Tag Archives: record keeping

Be wary of constitutional fails by your private company

sqpegroundholeAdministering a private company requires sound business skill and judgment. Since the Commonwealth has substantially taken legislative responsibility for companies and securities from the states, regulatory reform has been introduced so that numerous compliance obligations have been streamlined in a practical way.

It is not always understood that the reforms were only to the regulatory framework of companies. They do not necessarily extend to the differing regimes in place for each company. Conduct of a private company still very much remains the responsibility of the directors of the company who are required to observe the constitution of the company (COTC). A number of the regulatory reforms have no affect on the regime that applies to a company unless the company takes the necessary action to enliven them.

From 1998 – the “replaceable rules”

Reform to the framework in the Company Law Review Act 1998 (CLRA 1998) introduced “replaceable rules” that apply to a proprietary (private) company other than a company with a sole director/shareholder. Unlike “Table A” in the former states’ Companies Acts, which could be adopted as articles of association optionally by a private company, the “replaceable rules” take effect by default. In other words a company, which does not adopt a custom divergent COTC, is taken to adopt and can rely on the “replaceable rules” in the Corporations Act 2001. Nevertheless a majority of private companies, including companies established prior to 1998, have adopted a COTC which overrides the replaceable rules and their impact. So the reforms reflected in the “replaceable rules” don’t apply to those companies.

This post highlights some of the difficulties this causes to private companies that we notice in practice.

Directors meetings

When private companies take significant actions resolutions need to be passed by the directors. As a standard, resolutions of directors need to be passed or agreed to at a directors meeting. It is a common alternative practice for directors of a company to complete a “circulated” resolution of directors signed by all directors of the company without formally holding a directors meeting. For most private companies that is fine as their COTC permits this procedure as an alternative to the company holding a directors meeting. The alternative procedure is authorised both in:

  • model “Table A” type COTCs which pre-date the reforms; and
  • section 248A of the Corporations Act 2001 where section 248A applies to the company as a replaceable rule.

However there is a minority of companies with old or inadequately drafted COTCs where the “circulated” resolution of directors capability is not available to the company either under the COTC, or under the replaceable rule in section 248A where the provisions in the COTC replace the replaceable rules including section 248A.

Invalid directors’ resolutions

Thus directors of private companies may be completing “circulated” directors’ resolutions on the mistaken assumption that their COTC, or the replaceable rule in section 248A, authorises the resolution without the holding of a directors meeting. The impugning of all of the resolutions of the directors of a company done in this way could have far reaching consequences for the company particularly if the activity of the company comes under the close scrutiny of government or lawyers. For instance, say a company in this predicament is a trustee of family discretionary trust: It is open for the Commissioner of Taxation to treat a resolution to distribute income to beneficiaries done in a way unauthorised by the COTC as invalid and not made in time to prevent the income being assessed for income tax to the trustee of the trust at the highest marginal rate under s99A of the Income Tax Assessment Act 1936.

If a COTC displaces the replaceable rules it is prudent to identify the capability in the COTC that permits the directors to use a circulated resolution instead of holding a directors meeting and to cite the reference to the capability in the circulated resolution. Look for wording in your COTC similar to section 248A. It is often the last article under the DIRECTORS PROCEEDINGS part of a COTC.

A COTC without the circulated resolution capability frequently has other shortcomings such as no capability for a director to attend a directors’ meeting by telephone or online over the internet. This is another case where inadequacy of the COTC can lead to invalidity of attempted directors resolutions done with this capability assumed by the directors.

Directors resolutions can also fail due to other procedural misunderstandings such as:

  • failure to give notice of a directors’ meeting to all directors;
  • a meeting may have a quorum requirement under a COTC which is not met; and
  • a proceeding by a single director is not a meeting.

Single director companies

The CLRA 1998 also changed the regulatory framework to allow for single director companies. Prior to the CLRA 1998 the minimum number of individual shareholders of a private company was two and so many memorandums and articles of association of private companies then in place, which became their COTCs from 1998, entrenched the two individual director minimum to comply with the pre-CLRA 1998 law. These COTCs required alteration to remove the minimum of two individual director stipulations and to allow the company to have a single director. This is a more obvious case of where a pre-CLRA 1998 COTC, in particular, needs alteration should the private company seek to have only one director.

