by Clayton HellenChanges to the corporate tax rate – are your franking credits affected?
Changes to the tax laws commencing the 2018 financial year were introduced to provide tax relief to smaller companies. Instead of the blanket 30% corporate tax rate across all companies, the following rates apply:
A base rate entity is a company for which:
- no more than 80% of its assessable income for the financial year is passive income; and
- aggregated turnover does not exceed:
- $25 million for the 2018 financial year;
- $50 million for any of the 2019 financial years onwards.
Included in the definition of passive income are corporate distributions (excluding non-portfolio dividends) and franking credits on those distributions, and any amount received from a trust to the extent that it is referable to passive income.
While the reduction in corporate tax rate provides welcome relief to small businesses operating out of corporate structures, there may be serious implications to franking accounts where a trading company was previously taxed at 30% but is subsequently regarded as a base rate entity.
It is common to structure ownership and operation of a business via a trading company in which the shares are held by a discretionary trust. One of the beneficiaries of the trust is a bucket company that receives income from the trust so that trust income is not taxed in the hands of the trustee at the highest marginal rate but at the lower corporate tax rate. If the bucket company has been receiving income franked to 30% and has accumulated significant franking credits at this rate but it then becomes a base rate entity, it can only frank dividends to the lower tax rate which may lead to an excess of unusable franking credits.
More seriously, the bucket company may be liable to pay top-up tax in the following scenario: The trading company is a base rate entity and pays a dividend to the trust franked at the lower rate. The trust distributes the dividend to the bucket company, but because the distribution came from a trust (and therefore the bucket company does not have at least a 10% voting interest in the trading company excluding it from the definition of “non-portfolio dividend”) the income will be deemed to be passive income and the bucket company will not be regarded as a base rate entity. As a result, the bucket company must pay tax at 30%.
It remains to be seen if the Department of the Treasury will address the indirect effects of the change to corporate tax rates on company franking accounts. In the short term, anyone using a bucket company to retain profits should carefully consider the effectiveness of the strategy in light of these changes.
by Clayton HellenAustralian Consumer Law: Warranty against defects and the mandatory statement to be provided to consumers
Are you a service business and do you guarantee that if the goods or services your supply are defective you will repair or replace the goods, provide again or rectify the services, or compensate the consumer? If so, from 9 June 2019 you will be required to include, in all documents containing your warranty such as your terms and conditions, marketing material, receipts, product packaging or consumer contracts (Warranty Document), one of the following statements which best suits your business:
Existing Requirements
Even if you only supply goods to consumers you are required to provide the following statement to your consumers in a Warranty Document:
Our goods come with guarantees that cannot be excluded under the Australian Consumer Law. You are entitled to a replacement or refund for a major failure and compensation for any other reasonably foreseeable loss or damage. You are also entitled to have the goods repaired or replaced if the goods fail to be of acceptable quality and the failure does not amount to a major failure.
Businesses that do not comply with the requirements of the Australian Consumer Law risk fines of up to $50,000 for companies and $10,000 for individuals per breach. Given the upcoming changes it is a timely reminder that you should ensure that your warranties should be documented:
1. transparently;
2. to concisely note:
a. what the consumer must do to claim the warranty
b. what you will do to honour your warranty;
c. who will bear the expenses of the warranty and if relevant how the consumer can claim such expenses from your business;
3. to prominently state your business’ name, address, telephone number and email address;
4. to clearly state the length of the warranty and the time frame in which a consumer may claim the warranty.
Exceptions
Businesses are not required to display the mandatory statements noted above in relation to:
- the transportation or storage of goods for the purposes of a business, trade, profession or occupation carried on or engaged in by the person for whom the goods are transported or stored;
- services supplied under a contract of insurance; or
- supplies of gas, electricity or a telecommunications service.
In addition to the exceptions noted above, Parliament may amend the Competition and Consumer Regulations 2010 (Cth) to exclude the supply of certain goods from the operation of the Consumer guarantees in the Australian Consumer Law; however, as at the date of this article no additional exceptions have been provided.
If you would like us to prepare new terms and conditions for you or review your existing warranties, or if you would like to obtain further advice in respect of the Australian Consumer Law please don’t hesitate to contact us.
by Clayton HellenUpdate: Trust attack averted (for now)
Last week we advised on the threats facing discretionary trusts as a structuring tool, particularly in light of the Australian Labor Party’s (ALP) plans should they win power at the federal election on 18 May 2019. As we now know, the Liberal-National Coalition defied all expectations not only to retain power but to be able to form government in its own right. The incumbent Morrison government campaigned against the ALP’s policies of abolishing negative gearing, reducing surplus franking credits to low income earners, reducing the CGT discount from 50% to 25% and taxing distributions to beneficiaries of discretionary trusts at 30%.
