Business Focus
Newsletter Issue 1, 2003
Coaching the best results
from business people
By Anne Gorman
Business coaches, like personal trainers, aim to help
executives achieve peak performance.
Leadership is a lonely place to be these
days and there are significant new and
constantly changing challenges facing
everyone in senior positions in business.
These challenges include the fast pace of
change, competition in the global market
place, and the huge gap between what
business leaders are being asked to do
and what they have been trained to do.
Basically they are supposed to know
everything! The leader can’t keep taking
problems home to the family and often
can’t talk to the board or the people who
report directly to them.
The essence of business coaching is to
help leaders and business owners in the
business world, whether they work in large
corporations or in small to medium-sized
businesses, get unstuck from their
dilemmas, within the privacy of a trusted,
confidential, one-on-one coaching
relationship.
One of my clients is the CEO of a small
cosmetic company specialising in natural
products. He was desperate to talk to
someone who might bring a new
perspective to his problems and he felt
that he could not speak to his board or his
senior staff.
The company was on a slippery slide. It
was losing market share, so profits were
falling, the product range and presentation
was looking tired and the sales and
distribution team were increasingly
dispirited. He himself was losing energy
around the business, a fatal condition
for a CEO.
But this was not the real problem. After all,
he was a competent businessman and had
all the expertise he needed to take action
on these fronts. The real problem was that
he had not been able to convince his
board to invest in change. In his view they
could only see, as shareholders, that this
would deplete their dividends. They were
talking of selling the business.
Our CEO embarked on eight coaching
sessions over four months and some
phone calls in between. These cost the
company around $6000. We developed a
plan and a way to approach the board that
left them with no option but to invest in the
future health of the business.
The medium-term benefit to the company
was an increase in ROI of over 150% and
the longer-term benefits look even better.
Our CEO’s self-confidence has grown,
he’s sleeping better and his energy
has returned.
Anne Gorman is the co-founder and
business director of The Australian
Institute of Executive Coaching.
Tel 1800 554 040, email
agorman@bigpond.net.au
Contents
1 Coaching the best results from
business people
3 Understanding your customers
and their needs
4 Managing conflict within family
owned businesses
6 Notice board
7 Succeeding well beyond the
comfort zone
8 Tax relief available for de-mergers
10 Protecting yourself from
passing off actions
11 Maintaining your relationship
while still getting paid
13 Avoiding some of the pitfalls in
negotiating contracts
14 Need for caution when allocating
franked dividends
The information, opinions and advice in this newsletter are of a general nature only and are not intended
to be complete or definitive. You should not rely on the contents of this newsletter but should make your
own enquiries before taking any action in relation to the matters set out in this newsletter. National
Australia Bank Limited ABN 12 004 044 937, its related bodies corporate and all of the authors do not
accept any and hereby exclude all liability be it contractual, tortious or otherwise (unless such liability
cannot be excluded) for the contents of this newsletter or for any consequences arising from its use or
any reliance placed upon it.
He has also learned some new skills,
new leadership behaviours and some
things about himself that will not get in
the way of his progress again.
As his coach, I did not tell him what to
do. What he needed and got was
someone who would draw alternative
strategies out of him and remove the
blockages.
Working together
The coach is the silent partner with
one and only one agenda; the success
of their subject. As in competitive
sport, coaching involves a
collaborative effort between a coach
and a player who is willing and able to
lift performance.
For this process to be a success five
things must come into play. The client
must have: a reason to change, a
desire to change, a commitment to
change, a way to change, and support
to change.
One of the best news coaching stories
in the larger corporate world is the
public story told by Lion Nathan’s
CEO, Gordon Cairns, who attributes
much of the company’s recent success
to his business coach.
One of the key factors in the coaching
process, for Cairns, was a shock
experience in the form of a feedback
report of what his staff thought of his
leadership behaviour. The report
revealed that what he thought of his
leadership and what others thought of
it were two very different things.
Supported by his coach he set out to
make constructive changes such as
listening more, and confronting less.
As a result, he has achieved a
dramatic cultural shift in company
culture. Lion Nathan, from being
near the bottom of the list, is now the
4th best organisation to work for in
Australia, as judged by the 2001
Australian Best Employers to Work for
Study. In that study it has been also
rated more than 40 per cent ahead in
average profit growth compared with
that of all other survey participants.
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Evaluating coaches
A coach can cost anything from $3000
for 6-8 fortnightly sessions to $15,000
for a year’s contract. Some top-end
coaches charge more than that and,
because the results are worth it, clients
are willing to pay.
One of the things standing in the way
of coaching is the idea that coaching
is for wimps! One of the burdens many
Australian men have had to carry is
that to ask for help in any form, is a
slur on their manhood.
That is why many men find it difficult
to approach a counsellor when
depressed or running into family
problems. But coaching is not
counselling and while no one can deny
the importance of counselling when
these problems arise, coaching is no
more like counselling than a sports
physio is a football coach.
Just as in the sporting arena, not all
coaches are created equal. For a start,
coaches need to be familiar with the
corporate scene and comfortable
operating within it. They also need
maturity and presence to hold their
own among personalities who
may bring strong beliefs,
preconceptions and resistances to
the coaching process.
So if you are thinking of using a coach
make sure that the coach has received
training from a reputable organisation;
they are experienced and mature
people; that they have a methodology
based on sound theory and practice
and they present you with a coaching
agreement that includes a
confidentiality agreement, milestones,
progress reviews; and the obligations
of both parties.
It is important that there is a good fit in
terms of the chemistry between you,
and that you trust the experience of
the coach and have checked out their
references (coaches are only as good
as the success of their last client).
Coaching sessions in the beginning
may last for two hours (no more) but
after that should never exceed 1.5
hours or even less. If the coach is
drawing the process out unduly or if
you are having to tell them how to
coach you, then you may want to
review what is really happening.
Conclusion
I have seen some remarkable changes
occur for people as they move through
the challenge of coaching. Men and
women open up and start enjoying
their jobs, they learn the language of
constructive feedback, of positively
confronting people when they need to,
of ditching the fear factor so they can
make a real contribution to the
organisation, instead of wasting time
with political games.
