Earlier developments in this tale can be found here

The Corporations Act requires a director of a company to prevent the company from incurring a debt if the company is insolvent, or if the company will become insolvent by incurring the debt or a range of debts including the debt.

“ASIC first contemplated issuing guidance during the downturn in economic conditions when a rise in corporate insolvencies was expected. We thought that the market, including directors and their professional advisers, would benefit from clarification about the factors we consider when deciding to commence an investigation in relation to possible insolvent trading, and issued some proposals in November last year”, ASIC Commissioner, Michael Dwyer said.

“It is important that directors focus on their obligations to prevent insolvent trading and we expect this guidance will assist directors of small-to-medium enterprises, in particular, to fulfil this fundamental responsibility”, Mr Dwyer said.

Regulatory Guide 217 Duty to prevent insolvent trading: Guide for directors sets out four key principles which ASIC considers directors should follow to meet their obligation to prevent insolvent trading, That is, to:

* keep themselves informed about the company’s financial position and affairs;
* regularly assess the company’s solvency and investigate financial difficulties immediately;
* obtain appropriate professional advice to help address the company’s financial difficulties where necessary; and
* consider and act in a timely manner on the advice.

RG 217 also details factors which ASIC will consider when deciding to bring proceedings against a director for allowing a company to trade while insolvent (including criminal proceedings and proceedings to recover compensation for loss resulting from insolvent trading).

The new resources can be found on the Fair Work website and will provide:

• tools to assist employers to calculate pay rates
• information on modern awards and the National Employment Standards
• example questions from employers
• information on conditions for apprentices and trainees, employing workers part-time and dispute resolution

Michael Campbell, executive director, Fair Work Ombudsman, said, ‘the agency is devoting considerable resources to assist the retail industry.

‘Essentially, it’s a place for retail employers to access materials specifically designed for small-to-medium sized businesses.’

Retailers can also obtain information by calling the Fair Work infoline on 13 13 94 between 8.00 am 6.00 pm on weekdays or by visiting the Fair Work website.

•     the company’s assets exceed its liabilities immediately before the dividend is declared and the excess is sufficient for payment of the dividend;

•     it is fair and reasonable to the company’s shareholders as a whole; and

•     it does not materially prejudice the company’s ability to pay its creditors. Where the payment results in the company becoming insolvent, it will clearly prejudice the company’s ability to pay creditors.

The Bill, once enacted, will be effective from the date of royal assent.

Under the new regime, entering into an instalment agreement will not remove the director’s obligations under the DPN. The only thing an instalment agreement will do is to preclude the Commissioner from commencing proceedings to enforce the obligation of the director’s penalty notice for the period while payments are made.

The new regime confirms that a DPN takes effect from the date when it is posted — NOT when it is received by the director (DCT v Meredith).

The notice period of the DPN under the new regime has been extended from 14 days to 21 days before recovery proceedings can be taken against the directors.

To avoid personal liability, the company must appoint a Liquidator or Voluntary Administrator within 21 days from the date of the notice.

The defence of “illness or other good reason” is made more difficult for a director to rely on. In addition to establishing the director was ill or for some other good reason did not participate in the management of the company at the time the relevant tax liability fell due, the director must now also establish that it would have been unreasonable to expect her or him to have taken part in the management of the company at that time. This fixes drafting problems with the existing provisions.

The Court has no power under section 1318 of the Corporations Act to grant relief to a director from their obligations in respect of a DPN. This confirms the existing law in DCT v Dick.

The ATO has no discretion to remit a DPN regardless of circumstance.

1: Know why you have a service trust

Let me tell you a story with a fun multiple answer quiz:

Assume you get audited. The ATO shows up at your door and water-boards you. They ask why you set up your service trust. So why did you do it?

• I did it to save tax
• I did it for asset protection
• None of the above

If you choose (a) or (b), you need help from your accountant. Run, don’t walk.

Why is (a) wrong?

Repeat after me: Your service trust is not there to avoid tax. Etch this in your brain before reading any further. It helps you fight the urge to sing like a canary when the ATO gets out the crocodile shears.

But can’t I legitimately structure my affairs to save tax? You would think in a democracy that this is the case. But it isn’t. If the dominant purpose is to save tax then no. Remember, there is a fine difference between tax planning (legal) and tax avoidance (illegal).

The Part IVA general anti avoidance provision hovers over every action. If a reasonable person in your position believes the service trust exists solely for the purpose of avoiding tax – then think of a good place to hide your shank in jail.

Why is (b) wrong?

Cleverly (or so you think), you are adamant that your service trust is not there to save tax – you set it up for asset protection. And you’re a man of your word – you say the same thing in a suit in court (when the ATO is grilling you).

Later on, your business goes bust. Here lies the problem. You now can’t plead in the insolvency court that your service trust was there to save tax. The ATO transcripts where you swear your service trust is there for asset protection reasons don’t make good reading in the bankruptcy courts.

Why is (c) correct?

