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Ignorance Is Not Always Bliss

March 1, 2018

Many business owners set out with a view that the sky will always be blue.  Maintaining a positive outlook is important however, as we all know, the weather can change unexpectedly and quickly. All too often we meet with business owners who are neither aware nor prepared for the impact an adverse event can have on them and their family personally.  We often liken this to being caught in the rain without an umbrella.

 

In our role as advisors raising awareness of key risk areas is extremely important to mitigating collateral damage that can cause a business venture to fail.

 

We will now take a very brief and practical look at some of the common risk areas from a director’s perspective:

 

 

ATO Director Penalty Notices

 

Director Penalty Notices (DPN’s) are designed to encourage compliance with Australian Taxation Office (ATO) reporting obligations. By lodging activity statements and reporting superannuation on time, directors will mitigate personal exposure. Incoming directors can also be affected by historical non-compliance with tax obligations, so it is imperative to undertake proper due diligence prior to accepting a role as director.

 

 

ATO – Non-Compliance Tax

 

If a company doesn't comply with its PAYG withholding obligations, a non-compliance tax (NCT) may be payable by you if you are a director or an associate of the director of a company.  The definition of an associate adopted by the ATO can be wide reaching.

 

The purpose of NCT is to encourage companies to meet their PAYG withholding payment obligations by reversing the benefit of related party tax credits.

 

 

Related Party Lending

 

It is common for directors and related parties to draw funds from a business without thinking about when and how the loans will be repaid. When times are good there is usually not even a second thought given. At some point however, these loans will need to be repaid. 

 

 

Credit and Loan Applications

 

Always read the fine print to identify personal guarantees and clauses charging personal assets, such as real property like the family home.

 

It also pays to be conscious of who has been requested to sign a personal guarantee before complying with the credit providers’ terms of trade. We have seen several examples this year alone where non-directors (usually spouses of directors) have co-guaranteed a trading debt with a supplier with no commercial justification for same.There are some instances, however, where there may a commercial reason for requiring a guarantee from a non-director, such as an overdraft where the family home is used as security.

 

 

Preference Claims

 

It pays to be aware of who the company is paying and when. Preference payments only come into play when a company enters liquidation and the liquidator makes a preference claim against a creditor. Seeking specialist advice before entering liquidation can help mitigate this potential issue.

 

 

Insolvent Trading

 

This is a more well-known risk associated with being a director of a company as well as being a complicated area of the law.What is important, is that directors need to closely monitor the performance of their business and if there is any doubt about solvency, independent advice should be sought at the earliest opportunity.Insolvent trading claims can also be made against individuals who are not directors if the liquidator is able to establish that the relevant individual has been performing duties consistent with those of a director.

 

 

With the new Safe Harbour provisions, that came into effect on 19th September 2017, it has never been more important to be able to recognise the warning signs and seek advice early.

 

At de Jonge Read, we are here to help by providing independent advice to business owners who are concerned about the health of their business and to fully understand the risks associated with same.

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