Readers of On The Pulse are likely familiar with the eligibility criteria for small business restructuring (SBR) (see link for a refresher). Introduced in 2021, SBR has become a valuable tool for rescuing viable businesses facing financial distress.
The latest ASIC review (see link) confirms that the ATO remains the dominant creditor in SBR processes, both in terms of value and volume. This means that for most companies using the SBR process, the ATO is often the majority value creditor, and its vote on a restructuring plan is decisive. Over the last few months, the ATO has become increasingly stringent. What was acceptable six months ago may now fall short (see article).
With SBR proposal acceptance rates declining (see article) - in part due to the ATO's tougher stance - it is more important than ever for directors and advisors to understand the ATO’s “hidden checklist” when reviewing restructuring plans.
What concerns the ATO - and why?
Public interest and competition considerations
As a government agency, the ATO is no doubt a “model creditor” in many insolvency appointments, including SBR. They must address public interest and competition considerations involved in ensuring the non-compliant taxpayer does not gain “an unfair advantage over other businesses”, even if the proposed restructure provides a better return than a winding up.
Compliance history and viability of business
Additionally, in recent SBR cases, the ATO has rejected, or signalled their intention to reject restructuring proposals, citing concerns such as:
“The company has an extremely poor compliance history, including frequent late lodgements and minimal payment of tax debts over an extended period….. the company has provided significant loans to a director or a related entity, which they have not repaid, while at the same time accruing tax debts….. There are concerns the company may be unable to pay all future post-plan taxation and SG liabilities on time and in full as the cash flow forecast shows minimal net profit each month….”
Below are key considerations behind the ATO objections:
Poor lodgement compliance
Frequent late or missing lodgements suggest a pattern of non-compliance. These raise red flags and require explanation during the SBR process.
Minimal tax payments
The ATO is concerned about debt escalation during or after the restructure. Past payment behaviour is seen as an indicator of future reliability.
Poor cash flow
Inadequate cash flow raises a question mark on the profitability of the business. Low or negative net profit and long-term debt accrual may indicate poor compliance in the future. The ATO needs to be convinced of the business’s ability to meet post-plan obligations.
Behavioural risk
The ATO does not want to approve plans that reward poor or unfair conduct. They need to maintain a fair environment to ensure that other businesses meeting their tax obligations are not disadvantaged.
Unmanaged director loan
Significant unpaid loans to directors or related parties are not acceptable to the ATO, as they do not want to be used as a lender to the business. If the director repays the loan, the company could use those funds to pay the ATO. Unrepaid loans hide the true viability of the business, resulting in substantial unrecoverable assets on the balance sheet and untaxed/unreported director income – leading to lost PAYG withholding and income tax for the ATO.
Any of these issues - individually or in combination - can lead to rejection of an SBR proposal. Quite often, these problems cannot be simply fixed through the proposed restructuring plan.
Preparing for SBR - before engaging a restructuring practitioner
To maximise the chance of success, directors should seriously consider and proactively address the ATO’s concerns. Early action and visible improvement will demonstrate a genuine turnaround effort to the ATO. Key steps include:
Bring lodgements up to date
All outstanding BAS, income tax returns, and SGC statements should be lodged before submitting an SBR plan. However, if the backlog is significant, seek professional advice first – in some situations, liquidation may be a more suitable option.
Make regular, improved tax payments
Even small, regular payments help demonstrate a commitment to ongoing compliance and financial discipline. If the Company is already on a payment plan, formal or informal, consider increasing the payment instalment whenever cash allows.
Tackle director loans
Consider what the director can repay - repay part or all of the director's loan where possible, even small amounts. Place the director/s on the company payroll and stop drawings. Note this can form part of the contribution (from the director’s personal funds) to the plan; however, need to substantially compensate for such loan amounts.
Practical example: identifying and addressing common red flags before an SBR
Business overview
A potential SBR client operates in the construction industry, installing patented flooring systems.
Current situation
ATO debt: approx. $100,000
Director on payroll, but historically underpaid
Lodgements are up to date
Main customer defaulted; accounts receivable not recoverable (out of control of company)
Current ATO payment: $3,500 / month (not on a formal payment plan, affordable)
No alternative business lines at present
Initial assessment
Based on the current position, the ATO would likely reject an SBR plan due to:
No evidence of fundamental business change or resolution of prior issues
Ongoing customer concentration and credit risk
Underpayment of the director, suggesting the business is not viable
Recommended action plan
Following consultation, the director has identified and agreed to:
Launch a new business line to diversify revenue and reduce reliance on a former key customer
Increase ATO payments using personal funds to demonstrate commitment and prevent debt escalation
Defer SBR appointment until changes are implemented and cash flow improves
Likely outcome
If the above steps are effectively carried out, the business is more likely to secure ATO support for an SBR proposal because:
The business model is strengthened, with reduced reliance on a single customer
Cash flow forecasts (and possibly new contracts) support future viability
Ongoing compliance and proactive payments demonstrate behavioural change/ improvement (Note: the overall debt may still rise during the transition period)
Key considerations
In this case, the director penalty notice (DPN, see link) exposure was low. If a DPN is received, seek immediate advice
If a director/shareholder loan exists and exceeds admissible creditors' claims, reducing or repaying these should be considered before appointing an RP
A director’s willingness to implement real change is crucial to a successful restructure.
Worrells can help
For more information on the SBR, click here to download our complimentary guide to small business restructuring.
If you have a client who is concerned about their business, have a chat with your friendly Worrells principals sooner rather than later. We’re here to help and can take you through the practical solutions available.
To give the best chance of success, a restructuring practitioner should assess all the factors before starting an SBR.
