Small Business

The four main types of business structure commonly used by small businesses are:

Prior to starting up a business, you need to decide on the business structure that best suits your needs. Factors that may assist in this process include:

the type of business;

establishment fees and maintenance costs;

tax obligations; and

the level of asset protection

Sole Trader

A sole trader is the most simple business structure consisting of an individual trading on their own and operating under their own name or with a registered business name. The sole trader controls and manages the business and is responsible for all debts and liabilities.

Sole traders are subjected to the same tax rates as individuals.

however, you should be aware that as a sole trader, your assets are potentially more exposed to the risk of litigation.

Partnership

A partnership is formed when two or more people (up to 20) go into business together with a view to making a profit. They may operate under their own names or with a register business name. Limited partnerships involve passive investors who are not involved in managing the business.[1]

A partnership is not a separate legal entity and doesn't pay income tax on the income earned by the partnership. Instead, each partner pays tax on their share of net partnership income.^[2] In a partnership liability is also unlimited (unless you are in a Limited Partnership) and extends to debts incurred by a partner without the knowledge or consent of the other partner.^[3]

Proprietary Limited Company

A Proprietary Limited (Pty. Ltd.) company is an independent legal entity able to do business in its own right. The shareholders own the company and directors run the company. The directors of a company, as well as company employees, can be shareholders.

A company's operations are subject to the Corporations Act 2001, overseen by the Australian Securities and Investment Commission (A.S.I.C.). This Act simplified regulations to allow a company to have only one director and only one member.^[4]

There are costs associated with registering a company and the company tax rate is 30% on all profits. However, a company often offers a greater level of asset protection as opposed to some of the other business structures, as your personal assets are separate from the business.^[5] With this in mind, major creditors will often require directors to personally guarantee the company's liabilities.

Additionally, personal liability of directors and employees can also arise if they commit an offence under the Corporation Act 2001 or are found to have negligently performed their duties.[6]

Trust

A trust is a business structure whereby the trustee holds property and earns and distributes income on behalf of the beneficiaries. One of the most common types of trusts is a discretionary trust.[7]

There are costs associated with registering a trust and for discretionary trusts, profits are distributed to the beneficiaries at the discretion of the trustees and can, therefore, be distributed in such a way to minimise tax, e.g. to beneficiaries in lower tax brackets. However, a trust often offers a greater level of asset protection as opposed to some of the other business structures if the trustee is a company that owns no assets.

For further information on the different types of business structures, visit NSW Small Business and the Australian Tax Office (A.T.O.).

For information on regulations and fees involved in establishing and running a company, visit the Australian Securities and Investment Commission (A.S.I.C.).

Franchising, Home Businesses and Independent Contractor

Franchising is one of Australia's fastest-growing business sectors. A franchise is an agreement under which a franchisor licenses a franchisee to operate a developed method of doing business that is identifiably associated with the franchisor. The franchisor provides ongoing guidance, systems and assistance in return for periodic payment of fees and/or purchases. There are two basic kinds of franchises:

What is Franchising?

A business format franchise in which the whole business concept is licensed, including the name, appearance and method of carrying on the business.

A product franchise in which the product is manufactured and/or supplied by the franchisee.

Buying a franchise is unlike buying a conventional business. As a franchisee you enter a long-term relationship with your franchisor and you will be obliged to run the business in accordance with their system. To a large extent your success will depend on the success of the franchisor.

Before you buy a franchise you need to assess all information and decide whether you are personally cut out to be a franchisee. You need to weigh up the advantages and disadvantages, be aware of the taxation implications and have carefully read and understood the franchise agreement.

Before Entering a Franchise Agreement

Before you enter a franchise agreement obtain information on:

demand in the marketplace for the service or goods on offer;

a complete description of the business;

the track record of the franchisor and current motives for franchising;

what the franchisor has to offer by way of name, product, reputation, site location, advertising budget and back-up;

how other franchisees are faring in the same business;

evidence of the franchisor's strategic plan, i.e. where the business is going;

the fees involved, i.e. up-front capital and percentage of takings which you have to pay to the franchisor for the continuing right to operate the business;

terms of sale for goods supplied by the franchisor and if you can purchase stock from outside the franchise network;

the franchise agreement document and the period of the franchise;

obligations on both parties when the franchise is terminated, the number of agreements terminated recently and the reasons;

territorial rights, i.e. exclusive or otherwise;

whether there is a Franchise Operations Manual.

Warning Signs

Most franchisors are open and honest with you. However, you should be wary of those franchisors (or master franchisees) who:

are reluctant to provide anything in writing;

are reluctant to give details of other franchisees within their system (required by the Code);

require full up-front payment for the business to be made before any information is released;

claim that you can make large amounts of money quickly and with little effort, i.e. it looks to good to be true.

And What About You?

Consider the above information in the light of your own strengths and weaknesses and your expectations:

Do you have the type of experience required? Are you ready for the hours and commitment needed?

Will you be comfortable with the amount of control the franchisor will have?

Is your financial position strong enough to see you through the first year?

Are you suited to the industry and to the franchise company?

Are you physically capable of the work required?

If you have any serious doubts on any of these points, think further and explore alternatives.

Franchising and Tax

The initial franchise fee and any renewal fee will generally be regarded as a capital asset and is not deductible.

An agreement to purchase a franchise often contains provisions covering the ongoing payments to the franchisor of royalties or levies. These can be deductible in the year that they are incurred.

Fees paid for ongoing training provided by the franchisor will generally be deductible.

Interest paid on loans to pay the franchise fee or buy equipment may also be tax deductible.

Advantages of Franchising

Easier access to finance with the support of the franchisor.

Direct benefit from the franchisor's advertising and buying power.

Use of an already established business name.

Management and industry knowledge back-up.

Reduction of business risk.

Disadvantages of Franchising

Payment of fees and/or percentage of turnover and future resentment of same.

Loss of some independence through franchisor control of management techniques.

Unreliable franchisor.

Over-dependence on the franchisor who may make mistakes.

Reputation of a franchise may be affected by factors beyond the franchisee's control.

Franchise Agreement

A franchise agreement is a written document outlining the rights and obligations of both the franchisor and the franchisee. It is a legal contract and much care should be given to its contents, for ultimately it contains the rules and regulations from which your future income will result.

Operations Manual

The Operations Manual sets out in detail how the franchise is to be run - leaving no room for misunderstandings or misinterpretation. Every member of the franchise, although independently owned, must work to the rules set out in the Operations Manual. Unity is an important factor in a successful franchise.

The Franchising Code of Conduct

On 1 July, 1998 the Franchising Code of Conduct, which protects the rights of franchisees and sets out the obligations of franchisors, came into effect. All franchise businesses are required by law to comply with the Code. By improving the disclosure requirements of franchisors and prohibiting "unfair" conduct, the Code has brought about significant change in the way franchise business is conducted.

The Code has been prescribed under the Trade Practices Act 1974 and the Australian Competition and Consumer Commission (A.C.C.C). has the responsibility of enforcing the Code.

