Brad Fox

The Association of Financial Advisers (AFA) notes the introduction of legislation relating to the Tax Agent Services Act (TASA) and welcomes greater certainty on the matter for advisers.

“We are pleased that common sense has prevailed and acknowledge the support of the Coalition and the Independents, as well as the Financial Services Council (FSC) and the Financial Planning Association (FPA) in collectively lobbying on the issue,” said AFA CEO Brad Fox.

In particular, the AFA welcomes the extension of the current exemption for financial advisers from TASA until 30 June 2014.

“The delay in implementation is essential given the regulatory overload the industry is already dealing with,” Mr Fox said. “It would have been an unfair and unreasonable expectation and an all but impossible rush for advisers to be ready for TASA by 1 July 2013.”

Mr Fox also welcomed more clarity around the definition of tax (financial) advice services, its interaction with the current Tax Agent Services regime and the definition of ‘tax agent services’.

“Getting the definitions right by way of regulation will give all interested parties an appropriate opportunity to make the legislation work in practice,” Mr Fox said. “The AFA looks forward to working with Treasury and the Tax Practitioners Board on this next vital step.”

Mark Rantall

Yesterday’s tabling of a Bill to provide for fairer taxation of excess contributions in super is a welcome measure designed to create greater equity for lower and middle income earning Australians.

Yesterday’s Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Bill 2013 provides a fair and considered response to resolving a fundamental imbalance for many Australians.

Mark Rantall, CEO of the FPA said:

“The FPA welcomes the tabling of this Bill into Parliament and on behalf of our members and the millions of Australians they serve, we are pleased to see a genuine attempt by legislators to bring greater balance to the process of taxing excess contributions to super. The FPA has been calling for change to the unfair penalties for excess concessional contributions for many years.

“It is vital to regain balance and equity in our taxation system, and the key area of taxation of superannuation’s concessional contributions is the right place to stay focused.”

The changes contained in the legislation will enable excess concessional contributions to be included in an individual’s taxable income and allow them to be taxed at the individual’s marginal tax rate regardless of their income or the cause of the breach. A non-refundable tax offset of 15 per cent will be provided to individuals to account for the income tax paid by their fund.

The changes will apply to contributions made on and after 1 July 2013.

For better consumer protection, AFA again calls to enshrine the term “Financial adviser”

“Those who work under an AFSL are obliged by law to act in the best interests of their clients,” said AFA CEO Richard Klipin. “In the interests of properly protecting consumers, it is this distinction that they need to understand. It therefore makes sense to enshrine the term in legislation so that only those who work inside the AFSL tent have the right to call themselves a financial adviser/planner and belong to a professional association such as the AFA. Those who sit outside the AFSL tent should not be permitted to use the term financial adviser/planner.”

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The AFA is Australia’s longest serving financial adviser association and this year celebrates its 65th Anniversary.

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“The AFA has provided leadership and direction to holistic and risk specialist financial advisers through more than six decades of change, including FSR,” Mr Klipin said. “We therefore have a very clear understanding of the profession and we believe the fundamental issue is consumer protection – consumers who engage an adviser working under an AFSL have rights and protection. Until this distinction is enshrined in law, those who do not act under a financial services licence will continue to operate and consumers who use their services will continue to be at risk.”

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AFA President, Brad Fox said that in the interests of consumers, it is very important that members of the financial advice community’s various professional associations are seen to be cooperative, supportive and respectful of each other in raising public perception around financial advice. “It is a combination of behaviour and education that will change consumer perception, not a sticker or badge that says you belong to one association or another,” Fox said.

