Welcome to our final newsletter for 2024.
This article comes to you from our beautiful Sunshine Coast office.
In this edition, we highlight what we’ve seen in our industry this year. Happy reading and Merry Christmas and a happy holiday season to our friends and valued colleagues. Thank you for entrusting us to assist you and your clients.
1. ATO Debt Collection Continues to Soar!
- The ATO is more rigorously pursuing unpaid taxation debts – it was reported in September that over $100 billion is owed to the ATO, the largest it has ever been, almost double the annual defence budget, triple the Federal Government’s new housing investments over the last two years, and roughly equal to annual Federal health spending.
- ATO debt collection is driving the high level of insolvencies – there is still however a catch up from COVID where the ATO (and other creditors) did not actively pursue debts owed, which contributed to record low insolvencies.
- There appears to be more focus on collecting company and business-related debts, not individual debts.
- The ATO continue to issue Director Penalty Notices (DPNs) to Directors to make them personally liable for unpaid company tax and superannuation.
- Garnishee notices are being used again as a debt collection tool.
- Credit defaults (for business debts in excess of $100,000) are being reported to credit agencies by the ATO, which adversely impacts credit scores (and the potential ability to borrow money) and can impact the continuity of trade supplier terms / accounts.
2. Small Business Restructures (SBRs) are all the rage!
- SBR appointments are on the rise – 1,021 FY 2025 YTD.
- The ATO is still the major creditor in SBR appointments.
- There continues to be strong support and acceptance of SBRs – a lot of work is done at the front end to ensure SBRs:
- provide a better outcome than a liquidation; and
- are viable and sustainable – it is often a catalyst for a review of the company’s financial performance and to improve and tighten up areas (e.g. price increases, targeted marketing, cost scrutiny, etc).
- The Queensland Building & Construction Commission (QBCC) has been understanding and not terminated building licences – SBRs do not cause an automatic loss of a building licence for a company, however the QBCC will still consider other compliance issues (e.g. MFR requirements).
- The ATO whilst still supportive, is expecting better outcomes / returns than previously.
- Some feedback we are receiving from the ATO is:
- Lump sum up front payment/s are viewed favourably.
- Payment terms of 2 years or less are preferred.
- Director loan accounts (even for drawings) and related party loans are viewed unfavourably – the SBR offer should allow for this.
- Related party creditors should not claim in the SBR – to maximise the ATO dividend.
- Poor previous payment history and non-compliance are also being viewed unfavourably.
- Cash flow forecasts and financial statements must be provided and be realistic and justifiable.
- SBRs are only for companies (not available for individual debts – the Bankruptcy Act deals with this).
3. Voluntary Administrations (VAs) still have a place
- SBRs are only available to companies with less than $1million in debt and where all employee entitlements (including superannuation) have been paid.
- Related party debts can claim and participate in voting in VAs.
- There has been an increase in VAs in the last quarter, predominantly driven by ATO debt recovery action (including issuing DPNs and garnishee notices).
4. Director and Shareholder Disputes on the Rise?
- We are seeing an increase in director and shareholder disputes, especially where money is tight.
- Shareholder agreements are still rarely used – this can make it more difficult to resolve shareholder disputes.
5. Individual / Personal Debts Owed
- Personal insolvencies remain lower than pre-Covid numbers.
- The ATO has however issued a record number of DPNs to Directors to make them personally liable for Company debt.
- ATO debts are not statute barred so there is no time limit on collection (unlike other debts).
- The ATO can retain tax refunds to apply against debts owed.
- Will the ATO chase these debts later? This can impact individuals if they acquire assets.
6. Members’ Voluntary Liquidations (MVLs) are still a useful tool to save tax!
- Where businesses are sold, MVLs can often save your clients tax – Exiting the Family Business and Members Voluntary Liquidations.
- MVLs are also beneficial when shareholders can’t resolve disputes, where a company is solvent – they can appoint an independent party to wind-up the company.
7. The Main Industries facing Insolvency are (still)…
- Construction, Hospitality and Retail Trade.
- Economic pressures and consumer spending are increasingly adversely impacting small businesses.
8. Safe Harbour – Protection for Directors from Insolvent Trading
- Despite its introduction in 2017, the Safe Harbour regime has not been widely utilised – why?
- Limited awareness and understanding among directors and advisors, especially for small to medium businesses.
- For directors in the SME market, decision making is not often motivated by avoiding insolvent trading liability. Therefore, safe harbour is not a high priority.
- They do not often meet the pre-conditions of substantially paying employee entitlements and substantially complying with taxation lodgements.
- Directors need to develop a course of action that will reasonably likely lead to a better outcome compared to entering voluntary administration or liquidation – this is problematic for companies not making a profit or where they cannot compromise debt owed.
9. Voluntary Liquidations (CVLs) are still the most common form of insolvency
- Record high for insolvency appointments – 2,536 FY 2025 YTD.
- Economic factors and pressures are contributing to insolvencies in SME market.
- Whilst the impact can be difficult on directors and shareholders, closure and finality often provide relief from stress of dealing with business pressures and unpaid debts.
- Early intervention is always recommended:
- To understand the options available and the implications.
- To prompt change if the business is to survive.
- If the business can’t continue, to assist planning for the future and mitigate financial difficulty.
Thank you again for your support in 2024. Watch this space for 2025!
Article written by Jason Cronan (Director) and Daniel Luckman (Associate Director) – Sunshine Coast