Protecting Your Business For Customers’ Insolvency

Running a business is all about managing risk – most acutely to avoid bankruptcy or insolvency. When providing services or goods to a customer, there is always the possibility that your customer will unexpectedly be unable to pay you according to your agreed trading terms or even leave your debt unpaid.

This has been highlighted recently in NSW with the collapse of a number of construction firms. Of all the companies going into administration in the financial year ending 2012, 22% were from the building and construction industry.

As a creditor, protecting your interests should be a high priority. The insolvency of a major debtor can severely impact your business and cash flow. Business owners and managers must consider the risks and develop strategies to mitigate them.

Perform background checks

Background checks seem simple but are often neglected in the haste to secure sales. A background check on a new or existing customer may reveal details of their business or trading history and that of the key individuals involved in your customer’s operations. According to a report in Forbes Magazine, two thirds of accountants surveyed considered that their clients did not check the background of customers thoroughly prior to entering into supply agreements. Consequently, creditors can be caught by surprise when a customer is unable to pay for goods and services.

Background checks may include Australian Securities and Investments Commission company searches, business name searches and personal name searches into the proprietors and managers of the business. Searches at the Land Titles Office in the name of the customer and the proprietors will reveal property holdings which may provide comfort when taking personal guarantees from directors. A search of the Personal Property Securities Register will reveal other parties that have an interest in the customer’s business assets. Credit Reference Association checks will reveal whether the customer has had difficulty fulfilling obligations to suppliers in the past.

Adverse findings after any of these checks may require you to reconsider your position.

Ensure detailed contracts

Contracts may include provisions for the execution of security agreements to ensure that the title for goods remains yours until the customer has paid for them in full. In doing so, should the customer become insolvent without paying for goods, you are able to be repossess those goods. Various terms such as claims to extend or change payment terms should also be clearly detailed in any contract, to prevent any uncertainty in the event of insolvency. Similarly, if late payments do occur, actions may be considered to prevent this happening again, as this can be a sign that your customer is experiencing financial difficulties. The information gathered in your background checks can be useful when drafting a contract. For example, if your prospective client has not fulfilled payment terms on previous contracts, you can use this information to justify a demand for full payment on delivery or shorter trading terms.

Register your interest in supply

Registering your interests on the Personal Property Securities Register (PPSR) may ensure that claims against your supply are enforceable and prioritised over other suppliers. In the event of insolvency, without registration and supporting security documentation, an administrator or liquidator may be able to retain your supply for the benefit of all creditors. To be enforceable, your interest must be detailed accurately on the PPSR and within time, otherwise the priority may be affected.

Keep accurate books and records

It is vital that you keep adequate, accurate and comprehensive records of all transactions, including written contracts, verbal communications and any claims made by customers. This will ensure that if a debtor does become insolvent, you will have evidence to support your claims, interests and rights regarding your supply.

Find ‘good’ customers

Easier said than done, however, reliable customers are particularly important for ensuring growth and smooth trading. Maintaining a good relationship with these clients will help keep your business sustainable and strong in the future.

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Insolvency Law Reform Bill 2013

Late last year, the draft Insolvency Law Reform Bill 2013 was released by the government for comment and suggestions. The first changes made under this Bill are to commence from September this year. The Bill will amend the Corporations, Australian Securities and Investments Commission and Bankruptcy Acts. It aims to:

  • Align and modernise the registration and disciplinary frameworks that apply to registered liquidators and registered trustees
  • Align and modernise a range of specific rules relating to the handling of personal bankruptcies and corporate external administrations
  • Improve the powers available to the corporate regulator to regulate the corporate insolvency market and the ability for both regulators to communicate in relation to insolvency practitioners operating in both the personal and corporate insolvency markets.

Those benefiting from the reforms will be businesses that become creditors of insolvency administrations.

Several provisions in the Bill will be of interest to creditors. They include:

  • Information may be requested from the insolvency practitioner outside their existing obligations. Provided the request is reasonable (i.e. the practitioner has enough funds to comply with the request), the practitioner is obliged to comply. Creditors will also have the authority to change default reporting requirements (as set out by regulations) that a practitioner is subject to, provided the changes are also reasonable.
  • Creditors will be able to appoint an assessor who would review the costs and remuneration incurred during an insolvency administration. This information may be used as the basis of a resolution to remove the insolvency practitioner and appoint a replacement, without having to firstly, apply to the Court.
  • Creditors will gain the authority to request that a meeting of creditors is convened on three conditions, namely, when resolved by creditors or a Committee of Inspection, when requested by at least 25% of the creditors, or by 10% of creditors who have lodged security for the cost of holding the meeting.
  • An insolvency practitioner would be required to gain the prior approval of creditors before deriving a profit or benefit from a transaction relating to an administration.

