The question of costs occupies a significant amount of the life of a proceeding and complexities surrounding costs are difficult to unravel. The losing party will usually pay the successful party’s costs that were reasonably incurred for running the proceeding.
Pentelow v Bell Lawyers Pty Ltd [2018] NSWCA 15 demonstrates an important principle that courts use to determine costs when a successful litigant is self-represented.
Background
Self-represented litigants are on the whole not able to claim for their costs, even when successful, except for disbursements (such as court filing fees and expert witness appearances): see Cachia v Hanes (1994) 179 CLR 403.
The eponymous Chorley Exception, as described in London Scottish Benefit Society v Chorley (1884) 13 QBD 872, holds that where a self-represented litigant is a qualified solicitor, they are entitled to claim professional costs for legal work they performed themselves.
The principle holds because solicitor costs are quantifiable by the courts. Costs claimed by a layperson for representing themselves for time spent performing legal work are necessarily more amorphous and will not accurately reflect the actual costs that would usually be involved.
The Chorley Exception has some limits. A solicitor cannot claim costs for instructing themselves or attending on themselves as they would do when they act for a litigant. As observed by Madden CJ in Ogier v Norton [1904] VLR 536, it would be absurd for a solicitor or barrister to claim costs that duplicate themselves as both client and solicitor and to profit on providing their own counsel.
In Pentelow v Bell Lawyers Pty Ltd [2018] NSWCA 150 (“Pentelow”), the New South Wales Court of Appeal considered a claim for costs from a barrister that had been owed money by an instructing solicitor. The applicant had been successful in those proceedings and now sought to claim for costs incurred in that original proceeding.
Issues
The Court was tasked with considering whether:
(a) the Chorley Exception applies to barristers, not just solicitors;
(b) a barrister is self-represented if they instruct solicitors to act for them but do much of their own legal work; and
(c) whether the Chorley Exception would apply to an otherwise eligible costs applicant performed legal work themselves.
Decision
In a 2:1 judgment, the Court held that:
(a) self-represented barristers are subject to the Chorley Exception in circumstances where:
(i) admission to practice law is uniform for both barristers and solicitors under the Legal Profession Act 2004 (NSW);
(ii) the work performed by solicitors and barristers contains significant crossover, such as drafting pleadings and affidavits, as prescribed in the New South Wales Bar Association Barristers’ Conduct Rules.
(b) the fact that the applicant instructed solicitors does not preclude claims for work performed by the applicant; and
(c) while the applicant is entitled to recover their own costs, the Chorley Exception should be read narrowly and any discussion of it by lower courts should be confined to the facts of the case.
Heading to the High Court
The High Court of Australia is currently considering an Application for Special Leave to Appeal in Pentelow, which has yet to be determined. While the position in Pentelow was a consistent application of common law surrounding the Chorley Exception, there is speculation that the High Court is interested in having their say on the issue.
In a recent High Court Case regarding the self-representative costs, Coshott v Spencer [2017] HCATrans 263, special leave was granted and the matter was listed to be heard before 7 judges. This leave was ultimately rejected once it was discovered that the respondent was operating through an incorporated legal practice and the case was not an appropriate vehicle to assess the issue. While this case highlights the issue of the Chorley Exception applying to practitioners operating through such entities, it also indicates the High Court’s interest in this area of law.
Conclusion
Costs in legal proceedings are often difficult to ascertain and rely on considerable judicial discretion after an assessment of costs.
The application of the Chorley Exception to barristers is logical where the legal qualifications of solicitors and barristers and the work that they perform in proceedings overlaps. However, this does not mean there is a natural extension of the underlying principle to barristers as a whole.
Self-represented litigants should be aware that unless they are legal professionals, they are not entitled to claim any costs except those that come straight out of pocket.
Until such time as the High Court rules has an opportunity to rule on this issue, those that come up against self-represented litigants that are solicitors or barristers should also be aware of the risk of having to pay the other side’s costs subject to the Chorley Exception.
Introduction
Since the mid 1990’s, when advertising regulations around law firms were relaxed, there has been a general trend in Australia of increased litigation and court cases. Such a trend has had significant impacts on the way people and corporations behave in our society, but not always for the better.
