limited room for error. Directors and advisers need to ensure the proposal is properly prepared, commercially realistic, and supported by a clear explanation of why the business should survive.
In the current environment, a strong SBR proposal will usually need to address the following matters.
First, all tax lodgements must be up to date. This is non-negotiable. Outstanding BAS, income tax returns, superannuation reporting, and other lodgements need to be addressed before a proposal can be issued.
Second, employee entitlements must be paid and up to date. This includes superannuation. A company that has not dealt properly with employee entitlements will face obvious difficulty putting forward a credible restructure.
Third, there needs to be a clear explanation of how the business got into difficulty. Creditors, particularly the ATO, want to understand what caused the debt to build up.
Fourth, and just as importantly, the proposal must explain what has changed. If the same issues remain, creditors are unlikely to be persuaded that the business will trade successfully after the restructure.
Fifth, the proposal must demonstrate future viability. This will often require cash flow forecasts showing that the company can meet its ongoing trading obligations, remain compliant with future tax liabilities, and fund the proposed SBR payments.
Sixth, creditors must receive a better return than they would in a liquidation. This remains a fundamental part of the analysis. Any director loan accounts, related party transactions, preference recoveries, insolvent trading claims, or other potential recoveries need to be considered.
Seventh, the company must demonstrate ongoing tax compliance. The ATO is increasingly focused on whether current obligations are being met, not just whether historical debt can be compromised.
Finally, related party transactions will be closely scrutinised. Director loan accounts, payments to related entities, asset transfers, and drawings taken while tax debts remain unpaid can all affect the outcome.
Director engagement is critical
The SBR process moves quickly.
Directors need to be engaged, responsive, and ready to provide information. Cash flows, trading history, creditor details, tax records, employee entitlement information, and explanations for key transactions all need to be dealt with promptly.
While the restructuring practitioner assists with the process, it is ultimately the director’s proposal.
A well-prepared director, supported by good advisers, will always be in a better position than one who waits until the pressure becomes unmanageable.
The key takeaway
The SBR process remains a very useful restructuring tool for small businesses, but it is not a soft option.
The ATO’s approach has evolved. Proposals are being reviewed more closely. Viability, compliance, director conduct, and liquidation comparison are all critical.
The best outcomes are still available, but they are more likely to be achieved where directors act early, understand the issues, and put forward a proposal that is realistic, properly supported, and commercially better than liquidation.
For viable businesses, SBRs remain powerful.
But in the current environment, the proposal needs to stack up.