Small business' exemption from redundancy payments: no longer clear law
A recent decision in the South Australian Industrial Relations Court has cast doubt on a section of The Workplace Relations Act 1996 (Cth) which has previously protected small businesses from making redundancy payments.
Read more
The Workplace Relations Act 1996 (Cth) protects small businesses with less than 15 employees from making redundancy payments.
However, a recent South Australian Industrial Relations Court (SAIRC) decision has cast doubt on this principle, leaving small businesses exposed to redundancy provisions in awards.
In
Summerton v Yirra Pty Ltd1 , the SAIRC accepted a building worker employed by a company that only had a few workers was entitled to a severance payment when he resigned, despite the fact that the company should have been exempt from making redundancy payments.
The worker was covered by the National Building and Construction Industry Award, which allowed him a severance payment if he ceased employment, for reasons other than misconduct or refusal to work. His relationship with his employer had been deteriorating for several months, culminating in his resignation.
The worker claimed he was entitled to a severance payment of $6,500, in accordance with the formula for calculating payment under the award. The employer denied his entitlement. It argued that the payment was effectively a redundancy payment, which was prohibited under the Act.
The worker attempted to classify the payment as an incentive-based payment on the following grounds:
- payment was calculated by reference to length of service, so this provided an incentive for longer service;
- it encouraged the avoidance of misconduct, as cessation of employment for misconduct disqualified the entitlement; and
- it discouraged rejecting any duties, as refusal to work was another disqualifying factor.
Industrial Magistrate Lieschke accepted this interpretation, finding that the worker was in fact entitled to an 'incentive based' severance payment.
This decision highlights that a loosely drafted award may expose small businesses to redundancy provisions that they should be exempt from. Had the award narrowed its definition of 'redundancy' to termination for genuine operational reasons or where the employer is insolvent, it is unlikely the company would have been forced to make the severance payment.
We understand the decision is being appealed.
1Summerton v Yirra Pty Ltd t/as Richmond Demolition and Salvage [2008] SAIRC 43 (27 June 2008)
Could you be personally liable? Tax and super debts
Business structures are usually geared to protect directs and their personal assets from the commercial risks arising from trading operations. When it comes to tax liabilities, that corporate protection can dissolve away.
Read more
This is how it can happen. You and your wife are the directors of a company that runs a medium-sized business. Things were promising in the first few years as the business grew and you took on more staff. But things haven't gone so well recently; the company hasn't met your sales projections for the quarter, all its value is tied up in inventory and trade debtors, the bank's just increased the interest payments on your business loan (again).... and then your accountant tells you that, as well as interest payments and wages, your superannuation contributions are due and you now have to pay your PAYG withholding monthly.
With the slowdown in the economy, the chances are that business debtors are struggling to pay their bills on time. You're under pressure to prioritise debts and expenses to be met with the available cash. You've got to pay wages or else you'll lose your staff, and you've got to make your interest payments or else the bank will close down the business. You know that if you miss a few instalments of your PAYG and super payments the ATO is going to start chasing you for it, but you hope that things will turn around in the business so you will be able to pay when the Commissioner comes knocking.
You figure the worst thing that can happen is that the Commissioner will wind up the company if things don't turn around and you can't pay those tax liabilities. That would be a mistake.
Income tax withholding
Most employers will know that they are required to collect and remit PAYG withholding on either a quarterly or monthly basis, depending on the size of the company (subdivision 16-B of the Tax Administration Act 1953 (TAA)). But what a lot of employers don't know is that Part VI of the Income Tax Assessment Act 1936 (1936 Act) imposes fairly severe obligations and, potentially, penalties on directors of companies that fail to remit amounts withheld as required under the TAA.
The purpose of Division 9 of Part VI of the 1936 Act is ominously described as ensuring that 'a company either meets its obligations [under the TAA in relation to PAYG withholding], or goes promptly into voluntary administration under Part 5.3A of the Corporations Act 2001 or into liquidation'. The obligations on directors are set out in more clear terms in section 222AOB of the 1936 Act: directors that don't remit the PAYG when it becomes due either have to come to an agreement with the ATO in relation to payment, place the company into the hands of an administrator, or begin winding it up.
Most company directors would now be thinking, 'Gee; that's pretty harsh', but that's not the worst of it. Section 222AOC of the 1936 Act states that, 'if section 222AOB is not complied with on or before the due date, each person who was a director of the company at any time during the period beginning on the first deduction day and ending on the due date is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount of the company's liability' in respect of amounts that have been deducted but not paid.
So if a company has deducted PAYG but doesn't remit it to the ATO when it becomes due, it's not just the company that is liable for it, but any person that was a director of the company from the time it was deducted to the time it became due for payment to the ATO.
Superannuation guarantee contributions
There is no similar provision in the superannuation law that exposes directors to personal liability for unpaid superannuation guarantee contributions, but the ATO can still take action against directors under the TAA to recover any superannuation guarantee charge (SGC) levied against the company if the director has unpaid loans to the company.
Part 4-15 of the TAA allows the Commissioner to recover an amount of a 'tax-related liability', and any costs associated with enforcing a judgment debt in respect of such a liability, from any third party that owes, or may later owe money, to the company with the 'tax-related liability'. Any unpaid SGC, together with the general interest charge (GIC) associated with the unpaid SGC, will be a 'tax-related liability' (which basically means any pecuniary liability arising under a tax law administered by the Commissioner of Taxation), so the Commissioner could seek payment of it from a director of the company that owes money to the company.
