In multiple proceedings handed down in August, the Federal Court held that nearly all deductions amounting to several million dollars claimed by three entities controlled by one individual should not be allowed.

This is a case referred to as Melbourne Corporation of Australia Pty Ltd v Commissioner of Taxation. It also involved a business called the Anglo American Charitable and Cultural Trust (the AA Trust).

What’s the story?

The case came about because the Tax Commissioner issued amended assessments of income tax and penalty assessments in relation to the above-mentioned companies. These were in relation to tax deduction claims for management fees and interest said to be incurred in respect to purported loans.

The question arose as to whether the alleged management fees were actually incurred.

In addition, there were queries around whether purported loans were actually made, whether the proceeds of the loans were used in producing assessable income or whether the interest claimed was in relation to the alleged loans.

The case concluded with the court upholding that the value of “management fees” and interest were “no more than ex post facto constructions designed to be fiscally convenient for tax purposes”.

Basically, the claims were not valid.

In one of the cases, as shared by Senior Content Analyst Heidi Macguire from Wolters Kluwer Tax and Accounting, “The lead appeal in this decision was in relation to Melbourne Corp which, over the 2001 to 2014 income years, claimed deductions in respect of management and consulting fees as well as interest expenses in relation to arrangements with various Australian entities.

The Commissioner disallowed the deductions and imposed penalties at the rate of 75% for intentional disregard, increased by 20% for the years after 2001.

The assessments resulted in Melbourne Corp’s taxable income increasing from $168,018 to $2,431,071, with penalties of $589,225 and shortfall interest charge of $175,746 imposed.”

You can read further details and evidence from the trial here.

A caution for all business owners

There are many ways to minimise tax as a business or individual but if your accountant goes beyond what is legal, there will always be the risk of a response and investigation from the ATO, and subsequent legal action.

In terms of writing off management fees or loan expenses, it is important to have documented evidence of everything. At the very least, the ATO needs to see the flow of money between bank accounts as a way of proving tax-related claims.

The term ‘wilful blindness’ was mentioned many times during the Melbourne Corporation cast. In his findings, Justice Logan stated that the taxpayer’s directors conduct (and his evidence) was not dishonest, but he was mistaken to the point of wilful blindness to the obvious in fixing and then causing the amounts to be claimed.

Justice Logan stated that the accountant in question, “Appears additionally to have convinced himself, seemingly based on a mistaken understanding of the proposition, that it is not for the Commissioner to dictate to a taxpayer how to run a taxpayer’s business or one controlled by a taxpayer.”

For penalty purposes, this behaviour was classed as ‘reckless’ rather than ‘intentional disregard’. However, as Heidi McClure wrote in the conclusion of her lengthy article about the trial:

“An act of will, no matter how genuine, does not overcome lack of documentation, contradictory evidence, unreliable ledger entries or transactions devoid of any plausible explanation.

Second, making ex post facto (after the fact) constructs or “closing adjustments” after the end of an income in order to achieve a fiscally convenient outcome does not serve to minimise tax but rather leads to a finding of sham.”

Long story short… tax returns require an honest approach based on documentation and evidence. If you’re a business owner, this means keeping your receipts and records of all interest, loan and other transactions. If you make a claim that the ATO notices as outside of standard benchmarks, you must be able to prove it is genuine.

Legal Affairs Lounge provides legal advice for individuals and business owners on the Legal Affairs .

Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.

Many business owners assume that becoming insolvent means liquidating. When this happens, a liquidator is appointed to sell off assets and repay debt, and the company must stop trading while this all takes place.

The good news is there are alternatives, and you can solve insolvency without liquidating. Here’s a rundown of your different options to resolve your situation and stay in business.

Pay your creditors

If you have fallen behind but the business is turning around, you may be able to arrange to repay the providers you owe money to. You could take out a loan or you may be able to negotiate a payment plan with the tax office (be aware you may be charged interest on your tax debt).

With the tax office, it’s essential you reach out and set up a payment plan before you start receiving penalty notices as a result of not paying your bills.

If you decide to take out a loan to repay your creditors, make sure you can make the repayments before you commit. You may be able to secure the loan against some assets, which will minimise the risk for both you and the lender.

Find a way to consolidate your debt

Speaking of loans, if you have several different accounts and credit cards that are overdue, a loan from the bank or another lender may make everything more manageable and lighten the load thanks to a lower interest rate. This might be a good time to review your current credit situation with a finance broker.

Raise capital

If an injection of funds will put things on the right track, you may be able to ‘lend’ to the business from your personal funds or find an investor who is willing to contribute financially in return for part-ownership or other compensation.

With this being said, you need to have confidence that you’re not just digging a deeper hole for yourself. Work with your accountant and financial planners to do some forecasting so you have an idea of what’s actually possible.

Did you know Apple was on the brink of bankruptcy at one stage? It was Microsoft that saved the day, by investing quite a few million.

Review your income and expenses 

It is very easy to say ‘just earn more money’ but a lot less simple to do so. However, with a combination of strategy, great people, good market knowledge and a product or service people want, you can reinvent your business model and get back on top.

