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As a trusted advisor serving SME clients, you’re well aware that small businesses are the lifeblood of our economy – driving job creation and economic growth. In today’s challenging climate, many of these businesses can be faced with significant financial hardships, especially where they are burdened with ATO debt accumulated during 2020.
That’s why we’re excited to share the benefits of the Small Business Restructure (SBR) process, a legislated pathway under the Corporations Act that is saving many small businesses from collapse.
Why the Small Business Restructure?
The SBR process offers a vital opportunity to rehabilitate a small business burdened by debt – including ATO debt. Consider these key points:
- A Timely Rescue for Small Businesses: The SBR process recognises the critical role small businesses play in the economy and offers them a lifeline to avoid insolvency. With many businesses facing unprecedented financial distress, the SBR is proving to be a valuable tool in keeping them afloat. Directors remain in control of the business throughout the process while the appointed Restructuring Practitioner works with you (the accountant) and the director to formulate a recovery plan and a proposal to compromise creditor debt.
- Effective Debt Compromise: Recent ATO reports indicate that small business debt makes up 66% of its outstanding collectable debt. Traditionally, outside of a formal insolvency process, the ATO has limited flexibility in compromising tax debt (excluding penalties and interest). However, through the SBR, a compromise of cents on the dollar on outstanding amounts can be reached – often within a short timeframe of just 7 weeks. The ATO is a strong supporter of viable restructure proposals.
- Structured Eligibility and Approval: To qualify for an SBR, a business must:
- Be operated by a company (and includes that which is corporate trustee of a trading trust).
- Owe less than $1 million to its creditors (excluding employees).
- Not have undergone a small business restructuring or used simplified liquidation in the past 7 years.
Additionally, the business must be able to:
- Settle all outstanding employee entitlements (often linked to unpaid superannuation).
- Lodge all outstanding documentation and returns with the ATO.
For an SBR offer of compromise to be accepted, creditors representing at least 50% in value of those votes lodged must vote in favour. In many cases, if the ATO comprises more than 50% of the creditor pool, its decisive vote can secure support for the proposal, binding all creditors to the agreed terms.
A Word of Caution
While the SBR provides a structured and beneficial solution, we urge you to remain vigilant. Some firms have been engaging in sharp business practices by offering services at rates significantly above current market levels, providing finance to directors at high rates of interest or promoting restructures that have little chance of success. This predatory pricing often targets financially distressed businesses, taking advantage of their vulnerability during critical times.
What You Can Do:
- Conduct Thorough Due Diligence: Ensure that any service provider you consider is offering transparent, fair pricing aligned with industry standards. While the legislation requires the payment of a fixed ‘up front fee’, this can have promotors of SBRs put forward proposals to creditors which have a low likelihood of success.
- Prioritise Your Client’s Best Interests: Advise your clients to compare providers and select those with proven experience and ethical practices. Costs badged as ‘success fees’ should not be paid.
- Leverage Your Expertise: Guide your clients away from opportunistic practices and towards sustainable, legally compliant solutions.
Explore the Possibilities
To learn more about how the Small Business Restructure can be tailored to support your clients, reach out to Adrian Hunter.
