Insolvency Assistance for Corporations in Small Business

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With 1 January 2021 fast approaching, directors may need to consider if a company’s business requires significant debt restructure to survive and escape insolvency. The proposed changes to insolvency laws are designed to:

  • Keep control of distressed businesses with owners
  • Restructure viable businesses and retain employment
  • Increase the speed of business restructure and reduce costs
  • Increase the timing and return to creditors of restructuring and liquidation

Businesses in financial difficulty – Important Information for Directors

Directors who intend to consider a simplified insolvency restructure as an alternative to Voluntary Administration or a simplified liquidation should give consideration to the proposed changes and prepare the business to ensure both eligibility and increased prospects of success.

Customers in financial difficulty – Important Information for Suppliers and Lenders

Suppliers and lenders may need to review exposures to potentially insolvent debtors, credit policies and procedures. Failure to review these exposures can have significant impacts on revenue and even worse consequences may follow.

Time is of the essence in dealing with these issues for companies operating small businesses.

If you require assistance, you should contact your accountant or lawyer to seek advice without delay.

 

Tim Hayter, Principal, Mid West Lawyers

This information is general in nature and should not be relied upon as legal advice. Formal legal advice should be sought for your particular circumstances.

 

The Importance of a Corporate Trustee for your SMSF

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A Self-Managed Superannuation Fund (“SMSF”) is a type of superannuation structure that allows members to control and manage their own funds. Unlike other superannuation funds, members have autonomy over the choice of investments they can make. The activities of an SMSF must be conducted through a trustee because the fund itself is not a separate legal entity. Each member of an SMSF must also act in the capacity of trustee whether this be as an individual or through a corporate entity.

It is important to consider the trustee structure of an SMSF from the outset. Initially, an individual trustee structure costs less and there are fewer reporting requirements, such as those of a company under the Corporations Act 2001. However, there are many benefits of having a corporate trustee for your SMSF which in the long term, are likely to outweigh the associated costs and administration. Given that superannuation is a long-term strategy, these benefits should be carefully considered.

Protection of members

Assets held in an SMSF for which a corporate entity is trustee, are held in the name of that company. Companies have limited liability and directors are generally not personally liable for company debts. This provides greater protection should the trustee company be sued or the SMSF become insolvent.

Administration – changing fund members / changing assets

The appointment of a corporate trustee allows for easier administration when changes in the structure and membership of the SMSF occur. Such changes might be brought about by the addition of children as members to the fund, the death of a fund member or divorce or separation of fund members. Because fund assets are held in the name of the corporate entity rather than individually, it is unnecessary to transfer the ownership or registration details for each asset held. This results in less administration and significant cost savings.

Sole members

If a single-member fund has a corporate trustee the fund member may be the sole director of that corporate entity. If a corporate entity is not appointed, then the rules require that another person (in addition to the sole member) be appointed trustee. This may not be desirable for the fund member who wishes to have autonomy over his or her own SMSF. A further issue with sole member funds is that the death or discontinuance of a trustee means that the fund cannot continue unless an additional trustee is appointed. This situation is unlikely to occur in the case of a corporate trustee.

Conclusion

It is also recommended that a sole purpose company be used as the corporate trustee which results in lower ASIC fees and assists in separating the affairs of the fund with any other activities.

Tim Hayter, Principal, Mid West Lawyers

This information is general in nature and should not be relied upon as legal advice. Formal legal advice should be sought for your particular circumstances.

Co-Ownership Property Disputes

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A co-owner is a person who owns land with one or more other owners. Co-owners may hold land as joint tenants or tenants in common. The way land is held is important in property law as it impacts on the way it can be dealt with generally, and what happens after the death of a co-owner.

Joint tenants hold property together as a whole – in other words it cannot be divided into shares. Spouses and de facto partners usually hold property as joint tenants. Joint tenancy is subject to survivorship provisions – when a co-owner dies his or her interest in the property is extinguished and automatically passes to the remaining owner/s.

A tenancy in common can specify the individual shares of the property held by each owner. The shares need not be equal and co-owners are presumably free to transfer, sell or leave their share in the property by Will. Tenants in common is a popular arrangement between other family members, friends or business entities. Co-owners who are tenants in common each acquire a share proportionate to the contributions made. Any loan for the property is taken in all names and the parties are usually jointly and severally responsible for repayments and performance of all obligations.

What can go wrong?

