Tax tips: End of financial year is just around the corner – are you ready?
Believe it or not, the end of the 14/15 financial year is just around the corner! This means you only have a few weeks left to ensure you have followed the correct steps if you are planning on writing off a bad debt.
The ATO allows you to write off genuinely bad debts(1) meaning you may be able to pay less tax and claim a GST credit. Sounds good, right? So what’s the difference between a regular overdue invoice and a bad debt? Much of it comes down to your efforts in recovering the debt.
To ensure you’re within the law, you must follow these five steps:
1. Issue a reminder notice
2. Contact the client by phone and mail
3. Issue a formal notice of demand
4. Issue and serve a Summons (Claim) and obtain Judgment
5. Commence an action to enforce Judgment
If you need help with any of this, contact us now. We’re here to help you quickly recover the debt. If it’s a bad debt, we can help you follow the right process so you can legally write it off.
(1) Source: Australian Taxation office Taxation Ruling 92/18(S32).
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9218/NAT/ATO/00001
Scary statistics: company insolvencies
They’re the stats that scare. It seems almost weekly that we hear about another company going into administration in the news. Going into administration effectively means your company is being taken under the management of an appointed administrator, appointed by the courts, your creditors, or your company directors.
In Australia, when a company goes into administration, the law requires external administrators to notify the Australian Securities and Investments Commission (ASIC) of their appointments.
In the December 2014 quarter, 2,003 companies went into external administration(2). That’s over 650 per month on average, which might not sound like much, but when you start to consider the fact that all of those companies have creditors, shareholders, employees, and suppliers that sometimes have little chance of being paid what they are owed, it becomes a little more real.
The top ten industries in this most recent quarter were:
| Other (business & personal) services | 685 |
| Construction | 348 |
| Retail trade | 177 |
| Accommodation & food services | 150 |
| Transport, postal & warehousing | 108 |
| Manufacturing | 68 |
| Rental, hiring & real estate services | 62 |
| Mining | 51 |
| Agriculture, forestry & fishing | 49 |
| Wholesale trade | 47 |
| Other industries | 208 |
| Unknown | 50 |
To reduce the risk of falling victim to a company that goes into administration (and not getting paid), it pays to do undertake due diligence on any company that you are planning to go into business with.
The team at Optimum Recoveries can do this for you confidentially and discretely.
(2) Source:
http://download.asic.gov.au/media/3011716/insolvency-stats-summary-december-qtr-2014.pdf
Invoice irritation: What to do when your clients aren’t paying up
Nothing breaks your heart in business like an overdue invoice. You’ve put in the hard work, the product or service has been delivered, and your invoice sits there waiting, like a kid waiting for a bus that isn’t coming.
In our experience, there are three main reasons why clients don’t pay on time:
- Cash flow problems,
- Unhappy with the product or service, or
- They would rather spend the money they owe you on something else.
So what can you do? It’s a question we’re asked frequently.
- Payment terms: did your invoice include standard terms and conditions, including the payment terms, due date, and details about how to pay, and what happens if they don’t pay? If it didn’t, then this is an easy fix for next time.
- Contact the client: By phone, we mean. We’re all human. If the debtor is in category one or two, then a quick chat will help you get to the bottom of the payment prolongation. They might have even just misplaced the invoice, or it got lost in the post or sent to their junk mail email folder. Maybe they are just waiting to be paid by another supplier. A conversation will soon tell you. If they intend to pay but just need a bit more time, then you should try and accommodate an extension or payment plan. If they are unhappy with the product or service, or you suspect that they are just spending the money elsewhere, you might need to engage an expert.
- Follow up in writing: After your phone call, always follow up in writing, detailing the agreement that you have come to. Or, if there is no agreement, make a diary note of your conversation. You might need written evidence if you want to write the debt off later.
- Stay cool and call in an expert: Let’s say you had the conversation, the client agreed to pay you in 14 days and it’s been a month. It’s important at this point to keep a calm head. Another phone call might be in order. Or if you think it might get sticky, it might be time to engage a commercial debt collector to ‘make the call’. We’re experts at recovering difficult debts. We use techniques like neuro-linguistic programming to ensure the right outcome for you.
Ultimately, it’s about communication and process. The last thing you want to do is lose a great client over a misunderstanding about a late invoice. By following the right process to recover overdue invoices, you should be able to recover what’s owed to you, maintain your relationship, and not have a breakdown in the process!
Engaging an expert: Benefits of outsourcing your debt management
There’s a reason why you don’t service your own car, do your own tax return, or fix your own broken arm. It’s really no different when it comes to debt management. There are complex rules, steep penalties, strict guidelines, and specialised skills required.
If you are overworked and stressed, you’re spending more time on debt collection rather than on your business, or you’re having trouble keeping up with your overdue accounts, it’s probably time to look at outsourcing your company’s debt management.
Here are the benefits:
- Save money: accounts paid on time and in full means you get what’s owed to you and don’t have to use your overdraft to cover outstanding invoices.
- Save time: by engaging an expert you can save the time you and your staff are spending chasing up late payers.
- Save your nerves: having overdue accounts can be stressful. Why put yourself through the stress, or your staff for that matter, which can lead to unplanned leave and stress in the workplace.
- Improved processes: We can work with you to develop customised debt management processes and solutions that can be tailored to your business, and can help you through the cycle of debt prevention, management, and recovery.
- Save relationships: Some businesses prefer to outsource this function, which allows them to focus on delivering a great service or product for their client, and leaving the collections to a third party. No awkward phone calls required!
Find out more about our services in debt prevention, management, and recovery.
Payment protection for subcontractors
There’s some good news for building and construction sub-contractors in NSW. New regulations(3) were introduced this month to provide greater protection and assurance around retention money.
In the building and construction industry, it’s common practice for the head contractor to withhold 5% or more of the contract price from subcontractors.
The ‘retention money’ is like an insurance policy for the head contractor, providing protection against rectification costs and the risk of subcontractor insolvency.
Great in theory, but in practice some subcontractors have missed out because the head contractor has misused their retention money or worse still, goes out of business and the retention is never paid at the completion of the work.
These new laws will help ensure that money retained from subcontractors by head contractors is protected. So long as the work has been completed as agreed and on time, the final retention payment will be made.
Retained monies must now be quarantined in a separate trust account, with strict rules about when the head contractor can withdraw funds.
The Queensland Building and Construction Commission (QBCC) has proposed a similar regime in a recently released discussion paper. However, the Queensland Government appears to be taking a ‘wait-and-see’ approach, electing to observe the effect of the reforms ‘down south’ before attempting similar law reforms.
For any questions regarding the changes (or other general building and construction legal questions), get in touch with Craig Mason from our legal partners Streten Masons Lawyers on 1300 000 529 or c.mason@smslaw.com.au
(3) Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2015 (NSW)
We’re in Brisbane, Melbourne and Sydney
Did you know that we have offices in Brisbane, Melbourne, and Sydney?
In Brisbane, you’ll find us at:
Unit 5, 67 Depot St Banyo QLD 4014
Ph: 07 3166 8888
Email: orqld@optimumrecoveries.com.au
In Sydney, we are located at:
Level 32, 1 Market St Sydney NSW 2000
Ph: 02 8028 8668
Email: ornsw@optimumrecoveries.com.au
And in Melbourne, our address is:
Level 23, 40 City Rd Southbank VIC 3006
Ph: 03 9038 8887
Email: orvic@optimumrecoveries.com.au
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