An increasing number of Australian businesses are being driven to business rescue programs – like Small Business Restructuring and Voluntary Administration – to save their businesses as the ATO tightens the screws on tax debt.

And with insolvencies still hovering well above pre-COVID levels, business owners are being urged to overcome their fear and shame to give their business the best chance of survival. The time to act is now.

Since the start of the (calendar) year we have experienced a noticeable uptick in Small Business Restructuring (SBR) plans and Voluntary Administrations (VAs) to resuscitate or restructure businesses across a wide range of industries. Tax debt is the primary reason but higher operating costs are also pushing businesses to or over the edge.

It’s obvious that out of necessity, an increasing number of businesses are discovering the benefits of Australia’s business rescue solutions. We have some of the most advantageous legislation in the world: it’s both quick and commercially focused, but it shouldn’t be a last-minute or enforced decision.

Patrick Schweizer, author of Alares Monthly Credit Risk Insights says, “As the ATO continues to work through the record amount of outstanding tax debt, it’s increasingly driving small businesses into SBRs and larger businesses into Voluntary Administrations. And our April report shows that insolvencies remained 50% above pre-pandemic levels, reinforcing the long anticipated catch up in insolvencies from the pandemic lows.”

According to the Alares report, SBRs accounted for more than 14% of all insolvency appointments in April, while VAs accounted for almost 14%. Court liquidations were over 19%, as the ATO remained active in direct Court recoveries and the big four banks were “vigilant”, stated the report. “Non-ATO initiated winding up applications were slightly down compared to March, which again points to the ATO currently being the key driver for insolvencies,” Schweizer says.

The creditor community is becoming less tolerant to operational behaviours that may have contributed to a business’s financial distress, and the ATO is again at the forefront of this changing creditor position. It’s placing an even higher level of scrutiny on historical compliance when considering a proposal for restructuring. Anecdotally we’re hearing this is also the case with pre-insolvency discussions regarding ATO payment plans.

As an involuntary creditor, the ATO doesn’t have the option to withdraw credit from a business – nor does it automatically know they’re even in a trading relationship until the liability is self-reported. As such, a high importance on reporting compliance is required to allow an effective and efficient tax system. During the last few ‘pandemic years’ the ATO appeared to move away from this position, and for those that have become delinquent with their lodgement activity, the hammer is about to drop. If a business has fallen behind with their statutory compliance, it’s crucial to act now.

Insolvency regime benefits

Having a strong business rescue framework (such as the SBR and VA regimes) provides an opportunity for those businesses that have encountered some form of extraordinary distress – like bad debts, weather events or pandemic influences – to not be forced to close, which therefore preserves greater value for creditors and stakeholders.

A robust insolvency framework has many advantages, including recycling underperforming resources such as labour and equipment assets, into viable business ventures. It also provides a balance between the debtor and creditor relationship, as well as giving confidence to markets that anti-competitive behaviours by unscrupulous players in the market will be investigated and held accountable.

Andrew Spring is partner at Jirsch Sutherland.