As local and global pressures continue to stress small and medium businesses (SMEs), many finance professionals are seeing an increase in insolvencies among clients.
In the first half of FY23, external administrator and controller appointments rose 62% compared with the previous corresponding period, according to Insolvency Australia.
In the first six months 2,153 external administrator and controller appointments were made in NSW, 1,192 in Victoria, 796 in Queensland, 346 in Western Australian, 122 in Southern Australia and 96 in the ACT. Tasmania and the Northern Territory each had five.
Insolvency Australia director Gareth Gammon says this was the result of tougher action by the ATO on tax debt, as well as rising interest rates, surging cost of living, and labour and material shortages.
The ATO is believed to be chasing around $45 billion worth of tax debts, with about two-thirds of that debt owed by small businesses.
In its 2023-24 corporate plan, it foreshadowed that it would make more aggressive use of penalty notices related to these, and dramatically increase its use of credit referrals, disclosing debts of $100,000-plus to registered credit bureaux. It expects to issue about 2,400 credit referrals this year.
While those with construction and hospitality businesses seem to currently be overrepresented in insolvency numbers, accountant Cameron Allen, a partner at Marsh & Partners Brisbane, says this vulnerability is being driven by economic factors rather than the ATO cracking down on these sectors.
“Often they do have poor cash flow though, which makes it more difficult to negotiate with the ATO,” he says.
Allen, whose specialties include business transmission and structuring, believes there are currently many SME owners whose businesses have stalled, and who expect the ATO to effectively fund them through that stall.
“While this strategy may have worked during the pandemic, the pendulum has swung the other way,” he says. “For example, Director Penalty Notices (that can make a director personally liable for three types of tax debts including PAYG, SGC and GST) seem to be issued a lot faster and earlier than in the past.”
IPA member, insolvency expert and registered liquidator Chris Baskerville of Jirsch Sutherland has noticed an uptick since April in both enquiries from SMEs and face-to-face meetings – a signal of prioritisation.
“There is a greater sense of urgency around how quickly the company can be restructured or put into liquidation,” he explains.
While voluntary administration may be an option for SMEs that have had some sort of one-off disaster but are otherwise a viable trading business with good prospects, it saves only 2% of insolvent businesses, according to ASIC.
However, it is possible for accountants to assist businesses in managing their debts and achieving financial viability. Here are three tactics to help small businesses negotiate and handle business tax debts.
1 Get the facts
For businesses in trouble, a head-in-the-sand approach, with a series of overdue BAS notices or returns accumulating, spells danger. Proactive steps, ideally before a debt grows, are key.
“For an accountant, it’s about being brave enough to have a conversation with a client where you say ‘I think you’re in trouble’,” Allen says.
Once you have agreed on the problem, gather all the information needed to identify solutions. With full details of all debts and other financials it may be possible to propose a solution to help a business become financially viable.
“The first thing we do with any business is ask a series of qualifying questions to work out the best solution,” says Baskerville. “It’s a fact-find to discover if they have a business that’s worth saving.”
2 Ask for more time to pay
The information gathered at step one will indicate the likelihood of this working. For a client with a good lodgement and payment history, a phone call or submission on the ATO portal asking for six to 12 months to repay a debt will usually get approved, says Allen – despite the increased focus on recovery.
“But if an SME has had multiple arrangements in the past and defaulted on those, the situation becomes a lot harder to resolve.”
Accountants should prepare a simplified cash flow for the ATO that demonstrates capacity to pay, but Allen recommends careful and conservative forecasting.
“The ATO will also be considering whether the business can pay debt back faster,” he explains.
From a trading perspective, an accountant needs to be sure a business is experiencing a temporary setback, not something from which they cannot recover, before exercising this option, adds Allen.
For those that expect finances to improve in the projected cash flow period, an ATO payment plan can be successful. However, debt, as well as ongoing tax liabilities, will have to be managed over the negotiated repayment period.
3 Consider a business restructure
For businesses to qualify for restructuring, they must have total debts (including secured debts) of less than $1 million and fully paid-up employee entitlements, as well as, generally, having lodged all their tax returns, says Baskerville.
“The big advantage of small business restructuring is that the director retains control of the business the whole way through the process.”
Another advantage is a significant reduction in debts.
“A business may only need to pay 20–30% of the business’s unsecured debts, or whatever is negotiated by the finance professional handling the restructuring, although business restructuring doesn’t prejudice the rights of secured creditors.” Baskerville says.
For SMEs in real trouble, the cost of restructuring – which includes a fixed fee, agreed with directors before work commences, and a percentage of disbursements, approved by creditors when they vote on acceptance of the plan – can be prohibitive. Costs will vary based on complexity and other factors, and will be established by the restructuring practitioner.
Restructuring an ailing business may also not be a ‘fix’, may affect credit ratings, and could signal to clients and employees that the business is struggling.
Only accountants who are registered liquidators may act as small business restructuring practitioners. Directors are encouraged to seek independent and trustworthy advice to determine the company’s eligibility and develop a restructuring plan.