It is rarely wise to cite tax savings or asset protection as a reason for doing anything. If someone asks, service trusts are great to help your Business Succession Planning, Estate Planning and modern business structures – and they really are. Saving tax and asset protection are merely wonderful by-products.

2 – Set up your structures properly

The last thing you want to do is hand the ATO the ammunition to attack you. Poorly drafted or incorrectly implemented arrangements are the kiss of death.

So how do you set up a service trust?

• Make sure the core business structure is up-to-date. Update trust deeds and the Constitution.
• Set up the new service trust vehicle: family trust, unit trust, hybrid trust or company. You now have your service trust (or service company – quite rare). The service trust provides as many services as it can to the main business: this includes cleaning, secretarial, serviced offices, accounting, chattel leasing, property leases etc…
• Build a Service Trust Agreement. This is the ‘glue’ between the core business and the service trust. You need this so you don’t offend our preciously delicate friends at the ATO.

3 – Charge commercial rates

Remember those naughty people we spoke about at the start who got caught. Chances are they were being greedy and charging more than commercial rates. Or were lazy and failing to make the service trust look arms length.

The mantra is:

“My service trust always acts as though it is arms length and a genuine business”

Your service trust can’t be a sham or non-commercial. Forget about “mark-ups”. A commercial business doesn’t charge “mark-ups”. It charges what the market can bear. It can only charge what the market would charge in a normal arms length transaction. Not sure of what the market will bear? Then get some quotes from other businesses in that industry. Is your service trust providing exceptional quality administrative services? Then you can charge more – but only if the market would charge this amount anyway.

Phillips case is the most telling High Court authority regarding service trusts. In a subsequent tax statement the Deputy Commissioner of Taxation stated (correctly in my view):

“There may have been widespread use of service trust arrangements which involved payments that were grossly excessive in relation to the benefit conferred by the service arrangement.”

The Deputy Commissioner is correct. Service trusts are completely valid – as long as they are on valid commercial grounds. But what are valid commercial grounds?

4: Get professional help

Invest in help from your accountant. Their knowledge is invaluable and saves you more than just money.

5: Do what your documents say

If you have an agreement that says that the service trust will provide certain services, don’t let the main business entity pay for them directly. If you treat your two businesses as though they are really just one, don’t be surprised if the Tax Office does the same.

The minimum amounts had been reduced for the 2008 – 09 and 2009 – 10 financial years. This means, for example, that the minimum annual drawdown for 2010 – 11 for someone aged 64 years or less will remain at 2 per cent; and for those aged 65 – 74, will be 2.5 per cent.

Between October 1995 and July 1998 two companies operated by Mr Soong deducted tax instalments totalling $6.7 million from the wages of their employees. This money was not remitted to the ATO.

When the first of these companies was liquidated the employees were moved into the second company where Mr Soong continued to withhold funds from his employees’ wages without forwarding it to the ATO.

Tax Commissioner Michael D’Ascenzo said this case was an example of a ‘phoenix’ arrangement which involves the deliberate liquidation of a company to avoid paying outstanding debts.

The conviction is the result of a long standing joint investigation conducted by the Australian Federal Police and the ATO.

Soong will serve two years jail before being eligible for parole and has been ordered to pay back $6.7 million to the Commonwealth.

The draft legislation is an attempt to stop companies and directors engaging in phoenix activity.

The ATO estimates that the level of suspected phoenix cases may be in the order of $600 million and that this is an unacceptable risk to the governments revenue.>

Section 255-100 of the proposed Bill says:

The Commissioner may require you to give security for the due payment of an existing or future tax related liability of yours if: (a) the Commissioner has reason to believe that: (i) you are establishing or carrying on an enterprise in Australia; and (ii) you intend to carry on that enterprise for a limited time only; or (b) the Commissioner believes that the requirement is otherwise appropriate, having regard to all relevant circumstances.

The Bill gives the ATO power, at any time, to require such security deposits as the Commissioner considers appropriate. It is expected that the ATO will use this power in high risk industries known to be at risk for phoenix transactions and against directors with a history of failed companies with large tax debts.

• concreters;
• construction and plumbers assistants;
• electricians;
• sales and marketing managers;
• sales representatives;
• university lecturers and tutors; and
• truck drivers

advising them of their obligations for the year ended 30 June 2009. On average, targeted taxpayers decreased their claims by 7.6%, with a total work-related expenses claim change of $40.3 million.

This year they will focus on:

• occupations with a pattern of large and/or rising claims or with issues identified from our intelligence
• returns which do not fit the pattern or norm for a particular occupation across the community, and
• returns lodged by tax agents that are significantly outside the norm for their average claim for their clients.

Due to previous claim patterns and behaviours, the ATO will be specifically focussing on people employed as:

• engineers
• mechanics, and
• teachers.

The most common mistakes by people in these occupations include:

• insufficient documentation available to support motor vehicle and travel expenses
• incorrectly claiming motor vehicle expenses on the basis that they are carrying bulky equipment
• incorrectly claiming travel or motor vehicle expenses when they are required to travel from home to work more than once per day, and
• incorrectly claiming home office, mobile phone and internet expenses.