Reinventing the ATO – More Insolvencies & Bankruptcies Possible!

Tax Commissioner Mr Chris Jordan has said in a speech to the Tax Institute on 19 March 2015 that the Australian Taxation Office (“ATO”) is bringing forward the point at which it takes legal action to recover debts from both individuals and companies.
Is this a good thing or bad news?

As a Registered Liquidator and Registered Bankruptcy Trustee, I see too often the impact of when family business owners (or SMEs) and individuals don’t treat the ATO with the same priority as other creditors. Left unresolved it typically means the forced liquidation of a company or bankruptcy of the individual. Consequently, I believe the recent announcement is a good thing for a couple of main reasons:

  1.  It provides other businesses that are tax compliant with a level of confidence in knowing that the ATO is taking more of a pro-active stance in recovering businesses taxes; and importantly
  2. Any effort that causes business owners or individuals to seek professional advice from insolvency and business recovery specialists at an early stage, thus with a greater chance of avoiding liquidation or bankruptcy is a good thing. Isn’t it!

Mr Jordan also indicated that “despite our increased efforts, the amount of debt we have to collect has continued to rise in recent years”. This is concerning at a time when the budget position is deteriorating. Of significance is that the value of collectible debt was almost $19.5 billion at the end of June 2014 – up almost 10% on the previous year.

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He also went on to indicate that “we will be taking legal action earlier when warranted. This means initiating bankruptcy and wind-up action where there is evidence that a tax payer is insolvent, and looking to use other statutory powers where businesses have failed to pay employee superannuation entitlements or pay amounts held in trust. In the past, we have waited for taxpayer’s debt to escalate to an average over $300,000 before initiating bankruptcy proceedings, compared to other creditors who often take action at around an average of $35,000. For corporates, we wait for their debt to be more than $340,000 compared to other creditors who initiate action at an average of $93,000.”

The above statement indicates that the ATO is likely to look at recovery action along similar lines of a corporate. Further, the ATO has long held a view that PAYG withheld from an employee’s pay is in effect “money being held on trust for the ATO” and should not be generally used by the company as working capital indefinitely. This is a common misconception by a number of SMEs and not well understood.

Whilst the above comments were only one part of Mr Jordan’s speech titled “Reinventing the ATO” which is available from the ATO website www.ato.gov.au it does highlight the focus the ATO is putting into this area and others to improve outcomes and engagement with specific stakeholders.

The ATO already has significant tools at its disposal to aid in the collection process, for example Garnishee Notice and Director Penalty Notices, as well as the formal recovery actions such as Bankruptcy Notices and Statutory Demands – but importantly it needs to use these with reference to the above targets in mind and to act like a typical creditor seeking to recover amounts outstanding. It must however be transparent, talk in plain English and be fair in its recovery efforts. Such things are mentioned in the speech and the blueprint document available from the ATO website.

Only time will tell if all the talk amounts to anything real. Hopefully it does for the sake of all taxpayers.

If you find yourselves overburdened with tax debt and you are unsure how to approach dealing with it, give me a call and we can evaluate the options and devise a plan to deal with it. More information about options is available from our website jonespartners.net.au .

Will the Australian government’s “single touch payroll proposal” create more insolvencies?

The Australian government announced measures to cut red tape for business and to provide a simplified payroll system that would mandate or a “single touch payroll system”

The Australian Taxation Office (ATO) is currently conducting a consultation process in order to examine the consequences of this measure and has called for submissions from stakeholders.

Under “single touch payroll”, employers will be required to electronically report payroll and super information to the ATO (Australian Tax office) when employees are paid, using standard business reporting – enable software. This is different to the current situation where employee tax deducted from payroll is reported in the employers BAS and only forwarded to the ATO depending on the particular companies reporting requirements. Superannuation is only required to be forwarded 28 days from the end of each quarter. If the super deducted from employees pay is unremitted employers have three months to report the breach to the Australian taxation office.

