Author
Marcus PetrovicDirector & Head of Client Strategy
By the time the ATO filed a wind up application against a long-running regional pub outside Perth , the business was carrying almost $600,000 in tax debt and the owners were preparing for the possibility of shutting the doors for good. The pub had already spent years under pressure, with rent increasing sharply after the property changed hands, customer spending slowing down, and repair costs continuing to pile up while the venue tried to stay on top of day to day operating expenses.
Then COVID hit the hospitality industry. Trade disappeared during lockdowns, but the expenses did not disappear with it. Wages, supplier costs, utilities, BAS obligations, and tax liabilities continued building in the background while the business fought to survive week to week. By the time the wind up notice arrived, the business was out of time. Instead of entering Liquidation, the company went through a Small Business Restructure. The outcome reduced the tax debt by 66% and allowed the hotel to keep trading.
How the Business Ended Up Owing $600,000 to the ATO
The pub had been operating in a regional town outside Perth for close to 20 years. Like a lot of country pubs, the business relied heavily on regular local trade and consistent cash flow to stay on top of wages, suppliers, rent, and tax obligations. The financial pressure did not happen overnight. Several years before the ATO became involved, the venue was already dealing with rising operating costs and tighter margins after a new landlord purchased the premises and increased the rent almost immediately.
At the same time, alcohol sales started slowing down, making it harder for the hotel to cover basic operating costs each month. The building itself also required ongoing maintenance work, and many of those repair costs sat with the business. When COVID lockdowns arrived, the venue was forced to shut completely for periods of time, wiping out revenue almost overnight while expenses continued building in the background. Staff still needed to be looked after, suppliers still needed paying, and tax obligations kept accumulating while the business tried to keep operating.
Over time, the ATO debt became too large to manage through standard repayment arrangements, eventually leading to formal recovery action.
What Happens When the ATO Files Wind Up Proceedings
Eventually, the ATO escalated recovery action and filed a wind up application through the court. This is one of the most serious debt recovery actions a company can face because, if the application proceeds successfully, the business can be forced into Liquidation. Directors lose control of the company, trading often stops, and a Liquidator is appointed to deal with assets and creditors.
For most business owners, this is the point where the pressure becomes overwhelming. Suppliers are chasing overdue accounts, cash flow is tight, staff are asking questions, and directors are trying to work out whether the business can realistically survive. That was the position the hotel found itself in. Despite the debt, the venue still had customers coming through the doors and an established local reputation. The problem was that the accumulated tax debt had grown beyond what the business could realistically repay under normal payment terms.
A lot of directors assume that once a wind up application is filed, Liquidation is unavoidable. In reality, that is not always the case. Some businesses still have underlying value and ongoing trade, but they need a realistic pathway to deal with debt that has built up over time. You can read more about what a wind up notice means and what to do next.
Why a Small Business Restructure Was the Better Option
Rather than allowing the company to move straight into Liquidation, the directors entered a Small Business Restructure. A Small Business Restructure is designed for businesses that are still commercially viable but cannot continue operating under existing debt pressure. The process allows directors to keep trading while a formal proposal is prepared for creditors and gives businesses an opportunity to deal with accumulated debt in a more manageable way.
In this case, the restructure helped create an opportunity to address the debt before the wind up application progressed further. That breathing room allowed the business and advisers to properly assess the numbers, review future trading capacity, and determine whether the venue could realistically survive if the debt burden was reduced to a sustainable level.
Learn more about how a Small Business Restructure can help Australian small business owners through the video below.
Why the ATO Accepted the Proposal
A lot of directors assume that once the ATO starts wind up proceedings, there is no room left to negotiate. That is not always the case. The ATO still considers whether a restructure will produce a better commercial outcome than shutting the business down entirely.
In this case, the hotel still had regular trade, an established local customer base, and the ability to continue operating if the debt was reduced to a realistic level. The restructuring proposal needed to clearly show what the business could genuinely afford to repay and why that outcome would likely give creditors a better return than Liquidation.
That meant reviewing the company’s trading position, operating costs, liabilities, cash flow, and future viability in detail. The proposal had to be commercially realistic because there was no value in putting forward repayment terms the business would never be able to maintain long term.
Reducing the Tax Debt by 66%
After reviewing the financial position of the company, a formal proposal was presented to creditors through the Small Business Restructure process. The proposal reduced the ATO debt to 34 cents in the dollar, reducing the overall tax debt by 66%.
Creditors approved the proposal, the wind up application was withdrawn, and the business continued trading under repayment terms the company could realistically manage. For the owners, it meant they could focus on operating the venue again instead of spending every week reacting to mounting financial pressure and ongoing legal action.
Why Timing Matters Before Liquidation or Wind Up Action
One of the biggest mistakes directors make is waiting too long to get advice. A lot of business owners assume they only have two choices, somehow catch up on the debt alone or shut the business down completely. In reality, some businesses still have restructuring options available even after serious ATO recovery action has started. Others do not. The challenge is figuring that out early enough.
Once court proceedings, creditor pressure, and unpaid liabilities continue building, the available options can narrow quickly. For accountants advising clients after a statutory demand or wind up notice, timing is critical because options may narrow once court action progresses.
That is why early advice matters so much in restructuring matters. The earlier the situation is assessed properly, the easier it becomes to understand whether the business can realistically be stabilised or whether Liquidation is unavoidable.
Hospitality Businesses Have Been Hit Hard by ATO Debt
The hospitality industry has faced sustained pressure over the last several years. Many venues are still carrying tax debt that built up during COVID while also dealing with increased wages, supplier price increases, rent pressure, staffing shortages, rising operating costs, and reduced discretionary spending from customers.
For some businesses, the underlying operation is still profitable enough to survive, but the accumulated debt has become impossible to manage under normal repayment terms. That does not automatically mean the business is finished. You can learn more about Small Business Restructure options and how they compare to Liquidation pathways for Australian businesses.
Getting Advice Early Can Preserve More Options
Once the ATO starts escalating recovery action, hoping things improve on their own rarely works. The earlier directors seek advice, the more opportunity there usually is to assess restructuring options, creditor negotiations, repayment proposals, business viability, and director risk exposure before the situation becomes more difficult to recover from.
In this case, the regional pub avoided Liquidation because action was taken before the wind up application progressed too far through the court process. The venue is still operating today and repaying its debt under terms the business can realistically sustain.
If your business has received a statutory demand, wind up notice, or ATO recovery action, Mackay Goodwin can help assess whether restructuring options are still available.
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