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Debt got you down? Here’s how a Small Business Restructure could help

The Pandemic continues to batter small businesses around the country, especially those burdened with existing debt. To make matters worse, tax debt stress appears to be affecting a growing number of businesses. 

For businesses left wondering what their futures look like, undergoing a Small Business Restructure could help tidy up old debts. 

Tax debt during the Pandemic 

The Australian Tax Office (ATO) recently reported that business tax debt had grown from $24.9b as of 30 June 2020 to $53.8b on 30 June 2021, before Omicron struck.

The good news? In the last Budget, the Federal Government introduced changes to debt collection legislation, providing small businesses with additional protection and options when faced with tax debt. 

To further support small businesses, the ATO has encouraged taxpayers to lodge their returns on time to receive stimulus payments, such as Jobkeeper, even if the company couldn’t pay the underlying tax debt. 

While the ATO scaled back its debt recovery actions for much of the Pandemic, it has recently taken a more assertive approach with an expectation that businesses address tax debts, usually by way of a repayment plan, in some instances up to three years.

The Small Business Restructure (SBR) process was introduced in the same suite of ATO debt collection changes. 

What is Small Business Restructure? 

The SBR process is designed to assist businesses in restoring operational liquidity by severing the financial burden of legacy debts through a formal debt agreement with creditors.

The process enables eligible businesses to settle their debts with creditors’ agreement to maximise the chances of trading viably in the future. 

Unlike any other insolvency procedure, under the SBR process, business owners remain in control of their business during the restructure.

How does it work? 

After engaging a small business restructuring practitioner and commencing the restructuring process, creditors are prohibited from taking action against the business to recover money and property, including terminating contracts and formal debt recovery proceedings. 

Over the next 20 business days, directors are assisted through the SBR by a restructuring practitioner to create a restructure plan. 

Typically, a plan creates a pool of monies which is applied in full and final settlement of all creditor debts, the pool of monies could be funded from various sources, including:

  • third party contributions
  • proceeds from the sale of assets
  • future trading profits
  • refinance

In almost all cases, the outcome to creditors should be greater than the expected return if the company was liquidated.

John McInerney, Partner – Financial Advisory at Grant Thornton, said, “Based on our recent engagement with the ATO, they are supportive of the new SBR process introduced 1 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.”

At or before the end of the 20 business days, the SBR practitioner certifies the plan based on their assessment of the company’s finances. The plan is then shared with creditors for their consideration.

After receiving the plan, creditors have 15 business days to vote on the plan. If more than 50 per cent of creditors support the plan, it is approved and binds all creditors.

Once the plan is approved, the business continues to trade under the control of its Directors. All while, the practitioner administers the plan and distributes funds to creditors, protecting the future of the business. 

Alternative to a repayment plan

Mr McInerney said, “While a repayment plan may appear attractive to a debt-riddled business owner, there is often a failure to adjust the underlying business model, in which case the business may end up collapsing with a heavier debt burden.

The SBR is a viable alternative to a debt repayment plan. Businesses can also use it to prevent directors from being individually liable either for Insolvent Trading or from receiving a Director Penalty Notice from the ATO to repay the entirety of the company’s tax debt personally.

Mr McInerney continued: “As businesses find their feet in the new normal, advisors will be called on more than ever to assist clients in dealing with legacy debts, including the ATO, in many cases. The ATO was a major creditor in 70 per cent of SME insolvencies pre-COVID, and is now likely over-represented in the creditor pool as a result of the growth in ATO business debt during the Pandemic.”

Read more: Starting a side hustle? Tax Tips to get you started on the right path from day one

Read more:Lockdown leniency over as the ATO resumes debt collection

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Heidi Heck

Heidi Heck

Heidi Heck is a Journalist at Dynamic Business. She is a student at the University of Queensland where she studies Journalism and Economics. Heidi has a passion for the stories of small business, as well as the bigger picture of economics.

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