• The Australian Institute of
Executive Coaching provides
training for people who wish to
learn the skills of business or
executive coaching. These
courses are designed and run
by John Matthews who is
regarded as one of Australia’s
most accomplished master
coaches. The Institute has
trained over 200 people in
Executive/Business Coaching.
Understanding your customers
and their needs
By Andrew Griffiths
Good customer service isn’t rocket science, but many
businesses fail to meet the expectations of their customers.
As customers, we all have certain
expectations before we use a
business. If you are going to a pizza
bar, you expect that the pizza will be
served with the toppings you specify,
that it will probably take about
15 minutes to prepare, and that it will
be packed in a box that will keep it
warm until you get home. You will be
charged a standard and acceptable
price and, in all likelihood, the pizza
will taste reasonable. Subconsciously,
these are all of the expectations that
you have regarding this purchase. If
the pizza bar meets them all, you
will walk away happy and will
probably return.
If you have been going to the same
pizza bar for some time you may
have developed a rapport with the
employees, so if they mess up one or
two of your expectations, you may
forgive them. Perhaps you had to wait
longer than usual, or they increased
their prices and you were unaware of
the change.
Whatever the case, the degree of
confidence that you subconsciously
have in the business will determine
how much you will tolerate.
If you are using the business for the
first time, however, and they fail to
meet even one of your expectations, it
is very likely that you won’t go back
again (unless it is a completely
convenience-based decision, such as
the pizza bar is across the road from
your home).
On the other hand, if the business
exceeds your expectations – perhaps
they gave you free garlic bread – and
they delivered on every other
expectation, you will go away raving
about the business to everyone
you know.
The two real keys here are identifying
what your customers expect, and then
meeting and, where possible,
exceeding these expectations.
Identifying your customers’
expectations requires an open mind
and communication with other
people – your staff, your customers
and your friends.
What do your customers expect when
they come to your business? Ask a lot
of questions and put yourself in your
customers’ shoes. Look at your
business from a customer’s point of
view and try to identify what they
expect from you. Think about yourself
when you make a purchase. Stop for a
few seconds and go through the
purchase process and the
expectations that you have before
you enter a business, and then try
to determine if those expectations
were met.
Author, Andrew Griffiths
I know that my wife, my friends and
my business associates aren’t stupid
either. In fact, it’s highly unlikely that
there are a lot of stupid customers out
there, yet many companies still treat us
as if we are stupid!
Treating your
customers with
respect
Treat your customers with the respect
that they deserve and your business
will benefit enormously. Don’t get
caught in the trap of looking at
customers simply as numbers on a
spreadsheet. This is an area where I
feel many larger organisations have
started to flounder. The unique needs
of every customer are being lost sight
of as businesses focus on their
balance sheets and profit and loss
statements. Customers know this and
they have had enough. A flashy
advertisement and a few false
promises just don’t cut it any more.
Customers should always be treated
with the utmost respect. Unfortunately,
poor customer service generally stems
from a real lack of respect for
customers. As a consumer, I know that
I’m not stupid.
Respect is a powerful word. Respect
your customers’ intelligence, their time
and their decision to make a purchase
from your business when they could
have purchased the same item from
your competitor up the road.
With regards to your own business,
once you have a very clear
understanding of what your customers
expect from you, you can begin
work on ensuring that you meet
these expectations and, hopefully,
exceed them.
3
Outstanding
customer service
This is simple: if you offer really good
customer service, your customers will
keep coming back to your business.
They will tell their friends, who will in
turn visit your business, and they will
tell their friends. This cycle of
recommendations results in a business
attracting more and more customers
simply by word of mouth. Having
people recommend your business isn’t
just a very good feeling; it’s very
profitable too.
Most small business owners and
operators take a lot of pride in what
they do. There is no better feeling than
having a customer walk up to you and
compliment you on the great business
that you are running. For me, this is
the ultimate reward. For that reason,
I always take the time to offer
congratulations to any business that
I feel is offering outstanding service.
When a business offers poor service,
on the other hand, I not only don’t go
back, I advise everyone I know not to
go there.
So, the benefits to you of offering
good customer service are that your
business will grow by word-of-mouth
(free) advertising, you will make more
money, and you and your staff will all
walk a little taller because you have
positive affirmation that you are good
at what you do. Sounds pretty good to
me.
• This article is an extract from
Andrew Griffiths’ new book,
101 Ways to Really Satisfy Your
Customers, published by Allen and
Unwin RRP $24.95.
Managing conflict within
family owned businesses
By Michael Kulic
Emotions bind together family businesses but if not managed
carefully, they can also sow the seeds for destruction.
In many ways, the family business is
like any other business. It produces
products or delivers services. It has
employees. It generates revenue. It
focuses on getting and keeping
customers and making profits. It is
comprised of individuals with differing
objectives, needs, levels of ability
and desires.
But a critical and fundamental
difference between family and nonfamily businesses is that the former is
bound together by emotional ties that
are both positive and negative. It is
orientated inwards toward the security
and the nurturing of its members.
A family places high value on loyalty
and protection. In addition, it operates
to minimise change and to keep the
equilibrium of the family intact.
Problems occur when the system
overlap of the family values and
priorities are so great as to overwhelm
the business values and priorities – or
the reverse.
4
Perhaps the most common example of
family values prevailing is when
children with different abilities work in
the business, and the founder decrees
that, regardless of their contribution to
the business, they are loved equally
and thus will be paid equally and own
equal amounts of shares.
The most successful families are those
who find an appropriate balance
between family and business values,
and have articulated those values. For
most, this means running the business
according to sound business
principles, and providing space for
a normal family life away from the
business. There is some overlap, but
it is under control and within
reasonable limits.
Handling conflict
All families have conflicts; the
difference between successful families
and the unsuccessful ones is that the
successful families learn how to deal
with them. For each family member
has their own unique values and
ethical standards, and there are no
common rules that apply to all.
