In this article, we explore the complexities around determining your financial reporting obligations for your proprietary company and what you need to consider in making that determination.
What is the risk?
Determining when your proprietary company needs to lodge financial statements with ASIC can be complex. There are multiple pieces of legislation and ASIC instruments that may need to be considered before you can conclude that you have no reporting obligations. If you have obligations to lodge financial statements with ASIC, these financial statements will have to be prepared in accordance with Australian Accounting Standards and in most instances will also be required to be audited.
Failure to prepare and lodge appropriate financial statements can have significant consequences including fines and convictions. ASIC recently announced penalties it had obtained from a range of companies failing to lodge financial statements (ASIC 23-246MR). If you are considered a significant global entity (SGE), the Australian Taxation Office may also take action against you for failure to lodge general purpose financial statements.
How can you identify and assess the risk?
If you are operating a proprietary company incorporated in Australia, it is essential that you do a careful analysis of whether you need to prepare financial statements and continue to re-assess this as your circumstances change.
The first determining factor to consider will be the size of the proprietary company. This size should be determined as if the rules of consolidation under Australian Accounting Standards are applied, taking into account the relevant information from controlled entities as well. A proprietary company is considered to be large if any two of the following three conditions are met:
- Consolidated revenue for the year ≥ $50m.
- Consolidated gross assets at year-end ≥ $25m.
- Consolidated number of employees at year-end ≥ 100.
If you satisfy the large proprietary company test, the default position will be that you need to lodge audited financial statements with ASIC. There may be limited circumstances where financial statements do not need to be prepared such as where a deed of cross guarantee is in place and the company complies with the requirements of ASIC Corporations (Wholly-owned companies) Instrument 2016/785.
If you fail the large proprietary company test, and are considered to be a small proprietary company, there are various other reasons that you could be required to prepare and/or lodge financial statements including:
- Controlled by a foreign company and not consolidated in a set of financial statements already lodged with ASIC.
- Have one or more crowd sourced funding shareholders.
- Hold an AFSL.
- Part of a significant global entity.
- Are required to prepare financial statements in accordance with Australian Accounting Statements under the constitution or any other agreements such as shareholder agreements or loan agreements.
There are nuances and exceptions to some of these requirements housed in various legislation and ASIC instruments that would need to be considered in detail before you could conclude that you do not have financial reporting obligations with ASIC.
As the requirement to lodge financial statements depends on your specific facts and circumstances, this is likely to change over time as your company, or if you are part of an international group – that group, grows and changes. It is important that you regularly reassess to ensure that you haven’t now triggered financial reporting obligations that you previously weren’t aware of.
How can a Moore Australia Advisor can help?
We have expert teams that can help you work through the full assessment of whether your proprietary company needs to lodge financial statements with ASIC, from assisting in performing the small/ large proprietary company test, analysing the application of the legislative requirements through to preparing the financial statements if required. Contact your local Moore Australia Advisor to find out more.