What’s causing this increase?
A number of factors are thought to have contributed to the increased number of claims.
There is great debate over the role that ‘No Win, No Fee’ policies have had on our legal system. While there is the obvious effect of increasing the number of cases that get off the ground, these policies also help increase accessibility to the legal system by assisting people who have legitimate claims and might otherwise not be able to afford legal fees. The negative effects of these schemes are probably compounded by those that chose to abuse them, both vexatious clients and the ‘ambulance chasing’ dodgy lawyers. Similar issues arise under the increase in litigation funding, where 3rd parties provide the funds necessary to carry out proceedings then take a cut of the payout.
Another factor is the general trend of Australia becoming a ‘blaming and claiming society’ where people’s first instinct in the case of an accident is to look for someone to blame. While individual greed and other factors might play into this trend, a great part of it is probably attributable to the age of information. In our modern society, people’s access to information about their legal rights is greater than ever, and with that comes increased sense of rights and entitlements.
There are the extreme examples of people who abuse the legal system, such as Mohammed Rahman, who has been banned from commencing any legal proceedings in NSW courts after bringing 50 cases in just 10 years. He is 1 of 12 people who have made it onto the States ‘vexatious litigant register’.
What are some of the impacts of a more litigious society?
This increase has seen a number of both positive and negative effects on our society. Negative impacts can be seen through:
(a) Increased burden on our Judicial system;
(b) Longer wait times in Courts;
(c) Greater expenses incurred in assessing and preventing injury;
(d) Higher insurance premiums for many industries; and
(e) A heightened fear of lawsuits leading to overly cautious behaviour.
Local councils and medical practices have felt the effects of increased insurance premiums most of all, having to close facilities such as parks, recreational centres and rural practices that are just too costly to insure. The loss of local recreational centres and parks have also been thought to be linked to the increase in obesity in young Australians.
There are some positive effects of increased litigation too, with some of the being direct counterpoints to some of the negative aspects, such as:
(a) The greater experience incurred in preventing injury and the heightened fear of law suits leading to increased safety;
(b) Increased accountability for wrong doings; and
(c) More recognition of individual rights.
What can a good lawyer do for you?
Fighting for your legal rights isn’t always a bad thing. Despite the onslaught of vexatious claims the Courts hear nowadays, many people still have legitimate grievances that should be heard. The important thing when dealing with a claim is assessing the best course of action to achieve the best results possible. Many forms of dispute resolution can be used as an alternative to litigation, such as:
(a) Mediation;
(b) Conciliation; and
(c) Arbitration.
In fact many cases can be settled without the need for any sort of formal proceedings, through means like letters of demand and deeds of settlement.
Conclusion
Whether it’s the scalpel or the sledgehammer, great thought and care needs to be given when considering what tool to use at the outset of your claim.
Introduction
The Building and Construction Industry (Improving Productivity) Act (“the Act”) is a piece of federal legislation aimed to improve workplace relation frameworks to ensure building work is carried out fairly, efficiently and productively, to benefit all building industry participants and the Australian economy as a whole.
When does the code apply to you?
The Code for the Tendering and Performance of Building Work 2016 (“the Code”) applies to Commonwealth funded building projects on or after 2 December 2016. It was implemented to help promote the aims of the Act by providing standards which the Commonwealth expects industry stakeholders to adhere to. These standards are aimed to promote efficiency, reduce delays and costs in construction, and improve workplace relations.
Under section 34 of the Act, the Code may apply to:
(a) Building contractor corporations; or
(b) Building industry participants whose work is in a Territory or Commonwealth place; or
(c) The Commonwealth or a Commonwealth authority; and
(d) Their related entities.
From the moment such a group submits an expression of interest or tender for a Commonwealth funded building project after the 2 December 2016, they become a “code covered entity” and must comply with the Code.
What are your new rights/ obligations under the code?
