Oct 29, 2024 | Business Law
What is Home Building Compensation?
Home Building Compensation (‘HBC) cover (formerly known as Home Warranty Insurance) is a mandatory insurance scheme for builders and contractors.
HBC cover protects homeowners from incomplete or defective building work in the event of a builder or tradespersons:
- disappearance
- death
- insolvency or;
- licence suspension by NSW Fair Trading.
Who requires Home Building Compensation insurance?
Any builder or contractor undertaking a residential construction or renovation project exceeding $20,000 (incl GST) must obtain HBC cover. In line with Home Building Act 1989 (NSW) s 92 (‘Home Building Act’), a certificate of insurance must be provided to the homeowner before any money is deposited or work has begun.
If your home has defective or incomplete building work, it is important to know how you can claim on your HBC insurance.
What does Home Building Compensation cover?
Depending on the circumstances, your HBC cover will provide insurance in the event of:
- failure to commence work (claimable for up to 12 months from the date of failure to commence)
- failure to complete the contracted work (claimable for up to 12 months from date of cessation of work worth up to 20% of the contract price)
- major defects (claimable for up to 6 years from the project’s completion for the cost of repair)
- non-major defects (claimable for up to 2 years from the project’s completion for the cost of repair).
The Home Building Compensation Fund
In NSW, HBC insurance is offered by a corporation known as Insurance and Care NSW (‘icare’) who are the sole provider of the Home Building Compensation Fund (‘HBCF’).
The HBCF requires all licenced builders and contractors to complete a risk-based eligibility assessment to qualify for a certificate of insurance.
If you have suffered loss or damage and have valid HBC cover, you should make a claim.
Making a Home Building Compensation Claim
In accordance with Home Building Act s 18BA, you must make a reasonable effort to notify your HBC provider when you have incurred loss or damage.
When making a home building compensation claim relating to defective or incomplete work, the following information should be provided in your claim application:
- Details of the property
- The certificate of insurance and building contract
- A description of the building work alleged to be defective or incomplete
- Evidence that you have attempted to settle the dispute with your builder or tradesperson.
Additional information that can aid the assessment of your claim include: plans, building inspection reports, correspondence, invoices and photo documentation.
It is also important to make sure that you are lodging your claim within your HBC providers’ policy insurance period.
Once a claim has been lodged, your insurance provider will review the information provided and assess what the policy can cover. A determination letter will be sent including decisions on each of the items you claimed.
To learn more about making a claim under a policy issued by the HBCF, please refer to the icare website.
Disputing a claim decision
If you are not satisfied with the claim decision, you can appeal to the NSW Civil and Administrative Tribunal (NCAT). NCAT can make orders for compensation or grant a greater share of compensation than what was initially awarded.
Alternatively, if you are unhappy with how your claim was handled, you can request the State Insurance Regulatory Authority (SIRA) to conduct a regulatory compliance review. SIRA will assess whether icare (or its brokers) have correctly followed the Home Building Act, the Home Building Regulation 2014 (NSW), or the HBC insurance guidelines.
To learn more about resolving construction disputes with builders, architects, subcontractors and swimming pool builders, please visit our website.
Contact Us
If you have suffered loss or damage during a home building or renovation project, we recommend seeking independent legal advice.
If you would like to discuss your home building compensation matter with an experienced solicitor, please contact Etheringtons Solicitors on (02) 9963 9800 or via our online contact form.
Feb 3, 2024 | Business Law
There are a variety of structures a business can operate under. These structures include sole trader, partnership, company and trust. A business’s structure is dependent on its growth prospects, the number of members and owners and the potential liability of key members of the business.
An often complex and misunderstood business structure is a trust.
What is a trust?
Trusts are commonly used to protect business assets for beneficiaries. In a trust, the trustee is responsible for carrying out the operations of the business on behalf of the beneficiaries. Trusts require a Trust Deed that outlines the responsibilities of the trustee and details how the trust will operate. A Trust Deed should be drafted by a solicitor.
Who is involved in a trust?
The following parties are mandatory in a trust business structure:
- The settlor: The person or entity who sets up the trust and nominates the beneficiaries.
- The trustee (or trustees): An individual, company or otherwise who administers the trust and has control over the assets. The trustee is legally responsible for managing the trust’s income and tax liabilities.
- The beneficiary (or beneficiaries): The person or entity who benefits from a share of the trust.
Trusts may also include an appointor who has the power to appoint or remove a trustee.
Advantages of a trust
The benefits to using a trust structure include:
- Separation of the beneficiary and the trustee. Separating these actors is useful if a beneficiary suffers from a condition that impairs decision making or if they do not wish to be actively involved in managing the business operations.
