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Hudson & Young Blog

Director Liability - Update

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The legislation in relation to Director Penalty Notices has been through a review and revision process since our last article on the topic. Worrell’s Solvency and Forensic Accountants summarises:

Under the current law, the DPN essentially provides directors a final opportunity to extinguish their personal liability by either paying the debt or placing the company into administration or liquidation, within 21 days from the date of the notice. If they do so, they will be absolved of personal liability. Understandably the concern was that the proposed amendments would have effectively created an automatic lockdown for liability in certain circumstances, and the only means available to directors to extinguish this personal liability would have been to pay the director penalty in full.

The revised draft legislation provides that a director penalty will not be remitted by placing the company into administration or liquidation, where three months has lapsed after the due day (“restricted remission provisions”). Whilst the ATO will still be required to issue a DPN prior to commencing recovery proceedings, the director will have no ability to discharge their personal liability by placing the company into administration or liquidation in these circumstances. The three-month lockdown on director liability therefore remains a central feature of the revised draft legislation.

A summary of the major changes proposed by the revised draft legislation (in comparison to the current law) is available from us here. pdf 50x50

UPDATE:

This legislation has now passed both houses of parliament and become operational law from 29th June, 2012.

Small business left out in budget balancing act

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Another budget and there seems to be something in it for everyone. Mark Bouris (“The Apprentice, Yellow Brick Road, etc.) sums it up:

THE budget came and went last week with a very clear political agenda to come out of it: that the Labor government intends to win back their traditional voters by ensuring a lot of money is pushed their way through tax cuts and cash bonuses for schoolchildren.

At the same time, the budget appealed to conservative voters who don't think Labor can manage an economy, by declaring that the budget will be in surplus by next year and for three years after that.

There are the big issues to contend with, of course, and these issues do translate into economic growth and interest rates, for example, but what of small business? Bouris wonders:

While I think this is a smart budget politically, we should all be concerned about an anomaly: the 1 per cent reduction in company tax promised to business owners that the government abandoned on budget night.

I say anomaly because if you base the coming-right of the economy and the balancing of the budget on strong growth in 2013, then you'd expect Australia's 2.7 million small business owners, who employ 60 per cent of the workforce, to play some part in that.

I know the government and its advisers have placed their faith in an ongoing resources boom but that still leaves about 85 per cent of the economy.

When you look at factors such as reduced borrowing, a strong Aussie dollar, reduced consumption, rising superannuation costs and rising costs of power, you see a business community that needs a help along and didn't get it.

This economy now needs to be measured in mining and non-mining terms and therefore the growth estimates in the latest budget cannot be said to be indicative of the small business landscape.

 

Web Strategy 4.0

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Photo: AP

In this month’s web strategy we look at getting on top of Google. Here at H&Y we do not get involved in search engine optimization – not because we don’t believe it is necessary, but because it is such a specialist and ever changing field we believe it is prudent to refer clients to experts.

There are basic components that can be incorporated into any website to assist with the Google ranking, but we believe the amount of effort and money that should be devoted to SEO depends entirely on the business and the site and this is determined by the defined web strategy.

It is very easy so throw money at Google and SEO consultants to ensure your site stays at the top but Sydney-based small business strategist Robert McAnderson explains a more frugal concept to The Age:

Traditionally, all businesses start by buying their company name and domain name. That is important, McAnderson says. Going one step further, he promotes the purchase of additional, relevant domain names based on the products or services sold from your website.

Determine which additional domain names to enlist through keyword research pinpointing the most frequently searched keywords consumers use when searching the internet for the products and services you sell.  As your commercial offering evolves, so should the domain names you buy, he says. 

Your business may wind up with several websites selling your products or services. That plural approach, he admits, goes against the traditional view of running just one small business website, but it gives flexibility, ensuring your website “talks” to customers about what they seek.

Just as in the past, a company had several brochures for selling its particular products or services, a business website now resembles a tailored brochure. Only, McAnderson says, it is far more dynamic. 

Another important part of any strategy is the monitoring of success:

So it connects with potential customers, perform keyword research using Google or Wordtracker. Wordtracker charges $69.00 per month plus VAT where applicable, but Google Adwords keyword tool is free: “a very useful tool for measuring trend changes for keywords”.

