Business Sales-Key Questions

I have not had a chance to write for a while and wanted to list a few things I have observed about business sales. I hope these are helpful.

  1. Get your details in order- We find that by engaging with a quality agent you will be encouraged to collate all documentation regarding the business and this includes both financial and legal documentation. The correct A.B.N, A.C.N, name of entity or trust and the registrations are all critical to getting it right on the contract;
  2. Get tax advice before you transact- Getting the structure of the purchasing entity right is critical to the tax outcomes later. You need to ensure the actual net amount you expect to receive and the tax concessions available are understood from the outset, so you can negotiate on a figure with confidence;
  3. Check what loans are secured over the business- You need to understand what loans must be repaid at completion to give clear title to a buyer. Check what facilities are required to be reduced and to what level. Find out what securities are held including P.P.S.A, home loan mortgages or guarantees, that need to be released and plan ahead with your lender;
  4. Work out what adjustments must be made- If you have significant stock or work in progress, you need to figure out exactly how to deal with this as part of the terms of Contract. Find an independent experienced stocktake consultant and ensure the costs are covered in the deal. If you have large amounts of work in progress you need to ensure a clear method to calculate this is written in the Contract. This might be identifying a percentage of an uncompleted project fee;
  5. Consider the structure of payment- It is very often required that as a Seller you need to offer some part of the sale price as a financed amount over a set period. Figure out what percentage is acceptable as a risk, how it can be secured and how it is helping the deal get across the line. Consider profit earn out amounts if you are expecting a rise in sales due to a delay or condition arising after completion. Find out how these extra amounts are taxed. Think about making it easier for the buyer to borrow and if a separate consultancy agreement can assist with concerns over restraint of trade after the sale.
  6. Terms Sheet- Make sure you start with a terms sheet on agreed fundamental points. Do not waste legal or accounting costs by engaging  with a party if you cannot agree on the big ticket items, like price, or stuff that is essential. Do not have legal advisors renegotiate fundamental terms, or go too far into a deal unless you know the other party can complete on those terms (including adequate finance).  So call us if you are considering buying or selling so we can have an early discussion about the important questions to be resolved before you start.

Succession Changes

Hi everyone! There have been a number of changes that affect strategic succession plans as a result of reforms to tax during the last year. As a business owner or investor you should note:

  1. Foreign Residency– If you are or became a foreign non-resident taxpayer and you own real estate, you need to consider the impact of capital gains tax reforms on the sale proceeds (hint:check your residency status which depends on the circumstances);
  2. Family Trusts– when can you split assets into separate trusts? Tax Determination TD 2018/D3 sets out when a “re-settlement” occurs over assets causing a tax liability. This might deem a declaration as a new personal right or obligation giving rise to an E1 CGT event to happen and a liability to arise; (high caution splitting trusts)
  3. Inter-company loans and loans by individuals from family companies.  There are specific requirements for compliance defined under TD 2018/13 where a loan is an “ordinary commercial transaction”. Ask the question is it “solely or mainly part of an arrangement involving a payment or loan to a shareholder or shareholder’s associate (target entity) causing it to be a “deemed dividend”? (and taxable income in that financial year);
  4. Division 7A Loans– The benchmark interest rate for these loans is now 5.20% per annum (TD 2018/14); (check your loan documentation)
  5. Small Business Company Tax Change–  Check Tax Ruling TR 2017.D7 and Practical Compliance Guideline PCG 2018/D5 which defines what to assume for  imputation purposes when deciding a corporate tax rate. This requires a “carrying on a business test” and a practical administrative approach to choose a simple method;
  6. Central Management and Control– Where is the jurisdiction for a company sit in terms of “central management and control” and are the profits taxable in Australia?. A PCG on TR 2018/5 regarding residency is set out in PCG 2018/9 with reference to where it is controlled and directed as a “matter of substance” and how its control and direction is exercised over time. A change in residency of a Director shareholder will have a significant impact. The place where meetings are held or the Directors are located will have an impact;
  7. Self Managed Super Funds– A Decision Impact Statement in response to the case Aussiegolfa Pty Ltd (Trustee) v FCT  states a super fund trustee can never breach the”sole purpose test” simply because market value was paid when leasing an asset to a related party.  Consider if this influenced the “investment policy” for the fund. For example, buying residential property and leasing to an associate, even at market rates, is contravention of the test;
  8. Land Tax – Caution must be exercised regarding family trusts that have a foreign resident beneficiary under the relevant state based Duties Acts. (consider amending the Deed to remove a foreign non-resident taxpayer).

