Is that security deposit really safe? Landlords beware!

Transcription

1 Is that security deposit really safe? Landlords beware! AUTUMN 2015 This edition 3 Why 63 could be your most valuable age Trusts Beware ATO action on Gift 4 back and similar arrangements 5 Small Errors, Big Losses 6 Events to watch out for... A recent decision in the Hue v Dura [2014] VSCA 326 case in the Supreme Court of Victoria, Court of Appeal (Dura decision) has highlighted some important issues surrounding security deposits, primarily who has priority over those funds in the event one of the parties is placed into administration or is wound up. The Dura case relates to funds that were required to be paid into a joint account held in the names of the solicitors for each of the parties as a requirement of a Court order and whether the payment gives rise to a security interest under the Personal Property Security Act 2009 (Cth) (PPSA). Judgement The Court found that to be able to protect and register your interests on the Personal Property Security Register (PPSR) in accordance with the Personal Property Security Act 2009 (Cth) (PPSA) the transaction must fit the definition of a security interest as defined in Section 12(1) of the PPSA. That is, an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property). Although the PPSA does not define the word transaction, the Dura decision requires that, a transaction must be a consensual transaction between the parties for it to give rise to a security interest. In the instance of the Dura decision, as the funds were required to be paid in accordance with a Court order, the transaction was not considered to be a consensual transaction between the parties and there was no security interest. Further, the PPSA did not apply as Section 8(1)(c) of the Act states the PPSA does not apply to any interests created as a result of the operation of general law. Implications for landlords holding security deposits The principles from the Dura decision are highly relevant in a number of situations involving taking security for performance of obligations, funds held on trust and security deposits. One such example is that a landlord under a lease may hold a security deposit to cover the event that rent is not paid or the tenant fails to meet other obligations under the terms of the lease. The answer, applying the principles of the Dura decision is that in accordance with the PPSA, a security deposit paid pursuant to a lease agreement is categorised as a security interest and accordingly the landlord should register the interest on the PPSR to protect their interests. Failure by the landlord to register that interest may result in the landlord losing the benefit of that security bond in the event of the insolvency of the tenant. >> continued page 2 Critical Point Network 1

2 Is that security deposit really safe? Landlords beware! >> continued from page 1 The Dura decision makes it clear that there must be a consensual agreement between the parties to the arrangement and therefore, the message here is to ensure that the lease agreement contains the right clauses to enable the registration of the interest and register the interest on the PPSR immediately after the lease is executed. It is also important to remember that Section 588FL of the Corporations Act 2001 (Cth) requires security interests granted by a company to be registered within 20 business days after the security agreement giving rise to the security interest came into force to ensure that it can be enforced and the interest does not vest back in the company in the event of insolvency. In the event that a tenant enters administration or is wound up, the implications of not appropriately documenting and registering an interest in a security deposit on the PPSR is that the landlord will lose its priority and rights as a secured creditor over the security deposit, and only rank as an unsecured creditor resulting in potential losses that could have been potentially avoided. Elissa Hall Manager Business Recovery and Insolvency Services Telephone (03) Critical Point Network

3 Why 63 could be your most valuable age Careful planning on when and how you contribute to superannuation will help in the management of longevity risk. There is no question that superannuation is a fantastic place to hold your retirement savings. The tax concessions applying to superannuation certainly helps build wealth during your working life as well as reduces the amount required to be withdrawn to meet your needs once you are no longer working. If the tax concessions were not available, you would need more assets to generate the same level of after tax income. With people living longer, there is a risk of outliving your savings known as longevity risk. Superannuation can help manage this risk because of the tax concessions available, so it makes sense to utilise the benefits of superannuation as much as you can. However, there are limits on the amount you can get into superannuation and as you approach 65 the rules around making contributions change. To make sure you can maximise the amount you get into super means knowing the rules early. We are seeing more people staying in the workforce longer, either due to concerns about their financial position or simply as a way of continuing to do something they enjoy. To know how much you can contribute to your superannuation we need to focus on a couple of areas: 1. Are you eligible to contribute? There is not much point working out how much to contribute until we determine whether you are eligible to contribute. Put simply, once you reach your 65th birthday, the only way you can contribute to super is by meeting a work test, where you are gainfully employed for at least 40 hours in a consecutive 30 day period. There are lots of things to consider when determining whether someone is gainfully employed which I will not discuss in this article, needless to say it may be worth getting advice on this if you have concerns. In the financial year you turn 65: a) You can make contributions up to your 65th birthday regardless of whether you are working or not; b) After your 65th birthday you can make contributions if: a. You are still working and meet the work test ; or b. You have stopped working but have worked at some point during the financial year and met the work test. 2. How much can you contribute? For many people approaching 65 restructuring assets into superannuation can be an advantage, as discussed previously, so knowing how much you can get into superannuation becomes an important question. There are 2 ways you can contribute to super, either using pre-tax money (generally salary sacrifice or personal deductible contributions) or after tax money. The cap applying to pre-tax money is the Concessional Cap and for people turning 65 this cap is $35,000 for the current financial year. For after tax money, the Non Concessional Cap (NCC) is applied. In the current year this cap is set at $180,000 or you can bring 3 years worth of this cap forward, being $540,000. Once you are over 65, you do not have the option of the 3 year bring forward rules, except for the financial year in which you turn 65. Now this is where planning early becomes important to make sure you can get the most into super as possible. You want to be able to maximise your contributions in the year you turn 65, so this may mean making smaller contributions in the years leading up to 65 so you do not trigger the 3 year period too early. In the year you turn 65, if you trigger the 3 year bring forward cap but do not use all of this cap, so long as you continue to meet the work test you can still contribute up to the full amount of the cap after you turn 65. This might be useful if you are waiting on the sale of other assets to make the contribution. For example, if you make a contribution of $185,000 in the year you turn 65, you have triggered the 3 year cap and have another $355,000 you can contribute over the next 2 years so long as you continue to meet the work test. If you trigger the 3 year cap when you are 63 then you do not get another chance to use the 3 year cap, so the maximum you can contribute is $540,000. On the other hand if you only contribute $180,000 when you are 63 and 64, you can use the 3 year cap in the year you turn 65, meaning the total you can contribute is $900,000 an extra $360,000. Also, by holding off using the 3 year cap you may also get the advantage of increases in the cap that may occur, for example on 1 July 2014 the 3 year cap increased by $90,000. In summary, to make the most of the superannuation concessions available you may need some careful planning in the years leading up to your 65th birthday. Making the right decision when you are 63 can have a significant impact on the amount you can get into your super. Understanding when you can contribute and how much you can contribute will help ensure you optimise the amount you get into super and help in the management of your longevity risk. Article by: Matt Kerr Senior Advisor Wealth Management Telephone (02) Melbourne contact: Brad Twentyman Director Superannuation Telephone (03)

