Small Business Restructuring (SBR) is a method for companies to settle debts they owe to creditors, while allowing the directors to remain in control of the company. The Small Business Restructuring process was introduced in 2021 and can be used by a company to avoid liquidation so that the company can continue trading.
What was the ATO’s Former Position
The ATO initially did not really review SBR proposals in great detail or request or require a large amount of information to consider a proposal. They were also often prepared to accept returns in the vicinity of 20 to 30 cents in the dollar or sometimes even less.
However, over time the ATO introduced more stringent criteria to assess proposals and they implemented a specialist SBR team to collect information and determine voting on proposals.
What Does the ATO Now Want as Part of a Proposal
The ATO now want various information and documents as part of an SBR proposal, which will include where relevant:
- Current draft financial statements.
- Three to four years of historical financial statements.
- A valuation of any material assets owned by a company to assess their value especially if they are to be retained as part of the SBR process.
- Details of any assets disposed of by a company in the last at least two years.
- Statements for any director loan accounts so they can see how and when funds have been drawn and/or repaid or if loans have been written off or cleared in the period leading up to an SBR appointment.
- A future cashflow forecast and profit and loss forecast which the ATO will want to show that the company can trade profitably in the future.
- A statement from the company’s directors setting out the reasons for the company’s failure and what steps the directors have taken to improve the company’s profitability.
The above matters are in addition to the SBR eligibility criteria which include no overdue tax lodgements and no outstanding employee entitlements including superannuation.
What will the ATO Consider
The ATO will consider various factors in assessing an SBR proposal including:
- The amount of the return to the ATO is obviously important and the ATO often now want over 40 or even 50 cents in the dollar return to approve a proposal.
- The company’s past compliance history, i.e. has it made lodgements on time, how old is its tax debt and has it engaged with the ATO and entered into payment arrangements.
- If there are any reasons for the company’s failure then this will mean the ATO will be more likely to vote for a proposal. Reasons for failure might include, natural disaster, damage to equipment, poor health of the director or a family member, or the insolvency or failure to pay of a major customer.
- Do they believe the company can trade profitably in the future.
- The steps which the directors have advised they have taken to turn the company around.
Submitting a Draft Proposal to the ATO
Company’s only get one opportunity to put an SBR proposal formally to creditors. If the ATO votes against a proposal then it cannot be increased or changed and the proposal will fail. A company can also only put forward one SBR proposal each seven years.
The ATO has a process where a company can provide them with a draft proposal, along with the information and documents referred to above and the ATO will provide feedback on the proposal which may include whether or not it is acceptable. If company’s want to submit a draft proposal to the ATO then this generally has to be done within 10 business days of an SBR appointment meaning directors need to have all information/documents ready to go on an SBR appointment.
If the ATO indicates that it will vote against a draft proposal then directors have the option of improving the proposal ultimately put to creditors.
Advice and Assistance
As you can see putting an SBR proposal to the ATO is now more difficult than ever and directors need proper advice such as that from the professionals at Pearce & Heers.
So, if you are seeking advice or assistance regarding the options available to your company including Small Business Restructuring please contact our Brisbane or Gold Coast office for an initial obligation free consultation.
