Are you prepared for mandatory data breach notification laws?

From 22 February 2018, the Privacy Act 1988 (Cth) will include a mandatory data breach notification scheme. Under the scheme, entities governed by the Privacy Act, often referred to as APP entities will be required to notify the Office of the Australian Information Commissioner (OAIC) and any affected individuals of ‘eligible data beaches’.

One only has to look to Uber’s recent admission of a worldwide data breach, exposing 57 million of its users, to understand why the introduction of mandatory data breach notifications in Australia is welcomed. Whilst providing comfort to many Australians, the scheme’s introduction will place the onus on Australian businesses to adequately prepare for these changes.

If you’re an APP entity, which includes businesses with an annual turnover of over $3million, Government agencies and a number of small business operators, this is what you need to know about the new scheme.

The scheme
Under the scheme, should an APP entity have reasonable grounds to suspect an ‘eligible data breach’ has occurred, the entity will be required to notify the affected individual/s and OAIC. An ‘eligible data breach’ occurs where there has been ‘unauthorised access to, unauthorised disclosure of, or loss of, personal information held by an entity’ and ‘the access, disclosure or loss is likely to result in serious harm to any of the individuals to whom the information relates’.

The notification requirements of the regime will include APP entities:

1. Conducting expeditious assessment of the suspected breach within 30 days of it becoming aware of such breach. An assessment involves:

a. Determing if an assessment is required, and identifying who will be responsible for conducting the assessment;

b. Gathering information in relation to the suspected breach – who had access to the information, what information is affected;

c. Evaluating the information, and identifying the breach as an ‘eligible data breach’.

2. Notify the OAIC and affected individual/s by:

a. Preparing a statement setting out the entity’s details, description of the breach, the kind of information concerned, and recommendations about what individuals should do in response to the breach;

b. Provide a copy of this statement to the OAIC and, if practicable, the affected individual/s.

Exceptions
There are some exceptions to the above notification requirements.

These include:

1.  Third parties – if another entity has already provided notifications in relation to the same data breach, as a result of share services arrangements; and

2. Remedial action – if an organisation takes remedial action whereby the breach does not result in serious harm, the breach is unlikely to be deemed an ‘eligible data breach’.

Penalties
Should an APP entity breach their obligations under the Act, civil penalties may apply. At present, the maximum civil penalty administrable is 2000 penalty units, or $1.8 million.

Preparation
Prior to 22 February 2018, businesses should review the adequacy of their practices and procedures to ensure that their obligations under the amended legislation can be met in the event of a data breach. Further, businesses should prepare a response plan, or amend their current plan, to allow for quick, efficient and lawful response to any suspected or actual data breaches.
In addition to the above considerations, a review of your business’ contracts with service providers and third parties should be conducted. This will ensure that each party is aware of its responsibilities in respect of the notification scheme is understood.

 
If you’d like to discuss the mandatory data breach notification laws, call Rouse Lawyers’ technology team on 07 3648 9900.

How to get out of a franchise

A franchise agreement is a legally binding commitment for the term of the franchise with restrictions on exiting early. Franchisors and franchisees must follow different steps if they believe they have grounds to unilaterally terminate the agreement. This will always depend on the circumstances.

What can franchisees do to end the franchise agreement?

Franchisees may wish to end a franchise agreement early for a variety of reasons. The business may not be as successful as hoped, or the franchise system may have failed to meet expectations. There are multiple options for getting out of the franchise agreement. Each come with their own risks and consequences and should be assessed on personal circumstances. Few are straightforward.

(a)   Cooling-off

Under the Franchising Code of Conduct (Code), franchisees have a 7 day cooling-off period to terminate a franchise agreement without giving a reason. The right must be exercised within 7 days of entering into the agreement or making a payment under the agreement, whichever the earlier. This doesn’t apply to the renewal, extension, variation or transfer of an existing agreement. For example, somebody buying an existing franchised business won’t have the right to cool-off.

If a franchisee terminates during cooling-off then the franchisor must refund any money paid by the franchisee within 14 days, less the franchisor’s reasonable expenses.

(b)   Sale of business

If a franchisee wishes to sell their business, a franchisor cannot unreasonably withhold consent to the sale. The franchise agreement will set out the conditions for a transfer. If these are followed and the franchisee establishes that the buyer can perform the obligations under the agreement to an equal standard, the franchisee is generally free to sell their business.

The existing franchise agreement will either be assigned to the buyer, or more commonly, the buyer will enter into a new franchise agreement with the franchisor. The outgoing franchisee and franchisor should enter into a written agreement to formally terminate the franchise relationship.

With exception to the cooling-off period or selling the business, a franchisee’s right to otherwise terminate a franchise agreement is limited.

