Small Business Restructure & ATO Debt
ATO tax debt can be a significant component of a business’s overall debts. Whilst this debt may seem overwhelming, a range of programs may help businesses to manage and resolve ATO debt, as well as debt to other creditors.
Programs for business debt relief
Programs that may help a business with debt relief include:
Small Business Restructure
A small business can go through a small business restructure, whereby a restructure practitioner is appointed to help negotiate with creditors for a debt reduction (including debts with the ATO). A small business restructure can result in creditors agreeing to accept a lesser amount than that initially owed to settle the debt.
Voluntary Administration
If your business is insolvent or likely to become insolvent, support is available via the process of voluntary administration, which may provide a temporary freeze on collections of ATO debt and other debt while administrators assess options. This can give your business the opportunity to achieve a better outcome for its stakeholders than an immediate liquidation.
Informal Workouts / Safe Harbour
Your accountant can assist with negotiating manageable payment plans with the ATO. Entering into a Safe Harbour engagement is a way to implement restructuring plans and defend directors from potential claims of insolvent trading, should the attempted restructure fail and the company be placed into liquidation.
Liquidation
If liquidation is the only option for your business, a registered liquidator can guide you through the liquidation process, helping to ensure the liquidation will be conducted in accordance with the Corporations Act 2001 and other relevant laws.
Let’s look in more detail at the above options, and how they can provide some relief for companies and their directors, when navigating the difficult scenario of insolvency or potential insolvency.
Small Business Restructure
If your small business is in financial distress, it may be possible to stay in control of your company while being supervised by a small business restructuring practitioner.
A small business restructuring practitioner (SBRP) assists you to reach an agreement with your business’s creditors to compromise your business debts, including ATO tax debt. In essence, a small business restructure provides your company with ‘breathing space’ to develop a plan that will provide for the continuation of your business and the best return for creditors, given your financial circumstances.
The benefits to a small business of undergoing a small business restructure (SBR) are:
- An honest assessment of your current predicament, whether or not your business is able to be rescued, and whether it has a viable future.
- Reduction of debt, via compromises with creditors, tax relief, and other restructure measures.
- A map for future business success, rather than focusing on past problems.
- A fast turnaround for a resolution (with Business Rescue Solutions, you can expect a resolution within 36 business days). This means that in just over one month you have a clear vision of where your business stands, and a path for moving forward.
- Clarity of payment for Business Rescue Solutions’ services at the outset—no surprises. (The SBR is done at a fixed price which must be agreed to before it commences.)
- Business Rescue Solutions’ Restructure Practitioners are registered with ASIC as ‘registered liquidators’.
- The SBR is looked upon favourably by the ATO because part of the eligibility for an SBR is that all business tax returns have been lodged.
Voluntary Administration
If your company is insolvent or likely to become insolvent, and you’re not eligible for small business restructure, you may consider voluntary administration. In this circumstance, specialist administrators can assess your company’s financial situation and explore options for restructuring or repaying debts. ATO tax debt will be included as part of the overall liabilities owed by your business, if applicable.
During the voluntary administration period, debt collection efforts by the ATO pause temporarily. If a Deed Of Company Arrangement (DOCA) is proposed, whereby the company pays all or part of its debts, it is then considered relieved from those debts. Subject to creditors accepting the DOCA, your business can be saved.
The benefits for your business undergoing voluntary administration (VA) are that:
- VA is looked upon favourably by the ATO, as your company is required to have submitted business tax returns in order to be eligible for VA.
- There is the possibility that your company may be saved.
- You may be able to trade during the VA, if the administrator and creditors determine that this is the best possible solution.
- There is often goodwill from creditors, including the ATO, for companies that enter into the VA process. With a VA underway, there is a better opportunity for better outcomes for employees and creditors if the company can continue to trade, and better outcomes if the company needs to be sold, as it may still be a viable operation.
