As the festive season approaches it is an opportunity to do a mid-year health check for clients. Some of the risks that clients may be exposed to are more obvious than others.
There has been much activity in the insolvency arena around Small Business Restructuring (SBR). It has been an opportunity for businesses in financial difficulty (whilst meeting the relevant criteria) to put a proposal to their creditors for a compromise of their debts. Often these debts are predominantly owing to the ATO and the ATO has recently updated its website to set out what it requires when reviewing an SBR and the circumstances as to when they will approve a proposal (Small business restructuring | Australian Taxation Office).
We understand that there has been a slowing in the number of SBR appointments nationally, which may reflect the closer scrutiny applied by the ATO when reviewing SBR proposal. As noted on their website, the ATO closely scrutinises the compliance and payment history of the company when assessing the SBR proposal. Early action is always recommended to provide a company with the best possible chance of successfully undertaking an SBR.
We also note that the ATO have increased their enforcement of outstanding debts by being the petitioning creditor in a large number of recent Court appointed liquidations. Once the ATO files winding up proceedings, the company’s options are limited and therefore we recommend directors act before any such action occurs.
Christmas time is also a good time to review whether the company’s lodgements have been completed especially the Business Activity Statements (BAS) to the end of September 2025. The ATO have continued issuing a large number of Director Penalty Notices, and where the BAS is lodged outside of 3 months of its due date, the director will be personally liable for the debts incurred on that BAS and no formal appointment for the company will remove the director’s personal liability.
Cash flow problems at this time of year with businesses facing holiday downtime, coupled with holiday pay pressure, may also highlight the need for a check on the overall financial viability of a business and its directors/proprietors.
Although tax debt is a significant issue in relation to a business’ operations there are other exposures to both corporate and personal liability that can arise from changes in an individual’s circumstance. Some of these are discussed below.
Newly Appointed Director
If your client has recently consented to be a director of a company without seeking financial advice they may have inadvertently signed up for unexpected liabilities in the form of tax liabilities or even potential exposure to insolvent trading. If the appointment has just occurred and the director has realised the adverse financial position, it may be possible for the director to avoid personal liability if they take action which results in the tax being paid or a formal insolvency appointment within 30 days from inception.
Appointment following Bankruptcy of Spouse
It is not uncommon for a company director facing bankruptcy to appoint their spouse as a replacement director. This pre-empts the disqualification of the individual, following bankruptcy, from being a director under the provisions of the Corporations Act 2001.
The spouse, who may not have been active in the business prior to appointment, may not be aware of the risks and responsibilities of being a director.
Cessation as a Director
Resigning as a director may seem like the end of an involvement with a company but it is easy for a retiring director to overlook liabilities that were incurred while they were a director. Similarly, they may have entered into agreements with financiers, leasing companies and landlords that leave them exposed despite their retirement. If a company has been operating for a number of years, directors may have forgotten what personal guarantees they gave to suppliers, often given many years ago. Action will be required to eliminate or reduce the exposure.
Separation and Divorce
While many separations may start off with the parties intending to resolve their financial affairs amicably, circumstances can often change over time. We have seen a number of instances where one spouse has been unaware that debts have been incurred in their name or they may be ignorant of their entitlements under complex trust arrangements. At the very least a credit check may identify debts, defaults or enquiries from third parties.
While the discussion above has centred around companies and directors, similar considerations apply to partnerships.
At SV Partners we are often asked to investigate the personal circumstances of an individual in circumstances where they are facing potential exposure. Should you have any questions in this area please do not hesitate to contact us.
Article by Hillary Orr (Consultant) – Adelaide