The Institute of Chartered Accountants has been privy to the discussions behind this strategy and has shared some useful insights.

The “single touch payroll” proposal does appear to afford a considerable reduction in red tape and is therefore clearly very advantageous to business.

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This should make small businesses much more efficient and as a consequence reduce the likelihood companies going into liquidation or administration or directors facing personal bankruptcies

On the other hand there may be cash flow implications for small businesses in that they will be required to remit the employee deductions at the end of each pay period.create more insolvenciesIt is likely that this cash flow pressure will increase the numbers of company liquidations, administrations and receiverships due to the fact that company directors will be forced to approach insolvency practitioners at a much earlier time.

There is of course a very big advantage to the ATO that there will be an early warning where tax and superannuation are unremitted.

One of the biggest problems facing the economy so far as insolvent companies are concerned is that when a company is in financial difficulty and cash flow is tight it is too easy to use unremitted PAYG tax and super as working capital to fund the ailing business. (See Related Article Insolvency and the Tax Man Jekyll and Hyde)

The problem is compounded because the ATO appears to be somewhat inefficient in chasing up these outstanding debts. As a consequence the insolvent company is allowed to continue for a considerable time often incurring more debts and creating unfair competition in its industry environment.

In defence of the ATO it is frequently unaware of the liability because the employer has not lodged the appropriate documentation.

As a consequence so-called fraudulent Phoenix activity (See related Article Phoenix Fire Reignites) involving a succession of liquidated companies with a similar name, address and phone number employees and website—has become common.

The single touch payroll proposal is a practical way of solving this problem.

Call us or visit our website to see how our specialist team can help businesses facing financial pressure as a result of unremitted taxes and superannuation

Unemployment and Credit Card Debts – The Major Causes of Bankruptcy in 2014

Recent statistics issued by the Australian Financial Security Authority (“AFSA”) reveal that for the 2013/14 financial year unemployment/loss of income (8,418) and excessive use of credit card facilities (6,999) were the top 2 causes of personal insolvency. These causes have remained relatively stable since 2007/08 and are not necessarily a huge surprise.
Whilst not overly unexpected, in my experience as a Bankruptcy Trustee it does illustrate what I find commonly happens and should serve as a timely reminder for individuals who may find themselves in a position where their employment has been terminated.

When there is a loss of employment, it is not uncommon after the termination payment has been spent for there to be a tendency to rely on credit cards to continue funding expenses and lifestyles of the individual / family. After all there is a view taken that another job will be just around the corner. Or will it? What was just going provide very short term funding to get through then goes on for many months and additional cards frequently get added along the way. Before you know it there may be about 6 credit cards (and quite often more) all with between a $5,000 – $20,000 limit. Oh and I forgot to mention the odd personal loan and monies borrowed from family members. For example in 2014 I was appointed to a bankruptcy administration where the individual had accumulated 12 credit card debts with combined debts over $250,000. Ouch!!

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With no real change in employment circumstances (ie still unemployed) and no real trimming of family or personal expenses and being able to only make minimum payments, the whole position spirals quickly out of control. This cycle also quite often involves a health issue which can further exacerbate the feeling of helplessness. And then the calls start from the collection agencies appointed by the credit card providers which add more stress.

The statistics also reveal that for 2013/14 excessive use of credit for clerical and administrative workers was the most common cause personal insolvency.

When business confidence is low (ie because there isn’t much top line growth to be easily had in the business) there is a tendency by management to focus on headcount and other overhead expenses to meet profit targets and appease shareholders. This means looking at exiting certain staff. With the unemployment rate currently sitting at a stubborn 6.3%, individuals and households should regularly review their reliance on credit as a means to fund day to day expenses particularly where such debt is not being regularly cleared in full or substantially so.

