THE Insolvency Review ISSUE 04 - DECEMBER 2021
External Administrations: September 2021 In Focus: Can a Members Voluntary Liquidation Help You? Personal Insolvency: September Quarter Statistics
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Welcome Welcome to the final issue of The Insolvency Review for 2021. As we look towards 2022, it’s with a renewed sense of hope and excitement. With borders reopening and travel to resume, we are optimistic that we can return to some semblance of normality, particularly as the Christmas period approaches. Businesses are looking forward to a return to normal trading, particularly across the tourism sector as the Christmas holidays begin. Our look at external administrations discusses the trends over the September quarter and provides an outlook on how the Federal Government’s shift to recovery will alter the landscape moving forward. Also in this issue, Daniel Luckman from our Sunshine Coast office breaks down the advantages of the Members Voluntary Liquidation process and the tax benefits it offers for those seeking to exit their business after many years of hard work. Finally, with the stabilisation of personal insolvency figures over the September quarter, we look at the shift in financial behaviour sparked by the pandemic and the outlook as we move into the new year. We wish you and your family a safe and enjoyable holiday season and a very Happy New Year. Until next time.
Terry van der Velde Managing Director SV Partners
HEAD OFFICE 22 Market Street, Brisbane, Qld 4000 GPO Box 5300, Brisbane, Qld 4001 Tel: 1800 246 801 Fax: 07 3229 7285 For enquiries, please contact: media@svp.com.au or visit us at www.svpartners.com.au
EXTERNAL ADMINISTRATIONS
“Companies that hadn’t invested in innovation
as a core function prior to the pandemic are already struggling to meet new demands by clients and employees.”
Fig. 2 Source: ASIC Australian Insolvency Statistics Series 1A - 1.1 - November 2021 Companies entering external administration and controller appointments
A
s most states transition out of lockdown and vaccination rates continue to rise across the country, Australia is cautiously stepping out of the safety bubble. With it comes the welcome return of many activities as people return to shopping, dining out and socialising once more. Although the much publicised tsunami of insolvencies have yet to materialise, external administrations have increased just over 15% YoY for the September quarter to 1090 up from 946 in 2020. Compared to the 1269 external administrations in the June quarter, September statistics show an overall decrease of 14% (see Fig. 1). This is representative of figures in most states with the exception of Queensland and Western Australia, which both logged double digit growth.1
Companies entering External Administration
Across industries, notable increases on the quarter include: • • •
Wholesale Trade with an 87.5% increase to 45 A 62% increase in the Administrative & Support Services sector 23.5% rise in the Manufacturing industry to 42
According to the Australian Bureau of Statistics, 25% of wholesale trade businesses found that it would be difficult or very difficult to meet their
Source: ASIC Australian Insolvency Statistics Series 1A 1.1 November 2021
Fig. 1
Companies entering External Administration 1 ASIC Australian Insolvency Statistics Series 1A 1.3 August 2021 2 ABS - Business Conditions Sentiments Release - June 2021 3 Australian Chamber-Westpac Survey of Industrial Trends Q3 2021 4 McKinsey & Company - Why 2021 will define the next decade for Australian companies - March 2021 5 IGT - An Investigation and Exploration of Undisputed Tax Debts in Australia - June 2021
financial commitments over the September quarter.2 The Australian Chamber-Westpac Survey of Industrial Trends notes that the most recent lockdowns across New South Wales, Victoria and the ACT had also adversely affected the manufacturing sector with output stalling, in particular due to material constraints. However, rather than contracting as it did in 2020, orders expanded over the period.3 Month by month, external administrations have decreased over Q3, reaching their lowest in September since January 2021. Research from McKinsey & Company looks at 2020 as an inflection point for the Australian economy and businesses as a whole. The pandemic forced many companies to adapt quickly and implement changes that would normally take years in a matter of months. Those which were innovation focused prior to the pandemic, ultimately had a softer landing and reaped the financial rewards with the range of performance particularly evident for those in tech and media, retail, energy and healthcare. In contrast, “companies that hadn’t
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invested in innovation as a core function prior to the pandemic are already struggling to meet new demands by clients and employees”.4 Flexibility offered by the Australia Taxation Office (ATO) to many SMEs over the course of the pandemic has perhaps lulled many into a false sense of security. While offering the ability for those with outstanding tax debts to enter into payment arrangements, the ATO notes that the mechanism has seen a decline in use. The recent Investigation and Exploration of Undisputed Tax Debts in Australia by The Inspector-General of Taxation reports that small to medium enterprises accounted for 62.6% of collectable debt in FY20, some $21.40 billion of the toal $34.18 billion.5 In our experience, the ATO is often a catalyst for many external administrations and as the resumption of pre-COVID debt recovery actions begin to ramp up in the near future and creditors begin to call, business will likely have to face their financial challenges head on, with a rise in insolvencies likely to follow.
