What is a small business restructure
A small business restructure (SBR) is a formal process under Part 5.3B of the Corporations Act 2001. It allows an eligible company to restructure their debts by proposing and agreeing to a restructuring plan with their creditors (usually involving a debt compromise), while the directors stay in control of the business.
The SBR process is specific to small incorporated companies with non-complex debt. SBR doesn't apply to unincorporated businesses or individuals.
Restructuring process
Visit Australian Securities & Investments CommissionExternal Link for information about the restructuring process, including eligibility requirements and appointing a restructuring practitioner (RP).
Our approach to restructuring
We are a creditor of most companies using the SBR process, and we are often the majority value creditor. Our vote on a restructuring plan is often decisive.
The best offer possible under the circumstances should be presented, as the restructuring plan can't be altered once the voting period begins. We generally support a restructuring plan for an eligible company where:
- the plan would result in a higher payment to creditors within a reasonable period than would be received if winding up
- there are no potential public interest concerns or risks that would make support for the plan inappropriate.
The ATO will only disclose information regarding a company's taxation affairs to authorised contacts.
Feedback on restructuring plans
Where we are a major creditor, we are open to reviewing draft restructuring plans and providing feedback. You must provide the draft restructuring plan with all the supporting information as soon as possible, no later than 5 full business days before the day the plan is required to be issued to the creditors.
The draft report and supporting information should be sent via Online services for business.
We won't consider a restructuring plan until all the supporting information has been provided.
Supporting information for restructuring plans
To allow us to consider a restructuring plan, you must provide:
- 3 years of profit and loss accounts, balance sheets and interim financials for the period prior to the appointment of the RP
- details of assets as at the date of appointment of the RP
- any amounts owed above the $2,000 priority cap for excluded employees
- estimated dividend to creditors in a liquidation scenario
- transaction reports for any loans relating to directors, shareholders or related entities
- any research and development offset claims for the current financial year
- cashflow forecasts including key assumptions
- documented changes to management and operations teams aimed at improving financial performance
- confirmation of lump sum payments or contributions from third parties if applicable.
Other information requests will be made on a case-by-case basis.
Tax lodgment and superannuation requirements
Before a company can issue a restructuring plan to its creditors, all employee entitlements that are currently due (including super) must be paid, and all lodgments must be up to date. If these obligations aren’t completely met, the company must demonstrate it is substantially compliant.
Superannuation entitlements are protected in the same way as priority payments in a liquidation, however, for excluded employees, only the first $2,000 is treated as a protected payment.
For more information, see section 556(1) of the Corporations Act 2001 and regulations 5.3B.14 (1)(e) of the Corporations Regulations 2001.
Substantial compliance test
The substantial compliance test only applies to those that are not completely up to date with their lodgment obligations and all employee entitlements that are currently due.
The test is used to determine whether a company has taken reasonable steps to meet its tax and superannuation obligations before a restructuring plan can be put forward to creditors.
Super guarantee charge statement
If a company fails to pay superannuation in full, on time, and to the correct fund, it must lodge and pay a Superannuation Guarantee Charge (SGC) statement.
While the SGC is not an employee entitlement under section 596AA(2) of the Corporations Act 2001, payment of outstanding SGC that results in super contributions to employees’ funds can demonstrate substantial compliance with regulation 5.3B.24 of the Corporations Regulations 2001.
Tax lodgments
Each lodgment obligation is assessed separately. If a required tax return, notice, statement, application or other document hasn't been lodged, the company must demonstrate that reasonable steps to lodge (for example, a genuine attempt to lodge on time). The company must also show that external factors, prevented it from lodging.
Consequences of non-compliance
If the plan is provided to creditors before these obligations are met, the restructuring process will terminate.
It's essential that the RP is satisfied the company has met these requirements before distributing the plan to affected creditors.
Tax implications to consider
When preparing and submitting your restructuring plan, practitioners should carefully consider the tax and compliance implications.
