Some years ago, I wrote an article entitled The ATO as an insolvency regulator,[1] suggesting that with the various insolvency activating powers then available to the Australian Taxation Office, it was the real regulator of the system, not ASIC. That was even before its increased powers given in 2012. That regulatory role has continued, in particular with the introduction of the Part 5.3B “small business restructuring” regime.
A recent ABC news program – Restaurants and pubs are legally wiping debt to stay afloat – ABC News – explained the use of the Part 5.3B regime to ‘wipe away’ debt to allow restaurants, pubs and other small businesses that had not, for example, paid their employees’ superannuation, or had used employees’ tax moneys for their own purposes in order to “stay afloat”. The unpaid tax accumulates and with penalties can amount to a large sum owed by the company, which it cannot pay, thereby making it potentially insolvent.
This system is largely predicated on the existing long-term 20th century arrangement, or charade, or game, whereby tax is imposed, companies do not pay and instead unlawfully use those moneys, and the ATO then has to try to recover, and then they each go backwards and forwards to some resolution.
This has kept the ATO, businesses, accountants and insolvency practitioners occupied for many decades.
The evils
In 2002, a court said that
“the evils of tax payers deducting taxation payments from employees’ wages and not passing them to the authorities are considerable and perhaps widespread. The evils are not limited to the tax avoided: they extend to the use made of the money, namely either theft or use as working capital, thereby permitting companies to continue to trade which in truth are not capable of continuing to trade lawfully”[4].
That evil continues despite an attempt in 2016 to at least control it, being rejected by the accountants and others in favour of their clients’ retention of these tax moneys, this despite the fact that Australia
“[stood] out internationally as having some of the longest lag times between employees being paid and taxes being remitted to the Government” and that “this may be a contributing factor to the significant collectable debt owed by businesses”.
The then government backed down, announcing on 10 June 2015 that it recognised the
“cash-flow implications for business of real time payments”
for under-capitalised businesses.
Meanwhile, as I have said,
“the ATO’s unpaid debt remains and the ATO is busy winding up to little effect and many insolvent businesses are still continuing to trade”.
Despite this evil, ASIC likewise endorses giving financial support to restaurants and pubs simply to “keep these struggling companies afloat”, and “helping them to [just?] survive”. [5]
This is rather than support their more efficient and tax compliant competitors, with their greater potential to make a contribution to the economy?
The ATO
In any event it is the ATO rather than ASIC that is and remains the main player, and in insolvency generally.
As a competition regulator
The ATO itself explains its role as being broader than debt recovery, that is, it is also a competition regulator. It points out that businesses that don’t pay their tax gain a significant competitive advantage over others in the market.[6]
All companies going into the SBR process have, for however long, been taking that unfair advantage over their competitors, conceivably adversely impacting those competitor businesses. That those competitors have in fact survived regardless is, in contrast, a mark of their market strength and worthiness, and productivity.
The government also points out that tax evasion through phoenixing puts other businesses “at a competitive disadvantage” and can in fact deny others access to the relevant market, a serious impediment to competition.
The ATO’s published guideline of April 2025 says that it seeks to ensure there are no overriding “public interest considerations” involved in accepting an SBR through the non-compliant taxpayer
“looking to gain an unfair advantage over other businesses”, even if it provides a better return than a winding up.[7]
Is “looking to gain” relevant, if the reality is that an unfair advantage is given, and there is economic damage, whether intended not?
And as Dr Emmett has said,
“one might fairly ask … why it would be in the interests of the business community generally to preserve inefficient enterprises”. ++
A reality
A reality is however that
“insolvent companies going through a rescue procedure inevitably improve their market position and consequently gain a certain competitive advantage over solvent competitors who cannot take the same route”.[8]
That acceptance of the fact of a balance being needed does mean that a ‘restructuring’s’ impact on competition is accepted, and it is a matter of the degree involved.
It is inherent in an SBR that hotel company A thereby gains “an advantage over other businesses” – hotels B, C and D down the road – hotels that, because of their greater efficiency and tax compliance, have not had to access the SBR regime and which have paid their taxes.
Nevertheless, there may be said to be a greater public interest in company A surviving, courtesy of Part 5.3B.
