The Small Business Restructuring (SBR) process gives owners of financially distressed small businesses access to a single, streamlined method of restructuring their debts, while allowing them to remain in control of their company. While introduced in January last year, uptake of the process has been slow: only 42 Small Business Restructures were undertaken between January 2021 to the end of March 2022.
However, this is no reflection on the process. SMEs may have been slow to utilise the SBR process as a result of the federal government COVID support measures and the ATO’s light approach to debt collecting.
But, with the ATO now ramping up its debt-collection activities, it’s time for debt-laden directors, particularly those who have received a warning letter or a Director Penalty Notice (DPN), to consider an SBR. The ATO has issued thousands of warning letters and DPNs and changed the Non-Lockdown DPN rules so directors are aware that entering into a payment arrangement will not avoid personal liability for tax debts that remain unpaid. This makes the SBR process an attractive option.
Key benefits of the SBR process
An SBR offers a myriad of benefits. Crucially, it is a pressure release valve for businesses that have been affected by factors outside their control – such as the pandemic.
There are nine key benefits:
- A business can remain operating, allowing it to generate cash flow to aid the repayment process.
- Directors stay in control of their business throughout the process.
- There’s an automatic ‘stay’ of creditor actions, providing breathing space from aggressive creditors and debt collectors.
- Directors are protected from being liable for insolvent trading and, if an SBR process is entered into at the appropriate time, from personally having to repay the tax debt.
- Simplicity: SBRs are simple to understand and time-efficient.
- Lower costs: the process is designed to reduce access costs for small businesses.
- Early intervention: the process enables a business to ask creditors for help at the first sign of financial distress.
- Proactive planning: SBR practitioners (SBRPs) require businesses to provide a plan that demonstrates their viability.
- Specialist assistance: a qualified SBRP manages the SBR process, ensuring compliance and protection assistance.
The major benefit of an SBR is that businesses can continue to operate with their directors retaining day-to-day control. These plans help the business come out the other side in much better financial health as they focus on financial, rather than operational restructuring.
Let the music play
One SBR process I undertook in late 2021 was a perfect example of how it can work. It was a Sydney-based jazz club that was in a difficult financial position due to start-up costs and operational issues. Then when the COVID lockdowns and restricted trading conditions hit, it became impossible to catch up. I worked closely with the director and his accountant to develop a plan that we presented to the creditors – predominantly the ATO – which was approved, and creditors were subsequently paid.
The attraction of the SBR process, in this case, is that it was less intrusive and more cost-effective than a voluntary administration, plus, it didn’t affect the director’s ability to access any government grants or support packages.
Peter Rechniewski, the director of the jazz club, Foundrey616, says the SBR plan “provided the best outcome”. “The plan took the pressure off, and helped me articulate my plan to the ATO,” he said. “It enabled me to focus on growing my business, which included starting an international program, so I can bring in overseas bands to my venue.”