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“To see that consumers are better served, we believe the focus should firstly be on ensuring sensible FOFA outcomes, rather than pursuing self interests,” he said. “We can assure all consumers and interested parties that AFA Members are not operating in a moral and/or ethical vacuum and have continued to demonstrate outstanding professionalism and compassion for our clients for 65 years. We also confirm that the AFA will continue to represent the interests of all financial advice professionals where those interests are consistent with positive consumer outcomes.” ]]>

For better consumer protection, AFA again calls to enshrine the term “Financial adviser”

“Those who work under an AFSL are obliged by law to act in the best interests of their clients,” said AFA CEO Richard Klipin. “In the interests of properly protecting consumers, it is this distinction that they need to understand. It therefore makes sense to enshrine the term in legislation so that only those who work inside the AFSL tent have the right to call themselves a financial adviser/planner and belong to a professional association such as the AFA. Those who sit outside the AFSL tent should not be permitted to use the term financial adviser/planner.”

x

The AFA is Australia’s longest serving financial adviser association and this year celebrates its 65th Anniversary.

x

“The AFA has provided leadership and direction to holistic and risk specialist financial advisers through more than six decades of change, including FSR,” Mr Klipin said. “We therefore have a very clear understanding of the profession and we believe the fundamental issue is consumer protection – consumers who engage an adviser working under an AFSL have rights and protection. Until this distinction is enshrined in law, those who do not act under a financial services licence will continue to operate and consumers who use their services will continue to be at risk.”

x

AFA President, Brad Fox said that in the interests of consumers, it is very important that members of the financial advice community’s various professional associations are seen to be cooperative, supportive and respectful of each other in raising public perception around financial advice. “It is a combination of behaviour and education that will change consumer perception, not a sticker or badge that says you belong to one association or another,” Fox said.

x

“To see that consumers are better served, we believe the focus should firstly be on ensuring sensible FOFA outcomes, rather than pursuing self interests,” he said. “We can assure all consumers and interested parties that AFA Members are not operating in a moral and/or ethical vacuum and have continued to demonstrate outstanding professionalism and compassion for our clients for 65 years. We also confirm that the AFA will continue to represent the interests of all financial advice professionals where those interests are consistent with positive consumer outcomes.”

The post AFA: calls again to restrict use of the term "financial advisor" under legislation appeared first on AdviserVoice.

The Institute, whose member actuaries work for insurers rating risks and setting premiums, notes that the lack of adequate insurance coverage for floods and/or its prohibitive cost, are key issues which must be addressed in any national funding solution.

“One positive outcome of the Queensland events is that flood has finally become a serious subject of debate after many years of being ‘out of sight, out of mind’ or ‘too hard,” according to Peter McCarthy, chairman of the Institute’s General Insurance Practice Committee.

“While flooding and severe rain events have always been common in Australia, compared to say, cyclones or earthquakes, getting insurance can be very difficult or prohibitively expensive. Furthermore, a distinction is often drawn by insurers between flood types, such as riverine versus storm, which can elude consumers,” Mr McCarthy said.

“The issues with flood are that, unlike other disasters, the same properties flood again and again, many high risk areas are known by residents, business owners, governments and insurers, and the scale of damage is greater than for other disasters,” Mr McCarthy said. Flood premiums insurers must charge to provide full flood cover are also extremely expensive. As a simple illustration, a $500,000 property which floods every 30 years may require a premium for flood of up to tens of thousands of dollars.”

The Institute believes that any national solution for flood must begin with an agreed policy goal and an understanding that the issues are broader than insurance. “For example, is the objective to fully compensate everyone affected for their losses or to partially compensate a proportion of those affected?” Mr McCarthy said.

“There’s also a need to decide what property will be covered and to what limits. Will there be compulsory cover? Will private residence and commercial properties be covered? Will government infrastructure be covered?

Defining what ‘flood’ events are covered is also key, Mr McCarthy said.

“There are complexities regarding interaction of flood with other natural hazard covers. For example, flood damage which occurs when rain is still falling creates an overlap between ‘storm’ and ‘flood’ covers. Or, in the case of Cyclone Yasi, damage caused by wind is likely covered but damage from a river flooding caused by rain from a cyclone may not be covered and storm surge is normally not covered.”

A realistic assessment must also be made about whether it’s affordable to implement the solution long-term. The collection mechanism (tax, levy, or premium), level of compulsion to contribute and amount required to reinstate damaged assets, may also limit options.

“To manage affordability, options must address the level of cross-subsidies from owners of properties that are not in flood prone areas to owners of properties which are,” Mr McCarthy said.

And, to estimate costs and address issues associated with a funding solution, modelling of flood impacts is required, but the limitations of this must also be recognised, he said.

