What the ATO looks for when reviewing SBR proposals

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What does the ATO look for when reviewing a small business restructuring proposal?

Small Business Restructuring (SBR) can give eligible companies an opportunity to restructure unsecured debts, continue trading and retain control of the business.

However, when the Australian Taxation Office (ATO) is a major creditor, its vote can have a significant influence on whether a restructuring plan is accepted.

The ATO considers more than simply whether a proposal offers a better return than liquidation. It may also consider the company's tax and superannuation compliance, ongoing viability, director and related-party transactions, payment history, governance and whether the proposed contribution represents a credible outcome for creditors.

Understanding these issues before a restructuring plan is proposed can help business owners address potential concerns early and put forward a stronger proposal.Yet despite the increased interest, the SBR process is not always the most appropriate insolvency appointment for a business. It is important to consider creditor expectations, and particularly the Australian Tax Office (ATO), who is commonly the largest creditor in an SBR.

With a business only able to submit an SBR proposal once every seven years, business owners should be aware of the common red flags that may lead to an SBR proposal being rejected and subject to a higher level of scrutiny by the ATO.

Imagine you own a small business and have endured several financially difficult years.

You are carrying substantial tax debt, suppliers are chasing payment, and you’re not quite sure how you will make it through the next quarter.

Instead of closing your doors, SBR could be a viable option to restructure unsecured debt while you continue to trade and remain in control of the business.

The SBR process is cheaper and simpler than entering voluntary administration, and requires you to:

Work with a restructuring practitioner.
Develop a plan to repay a compromised debt amount in a reasonable timeframe.
Present the plan to creditors to vote on.

Concerned the ATO may reject your SBR proposal?

Issues such as outstanding director loans, poor tax compliance or unrealistic cash-flow forecasts do not necessarily mean SBR is unavailable, but they should be considered before a restructuring plan is put to creditors.

RSM's registered restructuring practitioners can assess your circumstances, identify potential concerns and help determine whether Small Business Restructuring is the right option for your business.

Who is eligible for the small business restructuring process?

Small Business Restructuring is available to eligible incorporated companies that are insolvent or likely to become insolvent.

Generally, a company must have total liabilities of $1 million or less and satisfy requirements relating to previous restructuring or simplified liquidation appointments involving the company and its current or recent directors.

Before a restructuring plan can be proposed to creditors, the company must also have paid employee entitlements that are due and payable and have lodged the returns, notices, statements and other documents required under taxation laws, or be substantially complying with those obligations.

Importantly, this does not mean the company's existing ATO tax debt must be paid in full before a restructuring plan can be proposed.

A registered restructuring practitioner can assess whether your company satisfies the eligibility requirements and whether SBR is appropriate for your circumstances.

Common red flags that can lead to rejected SBR proposals

Meeting all of the eligibility criteria does not automatically guarantee a successful SBR process. Some of the red flags that could lead to the ATO voting to reject a proposal include:

Unresolved director loans
Poor compliance histories
De-prioritisation of tax debts over other creditors
Material governance issues
Lack of transparency or delays providing key information
Behaviour inconsistent with SBR intent
Concerns over ongoing viability

The ATO is also very aware of SBR being used to “park” tax debt – which means using SBR to delay paying the ATO without a genuine intent to save the business.

These red flags affirm that your actions before submitting an SBR proposal do matter. For example, if you have director loan accounts where money has been taken out of the business without paying tax, you can expect the ATO to consider the level of drawings in comparison to the level of indebtedness. For this reason, if there is a perception that a director or related party has benefited from the business and creditors are otherwise being asked to compromise their debts, creditors may be sceptical and vote to reject the proposal.

What makes a good SBR proposal?

So what does the ATO look for in a small business restructuring proposal?

Here are key elements highlighted by the ATO:

What the ATO may consider	What a strong SBR proposal should demonstrate
Contribution	The proposed contribution reflects the company's actual financial capacity and represents a credible outcome for creditors.
Return to creditors	Creditors are likely to receive a better outcome than they would through liquidation, supported by appropriate analysis.
Viability	Cash-flow forecasts demonstrate the business can make restructuring payments while also meeting future tax, super and operating obligations.
Timeframes	Repayment periods are realistic and supported by forecast cash flow rather than optimistic assumptions.
Tax and super compliance	Required lodgements and employee entitlements are appropriately addressed and there is a credible plan for maintaining compliance.
Director and related-party transactions	Director loans, drawings, related-party repayments and transactions are transparent and appropriately explained.
Governance and conduct	The company's behaviour demonstrates genuine financial restructuring rather than simply deferring or “parking” tax debt.
Transparency	Relevant information is provided promptly and the circumstances that led to the financial distress are clearly explained.

Any SBR proposal must present a genuine path forward, supported by cashflow forecasts and a repayment plan that makes sense. It is worth taking the time to get it right before submitting the plan, because once it has gone to creditors to vote on, no changes can be made.

If there is uncertainty about whether the ATO will see a particular issue as concerning, there may be an opportunity to discuss the draft plan with them before it is formally submitted. This transparent approach can work in your favour, especially where the issue is a genuine mistake or an accidental oversight that has since been fixed.

Preparing a solid SBR plan from the outset

Given failed SBRs often lead to liquidation, it’s important to work closely with your restructuring practitioner from day one. Help them gain a true picture of your business, its challenges, and its future viability once a plan is in place that seeks to prevent the same financial issues from reoccurring.

When done well, an SBR can offer a clean slate for a struggling business – if owners are willing to cooperate transparently, in good faith, and with a willingness to re-evaluate how the business operates going forward.

If the ATO and other creditors can see you have made improvements to the business, and have a promising future ahead, they are more likely to accept your proposal.

For help developing an SBR proposal, including reviewing your debt situation and liaising with the ATO, RSM’s qualified restructuring practitioners are here to assist. We have supported hundreds of small businesses through the process, and are well acquainted with the ATO’s requirements. Our goal is to help you move forward without the burden of legacy debt, and create a stronger foundation for the future.

What does the ATO consider when reviewing an SBR proposal?

The ATO may consider the proposed return to creditors, the company's tax and superannuation compliance, historical payment behaviour, business viability, cash-flow forecasts, director and related-party transactions, governance and whether the proposal represents a genuine and sustainable restructuring of the business.

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Can the ATO reject an SBR proposal even if it offers more than liquidation?

Yes. A better financial return than liquidation may be an important factor, but it does not automatically mean the ATO will support the proposal. The ATO may also consider compliance history, viability, director conduct, public-interest considerations and whether the proposal is fair and achievable. Competitor and practitioner commentary increasingly highlights this point.

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Does ATO debt need to be paid before entering small business restructuring?

Existing tax debt does not generally need to be paid in full before a restructuring plan is proposed. However, required tax lodgements must have been made, or the company must be substantially complying with its lodgement obligations.

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Do employee entitlements need to be paid before an SBR proposal?

Employee entitlements that are due and payable must generally have been paid, or the company must be substantially complying with that requirement, before the restructuring plan is proposed to creditors.

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How long do creditors have to vote on an SBR proposal?

Affected creditors generally have 15 business days from receiving the relevant restructuring documents to vote. A proposal is accepted when a majority in value of voting creditors supports it.

What happens if an SBR proposal is rejected?

If creditors do not accept the restructuring plan, the restructuring process ends and the company will need to consider its remaining options. Depending on its financial position, these could include another insolvency or restructuring pathway. Professional advice should be obtained promptly.

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