Many business owners reach out to us asking whether their tax obligations can be included in a small business restructure.
General debt guides explain your options, but they don’t address the specific treatment of ATO debt within restructuring plans very well.
We’ll walk you through which ATO debts qualify for restructuring and how the ATO votes on your proposal to give you a better idea of what to expect.
Can ATO Debt Be Included in a Small Business Restructuring Plan?
Yes, ATO debt can be included in a small business restructuring plan.
All unsecured debts incurred before entering the small business restructuring process are included in the restructuring plan, and your restructuring practitioner.
The ATO is often one of the largest creditors in small business restructure cases, which means they substantially influence plan acceptance.
What types of ATO debts qualify for restructuring
ATO debts qualify as unsecured debts under the small business restructuring framework.
Any tax liability that existed before the restructuring practitioner’s appointment can be included in your proposal.
Income tax, GST, and PAYG obligations
Your income tax returns, GST liabilities, and PAYG obligations all qualify for inclusion in the restructuring plan.
The ATO requires outstanding Activity Statements and Business Activity Statements to be lodged before creditors receive your restructuring proposal.
Any overdue tax returns must also be lodged, and any tax debt arising from these lodgements is included in the pre-appointment debt to be negotiated through the restructuring plan.
How ATO Debt is Treated vs Other Creditors in Small Business Restructuring
Tax obligations get treated differently from other debts in the small business restructuring process, so understanding where your ATO debt sits in the creditor hierarchy shapes your restructuring strategy.
ATO’s position as an unsecured creditor
The ATO functions as an unsecured creditor in small business restructuring, placing them in the same category as trade creditors and suppliers.
The difference is that the ATO is the majority value creditor in most small business restructuring cases, so their voting position can be a deciding factor between whether your restructuring plan succeeds or fails.
Priority of employee entitlements over tax debts
Employee entitlements like wages, leave entitlements, and redundancy payments sit outside the restructuring plan.
Your employees are protected first, before any ATO or other creditor debts. You must pay all due and payable employee entitlements before you can propose a restructuring plan to creditors.
Unpaid superannuation and PAYG withholding requirements
Superannuation obligations must be brought up to date before the restructuring plan can be proposed.
If your company failed to pay superannuation in full, on time and to the correct fund, you must lodge and pay a Superannuation Guarantee Charge statement.
Other components of the SGC are not required to be paid before the plan is sent to creditors, but they are part of the amount owed to the ATO and must be factored into your total liabilities assessment.
Bringing tax lodgements up to date before restructuring
All tax returns and activity statements must be lodged with the ATO before proposing your plan.
If the required documents haven’t been lodged, you must demonstrate reasonable steps to lodge and show that external factors prevented timely lodgement.
The small business restructuring process will terminate if the plan is provided to creditors before these obligations are met.
Does the ATO Vote on Your Restructuring Plan?
Creditors vote on whether your small business restructuring plan proceeds.
Once the restructuring practitioner provides your proposal, creditors have 15 business days to accept or reject it.
During this period, they can dispute the debt amount listed in your restructuring proposal statement if they believe it’s inaccurate.
How creditor voting works in small business restructuring
A plan is accepted if more than 50% of creditors by value that vote choose to accept it.
Related party creditors cannot vote on a restructuring plan. The calculation focuses on value, not the number of creditors, meaning one large creditor can outweigh multiple smaller ones.
What factors affect the ATO’s decision
The ATO supports a restructuring plan where the plan would result in a higher payment to creditors within a reasonable period than would be received if winding up, and there are no potential public interest concerns or risks that would make support for the plan inappropriate.
The most common reasons to reject a restructuring plan are:
- Non-repayment of director or related entity loan accounts
- Poor tax compliance history
- Non-payment of tax liabilities that would provide an unfair advantage over other businesses
If the ATO votes against your proposal
If the ATO rejects a restructuring plan, it can’t be reviewed.
While they’re under no obligation to provide reasons for the rejection, it’s normal to provide general reasons unless doing so could breach privacy or confidentiality.
If the plan is not accepted, the restructuring process ends. You remain in control of the company, but creditors are no longer prevented from enforcing their rights.
Alternative options when restructuring fails
Other formal options may be available, and directors in this situation will generally place the company into liquidation or voluntary administration.
Get the Right Advice to Get Your Business Back on Track
Small business restructuring gives you a genuine pathway to address your ATO debt while keeping your company operational.
As insolvency experts, the team at Business Savers can help you navigate the process and answer all your questions along the way.
Book a free consultation with our team today to get advice tailored to your business.
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