Employee entitlements and insolvency

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I find that many Directors of companies are astounded at the size of employee accruals for annual leave, long service and redundancy entitlements when they are forced to calculate these debts at the close of businesses’ trading.

Employee accrual entitlements are as genuine a creditor as a supplier of consumables and every effort should be made to ensure that financial statements record these debts and accruals.

Whilst employees receive a preferential distribution from winding up, not all employees receive this benefit. Accountants and business advisors should note when advising their clients that not only are Directors limited in the priority payment they can receive in a winding up, but also spouses and relatives of Directors who may be employees are also limited in the priority distribution that can be made to them for wages, annual leave, long service leave and redundancy entitlements.

The lessons to be learnt from these issues are that employees who are related to Directors should be treated as arms length staff and encouraged to use up accrued entitlements just as a company would to its other staff. In addition, when accounts are prepared for companies, special attention should be paid to ensure that employee accruals are accurately recorded in the balance sheet.

Finally, Directors should ensure that all superannuation entitlements due to staff have been remitted to their superannuation funds by the due date. The result of not making the payment on time is to create an additional debt on the company for the Superannuation Guarantee Charge that will be imposed by the Australian Taxation Office.

Members with queries are invited to contact Peter Macks at Macks Advisory on 08 8231 3323 or email to [email protected]