When a business starts falling behind on its obligations, the pressure can become overwhelming. Sales may have dropped, cash flow may be tight, suppliers may be demanding payment, and tax debt with the Australian Taxation Office (ATO) can continue to grow.

But financial difficulty does not automatically mean a business has to close its doors.

In this discussion, Toufic Haddad of Latitude Accountants spoke with David Ingram from I&R Advisory, a corporate advisory firm specialising in insolvency and reconstruction work, about the options available to businesses facing serious financial pressure.

The key message is simple: do not ignore the problem. The earlier a business owner understands their financial position and seeks professional advice, the more options they may have.

What Should You Do If Your Business Has Significant Tax Debt?

The first step is to speak with your accountant as soon as you recognise that your business is experiencing financial difficulty.

Rather than waiting until creditors are demanding payment or the ATO is taking further action, business owners should work with their accountant to understand the full financial position.

This may involve reviewing:

• Outstanding debts and creditors
• Accounts receivable and debtor positions
• Current and future cash flow
• Upcoming work and expected revenue
• Tax and other outstanding lodgements
• Employee entitlements
• Personal guarantees attached to supplier accounts
• Existing arrangements with the ATO
• The business’s ongoing operating costs

As David explains, once the overall position is understood, an insolvency or restructuring adviser can help assess the available options. These could include an ATO payment plan, further cost reductions, a Small Business Restructuring process, voluntary administration or liquidation, depending on the circumstances.

Can the Business Actually Be Saved?

Before considering a formal restructuring process, one of the most important questions is whether the business is genuinely viable.

This is an important distinction.

A business may have accumulated significant historical debt while still having a fundamentally profitable business model. For example, sales may have fallen because of difficult trading conditions, a major customer may have failed to pay, or unexpected circumstances may have created a temporary cash-flow crisis.

In these situations, restructuring may provide an opportunity to deal with historical debts while allowing a viable business to continue operating.

However, if the business is continuing to make losses and there is no realistic pathway to profitability, restructuring may simply delay the inevitable.

The numbers need to demonstrate that the business can:

• Continue meeting its normal operating expenses
• Meet its future liabilities
• Make the required contributions under a restructuring proposal
• Remain profitable or financially sustainable going forward

As David explains, some businesses ultimately cannot support a restructuring proposal because their projected cash flows do not demonstrate that they can meet their ongoing obligations.

What Is Small Business Restructuring?

Small Business Restructuring, commonly referred to as SBR, is a formal process designed to help eligible small businesses deal with historical debts while continuing to trade.

Rather than immediately shutting down the company, an eligible business can put a restructuring proposal to its creditors. The proposal generally involves creditors receiving a percentage of what they are owed over an agreed period.

For example, a business might propose paying creditors 30 cents for every dollar owed.

The remaining amount may then be dealt with according to the restructuring arrangement.

The process involves working with an insolvency practitioner and preparing the necessary documentation and proposal for creditors.

What Does an SBR Look Like in Practice?

Consider a business that owes:

• $200,000 to the ATO
• $100,000 to a supplier
• $300,000 in total historical debt

If the business is viable and meets the relevant requirements, it may propose paying creditors a percentage of the debt rather than the full amount.

The proposal could, for example, offer creditors 30 cents in the dollar.

The business must still be able to meet its ongoing liabilities and make the required contributions towards the restructuring plan.

The proposal is then presented to creditors for consideration.

How Do Creditors Vote on an SBR?

An important point about Small Business Restructuring is that the insolvency practitioner does not simply decide whether the proposal succeeds.

The creditors vote on the proposal.

A report is prepared comparing the proposed restructuring outcome with what creditors might receive if the company instead entered liquidation.

For example, if liquidation would likely result in creditors receiving little or nothing, a proposal offering creditors 30 cents in the dollar may provide a better outcome.

A restructuring plan may operate over 18 or 24 months, with contributions potentially being made periodically throughout the arrangement.

