Business

Q: What tax things should I be careful of before I sign any contract?

A: Tax and revenue law is becoming more and more complicated. Before signing any contract you should consult with both your lawyer and your accountant and ensure that they talk to each other to make sure that all possible tax ramifications of your contract have been taken into account.

Some specific issues that arise include:

  • GST - most contracts are subject to GST and while there may be exceptions available you should never assume they apply as they are often quite specific
  • Capital gains tax - the sale or creation of any sort of property, including intellectual property can have CGT implications - for example, did you know that by being paid a lump sum of money for agreeing not to compete in a business with someone the entire payment is treated as a capital gain?
  • Are you eligible for one of the capital gains tax concessions?
  • There are a number of provisions in the Income Tax Assessment Acts that deem you to have received income even if you have not received any payment.
  • Stamp duty is payable on the sale of a number of different types of property not just land - for example a purchase of a share in a company could make you liable for stamp duty based on the value of land held by that company

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Q: Tax - What is Division 7A?

A: Division 7A of Part III of the Income Tax Assessment Act 1936 entitled "Distributions to entities connected to a private company" was introduced in 1998 in an attempt to stop people taking money out of companies in a tax free way.

Division 7A, generally, makes:

  • payments by;
  • transfers of property from;
  • loans from; and
  • guarantees by

companies to shareholders and their associate's taxable dividends in the hands of the shareholder or associate receiving the benefit.

Extreme caution needs to be taken when companies are allowing shareholders and their associates to use company property or when loans are made from companies to shareholders or their associates.

Division 7A does not stop companies making loans to their shareholders and associates. As long as an appropriate loan agreement is put in place the loan will not be treated as a dividend. The loan agreement must require:

  • interest to be paid at the benchmark interest rate;
  • require minimum principal repayments; and
  • have a maximum term of 7 years if unsecured and 25 years if secured.

One often overlooked area of Division 7A is guarantees by companies to support borrowings by their shareholders or associates. If a company guarantees a loan from a bank to a shareholder or an associate of a shareholder the amount of the loan will be considered a dividend by the company to the shareholder or associate of the shareholder unless the company has an effectively non-contingent obligation to repay the loan. That is, if the guarantee document does not state that the borrower, being the shareholder or their associate, must default before the company is liable then the amount of the loan will be a dividend.

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Q: Tax - What are the debt equity rules?

A: The debt equity rules came into effective operation on 1 July 2005 when the transitional period ended.

The rules are aimed at stopping the long existing practice of companies repaying loans from shareholders out of profits in a tax free way.

On 15 July 2005 the assistant treasurer, Mal Brough, released a press release stating that the debt equity rules would only apply to private companies having a turnover greater than $20 Million.

This last minute decision, which applies from 1 July 2005, means the debt equity rules have no application for the majority of private companies.

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Q: What do I need to do to sell my business?

A: You have made the big decision to sell your business - now how do you go about it?

The first decision you need to make is who you will sell your business to. Is it the general market place and are you going to use a business broker or are you able to sell out to a competitor or even to a key employee?

Once you have decided who the potential purchasers are you need to consider how you are going sell the business? This will depend on the entity that actually owns it; is it a company or a trust or you personally? Can the sale be set up in a way that will limit the amount of tax, particularly capital gains tax that you will have to pay or stamp duty that a buyer may have to pay?

Some other important things to consider are:

  • Will you require someone to guarantee the purchaser's obligations under the contract?
  • How is the price to be split between goodwill and other assets?
  • Is there any stock to be sold and if so on what terms - is there a cap on the amount of stock the buyer has to take?
  • What is happening with employees?
  • Are there any contracts for the business that need to be assigned to the buyer?
  • Are you agreeing to give a restraint of trade and if so, on what terms?
  • Are you giving any warranties about the sale?
  • For GST purposes and the sale of a going concern, are you going to be supplying everything necessary for the ongoing conduct of the business?

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Q: What should a buyer of a business look out for when buying a business?

A: Buying a new business can be a very exciting time but there are many issues that you should be aware of. It is important to consult with your lawyer and your accountant before committing yourself to anything.

