NOCLAR, Single Touch Payroll, Illegal Phoenixes, Contracts and Super Amnesty

29th June, 2018

NOCLAR and the Insolvency Practitioner

NOCLAR is the widely used abbreviation referring to non-compliance with laws and regulations.

The International Ethics Standards Board for Accountants (IESBA) has released an amending standard to the Code of Ethics for Professional Accountants to redefine the accountants’ role when laws or regulations are broken.

The standard was developed to partially address ethical lapses that occurred during the global financial crisis in 2008 and became an effective international code from 15 July 2017.

The standard applies to all accountants and clarifies that the public interest is more important than confidentiality to a client or employer.

The new standard introduces the ability for accountants to set aside the duty of confidentiality in order to disclose NOCLAR to appropriate public authorities where there is a strong public interest reason.

NOCLAR provisions do not apply to matters that are clearly inconsequential or relate to personal misconduct unrelated to the business activities of the client or employer.

NOCLAR requires accountants to firstly alert management (or those charged with governance) about actual or suspected NOCLAR, to enable them to take appropriate action and only to take further action if it’s in the public interest and those charged with governance and management failed to act.

Such further actions that accountants could do include disclosure to an appropriate Government agency.

Examples of NOCLAR breaches include:

  • fraud/corruption/bribery;
  • proceeds of crime;
  • public health and safety; and
  • tax liabilities.

From our perspective as accountants involved in pre-insolvency reviews or investigative accountants reviews, the challenging questions to be considered include should we report the client's failure to withhold PAYG or superannuation to the ATO, or should we report possible insolvent trading to ASIC.

We currently consider in these circumstances that we should alert non-compliance of this nature to the client, unless it is so extreme as to be in the public interest.

With respect to many companies we review, ATO non-compliance is common and insolvent trading is likely, so we thought we should set out our views on NOCLAR in this article.

We are happy to discuss and clarify our approach to NOCLAR with any client of the firm.

Single Touch Payroll Reporting - a new world of data

Single touch payroll reporting has been a stated initiative of the Government for some years now, and if your business employs 20 or more people, your new reporting processes must be in place by 1 July 2018. For businesses employing less than 20, you will have until 1 July 2019 to implement processes to enable compliance.

Under single touch payroll reporting, employers will report payments such as salaries, wages, pay as you go (PAYG) withholding and superannuation information from your payroll system each time you pay your employees.

As a result of this new payroll reporting, the ATO will now have instant access to payroll information which will make it easier for them to recognise the non-payment of debt.

For companies currently relying on the ATO as a source of informal working capital, they should be aware that the ATO will now have the tools to quantify debt obligations and act more swiftly with debt collection processes.

All businesses should ensure that sufficient cash is retained to meet tax and superannuation obligations on time or run the risk of an unwanted enquiry about compliance coming from the ATO.

Illegal Phoenix activity

In previous newsletters, we referred to the Government’s intention to introduce legislation designed to detect and prevent illegal Phoenix activity occurring.

In the recent Federal Budget, the Treasurer committed more than $40 million over four years to expressly tackle illegal Phoenix activity in order to support the legislative reforms proposed last year.

Some of the proposed illegal Phoenix reforms include:

  • extending the director penalty notice regime to GST;
  • the introduction of a director identification number that will interact with other government agency identification numbers to more accurately track relationships between directors and companies;
  • preventing the backdating of director resignations to escape liability for prosecution;
  • targeting specifically those who facilitate Phoenix activities, including friendly advisors and liquidators who fail in their reporting duties; and
  • considering the introduction of criminal penalties for financial and corporate misconduct, which would include creating accessorial liability offences.

Illegal Phoenix activity is said to cost the Government in the billions of dollars of lost revenue annually, and for this reason, there is a concerted effort being made to create law to prevent and penalise those involved in the activity.

Reforms to Contract Law

The Treasury Laws Amendment (2017 Enterprise Incentives No.2) Act 2017 commences on 1 July 2018. A key element of this act is to restrict the operations of certain contract termination rights when a party enters into a formal restructuring procedure.

The act creates a process designed to protect a party’s assets whilst it undergoes a formal restructuring or procedure under Chapter 5 of the Corporations Act; being a formal scheme of arrangement, receivership, controllership or voluntary administration.

Traditionally, contracts are easily terminated by reason of external administration and this has frustrated restructuring efforts where the contracts relate to critical suppliers, leases, licenses or loan agreements.

The act stays the exercise of rights of termination by reason of the company entering into a restructuring procedure and that stay acts throughout the life of the restructuring procedure.

The act creates a substantial change to the current prevailing laws but it does not apply retrospectively. The act will only apply to contracts entered into on or after the commencement date (1 July 2018).

There is a range of contracts that will be excluded from the operation of the act, the most significant being pre-1 July 2018 contracts and factoring arrangements. There are many other exclusions, but they relate to matters infrequently encountered by companies in external administration in South Australia.

Superannuation Guarantee Amnesty

On 24 May 2018, it was announced by the Minister for Revenue and Financial Services that a 12-month Superannuation Guarantee (“SG”) amnesty would be commenced to provide a one-off opportunity for employers to self-correct past SG non-compliance without penalty.

Employers who voluntary disclose previously undeclared SG shortfalls during the amnesty, and before the commencement of an audit will:

  • not be liable for the administration component and penalties that may otherwise apply to late SG payments; and
  • be able to claim a deduction for catch up payments made in the 12 month period.

Employers will still be required to pay the nominal interest and the associated general interest charge.

If employers are able to pay the full SG shortfall, then payment can be made directly to the employees’ superannuation fund, provided the ATO was notified. If full payment is not possible, the ATO will still be able to arrange a payment plan; however, the payments will be required to pass through the ATO.

It can be expected that given the Government is offering an amnesty in order to improve SG compliance, those employers that do not take advantage of it could expect higher penalties to apply after the amnesty finishes on 23 May 2019.

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