Whilst there are benefits in co-owning property, disputes do arise causing financial and emotional anguish. Property disputes between co-owners are often triggered by changing circumstances – a relationship or business breakdown, financial stress or the death of a co-owner. Some disputes arise simply because the owners do not understand the implications arising from how the interests in the property are held.

Co-owners may claim that interests held are disproportionate to contributions made, or argue over loan repayments, maintenance and other expenses, the use and development of the property and the entitlement to profits. Significantly, the dispute will be over when or whether to sell the property.

You should always obtain legal advice prior to buying property. If buying with another person your Lawyer will assist you in deciding whether to hold the property as joint tenants or tenants in common.

If other purchasers (besides a spouse or de facto partner) are buying, you should consider having a property ownership agreement prepared. Ideally, this will set out the agreed interests held, options to purchase a co-owner’s share, distribution of proceeds on sale of the property, the agreed use, distribution of profits and responsibility for management.

Tim Hayter, Principal, Mid West Lawyers

This information is general in nature and should not be relied upon as legal advice. Formal legal advice should be sought for your particular circumstances.

 

 

Partnerships – the Pros and Cons

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A partnership is an association of 2 or more people who carry on business as partners and distribute income and losses between themselves. In a partnership, the partners all own the business, all have control of the operation of the business and all the profits belong to the partners jointly.  With a partnership, the business is not a separate legal entity.

A partnership is one of the simplest ways to structure a business and is relatively easy to set up. Most partnerships are established by a partnership agreement which sets out the rights and obligations of the partnership. Although a partnership agreement is not compulsory, it is advisable to have a written document which clearly outlines the important aspects of the partnership at the outset of the business venture and before any disputes have arisen.

The advantages of forming a partnership include:

  • Inexpensive to set up;
  • No formalities, registration or reporting obligations other than tax returns;
  • More privacy than other business structures such as a trust or company; and
  • A broader management base, with a wider pool of expertise and capital.

The disadvantages include:

  • Unlimited liability for the partners, which means that the partners’ personal assets are exposed if the partnership’s assets are insufficient;
  • If a partner will not or cannot pay his or her share of the partnership liability, then the other partners must do so personally, jointly and severally;
  • Partners can be sued personally for anything done in the name of the partnership;
  • Potential for disputes and loss of trust between the partners;
  • Difficulties with the transfer or termination of partners; and
  • Limitations on size (generally the maximum number of partners in a partnership is 20).

A partnership may be the right business structure if there is compatibility between the business partners or if a sole trader is looking to grow his or her business through establishing a partnership.

Consideration should be given as to whether the advantages of setting up a partnership outweigh the disadvantages or whether some other business structure might be more appropriate. An accountant or lawyer can help you understand the cost and risks of a partnership.

Tim Hayter, Principal, Mid West Lawyers

This information is general in nature and should not be relied upon as legal advice. Formal legal advice should be sought for your particular circumstances.

Power of Attorney Abuse

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A Power of Attorney is a legal document authorising a person to act for you and make binding decisions on your behalf.  A Power of Attorney is usually prepared:

  • to facilitate and complete transactions when you are unavailable to do so, for example while travelling;
  • to get help with essential activities such as managing finances, withdrawing funds, paying bills and arranging goods and services, particularly as you become older and less mobile;
  • to ensure somebody you trust can look after your financial and legal affairs if you become physically or mentally incapacitated.

Most jurisdictions in Australia accept a Power of Attorney validly made in another state or territory. Legislation however differs in each, so it is important to understand the effect of a Power of Attorney (or similar document) made under the relevant law.

A person who makes a Power of Attorney is usually referred to as the principal or donor and the person accepting the appointment is known as the attorney.

What is Power of Attorney abuse?

Attorneys must act in the best interests of the principal, maintain separate accounts and records and avoid a conflict of interest. The relationship between the principal and attorney should be one of implicit trust, particularly as attorneys are neither supervised nor required to report to a specific authority regarding the principal’s affairs.

Attorneys who act without proper consent, outside the scope of authority permitted by the Power of Attorney, misappropriate a principal’s assets or fail to act in his or her best interests are abusing their position. Examples include situations where an attorney may:

  • neglect paying for necessities on behalf of the principal;
  • make decisions and take action without consulting the principal or, in the case of an incapacitated principal, fail to consult with those who are close to the principal;
  • use the principal’s funds for his or her personal gain or to benefit somebody else;
  • sell or transfer the principal’s assets for his or her financial benefit or to benefit somebody else.

