My little economy and big insolvency

Considering the recent discussion and announcements from the United States Federal Reserve surrounding increasing US interest rates and decreasing Quantitive Easing (Money Printing) has me thinking about what this means for Australia and where we are headed.
The Following Trend

Traditionally the Australian economy walked down a similar path to the US economy. Their economy tanked in the late 80s, ours followed suit. Interest rate graph comparisons show a similar story. It’s easy to conclude if their interest rates are headed up so are ours.

Points of Difference

That said our house prices didn’t tank like theirs did. Additionally, we also have a mining sector flogging off minerals to a growing China and necessities seem to be going up in price. So where are we going?


Hidden amongst all the economic excitement and uncertainty was a little known snippet that the price of fruit and vegetables increased by 8% in the December quarter. Admittedly, I only looked into the figures after seeing the price of carrots rise in my weekly shop last week.

8% what’s the big deal, you might ask? Carrots are still only $1.50 a kilo, who cares you might think? Well I ask and I care. Because fruit and vegetables used to be in abundant supply in Australia coupled against an elastic and limited demand whereby we are all happy to switch out broccoli for zucchini and can only eat what we can fit in our stomach has kept food ridiculously cheap in this country since I have started buying my own. 

In such circumstances how can the price of carrots jump so much.  My simple answer, successive governments have turned the tap off on the water in the riverina restricting supply, coupled with increasing demand from a growing population and perhaps a healthier aware population then previously.

Your cash

If fruit, vegetables and other necessities (I’m thinking electricity, petrol etc) continue to cost more and more for less and less, the RBA has two options; follow our American friends and head interest rates north to curb inflation. Alternatively, just let inflation run its natural course and keep interest rates down.

House Prices

If Interest rates go up then house prices stagnate and potentially fall. If inflation goes up, then there’s less money to spend on shelter leaving house prices stagnate and potentially fall. That is of course if house prices move on purely household income.

Asset classes

What if household income is taking a battering but people still think house prices are the best place to store their money. Then house prices are still going to grow as much as household finances and bank lending will allow. But will people really think houses are the best place to store their money when carrot company shares and term deposit rates are high?

You would think as an insolvency practitioner I would be wearing a counter cyclical smile right now. However, most of the insolvencies coming through my firm’s door are due to personal factors not economic factors.   For insolvencies to occur I need people to feel confident enough to sell ice to eskimoes, to start businesses, to run with the wolves and are not happy with their low paying job living at home with their mum. That said if you know a carrot company in trouble let me know.


* For a more technical analysis on money printing and the global economy Google Jeremy Grantham.

** Note – since first drafting this article your author notes that carrots were $1 a kilo again on the weekend. All is well in the world again.

Tax Deductions on Expenses Incurred with Director Penalty Notices (“DPN”)

The DPN Regime was introduced by the Australian Taxation Office (“ATO”) in 1993 as a method to ensure corporate compliance with taxation liabilities. Under the DPN regime, directors could become personally liable for the company’s debts under certain circumstances. The primary objectives of the DPN regime were to ensure directors caused the company to meet its taxation obligations or if this was not possible, promptly seek professional advice with the view to placing the company into voluntary administration or liquidation.
Until recently DPNs had only applied to Pay As You Go (PAYG) withholding liabilities. However, in July 2012, the DPN regime was expanded to include Superannuation Guarantee Charge (“SGC”) liabilities.  The regime was also amended to make directors automatically liable for PAYG withholding or SGC where such amounts have been both unpaid and unreported for more than three (3) months after its due date (known as the lockdown provisions). Under the new DPN regime a director cannot avoid personal liability where they have fallen foul of the lockdown provisions by placing the company into Voluntary Administration (“VA”) or Liquidation. The clear emphasis here is that directors need to ensure that at reporting the company’s obligations on time to still avail themselves to being able to avoid personal liability by subsequently placing the company into either VA or Liquidation.