4 Trusts Beware ATO action on Gift back and similar arrangements The Australian Taxation Office (ATO) is cracking down on trustees using reimbursement agreements to obtain a tax benefit. Gift back arrangements If your client is in the habit of regularly: making adult beneficiaries presently entitled to trust income; leaving those entitlements unpaid; and having the beneficiaries gift back their entitlements to the trust, then the ATO could seek to challenge this arrangement and tax the Trustee at the top marginal tax rate especially where it is clear (from, for example, s or a pattern of conduct over a number of years) that at the time of making the beneficiaries presently entitled to the trust income there was never any intention to pay out those entitlements in cash and/or by transferring property. Advise your clients to put in place arrangements that provide evidence that some of these entitlements have been satisfied for example, by having the trustee pay for the education/upkeep of a beneficiary s children. Similar arrangements Gift back arrangements are not the only arrangements the ATO is currently seeking to challenge anything the ATO regards as a Reimbursement Agreement will also be examined. For example, annually making trust distributions to a corporate beneficiary that is 100% owned by the trustee of the trust may well be challenged especially if the company then regularly pays fully franked dividends back to the trust so that there is, in effect, a perpetual circulation of funds. Similarly, regularly making interest free loans to beneficiaries where there is: 1. no evidence of those loans ever being repaid; and 2. no indication that the beneficiaries ever intend repaying them, could be challenged by the ATO. For clients that have used such arrangements in the past, encourage them to consider alternative arrangements, such as: a different (non-100% owned) corporate beneficiary should be used in the case of the perpetual circulation of funds mechanism; and evidence put together to show that loans to beneficiaries have been repaid/will be repaid for example, by documenting interest and/or principal repayment plans for these loans. Please contact a member of Pitcher Partners Tax Consulting group for more information. Further Details Listed below is a link to the Reimbursement Agreements Fact Sheet issued by the ATO. Whilst there is only one example in this Fact Sheet where the ATO clearly states it will seek to tax the trustee, which involves a corporate beneficiary that is 100% owned by the trust where distributions are repeatedly made and then paid straight back as dividends, it cannot and must not be assumed that this is the only arrangement the ATO will challenge. Trust taxation reimbursement agreement: Trust-taxation---reimbursement-agreement/ Greg Nielsen Executive Director Tax Consulting Telephone (03) Critical Point Network 4