Research performed with the online tools will either “confirm or confront” your perception of what the market wants when using search engines to find products or services, McAnderson says and stresses a vital point.

You must pursue total relevance. All keywords need to relate to the offerings sold on your website.

If your website fails to offer what consumers want, “they will simply navigate away from your website and you have wasted your time”.

DNO the SEO Revolution is not, McAnderson says, about “keyword deception”. Rather, it is a “philosophy” built on keyword relevance, he says.

Keyword research works because it takes the guesswork out of the process, letting you develop a website rich in highly searched keywords. 

Ten tips for starting a business

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There is plenty of advice out there for those starting a business. At H&Y it is simple – “come and talk to us!”

Scott Pape (a.k.a. The Barefoot Investor) gives his ten tips for businesses starting out:

1. Swing on the trapeze

"You are absolutely relentless," says my mate Andrea.

She's right. I've been hustling every day for the past decade.

That's not only the smartest, safest way to start a business, it also prepares you for the daily grind of going it alone.

2. Don't drink at Starbucks

Forget about the idea of starting a "lifestyle business" - where you can work a four-hour week from your laptop in Starbucks.

It's a load of rubbish.

The smartest internet entrepreneurs I know all have a desk in an office that they chain themselves to for at least 12 hours a day (generally more).

3. Make a commitment

Being in business requires a deep and lasting commitment.

Starting a business is a commitment to yourself - and what you're creating.

4. Prepare to be humiliated

Every successful person I know has at one time or another been totally humiliated.

The wealthier they are, the more it happens (and the more public it is).

Being in business is about putting yourself out there, creating something unique and taking a risk.

5. Do this first

Don't worry about renting a fancy office, building a website, printing business cards or designing a freakin' logo. Your first - and only - priority is to make a profitable sale.

6. Be a tightwad

There are two common business cost-killers: debt and staff costs.

7. Rip people off

Steve Jobs has a lot to answer for.

Being an inventor is wonderful if you have Apple's resources, but for anyone else it's a hard, costly and mostly unprofitable way of doing business.

It's far better to look around and see what your competitors are doing right and knock off their best ideas.

8. Don't you dare share

I can count on one hand the businesses partnerships that have worked out.

9. Make your mark

Building a business is one of the most creative and practical ways to make a change in the world (forget politics - I'm convinced that if more of our politicians were small business owners the country would be in better shape).

As a business owner you have the opportunity to do something that matters to your customers - to create something new, make your mark and live life on your terms.

10. Make it big in 2017

Huge things can happen in five years - but generally not any sooner.

The reality is that most businesses that start this year will not exist in 2017.

But even if you fail, you win - it's one of the best things you can possibly have on your resume, and you always learn something from going into battle.

The challenge of the start-up

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Beware rapid business growth, says Professor Nikolai Petrovsky. Picture: Calum Robertson

We often see start-up businesses and pretty much all of the consultants at Hudson & Young have been intimately involved with at least one of their own. There are tricks and pitfalls to the natural growth experienced by a new business and this process need to be managed.

Anthony Keane of News Ltd has discussed the issues with Deloitte:

Deloitte Private partner Tim Gullifer says there are three key strategies and five growth cycles that all businesses should identify.

"The three strategies are growth through diversification, growth through acquisition and growth through competitive advantage that is, being better than the competition in products and services," he says.

Gullifer says the five cycles of growth are start-ups, initial growth, mid-growth, late-growth and maturation.

"At each level of the growth cycle various levers can be pulled to ensure that the business continues to profit and grow to the next stage," he says.Business owners should understand which part of the growth cycle they are in and then focus on simple, low- cost strategies.

These include having a strategic plan, outsourcing one or some of your business roles, adopting the right technology and developing valuable strategic alliances.

"Team up with like-minded individuals who share your core values. The alliance partner needs to have experience, be commercially savvy and have strong, far-reaching networks.

"Don't confuse operations with strategy operational goals are year-on-year ways to conduct business.

"Develop an implementation plan with your adviser and identify milestones to be achieved before you move on to the next strategy."