With the government not having stated plans to introduce any of the ALP’s policies, the tax effectiveness of the discretionary trust is safe – at least for the next few years – by allowing the splitting of passive income amongst beneficiaries to achieve the most beneficial tax outcome for the trust beneficiaries as a whole. Coupled with the benefits of asset protection and access to a CGT discount which looks like remaining at 50% for the foreseeable future, the discretionary trust remains a highly recommended structuring vehicle.
by Clayton HellenAsset protection and income splitting after the federal election
Legal and financial advisors have long advised clients on the advantages of structuring their affairs using discretionary trusts, the two most notable of which are asset protection and income splitting. Assets held in a discretionary trust cannot be said to be owned by any specific beneficiary as no beneficiary is absolutely entitled to any such asset, and passive trust income can be split amongst beneficiaries to achieve the most beneficial tax outcome for the trust as a whole.
In the last 15 years the asset protection benefits of a discretionary trust have been eroded by the powers of the Family Court in family law matters, and since the decision of the Federal Court in the Richstar decision1 in 2006 there has been an argument that such erosion should also apply to matters involving the insolvency of trustees of discretionary trusts, by equating effective control of a trustee to a proprietary interest in the assets of the trust.
More topically, the income splitting benefits of discretionary trusts have come under attack from the Australian Labour Party, which is seeking to ameliorate the advantage should they win power at the Federal election to be held on 18 May 2019. The ALP’s plan is to tax all distributions from discretionary trusts to adult beneficiaries at 30%, regardless of the marginal tax rate of the beneficiary, from 1 July 2019. This policy targets the ability of the trustee to direct passive trust income to adult beneficiaries who currently earn less than $38,370 per year (taking into account the low-income tax offset) and whose income is therefore subject to a maximum 19% marginal tax rate. The ALP cites the independent Parliamentary Budget Office in claiming that these changes will lead to an additional $4.1 billion in taxes raised by the end of the 2022 financial year.
So where does this leave the discretionary trust if the ALP wins power at the election? It should be noted that the income splitting benefits of such trusts would only be reduced rather than entirely abolished. In taxing distributions to individual beneficiaries at 30% the ATO would be bringing all beneficiaries under a discretionary trust into line with “bucket companies” the income of which is taxed at a flat 30%. This means that a distribution of $139,000 or more to a beneficiary who has no assessable income in a given financial year will not be affected by the changes. Below this level of distribution, however, the changes will be felt.
Regardless of whether the ALP wins the election, discretionary trusts will remain an important structuring tool from as asset protection perspective. The fact that no one beneficiary can be said to have an entitlement to an asset of a discretionary trust allows risk of individual beneficiaries to be quarantined. In this context it is important to acknowledge that the Richstar decision has not been followed subsequently by courts, has been confined to the particular statutory context in which that case was decided and has been subjected to significant academic criticism. The flexibility of a trustee to distribute income and assets to beneficiaries will remain and, while the ALP has suggested in a separate policy a reduction in the percentage of the capital gains tax discount, there is no suggestion that it will restrict access of discretionary trusts to the discount. Moreover, where allowed by the succession legislation of the relevant jurisdiction, discretionary trusts will continue to be effective in estate planning.
Rostron Carlyle Rojas Lawyers is a full service law firm with expert Lawyers in Brisbane and Sydney. We offer our services globally, in wide array of legal areas including: Corporate and Commercial Law, Insolvency Law, Construction Law as well as Family Law to mention a few.
Don’t hesitate to contact us if you would like to discuss the use of discretionary trusts or structuring in general.
by Clayton HellenTerms and Conditions of Trade – what to include and what not to include
The terms and conditions of a business are often the foundation of the agreement between a business and its customers for the provision of goods or services and in some instances may be the only documentary proof of the agreement.
Given the importance of a terms and conditions document, businesses must ensure that it is robust, accurate and up to date, particularly given the changes that have occurred to key pieces of legislation in recent years. A small investment in a review of terms and conditions can have a large return in the form of protecting the business’s rights and potentially recouping outstanding monies.
