South Australian small businesses are facing a choice between calling in the liquidators or bringing in restructuring firms to go on payment plans amid mounting tax debts owed to the Australian Tax Office (ATO).

At an information night held three weeks ago by licensed small business restructuring (SMB) firm Small Business Restructuring Specialists, five clients representing about 12 businesses approached practitioner Thomas Dawson for advice on dealing with mounting materials costs and increased ATO debt collection activity.

Dawson said the businesses were “mainly in hospitality and building”.

“Some of the businesses were quite large and I assume well known food brands on the high street of Adelaide,” he said.

On the night, Dawson identified a swathe of common reasons for financial distress in the businesses: sharp rises in input costs (“for example a 30 per cent increase in cheese and dairy products over the last 12 months, chicken up 20 per cent over the same period, beer up 15 per cent, the list goes on”), landlords hiking rent prices, heightened labour costs and rising delivery fees.

But one of the key problems is increased collection activity by the tax office. It’s an issue that recently forced café and wine bar Community at Lot Fourteen to close and led to the collapse of Australian Floor Group in January.

“In short, the ATO gave many small businesses leniency during COVID but now are returning to pre-COVID collection activities,” Dawson said.

ATO deputy commissioner Vivek Chaudhary said in a September 2023 Tax Summit speech that many businesses have “accumulated unsustainable levels of debt”, with collectable debt increasing over the past four years from $26.5 billion in June 2019, to $50.2 billion by June 2023 – an 89 per cent increase.

“Small businesses continue to be over-represented in our debt book, owing over $33 billion of the $45 billion of collectable debt owed by all businesses,” Chaudhary said.

“Businesses appear to be de-prioritising payment of tax and super when they should be provisioning for these bills like they would with any other business expenses.”

According to Chaudhary, SBR is recommended to clients struggling with debt repayments, but remain “commercially viable businesses”.

There are three phases to the SBR process, according to the ATO:

1. The proposal phase where the directors and restructuring practitioner work on a plan for up to 20 business days.
2. The acceptance phase where creditors have up to 15 business days to vote thereby approving or rejecting the plan.
3. The plan implementation phase which is limited to a 3-year term but may be completed sooner depending on the terms of the plan.

“Typically, a restructuring plan will either involve a cash lump sum payment into the plan on or shortly after approval by creditors, or by way of monthly instalments over a period of up to 36 months,” Chaudhary said.

“On completion of the terms of plan, the company is released from all debts subject to the plan.

“To date, the ATO has supported most restructuring plans, voting in favour of 91 per cent of them.”

Dawson said his company has restructured about 50 restaurants over Australia “in almost every state, every major city, and also regional”.

“These businesses have very similar cost structures, high ATO tax debt and input costs, they also suffer from any reduction in discretionary spend and the reasons for distress are common throughout,” he said.

“I can’t sugar coat it anymore, I feel sorry for business owners in hospitality. If I said almost every hospitality business in Australia was in some form of financial distress, I don’t think I would be far from the truth.

“If they don’t know about their options many will just go into liquidation, this is why we are trying to inform as many businesses and accountants as possible, so business owners and their advisers can be properly informed. Many directors are very stressed and lose a lot of sleep. They don’t need to suffer in silence any longer, there is an option.”

He said SBR was a good option for owners who want to continue running their businesses while forming a deal to repay tax debt.

“When appointed we don’t take control of the day-to-day running of the business or bank account we just run the paperwork between the company and its creditors,” he said.

“The only alternative other than SBR is liquidation or voluntary administration which are expensive.

“SBR is the only way the ATO can compromise debt.”