You may need to do some deep diving into your finances to figure out what has gone wrong. There could be expenses you can eliminate, and you might have to let some people go but recovery is never impossible. Sometimes growing the business is not profitably and scaling back will help increase profits.

Marvel was in a terrible position in the late 1990s before it started making movies off the back of its popular comic book titles. Its partnership with Disney means it’s one of the most successful brands in the world.

Find a buyer

Many brands avoid going from insolvency to liquidation by selling to a larger company. This may be an option, especially if you have IP or products that are in demand.

If you decide to sell to cover the cost of your debts, you don’t necessarily have to do so at a ‘bargain basement’ price. Work with a legal and accounting team so you sell for fair value and do so in accordance with the law.

The benefit of selling your business is being able to repay your debts while your staff keep their jobs. The purchaser will take the responsibility of restoring client relationships and getting cash flow back in shape.

Make sure you discuss your Capital Gains implications with your accountant prior to any sale.

Solving insolvency without liquidating

The best thing to do if you’re facing overwhelming business debt is to get the advice of a professional. A specialist insolvency lawyer can help you explore every option, make the right decisions and come up with a plan so you can side-step liquidation.

Need help to make a call around insolvency and liquidation? Reach out to Legal Affairs Lounge today.

Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.

Take a look at some of the options and steps involved with the insolvency process if you are a business.

How do you know if you are insolvent?

The signs you are insolvent are:

• If the number of overdue bills keeps building rather than dropping
• If the total of your business debts is higher than the value of the assets, you own
• If your sales figures and profits have been on a downward trend
• If you don’t have the cash flow to cover your regular expenses
• Your financial team is continually receiving phone calls and letters of demand from creditors

In some circumstances, multiple creditors may take action against a company that doesn’t repay its debts. This can result in what’s known as compulsory liquidation — and an order is issued by the court as a result of the creditors’ actions.

Otherwise, the company’s directors can start the insolvency process themselves, if they feel they need help to take stock of the situation and bring things under control.

Being insolvent doesn’t necessarily mean the end of the business. The first and most important step is to engage a team of legal professionals who are experienced in insolvency and can guide business directors through the process. Once someone is on board to help with the relevant steps and paperwork, here are the potential steps to move through:

Voluntary Administration

When a company goes into voluntary administration, the directors hand control to external administrators who start investigating financial details and working out how to deal with creditors. These experts are sometimes referred to as insolvency practitioners or receivers.

The company can continue trading during this time but there has to be a formal admission to the Australian Securities and Investments Commission, which will make a note that the company is in administration.

Once the administrators have completed their investigation, there will be a clearer picture of whether it is possible to pay creditors and move forward, or if liquidation is the best next step.

Receivership

If debts can be restructured, payment plans can be arranged and assets sold in order to pay off the creditors, or if the company can be acquired by another entity, it may be possible to get back on track and continue trading.

In these circumstances, a receiver is appointed to oversee the management of assets, potentially restructure the company and help take care of financial obligations.

Liquidation

The insolvency professionals you work with may determine liquidation as the best course of action if there is no way to escape the financial difficulties the business is facing.

Liquidation is also referred to as “winding up”. As part of this, items of value (assets) are sold to help repay debts, the company is closed, and it stops trading.

How to recover from insolvency

Recovering from insolvency is possible and many Australian companies have been able to do so. A positive outcome often depends on taking action sooner rather than later.

To avoid the threat of insolvency, careful financial management and a monetary ‘safety net’ are essential. It makes sense to work with a good accountant so you can be aware of spiralling costs before they are out of control.

Would you like more information about the steps to insolvency, contact Legal Affairs Lounge today to discuss your options.

Disclaimer: The information contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice. Whilst the information is considered to be true and correct at the date of publication, changes in circumstances after the time of publication may impact upon the accuracy of the information.

Trademarking can be complex and it makes sense to complete the process with the help of a legal professional who understands how it all works.

Wondering how to trademark and why you need to? Here are some essential facts.

1. Why trademark?

Businesses brand themselves so they can be easily recognised and stand out from the competition. The trouble is it’s simple for someone to look at what you’re doing and then copy it.

Trademarking gives you ‘ownership’ of a phrase, logo, image, brand name or even a scent and prevents others from replicating what you do in order to make money.

For example, the phrase ‘I’M LOVIN’ IT’ is trademarked by McDonald’s. Paris Hilton trademarked the expression she became known for; “That’s hot”. This doesn’t mean nobody is allowed to say those words out loud… just that they can’t be used for commercial purposes. The lighting on the Eiffel Tower is trademarked so people can’t sell images of it lit up at night. And athletes are officially prevented from copying sprinter Usain Bolt’s signature victory pose.

If you forget to trademark, it’s possible for someone else to trademark your name/logo etc and then take action against you, even though you were the first to market.

2. Not everything can be trademarked

For example, you can’t trademark the word ‘lawyer’. It is far too broad and there are other operators who have the right to use this term.

