Australian Securities and Investments Commission (ASIC) Insolvency Statistics (as at 10 November 2024) have observed a recent spike in the past 18 months in Small Business Restructure (SBR) appointments, with the month of October 2024 seeing over 26% of all insolvency appointments in the month being SBR appointments (over 300 appointments for the month).
However, recent changes in the organisational structure at the Australian Taxation Office (ATO), which is often the majority in value creditor for SBR appointments, have seen the ATO’s approach to tax compliance significantly affect businesses undergoing SBR appointments. We believe this may put downward pressure on the volume of SBR appointments in 2025 and beyond.
Whilst there has been no change to legislative requirements for SBR appointments, the ATO has created its own processes and requirements to ensure an SBR plan meets its objectives.
As part of the organisational restructuring at the ATO, its Service Delivery Group was restructured into the Frontline Operations Group, which now includes a dedicated Deputy Commissioner of Taxation overseeing “Frontline Compliance”. This restructuring has marked a shift toward a firmer approach to taxation compliance compared to prior months.
A notable service that is no longer offered due to this restructure, and the overwhelming quantum of SBR’s that are being appointed, is that of obtaining the ATO’s opinion on a draft restructuring proposal. Previously, it was possible for Practitioners to submit a draft proposal to the ATO and receive feedback on the likelihood of success. With this option now unavailable, it places additional pressure on practitioners and company Directors to ensure the proposal offers a substantially higher than previously required return to creditors to increase the likelihood of ATO acceptance without prior input. This change substantially increases the risk of proposals being rejected and in doing so, prohibits companies from utilising an SBR proposal again for seven years.
The Deputy Commissioner for Frontline Compliance is responsible for determining whether the ATO will accept a restructuring plan proposed by a company under an SBR appointment. Previously, the ATO often favoured plan proposals where the contributions to be made under a plan would result in a higher dividend rate than that of a hypothetical liquidation scenario. However, it appears that in recent months the ATO places greater emphasis on several critical factors:
- A company’s historical taxation compliance;
- Related party loan transactions, particularly where directors have a history of taking loans in lieu of wages;
- A company’s ability to meet its future taxation obligations; and
- Whether it aligns with the public interest for the company to continue trading.
In a recent SBR appointment, the ATO was the majority in value creditor, rejected a plan proposal offering approximately 62 cents in the dollar contribution to be paid within 14 days of acceptance. The estimated return to creditors detailed in the hypothetical liquidation scenario was between 9 and 35 cents in the dollar. In rejecting the plan proposal, the ATO provided reasoning reflective of the points mentioned above, and in particular, noted there were substantial related party loans owing to the Company.
It appears that any increase in related party loan accounts, whilst tax debts were not being paid, will substantially increase the difficulty in obtaining ATO approval for an SBR proposal. The repayment of these loans as part of the proposal seems to be the only acceptable means of swaying the ATO’s reasoning towards approval.
This shift underscores the ATO’s growing emphasis on enforcing compliance and prioritising broader public interest considerations when evaluating SBR proposals. As a result, it is expected that there will be a decline in the number of SBR plans being accepted by the ATO, given the heightened scrutiny and stricter criteria now applied. Companies considering an SBR must carefully evaluate whether they can meet these increased compliance expectations and determine if appointing a Restructuring Practitioner remains a viable pathway for restructuring their debts where the ATO is a major creditor of the company.
If your business is considering an SBR, ensure your proposal is strong and aligns with ATO expectations. Contact SV Partners today to explore your options and get expert advice.
Article written by Victor Mackintosh (Senior Accountant) and Nicholas Davies (Accountant) – Brisbane