Typical issues that are required to be
addressed include:
•
•
•
•
•
•
who to bring into the business
what to pay them
how to evaluate performance
who to designate as a successor
how to transfer power
whether and how to share ownership
Many people respond to this situation
by trying to separate completely the
family concerns from the business
concerns. This is impossible and
undesirable. Attempts to build an
artificial wall would deny the reality of
family ownership and management.
More importantly, it would deprive the
business of the unique strengths and
contributions that the family can
bring in terms of loyalty, trust, and
willingness to sacrifice and share in a
common enterprise.
Sources of conflict
Conflicts inevitably occur in all family
businesses and several factors
contribute to them. Many of the
difficulties of the family business begin
with a founder who has spent their life
nurturing the success of the family
business operation.
A psychological conflict develops
when one or more family members
become increasingly involved in the
family business. A rivalry may be felt
by the ageing founder, particularly with
sons/daughters who may do a better
job than they have.
Particular issues can include:
• Equitable compensation of family
members. Remuneration of family
members may create personal
jealousies, especially when there
is resentment because one family
member is receiving more
than another.
• Intra-family rivalries. Where more
than one family is involved in the
business the ‘family’ interest may be
different. This may create jealousies
among the family members
especially as regards senior
appointments and positions of
power, which increases through the
generations of the extended family.
• Inter-generational rivalries. Sibling
rivalry is well noted as being a major
cause of conflict in family
businesses. While sibling rivalry is
normal, the need is to ensure that
such rivalry does not become a
destructive force that threatens the
survival of the business.
• Determination of authority. There
is a need for promotions and titles
of authority to be defined on an
objective basis so as to minimise the
impact of family feuding should one
family member surpass another.
• Working vs. non-working family
members. An added complexity is
the need to address the family
members not engaged in the
business every day. These inactive
family members may have both the
rights, and generally the demands,
of ensuring their share of the family
business is adequately dealt with.
• Separation of business vs. family
issues. It is extremely difficult to
separate business and family issues.
The dilemma is that whatever
happens at home is usually carried
over into the family business.
• Filling the founder’s shoes. The
question of succession becomes a
daunting task for many siblings
working in the family business. More
often than not the question of
succession has not been identified
or dealt with, and if more than one
family member works in the family
business this too can create conflict,
especially when no successor is
specifically identified.
Resolving these
problems
Research suggests that family firms
that survive over time develop
structures that systematically facilitate
communication, conflict resolution,
accountability and planning. Family
meetings and a formal family strategic
plan serve as those structures.
Effective communication will do much
to reduce conflicts confronting
business families. While conflict is
inherent in the family business scene,
‘healthy’ families do not avoid or
suppress conflicts, they simply
manage them more effectively. This is
a task made more difficult by the
family/business overlap.
Families that manage conflict
effectively recognise that when
differences go unresolved conflict
normally gets worse. A small
disagreement over an issue can create
disproportionate animosity if the issue
remains unresolved long enough. Such
conflicts in a business family are often
dangerously suppressed.
A common characteristic of successful
families is that they communicate well
and their values are clearly articulated
– everybody knows the ground rules
and is willing to abide by them. With
successful families they approach the
business as a partnership, with family
members willing to subordinate their
Michael Kulic is a partner with accountants, Howarth,
Tel (02) 9372 0777.
own personal desires to the best
interests of the family and the
business.
A powerful vehicle for building
communication, healing conflict and
avoiding feuds in business families is
at a ‘retreat’ where family members
work together.
Clearly, time should be taken and the
effort made to find a relaxed setting
away from the daily grind where each
family member can have the space to
reflect, take a good long look at the
business, where it is going and what
they think the future holds. Then, in an
organised fashion they need to come
together to share this with the rest of
the family.
Especially in the beginning, family
meetings need to be conducted
regularly, at least two times a year and
up to four times a year. It is only this
way that open dialogue can be
created, relationships enhanced and
conflicts confronted.
The chances of a successful retreat
are greatly enhanced by the
engagement of a facilitator to run
the meeting.
5
Notice board
Super review by ATO
Review of innovation
••••••••••••••••••••••••••••••••••••••••••
••••••••••••••••••••••••••••••••••••••
The Australian Taxation Office is to undertake its first
major survey of DIY superannuation funds to
determine if there are any compliance issues which
need to be addressed.
A number of DIY trustees will be interviewed as part
of a broader national review of the performance of
DIY funds for the 2000-01 year.
The field and desk audits will be conducted early in
2003 and the report on compliance is expected to be
finalised by midway through the year.
Specific areas of review will include super surcharge,
deduction claims, and reasonable benefit limits
administration and reporting.
R&D Start program
reactivated
•••••••••••••••••••••••••••
The R&D Start program has been reactivated with a
call for applications from AusIndustry.
New applications for the R&D Start program were
suspended in April 2002 and companies which had
made applications that were not processed will need
to apply again.
$170 million will be available for grants and loans
under the program during 2003-04. The first round of
grants is expected to be announced by mid-February,
and further decisions will be announced every six to
eight weeks.
AusIndustry has amended the general conditions of
contract for the program to include a schedule of
annual payments, with the aim of avoiding a repetition
of the over-expenditure which led to the program
being frozen over the past year.
For further information contact www.ausindustry.
gov.au or the AusIndustry Hotline on 13 28 46.
New innovation board
••••••••••••••••••••••••••••••••••••••••••••
The Victorian Government has established an
Innovation Economy Advisory Board which will
advise it on strategies and directions to encourage
innovation throughout the Victorian economy. It is
being chaired by the Treasurer and Minister for
Innovation, John Brumby.
6
The Federal Government has initiated a major
study to map Australia’s science and innovation
activities across the public and private sectors.
The Federal Minister for Education, Science and
Training, Dr Brendan Nelson, said the objective
of the exercise was to develop a comprehensive
overview of the Australian science, technology
and innovation system as a whole, including
public and private sector players, roles, linkages,
resources and priorities.
A taskforce has been established within the
Department of Education, Science and Training
to coordinate the work and will report by the
end of 2003.
Progress on BITS program
••••••••••••••••••••••••••••••••••••••••••••••••
A report of the Commonwealth’s Building on IT
Strengths (BITS) program shows that after two
years, the 10 incubators supported by the
program have assisted 158 early-stage IT and
communications companies.