The other side
This reality is, necessarily, the other side of the argument, that the ATO should properly have regard to the fact that hotel A’s liquidation may have a negative impact generally.
As the Productivity Commission explains,
“while firm exits may typically increase productivity, this is not always true. Firm exits impose costs. Productive assets are often scrapped, employees face search costs in finding new jobs, human capital can be lost, and productive firm networks can be weakened”[9].
Hotel A may otherwise turn out to be a successful business, lessons having been learnt, and paying tax.
In the end, the Commission says that
“there is an optimal level of entry and exit in an economy as both entry and exit, and the forces underpinning them, incorporate both benefits and costs”.[10]
Contagion and other impacts
Underlying this economics perspective is the legal concern of properly setting the level or threshold of exits, otherwise
“insolvency law will eventually be recognized as an acceptable business method to get ahead of one’s competitors”.[11]
The contagion effect, and the impact on creditors, and competitors, needs close monitoring.
The real question
The real question is whether Part 5.3B SBR, and Part 5.3A voluntary administration, each set an “optimal level of exits”, a question that might properly be raised in the context of the industry wanting a comprehensive or root and branch review of the system.
Preceding that review, changes to improve SBR as it is presently operating could be implemented based upon a recent most useful comprehensive analysis of the SBR system, by Dr Amanda Bull, based upon the experience and perspective of the SBR practitioners.[12]
Context
All this has to be seen in context. While there were 30,000 external administrations (“exits”) in the 2022-2024 period, there were 850,000 new businesses (“entries”) started.
Also in context, 3,000 SBRs in a corporate population of 3 million or so can’t do too much damage to competition, and if this small cohort needs help, so be it, and that it be defined as fair.
A bigger role?
No doubt as a Commonwealth agency, we can trust the ATO to address these public interest and competition considerations involved in ensuring the non-compliant taxpayer does not gain “an unfair advantage over other businesses”.
This role of the ATO may lead to bigger things, and it may become a “model creditor”, as the 2023 PJC Report on Corporate Insolvency suggests [recommendation 22], the term “model” including having greater regard to the legislative and policy environment.
The ATO is arguably entitled to assume that greater role given the prevalence of tax defaults in the SME sector, defaults that allow businesses to pay their private creditors first, or only. As the ABC article explains, a pub could wipe an unpaid tax bill of $350,000, an “opportunity anybody would jump at” without shame that it arose
“because of course tax came last”.
In that role the ATO may in effect determine what insolvent businesses survive, with greater powers than ASIC, the ATO being the real insolvency regulator.
As the ATO says,
“we are a creditor of most companies using the SBR process, and we are often the majority value creditor. Our vote on a restructuring plan is therefore often decisive”.
Its published guidance might usefully become more detailed, in effect operating as quasi-regulation, in shaping the operation of the SBR and VA regimes.
Apart from shaping the model creditor role of the ATO, SBR might be shown to be useful in other respects, for example through its debtor in possession structure, in further shaping change in insolvency practice.
More on that soon.
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[1] (2007) (July-Sept) Aust Insol J 24, Murray
[4] Deputy Commissioner of Taxation v Saunig [2002] NSWCA 390
[5] 25-111MR ASIC report suggests small business restructurings are keeping struggling companies afloat | ASIC
[6] Commissioner’s address at the Australian Chamber of Commerce and Industry event | Australian Taxation Office (ato.gov.au)
[7] Small business restructuring: Information for Restructuring Practitioners, April 2025
[8] Van Schadewijk, p 1.
[9] PC sub to HoR dynamism inquiry 2023.pdf
[10] PC sub to HoR dynamism inquiry 2023.pdf
[11] C Paulus at 76.
[12] Small To Medium Enterprises: Destined to Fail or Supported to Thrive? A Critical Analysis of the Australian Restructuring Framework as it relates to Small to Medium Sized Enterprises, Dr Amanda Jayne Bull, BBus (Int Bus)/LLB, Grad. Dip LP, LLM, PhD Thesis, Queensland University of Technology 2025.
++ Butterworths Corporation Law Bulletin, Quarterly Commentary, July 2025, [521]Does the regime for corporate rescue currently in force go too far? A Emmett AO KC.