There are just a snapshot of some of the tax issues that arise when reviewing succession plans and structures for client that have changes in circumstances. Perhaps it is a smart investment to have a broad discussion with both your accountant and legal advisor to coordinate the strategy, cheers

Mobile phones videos and Wills

‘Informal Wills’ – Just not Worth the Risk or Expense!

A recent trend in decisions by the Supreme Court of Queensland highlights the importance of getting good legal advice when making a Will.

In order for a Will to be valid in Queensland, it must meet certain formal requirements. These requirements exist to ensure that the Will expresses the Willmaker’s true testamentary intentions. It also assists by ensuring that the Will is not the result of  impaired capacity, undue influence or fraud.

Legislation in Queensland allows the Court to dispense with these requirements and to accept what are known as ‘informal Wills’. The Court will only accept an informal Will if it is satisfied that there is a document that records the Willmaker’s intentions, and that the Willmaker intended that document to be their final Will. The Courts have been asked to determine the validity of various “documents” including a Will written in the page of a diary and not witnessed, a document saved on a hard drive of a computer but not printed or signed and suicide notes.

Recently, an unsent text message was accepted by the Court (in QLD) to be a valid Will (Re Nichol). The text contained directions about who should receive the writer’s property after his death, and what should be done with his remains. The text message signed off with the words ‘my will’.

A video recording contained on a DVD was found to constitute a will (Mellino v Wnuk;Re Estate of Wai Fun Chan, Deceased). 

 The Court has also recognised the validity of an electronic ‘will’ created on an iPhone (Re Yu) and in recent weeks, Judgment was given and probate granted in a well-publicised case regarding a mobile phone video will.

 On the contrary, the Courts have rejected arguments concerning instructions for new Wills and draft Wills which have not been signed (Wood & Anor v Trudinger; in the will of Alan Stewart Trudinger [2017] QSC 245).

While informal wills can sometimes be accepted by the Court, these recent cases only go to further reinforce the importance of obtaining legal advice in succession when preparing and executing Wills. By not doing so, not only do you leave open the possibility that your true wishes may not be followed but you pass up the opportunity to consider the various structuring opportunities that might be available to your family after your death. This may also result in your estate being required to fund time consuming and costly litigation.

If you or your clients wish to begin the succession planning process, please contact us.

Sole Director of a company – what happens when you die?

There are three key things to think about what happens when a sole director and shareholder dies:

  1. Section 201F(2) Corporations Act to the rescue

    If the sole director and shareholder of a company dies, section 201F(2) of the Corporations Act 2001 allows a personal representative or trustee to appoint a person a director of the company. A personal representative is the person who is appointed executor under a will, or the person granted Letters of Administration if there is no will and the deceased died intestate.

  2. When will the Court appoint a director and in what circumstances?

    In considering an application for appointing a director after the sole director and shareholder dies, the Courts have generally allowed a person to be appointed director where there was some evidence the deceased intended a particular person be appointed his or her executor. The Court normally considers whether an appointment should be allowed under section 201F(2) and takes a practical approach in making orders that would preserve the estate’s assets or allow the business to continue running.

    Consider two examples :

    1. Estate Frumar [2016] NSWSC 1116
      The deceased was the sole director and shareholder of his company which ran his ophthalmic practice. The deceased left a note described as “last will and testimony” that appointed the plaintiff as executor. The plaintiff sought a limited grant of administration for the deceased’s practice to be sold as soon possible to preserve the value the practice. In allowing the application, the Court noted that the likely beneficiaries of estate agreed to the application.
    2. Estate Assim [2015] NSWSC 337
      The deceased was the sole director and shareholder and also the sole signatory on the trust account of his real estate businesses. Two issues arose from the deceased’s death that hampered running the business. First, as there was no signatory on the trust account, rental monies could not be paid out to its clients, which disrupted the business. Secondly, there was a potential purchaser interested in buying the real estate business. The Court noted the second purchaser issue was not as urgent as the first immediate problem of potential damage to the business’ goodwill if monies could not be paid out to clients.

