A different version of administration is catching on as the tax office chases up COVID-related debt.
An alternative to voluntary administration is gaining traction in Western Australia as an increasing number of small businesses succumb to the burden of rising prices, costly debt, and lower demand.
The number of struggling businesses opting to take the Small Business Restructure route – a cheaper and faster process involving the appointment of a restructuring practitioner, rather than an administrator – has jumped markedly in recent months from a low base.
Close to half of the 87 SBR appointments recorded by the Australian Securities and Investments Commission in WA since the option was introduced early in 2021 have been since May.
The vast bulk of them relate to this year.
While the busiest practitioners involved in SBRs for WA-based companies have barely reached double figures in terms of cases, some have told Business News a growing awareness of this route to dealing with insolvency has helped push more troubled small businesses towards it.
On top of that, the Australian Taxation Office has played a big role, both in forcing the hand of company directors and then seemingly being open to the SBR option when presented.
To the busiest locally based practitioner, Worrells Perth principal Mervyn Kitay, who has been appointed in 10 SBRs, the process had has so far resulted in a greater survival rate for those being restructured, with the tax office willing to take significant losses to allow otherwise viable businesses to trade through to profitability.
“Personally, I think this has come down from Treasury,” Mr Kitay told Business News.
“They don’t want the small-tomedium business sector to collapse. They are big employers, and small business is the fabric of the economy.”
Mr Kitay said the ATO had been willing to compromise with worthy companies, often with tax debt that was growing under hefty 11 per cent penalty interest rates, often for just 25 cents in the dollar.
Frequently referred to as an Australian form of the US Chapter 11 bankruptcy laws, the SBR bears some resemblance in that the directors of the business remain in charge.
Otherwise, however, the process appears far removed from the US experience due to strict limitations on scale, such as a debt ceiling of $1 million.
SBR is only available to businesses that have: paid their employee entitlements such as long service leave and superannuation; up-to-date ATO lodgements; a viable underlying business; and a track record of compliance.
Once an SBR has been entered into, the business has 20 days put forward a repayment plan. This usually gives it about two years (legally up to three) to trade their way out of trouble by paying off somewhere between 15 and 30 cents in the dollar owed to creditors.
The debt reverts to pre-plan levels if the terms of the plan are not met.
Because company directors continue to run the business and take the risk of failure, administration fees are typically half or less than those charged for even small voluntary administrations.
The SBR was part of a fresh approach to dealing with insolvency taken by the federal government in 2021 to give more small businesses a chance of surviving the economic impact of COVID-19.
It was designed only for the very smallest end of the business sector.
As it happens, plenty of businesses of survived the pandemic, buoyed by the JobKeeper employee subsidy and various stimulus packages at state and federal levels, which not only kept the economy alive but, in some cases, gave it an adrenaline rush.
Closed borders meant Australians holidayed at home, creating a surge of demand for accommodation and hospitality. And in places where lockdowns were most prevalent, online retail sites were swamped by consumers who had developed new habits around having money and no other way to spend it.
The construction sector was boosted by generous grants to those building homes.
At the same time, the ATO is understood to have been lenient on those owing it, reflecting the policy of the day: keeping businesses operating and the people employed.
Close to four years later and circumstances have changed. The stimulus is over, the Reserve Bank of Australia has raised interest rates to tame inflation, holiday makers and shoppers are free to travel where they want, and the ATO’s patience has worn thin.
As it happens, it is not only businesses that survived COVID that are being affected.
Business Reset founder and restructuring practitioner Jarvis Archer said businesses that started up in the thriving post-COVID environment created by stimulus and low interest rates environment had also been caught in the recent crunch.
“Typically, it is ATO debt that accumulated through the pandemic and around the past couple of years because of the cost-of-living expenses,” said Mr Archer, an early mover in this space who has been involved in 10 WA SBRs despite being based in Queensland.
Practitioners are dealing with a wide variety of businesses across many sectors, but hospitality, accommodation, retail and construction are most deeply affected.
According to Jirsch Sutherland Insolvency Solutions, which is represented in this state as WA Insolvency Solutions, the increase in SBRs reflects growing pressure on businesses across the board, with all forms of administration rising in recent months.
“We are seeing record numbers of CVLs [Creditors Voluntary Liquidations] particularly as the ATO continues its aggressive tax collection activities,” Jirsh Sutherland partner Chris Baskerville said in the firm’s newsletter.
“The statistics are fairly compelling.”
He said the recent Association of Independent Insolvency Practitioners conference was told about the positive impact SBRs have had on the economy by allowing more viable small businesses to trade out of trouble.
“[They] provide much better returns than Creditor Voluntary Liquidations (on average, 23 cents in the dollar), they’re tax compliant, and they preserve jobs,” Mr Baskerville said.
He also highlighted a massive increase in Director Penalty Notices, warnings and garnishee notices being issued by the ATO in August, which caused a spike of SBRs significantly above the elevated trend line.
“Don’t think doing an SBR is automatically going to get you a free pass from the tax office,” Mr Baskerville said.
“While the majority of SBRs undertaken since the regime was introduced have been getting approved by creditors (particularly the ATO), the tax office’s attitude has been changing.”
He said there were several reasons the tax office had started voting against certain SBR plans, notably: the existence of director or shareholder loan accounts; evidence that trade creditors were paid down prior to the SBR move; and a poor tax compliance record.
While the ATO may have limits around who is eligible for an SBR, its role was generally appreciated by those in the sector spoken to by Business News, because the new process discriminated in favour of business operators who were trying to the right thing and acknowledged the pandemic was the root cause.
“The SBR process is designed to allow financially distressed, but commercially viable businesses, the opportunity to restructure their debts while continuing to trade,” an ATO spokesperson said.
“The ATO will generally support a restructuring plan if it’s commercially appropriate and it would be objectively fair and reasonable considering the company’s compliance history and the conduct of the directors.
“The ATO has supported most restructuring plans where the ATO has been a creditor, voting in favour of around ninety-one per cent of them for the 2022-23 financial year.
“Early engagement with the ATO assists the restructuring practitioner in getting feedback on their report and helps ensure the proposal has the best chance for success.”