Director penalties
A successful SBR will not remit a lockdown director penalty or a standard director penalty that has not been remitted within 21 days of the director penalty notice, as the director penalty liability exists parallel to the liability of the business. While payments received under the restructuring plan may reduce the director penalty liability, the director remains personally liable for any balance.
GST groups
Where a business subject to a restructuring plan is a member of a GST group, the directors and RP will need to consider the implications of the groups GST liability for the purposes of the restructuring plan.
Consolidated income tax groups
When the company is a member of a consolidated income tax group, the directors and RP should evaluate the income tax implications arising from group membership.
ATO garnishee notices
Where there is an ATO garnishee notice in place on the date of appointment of the RP, the garnishee notice will not generally be withdrawn, the notice will continue to operate on the relevant amounts.
Superannuation guarantee charge and associated liabilities
The following superannuation guarantee charge (SGC) and associated liabilities where they apply should be included in the plan:
- SGC amounts for excluded employees which exceed the priority cap
- Part 7 penalties (section 59 of the Superannuation Guarantee (Administration) Act 1992)
- General interest charge on Part 7 penalties
- General interest charge on the superannuation guarantee shortfall.
Offsetting rules under a restructuring plan
Offsetting applies automatically under the tax law whenever credits arise.
In an insolvency context, there is no discretion to modify the offsetting outcome.
For SBR plans, we apply offsetting in the same way as under a Deed of Company Arrangement (DOCA), consistent with PS LA 2011/21.
The offsetting outcome depends on the period the credit is attributed to, not the lodgment date.
Credits relating to the pre restructuring period
Any credit that relates to a pre-restructuring period must be applied to pre-restructuring debts.
This applies whether the plan is still in place or has been completed, and even if those debts are taken to be released under the plan.
Credits arising in the post restructuring period (while the plan is still in place)
If a credit arises in respect of a period after the company goes into SBR but before the plan is completed, the credit will be applied to post-restructuring liabilities first.
Any excess may then be applied to pre-restructuring debts.
Credits arising after the plan has been successfully completed
Once the plan has been completed and the company is released from its admissible debts, credits relating to post-restructuring periods will generally be refunded, provided there are no outstanding post-restructuring liabilities.
Credits relating to pre-administration periods continue to be applied to pre-restructuring debts, despite the release.
Practitioner considerations
Tax liabilities included in a restructuring plan may be reduced following the lodgment of income tax returns or activity statements that generate credits or refunds.
Any credits that relate to periods before the RP's appointment (including amounts under the Research and development tax incentive) will be considered as a pre-insolvency credit and must be allocated accordingly.
Practitioners should assess the potential impact of such adjustments on:
- final tax debt amounts
- business cash flow
- overall viability of the restructuring proposal.
Assessment of restructuring plans
We assess each restructuring plan based on its own merits. We aim for outcomes that benefit all parties while ensuring the integrity of the tax and superannuation systems.
We'll support financially viable small businesses, while taking a firm approach with those who present a risk to the system or have a poor compliance history.
Rejection of restructuring plans
If we decide to reject a restructuring plan, it can't be reviewed. We are under no obligation to provide reasons for the rejection. However, it's our normal practice to provide general reasons, unless we determine that doing so could breach privacy or confidentiality.
The most common reasons for rejecting a restructuring plan are:
- non repayment of director or related entity loan accounts
- poor tax compliance history
- non-payment of tax liabilities
- it would provide an unfair advantage over other businesses.
Tax compliance following implementation of a restructuring plan
Once a restructuring plan is in place, it is essential that the company continues to meet all ongoing tax reporting and payment obligations in full and on time.
If the company fails to comply with its obligations after the plan has started, we may take stronger enforcement action. This may occur even if the company is otherwise meeting its obligations under the restructuring plan.
Maintaining tax compliance is critical to the successful completion of the plan. Any failure to manage ongoing obligations may place the viability of the restructuring arrangement at risk.