The Australian Taxation Office is getting tougher on Small Business Restructuring proposals

A deluge of flailing businesses taking advantage of a system to help them avoid large chunks of debt has drawn attention from the tax office.

A deluge of flailing businesses taking advantage of a system to help them avoid large chunks of debt has sparked a crackdown from the Australian Taxation Office.

Small Business Restructuring proposals have been taken up by thousands of businesses since their introduction post-Covid, enabling many to avoid liquidation.

However, the ATO fears the system is being abused, with an increasing number of companies failing to pass extra scrutiny from their major creditor.

According to credit risk insights data from ALARES, SBR appointments have dropped from a peak of almost 25 per cent of all insolvency appointments in March to just over 15 per cent in June.

The popularity of SBR plans stems from a company only needing to pay a portion – as little as 20c in the dollar – to the creditor, and the business can continue in the owner’s hands and not through an administrator.

To be eligible, the company’s debts must be lower than $1m.

Jirsch Sutherland partner Andrew Spring said while SBR plans remained an increasingly popular insolvency tool, the ATO – usually the main creditor – no longer gives companies “an easy pass”.

“In the early days the ATO was what you would call ultra supportive,” he said.

“And a lot of plans were getting through with little or no scrutiny and in the past 12 months that scrutiny has started to increase.

“We are finding a lot of people are spruiking the idea of writing off 80 per cent of your debts.

“We’ve actually had phone calls from people asking whether they can enter into a SBR and pay the ATO 20c in the dollar but that s not what the process was designed for.”

Jirsch Sutherland partner Andrew Spring.

Mr Spring said the Australian Securities and Investments Commission has publicly raised concerns that SBRs could be used to facilitate phoenix activity, where a company in financial distress transfers its assets to a new entity while leaving its debts and liabilities behind in the original company, which is then liquidated or abandoned.

He said while there’s no evidence of systemic misuse, the increased regulatory focus is reinforcing the need for transparency and accountability in every proposal.

“It’s a horses for courses situation depending on the interests of the creditor,” Mr Spring said.

“The ATO has said there’s no commercial benchmark that needs to be reach. It just needs to be appropriate for the circumstances.”

SBR plans can be rejected for a variety of reasons, including director loan accounts (owed to the company), poor tax compliance, and if it doubts the business is strong enough to continue.

Importantly, to have an SBR plan accepted, a business must confirm that superannuation can be paid for all staff, excluding directors, ATO lodgements are up to date and less than $1m is owed to unsecured creditors.

Mr Spring said there has been a rise in alternative pathways with more businesses opting for voluntary administration and Deeds of Company Arrangement, particularly when the ATO won’t support an SBR or when creditor arrangements are more complex.

“The ATO has been good at saying what they’re looking for and the red flags which would make it difficult,” he said.

“The big question is whether this business deserves a second chance and whether it’s still viable.”