The End of an Era: Grandfathered Large Proprietary Companies No Longer Exempt From Financial Reporting Requirement

Introduction

As a general rule, pursuant to the Corporations Act (Cth) 2001 (Corporations Act), ‘large’ proprietary companies are required to prepare, and lodge with ASIC, annual financial statements. For many years, a class of large proprietary companies, known as ‘grandfathered’ companies have been exempt from this requirement. However, as a result of the new legislation, this is set to change – predicted to impact over 1,000 Australian privately owned family businesses.

Test for large proprietary companies

A proprietary company is defined as ‘large’ for a financial year if it satisfies at least two of the below criteria:

• consolidated revenue for the financial year of the company and any entities it controls is $50 million or more;
• the value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is $25 million or more; and
• the company and any entities it controls have 100 or more employees at the end of the financial year.

Prior to 1 July 2019, the above thresholds were:

• consolidated revenue for the financial year of the company and any entities it controls is $25 million or more;
• 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 more; and
• the company and any entities it controls have 50 or more employees at the end of the financial year.

Audit requirements for large proprietary companies

Broadly, pursuant to the Corporations Act, the default requirements are that large proprietary companies must:

• prepare an annual financial report (which includes financial statements, notes to the financial statements, and a directors’ declaration);
• prepare an annual directors’ report;
• appoint an auditor and have their financial report audited;
• lodge their financial report with ASIC within 4 months of the year end; and
• distribute their financial report to members within 4 months of the year end.

What is a ‘grandfathered’ entity and what was the exemption?

A ‘grandfathered’ proprietary company is one that satisfies the following criteria:

• it has met the ‘exempt proprietary company’ definition at all times since 30 June 1994;[1]
• it was ‘large’ at end of first financial year ending after 9 December 1995;
• its financial report was audited for 1993 financial year and each subsequent financial year; and
• it lodged a notice within four months of end of the first financial year ending after 9 December 1995 (the effect of this notice being that it opted to be considered a grandfathered large proprietary company).

Many large Australian private owned family businesses fall within the classification of being a grandfathered entity.

For the best part of the last three decades, whilst grandfathered proprietary companies have been required to prepare annual financial statements, have them audited and send them to their members, they have enjoyed being exempt from the requirement to lodge the financial statements with ASIC pursuant to relief provided in ASIC Corporations (Exempt Proprietary Companies) Instrument 2015/840 (Instrument).

What is changing?

The Treasury Law Amendment (2022 Measures No. 1) Act 2022 (Act), which received royal assent on 9 August 2022, has the effect of repealing the Instrument.

In other words, grandfathered companies will no longer be exempt from lodging their financial statements with ASIC.

The changes come into effect for financial years ending on or after the commencement of the legislation, which occurred on 9 August 2022. The result of this is that the grandfathering exemption will still be available for the 30 June 2022 financial year, but that it will no longer be available for financial years ending 31 December 2022 or 30 June 2023.

What does this mean?

This means that over 1,000 privately owned businesses (who are classified as grandfathered entities) will no longer benefit from the exemption and will now be required to, among other things:

• lodge their financial statements with ASIC for financial years ending 31 December 2022 or 30 June 2023 and in each subsequent year thereafter;
• engage auditors to ensure that their financial statements comply with either the Australian Accounting Standards or other applicable accounting standards;
• make changes to their accounting systems to accommodate audits; and
• be aware of and respond to public enquiry, as members of the general public will now be able to access their financial statements.

[1] In broad terms, exempt proprietary companies were proprietary companies where there was no direct or indirect public ownership; that is, they were essentially owned by private individuals

Queries

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Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.