In the recent Administrative Appeals Tribunal Decision of James Gerald Michael Healy v Commissioner of Taxation ([2013] AATA 281), Senior Member C R Walsh was required to consider the tax deductibility of various expenses incurred by Mr Healy in defending and addressing a DPN (and also in annulling his bankruptcy). While Mr Healy was primarily unsuccessful on a technical aspect (the expenses were not in fact incurred by Mr Healy as his brother paid them), Senior Member Walsh analysed the ability of directors to claim a tax deduction for expenses incurred “in managing his or her own tax affairs and in complying with a legal obligation in relation to another taxpayer’s tax affairs.”

Senior Member Walsh explained that Section 25-5 of the Income Tax Administration Act 1997 (“ITAA”) provides for a taxpayer to deduct expenses incurred for “complying with an obligation imposed on you by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity.” The definition of tax under the Income Tax Administration Act 1997 was considered to be sufficient to encompass amounts due under the PAYG withholding regime. Under the DPN, Mr Healy’s obligation as a director was to:

  • Cause the company to comply with its tax obligations (by paying them)
  • Make an agreement to repay the company’s tax debt;
  • Appoint a voluntary administrator to the company; or
  • Place the company into liquidation.

As such, Mr Healy’s obligation would be “complied with” if one of the above events occurred. In Falcetta v Commissioner of Taxation (2004) FCAFC 194, the Full Federal Court were of the view that under Section 25-5 of the ITAA, expenses relating to, amongst other things, preparation of income tax returns, managing and complying with a DPN and obtaining legal advice on these issues would be deductible. In that case, Mr Falcetta incurred legal expenses in obtaining advice regarding the DPN for unpaid PAYG withholding debts of the company. The ATO Interpretative Decision (ATO ID 2004/831) on this authority suggests that the legal expenses will only be deductible under section 25-5 of the ITAA 1997 of:

  • It is complying with an obligation imposed on the taxpayer by a Commonwealth law that relates to the tax affairs of an entity; and
  • The advice is provided by a recognised tax adviser.

Based on these recent cases, it appears that directors have further incentive to seek prompt professional advice regarding any DPN received.

The ATO continue to use DPNs actively as a tax collection measure for companies, particularly those in the SME sector where non-compliance with PAYG withholding and SGC is more significant. Importantly DPNs are sent to the residential address of the directors as per ASIC records. So encourage your clients to open the mail they receive to their home address, rather than leaving it unopened on the kitchen bench as we have seen occur on a number of occasions which generally limits the options available to them.

If you would like to know more about DPNs please do not hesitate to contact us.


Should I transfer the family home – Beware!!

We are continually surprised by individuals who transfer ownership of their property (usually the family home) to a co-owner or family member for no consideration or for consideration of less than market value who when they subsequently become bankrupt think that such transaction may not be void (or recoverable). What sometimes concerns us more is that such advice may be given to them by consultants / advisors that are inappropriately skilled to properly advise the individual of the consequences, particularly in circumstances where their financial position is perilous.
We have recently been involved in a matter where this occurred and it provides a very useful instruction regarding the application of Sections 120 and 139ZQ of the Bankruptcy Act (“the Act”). Importantly Section 120(1) of the Act provides:

“A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

(a) The transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of bankruptcy; and(b) The transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.”
In the case of a related entity (ie spouse, brother, sister, children etc), Section 120(3)(a) indicates that a transfer is not void against the trustee if:

(i) the transfer took place more than 4 years before the commencement of the bankruptcy; and (ii) the transferee proves that, at the time of the transfer, the transferor was solvent.”
So in essence if you are going to transfer within the five (5) years to a related entity then they have to pay market value for the property to the bankrupt. And regrettably love and affection afforded to the transferor doesn’t constitute consideration!!