“Floods referred to as a ‘1-in-100 year’ or similar event may be more like 1-in-25 levels.  And, changes in land use (eg increased urbanisation leading to concrete covering land that was formerly grassland or forest) changes future flood impacts.”

It’s also important that a solution does not discourage research into flood prevention and mitigation, Mr McCarthy said. Changes may reduce the likelihood of flood damage, through changes to building codes or zoning, or reduce incidence or severity of damage through levees, dams or other structures.

Governance and oversight is also important and includes relevant legislation, public reporting and dispute resolution. This includes whose responsibility it will be to ensure property at risk is covered – whether this is individuals, government or both. Any funding solution should also address what relief should be provided to those with no insurance or those who are underinsured,” Mr McCarthy said.

Though lost super accounts are not a major issue for clients who have a financial planner, there are of course many Australian’s who have and this legislation will go a long way in helping to reconnect them with their lost super accounts and also reduce the number of multiple accounts.

“The FPA called for the use of the TFN through a number of submissions and we are always supportive of measures that make it easier for the client and the financial planner to use the superannuation system. Making the ‘back-office’ of superannuation more efficient and less onerous will encourage more Australian’s to engage with their fund,” FPA CEO Mark Rantall said.

“We are therefore very pleased that the government has followed through with this policy.”

“We will now review the detail as outlined in the draft legislation and contribute to the consultation process that has been outlined. And of course we look forward to working with the government on the implementation of the remaining Stronger Super Reforms.”

The Self Managed Super Fund Professionals’ Association has today voiced its support for draft legislation released yesterday which will allow self managed super funds to continue to invest in collectables and personal use assets such as artwork and stamps.

The draft legislation will allow the Government to make regulations about how SMSFs can make, hold and realise investments in collectables and personal use assets.

“We recognise the draft legislation as the first concrete step by the Government in keeping its promise to SMSF investors that they continue to be allowed to invest in artwork and collectibles,” said Sharyn Long,
SPAA Chairman.

“The draft legislation amends the Superannuation Industry Supervision Act (SIS) Act so regulations can be made which impose rules on SMSF trustees with regard to collectables and personal use assets.”

“The amendments to Section 62A of the SIS Act will also make clear that it is not a breach of the sole purpose test to have artwork and collectibles in a SMSF portfolio,” Ms Long said.

Originally, the Cooper Review concluded that artwork and collectibles lend themselves to personal enjoyment and current day benefits, so recommended these assets be banned from super funds, which are designed for the sole purpose of retirement benefits. In its response to the Cooper Review, the Government said it would continue to allow investment in artwork and collectibles, but stated that it would make clear rules setting out how SMSFs should hold these assets. In that vein, the Government has stated its support for a SPAA guideline which makes recommendations for holding, valuing and auditing these assets.

“We welcome the transitional arrangements proposed that gives SMSF investors 5 years until July 2016 to dispose of existing artwork or collectibles in their SMSF portfolios, if they are unable to comply with the new rules,” Ms Long said.

“SPAA looks forward to consulting with Government on the content of the new rules and hopes that they include the SPAA Best Practice Guideline for acquiring and holding artworks in a SMSF,” Ms Long said.

The changes to the limited recourse borrowing rules for SMSFs apply to arrangements put in place on or after July 7, 2010 or to refinances of existing loans on or after 7 July.

Pre 7 July 2010, more than one asset could be acquired and assets did not have to be the same form or type in order to undertake a single limited recourse borrowing arrangement. For instance, a portfolio of
shares in different companies could be acquired under a single arrangement

“We believe the definition of a single acquirable asset may catch out SMSF members who are not aware of the legislative changes,” said Mr Burgess. “This is because the changes mean separate borrowing
arrangements must be in place for shares in different companies or even different classes of shares in one company, with compliance potentially messier than when dealing with property.”

The acquisition of real property on separate titles is also not permitted unless a separate borrowing arrangement is put in place for each title. For example, several residential units in the same apartment
complex with the same characteristics will need separate borrowing arrangements.