The amendments of the proposed bill have the potential to greatly benefit creditors. The proposed bill represents a new, transparent and more regulated stage in insolvency practice, and will strengthen the rights of creditors affected by insolvency administrations.


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Reminder-Super Guarantee Increase

Just a reminder that as of 1 July 2013 the super guarantee was increased to 9.25% and the upper age limit has been removed.

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Motor Vehicle FBT Changes

In July this year the Federal Government announced that motor vehicle Fringe Benefits Tax (FBT) rules were to be changed to remove the statutory formula method of calculating fringe benefits tax. Current novated leases or company vehicles will not be affected provided there is no material change to the lease condition. Car leases signed after 16 July 2013 will be affected by the proposed changes.

Previously, the taxable value of a car fringe benefit was calculated using one of two methods – the statutory method or the operating cost and log book method. The statutory method of calculating the FBT is calculated by taking 20% of the cost of the car, less any employee contributions.

The operating cost method of calculating FBT totals all the running costs of the vehicle (fuel, service, registration etc) and multiplies it by a personal use percentage of the vehicle as determined by the log book.

If the main use of the car is for private purposes the statutory formula will generally produce a lower taxable value than the log book method. If the change proposed by the Government is legislated, everyone who has a company vehicle will be required to keep a logbook for 12 weeks every 5 years justifying the business usage percentage of their car.

The federal opposition have stated that they do not support the changes and will not proceed with the policy changes if elected. However until the outcome of the election is decided it is important businesses consider the private use of any vehicles before purchasing a new vehicle.

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Self-Educated Expenses Cap Delayed

The Government has decided to defer the introduction of the $2,000 cap on work related education expense deductions until 1 July 2015.

Upon announcement of the policy change, there were widespread protests from the education sector and professional associations. The government have stated the delay will allow them to further consult on how to best target excessive claims while ensuring genuine continuing professional development is maintained.


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Budget, Income Tax Rate & Medical Expenses Offsets

Budgeting For The 2013-14 Financial Year
The end of a financial year provides an excellent opportunity to prepare Budgets and Cash Flows for the forthcoming year. Budgets and Cash Flows provide a timely resource. They give business owners an opportunity to reflect on their business and also look to the future. If you do need assistance with preparing Budgets and Cash Flows contact your Chartered Accountant.

Personal Income Tax Rates
The 2013 Federal Budget contained a number of significant taxation changes that will impact individual taxpayers. Individual income tax rates have remained unchanged and changes that were due to apply from 1 July 2015 have been deferred until 2017-18.

Medical Expenses – Tax Offsets
The 2013 Federal Budget announced that the Government intends to phase out the out-of-pocket medical expenses tax offset. Currently, a 20% tax offset can be claimed for eligible out-of-pocket medical expenses in excess of $2,060 per annum. For general medical expenses, only taxpayers who claim the offset for the 2013 income year will be eligible to claim in future years.

Individuals who have expenses relating to disability aids, attendant care or aged care will continue to qualify for an offset up to 2019.

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Warning Signs of Insolvency

By recognising the warning signs of insolvency and implementing strategies to minimise risks, accountants, owners and managers may potentially avoid business failure and take steps to minimise personal risk.

To determine whether a business is insolvent, a number of factors must be considered. Accountants, owners and managers need to assess their solvency and the following factors should be considered when making that assessment.

1. Business aesthetics
Not all indicators of insolvency may be found on a spread sheet. A tell-tale sign may be the ‘look’ of the organisation itself. A prosperous business is in a position to spend more on the upkeep of its premises. It stands to reason that if a business is struggling, it will not be able to divert funds to the maintenance of its premises.

Similarly, employees may provide an indication of the business’ success. Staff are usually aware of how successfully a business is operating, and their mood can reflect this. For example, a successful business may have happier, more productive employees, while staff morale would be low where a business is struggling.

2. Insufficient and inaccurate books and records
Section 588E(4) of the Corporations Act 2001 (Cwlth) states that “if a company does not keep comprehensive and correct records of its accounts and financial position, or if it does not keep records of a transaction for seven years after its completion, then that company will be presumed to be insolvent during the period to which the records relate.”

During tough times, owners and managers of a business may not focus on maintaining their books and records however, it is essential that these be maintained to avoid the statutory presumption of insolvency.

