On 9 August 2022, amendments to the Corporations Act 2001 received royal assent that see the end of a ‘temporary’ lodgement exemption that has been afforded to certain large, family-owned companies for nearly three decades.
The changes were introduced by the Senate to the Treasury Laws Amendment (2022 Measures No.1) Bill 2022 just last week.
While sudden and unexpected, many will view the amendments as levelling the proverbial playing field: all large private companies will now be required to lodge financial statements with the Australian Securities and Investments Commission (ASIC). The only exception to this is where some other lodgement exemption or relief is available to the entity via, for example, a specific ASIC legislative instrument.
Backstory of the ‘grandfathering’ exemption
To provide a bit of context, the ‘grandfathering’ regime came about in 1995 during a legislative overhaul by the Keating government.
Prior to this, whether a company was required to prepare and lodge financial statements with ASIC was determined by whether it was an ‘exempt’ or ‘non-exempt’ proprietary company. An ‘exempt’ company was one that was essentially owned by private individuals. These companies did not have to lodge financial reports even though they were subject to audit and distributed to members.
In 1995, the basis for determining whether a company had to lodge financial statements with ASIC changed from the ‘exempt / non-exempt test’ to the ‘small / large test’. A company that was assessed as being ‘large’ (by satisfying two of the three prescribed criteria), was obliged to lodge a financial report. The ‘small / large test’ still stands today although the criteria used to perform the assessment have been updated over the years.
Despite the introduction of the ‘small / large test’ in 1995, the lodgement exemption was retained for exempt private companies on the condition they continued to meet the old ‘exempt proprietary company’ definition and met certain other criteria. Where all the necessary conditions were met, these companies still had to prepare financial reports and have them audited within four months of year end, however they did not have to lodge these financial reports with ASIC. And so ‘grandfathering’ was born.
This ‘grandfathering’ arrangement was only intended to be temporary however it has prevailed for the last 27 years.
Consequences of the amendments
About 1,100 large proprietary companies currently benefit from having ‘grandfathered’ status. These companies will now have the same financial reporting obligations as any other large private company in Australia.
Large proprietary companies, including those that are ‘grandfathered’, are required to prepare general purpose financial statements applying the new Tier 2 Simplified Disclosure framework (as a minimum). These financial statements must be audited, and they must be lodged with ASIC within four months of year end.
Effective date of the changes
The amendments are effective from 10 August 2022, being the day after they received royal assent. This means that ‘grandfathered’ large proprietary companies with financial years ending on or after 10 August 2022 will have to lodge their audited financial statements with ASIC.
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