These companies were selected by the
incubators from a total of 2474 applications over
the two-year period.
Of the 158 successful applicants, 31 have
graduated from the program and 21 have been
withdrawn from the program due to failure to
meet agreed milestones.
The BITS Incubator Program aims to increase
the success rates of new businesses in the
information, computing and teIecommunications
industries.
The BITS incubators provide a structured
business growth program including access to
early-stage finance, management advice, and
assistance with channels to market. Incubators
can provide up to $450,000 in assistance to
individual start-up companies through services,
seed funding or a combination of both. The
report can be accessed at www.dcita.gov.au.
Succeeding well beyond
the comfort zone
By Peter Stirling
Being one of the first in its field to utilise digital technology has catapulted a
Sydney company to international success.
The world’s first digital video alarm
system was not, as might be
expected, developed by a multinational information technology and
communications company.
It was the brainchild of Australian
inventor, Bill Nolan, whose
determination and entrepreneurialism
has built a fast-growing company,
Zone Products, at the leading edge
of the world security and
surveillance markets.
It was watching the direct telecast of
the first manned moon landing back in
1969 that set Bill, then a young
scientist with CSIRO Animal
Physiology, to thinking about the
remarkable possibilities of sending
video images over vast distances. Bill’s
career path took a series of surprising
twists and turns before he finally
followed up his interest in video
communications.
A factory-sponsored rally driver, Bill left
CSIRO to join the car industry, initially
testing cars in the toughest Australian
conditions for Volvo, and then working
his way to senior management levels
with Leyland and Toyota.
However, he is an incurable inventor
by nature, and among other things,
developed and patented a heat-pad
technology for the treatment of arthritis
and muscle pain which he sold to a
major US drug company. Another
collaborative invention is the world’s
smallest drilling rig which can be
transported on the back of a truck
but can drill as deep as most of the
big rigs.
But the idea of video surveillance kept
resurfacing. In the mid-80s when PCs
were still in their infancy and the
internet was beyond most people’s
imagination, Bill realised that it would
be possible to transmit video images
down telephone lines.
“I worked out that to do this we would
need to go digital, but at that time the
hardware and compression capability
were rudimentary, so you got about
one frame through every 15 seconds.
I formed a company with family funds
and some investors, and after looking
at about 140 possible applications of
this idea, the one that I picked as the
most promising was security. Clearly,
if you can be remotely alerted by
telephone with a video image of a
security breach within 15 seconds,
that is a reliable alarm system,”
Bill said.
By 1990, the company had secured
patents in 33 countries and since then
has maintained its position at the
forefront of digital video security,
employing 18 staff in Australia and the
United States to design, develop and
manufacture digital video transmission,
digital CCTV multiplexing and digital
video recording products.
In 1999, Zone won the ‘Most
Innovative Product’ at the Western
Sydney Industry Awards, with its latest
system, the Zone Raptor, and in 2001
Mr Nolan was named Entrepreneur of
the Year. Zone provided non-stop
digital video recording of security
cameras at the Sydney Olympic
Games and in 2000 was awarded ‘the
Security Industry’s Finest’ by the US
Security Industry Association.
Over the next 10 years, Bill continued
to develop the technology and
slowly build a business that had to
overcome the limitations in people’s
understanding of the potential of
digital communications.
7
In 2002, Zone went global and was
re-established as a majority Australianowned US unlisted public company
called Zone Products Inc, with its head
office in San Diego and a sales office
in Washington, DC. Subsidiary
companies were set up in Australia
and Singapore, and the Centre for
Research and Development remains at
Castle Hill in Sydney.
Since Zone’s first remote video
transmission system was released in
1990, systems have been sold in
Australia, New Zealand, the USA,
Singapore, Malaysia, South Africa and
Saudi Arabia. As well as their security
applications, Zone’s integrated digital
video systems are used for traffic flow
monitoring and environmental control.
IBM has validated Zone Products’
software as IBM eServer proven,
allowing IBM resellers worldwide to
sell Zone’s products, and Zone’s
Raptor is the only digital video security
system approved by IBM for use in
their products worldwide.
its security technology to the Pentagon
and has designed city-wide video
surveillance systems for application in
the US and other world markets.
In conjunction with a major US
company, it has made the shortlist for
a massive new security contract which
the US military wants to implement.
A new product is a unique 3-D alarm
system which creates a ‘virtual fence’
and can detect intruders at distances
of between a centimetre and five
kilometres. This product has a wide
range of applications from military
installations to museums and private
business premises.
Anti-terrorism is a growth industry, and
Zone Products has achieved a growth
rate of more than 100 per cent for
each of the past three years.
In a major new project, prompted by
the events of September 11, Zone is
now planning to extend its range of
products into biotechnology-based
sensors which could include chemical/
biological warfare sensors as well as
biosensors with medical and
commercial applications. The Zone
R&D department has set up a sensing
division and is currently developing
face recognition systems and
biosensors for civil and military use. It
is also investigating new biosensors
and alarm systems for biological
weapons.
In aiming to list on the US technology
stock market, the NASDAQ, it is
seeking to raise only a small amount of
initial capital, but to also substantially
raise its profile among potential US
consumers and the investment
community.
At the moment the intellectual work on
R&D is being undertaken in Australia
but Bill Nolan says that “the availability
of facilities and defence bio-hubs in
America as well as government and
financial support could cause us to
choose to take this activity offshore.”
• Zone Products Australia can be
contacted on (02) 9894 7025.
In alliance with other major suppliers,
Zone Products has recently delivered
Tax relief available
for de-mergers
By Mark Northeast
New tax provisions to allow businesses to restructure without
incurring a tax penalty may help with success planning.
Since the introduction of capital
gains tax in 1985, businesses have
often been prevented from
restructuring into separate parts
because of the tax cost.
The Government has introduced rules
that provide for “de-merger” tax relief.
These rules improve the flexibility of
such restructuring transactions.
De-merger relief may allow:
• Businesses to be spilt into different
entities without an income tax cost;
8
• The potential for segregation of
property from business – with some
limitations;
• Better access to CGT concessions
following restructure;
• Restructuring for asset protection,
estate planning and succession
planning purposes; and
• the introduction of new equity
participants into part of the business
following restructuring.