To assist franchisees in understanding the Code, the A.C.C.C. provides the Franchisee's Guide to the Franchising Code of Conduct. Go to www.accc.gov.au and select Small Business Easy Access Point.

The Code also provides mediation procedures where disputes cannot be resolved within the franchise system. Contact 1800 150 667 or visit www.mediationadviser.com.au (OMA).

More Information

For franchising matters in general contact the Franchise Council of Australia Ltd (FCA) on 9264 4077 or visit www.franchise.org.au.

For the Franchising Code of Conduct and the Franchisee's Guide visit www.accc.gov.au.

For advice and protection in buying a franchise you should seek the services of a solicitor, accountant or business adviser.

Your local Business Advisory Service can offer you one-on-one advice on buying a franchise. Call 1300 650 058.

Home-based business

Home-based businesses are an important sector of the Australian business community, with nearly one million people operating a business at or from home.

If you're running a home-based business there are a wide range of government requirements that may apply to you. Things to consider when running a small business from home include taxation, employment, council approval and licensing. Find links to what you need to know about setting up and running your home-based business below:

Planning

To run a successful home business you need to be able to handle a wide variety of issues. Think through the establishment of your business carefully, taking the time to research and plan your operations.

To develop your business plan, you need to consider these points about operating from home:

Is your home the best location for your business?

Can you conduct the type of business you want under local council regulations?

What are your legal obligations?

Will your home-based business allow you to balance your work and family life?

What are the town planning requirements of your local government authority?

Getting started

When you set up your office, you may need new furniture, office equipment and information and communications systems. It's a good idea to shop around, compare prices, and ask for advice from other home-based business operators.

If you decide to rent or lease equipment, rather than buy, you may be able to claim the payments as a tax deduction - check the Tax Office website about business deductions.

The way you set up your business in your home may affect your tax deductions. See the Tax Office information on home-based work and deductions.

As you may be spending a lot of time there, make sure your workplace is a pleasant, comfortable and safe environment for you and your clients. WorkCover NSW can provide you with advice about occupational health and safety.

You may need to employ staff or outsource work to contractors and you'll have certain obligations to them. See our section on employing people for more information about their work conditions.

Registration & licences for home-based businesses

Our registration and licences topic has information about registration for all new businesses, whether it's in your home or in an office. You'll find information about how to register business and company names, registration for taxation purposes and where to go to find out about licences and permits.

But if you're using your home as a place of business then specific regulations may govern the impact of your business activities on the surrounding area, such as pollution, energy use and parking. Depending on your type of business, you may need special permits relating to zoning, signage, noise levels or health issues. Check with your local council to find out what restrictions and approvals apply to your business.

Taxation for home-based businesses

As with any new business, you'll have a number of tax obligations to comply with when starting up. You may need to register for a Tax File Number, Australian Business Number, Goods and Services Tax, Pay As You Go withholding and Fringe Benefits Tax.

But if you carry on a home-based business there are specific tax issues you should know about, especially what expenses you can claim. Two types of expenses that are specific to running a home-based business are:

Travel expenses between your home and other business locations.

You may wish to join the Simplified Tax System which is an alternative method of determining taxable income if your small business has straightforward financial affairs.

Insurance for home-based businesses

As a home-based business you need to make sure you have the correct level of insurance to protect yourself. One of the most common mistakes made by home-based business operators is to assume that home and contents insurance covers their business risk - in many cases it doesn't.

Insurances to consider are:

Public liability cover for persons visiting your business at home (e.g. customers and suppliers)

Workers compensation for any employees working from your home

Fire, storm and theft cover for the loss of any stock and equipment

Professional indemnity insurance if you're in a service industry, especially if you're contracting to government

Personal accident or illness

Costs arising from interruption to your business

Marine policy if you send products via freight carriers or post.

It's important to note that many policies don't cover tools of trade, office furniture or computer equipment used for your business, unless you've specifically advised your insurer and they've agreed to cover you.

Independent contractor

On 1 March 2007 the new independent contractors laws were introduced, possibly affecting your tax, occupational health and safety and other obligations.

Visit the Independent contractor laws page on the Department of Innovation, Industry, Science and Research website for more information on how the laws affect you.

As an independent contractor, you should also consider the following issues:

How do I determine my status?

It is possible to be an employee for some work and a contractor for other work. The fact that you have an Australian Business Number (ABN) does not automatically make you a contractor. If you operate via a labour hire firm, you may not need to manage your own tax or occupational health and safety requirements and other obligations.

What are my taxation obligations?

Your taxation obligations

As a contractor, you may have to pay tax at a different rate to employees. You may also have to arrange to pay your own tax.

Personal Services Income (PSI)

PSI is income that is mainly a reward for personal efforts or skills, and can affect your tax obligations as a contractor. To find out how PSI will affect your tax return, use the following Tax Office resources.

What are my employment entitlements?

Superannuation

Some contractors are entitled to receive superannuation. If you are not covered, you may choose to arrange your own super contributions.

Entitlements

Unlike employees, contractors are not entitled to a minimum rate of pay or conditions such as annual leave, sick leave and redundancy entitlements. Your fees are a matter for negotiation between yourself and those you are contracting with.

OH&S laws

As a contractor, you are entitled to a safe and healthy workplace and are required to comply with the duties set out in the Occupational Health & Safety Act.

Workers compensation insurance

As a contractor, you may not be entitled to compensation unless you have arranged your own accident protection insurance.

How is my intellectual property affected?

Although you may have contributed to or created material, products and ideas as a contractor, you may not be entitled to intellectual property ownership such as copyright. This may depend on the work contract you sign.

Reporting Obligations and Compliance

Under tax law, you must keep records of all your business transactions. You're required to keep records relating to income tax, GST, payments to employees and business expense payments.

Activity statements are used to report and pay your tax obligations, including; PAYG, FBT and GST, and to pay deferred company and superannuation fund instalments.

Recording keeping

Good business records help you manage your business and make sound business decisions. They are also useful if you want to sell your business.

Under tax law, you must keep records to record and explain your business transactions. You're required to keep records relating to income tax, GST, payments to employees and business payments.

You can keep your records on paper or electronically. A variety of electronic record keeping packages are available. The Tax Office has tools and information to help, including e-Record, a free electronic record keeping software product.

Reporting Activity Statements

You make payments and report your obligations under the tax system using an activity statement. The activity statement allows you to report your obligations for a range of taxes, including:

Goods and Services Tax (GST)

Luxury Car Tax

Wine Equalisation Tax (WET)

Pay As You Go (PAYG) Withholding and instalments

Fringe Benefits Tax (FBT) instalments

Deferred Company Instalments.

The Tax Office will send your activity statement about 2 weeks before the end of your reporting period. Complete and return the original by the due date, along with any payment due.

You can register to lodge your activity statement online (using the Business Portal) or use a paper form.

