Life During Bankruptcy - Operating a Business
Life During Bankruptcy -
Operating a Business
It is common for people to continue operating their sole trader business and for persons to commence a new sole trader business during bankruptcy. During bankruptcy, you are restricted to trading as a sole trader.
We now discuss what you need to know if you would like to operate a business whilst bankrupt. We hope this blog will help you. If you have any questions, you are welcome to give us a
call on 1300 764 197.
Bankruptcy legislation requirements for trading your business during bankruptcy you must trade in your own name. This means that your name must be included in the name of the business. If you do not trade in your own name, you will be required to disclose to all parties you are dealing with that you are bankrupt.
If you trade in your own name, you only need to disclose that you are bankrupt if:
- You incur credit for more than $ 5,969.00. For example, you lease a mower worth $10,000.
- You draw a cheque for more than $ 5,969.00. For example, you draw a cheque from your bank account to pay a supplier.
- You promise to pay for goods or services for more than $ 5,969.00. For example, you order materials that cost $9,000.
- You undertake to provide your services for a cost greater than $ 5,969.00. For example, you commit to undertake gardening work that will cost the customer $10,000.
Examples of how people operate their business and
comply with bankruptcy laws
Operating a business in bankruptcy works well for a small business that sells labour and does not contract to do work worth more than $ 5,969.00.
- a lawn mowing run that involves you cutting lawns for $60 per mow with payment after each cut or a monthly invoice issued.
- a bookkeeping business that involves you maintaining each customer’s financial records for a monthly fee, for example of $400.
- a cleaning business that involves payment after each clean or a monthly invoice.
- a mobile mechanical repair business where the cost of each repair (labour and materials) does not exceed $ 5,969.00. For large repairs, it may be worth considering asking the customer to buy the parts and you provide your labour.
- a handyman business where the cost of each job does not exceed $ 5,969.00.
- a builder operating a deck building business where the customer buys the materials, and you sell your labour for not more than $ 5,969.00 for each job.
FAQ’s on operating a business while bankrupt:
Question: Will it be OK if I bill my customers at the end of each month?
Answer: Yes, that is OK.
Question: I let my customer’s accounts accumulate to $500 before I issue an invoice. Can I keep doing this?
Answer: Yes, that is OK.
Question: Is there a limit on the number of customers I can have?
Question: Can I employ staff?
Answer: Yes, but you must disclose your bankruptcy to your employee(s).
Question: Does the bankruptcy control how I run my business?
Question: Can I operate a separate bank account for the business?
Question: Do my tax obligations change while I am bankrupt?
Answer: No, your tax obligations are no different from when you are not bankrupt.
Question: What do I need to watch out for while operating a business whilst bankrupt?
Answer: You cannot have stock or accumulate assets above threshold amounts whilst bankrupt.
Tips and comments for operating a business whilst bankrupt
Below are my tips and comments for operating as a sole trader during bankruptcy:
- Trade in your own name, it is OK for your name to be included in the business name. For example, if prior to bankruptcy you traded as ‘Biscuit Mowing Services’ and wanted to keep the business name, during bankruptcy you would need to trade as ‘Biscuit Mowing Services by Joe Bloggs’. In the alternative you could trade as ‘Joe Bloggs Mowing’, the choice is yours. If you do not trade in your own name, the legislation requires you to disclose your bankruptcy to every person you deal with.
- Make sure you have an ABN and check with your accountant on the requirements of the ATO. For example, do you need to register for GST?
- Make sure you have an adequate system for maintaining your books and records. Talk to your Accountant about this. Remember, you will be required to pay all expenses incurred and taxes payable from operating your business.
- Make sure you can access your insurance requirements for your business.
- Plan for how your business will operate within the parameters of the bankruptcy rules. How will your business operate so it does not order goods, accept a customer order, or draw a cheque for more than$ 5,969.00?
- To do this without disclosing your bankruptcy you must trade in your own name and all transactions must be for less than$ 5,969.00, including the value of each contract you undertake to perform.
- Most people restrict the size of work they do and do not order goods, so they remain within the boundaries of the bankruptcy rules and do not have to disclose their bankruptcy to the people they deal with.
- Be aware that money owing from your customers remains yours when you become bankrupt. You do not lose your debts to your bankruptcy. This helps with continuity of cash flow.
ABN requirements – what happens
If you have operated a business prior to bankruptcy, you will keep the same ABN that you used prior to bankruptcy.
If the ATO deactivates your ABN when you became bankrupt, just apply to the ATO for your ABN to be reinstated and they will do that for you, without fuss or cost.
If you have not previously operated a business, bankruptcy does not preclude you from applying for an ABN. You just apply to the ATO and they will allocate an ABN to you without fuss or cost.
Continuing to earn your income by trading as a sole trader
If prior to bankruptcy you operated as a sole trader, you can continue to trade after you become bankrupt provided your business does not have stock or assets that would be lost to your bankrupt estate.
It is important to note that any debtors owing to you from prior to your bankruptcy will remain available to you and will not be lost to your bankruptcy.
The tools and equipment you need to operate your business are protected up to an auction value of $3,800. It is common for people to be concerned that their plant and equipment are worth more than$3,800 but this is rarely the case. The $3,800 is based on auction value and not the value that the plant and equipment has to you or would cost to replace. For example, a new mower may cost $900 but the mower would have an auction value of say $150. The $150 is the amount used to work out whether the combined value of your tools exceeds$3,800.