(c)   Breach by the franchisor

The Code doesn’t grant franchisees the right to terminate a franchise agreement if the franchisor is in breach. However, some franchise agreements may allow a franchisee to terminate in some circumstances. This could include when the franchisor is in material breach of the agreement and has failed to remedy that breach within a specified time. Unless the agreement provides this express right, franchisees must rely on other legal rights which are set out below.

(d)   Walking away

Closing the doors early and abandoning a franchised business is not advisable. Franchisors will normally have the right to pursue the franchisee for damages. The landlord would have this same right if there’s a lease involved. If the franchisee’s directors have given a personal guarantee, then walking away could expose the personal assets of the guarantors to risk. Walking away should be an absolute last resort, and only after exhausting all options with an administrator or liquidation consultant.

What can franchisors do to end the franchise agreement?

Franchisors generally have greater flexibility in their ability to terminate a franchise agreement.

(a)   Franchisee breach

If the franchisee has breached a provision of the franchise agreement, the Code allows franchisors to terminate the agreement if:

1. the franchisor gives the franchisee a written notice:

(a)      setting out the provision which has been breached;

(b)      setting out what is required to remedy the breach;

(c)      providing a reasonable time to remedy the breach (which need not be more than 30 days);

(d)      stating the franchisor proposes to terminate the franchise agreement if the breach is not remedied; and

 2. the franchisee fails to remedy the breach accordingly.

If the franchisee remedies the breach, franchisors cannot rely on that breach to terminate the agreement.

(b)   Immediate termination

There are also certain circumstances under the Code which entitle a franchisor to immediately terminate a franchise agreement if the franchisee:

1. no longer holds a licence which they must hold to carry on the business;

2. becomes bankrupt or insolvent;

3. if a company, becomes deregistered by ASIC;

4. voluntarily abandons the business or the franchise relationship;

5. is convicted of a serious offence;

6. operates the business in a way that endangers public health or safety; or

7. acts fraudulently in connection with the operation of the business.

Franchisors would need a strong basis and reliable grounds for making the decision to terminate a franchise agreement for these reasons.

(c)   Contractual termination

The Code also permits franchisors to terminate a franchise agreement where the franchisee hasn’t committed a breach, but only if the agreement contains this express right. The franchisor must provide the franchisee with reasonable notice and reasons for the termination.

Note that such provisions could be found by a Court to be an unenforceable “unfair contract term” under the Competition and Consumer Act 2010. Franchisors would need justifiable reasons for terminating a franchise agreement using such a provision.

Are there other ways to end a franchise agreement?

There are various other legal remedies available to both franchisors and franchisees to bring a franchise agreement to an early end. The following are some common grounds, however others may be available depending on the situation.

(a)   Mutual termination

Franchisors and franchisees can mutually agree to bring a franchise agreement to an early end. This should always be done in writing.

If franchisees initiate the request, franchisors generally require an exit payment. It is reasonable for franchisors to be compensated for losing out on franchise fees they would otherwise receive if the franchise agreement had run its full term. Franchisors may instead agree to buy back the business from the franchisee, but usually for under market value.

Franchisors are often free to on-sell the business to a new franchisee once the termination is formalised. The former franchisee generally has no right to the sale proceeds.

(b)   Dispute resolution

If a dispute arises between the franchisor and franchisee and the dispute resolution procedure under the franchise agreement or the Code is initiated, it will often be mediated. Sometimes the resolution may be an agreement to terminate the franchise agreement. Mediation can assist the parties to negotiate a mutual exit if the franchise relationship is beyond repair.

(c)   Litigation

If litigation is commenced, a Court may be asked to bring a franchise agreement to an end or to treat the agreement as if it had never existed. There are many different reasons why a party to a franchise agreement may commence litigation, which can often follow an unsuccessful mediation. Some common grounds are misleading and deceptive conduct, misrepresentations, failure to adhere to the Code and repudiation. Court proceedings are costly and the outcome can never be predicted.

What are the consequences of ending a franchise agreement?

If a franchise agreement is terminated and the franchisee is found to be at fault, a franchisor may ask a Court for an order for damages equal to the monies the franchisor would have expected to receive had franchise agreement run for the balance of its term.

Franchise agreements normally otherwise outline what happens when the agreement ends. Franchisees will generally be restricted from using the franchisor’s brands and intellectual property, and will be bound to a restraint of trade.

Franchisors and franchisees should factor in these considerations and be mindful of the repercussions before acting to terminate a franchise agreement.

There are also penalties if franchisors or franchisees breach the Code. Breaches of some provisions will attract penalties of up to $63,000 per breach, and these breaches may lead to infringement notices issued by the ACCC for $10,500 per breach. Compliance with the Code must therefore be taken seriously.

Finally, always obtain legal advice on your options before taking steps to terminate a franchise agreement so that you are fully aware of any unintended consequences.

Need advice ?  Talk to the Franchising team at Rouse Lawyers. Contact us today!