None of us ever really know what is around the corner, however if we hit corner already burdened with credit card debt, the path then becomes a slippery slope. If you are finding that your financial position is getting out of control why not speak to us for initial free consultation. You can also visit our website jonespartners.net.au and read more blog articles on bankruptcy and related topics. If you would also like to know more about the recent statistics released, please visit www.afsa.gov.au .

Voluntary Bankruptcy – A big thank you from the Bankrupt! Strange – Not Really

Recently I received an email from a former Bankrupt whose bankruptcy I had been administering. The email said “thank you both for your handling of this matter. Whilst a stressful time, your communication and consideration was very much appreciated”.
This individual had accumulated a range of credit card debts of just over $350,000. The incurrence of such debts was largely due to some significant health and family issues that he had been trying to deal with over many years. However, it got to the point where he could no longer make any headway on the level of credit card debt, despite earning a six figure salary. The inability to reduce the debt was taking a toll on his health and overall future perspective.

Consequently after considering the various options, he declared voluntary bankruptcy. In years 1 and 2 of the Bankruptcy, certain realisations were made such as equity in real estate and receipt of compulsory income contributions. These realisations enabled a first interim dividend to be paid to unsecured creditors. All was going to plan.

Importantly, I recall prior to the voluntary bankruptcy commencing that I discussed the topic of “after acquired assets” with him. In particular, my example was that of an interest in a deceased estate that may arise during the 3 year period of a bankruptcy. Certainly, this was not anticipated as the relationship with his family members had become fractured and quite strained. In short, the interest acquired or that devolves upon a bankrupt at the commencement of or during their bankruptcy from a deceased estate is an asset of the bankruptcy and therefore available for the benefit of unsecured creditors.

During the latter part of the 2nd year of the bankruptcy, he received notification from the Executor of his Late Father’s Estate that he had been listed as a beneficiary to approximately ¼ of the Deceased Estate (this such share was worth approximately $400,000). This was quite a surprise given the relationship with his family. When I received such notification from the former Bankrupt and confirmed same with the Executor, I discussed a solution with the Bankrupt which saw me suspend for a period of time of the compulsory income contributions he was making. This afforded him some breathing space, whilst not jeopardising the position of unsecured creditors given the share (or distribution) expected from the Deceased Estate, ie it was going to be sufficient to pay out all unsecured creditors in full, including interest claims.

Subsequent to be notified of the interest, there was a regular exchange of information regarding the timing of the receipt of the Deceased Estate Funds, as well as timely distributions being made to unsecured creditors of the Bankruptcy. Very recently sufficient monies were received from the Deceased Estate whereby a final dividend distribution was made to unsecured creditors and the bankruptcy annulled by force of Section 153A of the Bankruptcy Act.

Whilst from my perspective as a Bankruptcy Trustee, I approached with this Bankruptcy with the same degree of care and skill as any other bankruptcy administration, it is clear that the individual was appreciative of the support, explanations and communications that he received from me and my staff which assisted in him being able to close at this chapter and commence a new one.  After all, there is light at the end of the tunnel for those in financial difficulty.

This bankruptcy administration was also a fantastic outcome for unsecured creditors who saw all monies owed to them repaid!!

Bankruptcy is often demonised by people that know little about it factually (the Jack of All Trades & Master of None!) or alternatively those that have been a recalcitrant bankrupt and did not get away with what they thought they could! Getting the right information about personal insolvency options and the outcomes can very often help alleviate (not eliminate) some of the stress that is part of making this important choice.

If you would like to know more about personal insolvency options or have a client in financial difficulty please do not hesitate to contact me.

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.

Facts

  • 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.

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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.