Unfortunately, this form of financial abuse is too common and there are several cases where attorneys have misused their authority to the detriment of a principal. This often (but not always) occurs when the principal is aged and restricted in his or her capacity, and / or has granted an enduring Power of Attorney which continues to operate when the principal becomes incapacitated.

Although unimaginable to most, the perpetrator of this betrayal is often a family member or supposed close friend. The consequences can be financially and emotionally devastating for somebody who has placed enormous trust in an attorney to protect his or her interests. Family members and close friends who witness such abuse are also impacted.

Attorneys who abuse their power may be required to account to the principal for any loss sustained and face criminal penalties. Unfortunately, in cases where the abuse has been going on for some time, financial losses may not be retrieved

Protecting yourself from Power of Attorney abuse

Choosing the right person to be your attorney and understanding your rights is important to help minimise the potential for Power of Attorney abuse. The following points may assist:

  • Only appoint somebody you trust (even if that person is not a family member) and don’t be pressured into signing documents without understanding the nature of what you are signing and obtaining independent legal advice.
  • If you no longer feel comfortable with your appointed attorney, talk to somebody you trust. You can revoke a Power of Attorney at any time provided you have legal capacity. The revocation should be in writing and you should ensure that your attorney receives the document. Also provide copies to any financial institutions or other entities the attorney has dealt with on your behalf.
  • Have a Power of Attorney prepared by a lawyer to ensure it is valid and works with any other estate planning documents. Your lawyer should explain the different types of powers of attorney you can make, the scope of authority you will be giving, and when and in what circumstances your attorney may exercise that authority.

What to do when a Power of Attorney is abused

If you suspect your attorney is misusing his or her authority, you should obtain legal advice immediately. Your attorney may become evasive when you ask about receipts for transactions or query bank balances. If something doesn’t sound right, there’s a good chance that it isn’t right. Speak up, tell somebody you trust or call a support service.

If the principal is incapacitated and the Power of Attorney is enduring the process is a little more involved. An enduring Power of Attorney continues to be effective if a principal becomes incapacitated due to disability or illness and may not, unless through specific orders, be revoked.

If you are concerned that a Power of Attorney is being abused, then you will need to take action on behalf of the principal to protect his or her interests. Each Australian jurisdiction has protective laws in such cases.

Government bodies in each state / territory (Civil and Administrative Tribunals, Public Guardian Offices and / or Courts) have powers to investigate, intervene, suspend a Power of Attorney, and to make a range of orders with respect to Power of Attorney disputes and guardianship matters. For example, a Power of Attorney can be reviewed by a Tribunal and orders made to declare that the principal did not have the mental capacity to make the document and it is therefore invalid. In such cases, a substitute attorney may be appointed to manage the principal’s affairs.

Other legal remedies may also be appropriate, such as lodging a caveat over real estate to prevent a transfer of property and starting proceedings to reverse the transfer, or for compensation for loss incurred.

Fraudulent conduct by an attorney may also be reported to the police.

Conclusion

Granting a Power of Attorney is an effective way to appoint somebody you trust to manage your legal and financial (and, in some jurisdictions, health and lifestyle) affairs for a limited time, or indefinitely, if you become incapacitated.

Appointing an attorney, and accepting the appointment, should be made with the utmost of trust and with each party understanding their respective legal positions.

Clearly, attorneys must act in the best interests of a principal however may face conflict with family members or uncertainty when filling their obligations. If you are an attorney and are unsure of your role, or involved in a challenging situation, you should seek legal advice.

If you or someone you know wants more information or needs help or advice, please contact us on + 61 8 9921 6040 or email thayter@midwestlawyers.com.au.

Minimising Directors’ Liability – Deeds of Indemnity, Access and Insurance

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Company directors have many responsibilities when carrying out their duties.

Generally, company directors and officers are not personally liable for a company’s debts. Certain circumstances however can arise where directors may find themselves facing legal or other regulatory action exposing them to personal liability. Generally, the more complex the role, the greater the risk.

In addition to potential civil proceedings being brought against a company and personally against its directors, regulatory bodies such as the Australian Securities and Investment Commission (ASIC) have the power to personally fine directors for certain breaches of company law.

The threat of personal liability could cause directors to become overly risk averse which may jeopardise potential opportunities for the company’s growth and development. It is therefore appropriate that companies might wish to protect their officers against such liability and that company directors should insist on protection.

What is a deed of indemnity, access and insurance?

Liability cannot be completely avoided however directors may minimise personal exposure through a deed of indemnity, access and insurance. This is a contract whereby a company agrees to indemnify its director for liability incurred in his / her capacity as director during the time of office.

