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We are proud to announce the appointment of Shannon Adams as a Partner at Norman Waterhouse.
Shannon is a member of the Law Council of Australia's Financial Services Committee and is the South Australian contact regarding Consumer Credit Code issues. Shannon is also the State's representative on the Management Committee of the Association of Compliance Professionals of Australia. Shannon and his Financial Services Team will add further financial and insurance services expertise to the full range of commercial services available at Norman Waterhouse. Senior Associate, Edytka Mizgalski, has joined Shannon's team along with newcomers Associate, Leonie Wood, and Senior Recoveries Officer, Andy Koppany.
Normans is also delighted to announce the promotion to Senior Associate of Damian McGrath of our Asset Protection Team.
New arrangements are proposed for the taxation of independent contractors who derive income from providing personal services. These new rules were to be effective retrospectively from 1 July 2000, but this position has been confused by recent guidelines, amendments and promises from the Australian Taxation Office (ATO) to review the situation.
The Federal Government originally announced that the rules in relation to the alienation of personal services income would be changed as they apply to certain individuals who provide services as an agent to a principal, whether this be through another entity such as a company trust or partnership associated with the individual.
Independent contractors affected by the measure will generally have the same deductions available to them as are available to someone earning income as an employee. In contrast, a contractor operating through a company, partnership or trust will find that:
However, if a contractor (or its entity) operates a personal services business it will generally not be affected by these measures. If in an income year, each of the contractor's clients (counting associated clients as one client) provides less than 80 per cent of the contractor's income in that year, the contractor may apply a test to determine whether it operates a personal services business under a self-assessment process discussed below. However, if 80 per cent or more of the contractor's annual income is from one client (including associates of that client), the contractor will not be regarded as conducting a personal services business unless it obtains a personal services business determination from the ATO.
The test of whether a contractor and/or its entity operates a personal services business depends on whether the contractor or entity:
Confusions arising out of this position have lead to the ATO agreeing to rework the draft ruling on these issues as a matter of priority. In the meantime, transitional arrangements have been put in place for taxpayers with extra PAYG obligations as a result of these measures. In brief:
For further information about issues covered in this article, please contact Kim Evans, Senior Associate on +61 8 8210 1287 or E-mail kevans@normans.com.au.
It is common practice for companies to take advantage of their suppliers' failure (for whatever reason) to promptly take debt recovery action where the company does not pay invoices on time. However, as demonstrated by the recent decision of the Full Court of South Australia in Powell and Duncan v Fryer, Tonkin and Perry, directors of companies should take great care not to rely on their suppliers' goodwill or disorganisation as the case may be in order to maintain cash flows.
The case concerned a manufacturer of trailer yachts which was proven to have been trading whilst insolvent. The liquidators of the company sought to rely on the insolvent trading provisions of the Corporations Law to recover debts owed by the company from the company's directors. These provisions allow liquidators to recover from directors the amounts of debts owed by the company if those debts were incurred whilst the company was trading whilst insolvent. The directors of the company sought to rely on Section 588G of the Corporations Law which provides a defence to a director against any such action if he or she can prove he or she had reasonable grounds to expect, and did expect, that the company was solvent at the time that the debts were incurred and would have remained solvent even if the company had incurred those debts.
The principal director of the company argued that the directors reasonably believed that the company was solvent and would continue to remain solvent at the time the relevant debts were incurred for two reasons.
First, it was the practice of the company's creditors not to take recovery action provided that the company paid its debts within a reasonable time after the due date for payment (generally 30 days). Although there was no evidence of any such agreement having been reached with the relevant creditors, the principal director asserted that this practice could be relied upon by the directors in managing the company's financial affairs.
Both the Trial Judge at first instance and the Full Court on appeal rejected this first argument. As the company was not experiencing a temporary lack of liquidity, the directors could not rely on the possibility that the company's creditors would not insist on payment within 30 days in the future, even if they had done so in the past. The Trial Judge endorsed remarks of Debelle J in an earlier South Australian case, Carrier Air Conditioning Pty Ltd v Kurda, where he stated:
"A reasonable and prudent director would acknowledge that, while his company might have enjoyed periods of grace in the payment of its debts, there could be no reasonable expectation that that situation would continue."
Secondly, the principal director argued that taxes, employee entitlements and penalties for late payment of taxes were not debts for the purpose of determining whether a company is solvent under the insolvent trading provisions. In support of this argument the principal director asserted that the incurring of a debt involves an element of choice whereas levies, taxes and penalties are imposed without consent. On this basis, any obligation to make these payments could be ignored in determining whether the company had adequate cash flows to meet its other payment obligations.
Both the Trial Judge and the Court on appeal rejected this second argument and found that levies, taxes and penalties are debts and must be taken into account in determining whether a company is trading whilst insolvent.
The above case highlights the importance of directors ensuring that their companies only continue to trade whilst they are able to pay their debts as and when they fall due. If there is any doubt about the company's ability to pay its debts, advice should be sought from an insolvency practitioner at the earliest possible opportunity. Failure to take such steps may result in the directors becoming personally liable to pay the company's debts.
For further information about issues covered in this article, please contact Johanna Churchill, Senior Associate by E-mail jchurchill@normans.com.au.
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