Trade Practices

Case Studies

In Australia federal and state laws protect you, your business and your customers from unfair trading practices. These laws, together with industry codes of practice, help to ensure that your business operates fairly and competitively and that all consumers are adequately informed and protected[1].

Fair Trading Laws

You must be aware of your rights and responsibilities according to fair trading laws.

Trade Practices Act

The main federal law, the Trade Practices Act (TPA), ensures that trading in the marketplace is fair both for your business and your customers.

The Trade Practices Act, deals with almost all aspects of the marketplace: dealings with suppliers, wholesalers, retailers, competitors and customers. The TPA covers unfair market practices, industry codes of practice, mergers and acquisitions of companies, product safety, collective bargaining, product labelling, price monitoring,

and the regulation of industries such as telecommunications, gas, electricity and airports.

The Australian Competition and Consumer Commission (ACCC) promotes good business practices for a fair and efficient marketplace. It provides businesses with information about federal competition, fair trading and consumer protection laws and is responsible for administering the TPA.

State fair trading laws

Each state and territory also has its own fair trading laws, usually referred to as the Fair Trading Act, with consumer protection provisions much the same as those in the TPA.

State and territory fair trading offices can give general advice on your business rights and obligations under fair trading laws. However, if you're unsure how fair trading laws apply to your particular situation, then you are encouraged to obtain independent legal advice[2].

Complying with the Trade Practices Act

The Trade Practices Act applies to just about every aspect of a business - for example, advertising, price setting, and transactions with other businesses or consumers. Complying with the TPA minimises the risk of breaking the law and may actually improve performance by giving your business a competitive edge^[3].

Businesses of all types can benefit from putting in place measures aimed at improving relations with their customers. If you want to:

improve your customer relations

enhance your reputation

effectively assess and manage risks

avoid the costs of legal proceedings

increase your staff awareness about fair trading laws

then consider establishing your own compliance program.

Business Registration, Licences and Permits

This chapter will assist you in understanding the various registration processes involved with starting up a new business. This includes registering your business name, registering for taxation purposes and how to find the licences and/or permits that are required to operate your business.

Click on a heading below to begin.

You can also watch videos, listen to audio, download a PDF or start the quiz.

Licences and Permits

Notifying Changes

Privacy Act

Register Your Business

Registration of a business name does not in itself give you any proprietary rights - only a trade mark can give you that kind of protection. Ensure you have exclusive use of your name now and in the future throughout Australia by registering a trade mark.

When you're starting up a new business it's important to find out what registration and licences apply to you. This can be complex as local, state, territory and federal governments all handle registration and licensing for various aspects of your business.

Read more about the following topics to help you decide what you need to do:

A business name is simply a name or title under which a person, or other legal entity, trades.

If the business structure you have chosen is as a sole trader, a partnership or a trust, and not as a company, then you are required to register your business name in the state or territory in which you will operate. But you don't

need to register a business name if you plan to conduct your business under your, or your partner's, first name and surname.

If you are planning to set up your business in more than one state, you need to register your business name separately in each state.

If you decide that a company structure best suits your business, then you need to register as a company. By registering a company name you have the advantage of having exclusive rights to that name in Australia, without having to register in each state.

You can only choose a company name not already registered to a company or business. Special approval is also required to use certain words.

If your company carries on business in a name different to your company name, then you must register the business name in the appropriate state or territory.

Your domain name is your address on the internet and gives you an online identity or brand. It's a valuable part of your business identity and an important marketing tool.

If you wish to buy a .com.au or .net.au domain name, you must be a commercial entity and possess either an ACN or ABN. For more information go to the .au Domain Administration Ltd website.

A registered trade mark gives you the exclusive right in Australia to use it as a brand and to legally stop imitators. Unlike a business name, a registered trade mark can provide legal protection for your brand and enable you to stop others from trading with it.

Once registered, the trade mark is protected in all Australian states and territories for an initial period of ten years. If international registration is required, the trade mark must be registered in each country in which you want protection.

Be aware that registration of a business name, company name or domain name does not in itself give you any proprietary rights - only a trade mark can give you that kind of protection. Ensure you have exclusive use of your name now and in the future throughout Australia by registering your business name as a trade mark.

If you are unsure of what or how to register, seek the advice of your accountant, lawyer or trade mark attorney.

You also need an ABN in certain dealings with the Tax Office and other areas of government.

A range of taxes affect small business, so before you begin operating you'll need to know what you must do to comply with government taxation regulations.

The ABN is a unique 11 digit identifying number that businesses use when dealing with other businesses. For example, you generally need to put your ABN on your invoices, or other documents relating to sales that you make. If you don't, other businesses may withhold 46.5% from any payment to you.

Registering for an ABN is not compulsory, but you will need one to register for the GST. Your ABN allows you to:

facilitate a single Business Activity Statement

confirm your business identity to others when ordering and invoicing

avoid PAYG tax on payments you receive

claim GST credits

claim energy grants credits

obtain an Australian domain name.

FBT is a tax payable by employers for benefits paid to an employee or the employee's associate in place of salary or wages. Examples of benefits include a car, car parking, low interest loan and payments of private expenses.

If you are an employer and provide fringe benefits to your employees, the Tax Office recommends that you register for FBT.

You must register for GST if:

your business has a GST turnover of $75 000 or more ($150 000 or more for non profit organisations)

you provide taxi travel as part of your business, regardless of your GST turnover.

To register for GST you will need to complete an application form. If you wish to apply for an ABN at the same time, then use the same form.

Be aware that you need an Australian Business Number (ABN) to register for GST, as the ABN is part of the GST system. Your ABN will also be your GST registration number.

PAYG withholding is a legal requirement to withhold amounts for income tax purposes.

If you have employees, you're required to withhold tax from payments you make to them. You may have to withhold tax from payments to other workers, such as contract workers.

You may also need to withhold an amount from payments to other businesses if they don't quote their ABN to you on an invoice or other document if required.

You must send all withheld amounts to the Tax Office.

As a new employer, you must register with the Tax Office before you withhold from payments to your employees.

A TFN is a unique number issued by the Tax Office to individuals and organisations.

Partnerships, companies and trusts need their own TFN. A TFN can be obtained at the same time as an ABN, using the same application form.

Sole traders use their individual TFN in dealings with the Tax Office.

Some of the main reasons for having a TFN are:

to quote to employers (this applies to individuals only)

to quote to investment bodies responsible for paying interest, dividends and unit trust distributions

to quote to government bodies, for example the Tax Office, when applying for an Australian Business Number (ABN) or lodging income tax returns.

Pay-roll tax is a state tax on the wages paid by employers. It is calculated on the amount of wages you pay per month. You must pay pay-roll tax if your total Australian wages exceed the exemption threshold that applies in your state or territory - exemption thresholds vary between states.

Licences and Permits

Business Licence Information Service (BLIS) is the NSW Government's one-stop website to find out all the regulations, licences and permits needed to operate a business in NSW. The BLIS website contains summary information on Commonwealth and State licences and business regulations, and can generate the forms required to comply with these requirements, accessible on an industry sector basis.