When you go through the trademark process, you’ll first need to make sure what you want to trademark isn’t already protected from use by someone else. Many businesses have gone a long way down the branding path before they realise they can’t use the name or slogan they want.

With that being said, if you find a trademark similar to yours, you might still be able to claim it for yourself — if your business is very different. For example; Straight Line Graphic Design vs Straight Line Business Coaching. These businesses would not compete with each other and therefore may both be able to apply for a trademark around the wording ‘Straight Line’.

Facebook has trademarked the word ‘face’. However this only applies to social media companies that may be considered competitors.

3. Trademarks aren’t automatically approved

The trademark process involves application, review and approval. You may be asked to provide evidence that you require the trademark and you may need to supply a logo as well as a business name, plus additional information about your business and what you do.

There is also a period where other operators have the right to object to your trademark before it is finalised.

Because the process takes a while and involves a review process, there are costs involved. You’ll have to pay to apply for a trademark and to register it.

There are also costs involved with engaging a lawyer who knows how to trademark. However, when you consider that following the process correctly can save your business from being eclipsed by a competitor, it’s worth the money.

4. Trademarks expire

Businesses come and go and trademarks don’t last forever either. Generally, the validity of a trademark is ten years from approval.

5. Trademarks aren’t patents (or copyright)

Trademarks protect a name, logo, jingle etc that separates your brand from other operators and gives you the rights to use it exclusively.

A patent is more around a concept or invention. You may come up with a new computer program innovation and patent it so that nobody can take it to the market before you.

The term copyright covers the content your business creates. For example, if you write a guidebook, it counts as original work and can’t be recreated by others.

Need help to figure out how to trademark? The team at Legal Affairs Lounge will help you figure out if your application will be approved and streamline the experience so you can focus on other things. Reach out to us today.

Disclaimer: The content contained in this news post is general in nature and is intended to provide a general summary only and should not be relied on as a substitute for legal advice.

However, starting and operating a business can be complicated. Many people find they have bitten off more than they can chew, especially when it comes to paying taxes.

If you are behind on tax obligations such as filing your BAS, paying GST, paying your staff super and handing over PAYG tax, things can catch up with you pretty quickly. What many business owners don’t realise is that the Australian Tax Office has the option to recover unpaid tax dollars from you personally.

The ATO will start the process to recover money owed by sending you a Director Penalty Notice.

What is a Director Penalty Notice?

A Director Penalty Notice (DPN) is a notice from the ATO that is sent to the director if a business has overdue tax bills (usually around three months after the due date has come and gone), or if Business Activity Statements (BAS) have not been filed on time.

The notice will outline the unpaid amounts and explain the options available to resolve the matter.

The DPN will have a date on it and will outline how long you have to pay the money. It may make you immediately personally liable (this is known as a lockdown DPN) or give you a set time period (usually 21 days) to satisfy the requirements of the notice before you become personally liable.

It’s worth noting that a Director Penalty Notice will be valid from the date of delivery to your registered business or residential address, even if you have recently moved.

You can still receive a DPN if you have left your position as director of a company. An incoming director who has been in the role for more than 30 days may also receive this type of notice.

One of the reasons DPNs exist is to prevent company directors from failing to meet their tax payment and reporting obligations, then dissolving the company and walking away without being personally liable.

What to do if you receive a DPN

If one of these notices makes its way to you, generally your options include the following:

• Pay off the debt in full
• Pay off the debt in instalments within the allocated time frame
• Put the company into administration or liquidation so you can find a way to recover the unpaid money
• Work with a specialist to restructure your business
• Share a valid defence that explains why you should not be liable for the business’s tax debts

If you fail to do any of the above, the amounts the business owes will fall to you personally to repay.

Of course, the easiest solution is to complete your reporting obligations and pay off your debts. If the DPN has been issued because you lost track of time and didn’t pay your bills, you could quickly resolve it by transferring the funds to the ATO. You can work with your accountant and bookkeeper to find the money, or potentially borrow funds to cover the costs, if you are certain you can handle the additional debt.

It gets more complicated when the money is not available to pay off the amounts owing. This is when you will need the help of a legal professional who will either:

• Help you to put your company into administration
• Help with a restructure so you can pay your debts
• Help you confirm that you did in fact take reasonable steps to avoid the situation
• Help you confirm that the reason for not lodging or failing to pay was due to illness or other unavoidable circumstances

Get support to resolve your DPN

The last thing you want is to be personally liable for your business’s GST, superannuation and PAYG debts as it can result in bankruptcy and a great deal of stress for your family.

Once you receive a DPN, you need to take action very quickly. Those 21 days can go very quickly and result in additional problems such as the ATO commencing court proceedings against you to recover the money.

One of the best things to do is immediately call a lawyer who specialises in areas including business, restructuring, bankruptcy and insolvency. This professional will be able to help you figure out the best way forward.

Before you get in touch with your lawyer, do your best to find records of your company’s recent tax payments and evidence of your current financial position. Then you can work together to resolve the situation.

Need help to resolve a Director Penalty Notice? If you’re on the Legal Affairs , contact Legal Affairs Lounge today.