Under section 11D of the Code, code covered entities are required to:
(a) Ensure that payments which are due and payable are made in a timely manner;
(b) Ensure such payments are not unreasonably withheld;
(c) Report delayed or disputed payments to the Australian Building & Construction Commission (“ABCC”), which will be compulsory as of 1 September 2018.
The Code also provides several requirements for code covered entities to comply with handling a dispute, such as:
(a) The need to have a documented dispute settlement process; and
(b) Ensure disputes are resolved in accordance with said process in a:
(i) Reasonable;
(ii) Timely; and
(iii) Cooperative manner.
In the event of a delayed or disputed payment there is a requirement to report such issues as soon as practicable to the ABCC. While there has been a transitional period aimed to ensure the education of code covered entities with these requirements, from the 1 September 2018 a failure to report these issues will result in a breach of the Code which may result in adverse consequences such as sanctions.
How can you ensure you comply with these new requirements?
To comply with these new requirements the “Security of payment reporting form” (found here) can be submitted to the ABCC via email.
Conclusion
If you are a code covered entity, it is important to be aware of your new obligations in relation to such issues, to avoid sanctions by the ABCC and subsequent loss of business.
Introduction
A former Oxford student has recently claimed that the university was responsible for his failure to attain employment as a top tier lawyer in the case of Faiz Siddiqui v The Chancellor, Masters & Scholars of the University of Oxford [2018] EWHC 184 (QB).
The action was brought 16 years after his graduation and related to a poor mark received in a paper he wrote for the course “India, 1916—1934: Indigenous Politics and Imperial Control”. Among Mr Siddiqui’s allegations was that negligently inadequate teaching quality led to his poor mark, thereby preventing him from achieving first class honours and from later being hired by a top tier firm.
Although this particular claim was (somewhat unsurprisingly) rejected by the High Court of the UK, the possibility of future successful claims was explicitly left open, begging the question: could Australian students sue their universities where they fail to attain employment?
Background
Before looking at the possibility in Australia, it is worth examining the peculiar fact scenarios which have led to successful claims overseas.
In the case of Phelps v Hillingdon London Borough Council; Anderton v Clwyd County Council; Gower v Bromley London Borough Council; Jarvis v Hampshire County Council [2000] UKHL 47, litigants were awarded damages for the loss of wages they suffered as a result of the negligent acts of their schools. The schools failed to recognise and provide appropriate education for their special educational needs, and the court acknowledged that this failure directly caused their failure to find employment.
More recently, in the US, a lawsuit was settled when DeVry University agreed to pay $100 million to students affected by misleading advertisements relating to the employability and earning capacity of their graduates. It was found that the university’s assertions that DeVry graduates were more employable than their counterparts from other universities were false. Damages were accordingly awarded to students harmed by the deceptive conduct (though the definition of such harm was not made public, and settlement prevented the question being put before a judge).
It seems that negligence and misleading or deceptive conduct both provide potential avenues for redress.
Australia
In Australia, there have been no judgements to date relating to such educational negligence, and a handful of misrepresentation cases have been unsuccessful.
For example, in Fennell v Australian National University [1999] FCA 989, an ambiguous advertisement suggesting that graduates would be guaranteed work placement was deemed to fall short of misleading and deceptive conduct.
In Yee Tak On v Dr Linda Hort (ANU College) [2012] FMCA 391, a student was denied damages for failing a course where the homework requirements were greater than was foreshadowed in its course guide.
In Weir v Geelong Grammar School (Civil Claims) [2012] VCAT 1736, the mother of a student failed to establish that the school had provided a standard of teaching lower than advertised, and that the failure had caused her daughter to be denied entry into Law at Sydney University.
Conclusion
Despite the area being somewhat unexplored in Australia, these failed cases appeared to have largely turned on their facts. Scope may remain to hold educational institutions responsible where their students fail to attain employment and the circumstances are sufficiently clear.
Considering the current oversupply of university graduates to the legal market in Australia, it isn’t hard to imagine many of our own students finding themselves empathising with Mr. Siddiqui.
Background
With the boom of global online shopping in recent years, the Australian government has recently implemented new legislation to begin taxing low value goods from overseas sales. Any vendor that makes more than $75,000 AUD worth of sales in a year will have to comply by collecting GST for low cost goods upon purchase to then remit to the Australian government.