Click here to access the BLIS website.

Notifying Changes

Your business will inevitably change and grow - changes in your business circumstances may result in a need to change your business structure, your legal or trading name, your address and contact details. These changes may affect your tax and other regulatory obligations.

Change of business structure

Changed business circumstances may require you to change your business structure. For example, you might start off as a sole trader, then take on one or more partners and form a partnership, and then later still register as a proprietary limited company. When you change your business structure you are required to apply for a new ABN.

Change of personal details

Depending on the circumstances, you may need to advise the Australian Taxation Office (ATO), the Australian Securities and Investments Commission (ASIC) and your state or territory government. Such changes could be to your postal, email or business address, main business activity, financial institution account information, or authorised contact person details.

Change your ABN details

You can change your ABN details with the A.T.O. through:

Online transaction, if you have an ATO digital certificate

Phone the ATO Business Infoline on 13 28 66

Mail - Obtain a copy of the change of registration details form.

Through your tax agent.

Check your ABN details

Use ABN Lookup to check whether your ABN details are up to date.

Privacy Act

The Federal Privacy Act 1988 sets rules for businesses handling personal information. It also allows individuals to make a complaint if personal information is mishandled.

Some small businesses, including those that are non-profit bodies or unincorporated associations, need to comply with the Privacy Act.

Small businesses that collect personal information (other than their own employees' information) may need to comply. Personal information is any information about an identifiable individual, e.g. a person's name and address, marital status or income.

If your business has an annual turnover of more than $3 million or is a health service provider, the Privacy Act applies to your business.

Does your small business need to comply with the Privacy Act?

Is your small business:

a health service provider?

trading in personal information (e.g. buying or selling a mailing list)?

related to a larger business (a related body corporate)?

a contractor that provides services under a Commonwealth contract?

reporting entity for the purpose of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act)

an operator of a residential tenancy database?

If you answered yes to any of these, your business may need to comply with the Privacy Act. You may also need to comply if your business buys or sells business assets that include personal information (e.g.. a customer data

base).

The Privacy Commissioner's checklist, A Privacy Checklist for Small Business can help you to work out whether your business may need to comply.

Compliance with the Privacy Act - the basics

For many small businesses, complying with the Privacy Act means that the key things to do are:

tell people when you collect personal information what you expect to do with it

use personal information only for the reason you collected it, or in ways people would think reasonable unless you have their consent, have given them an opportunity to opt-out or the use is authorised by another law

pass on personal information only for the reason you collected it, or in ways people would think reasonable, unless you have consent or the disclosure is authorised by another law

if people ask, give them a chance to see any information you hold about them

keep personal information secure, accurate and up-to-date.

These requirements are set out in the Act in 10 National Privacy Principles (NPPs).

See A Guide to Privacy for Small Business for more information.

Insurance

This chapter will assist you in understanding the various insurance policies that are available for your business. You should be aware that there are certain insurances that are compulsory while others are optional. A brief overview of risk management will also be provided in order to minimise potential risks and allow the smooth running of your business.

Assets and Revenue Insurance

People Insurance

Liability Insurance

Evaluating the Policy

Risk Management

Assets and Revenue Insurance

Insurance is an essential part of running any business. If you are operating a small business you need more than just property insurance. Taking out the right insurance will help protect your business and minimise its exposure to risk.

Your insurance requirements will vary according to the type of business you are operating, but you should be aware that some forms of insurance are compulsory, such as workers compensation and third party car insurance.

When you're in business you deal with a variety of potential risks each day. Risk is not something you can avoid, but it is something you can manage. Risk management will increase the probability of success and reduce the probability of failure of your business.

To protect your assets and revenue-generating capacity, here are some of the types of insurance available:

Building and contents

Covers the building, contents and stock of your business against fire and other perils such as earthquake, lightning, storms, impact, malicious damage and explosion.

Burglary

Insures your business assets against burglary, and is most important for retailers or a business which maintains an unattended premises.

Business interruption or loss of profits

Covers you if your business is interrupted through damage to property by fire or other insured perils. Ensures your ongoing expenses are met and anticipated net profit is maintained through a provision of cash flow.

Fidelity guarantee

Covers losses resulting from misappropriation by employees who embezzle or steal.

Machinery breakdown

Protects your business when mechanical and electrical plant and machinery at the work site break down.

Motor vehicle

It is compulsory to insure all company or business vehicles for third party injury liability. Many different types of policies are available, so make sure you understand the options before making a decision. There are four basic options:

Compulsory third party (injury) - covers you for claims made against you for personal injuries and legal costs arising from the use of your car. You must obtain this insurance to register your car.

Third party property damage - covers your liability for damage to another person or to the property of others and your legal costs. It doesn't include repairs to your own car if you caused an accident.

Third party, fire and theft - covers you against the events covered above, as well as fire and theft. It also insures against damage caused if your car was stolen.

Comprehensive - covers you for all of the above plus damage caused to your own car by you in an accident. If you're buying a car on an instalment basis, financiers will usually insist on this cover.

People Insurance

There are several types of life insurance. Some are investment-type funds where you contribute over a certain time and get back your investment plus interest earnings at the maturity date. Others are designed to cover risk - things that could happen to you:[2]

Workers Compensation

This is compulsory for all businesses employing staff. Workers Compensation insures employees against injury or death caused in the workplace. The Workers Compensation system in NSW is administered by WorkCover.^[1]

Personal accident and illness

If you are self employed you won't be covered by workers compensation, so you need to cover yourself for accident and sickness insurance through a private insurer.

Income protection or disability insurance - covers part of your normal income if you are prevented from working through sickness or accident.

Trauma insurance - provides a lump sum when you are diagnosed with one of several specified life threatening illnesses.

Term life insurance or whole of life cover - provides your dependents with a lump sum if you die.

Total and permanent disability insurance - provides a lump sum only if you are totally and permanently disabled before retirement.

Superannuation

If you are running a business or employing people, you are likely to have superannuation obligations to your employees. If you are self-employed you also need to provide for your retirement - superannuation is generally used to provide for a retirement plan.

Liability Insurance

If you sell, supply or deliver goods, even in the form of repair or service, you may need cover against claims of goods causing injury or damage. Product liability insurance covers damage or injury caused to another business or person by the failure of your product or the product you are selling.

Public Liability

Public liability insurance protects you and your business against the financial risk of being found liable to a third party for death or injury, loss or damage of property or ‘pure economic' loss resulting from your negligence.

Professional Indemnity

Professional indemnity insurance protects you from legal action taken for losses incurred as a result of your advice. It provides indemnity cover if your client suffers a loss - either material, financial or physical - directly attributed to negligent acts.

Product Liability

Evaluating the Policy

When contacting insurance companies or brokers with your enquiries, it is important to appropriately disclose information in order to get the most precise insurance policy for your needs. By not disclosing all relevant or providing false information, your policy may not be valid. It is also essential that you keep the insurance company up to date with any changes to your personal details or circumstances.

