2024 INSOLVENCY RECAP
Jason Cronan (Director) and Daniel Luckman (Associate Director) | Sunshine Coast
Welcome to our final newsletter for 2024.
This article comes to you from our beautiful Sunshine Coast office. In this edition, we highlight what we’ve seen in our industry this year. Happy reading and Merry Christmas and a happy holiday season to our friends and valued colleagues. Thank you for entrusting us to assist you and your clients.
1. ATO Debt Collection Continues to Soar!
• The ATO is more rigorously pursuing unpaid taxation debts – it was reported in September that over $100 billion is owed to the ATO, the largest it has ever been, almost double the annual defence budget, triple the Federal Government's new housing investments over the last two years, and roughly equal to annual Federal health spending.
• ATO debt collection is driving the high level of insolvencies – there is still however a catch up from COVID where the ATO (and other creditors) did not actively pursue debts owed, which contributed to record low insolvencies.
• There appears to be more focus on collecting company and business-related debts, not individual debts.
• The ATO continue to issue Director Penalty Notices (DPNs) to Directors to make them personally liable for unpaid company tax and superannuation.
• Garnishee notices are being used again as a debt collection tool.
• Credit defaults (for business debts in excess of $100,000) are being reported to credit agencies by the ATO, which adversely impacts credit scores (and the potential ability to borrow money) and can impact the continuity of trade supplier terms / accounts.
2. Small Business Restructures (SBRs) are all the rage!
• SBR appointments are on the rise – 1,021 FY 2025 YTD.
• The ATO is still the major creditor in SBR appointments.
• There continues to be strong support and acceptance of SBRs - a lot of work is done at the front end to ensure SBRs:
• provide a better outcome than a liquidation; and
• are viable and sustainable – it is often a catalyst for a review of the company’s financial performance and to improve and tighten up areas (e.g. price increases, targeted marketing, cost scrutiny, etc).
• The Queensland Building & Construction Commission (QBCC) has been understanding and not terminated building licences – SBRs do not cause an automatic loss of a building licence for a company, however the QBCC will still consider other compliance issues (e.g. MFR requirements).
• The ATO whilst still supportive, is expecting better outcomes / returns than previously.
• Some feedback we are receiving from the ATO is:
• Lump sum up front payment/s are viewed favourably.
• Payment terms of 2 years or less are preferred.
• Director loan accounts (even for drawings) and related party loans are viewed unfavourably – the SBR offer should allow for this.
• Related party creditors should not claim in the SBR – to maximise the ATO dividend.
• Poor previous payment history and non-compliance are also being viewed unfavourably.
• Cash flow forecasts and financial statements must be provided and be realistic and justifiable.
• SBRs are only for companies (not available for individual debts – the Bankruptcy Act deals with this).
3. Voluntary Administrations (VAs) still have a place
• SBRs are only available to companies with less than $1million in debt and where all employee entitlements (including superannuation) have been paid.
• Related party debts can claim and participate in voting in VAs.
• There has been an increase in VAs in the last quarter, predominantly driven by ATO debt recovery action (including issuing DPNs and garnishee notices).
4. Director and Shareholder Disputes on the Rise?
• We are seeing an increase in director and shareholder disputes, especially where money is tight.
• Shareholder agreements are still rarely used – this can make it more difficult to resolve shareholder disputes.
5. Individual / Personal Debts Owed
• Personal insolvencies remain lower than pre-Covid numbers.
• The ATO has however issued a record number of DPNs to Directors to make them personally liable for Company debt.
• ATO debts are not statute barred so there is no time limit on collection (unlike other debts).
• The ATO can retain tax refunds to apply against debts owed.
• Will the ATO chase these debts later? This can impact individuals if they acquire assets.
6. Members’ Voluntary Liquidations (MVLs) are still a useful tool to save tax!
• Where businesses are sold, MVLs can
often save your clients tax.
• MVLs are also beneficial when shareholders can’t resolve disputes, where a company is solvent – they can appoint an independent party to windup the company.
7. The Main Industries facing Insolvency are (still)…
• Construction, Hospitality and Retail Trade.
• Economic pressures and consumer spending are increasingly adversely impacting small businesses.
8. Safe Harbour – Protection for Directors from Insolvent Trading
• Despite its introduction in 2017, the Safe Harbour regime has not been widely utilised – why?
• Limited awareness and understanding among directors and advisors, especially for small to medium businesses.
• For directors in the SME market, decision making is not often motivated by avoiding insolvent trading liability. Therefore, safe harbour is not a high priority.
• They do not often meet the pre-conditions of substantially paying employee entitlements and substantially complying with taxation lodgements.
• Directors need to develop a course of action that will reasonably likely lead to a better outcome compared to entering voluntary administration or liquidation – this is problematic for companies not making a profit or where they cannot compromise debt owed.
9. Voluntary Liquidations (CVLs) are still the most common form of insolvency
• Record high for insolvency appointments – 2,536 FY 2025 YTD.
• Economic factors and pressures are contributing to insolvencies in SME market.
• Whilst the impact can be difficult on directors and shareholders, closure and finality often provide relief from stress of dealing with business pressures and unpaid debts.
