Small Business Restructuring (“SBR”) is increasingly being used by companies dealing with financial distress. Between 1 July 2022 and 31 December 2024, more than 3,300 SBR plans have been proposed, with over 83 percent accepted.
According to a recent ASIC report (ref link below), creditors have received over $100 million in dividends through these restructures, with average returns of around 20 cents in the dollar. Unsurprisingly, the Australian Taxation Office (“ATO”) featured prominently, receiving approximately 87 percent of the total dividends paid.
While overall acceptance rates remain high, the trend appears to be declining (from 88 percent in the 2022–23 financial year to around 79 percent in 2024–25). At the same time, post-approval defaults are on the rise. In our experience, many businesses enter into an SBR without fully appreciating the discipline it requires. A successful restructure may reduce legacy debt, but it comes with firm obligations and often demands real change. We assess viability before a proposal goes forward, but much depends on whether directors are willing and able to change how they run the business. That might mean tightening systems, reducing costs, or adjusting how they pay themselves. Despite good intentions, not all directors can make that shift. We have seen businesses back into insolvency just months after being given a lifeline through an SBR.
This is one of the reasons it appears the ATO is now taking a closer look at SBRs before giving the tick of approval. A commercial return is still important, but it is no longer enough on its own. Viability and compliance history (amongst other things) now appear to carry significant weight in determining whether a plan is supported, at least where the ATO is involved. Based on what we have seen in practice, there are four common reasons the ATO has declined proposals, even where the commercial terms seem otherwise reasonable:
Unpaid and growing director loans: When director loan accounts have grown in parallel with unpaid tax, the ATO often appears to view this as directors paying themselves in preference to the ATO. It raises concerns about financial discipline and the prioritisation of obligations. Where there is no clear explanation or effort to address the drawings, the ATO has at times been unwilling to support SBR plans.
Poor lodgement history: The ATO appears to place high value on compliance behaviour. Lodging on time (even when payment cannot be made) shows a level of director responsibility. Several otherwise commercial proposals have failed due to a poor lodgement record or limited effort to engage with the ATO about the outstanding debt before the SBR process.
Lack of operational viability: The ATO (understandably) does not seem inclined to support a business that is likely to in any event collapse in the near term. If there is no credible evidence that the business can trade profitably, or if it appears the restructure is simply delaying the inevitable, the proposal is unlikely to succeed. Detailed budgets, clear revenue pathways, and signs of active financial management are critical.
Timing matters: The best outcomes occur when businesses seek advice early, before a Director Penalty Notice, statutory demand, or winding-up application is issued. Taking the initiative, rather than being forced to act, also appears to be viewed more positively by the ATO. It signals a genuine intent to resolve the company’s affairs and usually leads to a smoother process.
SBRs are not suitable for every business, but when used properly, they can be an effective way to reset and rebuild. Success depends on timing, planning, and a genuine willingness to do things differently. If you are advising a client in financial distress, or considering whether an SBR might be the right fit, speak to a registered restructuring practitioner – like us at Worrells - early. The earlier the engagement, the better the outcome is likely to be.
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