Company constitutions may contain indemnification clauses for directors and company officers however, these alone are usually not sufficient nor tailored to provide maximum protection. Further, a constitution may be amended without a director’s consent and any protection afforded generally ceases to bind the company once a director no longer holds office.

In addition to indemnification, the deed should allow directors ongoing access to company records and information and require the company to hold directors’ / officers’ insurance.

Following is an overview of the main components of a deed of indemnity, access and insurance.

Indemnification

The level of protection under the deed will be the outcome of negotiations between the company and director and subject to statutory restrictions.

The indemnity should endure beyond resignation / termination of the director’s position. Ideally, it should be unlimited in duration however, at the least, extend to the seventh anniversary after the date a director vacates the position, to allow for expiration of a six-year limitation period for civil claims.

Directors should insist on protection for all personal liability including legal costs arising from any proceedings / claims made against the company and / or the director personally. The indemnification should cover, not only legal proceedings, but the costs of participating in investigations and complying with audits, etc.

Protection should be as broad as possible noting this will be limited by legislation that prohibits a company from indemnifying its officers in certain circumstances, such as:

  • liability (and legal costs) arising from a breach of statutory and common law duties owed to the company such as fraud, dishonest conduct, criminal behaviour or a lack of good faith; and
  • certain specified penalties and compensation orders.

The indemnification provided is usually expressed as ‘indemnification for all liabilities incurred to the maximum extent permitted by law’.

The deed should allow immediate funding to enable a director to respond effectively to a request for compliance or to defend potential or actual legal proceedings. Provisions should also allow the director to exercise some level of control over proceedings, for example, consenting to or rejecting settlement offers and obtaining independent legal advice if a conflict of interest arises.

Access to company documents

Access to company records, during and after holding office as a director, is essential to ensure directors can properly answer an audit or defend themselves if they are personally sued.

The Corporations Act 2001 (Cth) provides statutory rights for directors to access company documents and inspect financial records for the purposes of legal proceedings for up to seven years after ceasing to be a director. However, this right is restricted to circumstances where the person requiring access is a party, or prospective party, to legal proceedings. Consequently, a former director may not be able to access material relevant to an ASIC investigation or Australian Taxation Office audit.

The deed should specify the access required and include, but not be limited to, board papers, minutes, agendas, register of members, legal advice or opinions provided during the course of the director’s tenure and all financial records and statements for an indefinite period or at least seven years after ceasing to be a director.

The deed should also make it mandatory for the company to maintain all compulsory financial and other records.

Company directors’ / officers’ insurance

For optimum protection the deed should require the company to hold and maintain directors’ and officers’ insurance (known as D&O insurance). The level of protection will be commensurate with the policy document which will generally protect directors for:

  • damages / judgements awarded to claimants in legal proceedings including their own legal costs and, in some circumstances, those of the claimant;
  • fines and penalties raised by regulators such as ASIC;
  • other expenses arising out of the claim.

A claim may include legal action taken by shareholders, employees, regulatory authorities, creditors, competitors and clients, as well as the company itself and other directors of the company.

Conclusion

Directors may be exposed to personal liability for losses incurred while directing and managing a company. Such risks however should not prevent a director from appropriately exploiting commercial opportunities and may be mitigated by having in place a deed of indemnity, access and insurance.

Directors negotiating such deeds should obtain independent legal advice to ensure optimum protection appropriate to their personal circumstances.

If you or someone you know wants more information or needs help or advice, please contact us on + 61 8 9921 6040 or email thayter@midwestlawyers.com.au.

How to Keep You Legal Costs Down

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If your business is involved in a commercial dispute, your biggest concerns are likely to be the financial losses that your organisation and its officers could suffer, and the size of your legal bill.

Commercial disputes can be disruptive, emotional and exhaust resources that should otherwise be spent for the advancement of the enterprise. By following the tips below however, you can help keep a lid on your legal costs while assisting your lawyer to provide considered and relevant advice tailored to your circumstances.

Consider the lawyer / client relationship

Your lawyer is there to assist and advise and will need to cut through a myriad of information to extract the relevant legal issues. The easier you can make this, the less time your lawyer will need to spend sorting through irrelevant details.

Compiling accurate information and presenting it in an organised manner has cost-saving benefits. For example, for a contract dispute your lawyer will need a copy of the relevant contract and any emails and correspondence surrounding the negotiations when making it. If you are claiming a financial loss, you may need to provide evidence of how this is calculated such as quotes, invoices and valuations. Getting the required information to your lawyer promptly and doing some research yourself keeps your matter on track and can help reduce costs.