This has the supposed advantages of increased GST revenue, more consistent taxing on household consumption and a step towards “levelling the playing field” between domestic and overseas retailers. However, these changes might cause more harm than good to the Australian consumer and economy.
Issues
There are many potential issues with the newly implemented system which may negatively impact consumers.
In some circumstances, purchases made from overseas might be vulnerable to being taxed twice. When purchasing low value goods, these goods could be classified as a taxable supply and will be taxed upon purchase. However, if a combined shipment of low value goods exceeds $1000 in value then they may also be deemed as taxable importation, and thus could be taxed again at customs. The only way to avoid this would be vendors providing notice to customs so that the relevant taxation rules can be “switched off”. If this is not done properly then consumers will have to rely on suppliers providing a refund, as GST taken upon importation cannot be refunded.
A supposed benefit of these changes is the increased equality between domestic and overseas suppliers when it comes to tax. Previously, only overseas shipments valued over $1000 were taxed, which made shopping overseas an attractive option for Australian shoppers. While the new increase in prices may drive more consumers to buy from Australian retailers, in the long term it is likely insufficient to combat the larger range and lower prices seen in international stores. In a lot of instances, it is still preferable and cost effective to pay the new tax and buy from overseas than it is to seek a local supplier. Backlash over the new system can already be seen from major suppliers such as Amazon, who announced they will no longer ship from the US site directly to Australian customers. Aussie shoppers can now only access the Australian Amazon website, which boasts considerably less variety than it’s US counterpart.
“Treasurer Scott Morrison has designed the new laws in order to level the playing field for Australian retailers as well as to raise revenue. This is a double benefit to the economy through GST and pushing consumers to Australian retailers.
While the target of pushing consumers back to Australian retailers has had the desired initial impact, Australian consumers are still demanding choice and lower costs consumables. It won’t be long before someone else comes and again disrupts the retail market just like Amazon has done by coming to Australia. We have seen this with Netflix, Spotify and Airbnb. The other issue I believe we will find is the laws will be difficult to enforce, and anecdotal evidence already is that even large overseas companies sending goods to Australia are not ready for this change. It is difficult to see what jurisdiction the ATO has to prosecute overseas companies for failing to collect and remit GST. It may come back to trying to stop goods at the border from anyone not meeting their obligation. Either way, through disruption or the inability to enforce, I believe the desired impact of the new legislation will become obsolete.”
Ricky Wilson
Director- Benchmarc Financial Group
Previously low value goods went untaxed in overseas purchases as the revenue produced by such taxes were outweighed by the cost of enforcement. Since online shopping has become such a large market, the situation has changed, and the government estimates that the new taxes will generate $300 million in the first 3 years. However, since the introduction of the new system this estimate might start to drop rapidly if other major suppliers follow Amazons example and stop shipping internationally. If many more follow suit, then it won’t take long for the operation to become unprofitable, leaving little advantage to a low value goods tax.
Outcomes
For anyone who uses imported low value goods in their homes or businesses, it is important to understand the potential effect these new legislative provisions might have on you. If you import large quantities of low value goods like stationary and other office equipment that totals to over $1000 in value, without proper precaution you might end up paying GST twice on these orders. Ensuring that you use a reputable supplier that complies with the new rules for avoiding double taxation is the only way to avoid this. Alternatively, if you purchase such goods from an importer then you may see a hike in prices.
While these reforms are very new, there are many other countries that have announced similar reforms, and it will be interesting to see how these policies develop, how they are implemented and who will win the stalemate between major retailers like Amazon and governments.
Conclusion
Ultimately these reforms may not have the intended benefit on the Australian economy as originally hoped, and Australian retailers may see very little increase in online business. The Australian consumer is most likely to feel the negative effects of these changes, with increased costs and decreased choices. Care also needs to be taken in choosing your retailer to ensure you don’t end up being taxed twice.
The Cummins principle has again surfaced in the decision in Turner as Trustee of the Bankrupt Estate of Wallace v Wallace [2017] FCCA 3044 (Wallace).
