17 October, 2017
It has been suggested by senior commentators1 that the threshold requirements for Safe Harbour may result in Safe Harbour not being employed by directors of small companies and businesses. We respectfully disagree. In our view, the thresholds are not impossibly high so as to be a bar to small companies.
In respect of employee entitlements, the legislature has thankfully clarified the position. It is now clear that employee entitlements are only required to be paid as and when they fall due. Previously, the draft legislation required that employee entitlements be "provided for". The notion was somewhat unclear – would a company be required to show its ability to meet all employee entitlements if it were to be wound up, or would it be sufficient for a company to show its ability to pay those entitlements as and when they fell due? The Bill passed by both Houses provides that a company must have substantially complied with its obligations to "pay the entitlements of its employees by the time they fall due."
In respect of tax reporting, there were some fears that the threshold would require up to date payments of a company's tax obligations (which would also lead to the ATO receiving a de facto priority). It does not. The only requirement is for the company to have complied with its reporting obligations.
Rather than setting impossible standards, the thresholds promote mindfulness in relation to employees and the ATO. The thresholds will have the effect of promoting early engagement with potential insolvency, including by small companies and businesses.
Set out below is a more detailed consideration of the specific requirements of the thresholds.
What is required under the thresholds?
In order for directors to obtain Safe Harbour protection, two threshold questions must be met (Section 588GA(4)). Whilst those threshold questions are deceivingly simple, exactly what is required of directors requires closer consideration.
Please click on the image to enlarge.
Safe Harbour will not apply if there has been less than "substantial compliance" or a company's failure to comply is one of two or more failures during the previous 12 months. Whilst the thresholds must be satisfied in order for the Safe Harbour to apply, the legislation only requires "substantial compliance" rather than "full compliance".
Payment of employee entitlements
The particular "entitlements" that must be paid are (Section 596AA):
- wages;
- superannuation;
- injury compensation;
- "leave of absence" entitlements under an industrial instrument; and
- retrenchment payments (being amounts in respect of termination, not just redundancy pay) payable under an industrial instrument.
An "industrial instrument" extends to a contract of employment as well as awards and enterprise agreements, etc. An "employee" whose entitlements must be paid is a person who is or has been an employee of the company, whether remunerated by salary, wages, commission or otherwise. "Excluded employees" (ie a director or an employee who is a relative or spouse of a director) will only be protected by the Safe Harbour thresholds up to the relevant priority caps ($2,000 for wages and $1,500 for leave entitlements).
Giving of tax returns
In contrast to the requirement to "pay" employee entitlements, compliance with a company's tax obligation requires the "giving" of returns, notices, statements, applications or other documents as required by taxation laws. This suggests that, to avail themselves of Safe Harbour, directors will merely need to ensure that the company has complied with its tax reporting obligations. For example, directors must ensure that the company has lodged its Business Activity Statements (BAS), company tax returns, fringe benefits tax returns etc. The legislation does not suggest that there is an obligation to make tax payments in order for the Safe Harbour to apply. Indeed, to infer a payment obligation to this threshold would prefer the ATO to other creditors and give the ATO a de facto preference. Instead, it appears that the threshold only serves to promote a greater mindfulness in relation to a company's tax reporting obligations.
Footnotes
1 – The Honourable Justice Black, "Three developments in insolvency law", Law Council of Australia Insolvency Committee Annual Dinner, 8 September 2017. Available at http://www.supremecourt.justice.nsw.gov.au/Documents/
Publications/Speeches/2017 Speeches/Black_20170908.pdf.
2 – Authors: Michael Sloan, Partner; Bronwyn Kirkwood, Senior Associate; Emilie Maddox, Senior Associate; and Jacqueline Chan, Lawyer.
3 – Navigating Safe Harbour Series
4 – The next wave of class action warfare?
5 – Are you ready to navigate the waters?
6 – Employment and tax thresholds
For further information please contact:
Michael Sloan, Partner, Ashurst
michael.sloan@ashurst.com