“The Australian Taxation Office (ATO) has recently advised that where assets are for practical purposes inseparable, or where there is an incidental ancillary asset of a very low value, the assets may be treated
as one asset. However, it is still unclear how this will be determined so SPAA believes advisers and trustees should proceed on the basis that each title represents a separate asset,” Mr Burgess said.

“The single acquirable asset rules have implications for advisers and trustees regarding the way in which assets can be acquired and the number of borrowing arrangements which may need to be put in place,”
he said.

Another contentious issue concerns improvements to properties for which limited recourse borrowing arrangements have been put in place after 7 July 2010. In essence, renovations or improvements are not
permitted as they may give rise to a different asset to the single acquirable asset that was the subject of the arrangement. Importantly, this would be the outcome regardless of the source of the funds used to
renovate or improve the asset.

“In the context of real property, the inability to improve the asset during the life of the loan is a significant issue and extreme care should be exercised where it is the intention of an SMSF trustee to alter a
property acquired under a limited recourse borrowing arrangement,” Mr Burgess said.

If the property is improved, the limited recourse borrowing arrangement will have to cease and the improved property transferred to a new borrowing arrangement. In situations where it is the intention of
SMSF trustees to improve a business real property, Mr Burgess said the parties could consider an agreement with the vendor to do this before the SMSF purchases it and consider adding this to the sale
price of the property.

“The rules which apply to a limited recourse borrowing arrangement put in place on or after 7 July 2010 are much more restrictive than the previous rules which applied to arrangements put in place prior to 7
July 2010. Trustees looking to use the limited recourse borrowing rules should seek sound advice from a SPAA Specialist Adviser to fully understand the opportunities and the risks involved,” Mr Burgess said.

It is surprising how often I receive calls from advisers asking me to explain how Centrelink will treat their client’s family trust or private company, predominantly for Age Pension eligibility.

(This story first appeared in the Journal of Financial Advice , Volume 3, Issue 4, 2010)

In many instances, ‘Mum and Dad’ had a family business for many years that has long since ceased to be a going concern and, but for the large loan account inside the company, would have wound it down a long time ago. In other cases, it is a family investment trust – testament to a wealth creation and/or asset protection strategy set up years ago with their accountant and financial adviser which may have provided some tax benefits and built scale in pooling family investment reserves. Sometimes, however, it is not necessarily Mum and Dad’s family trust or private company but their high-income-earning son or daughter who has set up the structure and asked Mum and Dad to be beneficiaries to help manage tax.

Nevertheless, in all the cases I have looked at, no-one has ever had the forethought, a decade out from retirement, to ask; “Will this impact on our ability to qualify for the Age Pension?”

What are the Attribution Rules?

The attribution rules were introduced from 1 January 2002 and became effective from 30 April 2002. Their purpose was to assess interests in family trusts, testamentary trusts and private companies under both the Income and Assets Tests.  This would effectively remove a ‘Centrelink shelter’ that had allowed many people to qualify for Government assistance who otherwise would have been caught if assets held in these structures had been invested in their own names.

Trusts and Private Companies

Without going into “what is a company?” and ‘“what is a trust?”, details of which I am sure we are all cognisant, consider what Centrelink and the Department of Veterans’ Affairs (DVA) defines as a private company or private trust. According to the Centrelink Financial Information Services (FIS) Fact Sheet FIS022.0905, a private company,

“is a separate legal entity, set up to run a business or to hold investments, registered under Corporations Law, owned by shareholders and managed by its directors who are elected by the shareholders.”

Centrelink will deem the entity as a private company if, at the end of the last financial year, it met any two of the following three criteria:

1.    the consolidated gross operating revenue of the company and any subsidiaries was less than $25 million;

2.    the consolidated gross assets of the company and any subsidiaries were less than $12.5 million;  and

3.    the company and any subsidiaries had less than 50 employees.

Most of the Mum and Dad enterprises I have encountered are certainly within that range, and if private companies hold many millions in Net Tangible Assets (NTAs) it generally means the directors hold significant wealth in their own names and in family trusts and Self-Managed Superannuation Funds (SMSFs), so they will not be looking to qualify for Centrelink anyway.