Mark Northeast is a partner with Pitcher Partners.
Tel (03) 9289 9999.
Unlike many recent tax changes, the
de-merger tax measures are welcome
as they can allow business groups to
restructure and "spin-off" businesses
at a lower tax cost than was previously
the case.
in the business property for their
retirement.
Figure 1. An example of a simple de-merger
Before De-merger
After De-merger
Shareholder
A
B
50%
50%
Shareholder
A
B
50%
50%
Shareholder
A
B
50%
50%
Company
Company
Company
H
H
S
Head Entity
Head Entity
De-merge Entity
100%
Company
S
De-merge Entity
Note: Under the de-merger rules A & B hold equity interest directly in
Company S in the same proportions as they hold equity proportions in
Company H. Under the de-merger rules there is no immediate tax
liability on the above “spin-out” of Company S.
What is a
de-merger?
A de-merger involves the restructure of
a corporate or trust group. Typically, a
subsidiary entity is “spun-out” from the
group, so that the ultimate owners of
the group acquire direct interests in
the subsidiary entity.
An example of a simple de-merger is
shown in Figure 1 above.
Who can obtain
de-merger relief?
To obtain relief, there must be a
de-merger group that consists of at
least a head entity and one or more
de-merger entities where the group
owns more than 20% of the entity.
A company or trust (other than a
discretionary trust) can be a head
entity of a de-merger group if no other
member of the group owns any
interest in the company or trust. A
de-merger group can consist of
companies or trusts (fixed or unit trust)
but not discretionary trusts.
At least 80% of the de-merger group’s
ownership interests in the de-merged
entity must be disposed of to the
owners of interests in the head entity;
What tax relief is
available?
Tax relief applies to de-mergers that
occur from 1 July 2002.
Rollover relief is available for
de-mergers of shares in companies
or units in unit trusts but not in respect
of the underlying assets in the
company or unit trust.
Where certain conditions are satisfied,
the outcomes, by reference the above
example, are:
a) Company H is not subject to capital
gains tax on the disposal of shares
in Company S
b) A & B being the continuing
shareholders in Company H and the
new shareholders in Company S are
not taxable on the receipt of
Company S shares.
c) The cost base that A & B had in
company H’s shares (before the
de-merger) is spread over the
costs bases of their shares in both
Company H and Company S (post
de-merger), based on the relative
market values of these entities after
the de-merger.
d) Alternatively, if shares held by A & B
in company H were pre-CGT, their
shares (after the de-merger) in
Company S will also be pre-CGT.
Succession planning
The following example outlines how
the de-merger rules might assist
businesses succession plan in a tax
effective manner.
Mum & Dad own all the shares in a
company (H Company), which owns a
business, and the premises on which
the business is operated. They wish to
ultimately hand over the business to
their daughter, but retain their interest
In these circumstances, S Company, a
100% owned subsidiary of H
Company, might be established.
Under existing CGT rollover relief the
business assets in H Company could
be transferred to S Company. The
outcome at that point would be that
the business property would remain in
H Company and the business would
be in S Company.
S Company could then be de-merged
or “spun-out” as shown in the diagram
above so that Mum & Dad own direct
interests in both H Company and S
Company. From there, the required
number of shares in S Company could
be issued or sold to the daughter so
that she obtains an interest in the
business company but not the
business premises.
This procedure might equally be
adopted in introducing new equity
participants into part of a business
only. The relevant part or division of
the business would be first “spun-off”
into a separate entity as shown above.
The de-merger relief rules are a
welcome tax reform outcome in
that they introduce an opportunity
to restructure in the relevant
circumstances where previously the
income tax cost may have prohibited
the restructure.
Business Focus
Business Focus is distributed to
more than 45,000 of the National’s
business customers every quarter. It
aims to alert readers to business
information and trends which will
assist them in managing their
businesses. We encourage feedback
from our readers who are invited to
write to the Editor at the address
below. Articles in Business Focus are
protected by copyright and can be
reproduced only with permission.
The Editor
Business Focus Newsletter
National Australia Bank Limited
Level 15, 500 Bourke Street
Melbourne, Victoria 3000
9
Protecting yourself from
passing off actions
By Jill Newton
Businesses which attempt to hitch themselves to the
coat-tails of other successful companies can find
themselves at the receiving end of legal action.
Any attempt to take advantage of the
reputation of another business can be
challenged in the Federal Court under
section 52 of the Trade Practices Act
1972, in conjunction with a passing
off action.
The essence of an action for passing
off is the protection of goodwill or
reputation attaching to a business or
commercial venture.
Passing off has evolved in Australia to
describe situations involving “the
deceptive or confusing use of names,
descriptive terms or other indicia to
persuade purchasers or customers to
believe that goods or services have an
association, quality or endorsement
which belongs or would belong to
goods or services of, or associated
with, another or others”.
There is no requirement that the
defendant should be carrying on a
business which competes with that of
the plaintiff or which would compete
with any natural extension of the
plaintiff’s business.
Further, there is no requirement that
there be an actual, subjective intention
to mislead.
Consumer Protection
Section 52 of the Trade Practices Act
(TPA) 1974 (and the equivalent
provisions in the Fair Trading Acts of
the States, which prohibit misleading
or deceptive conduct) proscribes a
range of unfair practices detrimental
to the interests of consumers. Section
52 is the broadest section of Part V
of the TPA.
‘Any person’ may seek an injunction
under section 80 of the TPA, allowing
10
possible plaintiffs to include as well as
consumers, rival traders and the
Australian Competition and Consumer
Commission.
To decide whether conduct is
misleading or deceptive involves a
consideration of its effect on the
consumer. A recent case, Sydneywide
Distributors Pty Ltd v Red Bull
Australia Pty Ltd [2002] FCAFC 157
(4 June 2002), concerned an appeal to
the Full Court from a decision of a
primary judge of the Federal Court
that the conduct of Sydneywide
Distributors Pty Ltd (‘Sydneywide’) in
connection with the distribution of
cans (not bottles) of an energy
drink known as ‘LiveWire’ contravened
section 52 of the TPA and
constituted passing off. The appeal
was dismissed.
