Introduction to Small Business Restructuring (SBR)
The ATO is commended for its participation as a creditor, and often the only creditor, in restructuring of eligible* small businesses with tax debt using the procedure outlined in Part 5.3B Corporations Act 2001 known as the Small Business Restructuring Process.[1]
How to extinguish liabilities of a company including debt to ATO using SBR
Creditors, such as the ATO, receive a proposal from an eligible* company, vote on a tailored proposal, and typically agree to receive a payment less than full amount owed. The remainder of the debt owed to creditors of a company, like ATO debt, is extinguished.
Case study – applicable to any business that meets the eligibility criteria under s 453
Consider a café operated by a company.
Substitute this business for any within the hospitality, building, construction, food industries or services such as plumbing, electrical, tutoring and labour hire.
Superannuation and payments to employees need to be up-to-date, or can be brought up-to-date.
ATO lodgements need to be up-to-date, or can be brought up-to-date.
Liabilities of the company need to be under $1 million.
Assume the company has unpaid taxes to ATO of say $180,000 and liabilities to other creditors of $20,000.
Assume the proposal to creditors provides for a fund of $30,000 from the directors personally. Add a storybook to explain to creditors the circumstances and the reasons why the proposal would be a better outcome than liquidation or administration.
Creditors receive the proposal via email. Creditors vote and consent to the proposal.
In this case study, creditors, including ATO, share in the $30,000. Creditors receive about 15c in the dollar on claims of $200,000 (less deduction for modest costs). The remaining $170,000 owing to creditors by the company would be extinguished (disappear) by operation of the legislation.
Creditors of the company are likely getting more money than in a liquidation scenario. The company is left with no liabilities at the end of the process and will continue trading.
The café (or business) continues to trade through the whole process under the control of the directors of the company. Allow about 2 months from start to finish.
An eligible* small business retains possession of the business and its assets while working with a Small Business Restructuring Practitioner, like us, to develop and implement a restructuring plan that is agreed upon with creditors to restructure (and extinguish) liabilities of the company, including those to the ATO.
Why would ATO agree?
The ATO has indicated that it approved 92% of all proposals submitted nationally up until October 2023.
The ATO has indicated that its current focus includes assisting eligible* businesses to access restructuring where possible and appropriate under Part 5.3B Corporations Act 2001.
ATO will generally support proposals under Part 5.3B Corporations Act 2001 that have no adverse features and can provide ATO with a better recovery within a reasonable period than would be received under bankruptcy or liquidation. The ATO will consider each proposal on a case-by-case basis. The ATO is to be commended for having a dedicated team of people experienced in SBR servicing the whole of Australia.
In line with community expectations, the ATO will not support proposals by those that seek to take advantage or refuse to meet their obligations or seek an unfair financial advantage (PS LA 2011/16 para 32).[2] To meet the expectations of PS LA 2011/16 we prepare a storybook or narrative in support of the proposal to creditors.
Extract of ATO’s Practice Statement Law Administration (PS LA) 2011/16 para 32
In determining whether to vote for an alternative agreement or arrangement, the Commissioner will have regard to all relevant matters. These may include, but are not limited to:
- any legal advice which the ATO may have obtained.
- the contents, comprehensiveness and adequacy of relevant reports: that is, regard should be had to the contents, including any relevant omissions, in the statement of affairs or report as to affairs, a proposal, the report prepared by the trustee or administrator.
- any liabilities not yet established, such as unissued assessments or outstanding documents.
- whether the debtor has made appropriate arrangements to meet future tax liabilities as and when they fall due.
- the debtor’s compliance history, and the compliance history of related parties or entities.
- the extent and seriousness of any taxation offences which may have been committed.
- the likelihood that the proposals put forward would be achieved.
- the maintenance of any priority the Commissioner may have had in bankruptcy or liquidation.
- any association between the debtor and other creditors (including associations which involve an assignment of debt).
- in the case of a debtor who is being less than candid about their financial affairs, the fact that the process may not provide the extensive investigative tools available to a trustee in bankruptcy or liquidator.
- other matters that are considered to be of public interest or which reasonably question the fairness and appropriateness of voting in support of proposals, particularly where the consequence of those proposals is the removal of statutory powers of investigation, examination or the ability to clawback assets or funds.
- any apparent voidable transactions or dispositions which might be unable to be pursued if the proposal were to be accepted.
- the tangible benefit to the Commonwealth revenue that is expected to be gained from any proposed arrangement.
- the manner in which the proposal would distribute a dividend between all classes of creditors or whether the proposal is considered to be unfairly prejudicial or discriminatory.
Our experience and observations
We are often retained by directors directly, or through their accountant, lawyer or partner to consider formal and informal restructuring options for businesses of various sizes: XS, S, M, L, XL, XXL and XXXL.
We can quickly perform a 60-minute invasive and or non-invasive assessment of a client’s financial and business options.
Monies owing to the ATO (and other creditors) are often significant for small businesses, and our knowledge of the options and the ATO’s approach to collection is often decisive in bringing about a successful outcome.
David Levi is a registered liquidator, registered with Australian Securities and Investments Commission. Registered liquidators may act as Small Business Restructuring Practitioners.
Contact David Levi on 0418 602 466 for a chat or Zoom session (free).
* Definition of eligible under s 453 of the Corporations Act 2001 (Cth).
[1] Corporations Act 2001 (Cth) s 452A
[2] Australian Taxation Office, Practice Statement Law Administration PSLA 2011/16, Accessible at: https://www.ato.gov.au/law/view/document?LocID=%22PSR%2FPS201116%2FNAT%2FATO%22&PiT=20220413000001
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