In terms of private trusts, again referring to the aforementioned FIS Fact Sheet, Centrelink includes family discretionary trusts and testamentary trusts with fewer than 50 ‘members’. Now, trusts generally don’t have ‘members’, they have beneficiaries, or objects (in the case of a discretionary trust). But for the purposes of the attribution rules, a trust with more than 50 members is deemed to be a widely-held trust in the same form as listed (or unlisted) property trusts, managed share trusts and other public trading trusts. In these cases the member’s holding is treated as a financial asset and deemed for income using the normal deeming rates.

The Assessment Tests with regard to Private Companies and Trusts

One of the difficulties faced by many people seeking to apply to Centrelink or to the DVA for financial support, particularly when they become eligible for the Age Pension, is determining how they will be assessed when there are often some seemingly minute and innocuous associations to a private company or trust. For instance, in the examples mentioned above where Mum and Dad are directors of a defunct company that ceased trading many years earlier, or where they are objects of a family trust and have never received a distribution, are they still caught by Centrelink/DVA?

There are two distinct tests that apply jointly to determine the inclusion of assets and income from a private company or trust. These are:

1.    a Source Test; and
2.    a Control Test.

Simply speaking, the Source Test relates to the source of funds introduced to a trust or private company, and the Control Test relates to who is in control of the trust or private company – for instance, directors of the company or corporate trustee, individual trustees, appointors and beneficiaries/shareholders.

By applying the attribution rules, a person applying for Centrelink/DVA support is attributed with the assets or income of the private trust or company and those assets and income are treated no differently to how the person’s own assets and income are treated.

1.    The Control Test

You might think, “Well, the trustee has control of the assets of the trust so it is likely they will be ‘pinged’ by Centrelink/DVA”. And it is true that the director of the private company or the trustee of the trust does have control of the assets. But consider also, apart from the day-to-day management of the trust, who else can exercise effective control of the trust. Centrelink considers that anyone that can dismiss and appoint a trustee, veto a trustee’s decision or change the trust deed is also included; that is, an appointor, principal or guardian. Centrelink will also look beyond the normal trust law auspices where it deems a person might have influence over the trustee, or where the trustee might be expected to act for the benefit of that person.

2.    The Source Test

The Source Test, on the other hand, seeks to attribute capital invested in a trust or company with the person(s) who originally transferred assets (which can include non-tangibles such as services), into the company or trust. If there has been no consideration paid for these assets, then there is necessarily an assumed retention of control by the transferor, unless in the case of a genuine gift.

If, after applying the above tests, a person is attributed with a share of the assets and/or income of a private trust or company, then the person’s share of the market value of the attributable assets, or the portion of net attributable income, will be assessed as being his/hers.

Strategy Considerations

There are some positives and negatives when applying the attribution rules.

Negatives

Many would consider it a negative to be assessed in the first place.  In addition to this, not all deductions allowed under the Tax Act will be allowed by Centrelink/DVA as a deduction to reduce income. These non-allowable deductions can include:

• prior year losses;
• losses from unrelated businesses;
• deductions caught up in the definition of Reportable Employer Superannuation Contributions (RESC); for example – salary sacrifice, and certain capital expenses.

Positives

There are some positive aspects however. On the assets side, a principal residence owned by a family trust will not be assessable. Also, assets are net of liabilities (if those liabilities are attributable to assessable assets). If a person is deemed not to be the controller of the trust of a private company, the person will not have the market value of the assets assessed against him/her, but will be assessed on the actual distributions or dividends (including imputation credits) made by the private trust or company for twelve months after the date of distribution.

However, the strategic advantage of the attribution of private trust/company income comes from the fact that private trusts and companies are not deemed for income, as are other financial assets, such as listed shares, term deposits and managed equity trusts.

This provides for the ability to manage the amount of income that is assessed to the Age Pension applicant. It can also have a positive outcome in planning for aged care as the use of a private trust may be useful in reducing the income-tested fee with only the actual (taxable) income of the trust assessed under the Income Test.