The case further demonstrates that transferring a property for love and affection is not enough to defeat creditors for the purposes of sections 120 and 121 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).
Background
The Cummins principle is a controversial principle in the law of trusts and stems from Trustee of the property of Cummins, a Bankrupt) v Cummins (No 5) [2002] FCA 1503.
Where there is a joint tenancy over a matrimonial home, it is presumed that the couple have perfectly equal interests in it. Problems stemming from this principle include difficulties for a non-bankrupt spouse who attributed more than half the purchase price of the property to argue they should be entitled to more than 50% of the equity. Other such difficulties are yet to be fully explored, due to the vast number of different types of relationships in modern society, particularly marriage like relationships that lack formalization.
Section 120 of the Bankruptcy Act provides that a transfer of property by a person who becomes a bankrupt is void if:
(a) The transfer took place within 5 years prior to the commencement of bankruptcy; and
(b) There was no consideration given for the transfer or if the consideration was less than the market value of the property.
Section 121 of the Bankruptcy Act provides that a transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void if the property would probably have become part of the transferor’s estate or been available to creditors had it not been transferred.
In Wallace, the Respondent was the wife of a bankrupt who transferred his interest in a matrimonial home in Sandringham and a holiday home in Robina to her for “natural love and affection”. The Trustee of the Bankruptcy sought declarations that the transfers of interest in land were void pursuant to sections 121 and 120 of the Bankruptcy Act respectively.
Decision
Riethmuller J considered and applied the Cummins principle in his judgment to determine the existence of a trust between the respondent and the bankrupt concerning the two properties. The existence of a trust would result in the two transfers of property not being classified as transfers for the purposes of sections 120 or 121, but rather the vesting of trust assets to the beneficiary of the trusts.
The court rejected the argument that there was a trust existing for the Sandringham property between the respondent and the bankrupt, and accepted the presumption in the Cummins principle that it was a joint property. The principle applied as the property was to be the matrimonial home in the circumstances where they were married and both contributed to its acquisition. He found that the presumption agreed with the registered title and ultimately decided that the respondent held no greater equitable interest than what was registered at the time of purchase (50%).
Since the couple then sold the Sandringham property and retired to the Robina home, the Cummins Principle also applied to this property. The presumption yielded the same result as the Sandringham property and it was found that the respondent only had an equitable interest of that which was registered at the time of purchase.
Riethmuller J then went on to determine that both of the transfers of property were void under the respective provisions of the Bankruptcy Act, as while love and affection is “good consideration” it is not “valuable consideration” (see Wirth v Wirth (1956) 98 CLR 228 and Director of Public Prosecutions for Victoria v Le [2007] HCA 52), and that the purpose of the Robina transfer was to defeat creditors’ interest.
Conclusion
Wallace demonstrates that the courts have a long way to go before the Cummins Principle can be settled and understood as originally intended. There is still much confusion surrounding the principle and how it might apply in a number of different circumstances and relationships, but one thing is clear, the Cummins principle is here to stay.
The question of costs occupies a significant amount of the life of a proceeding and complexities surrounding costs are difficult to unravel. The losing party will usually pay the successful party’s costs that were reasonably incurred for running the proceeding.
Pentelow v Bell Lawyers Pty Ltd [2018] NSWCA 15 demonstrates an important principle that courts use to determine costs when a successful litigant is self-represented.
Background
Self-represented litigants are on the whole not able to claim for their costs, even when successful, except for disbursements (such as court filing fees and expert witness appearances): see Cachia v Hanes (1994) 179 CLR 403.
The eponymous Chorley Exception, as described in London Scottish Benefit Society v Chorley (1884) 13 QBD 872, holds that where a self-represented litigant is a qualified solicitor, they are entitled to claim professional costs for legal work they performed themselves.
The principle holds because solicitor costs are quantifiable by the courts. Costs claimed by a layperson for representing themselves for time spent performing legal work are necessarily more amorphous and will not accurately reflect the actual costs that would usually be involved.