• Early intervention is always recommended:
• To understand the options available and the implications.
• To prompt change if the business is to survive.
• If the business can’t continue, to assist planning for the future and mitigate financial difficulty.
Thank you again for your support in 2024. Watch this space for 2025!
THE IMPACT OF THE ATO'S RECENT ORGANISATION RESTRUCTURE ON SMALL BUSINESS RESTRUCTURE APPOINTMENTS
Australian Securities and Investments Commission (ASIC) Insolvency Statistics (as at 10 November 2024) have observed a recent spike in the past 18 months in Small Business Restructure (SBR) appointments, with the month of October 2024 seeing over 26% of all insolvency appointments in the month being SBR appointments (over 300 appointments for the month).
However, recent changes in the organisational structure at the Australian Taxation Office (ATO), which is often the majority in value creditor for SBR appointments, have seen the ATO’s approach to tax compliance significantly affect businesses undergoing SBR appointments. We believe this may put downward pressure on the volume of SBR appointments in 2025 and beyond.
Whilst there has been no change to legislative requirements for SBR appointments, the ATO has created its own processes and requirements to ensure an SBR plan meets its objectives.
As part of the organisational restructuring at the ATO, its Service Delivery Group was restructured into the Frontline Operations Group, which now includes a dedicated Deputy Commissioner of Taxation overseeing “Frontline Compliance”. This restructuring has marked a shift toward a firmer approach to taxation compliance compared to prior months.
A notable service that is no longer offered due to this restructure, and the overwhelming quantum of SBR’s that are being appointed, is that of obtaining the ATO’s opinion on a draft restructuring proposal. Previously, it was possible for Practitioners to submit a draft proposal to the ATO and receive feedback on the likelihood of success. With this option now unavailable, it places additional pressure on practitioners and company
Directors to ensure the proposal offers a substantially higher than previously required return to creditors to increase the likelihood of ATO acceptance without prior input. This change substantially increases the risk of proposals being rejected and in doing so, prohibits companies from utilising an SBR proposal again for seven years.
The Deputy Commissioner for Frontline Compliance is responsible for determining whether the ATO will accept a restructuring plan proposed by a company under an SBR appointment. Previously, the ATO often favoured plan proposals where the contributions to be made under a plan would result in a higher dividend rate than that of a hypothetical liquidation scenario. However, it appears that in recent months the ATO places greater emphasis on several critical factors:
• A company’s historical taxation compliance;
• Related party loan transactions, particularly where directors have a history of taking loans in lieu of wages;
• A company’s ability to meet its future taxation obligations; and
• Whether it aligns with the public interest for the company to continue trading.
In a recent SBR appointment, the ATO was the majority in value creditor, rejected a plan proposal offering approximately 62 cents in the dollar contribution to be paid within 14 days of acceptance. The estimated return to creditors detailed in the hypothetical liquidation scenario was between 9 and 35 cents in the dollar. In rejecting the plan proposal, the ATO provided reasoning reflective of the points mentioned above, and in particular, noted there were substantial related party loans owing to the Company.
Victor Mackintosh (Senior Accountant) and Nicholas Davies (Accountant) | Brisbane
It appears that any increase in related party loan accounts, whilst tax debts were not being paid, will substantially increase the difficulty in obtaining ATO approval for an SBR proposal. The repayment of these loans as part of the proposal seems to be the only acceptable means of swaying the ATO’s reasoning towards approval.
This shift underscores the ATO’s growing emphasis on enforcing compliance and prioritising broader public interest considerations when evaluating SBR proposals. As a result, it is expected that there will be a decline in the number of SBR plans being accepted by the ATO, given the heightened scrutiny and
stricter criteria now applied. Companies considering an SBR must carefully evaluate whether they can meet these increased compliance expectations and determine if appointing a Restructuring Practitioner remains a viable pathway for restructuring their debts where the ATO is a major creditor of the company.
If your business is considering an SBR, ensure your proposal is strong and aligns with ATO expectations. Contact SV Partners today to explore your options and get expert advice.
PROPOSED BANKRUPTCY REFORMS
Michael Carrafa - Executive Director | Melbourne
Overview
On 8 July 2024, the Attorney-General’s Department announced a series of proposed amendments to the Bankruptcy Act 1966 (Cth) to ensure Australia’s bankruptcy system is fairer and operates in the best interest of all Australians.
These proposed reforms to Australia’s bankruptcy laws were drafted after an extensive roundtable consultation with key stakeholders from various sectors, representing both debtor and creditor interests. The reforms aim to reduce stigma and promote entrepreneurship.
The key changes to the bankruptcy laws include the following:
1. Increasing the involuntary bankruptcy (creditor petition) threshold from $10,000 to $20,000 (with indexation applied each year).
The $20,000 threshold was trialled during the pandemic, with positive results. This reform will reduce the volume of low-debt bankruptcies and will provide more breathing space for debtors navigating financial difficulty during a challenging economic climate. This reform will likely trigger a change in the lending practices of credit providers (e.g. reduced availability of credit, higher interest rates and collateral requirements).
