FINANCIAL CONSIDERATIONS FOR COMPANIES
RESTRICTIONS ON PROPRIETARY COMPANIES
Proprietary companies may only raise equity capital in circumstances where a
“disclosure document” (such as a prospectus) is not required to be lodged
with ASIC, except an offer of shares to existing shareholders or employees of
the company. These circumstances include:
- raising less than $2 million in 12 months through issuing shares to not
greater than 20 people as a result of personal offers to those people;
- offers to subscribe at least $500,000 per person;
- offers to persons who have been certified by an accountant to be of high
Public companies may raise equity capital under a disclosure document lodged
A company may also raise money by borrowing money from banks or other
financial institutions. Typically, financiers will require companies to secure
such borrowings by granting a fixed and/or floating charge over the present and
future assets of the company. In some cases, as a director of the borrowing
company you may also be asked to personally guarantee the borrowings of the
You should obtain specific legal advice when either the company grants a
charge or a director provides personal security for the debts of the company.
BECOMING A PUBLIC COMPANY
Becoming a public company means changing the type of company. In order to
become a public company, the proprietary company must pass a special resolution
in general meeting.
The Corporations Law imposes more obligations on public companies and their
directors than those imposed on proprietary companies. These include greater
restrictions on the ability of directors to vote on matters in which they have a
personal interest and on the giving of financial benefits to directors and other
“related parties” of the company. A major advantage of being a public
company is that it is permitted to raise capital through issuing a disclosure
document. If you are considering changing your company to a public company you
should seek specific legal advice.
COMPANY CANNOT PAY ITS DEBTS?
If you are a director of a company and you have reasonable grounds for
suspecting that your company is insolvent then you must stop your company from
further trading and taking on more debts, and obtain professional advice.
A company is “insolvent” if it cannot pay its debts as and when they fall
due. As a director you are breaking the law if you let the company trade whilst
it is insolvent. If you do let the company trade whilst insolvent then you can
be sued by a liquidator or creditors personally to recover debts incurred during
insolvency from your own assets. You may also face criminal prosecution.
Common signals of companies that are insolvent or approaching insolvency
- low operating profits or cashflow;
- problems paying trade creditors on time;
- non payment or late payment of statutory remittances such as PAYE or
- trade suppliers refusing to extend further credit to the company;
- problems meeting loan repayments or difficulty keeping within overdraft
- legal action is undertaken or threatened by trade suppliers or other
creditors over money owed to them.
WHAT DO DIRECTORS HAVE TO DO WHEN A COMPANY IS INSOLVENT?
If a company is insolvent, directors should either appoint an administrator
(a professional insolvency practitioner) or apply to the court for a liquidator
to be appointed to the company.
A creditor may also takes its own action by appointing a receiver or taking
steps to have the company wound up, depending on the circumstances.
If an insolvency practitioner (for example, a liquidator, receiver,
controller or administrator) is appointed to a company, the directors of that
company must provide them with reports as to the company and assist them
identify and realise company assets for the benefit of creditors.
There are substantial penalties for non-compliance and ASIC may take court
action against offenders.
CLOSING DOWN A COMPANY
You may apply (using form 6010) to have the company deregistered if the
- is not carrying on business;
- has assets of less than $1,000;
- has paid all its fees and penalties under the Corporations Law;
- has no outstanding liabilities;
- is not a party to any legal proceedings; and
- the members agree to the deregistration.
If the above conditions are not met then the process is more complex and
directors will need to obtain specific professional advice.
TAXATION OF COMPANIES
For Australian tax purposes, a company is defined to include all corporate
and unincorporated bodies or associations but not partnerships.
Residents and Non-Residents
Resident companies are taxed on their total worldwide income from all sources
whereas non-residents are only taxed on their Australian sourced income and
certain capital gains. Both resident and non-resident companies are liable to
pay income tax at a flat rate of 36% on their taxable income (reducing to 34%
for the 2000/2001 year and to 30% for the 2001/2002 year).
A company will be a resident of Australia if:
- it is incorporated in Australia; or
- it carries on a business in Australia and either has its central
management and control in Australia or its voting power is controlled by
shareholders who are resident in Australia.
Intercorporate dividend rebate
A resident company receiving franked dividends from another resident company
is generally entitled to claim a rebate on these dividends.
Tax Losses and Treatment of groups of companies
Ordinary income losses incurred by a company within a wholly owned resident
group of companies may be transferred and offset against the taxable income of
other profitable companies in the group provided certain tests are satisfied.
Group companies are generally companies which are owned directly or indirectly
100% by the same parent company.
Dividends, Interest and Royalties paid to Foreign Affiliates
The rules relating to dividends, interest and royalties paid to foreign
affiliates can be briefly summarised as:
Dividends: No withholding tax on franked dividends (ie dividends issued from
company profits from which corporate tax has been paid) distributed to foreign
shareholders. A resident company paying unfranked dividends to a foreign
shareholder must pay a flat rate of 30% tax which may be reduced to around 15%
by an applicable double tax treaty.
Interest: Interest paid from an Australian business to a non-resident is
subject to a final withholding tax of 10%. “Thin capitalisation” provisions
apply special rules to the deductibility of interest payments made by highly
geared companies to non-resident associated persons.
Royalties: Royalties paid or credited from an Australian resident company to
a non-resident are deemed to be from an Australian source and subject to 30%
withholding tax unless reduced by a double tax treaty.
Transfer Pricing Rule
Australia’s tax legislation contains comprehensive provisions ensuring that
Australian taxable income associated with international non arm’s length
transactions between companies is based on arm’s length prices. The ATO
scrutinises these transactions and may adjust the taxable income of the
companies involved by substituting more realistic prices. To assist with the
monitoring of the transfer pricing rules, the ATO requires that income tax
returns disclose any international transactions with a related party.
Every company which carries on business in Australia or derives Australian
income from property is required to be represented by a Public Officer who must
be appointed within three months of the company commencing business or deriving
income and must be a natural person (legal speak for an “individual” or a
“human being” as distinct from a company) who is not less than 18 years of
age and a resident of Australia.
The Public Officer is responsible for ensuring that a company lodges its
income tax return and is the person with whom the Commissioner of Taxation deals
in relation to a company’s tax affairs.
This Information Outline is
provided courtesy of Craddock Murray Neumann who are experienced in this
area of law. They are located at Level 1, 255 Castlereagh Street Sydney NSW 2000 or
call them on (02)
you would like more information on the legal topic, or you wish to obtain formal
advice regarding your situation.
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of law. This means that we strive to protect and advance the legal rights of our
clients, whether they are government departments, large corporations or private
individuals. This also means that we will not run cases merely for the sake of
running up legal costs at your expertise. We try to find practical, cost
effective solutions to your problems. If you need to fight we will be there with
you. We have set our fair share of precedents but our clients don't always want
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