The following is an extract from the Guide to Social Security Law, 4.12.7.10, which contains the general rules regarding the attribution of income to an attributable stakeholder:

‘Attribution of the income of a private trust or private company

• If the assets (1.1.A.290) of an entity are attributed to a person (the attributable stakeholder) then all of the income (adjusted net profits) generated by those assets will also be attributed to them (subject to the percentage of attribution of the assets),
• Income from the entity for an attributable stakeholder will NOT be deemed, actual income will be used and will generally be assessed on an annual basis from the income tax return,
• If the attributable stakeholder(s) choose to distribute entity capital or income to other people, the amounts distributed are to be treated as gifts by the attributable stakeholder and are subject to deprivation (1.1.D.110).

Exception: Distribution of the income of an entity to the partner of an attributable stakeholder is NOT treated as a gift of the stakeholder and is NOT subject to deprivation.
Note: An income support recipient who is an attributable stakeholder of a controlled entity can request a reassessment of their circumstances at any time.’

Therefore, in order to manage assessable income, a non-interest bearing deposit (or an insurance bond purchased by a private trust where there are no withdrawals) will generate zero assessable income for tax purposes. This means that while the value of the insurance bond will continue to be assessed under the Assets Test in full, there will be no assessable income, thus resulting in minimising the assessable income of the trust.

Of course, the benefits of the treatment of income from a private trust or company as opposed to the  deemed income from financial assets needs to be weighed up against the reporting and other associated costs of running a separate investment structure.

But what about the mum and dad with a loan to a defunct company, or the elderly parents who are trustees or minor beneficiaries of their children’s family trust?

Other Options

According to Centrelink, any person who has a loan to a private trust or company will be assessed under the deeming provisions, irrespective of whether he/she is a controller or non-controller. On the surface it sounds fairly black and white. This is, however, where the ‘Special Assessments’ area of Centrelink earns its stripes. In the case where a private company has a debt to the directors that will never be repaid (because the business that the company ran ceased to be a going concern a long time ago), it is worth going the extra step to push pass the initial bureaucracy and appeal the decision. I have seen instances like this where the loan was ignored, pending the winding-up of the company, without the amount being seen as a gift and deemed for a period of five years (as might normally happen).

For beneficiaries or shareholders with minority interests, Centrelink will look at the trust’s history of income distributions, or the company’s history of dividend payments to ascertain a payment pattern. If Mum and Dad are objects of a trust that has been in existence for a long time and have never received an income distribution (and are not deemed to be controllers of the trust or to have been an initial or subsequent source of transferred capital), then Centrelink has, in the past, been shown to disregard the holding, pending surrender of the holding.

In the case of a trusteeship or a directorship that has precluded eligibility for the Age Pension, the trustee or director can relinquish control, that is, resign as the appointor and/or trustee of a trust or, for a company, relinquish all formal roles, directorships and shareholdings. They are, of course, considered to have gifted all the assets held by the trust or company and the deprivation rules will therefore apply where the market value of the amount foregone/gifted, is assessed as an asset for five years and deemed for income.

According to Centrelink, it will accept a genuine resignation has occurred where, in respect of the private trust or company, both the controller and his/her partner:

• relinquish all formal roles and control;
• relinquish all beneficial interests; and
• make a written declaration that they will not exert any control over, or benefit in any way from, the trust or company.

Excluded Trusts

For the purposes of the Centrelink/DVA means test provisions, and in particular the attribution of assets or income of a private trust to an individual, the Social Security (Means Test Treatment of Private Trusts – Excluded Trusts) (DEEWR) Declaration 2008 specifies classes of trusts that are ‘excluded trusts’ for these attribution purposes, including:

• pre-10 May 2000 community and fixed trusts;
• trusts where the sole or dominant purpose of a trust is to receive, manage and distribute property transferred to it by a government body for a community purpose; and
• trusts that hold, manage, or dispose of indigenous-held land for a community purpose or where the sole or dominant purpose of a trust is to receive, manage and distribute income generated from the use of indigenous-held land for a community purpose.

It is also important to note that certain ‘Court-ordered trusts’ and, particularly, Special Disability Trusts, have different treatments again imposed by Centrelink and the DVA. But these issues are beyond the scope of this paper.

Conclusion

There are three important aspects of dealing with private trusts and companies to bear in mind:

1.    Make sure your clients fully disclose all beneficial interests and any trusteeships or directorships they might have.