It typically comes unstuck because the property is simply transferred by the transferor (who later becomes bankrupt) to their related entity and no consideration is paid. Importantly, that is not the end of the story. There is also a very useful Section of the Act, being 139ZQ(1)(d) which enables the bankruptcy trustee to cost effectively make recoveries for creditors. This is done by making an application to the Official Receiver to give written Notice to a person who has received the benefit of such a transaction to pay to the bankruptcy trustee an amount equal to the value of the property received. In essence, once such Notice is given, the property is charged with the liability of the person to make payments to the bankruptcy trustee as required by the Notice.

In a recent bankruptcy we were administering, a Section 139ZQ Notice was used very effectively to recover monies for creditors. We identified from our initial investigations of the bankrupt that he and his non-bankrupt spouse transferred their interests in two (2) residential properties to a related entity in the years leading up to our appointment for no consideration.

We considered that such transfers were void under Section 120(1) of the Act. Other than these transactions, we had not identified any other assets recoverable. Thus we were not in funds to become embroiled in some kind of protracted and costly litigation in the Courts.

Accordingly, we made an application to the Official Receiver to issue a Section 139 ZQ Notice to the related entity requiring payment for the bankrupt’s share of the transfers. Whilst the related entity initially did not appear to fully understand the strength of such Notice, they did seek professional advice whereupon subsequently both properties were sold and the amounts required in the Notices were paid in full – about $200,000 in all.

It is important that individuals who may be facing financial difficulty get the right professional advice before entering into these types of transactions which will not only potentially enable better solutions to be identified, but also minimise the emotional stress that is then caused when a bankruptcy trustee seeks to recovers these types of transactions.

Insolvent Builders & Home Warranty Insurance (“HWI”)

For many individuals or couples one of the biggest purchases in their lives will be the construction of a new home. Unfortunately over the years there have been many residential home builders that have gone into some form of insolvency administration and ceased to trade, leaving home owners with an incomplete home and lots of worries.
We are frequently appointed as Voluntary Administrators or Liquidators to residential home builders where they are insolvent. In one recent matter, there has been an instance where the HWI policies were not adequate to cover all costs incurred in completing the homes. We highlight in this article some important considerations customers should give if such an event occurs.

HWI is taken out by the residential home builder and is designed to cover customers. From 1 July 2010, the NSW Self Insurance Corporation, trading as the NSW Home Warranty Insurance Fund, took over as the sole provider of home warranty insurance in NSW. QBE Insurance (Australia) Limited and Calliden Insurance Limited were appointed as insurance agents of the NSW Self Insurance Corporation, through a contractual arrangement.

Importantly HWI provides a set period of cover for loss caused by defective or incomplete work in the event of the death, disappearance or insolvency of the residential home builder.

From 1 July 2002 a key element of a HWI policy is that it must indemnify beneficiaries (i.e. the customer) for non-completion of work due to early termination of the building contract. Insolvency of the residential home builder typically results in the termination of the building contract.

Critically from 1 February 2012, a HWI policy:

  • is required to be obtained where the contract price is over $20,000 or, if the contract price is not known, the reasonable market cost of the labour and materials involve is over $20,000; and
  • must provide cover of at least $340,000.

Relevantly claims for incomplete work are limited to 20% of the contract price (up to a maximum of the cover provided under the policy). It is this aspect that we believe is not always well understood by customers and indeed the residential home builder when insolvency occurs. We have set out below a recent matter we were appointed to highlight how HWI works when an insolvency event occurs resulting in the termination of the building contract.


  • Contract value for construction of home $300,000;
  • Costs paid as at insolvency event by home owner for first stages of construction $100,000;
  • Invoice issued by residential home builder for work completed but unpaid $25,000; and
  • Balance outstanding under contract at time of insolvency event / Liquidation: $200,000.

At the date of insolvency, the Insolvency Practitioner is often provided with a debtors listing relating to progress claims made by the residential builder. The recovery of each debtor is not always straight-forward and an accurate position regarding what the customer may owe (if any) can only be determined once the HWI is finalised. This can take many months to determine.