5 Small Errors, Big Losses Have you considered the financial impact small human errors may have on your organisation? Real stories include an organisation loosing thousands of dollars lost over three years because of a time sheet entry error, another one paying an ex-employee for twelve months after they left; or another company purchasing excessive stock and created cash flow issue from an unfortunate extra zero added to their sales forecast model. This article clarifies the issues and provides strategies to help you mitigate against these scenarios impacting your business. What types of human errors? Oversight: Are your staff subject to stress, fatigue, large volumes of work or old habits? These factors may be causing them to make data process errors. Lack of Training/Experience: Are your junior or new employees trained or experienced enough? Without spending time on appropriate training, they may be prone to making errors. Rules Based: When was the last time you reviewed or tested your systems? They may contain inaccurate/old business rules or formulas and may not have appropriate system controls in place. Violation: Research shows that most violations occur from people within an organisation. Human error may sometimes be the excuse for illegal or unethical behaviours. Do you have adequate audit trail on your key systems? How bad can it get? In extreme cases, even the most trivial human errors can result in bankruptcy for an organisation. More generally, it s not unusual for Pitcher Partners to observe human errors that result in tens of thousands, and occasionally hundreds of thousands of dollars in losses. Although some SME s are able to recover their losses, there is still material time and financial cost associated with recovery. Additionally, human errors can undermine the client s confidence in your abilities and tarnish your reputation. Strategies to mitigate human errors? Smaller firms Larger firms Reviews/audits Formal reviews or audits of critical models or systems that rely on data entry, and contain sensitive calculations or automated processes. More systematic, organisation wide review or audit of all models or systems supporting transactions, reporting or decisions. Case management software Automated discovery management software to find and catalogue relevant information and documents. System audit trails Simple audit trails of system access and changes. More complex audit trails providing detailed information on access, users and any changes made to system. Data entry validation Consider data validations for models or systems to limit risks of error. For example range controls. Ensure new software includes smarter validation and controls. Engage employees in designing smart systems. System check lists Cloud End-to-end integration Organisational engagement Training Check-lists and guidelines to guide more junior or less experienced employees. More comprehensive policies, online help or step-bystep processes with controls to ensure tasks are done correctly. Cloud-based software help ensure that subject matter experts can access, check and error-proof the most up to date documents in a timely manner. Implement end-to-end system chain (for example system integration from Point of Sale (POS) - to bank, account and tax submissions) to limit risks of re-keying errors. Champion regular process and system reviews and encourage employee participation and ownership. Ensure basic training needs are met and people are equipped to do their job. Engage employees early and often in system and process reviews and upgrades, encourage participation in process improvement, and ownership of change. Invest in training; plan systematic training programs; Make training part of career development. In summary, it may be time to pause and think about how human errors can damage your business and initiate a couple of strategies to mitigate the risk. Manny Vassal Client Director IT Consulting Telephone (03) Critical Point Network

6 Events to watch out for Road Show Series 2015 Getting in and getting out of your practice This road show will cover a range of issues associated with partners in professional practice and will explore: Valuing professional practices Admitting and exiting partners Succession of retiring partners Funding practices/partners Partnership models Partnership disputes Designed to be an informative session, it will be facilitated by Andrew Yeo together with specialists from Pitcher Partners Corporate Finance Team who will share their practical experience from providing valuations, due diligence and merger and acquisition advice to private businesses and public companies. For a full list of venues and dates, please head to Breakfast Briefings Series: PPSA Practical considerations Are we learning lessons the hard way? Session 1 Date Tuesday, 14 April 2015 Time 7.15am for 7.30am start 9.00am conclusion Venue Pitcher Partners, Level 19, 15 William Street, Melbourne Cost Members $40 and non-members $60 Session 2 Date Thursday, 16 April 2015 Time 7.15am for 7.30am start 9.00am conclusion Venue Pitcher Partners South East Office, 80 Monash Drive, Dandenong South Cost Members $40 and non-members $60 For full details, please head to Save the date Professional Advisors Conference CPN Contacts MELBOURNE Gess Rambaldi, Andrew Yeo or David Vasudevan Level 19, 15 William Street Melbourne VIC 3000 Telephone Facsimile partners@pitcher.com.au PERTH Daniel Bredenkamp Level 1, 914 Hay Street Perth WA 6000 Telephone Facsimile partners@pitcher-wa.com.au NEWCASTLE Greg Farrow The Glass House, Suite 4, Level Hannell Street Wickham NSW 2293 Telephone Facsimile newcastle@pitcher.com.au SYDNEY Scott Treatt Level 22, MLC Centre, 19 Martin Place Sydney NSW 2000 Telephone Facsimile partners@pitcher-nsw.com.au ADELAIDE Michael Basedow 160 Greenhill Road Parkside SA 5063 Telephone Facsimile partners@pitcher-sa.com.au Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professional Standards Legislation. Critical Point Network is a business of Pitcher Partners Advisors Proprietary Limited ABN Critical Point Network is a registered trademark. The material contained in this publication is general commentary only for distribution to clients of Pitcher Partners. None of the material is, or should be regarded as advice. Accordingly, no person should rely on any of the contents of this publication without first obtaining specific advice from one of the Partners of Pitcher Partners. Pitcher Partners, its Principals & agents accept no responsibility to any person who acts or relies in any way on any of the material without first obtaining such specific advice. Pitcher Partners 2015 PrintPost Approved PP381827/0043 CPN is printed on paper Certified Carbon Neutral. With 55% recycled fibre it is FSC Mixed Source Certified, sourced from sustainable plantation wood, Elemental Chlorine Free and manufactured by an ISO certified mill. The Professional Advisors Conference is an all-day conference which provides solicitors and accountants with expert advice and assistance on a range of topical and relevant issues. Please see below for the details of the upcoming CPN Professional Advisors Conference: Date Friday, 19 June 2015 Time 8.30am 4.00pm Drinks reception: 4.00pm 5.00pm Venue Crown Conference Centre, 8 Whiteman Street, Southbank VIC Cost Members $380 and non-members $480 (GST inc.) Food and beverages included Discount Group discount for 3 or more guests from the same firm An Early Bird price will also be available Invitations will be sent out closer to the date don t miss it! 6