3. Forecasts and plans
Every business requires a detailed budget and cash flow for the coming financial or calendar year. Without these, business operators are unable to monitor results or make useful planning decisions. Any budget and cash flow must be based upon a logical and informed interpretation of data.

4. Dishonoured payments
Withholding of payments to creditors, bounced cheques and dishonour fees are good indicators of a business’ inability to keep up with payments when they are due and payable, or within the terms of trading agreements. This may be symptomatic of a business that is struggling to make ends meet, particularly where such payments are related to unpaid taxes or other statutory liabilities.

5. Increased aging of creditors
Any overall increase in the time that it takes to make payments to creditors can indicate that a business is struggling financially and may have limited cash flow to meet payment obligations.

In this situation a business may prioritise paying some creditors over others with large lump-sum payments, or choose which creditors to pay on time and which to pay late, depending on its need for the respective supply. These strategies may suggest that a business has had to ‘tighten its belt’ by restricting available funds and making payments to essential suppliers first to maintain trading operations.

6. Altered credit terms
When a creditor’s payments are continually delayed, creditors may respond by altering their trading terms with a business. For example, a supplier might reduce trading terms, enter into a payment plan to enable the business to pay an overdue account, or place them onto ‘cash on delivery’ terms until any outstanding amounts are satisfied.

These actions indicate that a business is no longer able to satisfy its debts as and when they are due, and that it is clearly experiencing financial difficulty.

7. Delay of tax payments
As detailed above, businesses with limited available funds may choose to prioritise certain payments over others. This might include paying the most essential supplier first. Often, payments of statutory taxes such as PAYG and GST are delayed as they do not immediately affect the operations of a business. In the short term, this delay may improve a company’s cash flow.

Recent amendments to the Director Penalty Regime (see Summer 2012 Client Information Bulletin) mean that directors may be held personally liable for outstanding PAYG withholding tax, should the amount have not been reported and be in excess of three months of the date on which it was due.

Consequently, non-payment of such tax by a business would be considered a strong indicator of insolvency. A business may enter into a payment plan with the ATO to repay PAYG tax, which only confirms insufficient cash to meet business debts as and when they fall due.

8. Delay of superannuation contributions
In an effort to improve short term cash flow, a business may delay the payment of its employee superannuation contributions. As these contributions are usually paid quarterly, overdue amounts may not be recognised as such until some time after the due date.

As with delayed tax payments, delayed superannuation contributions may indicate that a business is struggling to manage its cash flow. The amendments to the Director Penalty Regime mean that the director of a company may now be held personally liable for unpaid superannuation contributions in certain circumstances. Consequently, non-payment of superannuation contributions by a business would also be considered a strong indicator of insolvency.

9. Bank overdraft limit reached
An indicator of insolvency is whether a business regularly trades at or close to its overdraft limit. If a business regularly trades at its overdraft limit, it means that there will be little to no emergency funds available should they be required.

10. Legal action
Legal action issued against a business will result in the business incurring the financial cost of defending any claim. This would impact future cash flow and should be taken into account when preparing budgets and cashflow forecasts. Obviously, unsatisfied judgments which have not been appealed would indicate insufficient cash flow to satisfy debts as a when they fell due.

If a business is faced with one of the following three things it would ordinarily be considered insolvent:

  • a winding up notice
  • a statement of claim relating to unpaid accounts
  • being issued with a director penalty notice.

If you are seeing these warning signs talk to your Chartered Accountant to discuss the options.

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For Effective Tax Planning You Need Tax Advisors and a Good Tax Accountant

Tax returns and tax laws become more complex year after year. Fewer people each year are able to file their individual returns without a little tax planning and assistance from a tax accountant.

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Need Some Personal Financial Advice? Talk to a Financial Advisor!

The title ‘Financial Advisor’ carries many connotations, but, in a nutshell, what they do is simple. They offer advice. Not just any advice, mind you. Top notch financial advisors stay ahead of financial news and trends, and they offer tangible, valuable advice that can help you grow your retirement fund into something you never imagined it could be, as well as help prepare you if life takes a difficult turn. Let’s take a look at some of the ways the financial advice of a financial advisor can help you.

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Signs You May Have a Bad Accountant

Regardless of how long you have maintained your relationship with your accountant, and regardless of whether you have a personal or business accountant, or both, it’s wise to step back and assess him or her on occasion. After all, you have entrusted this person, or business, with your finances. Here are a few things to key in on when evaluating your relationship with your current accountant.

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