ATO changes stance on Small Business Restructuring

The Australian Tax Office has hardened its stance on debt recovery actions, issuing guidance in April 2025 about aspects of the SBR Regime that focus on compliance, related parties and public interest. This attention has implications for SBR Practitioners and clients, as Jessie Wang explains:

The debt book of the Australian Taxation Office (ATO) has ballooned to over $105B, with collectable debt estimated at $46B. In response, the ATO has hardened its debt recovery actions. We have observed a notable shift in the ATO’s policies toward corporate debtors recently including in debt negotiations, court winding up applications and Small Business Restructurings (SBRs) recently. These changes, reflected in its updated guidance to the Restructuring Practitioners released in April 2025, signal a more assertive and structured approach from the ATO, with significant implications for small businesses and their advisors.

ATO’s Debt Recovery Strategy Has Hardened

The ATO’s broader debt book is currently over $105B, under half of which the ATO estimates is made up of collectable debt. That $46B is almost double the $26B of collectible debt owed as at the end of 2019. In response, the ATO has adopted a more targeted and urgent debt recovery strategy. This includes:

A sharp increase in Director Penalty Notices (DPNs), particularly for unpaid superannuation, and
Greater use of garnishee notices and credit reporting disclosures

In FY2024 alone, the ATO issued over 8,700 DPNs for unpaid super, more than double the previous year. The message is clear — the ATO is no longer tolerating passive non-compliance, and businesses that fail to engage meaningfully with the ATO will likely face firm enforcement action.

Closer Scrutiny and Stricter Compliance Expectations for SBR

The ATO’s April 2025 guidance outlines a more rigorous framework for SBR plan assessment, with a focus on related party activities and public interest / fairness to other businesses. Key factors include:

Substantial compliance test: The ATO now assesses compliance on an obligation-by-obligation basis. A company cannot rely on general compliance history. Each tax and superannuation obligation must be individually addressed.
Director and related party creditors: These debts must be included in the restructuring plan and cannot be excluded or subordinated. The ATO has indicated it will not support plans that attempt to circumvent this principle.
No unfair advantage over other businesses: The ATO has made it clear that it will not support a restructuring plan if it believes the company is seeking to gain an unfair advantage over other businesses using the SBR process or otherwise.

This includes scrutiny of:

Related-party transactions that may have siphoned value from the business.
Preferential payments to insiders and/or other trade creditors while tax debts accrued.
Use of the SBR process as a defensive tactic against pending winding-up applications.

The ATO is positioning itself not just as a creditor, but as a guardian of market integrity, ensuring that the SBR process is not misused to the detriment of compliant businesses.

A Good Option Amid Rising Insolvencies

With insolvencies rising sharply (external administrations up 43% in the first eight months in FY2025 from the same period in FY2024, while SBRs are up more than 200%), SBR remains a vital tool for preserving viable small businesses.

However, the ATO’s internal policy shift reflects a broader recalibration of its role, not just as a creditor, but as a steward of the tax system and a protector of fair competition. The ATO’s evolving stance means that SBRs must now be approached with greater diligence, transparency, and strategic foresight.
For restructuring practitioners, advisors, and small businesses, this means the bar has been raised. But with the right preparation and professional guidance, the SBR process remains a powerful mechanism for business recovery and renewal.

Practical Implications for Advisors and Clients

For advisors and small business clients considering an SBR, the implications are clear:

Compliance history matters: Tax compliance management plays a vital role in determining whether SBR is a viable solution to the business’s debt restructuring – businesses should always attend to the tax lodgements on time and engage with the ATO for payment arrangements if the business cannot afford the full tax payments.
Early engagement is critical: There is no legislative mechanism for changing the SBR plan terms once the proposal report is issued to the creditors (except for applying to the Court for variation, which will be costly). The ATO regularly provides feedback on draft plans, but only if submitted at least five business days before the plan is issued to creditors. Planning early may earn more time for possible discussion and negotiations, increasing the chance of success.
Transparency and documentation: Detailed financials, asset listings, forecasts, and explanations of related-party dealings are essential. The ATO expects a high standard of disclosure.
Plan quality matters: The ATO will not support a plan simply because it offers a better return than liquidation. The plan must be commercially sound, equitable, and demonstrate future viability. Generally, shorter plans provide more certainty to creditors, hence, are more appealing.

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