Small to medium businesses owed the Australian Taxation Office (ATO) a record-high $21.4 billion in tax debt in FY20, reinforcing the significant impact COVID-19 disruptions have had on the economy.
As such, Jirsch Sutherland has called on SMEs in financial distress to reach out their trusted advisers or risk falling behind on tax repayments.
“Inconsistent cash flow has a huge impact on when and how a business can meet its tax obligations,” said Andrew Spring, a Jirsch Sutherland partner.
“If you’re behind in your tax payments, it’s crucial to act quickly. While the ATO has been sympathetic about uncertain cash flows and made some changes to its normal practices — e.g. it suspended its normal collection strategy around April 2020 — this generosity won’t last forever.”
The ATO is expected to ramp up its enforcement activity over the next six months as the trend of rising tax debt continues to balloon.
Looking at last year’s data, a third of the SME ATO debt was housed in the construction industry, which has traditionally accounted for a disproportionately high level of insolvency appointments.
“Our fear is that these potentially terminal businesses may ‘infect’ their directors, owners, employees and stakeholders if action is not taken to address the financial imbalance,” said Mr Spring.
Highlighting Australia’s “advantageous” business rescue legislation, Mr Spring reminded SMEs to consider:
- Payment plans
“These can be a useful tool to manage short-term illiquidity, but more decisive options should also be considered for businesses that have been severely affected and are carrying significant debt (including ATO debt) on their balance sheets,” Mr Spring said.
- Voluntary administration
Voluntary administration is designed to resolve a company’s future whereby an independent registered liquidator (the voluntary administrator) takes full control of the company. This allows the director or a third-party time to find a way, if possible, to save the company or its business.
“This regime is Australia’s business rescue program. It provides an opportunity to not only defer payment, but also compromise the amount of the payment to a level that the business can afford,” he said.
- The new Small Business Restructuring Process (SBRP)
The SBRP was developed in response to the pandemic to assist businesses to restore operational liquidity by severing the financial burden of legacy debts through a formal debt compromise with creditors.
“It’s added another option to financially restructure and save a distressed business. Not only can you defer payment, but you can also negotiate the amount of the payment,” Mr Spring concluded.