Prior to entering into a policy, make sure you: [1]

Check what is and what is not covered - Look at the wording and definitions.

Are you under-insured? - It is very important that you insure your assets for their replacement value in today's prices. If you are not sure of the replacement cost, you may need the services of a qualified valuer to establish what your assets are worth.

Do you understand the term co-insurance? - You are deemed to be co-insured to the extent that the risk is under-insured, i.e. you will only be compensated for a proportion of the total loss.

When does your protection commence? - That is, immediate cover or otherwise.

Conditions of insurance - Note particular activities relating to the nature of your business. Are these activities excluded from the policy?

Check the claims procedures - Can you rely on straightforward and prompt service? Ask other similar businesses what their experience has been.

Do you understand the terms of a replacement policy? - A replacement policy aims to replace or restore property as new. These policies often have an upper limit on the amount payable.

Renewal conditions - Are increases in value built in the policy or do you have to declare any appreciation in asset value?

Reputation - Look at the insurance company's track record and whether it is well established. Are they prepared to discuss with you your insurance needs without undue pressure to buy?

Compare policies - Get at least three quotes. Compare insurance premiums as well as any no-claim bonuses or discounts available.

Negotiate Pricing - Be prepared to negotiate with the broker or insurance company. You may be able to reduce overall insurance costs by grouping different insurance types with one provider or achieve discounts by seeking reductions in initial pricing quotations.

Risk Management

Risks to your business can arise for many reasons - interest rate or price increases, your competitors' activities, injuries through hazards in the workplace, skilled staff leaving, natural disasters or terrorist activities. Managing those risks is an important part of running your business.

Risk management is a systematic process of making a realistic evaluation of the true level of risks to your business. Before risks can be properly managed they need to be identified - you can begin with these questions:

What can go wrong?

What can we do to prevent it?

What do we do if it happens?

There are standard procedures and processes to handle risk management in business. Standards Australia has developed a Standard, AS/NZS 4360:2004, Risk management that outlines procedures and processes to implement.

A good plan is to develop a risk register to document each potential problem, its level of seriousness, what is required to fix it and who will fix the problem.

Managing Intellectual Property

Case Study Videos

This chapter will assist you in understanding intellectual property (IP) and its impact on your business. Other issues such as IP commercialisation, IP management and IP protection will also be discussed.

What is IP?

There are different types of intellectual property and a brief overview is given below:[2]

Intellectual property (IP) results from the application of someone's mind or intellect to create something new or original. IP can exist in various forms, for example, IP can be an invention, a trade mark, book, film, trade secret or artistic design. In Australia, IP laws allow people to have the exclusive right to use and control, and therefore profit from, their own intellectual and creative endeavours.

IP is one of those areas that most business owners tend to neglect when considering the assets of their business. Items such as equipment, facilities, and buildings are usually thought of first, however, intellectual property is an increasingly valuable asset for many businesses. Additionally, it is also an important factor when differentiating businesses. For example, while two companies may each produce a lounge chair, each chair has a different design, production process and brand name each reflecting different types of IP.^[1]

Patents

A patent is an exclusive right to exploit an invention commercially, granted for a limited term in return for public disclosure of the invention.

Any commercially useful method, process, product or device that is innovative or inventive can be patented. However, some things are not patentable by law, for example, mathematical models, purely mental processes and artistic creations.

Australian patents are administered by IP Australia.

Trade marks

A trade mark is a unique way of identifying a product or service to distinguish it from its competitors. It is not necessary to register a trade mark to use it, but registration provides an exclusive right to use, license or sell that particular trade mark.

Australian registered trade marks are administered by IP Australia.

Designs

For the purposes of IP, design means the overall appearance of a product. This includes the shape, configuration, pattern and ornamentation which, when applied to a product, give it a unique visual appearance. A product is anything that is manufactured or handmade. Importantly the mechanics of how a product works or operates is not protected by designs law, but may be protectable as a patent.

Some designs are not considered registrable by law. These include designs for medals, layouts for integrated circuits, Australian currency and scandalous designs.

Australian registered designs are administered by IP Australia.

Plant breeder's rights

Plant Breeder's Rights (PBR) is a form of patent for new plant varieties. With respect to the propagating material, PBR grants the breeder of new plant varieties the right to exclude others from doing the following:

(a) produce or reproduce the material;

(b) condition the material for the purpose of propagation;

(d) sell the material;

(e) import the material;

(f) export the material; and

(g) stock the material for any of the purposes described in (a) to (f).

Copyright provides free and automatic protection for an author's original expression of ideas and information captured in a specific medium. The most common works protected by copyright are books, films, music, sound recordings, newspapers, magazines and artwork. Copyright also protects originally created typographical

arrangements, databases, media broadcasts, computer programs and even compositions of other people's work such as academic journals or CD compilations.

The moment an idea is put down in a material form, such as on paper, recorded on tape or stored on a computer disk, it is automatically protected by copyright. Because copyright protection is automatic in Australia, there is no official registry or application process for copyright protection.

Australian copyright is administered by the Attorney-General's Department.

Circuit layout rights

Circuit layouts are the layout designs or plans (topographies) of integrated circuits used in computer-generated equipment. They are sometimes referred to as computer chip or semi-conductor chip designs.

A circuit layout is a two-dimensional representation of the three-dimensional location of electronic components in an integrated circuit.

Circuit layouts are usually highly complex and the intellectual effort in creating them is considerable and may be of great value. An integrated circuit or chip made from a layout is vital in all kinds of electronic devices, from pacemakers to personal computers.

Circuit layout rights are administered by the Attorney-General's Department.

Trade secrets and confidential information

In Australia, the law regarding the protection of trade secrets and confidential information is prescribed by common law. This method of protection for trade and commercial secrets therefore needs to be managed by the entity wishing to keep something a secret.

Protection is usually maintained by not disclosing the secret information at all (or by disclosing to only a very limited number of recipients). When disclosure is unavoidable, best practice would mandate that such disclosure is made only after comprehensive written confidentiality agreements have been agreed by the discloser and recipients. Trade secrets are most effective in cases where the product is difficult to reverse engineer - that is, difficult to recreate from scratch. One disadvantage is that trade secrets do not provide any legal security against an independent competitor inventing an identical object.

For further information, visit IP Australia and the IP Toolbox.

IP Commercialisation

Just like cash, plant and equipment, IP is a business asset and it is becoming more common for IP to be the central component of business' strategic planning. Research has shown that unless IP is integrated into a business plan, it is unlikely to be commercially successful.

A business plan is a detailed overview of:

Where a business is now;

How it is positioning itself; and

How it is going to achieve its identified goals.

When preparing your business plan, you should take into consideration the following:

What business are you in?

What are the unique features of your business' products or services?

What product or service advantages give you an edge in the market?

What part does intellectual property play in creating your competitive edge?

What market trends will affect your business and your future IP requirements?

What is your target market?

Will this change in the future?

How will you position your business' products or services against those of your competitors?