Red Bull Australia Pty Ltd (‘Red Bull’)
has been importing and supplying in
Australia an energy drink product
under the name Red Bull in 250ml
slimline cans.
Red Bull’s entry into the Australian
market was highly successful due at
least in part to the extent of its
advertising and promotional
campaigns.
Sydneywide became a substantial
distributor of the Red Bull product in
Australia and planned secretly for the
manufacture in New Zealand and
importation into Australia of its own
energy drink under the name ‘LiveWire’
in 250ml cans and 330ml bottles.
Despite the Red Bull and LiveWire
names being displayed prominently on
the cans, the identical shades of blue,
silver and red as well as the diagonal
Jill Newton works for patent attorneys, Watermark,
Tel (03) 9819 1664.
thrust, were found to be striking
features of each ‘get-up’ with the
preferred expert asserting that “the
similarities in colouring and design on
the two cans are such as to cause
confusion”.
In arriving at this conclusion the
preferred expert focused on what was
described as the ‘gestalt’ of the brand,
which notion is “the overall identity of
a brand as it related to consumers”
including “not only the name, colour,
physical properties and packaging but
also associations with the brand and
branding devices used to create
associations, including its advertising
and the ‘channels’ through which
it is sold”.
Given a long line of decisions where a
defendant, while imitating the get-up
of another’s product, has been able to
escape liability by including its own
trade name on the product, this
decision is surprising, particularly as
the LiveWire and Red Bull names were
displayed prominently on the
respective cans.
Any argument, however, that the
nature and cost of a product will
determine whether a label is more
closely examined by a prospective
customer before committing to
purchase would seem at odds with
reality in a case such as this, involving
prominently labelled but low cost
energy drinks.
One important basis for the Court
concluding that Sydneywide’s conduct
was in breach of section 52 of the Act
and constituted passing off, was the
finding that Sydneywide had
deliberately misappropriated aspects
of the Red Bull get-up.
that consumers may be deceived, as
“traders best know their trade”.
The ultimate decision was said to be
based on a consideration of all of the
above matters, namely the Court’s
perceptions (as informed by experts)
of the similarities and differences
between the two get-ups, and the
finding of deliberate copying.
A finding of deliberate copying or an
actual attempt to misappropriate the
reputation or goodwill of a rival,
should, however, serve to prevent a
defendant escaping a section 52 or
passing off action merely by displaying
its own name on the product.
Deliberate copying
Summary
Section 52 of the TPA is designed to
protect consumers. A passing off
action, on the other hand, is designed
to protect a trader’s goodwill.
However, once it was accepted that
the Red Bull get-up as pleaded was
distinctive of the Red Bull product, the
principal issue in the case was
whether Sydneywide’s conduct was
likely to deceive (for the purpose of the
passing off action) or was misleading
or deceptive, or likely to mislead or
deceive (for the purposes of section
52). The primary judge found that both
causes of action were made out and
the Full Court saw no basis for
upsetting these findings.
A long line of Australian cases stand
for the proposition that deliberate
copying by a rival of the get-up of a
competitor is a basis for an inference
Maintaining your relationship
while still getting paid
By Roger Mendelson
Getting paid for an overdue account can generally be successfully accomplished;
the tricky aspect is not alienating a future customer.
Without risk there is no pain, without
risk there is no gain. The paradox for
the small to medium-sized business
lies in the fact that customers are
essential to provide fuel for growth but
simultaneously have the capacity to
starve the hungry beast.
The relationship between a business
and its customers is always a
twin-edged sword.
On the one hand, the business wants
to maintain the relationship, to ensure
further business from the customer
and the potential for referrals.
On the other hand, a business does
not survive on the sweat of its
employees alone – cash is king. There
comes a time when a customer is no
longer a customer but a threat to the
business. There can be no doubt of
the importance of having invoices paid
in a timely manner.
Assessing the
relationship
What is the best way to approach a
customer who is 90 days overdue on
an account payment? How do you
decide whether a customer is no
longer worth having?
The relationship issue becomes much
easier to manage if it is systemised.
As a business grows in size, it is
crucial that systems are put in place to
manage debtor relationships. Rather
than relying on ‘gut feel’ over whether
a particular customer will pay or is
valuable to the business, systems
should be set up to manage
the process.
If a business relies on the gut feel
approach and the personal knowledge
of staff members then it is vulnerable.
The first step in establishing a robust
credit management system is the
production of a clearly defined credit
policy. The policy specifies the credit
terms afforded to specific customer
categories and covers every type of
invoice issued by the business.
11
The second step is the production of
credit management procedures. For
most businesses, collection
procedures will include the following:
• completion of a credit application
form prior to the granting of credit
• detailing of credit terms on all
quotes, order forms and invoices
• initial telephone contact after a set
period, to query the unpaid account
• a first written statement, firmly
conveying the message that
payment is now due
• second telephone contact
• a final statement incorporating the
message ‘Final Notice’
• referral to legal counsel or a
collection agency
This process, if followed correctly,
provides a framework for managing
debtor relationships and lessens or
negates the impact of interpersonal
factors in recovering outstanding
invoices.
How to respond
Most of us are not psychologists and
all of us find it hard to express debtor
empathy when our businesses seem to
be slipping from a tenuous grip due to
squeezed cash flow. However,
consultation is essential if the money is
to be retrieved.
Taking a hard line approach when the
source of the problem is your invoicing
system or quality of product is not
going to win customers – establish the
reason for non-payment. If there is
a genuine problem relating to a
product or service, it will need to be
remedied. If not, then the recovery
process continues.
What is the response if a debtor says
they cannot afford to pay because they
fly overseas in a couple of days?
Perhaps you have heard the ‘I’ve just
bought a new car’ excuse? ‘I’m a
single mother with three kids’ sound
familiar? How about the simple yet
effective, ‘No, get lost’!
All of these responses form a part of
daily conversation for the debt
collection officer but for many of us
the most adequate retort may not be
at hand.
