Preventing a tsunami of insolvencies.

Preventing a tsunami of insolvencies.

The Government has stepped in to prevent a wave of insolvencies when the COVID-19 support measures run their course in December 2020.

Temporary insolvency and bankruptcy protections are in place until 31 December 2020 to enable businesses to trade through the pandemic. The measures provide:

  • A temporary increase in the threshold at which creditors can issue a statutory demand on a company (from $2,000 to $20,000) and the time companies have to respond to statutory demands they receive (21 days to 6 months);
  • A temporary increase in the threshold for a creditor to initiate bankruptcy proceedings (from $5,000 to $20,000), an increase in the time period for debtors to respond to a bankruptcy notice (21 days to 6 months), and extending the period of protection a debtor receives after making a declaration of intention to present a debtor’s petition;
  • Temporary relief for directors from any personal liability for trading while insolvent; and
  • Flexibility in the Corporations Act 2001 to provide targeted relief for companies from provisions of the Act to deal with unforeseen events that arise as a result of the Coronavirus health crisis.

Between March and July 2020, there was a 46% decrease in the number of companies that have gone into external administration compared to the same period in 2019.

Anticipating a wave of insolvencies in early 2021, the Government has moved to streamline insolvency laws to enable small business to either restructure or efficiently wind up. There are two key elements to the reforms:

  • A new formal debt restructuring process for companies that will enable a business to keep trading under the control of its owners while a debt restructuring plan is developed and voted on by creditors.
  • A new, simplified liquidation pathway for small businesses to allow faster and lower-cost liquidation.

The measures will be available to businesses with liabilities of less than $1 million. You can find further information on the proposed insolvency reforms here.

In Australia, the insolvency laws currently do not differentiate between large and small businesses. Everyone goes through a similar process. For small business, the complexity and the cost of adhering to the current insolvency system often leaves little for creditors, makes it difficult to restructure, and places control of the business in the hands of an administrator. These reforms should help simplify the process.

For more information please contact your PrimeAccountant on 02 9415 1511 or email reception@primeadvisory.com.au.

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SCAM WARNING – Do not reply, delete immediately

SCAM WARNING – Do not reply, delete immediately

During a time such as COVID-19 many scammers see an opportunity to target people who may already be afraid or unsure. Here are a few examples that will give you a better understanding of the types of scams and how scammers are targeting people through both email and SMS.

Several emails are circulating with malicious attachments claiming that the recipient is eligible for a ‘working from home payment’, these are scam emails trying to get you to download malicious software. Other emails are asking for your personal information such as drivers licence and Medicare card. Many of these either try and impersonate the Government or a third party. Note you should never give personal information unless you are sure who you are dealing with.

There has been reports of different SMS scams circulating in Australia that are pretending to be from the Government and trying to get you to click malicious links and give out your personal and financial details.

Scammers have also started to target Australians financially impacted by the COVID-19 crisis, cold calling people claiming to be from organisations that can help you get early access to your superannuation. These scams are following from the Government’s announcement about early access superannuation. The ATO is coordinating the early release of super through myGov, there is no need to involve a third party or pay a fee to access this scheme.

If you receive a message from the ATO asking for your personal information, you can call them on 1800 008 540 to make sure it’s legitimate. If you think it’s fraudulent, report it by email to reportemailfraud@ato.gov.au.

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Do home office expense claims affect the main residence exemption?

Do home office expense claims affect the main residence exemption?

Due to the COVID-19 public health crisis, many taxpayers commenced working from home for the first time during 2020. Deductions for ‘home office expenses’ may be available under s. 8-1 and Div 40 of the ITAA 1997 (general deductions and depreciation respectively).

Types of home office expense deductions

Deductions incurred in working from home are available where:

  • an area of the home is used as a ‘place of business’;
  • a room is used as a ‘study’, ‘home office’ or other ‘work area’ as a matter of convenience; or
  • no particular area of the home is used, but work is performed at home.

Whether an area of a home is a place of business is a question of fact. A place of business is most likely to exist where an area of the home is set aside for carrying on a business by a self-employed person or for use as a taxpayer’s sole base of operations for income producing activities e.g. where no other location is provided to an employee by their employer.

An area that has been set aside in a home will, or is more likely to, have the character of a ‘place of business’ if the area is:

  • clearly identifiable as a place of business;
  • not readily suitable or adaptable for use for private or domestic purposes in association with the home generally;
  • used exclusively or almost exclusively for carrying on a business; or
  • used regularly for visits of clients or customers.

TR 93/30 sets out the Commissioner’s view on when an area of a home is considered to be a place of business.

Home office expenses fall into two broad categories:

  • occupancy expenses — relating to the ownership or use of a home which are not affected by the taxpayer’s income earning activities (e.g. rent, mortgage interest, municipal and water rates, land taxes, house insurance premiums);
  • running expenses — relating to the use of facilities within the home (electricity charges for heating/cooling and lighting, cleaning costs, depreciation, leasing charges, cost of repairs).