The commercial terms and conditions should be clear:
Including price, method of payment, delivery, and dimensions, plans and specifications. Beyond these fundamental commercial provisions, the terms and conditions should also include reference to the nature of a quotation and how such a quotation can be accepted. Even though acceptance at law may differ from the general meaning of acceptance, specifying in the terms and conditions the circumstances giving rise to acceptance will provide prima facie agreement by the parties as to when the contract is entered into. Similarly, the terms should cover the time of risk passing in goods supplied, and the granting of access to premises of the customer where services are to be provided at the customer’s location.
Many terms and conditions lack provisions that strengthen the business’s rights particularly in the instance of default of the purchaser. Notwithstanding the impact of the Personal Property Securities Act 2009 (Cth) (PPSA) (discussed below), it is useful for terms and conditions to contain a provision defining when title to goods passes and when it is retained by the supplier – again, this might be sufficient at first instance to provide protection to the supplier. Stronger protections can be found in charging clauses pursuant to which the supplier may take a mortgage over real or security interest over personal property of the customer. Such provisions should be coupled with a power of the supplier to appoint a receiver or receiver and manager in the event of default by the customer, under which the receiver has the power to do anything that either the customer or supplier can do, including to sell property of the customer to satisfy debts to the supplier. Suppliers should also seek to obtain a personal guarantee from a director of a corporate or trustee customer; this provides a strong disincentive for a customer to default as the guarantor will face the risk of bankruptcy should the debts of the customer not be paid. Another form of protection for a business, at least at first instance, is a clause under which the parties agree to limit the supplier’s liability and to define the manner in which defective goods or services are dealt with. While such clauses must expressly be subject to statutory warranties and guarantees (discussed below) they may generally serve as a first level of protection against potential claims by customers and can also expressly exclude liability for indirect or consequential loss and loss caused by the actions of the customer. The terms and conditions should also contain clauses relating to the circumstances under which the supplier is entitled to cease supply and when the agreement may be terminated so as to reduce or avoid uncertainty.
It can often be a commercial decision as to which of these protective provisions to include in terms and conditions as a supplier does not want to scare away potential customers. Alternatively, it may be the case that the provision is always included but the supplier’s actions can mitigate the effect of the provision. One example of this is the creation of a security interest under the PPSA and subsequent registration on the Personal Property Securities Register (PPSR). The elements required to give rise to a security interest that may be registered on the PPSR – attachment, the type of collateral used as security, whether the interest is a purchase money security interest (if applicable) – should always be expressed in the terms and conditions; however, a supplier may choose not to register the security interest on the PPSR to keep the customer onside. Strictly speaking, security interests should be registered on the PPSR within 20 business days of entry into the agreement in order to give the supplier protection should the customer go into liquidation within 6 months, so by not registering its security interest the supplier is risking the loss of its products or its right to claim priority over the personal property of the customer in the event of default. Unfortunately, this is a risk that a supplier who is just starting out and who has little bargaining power may be forced to take.
Certain types of clauses should not appear in terms and conditions due to the impact of legislation. Under the Australian Consumer Law (ACL), suppliers of goods and services are taken to give certain consumer guarantees that cannot be contracted out of, including guarantees as to:
- acceptable quality
- fitness for any disclosed purpose
- due care and skill
- reasonable time for supply
Not only will any provision in terms and conditions that purports to exclude, restrict or modify such guarantees be deemed void, the supplier will have committed an offence of having made a false or misleading representation in respect of the guarantee, exposing a corporate supplier to a pecuniary penalty of up to $1,100,000 and an individual supplier to a pecuniary penalty of up to $220,000. The supplier will be equally exposed if its terms and conditions contain a provision seeking to avoid all liability for defective or damaged goods, as the ACL provides for minimum thresholds for repair or replacement of goods and supplying services again.
Other types of clauses will be impacted by legislation regardless of what is written in the terms and conditions. For example, the ACL also provides that if a supplier uses a standard form consumer or small business contract which contains an unfair term, the term will be considered void. A business’s terms and conditions will usually be considered a standard form contract as they will be prepared in advance and not be subject to negotiation. The ACL provides examples of unfair terms, which include provisions that allow one party but not the other to:
- avoid or limit performance
- terminate the contract
- vary the terms of the contract
- vary the price without giving the other party the right to terminate
- renew or not renew the contract
- assign the contract
While potentially impractical, one means of avoiding the imposition of the unfair contracts regime is to allow customers the right to negotiate terms and conditions; another is to clearly notify the customer of which terms in the contract give unilateral rights to the supplier. A more practical approach, however, is to have the terms and conditions reviewed and updated to ensure that no such unfair terms exist.
