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.

payroll proposal

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

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.

 

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.

 

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

In Australia is the economy as robust as some economists would have us think?

Whilst interest rates in Australia are at historic lows and we remain in relatively good financial shape when compared to other Western Economies, what lies beneath needs to be understood.
During the calendar years 2010, 2011 and 2012 we have seen corporate insolvency levels across Australia increase on average at almost 4.5% per annum. Further, many SMEs are also reported continued periods of reduced or static profits.

Interestingly, household debt levels also remain at near historical highs, despite some media commentary to the contrary. Will this lead to an increase in personal insolvencies in  Australia? In Western Sydney, for example,  Bankruptcy and other forms of personal insolvency including Part IX arrangements are at a record.

Many family owned businesses are finding their bankers increasingly  difficult to  deal  with .Some  business  owners have reported that they  have  been asked  to  find  another bank despite having a long term and  successful relationship  with their  existing financial  institution. Is  this  really  the banks concern regarding the financial  health of these  businesses or simply an example of the banks focus on their own credit  rating?

It is clear that  some  industries are facing particular challenges in the current  environment .Accordingly at Jones Partners, we are commissioning a definitive report on the state of the Australian  Economy  from an insolvency perspective.The report will be the first of its kind and seek to set a new narrative amongst lenders and professional advisers and the business community generally in relation to insolvency trends and the economic outlook.

This report  will address;

  • Historical personal and corporate insolvency trends
  • Reasons  for major  company  liquidations, receiverships, and voluntary  administrations
  • Trends  in Bankruptcies and Personal Insolvency  Agreements
  • Industries  at risk

We  are delighted  to  be be associated with  IBISWorld, who will be looking at these issues and other issues surrounding various insolvency trends in Australia and overseas.This project will  be launched at an exciting presentation by  Phil Ruthven Chairman and founder of  Ibis World at  an exclusive event hosted  by  Jones Partners on the 3 July, 2013.The function  is  already fully  booked however a video  excerpt will be available via  download in  due course

Phil Ruthven says that the risks associated with company failures can be attributed as to ⅔  management issues relating to the company itself and only ⅓ to the industry.  Phil says that a bad company in a bad industry is sure to fail whilst a well-run company even in a tough industry has every chance of succeeding and possibly increasing market share.  The presentation will look specifically at what it takes for companies to be successful in tough times and look at those industries under particular threat having a regard to the current micro and macro-economic trends facing Australia.  there will also  be a  focus on the current uncertainties surrounding the political scene and the impact it is having on small and medium businesses.

I am looking forward to releasing the outcome of the project and I invite interested parties to contact me or make  comments below

In addition I have created a LinkedIn discussion group called “Business At Risk”   to encourage engagement in the project

 

Superannuation a useful way to protect personal assets of individuals

Asset ProtectionIt is true that superannuation funds are ordinarily protected property in the event that an individual becomes bankrupt.  There is however and exception to this general principle where a superannuation contribution has been made to defeat the creditors.  In particular Section 128 B of the Bankruptcy Act makes specific provision in relation to transfers of property to a super fund where it can be inferred from all of the circumstances that at the time of the transfer, the transferor was or was about to become insolvent.  The kinds of transactions envisaged by these provisions relate to unusually large and irregular payments that are outside of the normal scope of the individual’s contribution to superannuation.
Unfortunately there are no cases decided on what this constitutes.

One problem that does occur is that if an individual becomes bankrupt after receiving a lump sum distribution from a superannuation fund.  The protection afforded by Section 116 no longer applies as the funds received are simply divisible property within the meaning of the Bankruptcy Act.  In these circumstances a debtor would be wise to delay receiving superannuation money until after the date of the bankruptcy.