- Whilst the VA is underway, the DOCA may include terms whereby your business experiences relief from creditor demands, including ATO demands.
The Voluntary Administration process
The Voluntary Administration process begins when a company’s directors determine that the business is insolvent or likely to become so, and appoint a Voluntary Administrator (VA). The VA assesses the business’s viability, exploring options like restructuring or selling the company. Within 8 business days, a meeting with creditors is held to confirm the VA and discuss forming a Committee of Creditors.
The VA investigates the company’s financial state and reports back to creditors before a second meeting within 20 days. At this meeting, creditors decide whether to return control to the directors, enter a Deed of Company Arrangement (DOCA), or proceed to liquidation. If a DOCA is agreed upon, the company must sign it within 15 days, or else the company enters liquidation.
Read more about Voluntary Administration.
Contact UsWhat happens during a Small Business Restructure with Business Rescue Solutions?
There are three phases to the small business restructure.
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Phase 1: Pre-appointment
Before the appointment of a small business restructure practitioner, checks take place to confirm that your business meets the eligibility criteria for small business restructuring, including that:
- Your company is insolvent or likely to become insolvent
- Liabilities are under $1 million, excluding employee entitlements
- Your company and/or the directors, including a former director in the previous 12 months, has not been subject to or involved in a simplified liquidation or small business restructure in the previous 7 years.
It is also confirmed that, at the time the restructuring plan is proposed to creditors, your company will have substantially complied with requirements relating to employee entitlement and tax filing obligations. A restructuring plan can’t be proposed until a small business has:
- paid the entitlements of employees that are due and payable (with the exclusion of employee entitlements not currently due to be paid).
- given returns, notices, statements, applications or other documents as required by taxation laws (within the meaning of the Income Tax Assessment Act 1997). [Tax debts do not need to be paid – only the required returns given.]
Once deemed eligible, you must confirm that you consent to the terms of the SBR, and then the process kicks off.
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Phase 2: Restructure (35-37 business days)
A SBRP (Small Business Restructure Practitioner) is appointed, and the SBRP advertises their appointment and notifies creditors. (Your company will need to disclose “Restructuring Practitioner Appointed” on all public documents during the restructuring process.)
When you enter the restructuring phase, a moratorium begins, during which time:
- Unsecured creditors (and some secured creditors) are prohibited from taking action against the company
- Personal guarantees cannot be enforced
- There’s a restriction on the operation of ipso facto clauses.
This moratorium provides ‘breathing space’ to continue trading whilst the restructuring plan is developed and proposed.
Whilst the SBR is underway, the directors of your company continue to have control of the company’s business, property and affairs, while the restructuring practitioner acts as your company’s agent, assisting with a restructuring plan and making a formal declaration to creditors about your company’s proposed restructuring plan. The practitioner doesn’t chop and change your business—instead, they conduct a historical analysis of your company to understand why it is in distress, and what changes your company has made to alleviate the situation. They then work with your company to develop a restructuring plan and restructuring proposal statement. These are documented, and circulated with creditors.
Creditors* then have 15 business days to consider the restructuring plan/proposal and
vote upon whether or not they accept it.
*NB: Related Party creditors are excluded from voting.
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Phase 3: Restructuring Plan Implementation
If creditors accept the restructuring plan, the SBRP manages the requirements, as set out in the plan, including realising any recoveries and paying distributions to creditors in accordance with the plan.
Safe Harbour / Informal Arrangements
The safe harbour provisions, introduced by the 2017 Treasury Laws Amendment, provide protection for company directors from personal liability for insolvent trading if the company is undergoing restructuring. These provisions aim to foster a culture of entrepreneurship by allowing directors to explore restructuring options for financially distressed but potentially viable companies without the immediate threat of personal liability. Instead of prematurely entering administration or liquidation, directors can seek advice and implement strategies to save the business, offering a more flexible approach to insolvency management.