Strengthening Our Presence in Greater Western Sydney – Narellan Office

We are excited and pleased to announce the opening of our new South West Sydney Office at Narellan. Daniel Soire, a Principal of Jones Partners and a Registered Liquidator, is a local Macarthur resident and will be supervising the Narellan office.
For many years now, Jones Partners has truly valued the importance of being accessible to professional advisors and business owners and individuals throughout Greater Western Sydney (“GWS”). The GWS region is a very significant contributor to the States GDP and has a huge diversity in the range of businesses that operate within it. Our continued presence (via our Norwest Business Park Office) has enabled us to develop strong relationships with other professionals such as accountants, lawyers and financiers, as well as and importantly assist business owners and individuals in this region who may get into financial difficulty. Having a very strong and keen interest in what happens in the region also helps us to understand the factors that can affect SME businesses as well as individuals.

The new Narellan office puts us closer to fellow professionals and SME businesses and individuals when they need expert insolvency, restructuring or bankruptcy advice in South West Sydney. We believe this proximity and not “the ivory tower” approach is what such stakeholders are seeking when looking for specialist advice in corporate and personal insolvency and restructuring.

Our continued and sincere focus throughout the GWS region reflects the importance we place on ensuring that SME businesses and individuals in this region get the “right advice” when they may be in financial difficulty. Jones Partners are a Chartered Accounting Firm that specialises in the provision of corporate and personal insolvency and restructuring services. For more information go to jonespartners.net.au

Strengthening our Presence in Greater Western Sydney

For many years now, Jones Partners has truly valued that importance of being accessible to professional advisors and business owners and individuals throughout Greater Western Sydney (“GWS”). The GWS  region is a very significant contributor to the States GDP and has a huge diversity in the range of businesses that operate within it. Our continued presence (via our Norwest Business Park Office) has enabled us to develop strong relationships with other professionals such as accountants, lawyers and financiers, as well as and importantly assist business owners and individuals in this region who may get into financial difficulty. Having a very strong and keen interest in what happens in the region also helps us to understand the factors that can affect SME businesses as well as individuals.
To further build on our presence and focus in the GWS region, we are excited and pleased to announce the opening of our South West Sydney Office at Narellan. As with our Norwest Business Park Office, the new Narellan office puts us closer to fellow professionals and SME businesses and individuals when they need expert insolvency, restructuring or bankruptcy advice in South West Sydney. We believe this proximity and not “the ivory tower” approach is what such stakeholders are seeking when looking for specialist advice in corporate and personal insolvency and restructuring.

Our continued and sincere focus throughout the GWS region reflects the importance we place on ensuring that SME businesses and individuals in this region get the “right advice” when they may be in financial difficulty. Jones Partners are a Chartered Accounting Firm that specialises in the provision of corporate and personal insolvency and restructuring services. For more information go to jonespartners.net.au

Personal bankruptcies decline for the quarter ended 30 June 2013

The quarterly personal insolvency statistics for the June quarter 2013 show that personal insolvency activity declined by almost 1.4% when compared to the June quarter 2012. Interestingly NSW, QLD, WA and Tasmania all recorded falls in personal insolvency activity whereas Victoria, SA, ACT and Northern Territory all recorded increases.
Bankruptcy numbers (which accounts for approximately 68% of the personal insolvency numbers for the June quarter 2013 ) actually fell by 3.93% when compared to the June quarter 2012. NSW accounted for approximately 32% of bankruptcies across Australia for the June quarter 2013.

Personal Insolvency Agreements (also known as Part X Arrangements) also declined for the quarter by almost 24%. However it should be remembered that they only account for only about 1% of the total personal insolvency activity numbers. Part X Arrangements whilst still a viable option have significantly reduced in number over recent years as creditors tend to take a more active role in ensuring that individuals are held to account within the terms of the Bankruptcy Act. As such the prevalence of Section 73 compositions can tend to be more favorably considered by creditors because the Bankruptcy Trustee has had adequate time to investigate the individuals financial affairs. Therefore creditors can have more confidence if a Section 73 proposal is than put to them during the bankruptcy.

As a Registered Trustee, I regularly advise individuals in financial distress about the options available to them so that they can take control of a very stressful period in their lives.