From Our Files The Structure That Almost Cost Everything
A director with a background in finance identified an opportunity to develop new products and committed personal funds to building a commercial enterprise around them. The company was established during COVID-19, during a period of active government encouragement for entrepreneurial investment.
The company was run properly. A professional product designer was engaged for the development work. Two employees were on PAYG. An external bookkeeper managed the financial and tax obligations. An accountant lodged the annual returns. The company applied for and successfully received the Research and Development Tax Incentive, a 43.5% refundable tax offset for eligible R&D expenditure administered jointly by AusIndustry and the ATO. PAYG withholding was met in full and on time. Superannuation was paid in full and on time. BAS were lodged on time. Every obligation a Lockdown DPN is designed to address was met.
The company failed because the ATO ceased processing its GST refunds without warning, on the basis that it allegedly wasn’t conducting an enterprise. That happened while R&D activity was actively underway and while the company was in discussions with external investors. Once the refunds stopped, the discussions had to stop. The company’s disclosure obligations to prospective investors made it impossible to continue in good faith. The business couldn’t survive without the capital it was entitled to receive. Every dollar the founder had put in was lost.
He came to us before a DPN was issued. That timing was everything.
What triggered the call to us was an ATO letter advising that money already paid out was now being clawed back. He held a trust that hadn’t been reviewed in years. He was both trustee and a primary beneficiary. His structure was exposed in ways he hadn’t been told about and had been since the day the company was incorporated.
Problem 1 The Family Home and the Trust That Offered NO Protection.
He held a trust that hadn’t been reviewed in years. He was both trustee and a primary beneficiary. In our assessment, the trust deed provided no meaningful protection for personal assets whatsoever. There was no succession planning. The family home, held jointly with his wife, was exposed. What looked like a structure was a document. It had never been built to do the job he assumed it was doing.
Problem 2. No Holding Structure. Everything in the Trading Company.
He had a trading company and nothing else. All assets, the IP, the patents, the R&D he had funded and developed sat inside that trading company with no separation and no protection. This is common. It is also one of the most consequential structural oversights a business owner can make. A holding structure exists precisely to quarantine assets of this kind from trading risk. When the trading company failed, everything inside it was lost with it.
Problem 3. Every Director Personally On The Hook.
Three directors. No protection between any of them and the company’s liabilities. Each director’s personal exposure was identical. None of them knew it.
Because he acted quickly, we were able to fully assess his position before enforcement action was taken. The company was liquidated cleanly. No DPN was issued to him or his co-directors. A trust structure was subsequently put in place to protect the family home as he continues to pursue the product commercially.
The structure didn’t fail him on the day that letter arrived. It had been failing him since the day the company was incorporated. He was fortunate that he found that out while there was still time to do something about it.