To qualify for the safe harbour defence, directors must demonstrate that they’re actively working on a plan reasonably likely to result in a better outcome for the company. Factors such as staying informed about the company’s financial health, preventing misconduct, maintaining accurate records, and consulting qualified advisers are key. While this protection covers civil liabilities, it does not extend to criminal liability or other legal obligations such as employee payments and tax compliance, thus ensuring directors remain accountable for their broader responsibilities.
Liquidation and your ATO debt
In the case of liquidation, your company is wound up, and its assets are realised by a liquidator to cover the costs of liquidation and to repay creditors, including the ATO. The ATO, like other creditors, will receive a distribution from the liquidation proportionally calculated based on the amount of its debt. If there are insufficient assets, the tax debt may remain unpaid, but the company is dissolved.
Note that company directors may still be personally liable for certain ATO debts, such as unpaid employee superannuation or PAYG withholding, under the Director Penalty Notice (DPN) regime.
Struggling with business debt?
How Business Rescue Solutions can assist
Business Rescue Solutions offers tailored strategies to Australian businesses grappling with both ATO tax debt, and other debt. Our team of registered practitioners are able to take you through the processes discussed above, including guidance through Safe Harbour engagements, Small Business Restructure, Voluntary Administration, and Liquidation.
Through these varied solutions, we provide businesses with the support and guidance needed to navigate complex tax debts and avoid further penalties or legal action. Our highly-experienced practitioners have achieved successful results for a range of businesses across Australia. To read more about how we’ve helped businesses, see our Case Studies.
Want to find out if we can help your business with tax debt relief? Take our 30 second test.
Find an office near you
Whether you need business debt relief in NSW, VIC, or somewhere else in Australia, Business Rescue Solutions is here to help. We have offices across the country, and are also available for online consultations. Speak with our experts today.
Need immediate support? Contact our free director helpline today on 1300 382 716.
FAQs
Bankruptcy applies to individuals, whereas for businesses, liquidation may apply (the company is wound up).
If your company enters into liquidation, the ATO typically does not cancel or ‘wipe’ a tax debt. Instead, the liquidation process involves selling off company assets to pay creditors in order of priority (the ATO is considered a creditor). If the company’s assets or the liquidator’s recoveries are insufficient to cover all debts, the remaining debt may remain unpaid.
Once a company’s liquidation is completed and the company is deregistered, it no longer exists, and the company itself is not liable for the debt. However directors may still be personally liable for certain tax debts under the ATO’s Lockdown Director Penalty Notice (DPN). In these cases, directors can be pursued personally for the company’s unpaid tax debts if proper compliance actions were not taken.
In summary, while the company’s tax debt may be unpaid after liquidation, the ATO may still pursue directors personally for specific unpaid liabilities.
Small business restructures (SBRs) can help businesses in ATO tax debt hardship. The SBR offers eligible businesses with more manageable ATO debt repayment options, and potentially, relief from financial pressures. As part of the SBR, a compromise is made between the creditors and your company, which involves you agreeing to pay back your debt to the creditor, in part or in full, over a defined period. If you and the creditor agree that you only need to pay your debt in part, the remaining debt is written off. However, similar to liquidation, the director might be personally pursued for unpaid tax debts under the ATO’s Lockdown DPN.
To be eligible for small business restructure, a company must be able to answer ‘yes’ to all the following:
- Is the company insolvent or likely to become insolvent?
- Are tax lodgements up to date? (This must be complied with before a restructuring plan is issued to creditors)
- Are employee entitlements up to date? (Again, this must be complied with before a restructuring plan is issued to creditors)
- Are liabilities under $1 million, excluding employee entitlements?
- Company has not been subject to a simplified liquidation or SBR in the previous 7 years?
- Directors, including former directors acting in the preceding 12 months, have not been involved in a simplified liquidation or SBR in the previous 7 years?
- Is the entity incorporated under the Corporations Act 2001?