May the farce be with you . . . edition # 274

I spoke with my accountant today and asked her if my company could lend me money – it’s got more money than it needs and I’ve got less than I want. Actually having written that I realise it’s not accurate. The point of borrowing money from my company is that I’m borrowing lots of money in my own name from a bank – and I don’t much fancy receiving 2% less on my borrowings than my company gets in interest from the bank. The Tax Office, quite rightly, tightened up on private companies lending money to their shareholders because an interest free loan from your company is a pretty easy way to avoid ever having to pay your personal rate of tax if it’s higher than the company rate. So they required that a ‘commerical’ rate of interst be charged.

So far so good. So I wanted the company to lend money to me on which I’d pay a commercial rate of interest (lets leave to one side that the rate should actually be commercial – ie the rate I can get – around 7.2% rather than the ‘standard variable rate’ which no-one pays and which is over 8%).

The tax office have ‘tightened up’ on this further. Now if they banned loans of this kind, I’m not sure it woudl make sense in principle, but I’m sure there’d be some sense in it – since no doubt this maneuvre offers various ways of avoiding tax that I don’t know about. But that would be too simple (and probably politically difficult).

So it’s the old death by a thousand wrist slappings. You have to have a written loan agreement. You can write one yourself but you’re better advised to buy one from a lawyer’s word processor at around $400 to fit the relevant sections of the Tax Act. And you can’t give yourself a rolling ‘line of credit’ on which you pay interest as it falls due – if necessary capitalising the interest by increasing the size of the loan. It has to be for a definite term. In fact the term has to be seven years if it’s unsecured and twenty years if it’s secured. This is the first level of farce because I can presumably write a second mortgage on our property (well buy one for another $400) and voila it’s secured. Still, the whole thing is a farce. Not much chance of being foreclosed on there!

But then what if I want to borrow from the company again to meet the repayments (which is the financial equivalent of just having a line of credit that you can capitalise interest on). No problem. I just write photocopy another loan agreement and off I go again. I can do this for as long as I’ve got paper and toner in my photocopier.

Today the BCA welcomed a new Bill with the short (propaganda) title of the “Simpler Regulatory System Bill”. I’ll have a closer look at it but at a quick inspection it doesn’t look reassuring. It contains a bunch of things that should not require legislation to fix. Indeed the fact that it does require legislation to fix them shows not that they’re being fixed but that they’re still broken! It’s like getting approval from head office to re-fix a nut on the wheel of a car as it runs down the assembly line.

Unfortunately it’s difficult to easily work out the detail of the changes even when consulting the relevant part of the ministerial website. But it’s quite clear that many of the changes, including those liseted below the fold, not only shouldn’t be made by parliaments but should have been made as a matter of routine years ago.

2.3 Change in office holders The requirement for a company to notify ASIC of a change in officeholder, where the officeholder has already notified ASIC, will be removed.
2.4 Company addresses A single process for notification of an update of all company addresses will be implemented.This measure will be supported by changes to the relevant regulations.
2.6 Reduce compliance burden associated with voluntary deregistration Amendments will allow deregistration of a company to proceed where an annual review fee becomes payable or is incurred after the application for deregistration is approved.
2.7 Upfront payment of annual fees for companies Amendments will allow companies to pay a single sum to cover review fees for an extended period.This measure will be supported by changes to the relevant regulations.
2.8 Electronic distribution of annual reports The default option for receiving annual reports will be changed to be via the Internet. Members will continue to be able to choose to receive hard copy annual reports free of charge.

Indeed, some are still wrong. Why should any ‘default’ form of delivery be mandated for receiving annual reports from companies? Annual reports should be made reasonably available to shareholders. That’s all ye know and all ye need to know. Why should companies be required to provide hard copy annual reports, and why at no charge? Why shouldn’t some companies not authorise their management to do what they consider appropriate, including charging reasonable fees for tree based annual reports?

This regulation will soon be obsolete.  Perhaps it is even planned obsolescence. Stand by for the next red tape busting initiative where a parliamentary committee changes this rule.  Then the only dilemma will be whether to repackage it in a future red tape simplification exercise or instead the next environmental package. But hey – why be picky?

It can be packaged into both.

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skepticlawyer
14 years ago

Great post, Nick. You’ve just explained why I’m a libertarian – absolutely brilliantly. This kind of pointless red-tape is really over the top.

Music-Band
14 years ago

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Tel
Tel
13 years ago

I think there’s a fundamental conflict of interests that every government faces, which inevitably leads to farce. On the one hand, they must appease their voters who have pet issues that they want to see “fixed” (for example, business owners creating tricky tax havens in the grey area between personal assets and business assets). On the other hand, they don’t want to go around smashing structures that are reasonably productive (and actually, their voters don’t want that either).

Another example is censorship of the Internet. The John Howard government was held over a barrel by Christian social conservatives who found easy access to information a terrible threat to their worldview (the kids will see porn, save the babies! the babies! think of the children… *SOB FOR EFFECT HERE*) while also facing the problem that the Internet is actually useful for business and industry, and it makes money, and any effective censorship system is practically impossible.

Their solution was farce. Roll out an impressive system for filtering that comforts the Luddites while having no effect in the real world. Then some spoilsport goes and publicizes that the system does not work and they build up a new and even more impressive system to do nothing while whispering very hard in the ear of those in the know that they should shut up about it.

The Rudd government are rapidly running into the same dilemma, they made big promises about Internet censorship and now have to give the illusion of fulfilling those promises while trying not to smash anything. Yet another argument for being a Libertarian (if anyone is feeling short of arguments in that direction).

Tax law is complex to ensure that everyone is kept in sufficient state of confusion that no one can figure out whether they are getting more or less out of it than the next guy.

Speaking of such things, how come my home loan is over 8% (and same with everyone I talk to) despite this being the rate that no-one pays and probably the most secure loan in the marketplace?

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