The Chorley Exception has some limits. A solicitor cannot claim costs for instructing themselves or attending on themselves as they would do when they act for a litigant. As observed by Madden CJ in Ogier v Norton [1904] VLR 536, it would be absurd for a solicitor or barrister to claim costs that duplicate themselves as both client and solicitor and to profit on providing their own counsel.
In Pentelow v Bell Lawyers Pty Ltd [2018] NSWCA 150, the New South Wales Court of Appeal considered a claim for costs from a barrister that had been owed money by an instructing solicitor. The applicant had been successful in those proceedings and now sought to claim for costs incurred in that original proceeding.
Issues
The Court was tasked with considering whether:
(a) the Chorley Exception applies to barristers, not just solicitors;
(b) a barrister is self-represented if they instruct solicitors to act for them but do much of their own legal work; and
(c) whether the Chorley Exception would apply to an otherwise eligible costs applicant performed legal work themselves.
Decision
In a 2:1 judgment, the Court held that:
(a) self-represented barristers are subject to the Chorley Exception in circumstances where:
(i) admission to practice law is uniform for both barristers and solicitors under the Legal Profession Act 2004 (NSW);
(ii) the work performed by solicitors and barristers contains significant crossover, such as drafting pleadings and affidavits, as prescribed in the New South Wales Bar Association Barristers’ Conduct Rules.
(b) the fact that the applicant instructed solicitors does not preclude claims for work performed by the applicant; and
(c) while the applicant is entitled to recover their own costs, the Chorley Exception should be read narrowly and any discussion of it by lower courts should be confined to the facts of the case.
Conclusion
Costs in legal proceedings are often difficult to ascertain and rely on considerable judicial discretion after an assessment of costs.
The application of the Chorley Exception to barristers is logical where the legal qualifications of solicitors and barristers and the work that they perform in proceedings overlaps. However, this does not mean there is a natural extension of the underlying principle to barristers as a whole.
Self-represented litigants should be aware that unless they are legal professionals, they are not entitled to claim any costs except those that come straight out of pocket.
Those that come up against self-represented litigants that are solicitors or barristers should also be aware of the risk of having to pay the other side’s costs subject to the Chorley Exception.
Interested in learning more about Insolvency & Reconstruction?
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Statutory Demands and Insolvency
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The liquidation of a company is the process by which a company winds down and ceases to exist. This can arise for many reasons and can be voluntary or involuntary. The process involves the appointment of a liquidator, gathering of company assets, paying off creditors, settling of affairs and distribution of remaining funds to shareholders.
Whilst companies can be forced into liquidation in cases of insolvency, there are practical benefits from liquidating a solvent, healthy company.
These range from large tax benefits (in certain circumstances), including:
Taxation issues may arise during the process of liquidating a company in a number of circumstances. The sale of transfer of a company asset may result in a taxable gain. In such a case the liquidator will need to pay the relevant income tax prior to distributing any remaining cash or assets to creditors or shareholders.
When distributing company assets in specie, a liquidator will need to consider:
Failing to take into account these factors can result in a liquidator becoming liable for tax debts incurred after their appointment.
Taxation issues may also arise in relation to distributions made to shareholders. Under section 47 of the Income Tax Assessment Act, a distribution is deemed to be a dividend to the extent it comes from the following “income” sources:
To be able to determine the extent to which a distribution will constitute a deemed dividend, so that the necessary tax can be paid, it is crucial that a liquidator is able to determine the composition of the distribution. This is known as the Archer Brothers Principle.
“By a proper system of bookkeeping the liquidator, in the same way as the accountant of a private company which is a going concern, could so keep his accounts that distributions could be made wholly and exclusively out of those particular profits or income.” – Archer Bros Pty Ltd (In Vol Liq) v. FCT (1952-53) 90 CLR 140.
This principle requires liquidators to maintain records and preferably separate accounts so that the specific source of funds used to make distributions can be identified and thus taxed appropriately.
This principle is also a useful guide for any ongoing company, as consistently maintaining such separation and records of both Capital and Revenue reserves will make the process of liquidation in the future far easier.