Introducing external advisers can make "an incredible difference", says Family Business Australia chief executive Philippa Taylor.

"One of the challenges for many small business owners is they don't know what they don't know," she says.

"In the first instance, it would be really good for a small business person starting out to find a respected family friend or a retired successful businessman prepared to give them an hour a week of their time just to bounce off ideas."

Taylor says when identifying the next stages for your business, don't forget the exit stage.

"From the start you need to have an exit plan. The end can change, what you decide doesn't have to be cast in concrete, but have that end in mind."It's easy to get into business but it can be heartbreaking and difficult to get out."

"Don't grow too fast," he says. "Growth comes with its own problems at times when we grew too rapidly. Sometimes scaling back means your productivity increases."

Prof Petrovsky says it's often worth the money to bring in key strategic advice.

"Stay lean and mean for as long as possible," he says.

"Conserve funding and don't spend unnecessarily. When you run out of funding, that's the end of the business."

The knack of looking big for small business

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Everyone who starts a business wants to talk it up – they would be crazy not to. And everyone wants their business to appear larger than it actually is. The really good entrepreneurs are naturals at this and usually get it right even if they can seem over the top.

Here are some tips from Tony Featherstone to make your business (particularly start-ups) look bigger:

1. Go 'global' from the start

I recently interviewed an entrepreneur behind a start-up that had a tiny presence in the United States yet on the letterhead promoted offices in Australia, New York and Los Angles.

2. Leverage the reputation of others

Smart start-up entrepreneurs often promote their advisory boards and mentors. Having better-known people on their website, even if the involvement is minimal, helps them look bigger.

3. Enter awards

There is no shortage of business awards and lists to enter, some more reputable than others. Right or wrong, having an 'award' can be marketing gold for unknown start-ups.

4. Focus on big numbers

Casual observers rarely dig beneath headline numbers. They just see big percentages and big dollars and think the start-up by default is big, even though its 80 per cent growth may be off a tiny base and profits are almost non-existent.

5. Join associations and professional bodies

Yes, some business clubs seem to accept anybody and professional bodies have varying entry requirements and accreditation processes. Even so, saying your start-up is a member of an organisation, or that you chair some committee or give presentations at events, helps with credibility.

6. Social media

It goes without saying that savvy entrepreneurs use various types of social media to imply they have all these followers hanging on their every word. and syndicating to others. Genuine thought-leadership material that readers value can make your firm (rightly) appear bigger than it is.

7. Print media

Savvy entrepreneurs build working relationships with the media, rather than see publications as a free advertising service and gush-fest.

8. Milk trophy clients

How often do you see small firms post a list of clients, always with the best-known at the top? They never say that the piece of work was small or that the client was from years ago. But, hey, big-name clients can give start-ups huge credibility.

9. Brand yourself

So often in start-up land, the entrepreneur is the story. 

Is my business solvent?

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We know that there can be personal ramifications for directors for trading whilst insolvent and we know the standard definition “cannot pay its debts when they fall due”, but what does this actually mean. What are the warning signs that a business is insolvent. Russell Emmerson of News Ltd discusses the signs with Brisbane accountant Tanya Titman, of Consolid8:

THE BIG QUESTION

The key question every person must ask is whether their business is viable. BRI Ferrier principal Nick Cooper says this is especially true in the current economic climate.

"If the business is not likely to be viable into the future, owners need to explore whether they can adapt their business and expand into new ventures," he says.

LOOK AT LOSSES

A business with no plans for profit on the horizon faces erosion of its capital.

There are some warning signs, however, including falling gross profit margins. Businesses should look to increase their prices or look at what costs can be cut to improve profitability. Look at whether your products or services can be made more efficient or take a hard look at your overheads

DEBT DOLDRUMS

Mounting debts, broken promises of payment and increasing formal demands for payment are pretty clear signs of a failing or disorganised business.

SYSTEMS IN PLACE

Missing business plans, cash-flow forecasts and disorganised internal accounts mean the business could already be failing without a way of telling the business owner. "Businesses focus on putting together the BAS, but do not even look at a profit and loss report on a regular basis," Titman says.