12
The theme of any debtor conversation
should be ‘firm but understanding’. A
business must be firm in its resolve to
recover the money but understand that
it may take some time to retrieve.
Anyone who is employed or has an
asset of some worth should be able to
pay back a debt over time.
The aim is to set up a payment
schedule, align it with the debtor’s
earnings cycle and assign a periodic
payment amount that is proportionate
to the debt owed. Mailing the debtor a
direct debit form with a document
detailing the payment schedule will
reaffirm the strength of the agreement.
If payment schedules are not
agreeable to the debtor, it may be time
for the ‘velvet hammer’. If a debtor’s
name and details are reported they will
be held on file for fifteen years.
Fifteen years is a long time for
business loans, car loans, home loans,
credit cards and rental agreements to
be inaccessible to a business or family.
It’s certainly food for thought.
The final steps
When is a debt a ‘bad debt’? If the
final notice has been given and the
account has not been settled the
credit management system
categorises the debt as ‘bad’ and the
customer should not be retained if the
debt is not settled immediately.
A customer relationship is a two-way
street – if a customer has taken the
turn-off and no longer feels any loyalty
towards your business, then you must
make a decision to write off the debt,
contact a debt collection agency or
seek legal counsel.
The agency will reach a point early in
the collection process where it goes
one way or the other.
If the debtor is responsive and
cooperative, it is in the best interests
of the agency to develop and maintain
that relationship on behalf of the
client. However, if the debtor is uncooperative then the agency will apply
stronger legal measures. A business
must define each debtor relationship
with the collection agency; however, if
Roger Mendelson is the CEO of Prushka Fast
Debt Recovery, Tel 1800 641 617.
the agency is unable to get the
relationship back on track at the
preliminary stage, then it should be
regarded as a liability and not
worth maintaining.
The other recourse is a legal one. If the
debt is large enough, the debtor has
sufficient assets and the expected
legal costs are economic, this is an
effective path to debt recovery. Debt
collection companies often have large
in-house legal teams that will work on
a business’s behalf to recover debts
on a commission basis as opposed to
a fee-for-service agreement.
Follow the system, have clear
outcomes and your business will
minimise the risk to cash-flow resulting
from customers who don’t pay up.
Avoiding some of the pitfalls in
negotiating contracts
By Damian Ward
Misrepresenting a product, whether deliberately or in
innocence, can have legal repercussions.
Skill in negotiating contracts is one
of the most valuable commercial
attributes a person can have. However,
what may be seen as good negotiation
on a business level may not
necessarily be viewed so positively
in the eyes of the law.
There is often a temptation to
exaggerate the capabilities of your
business in providing a product
or service to a party you are
contracting with.
While this may clinch a sale or deal, it
can create legal problems if the
purchaser decides that the ‘how’ or
‘what’ you said you could deliver is
not what they got.
The law generally states that a
company or person cannot engage in
misleading and deceptive conduct –
the nature of which is pretty broad at
law. In general, the following types of
representations and omissions may
come back to haunt a seller:
• not precisely identifying what you
will be providing under the contract;
• not disclosing all material elements
in relation to the deal and remaining
silent on the less attractive or
potentially disadvantageous
elements;
• making predictions or statements
of opinion about the benefits the
buyer will directly or indirectly obtain
under the contract without any
reasonable basis;
• making inaccurate statements about
what you can provide in an attempt
to persuade the buyer to purchase;
• making assurances about ‘after sale’
service or things which you will
do during the term of, and after,
the contract.
These representations or omissions
may not be intentional. However, under
the law, intent is not necessarily
relevant. Silence or not making
information available may also be
misleading and deceptive. Damage
may arise irrespective of whether the
seller was consciously dishonest.
To balance this otherwise bleak
picture, courts do recognise that in
negotiating there is some latitude for
general assertions. This is quaintly
called ‘puffery’. For example calling
the product ‘the best in the market’ or
‘the best in the world’.
Take, for instance, a manufacturer who
produces component engine parts for
industrial machinery. A client may
order a certain number of parts in a
certain timeframe. There may be a
stipulation that they must be provided
by a precise date. It is likely that your
organisation will say that the timetable
can be complied with and that the
parts will be delivered either on or
before the time stipulated. This is a
natural reaction in an attempt to
expand the business and maintain
goodwill with customers.
However, if you know at the time you
make those representations that you
cannot comply with the timetable or
you deliver the products later than the
stipulated time, you may be accused
of saying something that is misleading
and deceptive. This is because you
did not comply with the request for
the products to be delivered by a
critical date.
Damian Ward is a Senior Associate with
Abbott Tout Solicitors
This may give the purchaser a right to
sue for damages. These damages may
be the loss of contracts which the
purchaser’s entered into in reliance on
your assertions about meeting
deadlines.
A company may suffer damage arising
from a misleading and deceptive
representation in many ways, and this
is merely one example. There are a
number of do’s and don’ts to assist in
avoiding liability on this basis.
What to do:
• Ensure you intimately understand the
product you are selling. The precise
detail is important. Both the good
and bad elements of it are important
to your clients and therefore, in this
context, important to you.
• Take particular care with what you
tell clients. To the fullest extent
possible make sure you provide
them with the entire picture.
• Keep a record of the meeting and
details about what you said to the
client. While lawyers will invariably
tell you this, it is not always
commercially possible. Nevertheless
it is always a useful exercise. A note
of what you said will assist in
triggering your memory in the event
a claim is made and it will boost
your creditability before the court.
13
What not to do:
• Don’t exaggerate certain elements of
the deal that you consider beneficial
to the purchaser. It is important to
precisely and accurately identify
what the purchaser is likely to get.
• Do not withhold information that is
material to the purchaser’s
consideration in buying the product.
• Do not attribute qualities to the
product that it does not have.
• Do not make promises or predictions
about the product that cannot be
fulfilled or for which you have no
reasonable grounds for making.
General statements of comfort like
‘this will be a great product for you’
are generally not a problem. Direct
assertions about future benefits
might be. In particular, a precise
representation about when you can
deliver the product may be very
important. This is particularly so if
the statement is in response to the
client telling you that it has a
genuine need for the product by a
certain time.