The Commissioner is of the view that in most cases the apportionment of expenses attributable to a place of business should be made on a floor area basis and, where the place of business only existed for part of a year, also on a time basis (TR 93/30).

The following table sets out when occupancy costs and running expenses may be deductible:

The CGT impact of working from home summary

  • where the taxpayer has a place of business in their dwelling and claims occupancy expenses — the taxpayer’s entitlement to the main residence exemption (MRE) will be reduced proportionately; and
  • where the taxpayer does not have a place of business in their dwelling and only claims running costs — working from home has no impact on the taxpayer’s entitlement to the MRE.

 

For any further questions related to this matter please get in touch with your accountant from PrimAccounting on 02 9415 1511 or email reception@primeadvisory.com.au.

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Download our JobKeeper 2.0 Guide Today!

Download our JobKeeper 2.0 Guide Today!

From 28 September 2020, the eligibility tests to access JobKeeper for employers changed, along with the amount of the JobKeeper payment for employees and business participants. To receive JobKeeper from 4 January 2021, employers will need to assess their eligibility again.

Download the Guide here

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A ‘set and forget’ attitude can no longer persist

A ‘set and forget’ attitude can no longer persist

Like mortgages, once upon a time life insurance policies and portfolios would incur little change year-on-year and, as a consequence, it was common to see the ‘set and forget’ practice of many clients and advisors.  This attitude was aided also by the fact that many Australian’s held a vast majority of their personal insurances within the superannuation environment which often meant they were out of sight and mind.

Over the past few years, however, we have seen increasing volatility and some significant premium increases most notably around income protection as well as Life & TPD cover within industry superfunds.  It was evident that insurers had concerns about keeping the income protection product profitable but we’re not sure anyone saw the enormity of losses that were about to ensue.

In the 12 months to March 2020, the industry as a whole reported an after-tax loss of $1.8bn dollars, an incredible transition from a $760m profit in previous 12 months.  Some of this was due to poor investment results in the Dec and Mar quarters due to COVID-19 but much of it was also due to income protection products which were contributing losses in excess of $100m per month.

This can be seen below in our governing body, APRA’s, recent quarterly statistics report to March 2020.

The reasons behind these results are varied but most notably they are due to;

  • Claims experience being far greater than ever anticipated driven largely by an increase in musculoskeletal and mental health claims
  • Extremely low returns on investment. Insurers place their deposits into bonds and other fixed interest products and with interest rates at globally low levels, they are simply not making the returns that were forecasted years before when policies were being priced
  • Regulatory change in the superannuation industry for those with inactive accounts or under the age of 25

It is the trend seen in the graphs above that is worrying however and the reason that APRA has now seen fit to step in to enforce product change with the first having been the abolishment of new ‘agreed value’ income protection policies from the 1st of April, 2020.  This is one of a number of changes that will be seen over the coming 12-18 months (and perhaps beyond) aimed at achieving APRA’s clear mandate for income protection products to become profitable in their own right and not subsidised by lump sum products.

Along with product amendments, the impact most keenly felt for our clients has been the significant premium increases that almost every insurer has already implemented and the likelihood is that more are to come.  Just this week, OnePath announced a 25% increase to IP (Income Protection) premiums for both stepped and level premiums and we’ve seen similar (and some even greater) increases from many other insurers over the past few months.

The importance of reviewing your portfolio

Once, this industry would see little change to policies year on year. This narrative certainly does not ring true for the next 36 months (at least) and our focus at MBS Insurance is strictly to deliver better outcomes and proactively manage our clients’ insurance needs and portfolios.

We have believed for the past few years that the economics of the industry were heading in this direction and whilst we did not necessarily expect the severity of these results, we have been proactively driving discounted product arrangements with our Insurer partners.  This is not only for new clients, but also existing policy holders.

While reduced premiums appear contrary to what the industry requires, we are in the fortunate position of having a scaled distribution business model, with a client base in a desirable demographic.  Moreover, the philosophy of treating Insurers like partners ensures our clients attain better outcomes and we will continue to proactively mitigate the impact of these changes on our clients via negotiated terms and client engagement, to ensure portfolios remain appropriate and necessary.

Whilst we have always sought to disrupt the ‘set and forget’ culture within our industry, this product change and premium volatility has meant that the engagement of our clients at review time has never been greater, which is pleasing.  However, I would implore anyone with personal insurances in place, whether through their superfund or in a retail policy, to ensure that your existing portfolio is reviewed to ensure it remains the most appropriate and competitive portfolio available.

A ‘set and forget’ attitude can no longer persist… Please get in touch 02 9415 1511 or email reception@primeadvisory.com.au.

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