Businesses can leverage the SBR process in order to clean up old debt

John McInerney, Partner for Financial Advisory at Grant Thornton

As the economy continues to battle ongoing waves of COVID-19, businesses who are struggling to pay legacy debts may be left wondering what their future might look like.

The Australian Tax Office encourages taxpayers to lodge their returns on time to get stimulus payments like Jobkeeper, even if the taxpayer couldn’t pay the underlying tax debt.

As such, the Australian Tax Office recently reported that business tax debt has ballooned from $24.9 billion as of 30th June 2020 to $53.8 billion as of 30th June 2021 – pre Omicron.

Small businesses get lifeline in SBR

The Small Business Restructure process aims to enable eligible businesses to compromise their debts with their creditors’ agreement to maximise the chances of trading viably in the future.

Unlike any other insolvency procedure, under the Small Business Restructure process, business owners are facilitated to remain in control of the business during the restructure.

The Australian Tax Office scaled back its debt recovery actions for much of the pandemic.

However, it has recently taken a more assertive approach with an expectation that businesses address tax debts, usually by way of repayment plan, in some instances up to three years.

The Small Business Restructure is a viable alternative to a repayment plan.

Small Business Restructure’s impressive success rate

It can prevent directors from being individually liable for Insolvent Trading or if they received a Director Penalty Notice from the ATO to personally repay the company’s tax debt.

John McInerney, a Partner for Financial Advisory at Grant Thornton offered his views.

“Considering the fact that a repayment plan may appear to be attractive to a debt riddled business owner, there is often a looming failure to adjust the underlying business model, in which case the business may unfortunately end up collapsing with a heavier debt burden.”

“As businesses deploy strategies to find their feet in the new normal, advisors will be called on more, to assist clients deal with legacy debts, including the ATO in many cases.”

“The ATO was a major creditor in 70% of SME insolvencies pre-COVID and is over-represented in the creditor pool as result of the growth in ATO business debt during the pandemic.”

With SBR, creditors are prohibited from taking action against the business to recover money or property, including terminating contracts and formal debt recovery proceedings.

Directors are assisted in the SBR by a restructuring practitioner, who is a registered liquidator.

“Based on our recent engagement with the ATO, they are supportive of the new SBR process introduced on 1st January 2021 to manage the predicted tsunami of insolvencies.”

“To date there has been an approximate 90 per cent success rate for businesses who have undertaken the Small Business Restructure, which is a high success rate,” continued McInerney.

Who is eligible for a Small Business Restructure?

  • Liabilities – Total debts must not exceed $1m.
  • Tax affairs – All lodgements must be up to date.
  • Employee entitlements – All employee entitlements that are due and payable must be paid in full (including superannuation).
  • Limitation on time period – The company and its directors, current or in the last year, must not have engaged in an SBR or Simplified Liquidation process in the past 7 years.