All of these suggestions are in an
attempt to help minimise the risk of a
claim against you, and in the event
one is made, allow you to forcefully
respond to it. Regrettably, there is no
absolute way of protecting yourself
from a claim but these tips will make it
much harder for an action to succeed.
Need for caution when
allocating franked dividends
By Gary McDermott
Changes to the taxing of dividend imputation require careful
planning by companies.
The new ‘simplified imputation system’
has been in place since 1 July 2002.
But just how simplified is this new
system for private companies? While
the new system will allow private
companies more flexibility in choosing
the level to which dividends can be
franked, this may come at a cost and
taxpayers should remain wary.
Under the new system, companies are
required to maintain their franking
account on a ‘tax paid’ basis and not
on a ‘taxed profit’ basis (as was
previously the case).
By way of example, if a company
makes a profit of $100 on which it
pays $30 in income tax, the credit in
the franking account under the new
system is $30. This is in contrast to the
previous position where the franking
credit was $70.
This change simplifies the franking
account by effectively aligning the
concept of a ‘franking credit’ from
both the shareholder and company
points of view.
14
The biggest advantage being offered
to all companies under the new
system is the ability to choose the
level of franking to be passed on to
shareholders, subject as always to
certain limitations. This is done by
establishing a benchmark franking
percentage.
Private companies will be required to
set a benchmark franking percentage
in each financial year and frank all
dividends within that year to the
same extent.
Under the benchmark rule, if a private
company pays a fully franked dividend
to its shareholders on day one of the
tax year, any subsequent dividends
(other than deemed dividends arising
from private company loans) in that tax
year would be treated as fully franked
for the purposes of determining the
year-end franking account balance.
If a company simply runs out of
franking credits, resulting in a debit
balance in the franking account at year
end, it will be liable to pay franking
deficits tax as under the previous
regime.
Companies will be penalised if the
benchmark rules are not adhered to;
accordingly special care and planning
will be needed when setting the
benchmark franking percentage. If
the dividend is franked at a lower
percentage than the benchmark rate,
the company’s franking account will
still be debited at the full benchmark
rate, thereby wasting franking credits.
If the dividend is franked at a higher
percentage than the benchmark rate
the company will be liable for ‘overfranking tax’ an additional impost
which does not result in a credit to the
franking account.
Franking variation
Where the benchmark franking
percentage varies significantly
between income years there is a
requirement to notify the ATO and to
provide specified information.
The application of the benchmark rule
may create practical difficulties.
For example, prior to the sale of a
company, the company may choose to
pay out all its retained profits by
paying fully franked dividends to the
exiting shareholders. In this case, the
new owners will inherit the 100%
benchmark franking percentage and
any dividends within that year will be
required to be franked to the same
extent even if there are insufficient
franking credits.
While a discretion is available to the
Commissioner to allow companies to
depart from the benchmark rule in
extraordinary circumstances, whether
the Commissioner will consider such a
change in ownership to be sufficient
to warrant a departure from the
benchmark rule is unclear.
Private companies also need to ensure
that they have procedures in place to
meet the new reporting obligations to
both shareholders and the ATO.
For each franked dividend made, a
‘distribution statement’ showing
prescribed details of the dividend
including the franking percentage must
be provided to the shareholder.
Private companies will be permitted to
provide distribution statements to
shareholders up to four months after
the end of the income year in which
the dividends have been paid.
This provides some flexibility, by
allowing private companies to
retrospectively frank dividends (subject
to the operation of the benchmark rule
which may predetermine the level of
franking that needs to be used). The
reporting of dividends to the ATO will
continue as under the current regime.
Anti-avoidance rules
On the face of it, the new rules appear
to provide some flexibility. However,
don’t be fooled. There are specific
anti-avoidance rules designed to
prevent companies from taking full
advantage of the flexibility which is
inherent in the new system.
These provisions together with the new
reporting obligations need to be
properly understood by all companies.
Private companies paying franked
dividends now also have new reporting
obligations to the ATO where the
benchmark franking percentage in
one year varies significantly (ie by
more than 20%) from that used in
prior years.
In particular, private companies must
notify the Commissioner in writing
where there is excessive variation of
the benchmark franking percentage
between franking years. In certain
cases, this may trigger further enquiry
from the ATO.
There are also specific anti-avoidance
rules (dividend streaming rules) which
seek to limit the extent to which
dividends can be distributed
preferentially to various direct (and
indirect) shareholders.
A further change introduced under the
new system is the new ‘gross-up and
credit’ approach for franked dividends
received by companies – effectively
aligning the treatment to that which
currently applies to individuals, trusts
and superannuation funds. However,
the impact of the gross-up and credit
method for companies is that current
and past year tax losses will be
absorbed faster.
To date, we are yet to see the
introduction of any amendments to the
new imputation system to ensure that
companies do not waste current year
losses absorbed by franked dividends.
Until such time as amended legislation
is available, taxpayers should adopt a
cautious approach, particularly in
view of the ATO’s heightened focus
on tax losses.
The Government promises the new
system will simplify the pre-existing
imputation rules, decrease taxpayer
compliance costs and ATO
administration costs, and increase the
flexibility in choosing the level to which
dividends can be franked.
Gary McDermott is a partner in the Enterprise
Growth group in the Melbourne office of
PricewaterhouseCoopers, Tel (03) 8603 3736.
The rules are more complex and
require additional reporting procedures
by private companies to both
shareholders and the ATO. It is also
difficult to see how the application of
the new benchmark rules will
significantly reduce the administrative
burden on the ATO.
Further legislation is expected to clarify
the wasting of losses through the
gross up of dividends and to introduce
tougher anti-avoidance rules to
prevent trading in franking credits.
The absence of these and other
components of the proposed
legislation leaves us with some
uncertainty, even though the new law
has already commenced.
Finally, it cannot be overstated that the
new system has the potential to
inadvertently create traps for those
private companies and shareholders
who fail to properly understand the
complexities of the new rules. Careful
planning is more important than ever.
However, it is hard to see there being
any significant savings in compliance
costs for companies in the short term.
15