      The daughters of the deceased applied to be administrators of their deceased father’s estate. The Court granted the application, but placed limitations on their administration, including obtaining an undertaking that the company not be wound up and not to deal with the assets except of in the normal court of business.

  3. Complications where there is no will

    However, things get particularly tricky if the person dies without a will. Normally, the personal representative of an estate is the executor of a will. Where the sole director/shareholder dies without a will, someone, usually a family member, has to apply for Letters of Administration. This process can take a long time, and may be further complicated where there are competing persons applying for the role of administrator or if no one wants to apply for the role of administrator. Subject to the circumstances, this might be possible to obtain on an urgent basis.

    Another complication arises is if the deceased died intestate and no family member wants to apply for Letters of Administration. If there is no one will or can administer the estate, a creditor of the deceased may apply for Letters of Administration. A creditor may seek the winding up of the company, and this would bring the company and business to an end.

    The complications above emphasise the need for small companies and family businesses especially to ensure their estate planning is in order to ensure a successful business is not halted just because of the death of the sole director and shareholder of the company.

The best solution is to ensure that if you have a company in your group assets, adequate appointment is made for the Executor and a resolution passed conditional on this event. Ask us how to create a Strategic estate Plan that preserves the assets and entities.

Family Trusts and chain of succession

Hands up who is in business or has investments and use a Family Trust! That is a great many of us and there is a huge amount of wealth tied up in trust structures in Australia.

Now hands up who can explain how a trust works! In a large number of cases when we are discussing succession issues with clients there is a limited knowledge of the mechanics of trusts. The main problem is the misunderstanding by clients that they do not “own” the assets held in their family trust. All they have is a right to be considered by the trustee for a distribution of capital or income, if they are within the “class” of named beneficiaries. They might also be the “appointor” or “controller” of the trust. This is sometimes called the “guardian”. If so named in the document the person has the “power to appoint” the trustee and the power to change the trust terms.

Very often families accumulate wealth in real estate together in a family trust. If one of them dies there is not a separate identifiable part of the trust property that can be handed to their children as part of their estate. This can create a lot of problems in families where they have all interested their time and hard earned money in a collective enterprise “owned” by the trustee of the trust. What can you do?

It is important to check the financial statements to see if there are “loans” by any one family member to the trust or if the payments were recorded as a gift. Loans are able to be demanded back and repaid, including to an estate. This might also be created by amounts recorded as “distributed income” for tax purposes but the cash was accumulated and retained by the trustee. This is called an “unpaid present entitlement”.

The controller of a trust or person having a loan due to them can “forgive” the amount of the loan in their Will and it will stay in the trust without tax consequences. Unfortunately you have to die first!

The problem is dealing with a number of people that have different interests and a desire to separate that part of trust assets between them. Very often this can only be done by selling the trust property and distributing the cash. The other solution might be to transfer trust property by way of distribution but most often this will incur stamp duty and possibly capital gains tax.

An alternative solution might be to ensure a corporate trustee with all relevant family members as Directors and shareholders. A corporate “appointor” might also be inserted into the Deed by variation. The Directors could be the key family members and different classes of shares could be issued to them. In this way, without a change to the trust or a transfer of any property, recognition of the key family members could be achieved.

This also allows each key person to leave the shares in their Will and the company constitution could be changed to ensure that those shareholders then have a right to be appointed as a Director. The family group can hold their investments and perhaps the legacy that has been created, which in turn can continue to provide a source of income for a wider family group. This is a very technical process and one which you should seek specific advice every time. Remember all trust deeds are different and must be read carefully in the facts of each case. cheers

Decision Time- What happens when you face the end of life choices?

Enormous stress and guilt can result from a family member having to make an end of life or withdrawal of medical support decision for you. We advocate that as part of our clients’ Strategic Estate Plan, they complete and sign an Advance Health Directive.