What security do you have to protect your IP?

What policies do you have in place for developing your IP ability?

How far have you assessed the potential to commercialise your IP through licensing and selling your IP?

Have you conducted an IP audit and evaluated the cost and value of your IP?

Commercialisation

Commercialising IP is the process you undertake to get your innovation, whether it is in the form of products or services, to the market place. Bringing IP to a market-ready state may require a large amount of effort as well as a substantial investment as it will involve:

Developing the concept further;

Testing and trialling the product;

Designing tools;

Developing a manufacturing facility;

Developing a business or marketing plan; and

Marketing, promoting and selling the product.

There are various ways in which you can commercialise your IP: commercialising in-house or with a partner; outsourcing; and commercialising to a world market.

Commercialising in-house or with a partner

The two most common ways of commercialising your IP are:

To undertake all the steps in-house; or

To work with a partner.

Commercialising your IP in-house involves you developing your product to a market-ready state without any external assistance. This means that you will have the burden of taking on all the work and risks associated, yet will be able to reap all the benefits it you are successful. On the other hand, commercialising with a partner means you involve one or more parties to assist in developing your product to a market-ready state.

Outsourcing

Outsourcing may be an option if you do not have the capability to personally and exclusively manufacture, market or sell your IP product and do not wish to partner with another company. Outsourcing involves you, as the IP product owner, contracting one or more people or companies to undertake a specific task/s. For example, you might contract a company to physically produce your product and then promote and sell it yourself, or simply contract another person or company to do this for you as well.

Commercialising to a world market

Once you have decided the best approach to commercialising your IP for the Australian market, you may consider international expansion. Two possible scenarios that you might consider:

Retain manufacturing and selling rights in Australia (and some countries); and

Licence manufacturing and selling rights to a partner in relation to other countries.

Retain manufacturing and selling rights in Australia and the global market; and

Outsource manufacturing and selling tasks to an overseas provider over which you retain total control.

IP and taxation

You should be aware that you may face potential taxation liabilities during the various stages of commercialising your IP. These taxes include:

Taxes on income and gains made from commercialising IP; and

Transaction taxes such as GST, stamp duty and withholding tax.

For further information, visit IP Australia and the IP Toolbox.

IP Management

An IP audit is a systematic review of the IP owned, used or acquired by a company.[1] An audit's main purpose is to identify all the IP your company may have. Additionally, an IP audit can also establish the following:

Whether or not your IP rights are registered;

Who owns the rights and, if you do not, identify any conditions that apply to their use;

An assessment of whether your IP is being used effectively;

Whether your rights are being challenged or threatened by others;

Whether you have an effective IP management and maintenance plan in place; and

Records of your IP creation and ownership.

IP audits are generally undertaken either:

As part of an ongoing IP asset management program;

When a business is being bought, or sold; or

When you are enforcing or defending your IP rights.

For further information on IP auditing, visit the IP Toolbox.

IP Protection

Require all that have access to the information to sign a written confidentiality agreement.

It is critical that you protect any confidential information you may have. The concept of legal confidentiality is a body of law developed by the courts to protect relationships of confidence and the information disclosed in such relationships.However, confidentiality only arises when three essential conditions are met:

The information is imparted in a relationship of confidence. This relationship has to meet the necessary character of ‘confidentiality' which will be recognised by the courts;

There is a relationship of confidence between the person imparting the information and the person receiving the information;

The unauthorised use or dissemination of the information has caused, or would cause, damage to the recipient.

Examples of information which have been recognised as being legally confidential include:

Drawings of tools or equipment used in manufacturing;

Business proposals;

Designs of components;

Business reports;

Tribal secrets;

Customer lists and price lists;

Personal information; and

Marketing strategies.

There are a few basic steps that can be followed to increase the likelihood of a court recognising information as confidential, including:

Clearly marking all documents containing the information ‘confidential'.

Treat the information as confidential by restricting employee access to the information to ‘a needs only' basis.

Treat the information as confidential even at the point of destruction, by providing locked disposals bins for the disposal of any confidential information; and

For further information on how to protect confidential information as well as how to deal with infringements, visit the IP Toolbox.

Understanding Contracts

Obligations of Warranties and Guarantees

This chapter will assist you in understanding contracts, including what a contract is, the different types of contracts, what is in a contract and how a contract can end. Information will also be provided on leases such as the obligations of a lessee and information needed before signing a lease.

What is a Contract?

Different Types of Contracts

What is in a Contract?

Bringing a Contract to an End

Leases

What is a Contract?

There must be an offer to do something, it must be clearly stated, and definite in its intention. However, an ‘offer' can be withdrawn by the other party at any time before it is ‘accepted' or if it is a standing offer fixed for a period of time. An offer can also lapse when the time for acceptance expires or after a reasonable time in the circumstances.

Contracts are "legally binding" agreements, which, in a legal context are valid and must be fulfilled, with certain exceptions. For an agreement to be regarded as a contract, it must contain four essential ingredients. The absence of any of the following four parts will make the agreement not legally binding:

1. Offer

2. Acceptance

3. Intention of legal consequences

4. Consideration

Offer

Generally, the greater the value of the contract, the longer the life of the offer.[1]

Examples of an offer include:

Advertisements which include price details

Tender submissions

Formal quotations

Proposals to lease

Examples of what is NOT an offer:

‘ball park' estimate

Requests for proposals

Expressions of interest

Letters of intent

Acceptance

The offer must be clearly understood and its acceptance must be definite. Only what is offered can be accepted and if any new terms are suggested, this is regarded under contract law as removing the original offer made (or counter offer). Where acceptance is given with conditions, the acceptance is not complete until the conditions are fulfilled.^[2]These are regarded as conditional contracts.

Acceptance can be given in the following ways:

Verbally

In writing

By action which clearly indicates acceptance

Any acceptance by mail is complete at the time of posting and sometimes, a letter must be received e.g. insurance acceptance. Any acceptance by electronic means, such as email or fax, is completed at the time of receipt.

Acceptance is not valid if:

It is presumed through inaction or lack of response

You say "I will assume you have accepted if I do not hear from you within three days". Acceptance requires a positive action, that is, one of the three forms noted above.

Intention of legal consequences

The parties to the agreement must understand that the agreement can be enforced by law. However, for a

contract to be binding, it does not have to expressly state that you understand and intend legal consequences to follow.^[3] For commercial contracts your intentions are presumed, for example, to be legally bound.^[4]The parties to a contract can decide not to be legally bound by the agreement, but this must be clearly stated and is then an agreement that is not legally enforceable.^[5] For example, given that your intention will be presumed, it must be made absolutely clear if you do not intend your agreement to be a binding agreement.

Consideration

In a business arrangement, the promise must involve an exchange of something of value (the ‘consideration'). This is usually the payment, or promised payment of money but can be anything of value. However the payment is not required to be a fair one and a consideration can also be the promise not to do something (to refrain from exercising some right). A consideration cannot be something which cannot be given a commercial value.