"The problem is that so many businesses are not getting financial reports on a timely basis - often even when they have a bookkeeper."

Get your systems up to date.

CUSTOMERS

A thriving business may not have the time to chase its outstanding debts, but this can cut into its ability to make more sales.

FINANCE

If your business is relying on more security from the business owner or bumping up against its overdraft limit and defaulting on loans, your first port of call should be your financier. If you are no longer on speaking terms, or if you are moving banks to stretch your finances or avoid additional securities, it may be time to call in a reconstruction expert before your debts turn personal.

EARLY WARNING SIGNS

Alarm bells should start ringing at these early warning signs:

* Suppliers placing your business on cash-only terms or other "special arrangements".

* Paying suppliers rounded sums that bear little link to specific invoices.

* A rising number of dishonoured cheques and a reliance on post-dated cheques to keep suppliers and banks happy.

* Rising tax and superannuation debts and a lack of payment plans - and the penalties that will put you further behind.

* An increasing number of supplier disputes in a bid to stave off payment.

Legal action in insolvent companies

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This is an interesting article from our friends at Worrells Solvency & Forensic Accountants:

"It is not uncommon for the sole material asset remaining at the end of a company’s life to be a cause of action against a third party (e.g. a claim for breach of contract).  More often than not, at the time a director first approaches an insolvency practitioner, no action has been taken in relation to the claim or the action is in its infancy and where the company is insolvent, a liquidation or voluntary administration, is inevitable. 

The potential value of such litigation, if prosecuted successfully, may be significant.  Although it is usually the case that an insolvency practitioner will be unable to take any action in relation to the claim and realise its value for the following reasons:

(1)    The company is will often be assetless;

(2)    The administrator and/or liquidator will be required to incur significant legal costs to recover on the claim (which may include posting security for costs if legal proceedings become necessary), those costs will typically need to be borne by the practitioner personally;

(3)    The benefit of the claim will be retained solely by the insolvent company to be distributed in accordance with the priorities set out in the Corporations Act and therefore no compensating advantage to the director and/or close associates of the company to fund the costs of the claim (other than the right to apply to Court to recover those costs from the proceeds of the action in priority to creditors); and

(4)    The director is familiar with the material facts and history of the claim and therefore is better positioned than an insolvency practitioner to manage the claim.

On rare occasions the liquidator will negotiate the sale of the cause of action.

In September 2010 Con Kokkinos and Paul Burness, partners of Worrells Melbourne were appointed to two related entities that traded restaurant businesses from leased premises.  Upon appointment, the primary assets of both companies were claims against the owner on the basis of a failure to honour certain representations that their respective tenancies, would be renewed.  As the tenancies were not renewed the companies had no alternative but to cease trading.  The companies then initiated legal proceedings seeking damages for loss of future profits.

The appointments were precipitated by the filing of winding up applications against the companies by the Australian Taxation Office.  The voluntary administration, which typically lasts no more than 35 days, enabled the director to propose a Deed of Company Arrangement to creditors under which he would:

· Contribute a lump sum to be made available for distribution to creditors; and

· Continue to fund the proceedings and, if successful, make 20 percent of the net proceeds of the actions available for distribution to creditors.

The administrators determined that, if the legal actions were successful in a deed scenario, unsecured creditors could expect to receive a dividend of 100 cents in the dollar.  By contrast, it was considered unlikely that the claims would be pursued in a liquidation as no return to creditors could be expected.  Despite this assessment, the Deputy Commissioner proceeded with the winding up application.  The Court received a report from the administrators on the deed proposal, on which the application was adjourned to enable creditors to vote on the proposal.  These were ultimately approved by creditors at the meetings called at the end of the administrations to decide the future of the company.  The Deputy Commissioner not surprisingly voted against the proposals.

The director continued to fund the proceedings in accordance with the terms of the deeds and, in February 2012, judgment was handed down in favour of the companies.  It is our understanding that the legal costs incurred by the director significantly exceeded our preliminary estimates.

The issue of damages has yet to be decided.

This example highlights the fact that a Deed of Company Arrangement may be the most effective form of external administration for an insolvent company where the principal asset of the company is a cause of action."

It also highlights the current attitude of the ATO.

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