This is a document that prescribes in different circumstances what health decisions and specific medical treatment you have decided on.

Pursuant to the Powers of Attorney Act 1998 you have been able to make binding decisions on the terms of the health care such as CPR, blood products, intravenous fluids, naso-gastric feeding and pain relief (not the full list).

Note the difference with merely appointing a person as your Health and Personal Matters Attorney under the Act, is that they are able to be called on to make a health decision, but they are not bound to make any particular decision.

This uncertainty may be abhorrent and unacceptable to many people who prefer to mandate an outcome or treatment in certain circumstances. I guess in the end we are all human no matter how successful in life we are and the thought of having to be artificially sustained for a long period of time might not seem like the best exit.

It can be tricker for people who end up having a fluctuating level of capacity due to a mental health condition. Cue the Mental Health Act 2016 by which an SOC an Advance Health Directive are recognised. It is possible to dictate the future mental health treatment when a person has capacity and used to provide “future” consent instead of involuntary treatment.

There is a positive obligations on doctors and health professionals to check available records and to report reasons for not following them.

The Form requires a consultation with medical practitioner who must take you through every medical procedure listed and in each of the circumstances whether it is persistent vegetative state, terminal illness or unconscious. Not the most pleasant topic but all the same very critical to many people in terms of having the chance to determine the outcome should the circumstances arise.

 

There is a push for a national framework to ensure consistent approach in all states.

 

Everyone is presumed to have capacity until proven otherwise.

 

In our view it is critical that clients address this difficult issue by getting a valid and clearly stated document signed at the same time as their will and Enduring Power of Attorney. Ask us how!

Data Breaches and what to do about it

Data Breaches and what to do about it

Any company that stores data for their clients, patients, or customers must check the regulations regarding privacy and notifiable data breaches.(NDB)

A  mandatory notification of data breaches  commences in February 2018, and the Office of the Australian Information Commissioner (OAIC) has put out three draft resources for public comment before  14 July 2017.

The statements are useful guidelines for companies bound by the Privacy Act.

The  resources deal with:

  1. Identifying eligible data breaches;
  2. Notifying individuals about an eligible data breach; and
  3. The Australian Information Commissioner’s role in the NDB Scheme.

Identifying eligible data breaches

To check if an incident meets the threshold for  an eligible data breach, the guide gives  further clarity on the meaning of  “unauthorised access“, “unauthorised disclosure” and “loss” .

How an organisation  determines whether there is a “serious risk of harm” to an individual  as a consequence of the breach and what needs to be done to determine this, is based on what a “reasonable person” in the position of the entity would do, not  the particular individual. Close attention must be paid to the language of the Act and guide.

There are  some examples provided of remedial action  which may mitigate the “risk of serious harm”. The guides help an organisation assess these new obligationsin their circumstances.

Notifying individuals about an eligible data breach

The obligations to  notify all individuals of a breach, notify only those who are considered at “risk of serious harm” from it , and  where it is impractical to notify individuals, to publish notification, are covered by the guide.

The guide touches on the risks and benefits of different approaches and the relevant considerations for the three options.

The guide also provides one example of a data breach involving more than one organisation. This is an issue that is likely to be of concern for a business where there is more than one entity  in the service supply chain and contracts between them do not deal with how they will jointly deal with a data breach. An NDB can greatly affect both of their reputations.

 

Australian Information Commissioner’s role in the NDB Scheme

This brief guide gives background about the role of the Commissioner in terms of receiving notifications and enforcing compliance with the scheme. It also provides a  section describing  the powers that the Commissioner has including to make a declaration that notification need not be made or may be delayed.

Internal Controls, Testing and Audited Systems

 

It is very clear that data integrity and how we secure that data is going to be a far greater issue for all business and organisations that store data. Greater cost will be incurred to operate business as usual and to maintain normal procedures. It is critical to assess the strength of your organisation now and prepare the plan to respond to data breaches, especially those which may have consequences of a “serious risk of harm”. They say information is King and it has never been more true than in this new digital age. Ask us how to assess your compliance and prepare a risk audit.