Small Business Restructures (SBRs) continue to be a viable option for companies to compromise debts owed and to allow them to continue operating. The ATO is the largest creditor in most SBRs, and therefore its vote often decides whether the SBR is accepted. Understanding how the ATO assesses an SBR proposal can assist you better position a client before an appointment. Below are some key issues to consider.
1. Compliance – Lodgements and Payment History
A prerequisite for an SBR is all taxation lodgements need to be up to date, and employee entitlements paid. Even if lodgements and entitlements are now up to date, the ATO typically views poor historical lodgement and payment compliance unfavourably.
What to do – Paying something to the ATO is better than nothing! If payment compliance is poor, paying regular, affordable amounts is viewed more favourably.
2. Director Loans and Drawings
The ATO will scrutinise director loan accounts. Large debit balances, unexplained drawings, Division 7A breaches, or personal expenses run through the company can all undermine an SBR proposal. The ATO may not accept an SBR where a director has ‘profited’ at the ATO’s expense.
What to do – Some factors to consider include reducing / repaying the loan, minimising drawings / personal spending, paying wages instead of taking drawings, having a plan to repay amounts owed and including director personal contributions in the SBR proposal.
3. Demonstrable Cash Flow Viability
SBR proposals can last up to 3 years. For proposals over time, a cash flow forecast must be provided for the period of the SBR to demonstrates the ‘restructured’ business can trade profitably to meet post-appointment obligations and the SBR repayments.
What to do – Critically review historical financial performance and identify areas for improvement (e.g. revenue improvement opportunities such as new markets or increasing prices, reviewing and reducing excessive costs and expenses, consider the profitability of certain projects, etc). Ensure forecasts are realistic, demonstrate improved financial performance to meet ongoing financial obligations and the SBR, and changes to financial performance can be supported by sound reasoning. If time permits, implement these changes prior to the SBR to help prove financial improvement and change.
4. A Reasonable, Affordable Proposal
The ATO compares the SBR against a liquidation outcome (including recoveries from assets of the company, insolvent trading, voidable transactions and loan accounts). The SBR should deliver a better return, be supported by the company’s actual financial position, and be capable of being funded from genuine trading surplus or third-party contributions. Shorter SBR periods with credible funding are generally preferred over extended terms.
5. Extenuating Circumstances
Often extraordinary factors, such as Covid 19, one-off financial impacts to the business, natural disasters, and health problems contribute to a company’s financial distress. The ATO will consider such factors where it can be shown they have materially contributed to the company’s financial difficulties.
What to do – Provide relevant evidence to support any connection between one-off or extraordinary events contributing to the financial position and any changes that will assist mitigate any future impact.
6. Early Advice
Seek professional advice from SV Partners at an early stage to help provide your clients the best opportunity to prepare a successful SBR. We continue to see strong support from the ATO for SBR proposals that consider these factors.
Article by Jason Cronan (Director) – Sunshine Coast