Liquidation vs Restructuring: What Is the Difference?

Liquidation generally involves bringing the company’s operations to an end, selling available assets, and distributing any available funds to creditors according to the relevant process.

For a viable business, however, shutting down may not always produce the best outcome.

If the business has valuable operations but has been overwhelmed by historical debt, restructuring may potentially allow it to continue trading while addressing those debts.

This can also have wider consequences.

Closing a business can mean:

• Employees lose their jobs
• Suppliers lose a customer
• Commercial premises may become vacant
• Creditors may receive little or nothing
• A viable business may disappear from the market

The transcript provides an example involving a café with approximately $500,000 of historical debt, primarily owed to the ATO. After reviewing its financial position and projected cash flow, a restructuring proposal offered creditors 20 cents in the dollar over 12 months. The café continued trading, employees kept their jobs, and the business remained in operation.

The example demonstrates why the question should not simply be, “How much debt does the business owe?”

The more important question may be: “Is there a viable business underneath the debt?”

Why You Should Not Ignore ATO Debt

One of the biggest mistakes a struggling business owner can make is putting their head in the sand.

Failing to lodge returns, avoiding communication with the ATO or allowing debt to accumulate without addressing it can make a difficult situation considerably harder.

The ATO may be a significant creditor in a restructuring, so the business’s history of lodgements and communication can matter when the situation is assessed.

If your business is experiencing financial pressure, getting your lodgements up to date and understanding your numbers should be priorities.

When Should You Speak to Your Accountant?

You should not wait until your business has a six-figure tax debt before seeking help.

Early conversations can give you more time to understand what is happening and consider the available options.

Your accountant can help you assess:

1. Whether the business is currently profitable.
2. Where cash is being spent.
3. What debts are outstanding.
4. What your future cash flow looks like.
5. Whether costs can realistically be reduced.
6. Whether an ATO payment arrangement may be appropriate.
7. Whether specialist restructuring or insolvency advice should be considered.

If the business is potentially viable, early action may help create a pathway forward. If it is not viable, professional advice can help determine the most appropriate way to deal with the situation rather than continuing to accumulate losses.

Frequently Asked Questions About Business Tax Debt and Small Business Restructuring

Can a business survive a large ATO debt?

Potentially. The amount of debt is only one part of the assessment. The business needs to be assessed on its overall financial position and whether there is a realistic pathway to remain viable.

What is an SBR?

SBR stands for Small Business Restructuring. It is a formal mechanism that can allow an eligible small business to deal with historical debt while continuing to trade under a restructuring plan.

Do creditors have to accept an SBR proposal?

Creditors vote on the proposal. The outcome depends on the proposal, the creditors’ position, and the relevant requirements of the restructuring process.

Is liquidation always the best option for a business with large debts?

Not necessarily. If the underlying business is viable, restructuring may provide an alternative to closing the business. However, businesses that are not viable may need to consider whether continuing to trade is appropriate.

When should I speak to my accountant about business financial difficulty?

As early as possible. Early advice can help you understand the numbers, identify the cause of the financial pressure, and determine what options may be available.

Get Help Before Financial Pressure Becomes a Crisis

If your business is struggling with tax debt, declining sales or cash-flow problems, don’t wait until the situation becomes impossible to manage.

Latitude Accountants works with Australian business owners to provide practical accounting, taxation, and business advisory support. Our approach is proactive and focused on helping business owners understand their numbers and make informed decisions.

Get in touch with Latitude Accountants:

📍 Sydney Olympic Park | Marrickville | Melbourne | Loxton
📞 1300 706 597
📧 info@latitudeaccountants.com.au

Book a consultation and start understanding your options before the situation gets worse.

Disclaimer

This article is general information only and does not constitute financial, legal, tax, insolvency or business advice. Every business’s circumstances are different. Speak with a qualified accountant, adviser or insolvency practitioner about your specific situation before making any decisions.