2. Changing the bankruptcy notice response period from 21 days to 28 days.
Increasing this period will give the debtor more time to obtain advice concerning their financial position and negotiate an agreement with creditors.
3. Proposal or acceptance of a debt agreement will no longer be an “act of bankruptcy” for the purposes of s 40(1) of the Bankruptcy Act.
This amendment will prevent creditors from petitioning the debtors’ bankruptcy if the debt agreement fails or is somehow incomplete. This will provide greater flexibility for the debtor to negotiate, knowing they won’t be automatically exposed to bankruptcy proceedings.
4. Changes to the National Personal Insolvency Index, making the official record of a discharged bankrupt publicly available for only 7 years (the record was previously permanent).
This proposed reform aims to reduce the punitive nature and stigma associated with bankruptcy. Reducing the record period also aligns more closely with standard credit reporting practices (two years
starting from the day bankruptcy ends).
Other Models being Considered
1. Shorter Discharge Period
Our current bankruptcy system is for a minimum three (3) years. For some time now, consideration has been given as to whether the default discharge period for bankrupt should remain at 3 years or be reduced to 1 year.
2. International Models
The New Zealand model has been considered as an option for Australia to consider which provides an alternative personal insolvency option that allows a person with debts of between $1,000 NZD (New Zealand’s bankruptcy threshold) and $50,000 NZD and who holds no realisable assets to be cleared of their debts. The No Asset Procedure is less restrictive than bankruptcy and usually lasts for one (1) year. A person is only able to enter into a No Asset Procedure once.
The proposed Minimal Asset Procedure
An option being considered at present under Australian bankruptcy law reform is the Minimal Asset Procedure.
Government has considered Australia’s existing personal insolvency system in addition to numerous overseas models and considers the following to be potential elements of a Minimal Asset Procedure in Australia:
• there be a maximum debt threshold of $50,000 to enter the Minimal Asset Procedure;
• the Minimal Asset Procedure would last for 12 months, with a period of 4 years post-discharge to be listed on the National Personal Insolvency Index;
• a maximum threshold for income would be determined for eligibility for entry into a Minimal Asset Procedure;
• a maximum threshold of $10,000 in assets with exceptions for tools of trade and a vehicle to be eligible for entry into a Minimal Asset Procedure;
• a debtor may only enter into a Minimal Asset Procedure once during their lifetime, and
• a Minimal Asset Procedure should be less onerous than a bankruptcy.
We will closely monitor these reforms and any bills to be introduced into Parliament. At the time of writing this article, we understand that submissions are still being considered.
RESTRUCTURING ANYONE?
SMALL BUSINESS RESTRUCTURES IN THE WILD
Matthew Ormsby - Director | Adelaide
In recent times we have provided information on the eligibility requirements for a Small Business Restructure (SBR) and our approach to SBRs. In this article, we provide examples of SBRs we have conducted and the outcomes.
Prominent Restaurant
The restaurant had previously been sold leaving the entity with debts of $924,000. A lump sum contribution of $110,000 was proposed and related party debts, in the amount of $364,369 agreed not to claim. The proposal was accepted by creditors and a dividend was paid to creditors in the amount of 18.66 cents in the dollar.
Civil Contractor
The business continued to operate during the SBR. The director proposed a contribution of $94,900, payable in 6 monthly instalments. The contributions are to be sourced from the business’ future profits. The plan was accepted by creditors. The outstanding debts total $237,249 and the estimated dividend is in the order of 40 cents in dollar.
Petrol Station
The company operated several petrol stations in metropolitan Adelaide. The total creditors were $953,360. A contribution of $215,000 was proposed with an initial contribution, ongoing monthly contributions and a final contribution payment over a 14-month period. The business continued to trade throughout the appointment and the proposal was accepted by creditors. The proposed dividend is 21 cents in the dollar.
Hotel
Two companies operated a hotel in regional South Australia. At the time of appointment, the ATO had issued winding up proceedings against both companies in the Federal Court of Australia. Those proceedings were adjourned to allow the SBR to take place. The directors of each company proposed a contribution totalling $200,000 to be distributed amongst creditors of $503,911. The SBR was ultimately rejected because of the company's extremely poor compliance with historical ATO lodgements.
Media business
The business suffered financial problems due to the failure of a major customer. A contribution of $65,000 was proposed and payable by way of 3 quarterly instalments of $15,000 and a final quarterly instalment of $20,000. The proposed dividend is 22 cents in the dollar and the plan has been accepted by creditors.
Solution
The above examples show that the SBR regime is flexible. A tailored solution may be possible regardless of whether the business continues to trade or has ceased trading and the contribution amount can be up front, payable over a period of time or involve both cash and certain creditors waiving their rights to a dividend.
Our advice is always to lodge, lodge, lodge with the ATO to reduce the risks of Director Penalty Notices and increase the attractiveness of the proposal.
SV Partners is at the forefront of SBRs, restructuring and insolvency, so please don’t hesitate to reach out if you or your clients have any queries about how this process may assist.
Merry Christmas
SV Partners will be closed from Friday 20th December 2024 & repoen on Monday 6th January 2025.