Different Types of Contracts

The law recognises that legally binding contracts can be written, verbal, or a mixture of both. However, for business purposes, written contracts are usually preferred due to the following reasons:

The contents (‘terms') are in writing for all to see

They can ensure that precise language is used in describing the terms of the agreement

There is, therefore, less opportunity for misunderstandings and conflicting assumptions

There is less need to rely on memories of what was originally agreed

The individuals involved in the transaction may change over time.

Written contracts

If the contract has been formally written and signed by the parties, there is an assumption that all the terms of the agreement are contained in the written document regardless of what may have been verbally agreed.

Additionally, contracts can be a combination of written and verbal agreements if the written agreement lacks detail and only covers very few terms. Prior to signing, a written contract must:

Be presented to and understood by all parties to be valid; and

Be recognised by all parties as a contract, that is, it must look like a contract and not simply a receipt or docket

Also, once a contract is signed, it is assumed that all the terms have been read and agreed to.

Verbal agreements

Verbal agreements rely on the good faith of all the parties involved and can be difficult to prove as opposed to written contracts. The following are some ways in which verbal agreements can be supported:

The conduct of the other party both before and after the agreement

Specific actions of the other party

Past dealings with the other party

As desirable as a written contract is, in certain situations it may be counter-productive, such as:

If the value of the transaction is not particularly high; and/or

The presentation of a substantial document, possibly with many provisions, may raise more questions and uncertainty in the minds of the parties involved than it resolves, often ending in the transaction not proceeding.

What is in a Contract?

The terms of a contract are all the points of agreement between the parties concerning just how and under what circumstances the agreement is to be fulfilled.[1] With some clear exceptions noted below, contract law does not specify what those terms must be as they are up to the parties to determine.

Good contracts are those where the parties have carefully taken into consideration of all the circumstances and issues that are likely to arise during the lifetime of the agreement and have adequately provided for them. Such contracts will have clearly and fully covered such matters as:

Exactly what is required by each party

Limits to what is required

Payment terms, including credit terms and under what circumstances

Risks - what could go wrong in the relationship and how to provide safeguards against this.

Terms of a contract

Contract law recognises two types of terms: express terms and implied terms.

Express terms are the terms of the contract which are specifically agreed to between the parties and are put in writing in the contract document or agreed to verbally between the parties.

Implied terms are terms that may not actually be put in writing, talked about or even considered, yet are still binding. These terms will actually be regarded as part of the legally binding agreement because the law requires them to be part of the contract, or because common sense, standard industry practice or past dealings help to support each party's reasonable expectation about how the agreement will be carried out and to what standard.

Common sense

In every agreement, there are matters that are so obvious that they go without saying. For example, common sense dictates that goods are appropriately packaged.

Standard commercial practice

Unless the agreement involves an entirely new product or concept, each industry will have well established customary practices, including recognised quality standards and terminology.

Past performance

Past dealings and arrangements often create an expectation that future agreements will be carried out in the same way, unless the parties decide to change the arrangement.

Bringing a Contract to an End

When a contract comes to an end the parties involved have no further commitments to each other, with the exception of matters such as confidentiality and warranty provisions.[1] You should only bring a contract to a premature conclusion after careful consideration and only after all other avenues have been considered.

Contracts can come to an end, or be brought to an end, in a number of ways. This can be either by:

The actions of the parties themselves; or

By some unexpected event; or

The contract is found to be an unfair and unequal agreement

The following is a list of the various ways a contract can end:

Performance

The contract has been completed by all parties according to the agreement.

Agreement to end

The parties have agreed to end the contract. This means that they contractually agree to end the contract and are bound by that decision.

Illegality

This occurs when the carrying out of the contract has become illegal.

Frustration

This is when the intention to complete an agreement has been frustrated by events beyond all parties' control. A contract can only be ended for frustration when it is impossible and unfair to demand completion of the contract, as distinct from it being inconvenient, difficult or expensive.In New South Wales, the Frustrated Contracts Act provides a formula for sorting out payments and obligations after a ‘frustrating' occurrence.

Breach of contract

This is when the refusal or inability to complete a fundamental term (condition) of the contract is a breach of contract and therefore allows for the ending of a contract.[4]However, this could potentially lead to a claim for damages if there have been any losses or expenses as a result of the breach.

Mistake

A contract may be ended if the agreement is based on a fundamental mistake or mistaken belief about property. For example, if the parties discover that the property no longer exists.

Unfair and unequal agreements

A contract may also come to an end where the process of making the agreement can be shown to be unfair and improper, or if it results in gross inequality.

Unconscionable agreements

Unconscionable behaviour in regards to contracts includes unjust, unfair or unscrupulous conduct which is considered contrary to community standards.^[5] In business-to-business contracts of less than $3 million, a small business (not a publicly listed company) may allege unconscionable conduct where a stronger party has exploited its bargaining power to impose contractual terms or engage in conduct that would be unreasonable in the context of a particular commercial relationship.^[6]

Unconscionable contracts can also be brought to an end under the Trade Practices Act if there has been unacceptable behaviour by a company. Additionally, unjust contracts, both by companies and persons, may be enforceable through the Fair Trading Acts of each State.

Pressured agreements

A contract may also end if a person has only entered into an agreement because of threats, fear or actual force (duress).

Children's agreements

A person under the age of 18 is considered a child and therefore cannot be held liable to pay for non-essential items they may have ordered. A contract for a non-essential good can be abandoned by a child and it comes to an end

Leases

The Retail Leases Act 1994 applies to "retail shop leases". This term is defined by the Act to include most of the businesses that are generally considered to be retail businesses. There are some exclusions, most notably shops with an area of 1,000 square metres or more. The Act also does not apply to leases for less than six months or more than 25 years.

A lease is a special type of contract between the lessor (the owner) and the lessee to use the property of the owner. A lease can relate to land, or to personal property such as motor vehicles, photocopiers and telephone systems. Where the lease relates to land the owner is called the "landlord" and the lessee is called the "tenant".

Under the Act the term of the lease should be for a minimum of five years (including any additional term under right to renew). If it is to be for a shorter period, the tenant must see their solicitor or conveyancer to get a

section 16 certificate. The Act also regulates how the rent can change and the outgoings that the landlord can recover. The landlord cannot recover outgoings unless they are specified in the lease. The way they are to be recovered and how they are to be apportioned are also specified.

The terms of the lease are generally negotiated between the landlord and the lessee, or in some instances the solicitors of the two parties. Some of the main issues that need to be addressed in the lease are the term of the lease, the amount and frequency of the rent, details of the tenant's responsibility for the property outgoings, permitted uses of the property, the option if applicable and the bond or bank guarantee if applicable. It is advisable to consult with a solicitor to assist you in negotiating the terms of your lease. If you need help in finding a solicitor you can get assistance from the Law Society.

In NSW the lessee pays for his own legal costs. The lessor can no longer pass on their costs for entering the lease.