Another problem occurs in relation to self-managed superannuation funds.  Pursuant to the superannuation legislation, an individual who is a beneficiary under a self-managed super fund must be a trustee of the fund, either individually or as a director of a trustee company.  Unfortunately the legislation prevents a person who is a bankrupt from being a trustee under of a self-managed superannuation fund and the Corporations Act, prevents an individual from being a director of a company if that individual is bankrupt.  This means that whilst the intention of the Bankruptcy Act is to protect superannuation from creditors, in the case of a self-managed super fund there are practical difficulties.  One solution for an individual in these circumstances is to roll their superannuation into a retail fund.  Whilst this is not an ideal solution, particularly in that the individual, during the course of the bankruptcy loses control over the investment strategy in relation to the super fund, it does not of itself erode the protected nature of the superannuation, afforded by the Bankruptcy Act in relation to superannuation.

Finally, if the bankrupt receives their superannuation benefits by way of an annuity or pension, that will be taken into account by the trustee in calculating the bankrupt’s income for the purpose of the Compulsory Income Contribution Scheme.  Therefore an individual facing bankruptcy is much better to receive a lump sum from his or her superannuation fund rather than an annuity.

 

 

Protecting Inherited Personal Assets In the event of Bankruptcy

Protecting Inherited  Personal Assets In the event of Bankruptcy

One issue that frequently arises in relation to the administration of bankrupt estates is the difficulty of the bankrupt being a beneficiary under a Will.

Divisible property is defined broadly in the Bankruptcy Act and it includes, not only property owned by the bankrupt at the time of the bankruptcy, but also property acquired by the bankrupt after bankruptcy up until the time of the discharge, which is usually three years.  This is referred to as “after acquired property”.

The most common form of after acquired property is inheritance.  Simply put, if a bankrupt inherits money or property from a parent or some other person, that property forms part of the assets available to the trustee for distribution to creditors.  Of course, if the benefactor changes the Will and dis-inherits the individual, the problem is avoided, but on its own, this can have many practical problems quite apart from the enormous relationship issues that might be created amongst siblings.  In addition it is not uncommon for bankrupts to remain circumspect about their financial affairs when it comes to relatives particularly parents, and consequently, parents may be totally unaware of their children’s dire financial circumstances.

A useful solution to this problem would be to have a standard clause in every Will which specifically refers to a bankruptcy event and creates a testamentary trust in the event of the bankruptcy of any beneficiary.  Such a standard clause would avoid the necessity to revisit the Will in the event of a bankruptcy and the complications that may arise in these circumstances.

 

Asset Protection for Directors and Business Owners


Antecedent transactions

Business owners are often anxious about what might happen to their private assets should their business runs into difficulties and ultimately fail.

Many individuals contemplate transferring private property into some form of entity separate from the individual (such as a company or a trust), or transferring the property to a close relative or friend in the hope that if something untoward happened to them creditors would not be able to access the property.

Unfortunately the Australian Bankruptcy Act anticipates this kind of conduct and in certain circumstances affords provisions for a subsequent Bankruptcy Trustee to reverse the effect of a transfer.

In particular, two sections are relevant.  Section 120 of the Bankruptcy Act deals with transfers of property for undervalue or for no value at all.  Section 121 deals specifically with transfers of property with the intention of defeating creditors.

Undervalued Transactions

These provisions make void transfers of property within 5 years of the date of bankruptcy.  Certain kinds of property are of course exempted.  When the property is transferred to a related party, even if that party can demonstrate that at the time the transfer was affected, the transferor was solvent, i.e., can meet all his or her debts, the transfer may still be void if it is within 4 years of the date of bankruptcy.

The situation is a little easier if the property is transferred to an unrelated party.  In those circumstances, the relation back period is only 2 years.

What this means is that if an individual decides to transfer his house, for example to his daughter, and at the time of the transfer he has no debts or liabilities, the transfer may still be void as against a future bankruptcy trustee if the transfer is within 4 years.  This is because the transferee is a related party.

Transfers designed to defeat the creditors

These provisions introduce the concept of intention to defeat the creditors and the Act specifically states that if the transfer is done at a time when the transferor is insolvent, then that is an indication that the transfer can be taken to have its main purpose in defeating creditors.  Clearly the fact that there is no time limit placed on reversing transactions of this nature, these provisions are very powerful indeed.

 

 

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