The Commissioner can recover the amount of the SGC and unpaid GIC from the director or, if that exceeds the amount owed by the director to the company, an amount up to what is owed by the director to the company. Depending on the number of employees involved and the length of time the contributions have been unpaid, the debt incurred by the business could be significant.
Corporations Act
Directors also have to be mindful of their exposure under the insolvent trading provisions of the Corporations Act 2001 (the Act) for tax liabilities of a company. Division 3 of Part 5.7B of the Act imposes general obligations on directors to prevent insolvent trading. A breach of those obligations exposes the director to personal liability under Division 4 for debts incurred by the company while it was trading when insolvent.
This is an issue for directors because the raising of an assessment by the Commissioner in respect of those unpaid taxes will constitute a debt of the company payable from the date the payment fell due, not from the date of the assessment. The company could technically be insolvent because it doesn't have sufficient assets to meet those outstanding liabilities. A director that incurs further debts, including PAYG or SGC liabilities, when he or she knows that the company is insolvent will be exposed to personal liability for those debts.
There are also specific provisions of the Corporations Act 2001 which allow the Commissioner to take action against directors to recover amounts that are clawed back by a liquidator of a company where payments to the Commissioner are deemed to be voidable transactions. This could mean that directors who use the last available funds of a company to pay amounts owing to the ATO during a company's demise could be exposed to personal liability if those amounts are clawed back from the ATO by a liquidator to pay secured creditors.
Structuring your business
In light of the significant PAYG and super debts a business can incur, directors of companies that operate the business have to consider how to structure the company's affairs to limit their exposure to personal liability, particularly where the company is a trading company. The law gives the Commissioner significant powers to look through 'the corporate veil' and take action against directors for recovery of certain tax-related debts of a company, so directors can't afford to be complacent about their companies incurring these debts.
Our tax and commercial lawyers can assist you in structuring your business so that it is both tax effective and limits your personal liability.
Intellectual property considerations for internal restructuring
Corporate groups should bear in mind some key issues relating to intellectual property and licensing when restructuring.
Read more
Whilst accounting and taxation issues are often key drivers behind restructuring corporate groups, itis also often worth considering intellectual property ownership and licensing issues that might arise from the restructure.
Certain structures can be implemented to reduce the risk that intellectual property assets will be exposed to claims by other parties. For example, a separate legal entity can hold the intellectual property and licence it to entities within the group to afford some protection.
Enforcement
What is also often overlooked is which entity within a corporate group has the legal right to bring infringement proceedings, should a competitor be using the intellectual property without authority of the owner.
For example, in respect of a patent, only the owner or an exclusive licensee of that patent has the right to enforce infringements. It follows that if a subsidiary company is a non-exclusive licensee, it has no right to bring patent infringement claims.
The US case of LP v GSE Lining Technology, Inc. 383 F.3d 1202 (Fed Cir 2004) illustrates how this could be an issue. In that case, the holding company owned the relevant patents and granted a non-exclusive licence to one of its subsidiaries. The holding company sued a competitor for lost profits resulting from infringement of its patent. However, as the subsidiary was the trading entity, not the holding company, the Court on appeal did not allow the holding company to sue for lost profits incurred by its subsidiary.
If the licence within the corporate group had been an exclusive one, the trading entity subsidiary would most likely have been able to recover lost profits.
Summary
When restructuring within a corporate group, the following issues should be considered:
- What is the appropriate entity to hold the intellectual property?
- Are licenses of intellectual property documented properly?
- What rights has the licensee been granted under a licence?
Proof of insolvency
Insolvency is principally a question of fact and can therefore be determined in a number of ways, although ultimately it involves the exercise of some judicial discretion.
Read more
The question of the solvency of a company or an individual is of fundamental importance in the application of insolvency law. However, a thorough investigation of solvency is not required in most cases because of the presumption of insolvency. For example, insolvency is "deemed" where a company fails to respond within three weeks to a demand made under section 459E of the Corporations Act in respect of a debt owed.
Section 95A(1) of the Corporations Act defines "solvent" as the ability to 'pay all the person's debts as and when they become due and payable' and s95A(2) states that a company which is not "solvent" is insolvent. Section 95A thereby provides a cash flow test for determining insolvency; a test used in Australian Courts as early as 1890. Sufficiency of cash flow under the test is the ability to meet current demands, irrespective of whether a company is possessed of assets which, if realised, would enable it to discharge its liabilities in full. The question therefore is not whether the debtor company would be able, if time were allowed, to pay its debts out of total assets, but whether its current assets allow it to do so.
It follows that insolvency is principally a question of fact, and one which may be established in a number of ways. A company can be shown to be insolvent, for example, where:
- it has failed to honour bills of exchange;
- a receiver for a debenture-holder has taken possession of its assets;
- large numbers of outstanding debts and unsatisfied judgments exist;
- admissions have been made by the company or its solicitors of its inability to pay current debts; or
- there is an absence of assets on which execution can be levied.
Ultimately, however, the issue involves the exercise of some judicial discretion and the court is therefore entitled to take into account a variety of factors such as the nature of the company's undertaking, the character of the unpaid debt and the fact that the debt was incurred for the purpose of making the company a going concern rather than in the course of trading activities. Even balance sheet insolvency may become relevant at this point, for the court is not disposed to wind up a company with assets which are capable of being realised to satisfy a debt but which would cripple the company and make it unable to continue its business.
The High Court in Sandell v Porter said that 'the conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.'
For further information, please contact: