Chris King

Businesses are seriously underestimating the time, cost and effort it will take to get ready for the new Lease Accounting Standard, warns a leading corporate accounting expert.

Chris King, a partner in Pilot Chartered Accountants Corporate Advisory team, said upcoming changes to the Lease Accounting Standard could substantially impact the financial statements for all businesses with operating leases, including their ability to borrow funds.

The new standard, which comes into effect on 1 January 2019, will require operating leases to be recognised on the balance sheet instead of being the current rental or lease payment expense. According to Mr King the changes aim to create more transparency around lease commitments. He said the new standard would impact any businesses that rent premises and lease equipment or motor vehicles, most notably affecting businesses in the construction, not-forprofit, childcare and education, retail and manufacturing sectors.

“These changes will seriously impact key financial metrics such as gearing ratios, current ratios and EBITDA,” said Mr King.

“As an example anyone dealing with contracts that have earnouts based upon an EBITDA multiple or employee bonuses based on EBITDA achievement, could potentially pay a lot more than they anticipated based upon the new standard. “Current ratios, which for many organisations are close to 1:1, may drop below this benchmark threshold, potentially leading others to question their financial viability.

“The benchmarks you use will need to be adjusted to account for the changes, particularly if they have been set covenants by external parties like banks, financiers and regulators. “The term of the lease will have a significant impact on the value of the lease asset and lease liability.”

Mr King also warned that the changes to the leases standard had the potential to turn a small company into a large company under the Corporations Act 2001.

“This would trigger auditing and reporting obligations for companies that previously had no ASIC obligations,” he said. “Businesses should be talking to their advisors now to understand the impact the new standard will have on your business to reduce any potential issues and minimise implementation and compliance risk.”

The new changes will most likely impact:  existing licensing arrangements;

• key profitability measures;
• balance sheets;
• banking covenants; and
• contractual arrangements (including performance bonuses) which are linked to financial performance.

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Murray Howlett

Many company directors are unaware that they could be personally liable for unpaid superannuation payments for contractors and are potentially easy targets for the Australian Taxation Office (ATO), warns a leading tax strategist.

Murray Howlett, a partner at chartered accounting firm Pilot Partners, said the ATO rules around superannuation payments had tightened substantially in recent months and any company director in any sector who deals with sub-contractors could be exposed.

Mr Howlett’s comments come in the wake of this week’s announcement by Financial Services Minister Kelly O’Dwyer that the ATO would be able to apply for court-ordered penalties, up to a year in prison in the worst cases, where an employer gets caught shirking their superannuation liabilities.

“These new penalties don’t just apply to an employer but also to company directors, many of whom don’t recognise their responsibility, and it’s the first place the ATO looks,” said Mr Howlett.

“Superannuation penalties is a big one and directors need to know that they can be personally liable for super that they didn’t pay in respect to contractors.

“You think you know where these liabilities start and stop, but there are multiple ways under multiple tax laws where different parties can be liable.”

Under current Australian law if you hire a contractor paid wholly or principally for their labour, they are considered your employee for the purposes of superannuation and are entitled to superannuation payments, even if they’ve quoted an Australian Business Number.

If superannuation is not paid in these instances and if the ATO is not notified within three months of the due date, the director becomes personally responsible.

Howlett said company directors could be liable for super payments for many years not just a standard three or four year period and are unable to hide behind complex company structures or family trusts from backdated claims.

“Superannuation Guarantee rules are oddly drafted and it’s very easy for company directors to get caught out,” he said.

“You might think you understand your exposure to the ATO and that your company structure will protect you, but that’s not always the case.

“There is a strong belief that a company is separate from its owners, however, the government regulator has created trap doors you can fall through in this _ the year of the tax audit _ and more and more people are getting caught short five or six years after the laws were introduced.”

Howlett said the ATO’s data tracking capabilities had improved exponentially over the past five years and recommended directors only hire proprietary limited entities.

“There is no secret that the ATO is looking for revenue and contractors are kryptonite,” he said.

“If you do hire a contractor, then make sure they have a proprietary limited company otherwise your exposure to future claims is very real.”

Characteristics that suggest a contractor may be eligible for superannuation include:

• The level of independence – who, when, where and how the work is performed;
• Rates of pay and how they are negotiated;
• Their appearance to the world at large – does it look like they represent the company?

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