If you provide information in bits and pieces, or if your lawyer needs to constantly chase you for it, your legal costs are likely to increase. Similarly, if you provide numerous documents without screening them for their relevance to your case, your lawyer will need to spend time (at your cost) sorting through them to ascertain what is relevant.

Manage communications and meetings

Before calling or meeting with your lawyer, consider the relevant matters that need to be discussed and, write down any questions so communications can be kept on track and the information exchanged is valuable and useful to your matter.

Unnecessary detail merely complicates the facts and adds time to discussions. Having said that, you do need to understand advice and options so do not hesitate to ask for clarification or explanations of anything that is unclear.

Prepare a summary of your case

A well prepared, chronological list of facts and events can be of great benefit to you and your lawyer. Most clients have an intimate knowledge of their dispute however your lawyer is coming into the matter from a fresh perspective and will need relevant details to identify the legal issues and recommend the most appropriate action.

A chronology also helps to identify inconsistencies or vague areas where additional information or evidence may be required and may also be used to prepare Court documents if this becomes necessary down the track.

Documents should be prepared in a Word format so soft copies can be provided to your lawyer and amended, or information extracted, as necessary.

Explore alternative dispute resolution processes

There are various processes available for resolving disputes before, or without, resorting to litigation. In most cases, your lawyer will recommend using one of these processes in the first instance.

Negotiation and mediation can save time and money and provide more flexible outcomes than what may be available through the Courts. The evidentiary burden is generally lower than formal Court proceedings and there can be greater opportunity for commercial parties to preserve their relationship, which is particularly beneficial where ongoing business arrangements are in place.

For some matters, urgent Court proceedings should be commenced, for example where real property is at risk or there is immediate danger of losing assets or money. In such cases, you should make this clear to your lawyer so proceedings, such as an application for an injunction or the lodgement of a caveat, can be initiated immediately.

Be clear about what you want to achieve

Understanding the commercial drivers behind the objectives you wish to achieve provides focus and clarity when embarking on negotiations to resolve a commercial dispute. Generally, a strategic and pragmatic solution that avoids expensive litigation, if possible, and mitigates financial and other loss will be the desired outcome.

Corporate disputes can be complex and may involve several areas of law and the most appropriate remedy will be influenced by a range of factors including:

  • the relevant facts and the issues in dispute;
  • the parties’ respective legal and financial positions;
  • the strengths and weaknesses of each side including the available evidence;
  • whether the parties’ business dealings are to continue.

An experienced lawyer will step you through these matters so the most appropriate commercial objective in light of the circumstances can be identified.

Obtain legal advice promptly

It may be tempting to try to resolve a dispute without legal assistance, however if negotiations become protracted or the other party is non-responsive, the sooner you know your legal rights the better.

Legal action must be pursued against the correct entity and based on an identified breach of contract, legislation or general law which should be communicated to the other party or articulated in Court pleadings. Evidence, in acceptable format, must be available or accessible to support the case.

Consulting a lawyer early can help you to identify the correct legal cause of action or applicable defences available and understand the full extent of your legal rights without wasting valuable time and resources.

Understand Court processes and stick to timeframes

If your matter is litigated, the Court will issue a timetable for the management of your case. Practice directions will set out the correct processes to follow and applicable documents to be used.

Failure to comply with formal Court processes and adhere to the deadlines for attending directions hearings and filing documents is essential to avoid costs orders being made against you.

Conclusion

The complexity of a commercial dispute can be daunting and the potential for legal costs to escalate is real when a matter is not properly managed. Fortunately, clients can take steps to keep legal costs down while assisting their lawyer to provide sound advice to help resolve their dispute.

If you or someone you know wants more information or needs help or advice, please contact us on + 61 8 9921 6040 or email thayter@midwestlawyers.com.au.

Exempt Family Farm Transactions – a Word of Warning

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A ‘dutiable transaction’ under respective state / territory laws in Australia generally includes the transfer of real property from one party to another. Unless exempt, these transactions are liable for transfer duty.

Legislation across various jurisdictions provide duty exemptions for certain transactions including transfers of farmland between family. These exemptions offer considerable savings for intergenerational farm transfers however the provisions are complex and careful planning is required to ensure a party is not caught out with a non-exempt transaction.

