New thresholds for definition of ‘large proprietary company’ mean your business may no longer be required to lodge audited financial reports with ASIC each year.

As of 1 July 2019, the Corporations Amendment (Proprietary Company Thresholds) Regulations 2019 (Cth) came into effect. This amendment to the Corporations Act 2001 (Cth) doubles the existing thresholds for determining whether a company is a large or small proprietary company for a financial year.

This change has reduced the financial reporting obligations and costs for many companies that now fall into the smaller proprietary company threshold, as instead of having to file financial, director’s and auditor’s reports to ASIC as large proprietary companies do, they will only be required to keep written financial records for each financial year.

New thresholds

Under the new amendments, a company will be a large proprietary company for a financial year if it satisfies two of the following criteria listed in the table below:

Similarly, the requirements to be considered a small proprietary company are simply if the company does not reach two of the three of the above thresholds.

What this means for you

As mentioned above, the reporting requirements for each financial year are significantly different between large and small proprietary companies. Companies deemed to be large proprietary companies must lodge financial, director’s and auditor’s reports at the end of each financial year, as well as maintaining a whistleblower policy. Preparing these reports takes time and money, and failing to lodge them results in penalties on the company and sometimes even its officers, so removing the necessity to prepare them is great in regards to saving time, money and effort.

Furthermore, these reports become publicly available after being lodged with ASIC. The effect being that other businesses and prospective customers can freely access your financial information, which can potentially lead to market disadvantages or loss of business. Being able to avoid the reporting requirements is a great advantage to small proprietary business.

Conclusion and recommendations

The Treasury released estimates that after these changes approximately one-third of proprietary companies that submitted audited financial reports to ASIC for the 2017-18 financial year will not be required to lodge financial reports for the 2019-20 financial year under the increased thresholds.

If you are a business owner that has been over the threshold for the large proprietary company criteria for previous financial years, we certainly recommend that you take full advantage of these changes and see if your company can now be reclassified as a small proprietary company. The financial, time and effort advantages gained by these changes can be huge, especially with respect to keeping your company’s private financial information out of the public domain.

On 14 March 2019, the Parliamentary Joint Committee on Corporations and Financial Services (Committee) released its 369-page report detailing its findings into the franchising sector, with regards to the franchising code of conduct .

The Committee has stated that comprehensive and broad reform is required to resolve issues within the sector which are systemic. They have also noted that the current regulatory framework is not addressing the power disparity between franchisors and franchisees. To address the issues identified and rebalance the power disparity the Committee has made 71 recommendations most of which are to be referred for further investigation by a Franchising Taskforce (Taskforce). The major recommendations are provided below:

Franchising code of conduct major recommendations

The Committee has recommended that the Taskforce be formed to further investigate potential regulatory amendments including:

1. the implementation of a public franchise register to be updated annually, with updated disclosure documents and template franchise agreements, by franchisors;

2. a requirement that the franchisor (and master franchisor) make disclosure to franchisees regarding the purchase of products below cost pricing, the margin on products and the rebates the franchisor receives for the purchase of such products;

3. investigating the conflict of interests associated with supplier rebates and third line forcing and whether the ACCC should be investigating these issues;

4. whether the Australian Consumer Law should be amended to expressly extend the unfair contract terms regime to franchises by deeming franchise agreements to be standard form documents and making breaches of this regime subject to civil penalties;

5. whether the Franchising Code of Conduct (Code) should be amended to prevent unilateral variations in documents such as manuals and policies unless the majority of franchisees (or their representatives) agree to the variation;

6. an amendment to the Code requiring rental amounts paid to the franchisor under a head lease to be held on trust solely for the purpose of paying rent to the landlord;

7. whether amendments are required to deal with franchisees’ rights in relation to goodwill when the franchise agreement ends or is transferred as part of a sale contract; and

8. whether the extent to which franchise systems involve sufficient co-investment and risk sharing such that they should be regulated similarly to financial products.

Additional recommendations to the franchising code of conduct

In addition to those matters to be referred to the Taskforce, the Committee has recommended that:

1. unilateral variations of franchise agreements be prohibited unless the majority of franchisees (or their representatives) agree to the variation;

2. mandatory quarterly reporting on marketing funds be required and civil penalties be introduced for failing to adhere to the reporting requirements. An additional recommendation is that legislation is amended to clarify how marketing funds are to be distributed in the event a franchisor is wound up;

3. extensive additional disclosure be required including:

a. provision of disclosures in both hard copy and digital copy formats;

b. for existing sites – the disclosure of financial information in the context of sales, including the previous 2 years’ Business Activity Statements;

c. for greenfield sites – the disclosure of financial information in the context of sales including the previous 2 years’ Business Activity Statements for a comparable franchise site;

d. provision of a copy of mandatory guidance on employment matters and overseas workforce issues as prepared by the Fair Work Ombudsman;

e. the disclosure of all rebates, commissions or other payments in relation to the supply of goods and services to franchisees as a percentage of the full purchase price on each transaction;

f. the disclosure of the reasonable personal workload to be undertaken in running and operating the franchise business; and

g. provision of a copy of the ACCC’s Franchisee Manual as part of disclosure.

4. existing whistle-blower protections be extended to cover franchisees reporting franchisors who are breaching the Code;

5. numerous changes to the cooling off provisions be made, including:

a. that the cooling off period commence on the later date of:

i. the franchise agreement being executed;

ii. an upfront payment being made to the franchisor;

iii. the disclosure documents being received by the franchisee;

iv. a copy of the lease being received by the franchisee.

b. clarification that the 14-day disclosure period must commence 14 days before the franchise agreement is executed; and

c. making the cooling off period applicable to transfers, renewals and extensions of the franchise agreement;

6. franchisees be able to terminate franchise agreements in circumstances where:

a. they are suffering hardship;

b. they are being exploited by the franchisor; or

c. the business has failed;

7. franchisor rights of immediate termination be limited to special circumstances such as fraud and public health and safety and require 7 days’ notice to be given to franchisees during which period the franchisee can lodge a dispute which causes suspension of the termination process until the dispute is resolved;

8. a class exemption be created to make it lawful for franchisees to collectively bargain with their franchisor;

9. arbitration be provided as an option if mediation is unsuccessful and multiple franchisees be able to take part in mediation or arbitration with Franchisors;

10. the ACCC be given power to identify and act on instances of systemic churning and burning (i.e., the repeated sale of a franchise site that is known to perform poorly or fail in order to make money from franchisees paying franchise fees).
Whilst the Committee’s recommendations are numerous and substantive, the report is part of a greater legislative process which will involve:
• the Government considering which recommendations to implement; and
• the formation of the Taskforce to provide further recommendations,
before Parliament will consider any legislative changes proposed by the Government.

Additionally given the recent joint media release by the Hon Stuart Robert, MP and the Hon Michaelia Cash which confirmed the Government is looking at strengthening the unfair contract terms regime, it is expected that the amendments proposed by the Committee will be considered as part of the Government’s review of the unfair contract terms regime.

If you would like us to prepare new franchise documents for you, review your existing franchising documents or would like to obtain further advice in respect of the Franchising Code of Conduct, please don’t hesitate to contact us.

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.

Company phoenixing or ‘phoenixing’ occurs where, the primary controllers of a failed company conducts the same type of business while using some or all of the former company’s assets.

When is Company Phoenixing illegal?

Despite the adverse stigma that is most commonly associated with ‘Phoenixing’, there are circumstances in which it can be legal. There are many examples and success stories where a person has revived the business previously conducted after the financially distressed company enters liquidation and its remaining assets are distributed to creditors.

However, such activity is illegal when this attempted resurrection comes before creditors are paid and where the use of the former company’s assets was uncommercial.

For example, John realizes that ‘John’s Farms Pty Ltd’ cannot pay its debts as and when they fall due. John therefore decides to transfer the company’s assets to the newly-incorporated ‘Johnno’s Farming Pty Ltd’ for little to no value before putting John’s Farms Pty Ltd into liquidation. In this way, John has avoided paying the creditors of John’s Farms Pty Ltd, and has not legally “phoenixed” from the old entity to the new entity.

The Impact of Company Phoenixing

Company phoenixing affects many trades and industries, and sadly, appears to be on the rise.

In 2012, phoenix activity was estimated by Price Waterhouse Coopers and the Fair Work Ombudsman to have costed the Australian Economy between $1.8 to $3.2 billion annually. A second report in July 2018 indicated that this figure could now be as high as $5.13 billion per year.

Unpaid trade creditors seem to suffer the most, making up approximately 61.8% of this figure, whereas unpaid employee entitlements are approximately 5.8% and unpaid taxes and compliance costs are approximately 32.3%.

What is being done about company phoenixing it?

Early in 2019, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 was introduced (but had not been passed into law prior to the Federal Election in May 2019). In summary, the Bill purports to:

amend the Corporations Act 2001 (Cth) by introducing new criminal offences and civil penalty provisions for officers who fail to prevent a company from making ‘creditor-defeating dispositions’;

Empower Liquidators in allowing them to apply for court orders in relation to voidable, creditor-defeating dispositions;

Enable ASIC to make orders for the recovery of company property disposed of under such a disposition; and

Improve the accountability of resigning directors so as to prevent companies being left rudderless.