If the lease is for retail premises then the lessor needs to make sure the lease complies with the guidelines set out in the Retail Leases Act. For more information about entering a retail shop lease, please visit the Retail Tenancy website and be sure to read the Retail Tenant's Guide, found under "online forms".

Obligations of the Lessee

Most leases hold the lessee responsible for keeping the premises, fixtures and fittings in good repair. Many leases provide for payment of all or a portion of costs of rates, insurance, maintenance and so on. Make sure these are clearly stated and obtain an estimate of your share, as they are additional to your base rent. If you vacate premises before the lease expires you may still be liable for payment of rent and ongoing costs if a new tenant cannot be found. The lessee should make the same inquiries he would make if he were purchasing the property.

Registration of the Lease

In NSW if the lease period exceeds three years, including any options, a memorandum of the lease should be prepared and registered with the Land Titles Office.

What Information do I Need Before Signing the Lease?

The lessor must provide the lessee with a signed copy of the lease. If the lease is for a retail shop, the lessor is also required to provide a Disclosure Statement to the lessee at least seven days before the lease is entered into. The statement should be read carefully as it contains important information such as the location and area of the premises, the lease term, outgoings and the permitted use of the premises - be sure to read the appendix. Both parties should make sure that they speak to their solicitor, accountant, the local council (to be sure there is approval for the use) or business adviser before they sign the lease. It is particularly important to get expert advice on the GST implications of leases signed after December, 1998.

Obligations of Warranties and Guarantees

Where you operate a business other than as a sole trader or partnership, you may at some stage be asked to enter into a personal guarantee. This will be especially so where you operate you business under the umbrella of a company. A company is a separate legal entity and the directors of a company have only a very limited liability for the debts or other obligations of a company. A personal guarantee is a way of making the directors personally liable for the obligations of the company or other legal business. It is advisable to get legal advice before entering into a personal guarantee[

There are four types of Warranties:

Voluntary Warranties - these are given by manufacturers, resellers or service providers who choose to stand behind their goods or services. If a manufacturer, retailer or service provider chooses to give a voluntary warranty or guarantee, then the law requires that person or business honour it.

Extended Warranties - these usually give a purchaser similar benefits to a manufacturers warranty, but over a longer period. These warranties may apply only after the manufacturer's express warranty has run out.

Specified Warranties - these are imposed by State/Territory laws for particular products, such as used cars.

Implied Warranties - these are imposed by the Trade Practices Act and some State fair trading laws. With some exceptions relating to purchases by businesses, they cannot be excluded or modified by manufacturers, resellers or service providers, and importantly they apply in addition to any voluntary or extended warranty.

The Trade Practices Act provides more information on warranties.

Personal Guarantee

Debt Recovery

Relevant Consumer Protection Laws

This chapter will assist you in understanding how to avoid debts through sound credit management strategies and the processes involved in debt recovery. Information on relevant consumer protections laws and your rights and responsibilities as a debt collector will also be provided.

Credit Management Strategies

Pursuing a Debt

Letter of Demand

Legal Proceedings

Credit Management Strategies

A sensible business practice in providing credit is to undertake appropriate measures to prevent the incidence of bad debts. These measures do not need to be complicated or overwhelming.

The following simple preventative measures will be a good start:

Conduct a credit check on new clients - this may include each client completing an application for credit. A credit check may include business and personal details, credit references/guarantors or a commercial credit check.

Ensure that your credit policy and conditions are clearly explained to your clients.

Ensure all agreements, including the conditions of credit, are made in writing and signed.

If practical, collect a deposit or pre-payment before making a supply. Alternatively you may collect progress payments to reduce the risk of bad debts.

Maintain your debtors' account and make regular credit reports to highlight any due or overdue debts.

Implement a structured practice for following up overdue debts. In the first instance, this may involve making a phone call, visiting your clients or sending a polite reminder letter.

Continuously evaluate the credit rating of your clients.

Remember: you are not obliged to provide credit to risky clients.

If you still incur bad debts after having implemented credit management strategies and you wish to recover these debts, you may do so through the three following methods: Consultation, Letter of Demand or Legal Proceedings. It is advisable that you select the appropriate method(s) for recovering your bad debts.

Pursuing a Debt

You should be aware that there are Commonwealth consumer protection laws in place that dictates what is classified as unacceptable behaviour by debt collectors. This will be further discussed in "Relevant consumer protection laws".

When a debt arises, there are some things you can do prior to seeking legal action. Often, the most efficient method of recovering debts is to contact the person who owes you the money and attempt to find a resolution over the payment of debt. The customer may simply be having some financial issues due to unforeseen circumstance such as loss of job or being seriously ill, thus making them unable to work.

For further information, visit NSW Small Business.

Letter of Demand

If you are unsuccessful in recovering the debt by consultation you may wish to issue a letter of demand to the person who owes you the money (including a company) requesting that they pay you the outstanding amount by a certain date. Either you or your solicitor can draw up a letter of demand.

The letter should state details of the debt and also warn the person that legal action will be commenced if they do not pay by the prescribed date. Before issuing a letter of demand it is important that you evaluate the consequences of taking legal action. If you prefer not to send a letter of demand a less formal letter requesting payment may be more appropriate.

The letter of demand may be later produced as evidence that you tried to recover the debt if legal action is taken.

In the case where you are trying to recover a debt from a company you may also issue a statutory demand if you receive no response from your letter of demand. A statutory demand is a formal version of a letter of demand set out similar to a Court document. A statutory demand indicates that legal action is imminent if the debt is not paid within 21 days. Either you or your solicitor can draw up a statutory demand.

At this point in time if the debtor does not respond to your written request/demand you may consider taking legal action.

Relevant Consumer Protection Laws

However, as a general guide , a debt collector SHOULD NOT:[1]

In Australia, there are laws in place to protect consumers in relation to collection, namely, part IVA and V of the Trade Practices Act 1974and part 2, division 2 of the Australian Securities and Investments Commission Act 2001. If you choose to pursue legally owed debts, you must be careful at all times not to infringe on your debtor's legal rights.

Use physical force

Use undue harassment or coercion

Communicate with the debtor at any unusual time or place without their consent

Contact the debtor at their workplace unless there is approval to do so, there are no alternative means of contact, or the debtor is the proprietor or director of a business to which the debt relates

Stay near the debtor's location for an extended length of time for the purpose of intimidation, embarrassment or to create the impression of surveillance

Make contact with the debtor more than is reasonable according to the circumstances

Engage in misleading or deceptive conduct, such as false statements about the consequences of non-payment

In addition to this, a debt collector SHOULD:

Communicate with the debtor after 7:30am or before 9pm

Be discreet if contacting the debtor at work

Consider a personal visit to the debtor if initial communication such as post and phone calls have not succeeded, without making more contact than necessary or remaining at the debtor's location for an extended period of time

Alert staff and agents about their rights and responsibilities in collecting debts.

For detailed information regarding lawful debt collection practices, visit the Australian Consumer and Competition Commission (ACCC) website.

Legal Proceedings