Our experienced commercial lawyers can provide you with peace of mind by reviewing and updating your business’s terms and conditions. Please don’t hesitate to contact us.
by Clayton HellenInsolvency Law reforms and its impact on business and directors
The Insolvency Law Reform Act 2016 (Act) is due to commence operation on 1 March 2017 and is the first set of reforms proposed by the Australian National Innovation and Science Agenda (NISA).
The Act is generally a consolidation of the current rules which govern corporate and personal insolvency, as currently split between the Bankruptcy Act 1996 (Cth), the Corporations Act 2001 (Cth) (Corporations Act) and Australian Securities and Investments Act 2001 (Cth) and makes a number of changes including:
- increasing the powers of ASIC to regulate corporate insolvency;
- the registration of insolvency professionals;
- the introduction of a minimum remuneration of insolvency professionals without the need to hold a creditor’s meeting; and
- the improvement in the position of creditors to request information and review estate or external administration.
NISA proposals
The second set of reforms recommended by the NISA proposals paper (Proposal) issued in April 2016 if adopted will have a significant impact on business given the proposals include:
Reduction of bankruptcy period
The proposal recommends that the current default bankruptcy period be reduced from 3 years to 1 year with the effect that many of the restrictions placed on bankrupts such as obtaining finance and prohibition on overseas travel are reduced to 1 year. Despite the proposed reduction in the bankruptcy period, the proposal recommends that the period for the obligation to repay the bankrupts debts remain set at three years. In addition to the above the bankruptcy period may be extended up to eight years with income contributions to continue for that period. We note that any perceived risk as result of this change is easily mitigated by conducting bankruptcy searches as is appropriate due diligence for commercial transactions such as business acquisitions and loans.
Safe Harbour proposals
In addition the proposal seeks the introduction of safe harbour provisions to protect directors from personal liability for insolvent trading. The proposal has set out two models for the safe harbour provision with one being a defence to insolvent trading whilst the other will be a carve out and would require the liquidator to prove that the safe harbour provision should not apply. The two models are as follows:
- under the Model A, the directors would be able to absolve themselves of liability by appointing a restructuring advisor to develop a turnaround plan for the company; and
- under Model B, a carve out for s 588G of the Corporations Act would be introduced to allow directors to attempt to trade out of short term losses where it is reasonable to do so and any increases in debt do not materially increase the risk of loss to creditors.
These safe harbour provisions are aimed at providing directors with a restructuring option that allows them to retain control of the company whilst receiving formal advice rather than prematurely surrendering control to an external administrator. In relation to Model A, the recommendations have also provided for the defence to not apply where the director is disqualified at the time the debts are incurred, the defence is not satisfied, business activity statements have not been lodged or where there has been a significant failure to pay employee entitlements.
Both of the models discussed above contemplate the appointment of a restructuring adviser to lead the proposed turnaround activity and provide advice on the reasonable courses of action, whether the business is in fact reasonably capable of being saved. At this point in time it is uncertain what type of professional this adviser is likely to be; however the Proposal has noted that the restructuring advisor will need to be an accredited member an organisation approved by the Minister and that such organisations are likely to include (but not be limited to) the Law Society, CPA Australia, Chartered Accountants Australia and New Zealand, the Australian Restructuring, Insolvency and Turnaround Association and the Turnaround Management Association.
The main impacts of this proposal if adopted will likely be:
- insolvent trading claims becoming even less frequent, given the difficulty and expense required to pursue; and
- encouraging businesses and directors when facing financial distress to act much earlier in an attempt to fall within the safe harbour provisions;
- greater transparency with creditors as directors attempt to take reasonable steps in an attempt to save the business; and
- directors fully investigating the possibilities of restructuring and trading out of short term losses, without penalty of trading a company whilst insolvent where under the current regime they would likely resign or cease trading and apply for voluntary administration.
Ipso Factum clauses
The last recommendation of the proposals is that clauses which allow a contract to be terminated solely due to insolvency event are made unenforceable or void where the company is undertaking a restructure. The aim of this proposal is to prevent trade creditors and suppliers undermining the voluntary administration process by refusing to provide goods and services despite them still being paid on the basis of insolvency event.
It should be noted that this proposal does not affect the termination of a contract for reasons other an insolvency event such as non-payment of fee or the non-performance of the contract.
If you need advice on what this means for you and your business, contact us now or visit our dedicated insolvency space.
by Clayton HellenThe Pitfalls of Do It Yourself Wills
The purpose of drafting a will is to ensure that your assets are distributed according to your wishes when you pass away. As such wills and estate planning may appear straightforward particularly since will kits can be purchased from your local newsagent; However…