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The provider of this information is O'Reilly Lillicrap Solicitors - Brisbane

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 net worth.

Public companies may raise equity capital under a disclosure document lodged with ASIC. 

COMPANY BORROWINGS 

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 company.

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 include:

  • low operating profits or cashflow;
  • problems paying trade creditors on time;
  • non payment or late payment of statutory remittances such as PAYE or payroll tax;
  • trade suppliers refusing to extend further credit to the company;
  • problems meeting loan repayments or difficulty keeping within overdraft limits;
  • 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 company:

  • 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. 

Public Officer

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.

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