If the value of your tools and equipment should exceed the allowed auction value of $3,800 do not worry, it may be possible for a family member or friend to pay the difference and allow you to keep using the equipment. If this is your situation, we recommend you talk to us prior to deciding whether bankruptcy is right for you.
Your vehicles are protected up to a combined auction value of $8,100.
If you will continue to need to use financed equipment to operate your business during bankruptcy, this may be possible depending on the following:
- The lender is agreeable to you continuing to make the monthly payments and using the goods. This is usually the case.
- You can continue insurance on the goods.
The financed equipment does not have equity (value of goods above the loan payout amount) which exceeds the allowed amount under the bankruptcy legislation.
We recommend you read our article Life During Bankruptcy – Tools of Trade which can be accessed here.
Commencing a sole proprietor business during bankruptcy
You can commence operating as a sole trader at any time during your bankruptcy.
You can open a new bank account for the operation of your business.
You will need to apply to the ATO for an ABN if you do not already have one. There will be no issue with you obtaining an ABN from the ATO.
You will also need to access the ATO registrations required for the operation of your business. We recommend you meet with your Accountant about this. For example, will you need to be registered for GST, how often will you have to lodge a BAS?
Talk to your Accountant about keeping financial records and how you should go about this.
To avoid disclosing your bankruptcy you must trade in your own name and all transactions must be for less than $ 5,969.00, including the value of each contract you undertake to perform.
Identify your insurance requirements and organise same prior to commencing to trade.
We recommend you read our article ‘Life During Bankruptcy – Your Tools of Trade’ which can be accessed here
We have received feedback from some people that they have had difficulty obtaining public liability insurance after becoming bankrupt. We recommend you talk to your insurance company or insurance broker about this asap, just in case.
During bankruptcy, you will be liable for liabilities you incur and taxes payable from operating your business. Your bankruptcy will only capture (protect you from) liabilities up to the date of your bankruptcy. You are required to maintain proper books and records to enable your tax returns to be prepared. Your bankruptcy does not remove you from complying with the taxation legislation. We recommend you discuss your record-keeping software and systems requirements with your Accountant.
If during bankruptcy, your business accumulates liabilities that you cannot pay, it may be necessary for you to file for bankruptcy again. Nobody wants this to happen, take the time to set up the business properly and make sure you pay your bills as you go.
Possible impediments to trading a business while bankrupt
Possible impediments to trading a business whilst bankrupt are:
- a customer or industry requirement for you to trade using a company structure. During bankruptcy, you are precluded from being a company director while bankrupt.
- if prior to bankruptcy you operated a business and some of the business assets vest in the bankrupt estate, those assets will not be available for your continued use unless a family member or friend buys them from your bankrupt estate.
- whether bankruptcy will preclude you from maintaining your required registration to enable your business activity to continue.
- during bankruptcy, you cannot operate a business that requires stock. The stock will vest in your bankrupt estate as after-acquired property. In contrast to this, you can operate a business that has debtors, and the debtors are protected for you. When you collect your debtors, they become income. If your after-tax income exceeds your income contribution threshold, you will be required to pay income contributions to your bankrupt estate. This is typically a small percentage of your total income.
Restrictions by industry groups and professional organisations
If earning your income requires registration with an industry group or professional organisation, you should check that you will be able to operate your business when you become bankrupt.
Our observation is that industry groups and professional organisations treat each matter on a case-by-case basis, and they do factor in what caused your financial problems before deciding what trading restrictions, if any, are to apply. We recommend that you talk to your industry group or professional organisation about your circumstances and their requirements.
To give you some idea and as a guide only on what might happen, we have been told that a builder lost his unrestricted licence but retained a lesser licence and then built decks for his living and a Solicitor was restricted from operating trust accounts whilst bankrupt.
We recommend that you also talk to your industry group or professional organisation about what would be required for your licence or registration to be restored, once your bankruptcy is finished.
Managing your business cash flow during bankruptcy
The typical business best suited to being operated during bankruptcy is one operated on a cash flow basis. It is important that you pay your expenses as you go, to avoid having to disclose your bankruptcy to the people you are dealing with.
The profits from your business are yours and do not vest in your bankrupt estate. If your after-tax income exceeds the income contribution threshold relevant for your number of dependents, then you will be required to pay income contributions calculated from the excess amount.
A couple of points to note here:
- Your liability to pay income contributions during bankruptcy is measured in yearly blocks, calculated from the date when you become bankrupt. It is not calculated in financial years, like your tax.
- It is important to note that there is a difference between taxable income and the bankruptcy definition of after-tax income used to calculate your income contribution liability.
To calculate your income tax liability, the government allows you deductions. These deductions can include superannuation contributions and other expenses that do not specifically relate to your earning your income.
During bankruptcy, to work out if you have an income contribution liability, only expenses that were incurred to earn your income can be deducted. This means that your after-tax income could be higher than the amount shown on your tax return. This needs to be allowed for in your cash flow planning if your after-tax income is expected to exceed the income contribution threshold relevant for your number of dependants.
Do you have any questions?
It is common for people who are considering operating a business whilst bankrupt to ask a lot of questions. If you have questions regarding the business you propose to operate, you are welcome to give us a call 1300 764 197.
If you have any questions on bankruptcy or would like to discuss your situation, give us a call on 1300 764 197 or email: firstname.lastname@example.org and we will answer your questions.