- Greater flexibility in income tax management. The trustee can choose to distribute profits in a manner which minimises income tax payable if there are discretionary powers in the Trust Deed.
- The trust structure can provide more privacy than a company.
Disadvantages of a trust
Though there are several benefits to setting up a trust, there are also a number of limitations to consider:
- Expensive and complex. Trusts are expensive to set up and require the trustee to undertake formal yearly administrative tasks. Once established, it can be difficult to dissolve or make changes to the trust.
- Difficulties with loans. Due to the additional complexities of loan structures, it may be difficult for trustees to acquire a loan.
- Strict distribution of losses and profits. Profits must be distributed to beneficiaries each financial year otherwise the trustee must pay tax on undistributed income. Losses cannot be distributed so the trustee is personally liable for the debts of the trust.
Types of trusts
There are two main types of trusts that can be used by businesses:
- In a Discretionary Trust, the trustee can vary the Trust Deed to decide how the income of the business is distributed to the beneficiaries. This means that income and even capital distribution is flexible and can be tailored to the needs of the beneficiaries. Undistributed income, however, is taxed at the highest marginal rate which means that trustees are at risk of being liable for debts.
- In a Unit Trust, the property is divided into defined shares called units. Like a company, the beneficiaries are entitled to the income and capital of the trust in proportion to the number of units they hold. Losses, however, cannot be transferred to other entities and beneficiaries are subject to PAYG calculations.
Registering a trust
Before registering a trust, it is best to speak to a business adviser, lawyer or accountant to ensure a trust structure is appropriate for your business objectives. It is also crucial that you have a Trust Deed prior to registering which details your trustees, beneficiaries and the distribution of assets. Accordingly, you should be aware of the tax obligations of your chosen trust structure before registering.
To learn more about trusts and other business structures such as sole trader, partnership and company, please visit our website.
Contact us
If you are planning on registering a trust or are needing to adjust an existing trust, we recommend seeking professional advice. If you would like to discuss your business with a legal professional, please contact us on (02) 9963 9800 or via our online contact form.
Jul 5, 2022 | Business Law
There are four main types of business structures for conducting business in Australia, each with their own advantages and disadvantages. A person can carry on business as a sole trader, partnership, trust or company.
The choice of business structure is an important decision to make at the start of a business venture, as the structure can have an impact on tax implications and reporting requirements during the lifetime of the business. When setting up a business structure, consideration should be given to factors such as how many people will be involved in the business, what the business will do, potential risk or personal liability, how much income is likely to be earned from the business and the intended growth of the business.
Sole Trader
A person can carry on business on their own behalf as a sole trader. A sole trader can trade under their own name or a registered business name. The business income earned as a sole trader is taxed at the same rate as individual taxpayers.
This is the simplest form of business structure, with low establishment costs and with minimal legal and compliance requirements.
The disadvantages of this type of business structure include being personally liable for all obligations incurred in the course of the business, individual taxation costs, and an inability to split profits.
Partnership
Two or more individuals can carry on business in partnership, where the income from the business is received jointly. Partnerships are relatively inexpensive to form and operate. Most partnerships are established by a partnership agreement which sets out the rights and obligations of the partners. A partnership itself is not taxable, rather each partner pays tax on their share of the net income of the partnership.
The downside to this type of business structure is that partners are severally and jointly liable for the obligations of the partnership. There is also potential for dispute and loss of trust between the partners, which may impact the functioning of the business.
Trust
Under a trust, a trustee owns the property or assets of the trust and carries on business on behalf of the beneficiaries of the trust. A trustee can be an individual or a company. A formal deed is required to set up a trust and there are annual tasks for a trustee to undertake.
Some advantages of a trust are that there is flexibility in income distribution and income can be streamed to low income tax beneficiaries to take advantage of their lower marginal tax rate. Furthermore, assets can be protected through a properly drafted deed.
However, trusts can be costly to set up and there are more compliance and legal requirements.
Company
A company is a separate legal entity capable of holding assets in its own name. The words “Pty Ltd” after a business name show that the business is a registered legal entity trading in its own right. A company is owned by shareholders and directors manage the company’s day to day business and affairs. The shareholders of a company receive any company profits in the form of dividends. Shareholders can limit their personal liability and are not generally liable for the company debts. Instead, the financial liability of the company is limited to the assets owned by the company.
Companies are governed by corporations law and there are a number of duties and obligations for company directors. Primarily, directors have an obligation to act in the best interests of the company.
The establishment of a company and ongoing administrative and compliance costs can be high. There is also a requirement to publicly disclose key information.