IN FOCUS - CAN A MVL HELP YOU?
Exiting the Family Business and Members Voluntary Liquidations Article written by Daniel Luckman | Senior Manager - Sunshine Coast
The sale of a family business is usually 1. To bring finality to a company in a more formal sense than a voluntary an exciting time for all involved. This is deregistration of the company. Once particularly true for those who started out with a company has been deregistered, the a business idea and after many years of toil, are company ceases to exist as a legal entity now finally “exiting their business” – looking and can no longer do anything in its own forward to retirement or their next adventure. right. A party cannot commence legal proceedings against the company without Despite the excitement, it can be a bitter pill the permission of the Court. Reinstating to swallow when their accountant does the a company after a liquidation is more numbers and tells them how much tax they difficult and requires an application have to pay if they take all their hard-earned to Court; hence, there is an extra layer profit now! This is even more so the case when of protection for former directors and their accountant suggests they hold their “nest officeholders. egg” and slowly pay annual dividends / wages over many years to ensure the most tax effective 2. To assist in resolving disputes between outcome. shareholders by appointing an independent third party (the liquidator) to A small to medium business owner can find realise the assets of the company and pay a it difficult at times to differentiate themselves final distribution to shareholders. from a corporate entity – in their mind, it is their money!
Not many of us enjoy paying tax, especially more than we have to pay. Accordingly, when the opportunity presents itself to minimise tax payable, we are all ears. That’s where a Members Voluntary Liquidation may be able to assist.
Whilst there are other options available to deal with a shareholder dispute, placing a company into liquidation can be a cost-effective way to deal with the dispute without needing to make an application to Court (if you can get all parties to agree to the MVL – which is often the difficulty).
A Members Voluntary Liquidation (MVL) is the liquidation of a solvent company that 3. Taxation benefits which are often centred results in a final distribution to shareholders around the return of share capital and/or (if funds/assets are held by the company) and Capital Gains Tax (CGT) concessions that ultimately, the deregistration of the company. can be accessed through the MVL process. The MVL process is initiated by the directors and shareholders of a company. Ordinarily, whilst a company continues in existence, profits earned by a company MVLs typically have three (3) major purposes: are distributed to its shareholders as dividends.
Although a company can pay “franked dividends” (which benefits shareholders personally) often insufficient franking credits are available to pay all available funds as franked dividends (particularly following the sale of a business). Unfranked dividends received by an individual shareholder is assessable income and tax is payable on the income received at marginal tax rates. Share capital is ordinarily returned to shareholders in a MVL without any taxation consequences for them personally. Accordingly, if a company has a large amount of share capital, it is usually beneficial for the company to be placed into MVL. Final distributions by a liquidator in a MVL take on the nature of the equity accounts of the company, meaning if a capital reserve/profit is being distributed to shareholders, CGT concessions are likely to be available to shareholders to reduce the amount of tax payable by them personally (depending on their personal situation, more than one of the CGT concessions may be available). Below is an example of the possible tax benefits of an MVL, when CGT concessions apply to individual shareholders (note: each individual shareholder’s circumstances need to be assessed separately). MVLs are a powerful tool and when used in conjunction with the sale of a business, an MVL can often result in substantial tax benefits to shareholders.