Whilst returns to shareholders can be considerable, there may be tax requirements depending on the nature of the distribution. Based on the composition of the distribution, it may be deemed in part or wholly as a dividend which will incur tax.
Shareholders who acquired their shares before 20th September 1985 can potentially receive considerable tax-free capital gains upon liquidation of a company. However, pre-CGT shareholders are still assessable on the dividend component of a liquidator’s distribution.
Upon the cancellation of shares in a company at the completion of liquidation a capital gain or loss may occur, known as a CGT event C2. Any assessable dividend distributed by a liquidator will still form part of the proceeds for the share cancellation and can therefore reduce any capital loss.
The timing of dividends can impact the availability of capital losses for the shareholder depending on whether they were before or after the appointment of the liquidator.
The small business CGT concessions can drastically reduce the tax liability on sale of business assets for qualifying taxpayers and can be used to reduce the tax liability of shareholders upon liquidation.
Shares in a company can potentially be an active asset if the company has previously conducted a business and several conditions are met, including:
Where all conditions are satisfied, a capital gain on cancellation may be reduced using small business CGT concession. A general discount of 50% on taxable capital gains applies and can be further reduced by 50% in some scenarios.
Additionally, up to $500,000 of the remaining taxable capital gain can be taken as tax-free retirement benefit (if you are under 55 this must be paid into a superannuation fund).
Voluntarily liquidation of a company presents many great benefits to shareholders, however care needs to be taken both during and prior to liquidation to ensure that funds can be correctly identified and tax appropriately applied. Distributions made to shareholders also may be taxed differently depending on the nature of their shares.
INTRODUCTION
The phenomenal surges in cryptocurrency prices have put cryptocurrencies such as Bitcoin and Ethereum on the radar of many investors in the mainstream. Those interested in speculating with Bitcoin should be aware of the legal issues that may arise.
Since Bitcoin and cryptocurrencies in general are relatively new as a serious legal concept, the formulation and operation of the regulating laws is still a work in progress.
TAX ISSUES
In Australia, Bitcoin and other cryptocurrencies are not considered as a currency or form of money, but rather are assets that are then bartered for goods and services. This classes them as a capital asset and are thus subject to capital gains tax (CGT).
Cryptocurrencies are however a somewhat unique class of capital asset as they are more readily useable in place of normal currency, with many vendors nationwide accepting them as a form of payment. This opens them up to tax implications that are less likely to be seen when dealing with other capital assets such as property or shares.
A personal use asset?
Bitcoin differs from other capital assets as you’re far more likely to be able to walk to your local convenience store and buy a packet of gum with a Bitcoin than you are with your spare Telstra shares or your two-bedroom apartment.
As of legislation passed in September 2017, GST no longer applies when cryptocurrency is exchanged for a good or service. In this aspect, it is taxed akin to how a foreign currency would be. Because cryptocurrency is usable for day to day transactions, it is possible that it can be deemed as a personal use asset if it is used mainly to purchase items for personal use.
Cryptocurrencies are not personal assets if they are obtained, kept, or used as:
(a) an investment,
(b) to make profit, or
(c) in the course of carrying on a business.
Capital gains made from personal asset cryptocurrencies acquired for less than $10,000 are disregarded for CGT purposes. To be able to prove your cryptocurrency is a personal use asset, it is important to keep records in relation to all your cryptocurrency transactions.
Cryptocurrency as an investment
With the huge spike in prices late last year, purchases of Bitcoin as an investment have become very popular. Any profit made from transactions of cryptocurrencies for the purposes of investment or profit making may be subject to CGT. If you sell your cryptocurrency for a profit, this profit will be considered a capital gain and may be taxable. If you sell it for a loss, this will be considered a capital loss and can be used to offset other capital gains made in the same year.
Purchasing cryptocurrencies as an investment will automatically preclude it from being treated as a personal asset, however if the investment is held for more than a year, you may be entitled to the CGT discount.
Other uses of cryptocurrency
Cryptocurrencies are a versatile asset and have a variety of other uses (such as business transactions and cryptocurrency exchanging) and may have different tax implications in each instance. We recommend seeking advice regarding your specific use of Bitcoin to both minimise tax and avoid breaching any taxation laws.
