Is the ATO Winding up your Company?

SBR REGIME PROVES SUCCESSFUL IN HELPING BUSINESSES RESTRUCTURE DEBTS SO THEY CAN TRADE INTO THE FUTURE EARLY ACTION IS THE KEY TO AVOIDING BUSINESS INSOLVENCY, WRITES KIARA CALVERT The message is clear seek professional advice at the earliest signs of trouble as you have more options available and Small Business Restructuring (SBR) is an opportunity you can’t afford to miss out on. Don't let fear or embarrassment prevent you from taking necessary steps. It could be the difference between saving your business or closing its doors. Australian households have been struggling with the cost-of-living crisis since the end of the pandemic. As domestic budgets tighten, discretionary spending has taken a hit—dining out, personal grooming, and pet services are often amongst the first to go. This shift in consumer spending has placed immense pressure on businesses, particularly those in retail, hospitality, and personal services, which now face higher supply costs whilst battling reduced revenue. If profits of the business evaporate directors need to be vigilant and act swiftly to avoid disaster. Adding to these financial strains, the Australian Taxation Office (ATO) has resumed full-scale debt collection after pausing it in March 2020 due to the COVID-19 pandemic. Since January 2023, the ATO has intensified its enforcement efforts to recover unpaid tax debt, which has ballooned to over $52 billion – nearly equivalent to the Australian Defence Budget for the 2025 financial year of $55 billion. Of this, $35 billion is owed by small businesses and self-employed Australians. Unpaid tax debt has been on the rise since 2019, driven by shifts in tax compliance measures, economic effects of the pandemic and mounting pressures on small businesses. In response, debt collection has now become the ATO’s top priority, with a particular emphasis on unpaid superannuation, reinforcing its role in ensuring employers meet their obligations to employees. While unpaid superannuation guarantee charge (SGC) accounts for $2 billion of the total $52 billion in tax debt, it often serves as a red flag for other unpaid liabilities and can be an indicator that a business is facing financial difficulties. To expedite recovery, the ATO has issued more Director Penalty Notices (DPNs) and Creditor’s Statutory Demands. These measures have prompted many businesses to take action, as failure to respond could lead to winding up proceedings. The ATO’s more aggressive approach reinforces its commitment to a fair tax system, ensuring compliance, whilst supporting businesses that meet their obligations. At the same time, it sends a clear message to directors that ignoring tax debt is no longer an option. The ATO’s renewed focus on debt collection has led to a marked increase in insolvency cases, with over 11,000 companies entering external administration during the 2024 financial year – bringing insolvency levels back to pre-pandemic figures. The current trend in insolvencies is likely to keep rising. The construction, hospitality, and retail sectors have been hit the hardest as they struggle with higher wages, input costs, and declining consumer spending. SBR is one of the options available for a business in financial distress that provides a pathway for small businesses to combat debt, keep the doors open and survive long term. SBR allows eligible businesses a one-off opportunity to restructure their company debt and reach an agreement with creditors. It is simpler, affordable and faster than any other form of external administration and is becoming the “go-to” solution for many small businesses in financial difficulty. To qualify, a business must be an incorporated company, insolvent (or at risk), and have unsecured debts under $1 million. Employee entitlements and ATO lodgements must be up to date, and directors must not have had other companies enter certain external administration in the last seven years. The SBR process involves the appointment of a SBR Practitioner who works closely with the director to develop a restructuring plan, which creditors vote on. If approved by over 50% (by value), the plan is implemented and after distribution, the company is released from past debts covered by the plan and can successfully trade into the future. As of 30 June 2024, 1,953 SBR’s had been initiated with a 91% approval rate, indicating that the process has been successful in helping businesses restructure their debts. The SBR regime is very well suited to small businesses in Tasmania and will continue to be increased in scope as more people become aware of the financial benefits. The many benefits of SBR include; directors stay in control of the business; the company can continue to trade; the process is fast with creditors required to vote within thirty five business days; and debt is permanently written off. Given the rising adoption of SBR and its success in helping struggling businesses, it is imperative that directors consider this option before it’s too late. Delaying action or adopting a “head in the sand” approach can significantly limit the options available and expose businesses to harsher recovery actions from the ATO. Kiara Calvert is Tasmania’s newest Registered Liquidator, Trustee in Bankruptcy and Small Business Restructuring Practitioner. She is a partner of Hamilton Calvert Advisory.

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Success Story – Retail Business THE BUSINESS A well established retail business located in Tasmania operating for over 16 years. The business had experienced a reduction in sales due to a competitor commencing business in the region coupled with the director sustaining a lifestyle using company funds instead of addressing tax debt. THE SOLUTION Hamilton Calvert Advisory worked with the director to establish change in business practices, long term viability of the business and assisted with the creation of a repayment proposal to creditors. We worked closely with the ATO (major creditor) to negotiate any potential issues with the restructuring proposal, which was ultimately accepted. Within 3 weeks of the plan being approved, creditors received a dividend of 22c/$ and the business reduced its unsecured debt by $330,185 (45%). As a result of a change in business practices and the small business restructure process the company is now operating successfully. COMPANY FINANCIAL PROFILE PRIOR TO RESTRUCTURE ATO debt $723,808 Director had received Director Penalty Notices for unpaid SGC superannuation and PAYG withholding tax - $228,166 (personally liable) ATO had commenced proceedings to wind up the company, but had not filed with the Court at the time of our appointment COMPANY PROFILE AFTER SBR RESTRUCTURE Restructure Plan accepted by creditors Director paid Director Penalty Notices - $228,166 (from sale of property) – outside of SBR plan Director contributed $165,457 for SBR proposal SBR dividend 22c/$ Debt reduced by $330,185 (45%) Improved wellbeing of director Employee job security DEBT PERMANENTLY WRITTEN OFF = 45%

What happens to my superannuation if I become bankrupt? As bankruptcy will result in available assets being realised it is important to consider the status of your superannuation balances. Superannuation is not a personal asset and is held on trust for you and governed by superannuation law and for this reason it is not available to your trustee but is also protected by section 116(2)(d) of the Bankruptcy Act 1966 . It is important that you do not withdraw superannuation as a lump sum during bankruptcy as it would become a personal asset and available to your estate. If you entered into pension phase during bankruptcy, then the annual payment would be assessed as part of your income and you may be required to make a contribution to your estate. Can I have a self-managed super fund during bankruptcy? Once you become bankrupt you can no longer be trustee of your own super fund, if you are a director of a company that is trustee of your superfund you can no longer act in that role as a bankrupt cannot be a director of a company. If you have a self-managed superfund you should speak to your financial advisor prior to becoming bankrupt so proper planning can be put in place in order for your superannuation to remain protected. Does bankruptcy affect any life insurance?  Section 116(2)(d) of the Bankruptcy Act 1966 provides that policies of life insurance held by the bankrupt and/or their spouse or de facto partner are exempt property where the proceeds of such policies are received on or after the date of bankruptcy and become protected money. This can also extend to property purchased with protected money so it remains unavailable to a bankruptcy trustee to realise. Protection will only be available on or after the date of bankruptcy - not before. If insurance proceeds or superannuation is received before bankruptcy and placed in a bank account or used to purchase real estate it is not afforded the protection of being exempt property and will be available to creditors. Please do not hesitate to contact our firm for a free, initial confidential consultation to discuss your options available.