ASSETS
AMOUNT ($)
FINAL DISTRIBUTION
Cash at Bank
600,000
Distribution Category
Amount ($)
Dividend Category
Amount ($)
Total Assets
$600,000
Share Capital
100,000
Unfranked Dividend
600,000
Equity
Amount ($)
Distribution out of a Capital Profit Reserve
500,000
Share Capital
100,000
Total Distribution
$600,000
Total Dividend
$600,000
Capital Profits Reserve
500,000
Total Equity
$600,000
The Share Capital return is likely not to be Income tax is payable on the unfranked subject to any income tax for an individual dividend received by an individual shareholder. shareholder at their marginal tax rates.
For more information about MVL’s, visit us at svpartners.com.au
DISTRIBUTION AS DIVIDEND
CGT concessions are likely to be available As the dividend is an unfranked dividend, for an individual shareholder for the Capital no tax credits are available to the individual Profit Reserve portion of the final distribution. shareholder. Depending on their individual circumstances, no income tax may be payable by the individual shareholder on the final distribution. THE INSOLVENCY REVIEW
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PERSONAL INSOLVENCY Fig. 4
Sep Qtr 20
Sep Qtr 21
Source: AFSA Quarterly Personal Insolvency Summary November 2021
W
ith the extended lockdowns experienced in New South Wales and Victoria throughout the course of 2021 impacting jobs and spending, the number of personal insolvencies have remained largely steady over the June and September quarters with a 2.2% decrease from Q2 to Q3.
Commonwealth Bank research shows that, despite the reduction in household income and jobs due to the lockdowns, government support payments have more than offset the losses. The significant amount of cash currently in the system is likely to provide a boost in services-related spending and employment as states reopen, provided the transition to ‘living with COVID’ goes smoothly.1 Year on year figures for the September quarter show a 12.3% decrease (see Fig.3) however, numbers have largely settled over the course of the last 6 months.2 Overall, personal insolvencies are down from last year’s totals across most states with the exception of Tasmania, which posted an increase of 23.2%.
Bankruptcies
Debt Agreements
Personal Insolvency Agreements
YoY key stats (see Fig.4): Bankruptcies - 1,617 down from 1,713 in September 2020 Debt Agreements - 966 down from 1,247 in September 2020 Personal Insolvency Agreements - 35 up from 23 in September 2020
pandemic, emphasis will shift to boosting household income through lower taxes for low and middle-income earners, increased investment in business and infrastructure investment activity, and a focus on driving the unemployment rate down.4
24% of the 2,621 personal insolvencies in the September quarter were related to business, with business related bankruptcies accounting for 34.2% of the 1,617 total.3
According to CommBank’s Consumer Insights report for May 2021, the impacts of the pandemic were not evenly felt across
• • •
With the Federal Government transitioning to its Economic Recovery Plan after already providing $299 billion of overall support throughout the
Source: AFSA Quarterly personal insolvency statistcs - November 2021
Fig. 3 Sep Qtr 20
Sep Qtr 21
Conversely, Gen X (39-54 age group) endured the most challenging time with the impact felt across all aspects of their lifestyle, in particular, juggling children and homeschooling, adapting to changes in careers and dealing with financial stresses during the pandemic.5
WHAT IS A PERSONAL INSOLVENCY AGREEMENT?
A Personal Insolvency Agreement or Part X, is a flexible way to come to an arrangement in order to settle debts without proceeding to Bankruptcy. The agreement is administered through a qualified trustee and involves an offer being made to creditors to pay all or part of your debts owed either through instalments or a lump sum.
Total Personal Insolvencies 1 Commonwealth Bank of Australia - Economics - Issues September 2021 2 AFSA Quarterly Personal Insolvency Statistics Summary - November 2021 3 AFSA Quarterly Personal Insolvency Statistics Time Series - November 2021 4 Budget 2020-21 - Economic Recovery Plan for Australia Overview 5 CommBank Consumer Insights - May 2021
generations, with Baby Boomers and PreBoomers reporting the least impact.