Conclusion
Each business will vary and no business owner’s circumstances will be the same. It is advisable to talk to an accountant or solicitor about the costs and risks of each business structure to make sure that the business structure used is the right one for the business and its needs.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or via our contact form.
Jun 27, 2022 | Business Law
This article looks at companies – how to set one up, and the pros and cons of a company structure. When commencing a business venture, it is necessary to consider the most appropriate type of business structure for your company. Different business structures have different advantages and disadvantages.
Key Features of Companies
A company is a separate legal entity that is liable for its own obligations and capable of holding assets in its own name. A company is owned by shareholders. The liability of shareholders is usually limited to the amount of their shareholding guarantee. This means that shareholders can limit their personal liability and are not generally liable for the debts of the company.
Directors manage the day to day business affairs of the company. There are a number of duties and obligations directors must be aware of, such as the obligation that they act in the best interests of the company.
In Australia, the most common forms of companies are:
- Private company (or a proprietary limited company): this is a company which does not sell its shares to the public and cannot raise money from the general public through share issue.
- Public company: this is a company whose shares are owned by the public at large, with the company’s shares usually listed for trade on a stock exchange.
Companies are regulated by the Australian Securities Investment Commission (ASIC) and governed by corporations laws.
How to set up a company
An Australian company must be registered with ASIC. When ASIC registers a company, the company will be given an Australian Company Number (ACN). An applicant must nominate a principal place of business and registered office for the company.
Prior to lodging an application for registration, consideration should be given to:
- The proposed company name. A check should be undertaken to confirm the availability of the proposed name. If no name is specified in the application, the company will be referred to by its ACN.
- What rules will govern the company. This may be the replaceable rules from the Corporations Act (which means that the company does not require its own written constitution), a constitution or a combination of the two.
- Who will be the shareholders and directors of the company.
A company needs its own Tax File Number, which can be obtained online from the Australian Taxation Office (ATO) and an annual tax return must be filed.
A company must be registered for GST if its annual turnover is $75,000 or more. An Australian Business Number (ABN) is required to register for GST and can be obtained online through the Australian Business Register.
Pros and Cons
The advantages of forming a company include:
- Liability for shareholders is limited
- It is easier to raise finances for expansion
- Ownership can be easily transferred
- Taxation rates may be more favourable
The disadvantages include:
- It is expensive to form, maintain and wind up
- Reporting requirements can be complex
- You must publicly disclose key information
- Owners cannot offset losses against other income
Conclusion
A company might be a suitable business structure for unrelated parties who want to commence a business venture together, where there is a degree of risk and limited liability is wanted, or where there is a desire to list the company on the stock exchange.
Establishment of a company and ongoing administrative and compliance costs associated with corporations laws can be high. An accountant or lawyer can help you understand the cost and risks of a company and explain whether a company structure would be suitable for your business going forward.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or email [email protected].
Jun 22, 2022 | Business Law
A company is an association incorporated under the Corporations Act 2001 (Cth) (the ‘Act’). Incorporation gives the company a separate entity, distinct from its directors and shareholders. The company can enter into contracts, sue others, and be sued in its own right.
The Australian Investment and Securities Commission (ASIC) is the Government body authorised to administer the Act and may investigate and impose civil and criminal penalties for breaches under the Act.
As companies are separate legal entities, generally directors are not personally liable for the company’s actions. However, increasingly, ASIC and creditors of companies that have limited assets are pursuing recovery personally from company directors who may have breached their duties under the Act.
In certain circumstances, directors can be held personally liable for losses of the company. Some of these circumstances include:
- Insolvent trading;
- Personal guarantees;
- Breaching directors’ duties;
- Taxation debts and superannuation contributions; and
- Phoenix activity.
Insolvent Trading
The Act prohibits a company from trading whilst it is insolvent.
Because a company is a separate legal entity, directors and shareholders are generally protected from being personally liable for the company’s debts. This protection may be abused when directors allow companies to continue trading and incurring debt despite warnings of potential insolvency.
To circumvent unscrupulous or reckless trading, the Act provides that directors who allow a company to trade whilst insolvent will be in breach of both civil and criminal provisions of the Act and may be liable for its debts.
There are certain defenses available and directors may not be liable if:
- They had reasonable grounds to expect the company was solvent at the time the debt was incurred and would remain solvent after that time; or
- At the time the debt was incurred they did not participate in management due to illness or some other good reason; or
- They took all reasonable steps to prevent the company from incurring the debt.
Arguably, the threat of being personally liable for insolvent trading could cause directors who are facing transient cash flow issues to succumb to the early appointment of an administrator, despite good prospects of survival. To find an appropriate balance between encouraging enterprise and protecting the community, additional protections for directors have been introduced.
