When the Federal Government introduced changes to Australia’s insolvency framework in 2021, it was intended to mitigate the tough economic conditions triggered by the pandemic and to promote small business survival.
The simplified debt restructuring process enables small businesses to trade out of difficult financial circumstances under the guidance of a recognised restructuring practitioner, provided they meet the following criteria:
- The business must be incorporated under the Corporations Act.
- The business is resolved to be insolvent or likely to become insolvent.
- Total liabilities (excluding employee entitlements) do not exceed $1 million on the day the business enters the process.
- A small business restructuring (SBR) practitioner is appointed to oversee the process, including developing a debt restructuring plan and a restructuring proposal statement.
The latest ASIC data shows insolvencies are escalating in Australia, with the construction sector alone representing nearly one-third (27%) of all business failures in the 2023-24 financial year, followed by hospitality (15%). It also shows that SBR appointments are rising at an even greater rate, up more than 200% on the previous year’s numbers.
That acceleration has been driven largely by ATO support for the process, a noteworthy standpoint given its position as the principal creditor of almost 80% of submitting organisations. But that support comes with strict compliance conditions – before a small business entity can put forward an SBR plan to creditors, business owners must ensure that:
- Any due and payable employee entitlements have been paid (excluding leave and other entitlements not currently due).
- Tax lodgements – returns and activity statements, though not tax debts) must be up to date.
The SBR process provides organisations with the breathing space to review debts and determine a way to repay them while still maintaining control of the business, making it an appealing alternative to liquidation and voluntary administration appointments. From an ATO perspective, it’s an opportunity to reverse the situation and return a business to the system as a tax-compliant entity – and that’s why it’s considered a win-win.
The first step for business owners feeling financially strained is a financial health check conducted by accountants. A thorough assessment of your business plan and current situation will help identify areas for cost reduction that may enable you to continue operations through a challenging economic environment.
How Falanga & Co can help
Should you have any questions regarding your current lodgements or if the SBR process is relevant to you, please reach to your accountant.
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