Debt relief for struggling businesses in 2020: Not a magic bullet
State and Federal governments are rolling out many measures intended to offer some relief for business that are facing financial hardship as a result of the COVID-19 pandemic.
These include a six month waiver of payroll tax (from April to September 2020) in South Australia for businesses with annual grouped wages of $4 million or less. Businesses with annual grouped wages over $4 million can apply to defer their payroll tax for six months.
The ATO is also accepting applications from businesses who are having trouble meeting their tax and super obligations due to the pandemic, and may offer to defer income tax, fringe benefits tax and excise payment due dates up to 12 September 2020.
Temporary changes to Commonwealth bankruptcy laws that will be in effect for six months as of 25 March 2020 mean that the time frame for a debtor to respond to a bankruptcy notice is now six months instead of 21 days.
There is also an increase in the AFSA Temporary Debt Protection (‘TDP’) period that debtors can apply for, also now six months (up from 21 days). The TDP period means that unsecured creditors can’t take enforcement action to recover money owed.
This means that creditors who are looking to begin the process of recovering an outstanding debt may find themselves waiting a minimum of six months before any action can be taken.
A common element among many of these ‘emergency relief’ measures is that they are only temporary. You may have extra time to pay, but the debt is not taken away (and may even continue to accumulate interest…).
Businesses should be realistic to ensure that they are not just ‘delaying the inevitable’. Deferring all payments to creditors for six months and then being hit with a raft of simultaneous recovery actions is most likely a sure-fire path to insolvency.
For this reason, it’s best to be proactive with potential cash-flow issues, both as a debtor and as a creditor. Small businesses who take early action to negotiate with creditors may be afforded valuable ‘breathing room’ so that they can continue to trade. Creditors may (likely) need to find a compromise on outstanding debts with debtors who are in financial hardship.
This highlights the importance of positive relationships between creditors and debtors. Creditors with outstanding debts should obtain legal advice to explore the options that are still available to them.