SUCCESSION ISSUES
Despite what their name might suggest, as cryptocurrencies are classified as capital assets rather than a form of currency, this may lead to potential confusion when it comes to the execution of one’s will.
Whilst you might intend it to be grouped in with their cash, it could potentially end up being distributed with you other capital assets such as shares. An estate containing cryptocurrencies needs a sufficiently detailed will to ensure they are distributed correctly.
As this is such a unique form of asset, other potential issues might arise surrounding the technology involved. Banks can be court ordered to transfer savings to an estate executor. In contrast, there is no one person that can be ordered to hand cryptocurrency over.
Whilst the assets can legally be passed on to a beneficiary, without the proper means (private keys and passwords) they might remain inaccessible. If you’re considering entering into this modern market, it is important to make sure your will contains the necessary details to allow these assets to be accessed and transferred.
CONCLUSION
There remains a lot of uncertainty in this area due to:
(a) A lack of up to date legislation; and
(b) Little guidance provided by the courts.
It is important to make sure your will is comprehensive and up to date with your cryptocurrencies assets, and with tax time upon us, it is essential that you are aware of the tax implications for your cryptocurrency assets.
The recent decision in the matter of GLFB Pty Ltd trading as Harvest Homes [2018] NSWSC 598 is a lesson to all professionals in all industries on how important being detailed and consistent is in their business dealings.
In this case, one small detail was the reason for a statutory demand for a debt to be set aside by the Court.
Background
The plaintiff, GLFB Pty Ltd trading as Harvest Homes (Harvest), was issued a statutory demand in respect of two unpaid invoices by Zero to Infinity Solutions Pty Ltd (ZTI Solutions).
Harvest and ZTI Solutions were involved in a written agreement where ZTI Solutions would refer potential property purchasers to Harvest’s construction business (Agreement). In this regard, ZTI Solutions issued Harvest with nine invoices for its services under the Agreement (Invoices).
Harvest made an application to set aside the statutory demand under sections 459H and 459J of the Corporations Act 2001 (Cth) (Act). These provisions allow for a statutory demand to be set aside if:
(a) There is a genuine dispute between the parties that the debt is not as is represented in the statutory demand (section 459H); or
(b) There is a defect in the demand; and
(c) It would be substantially unjust to not set it aside (section 459J).
Issue
Harvest claimed that the statutory demand was defective as:
(a) The entity that issued the Invoices was not a party to the Agreement, but a related company owned and operated by the same director, called ZTI Property Investments Pty Ltd (Zero to Infinity Property Investments); and
(b) Despite the ZTI Solutions’ affidavit to the contrary, no verbally agreed variations of the Agreement had taken place to the effect that Zero to Infinity Property Investments was substituted as the payable entity of the Invoices.
The presiding Judge of Appeal, Leeming JA, was to consider whether the irregularity and inconsistency between the statutory demand and the Invoices were enough to set the statutory demand aside.
Decision
His Honour found in favour of Harvest and made orders to set aside the statutory demand on the basis that:
(a) A genuine dispute existed on the evidence as to whether the Agreement was varied, since Harvest and ZTI Solutions had given conflicting affidavits in this respect (satisfying section 459H of the Act); and
(b) The Invoices issued with the incorrect company name constituted a significant enough defect, since a debtor should know exactly which company it is indebted to, so it can properly pay off the debt (satisfying section 459J of the Act).
Finally, his Honour also remarked on ZTI Solutions’ general carelessness in issuing the Invoices, in that none of the companies named on the Invoices were actual companies that the director had incorporated:
(a) The name on the letterhead of the Invoices was actually “Zero to Infinity Property Investment Pty Ltd” (‘Investment’ being singular instead of plural); and
(b) The name of the bank account on the Invoices was “Zero to Infinity Property Pty Ltd” (missing ‘Investments’).
Conclusion
The devil is in the detail, and not being thorough and consistent will almost certainly lead to negative outcomes, especially in legal proceedings relating to statutory demands.