Is my Company Constitution tax effective?

Many will think of the Constitution of their company as a predominantly commercial document setting out the powers and procedures for the making of decisions by directors and shareholders, and the rights attaching to shares in respect of dividends, voting and winding up.

As far as tax is concerned the main focus is to allow for different classes of shares.

However, the content of the Constitution has an impact on the tax results in at least three important ways:

1. Super contributions for directors;
2. Differential dividends;
3. Issue of shares of a different class.

Super Contributions for Company Directors

A tax deduction is generally available for contributions made by an employer for the benefit of an employee.

For a number of years the general view has been that deductions also apply for contributions for directors. A basis for this was that the income tax legislation allowed a deductions for superannuation contributions for persons employed by a company, and the legislation deemed directors to be employed by the company (the additional requirements that they be engaged in producing assessable income or in the business of the company would ordinarily be satisfied in a trading business).

However, were substantially changed in 2007 with the Simpler Super Regime.

The revised requirements for employer contributions run as follows:

4. A deduction is available for contributions for employees (directors do not fall within the ordinary meaning of employee);
5. Employees are deemed to include those falling within the extended meaning in the Superannuation Guarantee legislation;
6. There are also the conditions that the employee be engaged in producing the company’s assessable income or its business, that the fund is a complying fund and the employee satisfies certain age conditions.

The Super Guarantee legislation does not deem any director to be an employee. Rather, it deems a director “who is entitled to payment for the performance of duties as a member of the executive body”.

This means is that a director is not deemed to be an employee unless they are entitled to payment for the performance of duties. The simplest way to provide that entitlement is an appropriate provision in the Company Constitution, for example providing an entitlement of say $1000 per annum. Alternatively, a binding arrangement (preferably, in writing) for the payment of directors fees is required.

Doubts of the correctness of the above analysis were put to rest by the decision in Kelly v FCT (No 2) [2012] FCA 689. A deduction for a superannuation contribution in favour of a director was denied. The court rejected the argument that actual payment of an amount was sufficient. It held that payment and entitlement to payment are different concepts, and entitlement to payment can be provided by the company’s constitution or approval by shareholders in accordance with the Corporations Act 2001.

Differential Dividends

It is quite common for a company to have various classes of shares (although readers should be mindful that the issue a different class of shares can result in the small business CGT concessions not being available on a sale of the business or shares in the company).

The issue of a different class of shares is common where it is desirable to pay dividends to certain shareholders to the exclusion of other shareholders, or at a different rate.

To do so, simply having different class of shares is not enough. If you only have different classes of shares, then all shareholders will be entitled to a share of any dividend declared in accordance with the rights attaching to those shares.

What is necessary is that the Constitution gives the directors the power to pay dividends on a differential basis. A provision of this kind is as follows:

Where there is more than one class of shares on issue, the Directors can declare a dividend so that the dividend:

(a) is made to the holders of shares of any one or more class or classes of shares;

(b) made at a higher, lower or the same rate as the dividend declared on any other class; and

(c) excludes the holders of shares of any other class or classes;

provided that the shares in each class will participate equally in any dividend declared. The resolution which declares a dividend is valid, even if the resolution is passed by virtue of the votes of persons who receive the higher rate of dividend.

Issue of shares of a different class

The issue of shares of a different class may have a number of tax effects including loss of the small business CGT concessions and impact on the utilisation of the losses. In addition, whenever there is an issue of shares the value shifting provisions, debt/equity rules and dividends streaming provisions must be considered.

In respect of the small business CGT concessions, the existence of a Significant Individual is required for the 15 year exemption, retirement exemption and to apply the concessions on a disposal of shares. For there to be a Significant Individual, it must be the case that the relevant shareholder has rights in respect of voting and, importantly, any dividend or distribution of capital.

The reference to the word ‘any’ has the effect that where a shareholder owns shares of one class, but there is another class of shares on issue, a dividend could be paid on the other class with the result that the shareholder does not have rights in respect of any dividend. However, this special rule does not apply to redeemable shares (the ATO accepts this point in Taxation Determination TD 2006/77).

If you are looking to issue shares simply to enable dividends to be paid to a different person, it is preferable for those shares to be issued as redeemable shares. It is also preferable for the rights attaching to those shares to be such that they can be cancelled without tax effect.

Key Points

Special provisions are required for a Company Constitution to be tax effective and to support implementation of tax planning strategies.

Before implementing any of the above arrangements, specific advice should be obtained.

As part of general tax administration, we recommend all accountants undertake a review of their client’s Company Constitutions to ensure their tax planning is not frustrated.

Need advice? Talk to the Tax & Superannuation Team at Rouse Lawyers. Contact us today!

NOTE: This article is for general information only and should not be relied upon without first seeking advice from one of our specialist solicitors.