A few of the many issues that you will need to consider include:

  • The purchasing entity - your lawyer will discuss with you risk management and tax considerations when making this decision
  • GST
  • What assets should be included in the sale - to ensure you are getting what you bargained for?
  • What intellectual property is used by the business?
  • Are any of the assets of the business subject to a mortgage or retention of title arrangements?
  • Are the business premises leased?
  • Is the business a franchise? Do you understand the Code of Conduct that applies to franchised businesses?
  • What is happening with the employees of the business?
  • Should the seller of the business be restrained from starting up a new business in competition to yours?
  • Do you understand the regulations that apply to the type of business you are buying - including OH&S, environmental laws and the need for a licence?
  • Do you need finance for the purchase?

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What are subcontractor statements and what to do about them?

Q: A NSW business can be liable for the business's contractor's liability for NSW payroll tax, wages and workers compensation insurance premiums of the contractor unless the business complies with the subcontractor rules.

A: The NSW industrial relations, payroll tax and workers compensation insurance laws potentially expose businesses that retain contractors to the contractor's payroll tax, wages and workers compensation insurance liabilities.

Each of the laws that regulate the obligation to pay wages, payroll tax and workers compensation insurance make a business liable for their contractors wages, payroll tax and workers compensation insurance liabilities in respect only of the work done under the contract if:

  • the contractor does not satisfy them; and
  • the business did not get a subcontractor statement from the contractor that relates to the period for which work has been done.

Q: In what situations will these rules apply?

A: These rules apply to all contracts where work is being carried out after 1 July 2003 even if the contract was entered before then and:

  • there is a contract for work (whether oral or in writing) between a business and a contractor; and
  • the contractor employs or is deemed to employ workers who carry out the work; and
  • the work done is in connection with the business of the business that retained the contractor.

Q: When don't these rules apply?

A: There rules do not apply:

  • where a contractor is in receivership, being wound up, or is bankrupt and payments under the contract are being made by the business to the receiver, liquidator or trustee in bankruptcy; or
  • where a business has contracted for work to be carried out and that work does not relate the business of the business, for example it may be for work on a residence of a director

Q: At what times must the subcontractor statement be given?

A: The subcontractor statement must be given for each period for which work is actually done and technically, it does not matter if it has not been given before the work has been done.

However, it is best that a statement be given before any work is done and that fresh statements are obtained if work continues beyond the period to which the earlier statement relates.

Q: What is a subcontractor?

A: The legislation defines "subcontractor" in broad terms. In short, it is an entity engaged to carry out work under a contract.

However, the liability of a business for pay roll tax, wages and workers compensation insurance premiums will not arise where the subcontractor is a sole trader or a partnership without employees. Although there may still be the obligation to get a statement.

Q: Is there an equivalent law in each state or territory of Australia?

A: There is no equivalent law in the other states or territories that permits for subcontractor statements. However, there are for example laws in the other states and territories which deem a business to be jointly and severally liable to pay workers compensation with their contractors.

The practical implication of that is that there is no way to get out of these unpaid pay-roll tax, wages and workers compensation insurance premium obligations in states and territories other than NSW.

Q: What happens if a subcontractor statement is knowingly false?

A: A subcontractor statement provided by a contractor will not relieve a business of liability if at the time the statement was provided the business believed the statement to be false.

Q: How long must the subcontractor statement be kept for?

A: A business must keep a copy of the subcontractor statement for at least 5 years (payroll tax) 6 years (wages) and 7 years (workers compensation).

If a subcontractor statement relates to all 3 items, it will need to be kept for 7 years.

Q: Does the subcontractor statement exclude liability if the contractor is actually an employee?

A: A business will need to ensure that its contractors are not deemed employees because of their particular relationship with the business. If that happened, the business could not avoid these liabilities by using a subcontractor statement.

Suggested action by businesses as a result of these laws

Businesses should review their contracts with their contractors:

  • to ensure that they require subcontractor statements to be given
  • to permit for termination of a contract when a subcontractor statement is not given
  • so that it is clear to the contractor that the business has no obligation to pay any money due under the contract for the period for which a subcontractor statement has not been given (or any penalty or other fees for late payment of that money) (however each of the 3 laws do make some provision for this if the contract does not deal with it)

Contact us if you want to know more about implementing a process for providing subcontractor statements to the businesses that contract to your business. We have a package that includes a statement that you can give to your contractors as you comply with these requirements.

For more information, visit the WorkCover website, Office of State Revenue website , or Office of Industrial Relations, Department of Commerce website. Copies of the Workers Compensation Act 1987, the Pay-roll Tax Act 1971 and the Industrial Relations Act 1996 can be found at www.legislation.nsw.gov.au.

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