Eligibility for duty exemption

In Western Australia, the Duties Act 2008 allows an exemption from transfer duty for ‘exempt family farm transactions’ defined as a transaction where:

  • (a) each transferor was using farming property in the business of primary production immediately before the transaction took place; and
  • (b) at the time the liability for the transaction arises, each transferee intends to continue to use the farming property in the business of primary production.

Essentially, the transfer must concern farming property (land used solely or dominantly in primary production) between family members.

Primary production includes the undertaking of the following activities for commercial purposes (whether selling the animal or produce farmed):

  • the growing or rearing of plants; or
  • the breeding, rearing or maintenance of living creatures; or
  • the breeding or rearing of horses.

If some, but not all of the land is leased to a third party and is used solely or predominantly for the purposes of silviculture or reafforestation, then the land may be treated as being used in the business of primary production.

A family member includes a child (or remoter lineal descendant); a parent (or remoter lineal ancestor); a brother or sister; an aunt or uncle; a spouse, former spouse or de facto partner of two years; or a spouse or de facto partner of a family member listed above.

Pitfalls and traps

Transferors, transferees and family members

The objective of the exemption provisions is to encourage younger farmers to continue a family farming business without incurring transfer duty. Every transferee to hold an interest in the farming entity after the transaction must be a family member of the transferor.

As evidence of the transferor’s pending retirement, he or she should have no continuing legal interest in the farming enterprise after completion. The exemption provisions also prohibit a transferor from retaining an interest in the farm’s post-completion operations as a transferor is not considered to be a family member of himself or herself.

Although it is common for property to be held, and businesses to operate, through a legal entity such as a trust, company or partnership, certain arrangements may prevent a transaction from being eligible for the exemption.

The transferor or transferee may have operated or intend to operate the farming business individually or through one or a combination of legal entities to which the transferor or transferee was / is related. However, the following arrangements are generally ineligible for the exemption:

  • land held by a transferor who is a trustee of a unit trust or discretionary trust;
  • land to be held by a transferee as a trustee of a unit trust scheme;
  • land to be held by a transferee as a trustee of a discretionary trust, unless every other beneficiary of that trust is a family member of the transferor and the transferor does not control the trust;
  • an arrangement in which the transferee includes the transferor as a beneficiary of a trust, an unrelated company shareholder, or unrelated partner of a partnership.

Failure to document transactions

Neglecting to formalise various inter-family arrangements can have negative stamp duty effects. For example, parents of a farming property may hand over possession of the farming enterprise to their children without documenting the arrangements.

The children go on to conduct the farming enterprise for several years under their own entities. Should the parties subsequently wish to formalise transfer of the farm property, it will be difficult to establish that the parents had immediately prior to transferring the land, been carrying on the farming business, as required for the exemption.

Five-year limit

Parties should be aware that the exemption is not available if a family farm transaction follows a transaction which occurred within the previous five years for which the exemption applied. This is the case even if the requirements for exemption would otherwise be met.

Post-transaction activities can trigger duty

Post-transaction planning is important to ensure that activities subsequent to completion of the exempt transaction do not trigger a duty liability.

For example, if a person other than a family member of the transferor becomes entitled to a share or interest as a beneficiary of a trust then liability for duty arises. Similarly, if the original transferor becomes a controlling trustee of a trust in which the property is held, this will likely be considered a ‘transfer’ with duty payable at the general rate.

Conclusion

The sale or transfer of a family farming enterprise involves complex financial and legal considerations. Failure to meet all conditions for an exempt family farm transaction either before or after the transaction may result in an unexpected liability for stamp duty.

When dealing with farm property, working with your taxation adviser and lawyer will help to ensure that duty issues are appropriately addressed and that the transaction is structured for optimum benefit.

If you or someone you know wants more information or needs help or advice, please contact us on + 61 8 9921 6040 or email thayter@midwestlawyers.com.au.

Ensure the Will Is up to Date Before a Loved One Loses Mental Capacity

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The question of mental capacity is an important consideration in will-making and can be a contentious issue. How often do we hear family members arguing over a loved-one’s ‘state-of-mind’ and ‘what Grandad would have wanted’ when sadly, his memory and ability to make reasonable decisions comes into question. This may be due simply to age, deteriorating health or a combination of both.

A person must have mental capacity to make or update a Will – this is one of the key elements to ensure the validity of a Will and limit the possibility of it being challenged on the grounds of testamentary capacity.

One way of reducing conflict and a potential challenge to a Will is to ensure a loved one (particularly if aged or in declining health) is encouraged to regularly review his or her Will and estate plan before mental capacity becomes dubious.

The test of mental capacity

The test of mental capacity was established almost 150 years ago in 1870, in a legal case Goods v Goodfellow. The language used reflects the era, but the key elements remain relevant:

It is essential to the exercise of such a power that a testator shall understand the nature of the act, and its effects; shall understand the extent of property of which he is disposing; shall be able to comprehend and appreciate the claims to which he ought to give effect; and with a view to the latter object, that no disorder of the mind shall poison his affections, pervert his sense of right, or prevent the exercise of his natural faculties – that no insane delusion shall influence his will in disposing of his property and bring about a disposal of it which, if the mind had been sound, would not have been made.

Translated to a more contemporary understanding, the Will-maker must:

  • understand the nature and effect of the Will;
  • understand the extent of the property in the Will;
  • understand the claims he / she ought to consider; and
  • be free of illogical beliefs that are not in sync with his / her level of education and surroundings.

What happens if a Will-maker lacks mental capacity?

Lawyers must ensure that a Will-maker’s interests are protected and have an obligation to question a Will-maker’s mental capacity if it is in doubt. The lawyer must be able to obtain instructions directly from the Will-maker and be satisfied that he or she understands the legal implications of the documents being prepared and signed.

Given the many possible perceptions of an ‘unsound mind’ or being free of ‘insane delusions’, this is not always an easy task. A testator, who is intermittently unsound, may still make a valid Will if it can be shown that the Will was made at a time of sanity.

Unfortunately, once the capacity of a Will-maker comes into question, additional steps are required to confirm his or her ability to properly understand the nature of the contemplated document.

At the least, this usually requires obtaining medical and / or psychiatric reports from practitioners which may add expense and cause additional stress and anxiety to the Will-maker and his or her family. The extra time required to obtain these reports and to establish mental capacity is itself an issue, particularly when a Will-maker’s health is declining.

If the Will-maker’s capacity cannot be established, then the Will cannot be made or an existing Will updated.

An outdated Will that clearly does not express the intentions of the deceased can be a major disappointment to the deceased’s family and loved ones.

If a Will is made or updated at a time when mental capacity is in dispute, a contentious challenge and / or a family provision claim may follow, after the testator dies.

What happens if no Will is made?

If no Will is made, then the Will-maker will die intestate and his or her assets will be distributed in accordance with pre-determined formulae set out in legislation in each state and territory.

Essentially, these rules provide for a specific order of distribution to the deceased person’s next of kin – those who receive an inheritance will depend on the individual and family circumstances of the deceased.

The distribution of an intestate estate generally reflects the moral expectations of society, but not always the wishes of the Will-maker. There are numerous reasons why a Will-maker may have wanted to leave out an expectant beneficiary or indeed include non-family members in the distribution of his or her estate. For a variety of reasons, the testator may also have wanted to allocate unequal shares to beneficiaries whom under the legislation would otherwise share equally.

Dying intestate therefore cannot guarantee that the Will-maker’s assets will be distributed as he or she intended.

Points to remember

The problems of intestacy or having an outdated Will can be avoided by ensuring a Will is made whilst a person is in good health and of sound mind. Some points to remember:

  • Mental incapacity can occur progressively or suddenly and can affect the old, the middle-aged and the young. Whilst we can all exercise caution and moderation, nobody is exempt from the fragility of life and an unpredictable future.
  • Determining mental capacity when in doubt is not straight-forward, will exacerbate the will-making procedure and add undue cost and stress to the process.
  • Planning your Will now and making the effort to review it regularly will safeguard your estate from the possibility of unintentional distributions.
  • Encourage your loved ones to review their Will and other estate planning documents when there is a change in personal or financial circumstances and particularly when they are ageing or in deteriorating health.
  • Lead by example and make or review your own Will and estate plan!

Summary

The real intentions of a testator cannot be established once he or she has died or is permanently incapacitated, unless a valid and up-to-date Will exists. Spending time on your estate planning today will avoid the uncertainty, additional costs and stress of trying to get it right when it is too late.

If you or someone you know wants more information or needs help or advice, please contact us on + 61 8 9921 6040 or email thayter@midwestlawyers.com.au.

Anti-phoenixing Laws and Director Penalty Notices – Updates for Directors

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Company directors should note new laws increasing their exposure to personal liability for certain debts and creating new criminal offences and civil penalties under the Corporations Act 2001 (Cth).

The Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020, as the title suggests, targets phoenix activities that rob the Australian economy and place companies engaging in illegal conduct at an unfair advantage. Below we summarise some key provisions and their impact on company directors.

