Setting the records straight

Over the past decade welcome relief has been afforded to small private companies through a range of amendments to the Corporations Law.

The Australian Securities and Investment Commission (ASIC) has supported these various changes to ensure that the compliance and regulatory framework for smaller companies is much simpler and easy to administer.

In spite of this, much confusion remains around the need to hold regular meetings or an Annual General Meeting, financial statement requirements, and the need to maintain registers and presence at a meeting.

We’ve outlined the annual compliance requirements for small proprietary companies below.

Annual Company Statement

A company will receive, within 14 days of its annual review date (the anniversary of its registration), an annual company statement (ACS). If any of the information in the ACS is incorrect, the company must notify ASIC within 28 days of the ACS issue date.

An annual review fee must be paid to ASIC within two months of a company’s annual review date and the directors must pass a solvency declaration, which is a type of resolution.

Resolutions are used by shareholders to make decisions about the company. This can be done in the following two ways:

1. At a meeting
2. By having all the shareholders entitled to vote record and sign their decision.

An ordinary resolution is passed if more than 50 per cent of votes cast by the shareholders of the company that are entitled to vote on the resolution are in favour.

A special resolution is passed if at least 75 per cent of shareholders of the company (that are entitled to vote on the resolution are in favour. In both cases, votes can be cast at the meeting in person or by proxy.

A solvency declaration is an ordinary resolution and as such, more than 50 per cent of members entitled to vote should sign the resolution.

A company must keep a written record (minutes) of the members’ resolutions and meetings.

Registers

A company must keep registers, including a register of shareholders and a register of changes. These registers must be kept at one of the following places:

  • The company’s registered office
  • The company’s principal place of business
  • A place where the work in maintaining the register is done.

A register may be kept either in a bound or loose leaf book or on a computer provided that it can be reproduced in written form.

Typically, for many small private companies, the registers are maintained at their accountant’s office.

The reason for this is two-fold:

1. The accountant has the necessary software to produce minutes, ASIC forms, resolutions etc. and it is practical for the accountant to hold these records.

2. The software that produces these various forms automatically updates all required registers in softcopy form.

Annual Financial Reports

The accounting requirements imposed on a proprietary company under the Corporations Act depend on whether the company is classified as small or large. A company’s classification can change from one financial year to another as its circumstances change.

A company is classified as small for a financial year if it satisfies at least two of the following tests:

  • Consolidated revenue of less than $25 million for the year
  • Consolidated gross assets of less than $12.5 million at the end of the year
  • Fewer than 50 employees at the end of the year.

A company that does not satisfy at least two of these tests is classified as large.

Under the Corporations Act, all proprietary companies must keep sufficient financial records to record and explain their transactions, financial position and performance and to allow true and fair financial statements to be prepared.

The Corporations Act only requires a small proprietary company to prepare an annual financial report (an annual profit and loss statement, a balance sheet and a statement of cash flows) and a directors report if:

  • The shareholders with at least five per cent of shares direct it to do so
  • ASIC directs it to do so.

However, even though the Corporations Act does not require a small proprietary company to prepare an annual financial report (except in the circumstances noted above), income tax laws require financial statements to be completed and it is good business practice to do so. For the directors to sign a solvency declaration on an annual basis, the requirement to have adequate financial statements completed would seem obvious.

It is important to note that if a company does complete financial statements under these circumstances, they do not need to provide them to ASIC.

For many directors operating smaller private companies, the simplification of the corporate annual reporting requirements would mean that it is something largely dealt with by their external accountants.

This is good news for company directors as it further reduces regulatory costs and makes life easier.