The safe harbour provisions are available to directors who take positive steps that are reasonably likely to result in a better outcome for the company than administration or liquidation.
Directors will not be liable for the debts of a company incurred whilst it is insolvent if:
- After suspecting the company is in threat of insolvency, the directors begin to develop a course of action that could reasonably be likely to lead to a better outcome for the company than immediate administration or liquidation; and
- The debts were incurred directly or indirectly in connection with this course of action.
Factors that may establish that a course of action would likely lead to a better outcome include:
- Whether the director properly informed himself/herself of the company’s financial position;
- Whether the director prepared a plan to improve the financial viability of the company such as a restructure; Whether the director retained a suitably qualified person to advise on the restructuring; and
- The taking of appropriate steps to prevent any misconduct within the company that could adversely affect its ability to pay its debts.
Directors generally cannot rely on the safe harbour provisions in circumstances where the company has failed to meet its obligations for employee entitlements, failed to maintain accurate financial accounts and records, or failed to substantially comply with its reporting and filing requirements under Australian taxation laws.
Personal Guarantees
A personal guarantee is a separate agreement between a director and a creditor where the director of a company agrees to pay a debt of a company in the event that the company does not make payment.
This could include a director providing security over personal assets such as a property.
Breaching directors’ duties
Under the Act, directors have certain duties that must be complied with.
Where a breach of any of these duties is committed and the company suffers a loss, directors can be personally liable.
In these circumstances, civil and criminal penalties under the Act will apply, including paying compensation to the company.
Taxation debts and superannuation contributions
Directors are personally responsible for companies complying with Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC) obligations.
Where these obligations are not met by a company, a director can be personally liable for non-compliance and will be penalised.
Phoenix Activity
This activity occurs where the directors of a company place it into administration or liquidation to avoid payment of creditors but continue the business under a new company name.
Not only can it result in civil and criminal penalties for directors, it can also result in a term of imprisonment.
Conclusion
Company directors hold a position of power and trust. The risk of personal liability is real but manageable and should not deter you from pursuing business and employment opportunities.
The best ways to meet the obligations of being a director are to become familiar with your duties and to understand the legal obligations and the situations which could give rise to personal liability, to be involved in the affairs and operations of the company and to obtain professional advice and assistance when needed.
If you or someone you know wants more information or needs help or advice, please contact us on (02) 9963 9800 or via our contact form here.
Jun 20, 2022 | Business Law, Property Law
Below are five things you should do before signing a business lease.
1. Factor in rent payments
As a tenant, you are required to pay an amount – often referred to as your rent – for occupying the premises. This amount is usually paid to your landlord or managing agent each month. Calculate how this will affect your business so that you will be able to operate effectively whilst paying the rental amount. Look out for clauses in your lease that set out the yearly increase in the amount of rent payable, as well as the utilities you are required to pay for.
2. Obtain council approval
It is important to check if you require council approval to operate your business before entering into a lease. All properties in Sydney are zoned by the local council. The type of activities and zones will vary from council to council, and determine what sort of activities the property can be used for. Examples include:
- Residential zones;
- Commercial zones;
- and Industrial zones.
If you are entering into a lease, you need to ensure that your business is allowed to operate at that location. If you operate without council approval the council can stop your business from trading and order you to close your business.
3. Organise security
When entering into a lease, the landlord will usually require you to provide security for the lease. The amount of security is usually the equivalent to four or more weeks’ rent.
Types of security you could provide include:
- Bank guarantees;
- Bank cheques;
- Deposit bonds; or
- A guarantee by a third party.
It is important to ensure that you seek legal advice on the type and amount of security you provide, as you will be required to forfeit this amount if you break the terms of the lease. Read our article about the Three Most Common Forms of Security for Leases for a detailed explanation of security options.
4. Note the condition of the property
Most leases have a ‘make good’ clause, which requires you to return the premises to their original condition when the lease ends. You therefore need to ensure that you keep evidence of the condition of the property when you entered into a lease. If this is not done, the landlord can use the security provided you provided to ‘make good’.
This is a common area of dispute between landlords and tenants. It is therefore important to know your make good obligations.
5. Seek a legal opinion on the terms of the lease
The lease is prepared by your landlord and will likely be drafted in their favour. It is therefore crucial that you seek a solicitor’s advice on the terms of the lease. They can also assist with negotiations. This can bring a balance of power to the relationship between you and your landlord, and will ensure that you know what you are signing.
Leases can have three or five year terms and are difficult to terminate before their expiry, so it is important to know your obligations and if there are any unfavourable terms.
Conclusion
These are some of the issues that may arise when signing a business lease. Therefore it is important to seek legal advice if you are considering entering into a business lease. Please get in touch to discuss your lease.