Common seals

The obligation of a company to use a common seal to execute documents was also removed from the regulatory framework by the CLRA 1998. Still a private company which was established before 1998, or any private company that has otherwise adopted a common seal, may need to act to dispense with its obligation to use the common seal.

Ordinarily this action would be:

  • The COTC is altered to:
    • provide that the company need not have a common seal; and
    • support the execution of documents by the company without a common seal.
  • The directors resolve to dispense with the common seal.

Execution of deeds and other documents, including, for example, an election by a company as trustee to become a regulated superannuation fund, can be invalidated if the private company must use a common seal that remains adopted by the company but executes the deed or documents without that common seal.

Special purpose superannuation companies – reduced ASIC annual fee

The reforms allowed for a company that has been set up to act solely as the trustee of a regulated superannuation fund, or for other designated special purposes, to apply a substantially reduced ASIC annual fee of $40 rather than $226.50. Entitlement to the reduced fee for a company that has been set up to act solely as the trustee of a regulated superannuation fund turns on the limit on the purposes for which the company can act being effectively included in the COTC.

It’s a fail for the directors to complete the declaration to claim the reduced fee without understanding whether the provisions of the COTC support the entitlement to a reduced fee.

Summary

Directors of a private company are expected to understand and to take responsibility for what is in the COTC.

Although the company regulatory framework has been reformed:

  • to more readily allow circulated directors’ resolutions as an alternative to holding directors’ meetings;
  • to allow private companies to have a single director;
  • to make common seals optional; and
  • to extend a reduced ASIC annual fee to dedicated superannuation trustee companies;

among other reforms, the COTC of the company and the standing resolutions of the directors are a regime which constrains how the reforms may apply to a private company. Directors of companies should check COTCs and their records to ensure that they support the company using capabilities supported by the reforms.

Are electronic records OK for tax?

They’re OK.

 

electronic paper-shredder

It’s clear on the ATO website that electronic storage of paper records is acceptable:

This article from Addisons explains the big picture:

  1. including in the context of record keeping obligations of companies under the Corporations Act 2001; and
  2. refers to the general requirement that taxpayers keep their (Commonwealth) tax related documents for five years.

ATO record keeping requirements in detail are in Practice Statement Law Administration PS LA 2005/2. PS LA 2005/2 shows that the period for keeping records referred to in the article can be longer than five years in certain cases. Records of documents going back to when an asset was acquired, even if prior to the introduction of capital gains tax in 1985, need to be kept for five years after the CGT asset is disposed of. It is also apparent under PS LA 2005/2 that the ATO can impose a range of penalties for failure to keep records including referring cases for criminal prosecution to the DPP where they perceive deliberate falsifications of records.

The article shows how ATO record keeping requirements reflect the Electronic Transactions Act (C’th) 1999. In essence, section 12 states that electronic records of paper documents required to be kept under Commonwealth law are OK if the electronic system is capable of conveniently and adequately reproducing the paper record. That section is referred to and is in line with Taxation Ruling TR 2005/9 Income tax: record keeping – electronic records.

Implementing electronic tax records

A taxpayer fails these requirements, and risks penalty, if electronic records are lost. Using a backup system is critical whatever electronic system is being used. Moreover electronic records have ease of duplication and filing advantages that make electronic records preferable to paper records.

There are other risks of loss of electronic records that should be borne in mind. Export to other formats from legacy or crippleware systems is an imperative when the records can no longer be retrieved from computer software say because the software becomes, over time, no longer licensed, no longer runs in the taxpayer’s operating system environment or the software itself has inherent restraints on its archiving capability. Many modern bookkeeping systems have easy to use export features which can be worthwhile using as a failsafe to ensure compliance with record keeping obligations.

Is a tax invoice that is only electronic OK?

The position with tax invoices is clear. In para 12 of Goods and Services Tax Ruling 2013/1 the ATO states:

Tax invoices in electronic form
  1. A document in electronic form that meets the requirements of subsection 29-70(1) (and if applicable, subsections 48-57(1) and 54-50(1)), will be in the approved form for a tax invoice. [Footnote 9 – This record must be in English or readily accessible and easily convertible to English as required by subsection 382-5(8) of Schedule 1 to the TAA 1953.]