Director Penalty Notices (DPNs) may now be issued for unpaid / unreported GST

Company officers would be aware that the Australian Taxation Office (ATO) can issue a DPN for unremitted Pay As You Go (PAYG) deductions and Superannuation Guarantee Charges (SGCs) for which directors may become personally liable.

If the DPN issues as a result of an unpaid liability reported within three months of the due date, the director must either pay the debt, appoint an administrator or cause the company to be wound up within 21 days. If the DPN issues as a result of an unreported liability or a liability reported after three months of the due date, the director is unable to avoid personal liability by having the company wound up.

The DPN regime now also applies to Goods and Services Tax (GST), Wine Equalisation Tax (WET) and Luxury Car Tax (LCT), with potential to make directors personally liable for unpaid amounts in certain circumstances.

After lodgement of an activity statement, the ATO may issue a 21-day GST DPN if the liability remains unpaid within three months of the due date. Directors must either pay the GST liability or place the company in administration or liquidation.

If a director causes a company to fail to lodge an activity statement within three months after the due date, the ATO can issue a Lockdown GST DPN. In such cases, the ATO may estimate the net amount of GST due and personal liability by a director cannot be avoided by placing the company in administration.

Additionally, the Commission of Taxation may withhold tax refunds to satisfy prospective tax obligations if a taxpayer fails to lodge a return or provide certain information pertaining to an estimated refund.

Spotlight on phoenix activities

Phoenixing may take various forms but essentially involves activities orchestrated by company officers aimed at avoiding liability for company debt. In such cases, assets may be transferred for below-market value or no consideration from an original company to a newly created entity. The original company is then wound up, leaving behind unpaid taxes, creditors and employees, while the new company begins its new life, trading under a different name, but usually under the same management.

Additional powers to combat creditor-defeating dispositions

The reforms enable the Australian Securities and Investments Commission (ASIC), either on its own initiative or upon application of a liquidator, to order the recovery of creditor-defeating dispositions of property.

A creditor-defeating disposition is one having the effect of ‘preventing the property from becoming available for the benefit of the company’s creditors in the winding up of the company, or hindering or significantly delaying the process of making the property available for the benefit of the company’s creditors in the winding up of the company.’

Dispositions of property that may be considered ‘creditor-defeating’ include property for which the consideration was less than market value, or the best price reasonably obtainable in the circumstances.

To facilitate a recovery order, the disposition must have been made while the company was insolvent, or 12 months before the company entered administration or liquidation, or have caused the company’s insolvency.

New criminal offences and civil penalty provisions

Additional provisions under the Corporations Act 2001 introduce criminal offences and civil penalties for company officers that fail to prevent a company from making creditor-defeating dispositions, as well as ‘other persons’ that facilitate the making of a creditor-defeating disposition.

The inclusion of ‘other persons’ who must not procure, incite, induce or encourage the company to make such a disposition has potential to expose professionals such as lawyers, accountants and insolvency advisors to liability.

Defences may be available for an alleged contravention of the new offences, such as legitimate restructuring activities or transactions under a deed of company arrangement or scheme of arrangement.

The safe harbour provisions presently in place for offences under insolvent trading provisions will also apply.

Restrictions on resignations – improving the accountability of directors

The laws restrict company officers from improperly backdating resignations and preclude a single (last) director of a company from resigning or being removed by a resolution of members, unless the company is being wound up.

The restrictions aim to minimise misconduct by preventing resignations aimed to obscure a director’s involvement in company decisions or to shift accountability to other directors, in particular, ‘paper’ directors that have no real involvement in the management of the company.

Resignations reported to ASIC more than 28 days after the ‘purported resignation’ will now take effect on the day of lodgement unless the company or a director applies to ASIC or the Court to fix the purported date of resignation. The applicant must establish that the director stopped being a director on the purported resignation date and it must be just and equitable to give effect to that date, taking into account any conduct, act or omission of the applicant with respect to notifying ASIC of the resignation and the reasons for the delay.

Conclusion

Directors should comply with their GST and other reporting requirements to minimise the risk of personal liability for unpaid amounts. Business Activity Statements should be lodged within the required timeframes and professional advice sought by directors if a company is facing insolvency or other issues likely to expose them to liability.

Directors in receipt of a DPN should seek urgent advice on their options to avoid personal liability or to lodge a defence.

If you or someone you know wants more information or needs help or advice, please contact us on + 61 8 9921 6040 or email thayter@midwestlawyers.com.au.