Given the above facts, the HWI and customer position unfolded as follows:

  • Following the liquidation of the residential builder, the customer lodged a claim under the HWI policy.
  • The Home Warranty Insurer arranged for an external consultant to inspect the dwelling to confirm / quantify the amount of works required to complete the contract.
  • The customer also had to prove to the Home Warranty Insurer the quantum of payments made to the residential home builder under the contract. In this case no “cash” payments had been made, but in circumstances where this occurs, this can create issues.
  • Three (3) quotes were obtained from different builders to complete the works. The Home Warranty Insurer then approved one of the builders to complete the works.
  • The certified costs to complete the dwelling were $250,000. Therefore, the customer paid the balance of the original contract price being $200,000 and made a claim for the additional $50,000 under the HWI policy.
  • In this case as the additional cost to complete the dwelling was less than 20% of the original contract price, the HWI covered the additional $50,000 that was required to complete the construction of the dwelling. Therefore there were no monies collectible under the outstanding progress claim in the Liquidation.
  • HOWEVER, if the certified costs had been for example, $285,000 (thus meaning the additional costs were greater than 20% of the contract price), then the customer would have had an uninsured loss to the extent of $25,000 that would have to be met from their own funds. In the particular insolvency administration concerned, there were 3 customers who ultimately had uninsured losses ranging from $25,000 to $60,000 per customer. Not insignificant!!

Unfortunately when an insolvency of a residential home builder occurs, it may take several months to work through this process and it will only be at the conclusion of the building contract once all of the costs are known, that the Liquidator would be in a position to determine if there is actually any debt owning by the customer.

It is important that customers get the right advice as to their position when their builder has been placed into some form of insolvency administration. We caution customers who want to go off miss-informed and complete the dwelling themselves as once this occurs they are likely to jeopardise any ability to claim on HWI.


Insolvency and Bankruptcy Numbers – Not What You Might Expect!

Welcome to our first Newsletter for 2014. A subject we are frequently asked about is what are the insolvency and bankruptcy statistics doing and what inferences can be gleaned from them. During the course of the calendar year we will be providing a regular commentary on movements. Set out in this article are graphs for NSW and Australia for corporate insolvencies and personal bankruptcies / personal insolvency agreements (“PIAs”) during the period 2010 to 2013 inclusive. Some key observations are:
Corporate Insolvencies

  • In both NSW and Australia appointments decreased by approximately 2% in the 2013 December quarter on the previous corresponding period (“PCP”).
  • In NSW there was a negligible change in insolvency appointments in 2013 on the PCP. However, nationally insolvencies increased approximately 1.8% in 2013 on the PCP.
  • In 2013 NSW maintained its average 39% of the national corporate insolvency market.
  • In 2013 creditors voluntary liquidations accounted for approximately 47% of all corporate insolvencies. Whilst some may express surprise about this, our own statistics broadly confirm this and given the relative ease via which this type of liquidation can be initiated by directors we believe it will continue to be widely used particularly by smaller corporates who no longer wish to continue in business.


Personal Bankruptcies / PIAs

  • In both NSW and Australia appointments decreased by approximately 9% and 8% respectively in the 2013 December quarter on the PCP.
  • In NSW there was a decrease in bankruptcies / PIAs of approximately 12% in 2013 on the PCP. Nationally appointments decreased by 10% in 2013 on the PCP.
  • In 2013 NSW maintained its average 33% of the national personal insolvency market for bankruptcies and PIAs.
  • The three (3) postcodes with the highest number of bankrupts in 2012/2013 were:
  • 2770: Mt Druitt and surrounding suburbs;
  • 2560: Campbelltown and surrounding suburbs; and
  • 2170: Liverpool and surrounding suburbs.

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It will be interesting to monitor the numbers as the year unfolds as to where they may head and what inferences can be taken from them about correlations with the overall state of the national economy. Whilst there appear to be several economic challenges ahead (for example a notable decline in business capex spending) we generally feel that insolvency and bankruptcies levels are likely to remain flat throughout 2014.