2.    Know the attribution and deprivation rules and how they will impact on your clients’ chances of qualifying for Centrelink/DVA support before you implement any strategies to maximise their pension amount.

3.    An initial Centrelink assessment should not be taken as the be-all-and-end-all – there are avenues for appeal.

And get some good technical advice!
 

Note: The accreditation for this CPD article is no longer current. Please visit our CPD section for current CPD quizzes. 

The report, National Insolvent Trading Program Report (REP 213) will be beneficial to directors of companies, company advisers (including accountants and lawyers) and other interested stakeholders to assist them in understanding and complying with their duty under the Corporations Act 2001 (Corporations Act) to prevent insolvent trading.

The NITP was aligned with ASIC’s oversight responsibility in monitoring compliance and conduct by company officers in relation to their obligations and behaviour where corporate failure occurs.

The program focused on companies which were in financial distress or nearing insolvency. Through on site visits, the program encouraged directors to seek professional advice at an early stage to address solvency issues. During the period 2006 to 2010, ASIC visited over 1,530 companies displaying solvency concerns. As a result, directors have an increased awareness of their duties.

There are four key messages from the NITP that directors should take into account in carrying out their role.

Directors must:

• maintain appropriate books and records
• identify insolvency concerns and assess available options
• seek professional advice
• act in a timely manner.

‘Where a director follows these key messages, they are less likely to breach their duties under the Corporations Act and by seeking advice at an early stage, better results may be achieved for external stakeholders, including employees and creditors’, ASIC Commissioner, Michael Dwyer said.

ASIC has previously released Regulatory Guide 217 Duty to prevent insolvent trading: Guide for directors (RG 217) which sets out key principles which ASIC considers directors should follow to meet their obligation to prevent insolvent trading. The development of RG 217 was assisted via the outcomes and observations of the NITP.

Key indicators of insolvency include, but are not limited to, ongoing trading losses, cash flow difficulties, outstanding trade creditors and the inability to obtain further finance.

ASIC’s forward plan for Insolvency Practitioners and Liquidators will focus on the conduct of liquidators and insolvency practices, particularly in relation to independence and remuneration. ASIC will however continue to review companies displaying significant insolvency indicators and encourage directors to seek appropriate advice early.

Download the National Insolvent Trading Program Report (REP 213)

Background

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 comprehension for loss resulting from insolvent trading). The Corporations Act imposes on directors a positive duty to prevent insolvent trading: see section 588G.

Between now and late 2010, ASIC will be in the field, across Australia, to detect businesses or people engaging in credit activities who are not registered with ASIC.

As of 1 July this year, it has been an offence to engage in credit activities (e.g. acting as a lender, or as a credit broker) if not registered with ASIC.

More than 14,000 people or businesses registered with ASIC before 30 June 2010, as a precursor to applying for a credit licence. Licensing is now underway and will be complete by 30 June 2011 or before. As of 23 September 2010, 292 licences have been issued.

As set out in the National Credit Transitional Act, ASIC can prosecute non-compliance or seek a civil penalty from the Courts.

The maximum criminal penalties for operating without registration or a licence are $22,000 for individuals and $110,000 for corporations, or two years imprisonment, or both; or civil penalties of up to $220,000 for individuals and $1.1 million for corporations, partnerships or multiple trustees.

ASIC’s primary focus of this surveillance activity is to ensure firms and people engaging in credit activities are registered and apply for a licence to meet the requirements of the National Credit Transitional Act.

ASIC Commissioner Peter Boxall, said ASIC was most likely to pursue prosecutions where firms or people persisted in engaging in credit activities without being registered or licensed. ASIC may take action – other than prosecution – at its discretion.

‘All indications to date are that the new regime enjoys widespread support from people working in the credit industry, and that people and businesses who have registered welcome action by ASIC to deter non-registered businesses.

‘ASIC is serious about its responsibilities in enforcing the regime and our decision to undertake surveillance action – shortly after registration has closed – demonstrates our determination to ensure the effectiveness of the new national consumer credit regime in providing a better business environment for the industry and for consumers,’ Dr Boxall said.