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26 21 PERSONAL INSOLVENCY
2621 personal insolvencies in September Qtr 2021 with a total decrease of 12.3% YoY Fig. 5
P
ersonal insolvencies have somewhat stabilised over the course of the last six months, with a 2 percent decrease in overall numbers from the June to September quarters. Non-business related personal insolvency figures for both Q2 and Q3 sit at 1,991 with a only a minor reduction to those which were business related, down to 630 from 691 at the end of June.1
TAS WA
Key statistics for the September Quarter (see Fig.5): • • •
NT
813 people entering personal insolvency in New South Wales, down from 827 in June 2021 138 new personal insolvencies in South Australia, down from 173 in the June quarter Both Victoria and Queensland posted identical figures to those in the June quarter with 447 and 773 respectively
Sep Qtr 21
QLD VIC ACT
The number of bankruptcies by debtors petition decreased by 11% on the quarter and 7.5% YoY to 1,451 in total, representing 90% of all bankruptcies in Q3.1
NSW
CommBank reports that over the course of the pandemic, consumer behaviour changed significantly with 42% of Australians having reduced their spending compared to pre-pandemic levels. Many instead chose to divert spare money towards investments and savings or to paying down debt.2 With the success of the national vaccination rollout and as states emerge from lockdown and transition to recovery, consumer confidence is again on an upward trajectory. The Consumer Sentiment Index increased to 105.3 in November up from 104.1 in August.3
Sep Qtr 20 Total Personal Insolvencies By State
1 AFSA Quarterly Personal Insolvency Statistics Time Series - November 2021 2 CommBank Consumer Insights - May 2021 3 Westpac Consumer Sentiment Bulletin - November 2021
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SA
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Source: AFSA Quarterly personal insolvency statistcs November 2021
Other
WHAT’S ON THE HORIZON?
As the Government shifts focus from its Economic Response Packages to a focus on recovery, support will move from cash payments to investments and tax breaks. The Economic Recovery Plan will accelerate personal income tax cuts for 11 million working Australians, with further tax incentives for businesses to increase cash flow and support investments. The Government also plans to invest heavily in infrastructure projects, some $14 billion over four years to assist the recovery, while also incentivising businesses to take on more employees and providing educational support for job seekers to upskill and get into the workforce.1 According to the OECD, the Australian Government’s refocus of its fiscal strategy to support the economy until the unemployment rate drops to pre-pandemic levels and recovery is well established, should also incorporate 1 Budget 2020-21 - Economic Recovery Plan for Australia 2 OECD Economic Surveys - Australia - Septemb 3 Creditorwatch Business Risk Index - October 2021 Results
measurable economic outcomes based around more definitive timeframes.2
October results from the Creditorwatch Business Risk Index found that businesses in the food and beverage services industry were the most likely to default at 5.97% followed by arts and recreation services (4.03%) and education and training (3.99%). It is expected that with lockdowns having ended across major capital cities, the accommodation, food and beverage industry should rebound as we move into the holiday season and businesses reopen. The top 3 areas most at risk of default include Merrylands in NSW at 7.76%, the Gold Coast in Queensland (7.73%) and Bringelly in NSW (7.66%). With the construction industry still in the recovery phase due to lockdowns, particularly in NSW and Victoria, data for payment arrears by industry rank the sector in position one with 12.6% of businesses THE INSOLVENCY REVIEW
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struggling to meet payment terms.3 Buoyed by the record levels of government support along with the many concessions from major banks and the ATO’s gentle approach to addressing tax debt, many creditors are holding off on recovery actions. With insolvency numbers having settled somewhat over the last six months, the expectation is that numbers will steadily rise into the new year as fiscal support is wound back. Recovery for sectors hit hardest by lockdowns will extend well into 2022 with many business still trying to recover from the challenges faced in 2020 and return to pre-pandemic levels of performance. The unfortunate reality is that the slope will simply be too steep for many to climb. Assessing and proactively addressing the situation is the best bet for a positive outcome for all stakeholders.
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