If you operate your business through a proprietary company that is controlled by a foreign company, it is important to consider whether or not the company is a small proprietary company, and if so, is your company eligible for relief from the requirement to have its financial reports audited in accordance with ASIC Class Order 98/1417 (Class Order).
WHAT IS A SMALL PROPRIETARY COMPANY?
A proprietary company is defined as small if it satisfies two of the following criteria:
- the consolidated revenue for the financial year of the company and any entities it controls is less than $25 million;
- the value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is $12.5 million or less; and
- the company and any entities it controls have less than 50 employees at the end of the financial year.
WHAT IS A FOREIGN COMPANY?
A foreign company is a company that is incorporated in a jurisdiction other than Australia.
WHEN IS A SMALL PROPRIETARY COMPANY CONTROLLED BY A FOREIGN COMPANY?
For the purpose of the Class Order, the concept of ‘control ‘ is as defined in accounting standard AASB 127 – Consolidated and Separate Financial Statements.
A foreign company will have ‘control’ of a small proprietary company if it exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
WHAT RELIEF IS AVAILABLE?
Under the Class Order, ASIC has the power to relieve eligible companies from the requirement to:
- appoint an auditor;
- have the company’s financial report audited;
- lodge an auditor’s report with ASIC;
- provide an auditor’s report to shareholders; and
- provide a statement by the auditor in relation to any concise financial reporting.
WHEN IS RELIEF AVAILABLE AND WHAT WILL ASIC LOOK AT?
ASIC has the power to do the above where it is satisfied that compliance would:
- be misleading;
- be inappropriate considering the circumstances of the company; or
- impose an unreasonable burden on the company, its officers or the auditor.
Factors which will be considered by ASIC include:
- the expected costs and benefits of complying with the audit requirements;
- any particular circumstance that would make effective compliance difficult;
- any unusual aspects of the company’s operations during the relevant financial year that would make compliance unreasonable; and
- any other relevant matters.
WHAT DOES ASIC WANT TO SEE BEFORE IT GIVES RELIEF?
ASIC will only grant relief if it can be shown that:
- the directors and shareholders of the unanimously agree that an audit is not required (provided the resolutions are made within the period which commences three months before the start of the financial year and ending four months after the end of the financial year);
- ASIC is satisfied that the company applying for audit relief is well managed and in a sound financial condition, in respect most directly relevant to the interests of creditors;
- the company’s year end financial report is compiled by a prescribed accountant; and
- the company lodges its financial report within the deadlines in the Corporations Act.
WHAT IS THE BENEFIT OF THE RELIEF?
The Class Order is designed to provide relief to small proprietary companies that are controlled by a foreign company from having their financial audited which can achieve significant costs savings for the company.
WHAT HAPPENS IF A STEP IS MISSED?
In ASIC’s view, a failure to satisfy any of the conditions of the relief for a financial year means that the company cannot take advantage of the relief for that financial year.
ASIC has advised that it cannot grant extension of time to lodge the ASIC Form 382 or to pass the annual resolution of directors and shareholders.
If documents are not lodged on time, the company cannot rely on the Class Order relief for the relevant year. As a result, the company will have a continuing obligation under the Corporations Act to prepare and lodge, and therefore should prepare and lodge, an audited financial report fort eh financial year in questions.
Further, the company will not be able to apply for relief under the Class Order for a subsequent financial year.
CHECKLIST FOR APPLYING FOR RELIEF
In order to rely upon the Class Order, the following will need to be satisfied:
- Have the resolutions of directors and shareholder been passed unanimously?
- Has the ASIC Form 382 notice been lodged with ASIC during the period commencing three months before the start of the financial year and ending four months after the end of the financial year?