Further, individuals who engage in “illegal phoenixing” can expect to receive a fine of up to $945,000.00 or imprisonment of 10 years for contravening these provisions whereas body corporates can expect to receive penalties of either $9.45 million or 10% of the entity’s annual turnover.

What you can do about phoenixing

Even if these measures are implemented, it is important for you to proactively assess a company’s circumstance.

As an employee, it is important to look for warning signs such as late payment or non-payment of wages, unpaid superannuation and entitlements.

As a creditor, one should be aware of late payment or non-payment of invoices which may indicate financial distress, as well as changes to company details.

Noting that officers of the company have certain duties under the Corporations Act 2001 (Cth), it is important to monitor the financial health of the corporation and ensure that decisions are made in accordance with key duties.

Often, the best way to ensure that your rights and obligations are being met is to seek advice.

How can we help?

Rostron Carlyle Rojas Lawyers are well appraised in the field of corporate law and are able to assist companies, company officers, creditors and employees in ensuring the discharge of their duties and protection of their rights. If you or someone you know requires further assistance, please do not hesitate to contact our Corporate Lawyers on (07) 3009 8444 or email us at [email protected]

Please note that this article has been prepared by Kishen Bhoola, Lawyer and settled by Sarina Mari Alwi, Senior Associate of Rostron Carlyle Rojas Lawyers. Its contents are for general information purposes only and does not by any means constitute legal advice, nor should it be relied upon.

With effect from 19 September 2017, the safe harbour reform came into effect, reflected in Section 588GA of the Corporations Act 2001 (Cth) (the Act). The practical effect of the reform was to encourage the turnaround culture of companies through innovation and strategic management instead of companies prematurely appointing a voluntary administrator.

What is a Safe Harbour?

The Act now provides an avenue for company directors to take steps against being held personally liable for a company’s inability to comply with their financial commitments. Section 588GA of the Act (the Safe Harbour Reform) provides that a director is not subject to an insolvent trading claim provided that upon suspecting that the company may become or is insolvent, they develop and implement one or more courses of action that are reasonably likely to lead to a better outcome for the company.

What are the requirements for the Safe Harbour Reform?

To determine what an appropriate course of action is, the Act provides a number of examples a Court is to consider in determining whether a director has in fact, complied with the Safe Harbour Reforms, such as, whether the director:

1. is properly informing himself or herself of the company’s financial position; or
2. is taking appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company’s ability to pay all its debts; or
3. is taking appropriate steps to ensure that the company is keeping appropriate financial records consistent with the size and nature of the company; or
4. is obtaining advice from an appropriately qualified entity who was given sufficient information to give appropriate advice; or
5. is developing or implementing a plan for restructuring the company to improve its financial position.

When do the Safe Harbour Reform provisions apply?

The Safe Harbour Reform provisions only apply to debts incurred (whether directly or indirectly) in connection with the course of action until such time that:

1. a ‘reasonable time period’ has passed; or
2. the course of action has ceased; or
3. the course of action is no longer reasonably likely to lead to a better outcome; or
4. the appointment of an administrator, or liquidator, of the company.

The phrase a ‘better outcome’ is defined in the Act as to mean “an outcome that is better for the company than the immediate appointment of an administrator, or liquidator, of the company.”

Debts incurred after the above circumstances may be subject to insolvent trading claims against directors.

What does this mean for directors?

Whilst the Safe Harbour Reform is intended for companies to strategically become more solvent, there is still a risk in relying on the Safe Harbour Reform as a defence to insolvent trading claims as the onus of proof is on the director should the matter escalate. So, while a director may think they are pursuing a course of action that is reasonably likely to lead to a better outcome, they need to be able to prove this. Due to this, many directors may decide to avoid the risk of not being able to successfully prove that their actions were in accordance with the Safe Harbour Reform and simply appoint voluntary administrators.

How can we help?

Our insolvency and commercial litigation team has extensive experience acting on behalf of companies and directors to reach positive outcomes. If you or someone you know requires further assistance with regard to directors’ duties or the Safe Harbour Reform, please do not hesitate to contact Rostron Carlyle Rojas Lawyers on (07) 3009 8444 or email us at [email protected]

Please note that this article has been prepared by Krishna Ramji, Law Clerk and settled by Sarina Mari Alwi, Senior Associate of Rostron Carlyle Rojas Lawyers. Its contents are for general information purposes only and does not by any means constitute legal advice, nor should it be relied upon.

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.