Australia: Summer 2014 Automotive Update

Welcome to the Moore Stephens quarterly automotive newsletter for 2014. We trust you enjoyed a safe and relaxing festive season.

In this edition Joe Gottlieb from Kilger Partners outlines specific PPSR issues, we advise on the LCT calculation changes and we provide commentary on the recent sales trends.

Please contact your Moore Stephens Automotive representative if you wish to discuss any of the issues raised in more detail.

PPSR - Are You Ready?

The Personal Properties Security Register (PPSR) is a single national register for security interests in personal property.

Given the transitional provisions under the Act end on 30 January 2014, we urge our clients to ensure they have registered all relevant assets in order to secure their interests.

oe Gottlieb, Special Counsel at Kliger Partners has identified the following key areas of concern in dealership structures.

1. Related party business loans

• Owners and directors loans
• Related entity funding arrangements
• Vendor finance arrangements for new investors/owners

These loans should be documented with formal loan agreements and registered under the PPSR. If the operating business is liquidated and these loans are not registered, the lender's claim will rank behind secured creditors.

Business structuring is often designed for asset protection however without appropriate registration under the PPSR, business structuring does not provide complete security over assets.

2. Related party business assets

It is common for automotive group structures to own dealership premises and plant and equipment outside the operating business entity.

Plant and equipment should be registered by the related entity to claim security over these items.

3. Dealership commercial leases

• Tenants often own and operate equipment on leased premises
• Landlords often pay for the tenant's fit-out as a lease incentive
• Tenants often give a cash-rental security deposit

Fit-outs, plant and equipment and cash deposits should all be registered by the tenant (dealership) to claim security over these items.

All leases for commercial property should be reviewed to ensure that security interests created by these types of arrangements are properly registered on the PPSR.

4. Sale of goods

• Goods are often supplied to customers on consignment or subject to ROT (retention of title) or "Romalpa" clauses.

No longer do ROT/"Romalpa" clauses in contracts protect the seller from unpaid goods in the hands of a customer, if a liquidator is appointed to the customer.

Regardless of clauses like "Property in the goods does not pass until payment is made in full," you should register your stock on the PPSR to ensure its protection. This is particularly relevant for vehicle and spare parts wholesalers customers.

Unpaid goods or consignment stock may not be able to be retrieved unless those goods can be properly identified and you can prove that your security interest is registered correctly on the PPSR.

5. Purchase of second-hand assets

You can also check the PPSR to see if second-hand plant, equipment, stock, vehicles or other used items you wish to purchase, are safe from re-possession and debt-free.

More information on the identification and registration of assets can be found on the Kliger's website.

Changes to LCT Calculations

Automotive retailers should be aware of changes to Luxury Car Tax (LCT) calculations, commencing 28 February 2014.

The calculation change means payments of fleet rebates, run out model support payments and all other third party considerations will need to be added to the consideration provided by the customer for the purchase of calculating the "price" for LCT purposes. As a result, the LCT value of the car will increase.

The LCT calculation change was initially addressed in a Decision Impact Statement (DIS) issued by the ATO in regard to the Full Federal Court decision of AP Group Limited v Commission of Taxation (colloquially termed "Son of Holdback").

The ATO has recently sent notices to directly to automotive retailers advising of the obligation to include fleet rebates, run out model support payments and all other third party considerations received within the LCT calculation, commencing 28 February 2014.

This requirement will obviously create practical issues, such as changes to DMS programs and calculations. In addition to this, further clarity is required as to the definition of "all other third party considerations".

Moore Stephens Automotive are currently in discussions with automotive industry bodies and the ATO to resolve these practical implications. We understand the ATO is preparing a Draft Ruling outlining the changes to LCT calculations. The draft ruling should include worked examples and case studies, which highlight the treatment of various distributor incentives so dealers can utilise this document as a future resource.

We will keep you informed of developments as they occur.

Record year for new vehicle sales

The last quarter of 2013 has continued the positive trend of 2012; with 1,136,227 cars sold by the December quarter, up 2.2% from 2012 sales result of 1,112,032 vehicles. The most popular choice was the Toyota Corolla with 43,498 unit sales, followed by the Mazda 3 at 42,082 and Toyota Hilux at 39,931.

The domestic manufacturers have lost a considerable 15.2% of market share compared to the December 2012 quarter last year. Only 118,510 of the 1,136,227 vehicles sold in Australia in 2013, that is, 10.4% were produced domestically. The decreasing trend is expected to continue as Holden plans to close its manufacturing operation in Australia from 2017. The decision was made by General Motors as it was decided that the operation was "no longer viable". Even though Holden Commodore and Cruze were amongst the top-10 highest sellers, this was not sufficient to maintain a sustainable operation. For the most part, this is due to the fact that the automotive industry is highly competitive and fragmented, evidenced by the entrance of 20 new brands to the market in the last 12 years. Despite the strong sales performance of Toyota Corolla, Toyota has lost 0.7% market share to 18.9% (2012: 19.6%), however it has remained the market leader, followed by Holden and Mazda.

It is interesting to note that both the SUV and light commercial segments increased their market shares in 2013, at 29.0% and 18.0% respectively, compared to 28.0% and 17.8% in 2012.

Top Performers - December YTD

Source: V-Facts

This year's total of 1,136,227 new passenger cars, SUVs and commercial vehicles sold in Australia better last year's previous record by 2.2%. Despite this Australian new car sales are forecast to hit a new record this year. The Federal Chamber of Automotive Industries (FCAI) expects that 1.145m vehicles will be sold in Australian in 2014, around 1.0% up on 2013.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2014 Moore Stephens Australia Pty Limited. All rights reserved.