1. Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Legal and Taxation Aspects of Your Small Business 3 rd Edition `08 IAN.BIRT

2. 2 Chapter:12 Unfair Trading Legal and Taxation Aspects of your Small Business IAN BIRT

3. Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Objectives After reading this chapter, you should be able to: –Identify and describe unfair trading practices by businesses –Explain the legal consequences of selling defective goods –Recognise various forms of legislation that regulate unfair business practices

4. Consumer Protection Legislation -1  The aim of consumer protection legislation is to protect consumers against unfair or dishonest trading practices by businesses  The main consumer protection legislation is: –Commonwealth trade practices legislation –State and territory fair trading legislation –State and territory sale of goods legislation –State and territory consumer claims legislation  Consumers are generally defined as buyers of goods or services for private (non-business) uses Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

5. Consumer Protection Legislation -2  Uniform consumer credit legislation also applies in each state and territory to protect consumers when making credit contracts with lenders  This legislation requires lenders to: –Disclose minimum information to borrowers before entering consumer credit contracts –Include prescribed information within these contracts  Heavy penalties for lenders that fail to comply with these requirements  Trade practices legislation also allows for industry codes of conduct regulating the conduct of businesses in specific industries to protect consumers Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

6. Unfair Business Conduct  The Trade Practices Act 1974 (Cwlth) operates as national consumer protection legislation  Parts V and IVA of the Act protect consumers from various kinds of unfair conduct by businesses supplying their goods or services – see Table 12.1  Because of constitutional limitations, the Trade Practices Act applies mainly to businesses run as companies  Each state and territory, however, has passed similar fair trading legislation to ensure that all businesses are regulated for unfair conduct Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

7. Unfair Business Conduct Prohibited Table 12.1 - UNFAIR BUSINESS CONDUCT PROHIBITED Type of unfair business conductRelevant section of trade practice Act Unconscionable conduct Misleading or deceptive conduct False representations Offering gift and prizes Bait advertising Referral selling Accepting payments without intending to supply Harassment and coercion Unsolicited goods or services Pyramid selling Sections 51AA-51AC Section 52 Section 53 Section 54 Section 56 Section 57 Section 58 Section 60 Section 64 Section 65AAC Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

8. Unconscionable Conduct A business is prohibited from taking advantage of a person’s known disadvantage when supplying its goods or services to customers  A disadvantage here includes: Illiteracy Age Poverty Illness Mental impairment Inequality in bargaining power Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

9. Misleading or Deceptive Conduct A statement is misleading or deceptive if it creates a false impression in the mind of an ordinary person in the targeted audience of the advertising  Main kind of unfair business conduct prohibited under the Act when selling goods or services: –Withholding relevant information –Making false predictions –Exaggerated sales talk –Silence Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

10. False Representations A business is prohibited from making false factual statements in relation to supplying its goods or services  Applies to false statements made in advertising  A business cannot falsely represent / state : –Its goods or services as being of a particular : Standard Quality Grade Composition Model –Its goods are new if they are second-hand Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

11. Offering Gifts and Prizes A business is prohibited from offering gifts or prizes when supplying goods or services and then not providing them Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

12. Bait Advertising  Bait advertising involves a business advertising nonexistent or limited quantities of goods or services at attractive prices  The purpose of the advertising is to lure customers to the business so that they can be persuaded to buy more expensive items Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

13. Referral Selling  Occurs where a business will not sell its goods or services to a customer unless the customer gives referrals  The business in return provides commissions or other benefits for the referrals it gets  The provision of these commissions or other benefits is conditional on the customer buying from the business  The prohibition of referral selling does not prevent ‘spotter’s fees’ being paid to anyone who introduces new customers to the business Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

14. Accepting Payment without Intending to Supply A business cannot accept payment for goods or services if it does not intend to supply them Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

15. Harassment and Coercion  A business is not allowed to use strong arm- tactics or force when supplying its goods or services to customers  This extends to requiring payments for goods or services  Separate state legislation also exists to protect consumers against “Hard sell” techniques by door-to-door salespeople Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

16. Unsolicited Goods or Services  Businesses are prohibited from demanding payment for unsolicited goods or services provided to customers  This conduct is also referred to as ‘Inertia Selling’  Inertia selling involves a business supplying unordered items to customers and then billing them Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

17. Pyramid Selling  The aim of a pyramid selling scheme is to generate fees for the scheme operator by getting new members  New members pay an entry fee to get into the scheme  Commissions are offered by the scheme operator in return for getting new members  The whole purpose of the pyramid selling scheme is to make income for its creator  The distribution of goods or services is irrelevant or incidental to obtaining money by signing new members Pyramid selling schemes are unlike network marketing schemes or franchise systems Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

18. Remedies for Breaches  The Australian Competition and Consumer Commission (ACCC) (www.accc.gov.au) is responsible for administering and enforcing the Trade Practices Act  Legal actions for breaches of trade practices legislation are heard in the Federal Court  Similar actions for breaches of state or territory fair trading legislation go to the relevant state court  The ACCC (or relevant state authority) prosecutes businesses for criminal breaches of Part V of the Act  The criminal penalties (fines) for breaches of any section (except sections 51AA–51AC and 52) are: For companies - up to $1.1 million fine For individuals - up to $220,000 fine  Fines are paid to the Commonwealth Government  The time limit for authorities to prosecute a business is six years from the date of breach Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

19. Main Civil Remedies Available  Anyone affected by the unlawful business conduct can seek civil remedies against a business that breaches the Act  The main civil remedies available are: –Injunctions Orders to prevent a business from engaging in prohibited conduct –Damages Orders for compensation to be paid to anyone who suffers financial loss as a result of the business’s prohibited conduct –Ancillary Orders - any other order that is appropriate in the circumstances  Actions for civil remedies must generally be started within six years after the breach or loss occurred Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

20. Anti-Competitive Practices  Known as ‘restrictive trade practices’  Part IV of the Trade Practices Act prohibits various kinds of anti- competitive business conduct – see Table 12.2  Aim to promote competition in markets  Free competition ultimately benefits consumers by ensuring minimum prices and unrestricted supplies of goods and services  Because of constitutional limitations, the Trade Practices Act applies mainly to companies  The Commonwealth, states and territories have cooperated to pass new legislation to overcome these limitations. A modified version of Part IV of the Act applies to all businesses, including unincorporated ones, in Australia  Most anti-competitive practices refer to businesses controlling prices or restricting supplies in a market for goods or services Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

21. Main Types of Anti-Competitive Practices Prohibited Table 12.2 - The main types of anti-competitive practices prohibited Type of anti-competitive behaviourRelevant section of Trade Practices Act Anti-competitive arrangements Price fixing Primary boycotts Misuse of market power Exclusive dealing Resale price maintenance Mergers and takeovers Section 45 Section 45A Section 45(2) Section 46 Section 47 Section 48 Section 50 Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

22. Anti-Competitive Arrangements Anti-competitive arrangements usually involve dealings between competitors to restrict supplies or fix the prices of their goods or services  A company can, however, follow competitors’ prices to competitively price its goods or services so long as no contract, arrangement or understanding is reached between the businesses about the prices charged  Anti-competitive arrangements can apply to a wide range of situations  Any contract, arrangement or understanding between competitors is prohibited if it has the purpose or effect of substantially lessening competition in a market for goods or services Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

23. Price Fixing Price fixing is a specific form of anti- competitive arrangement Contracts, arrangements or understandings between competitors to fix, control or maintain prices are absolutely prohibited Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

24. Primary Boycotts A primary boycott occurs where competitors:  Combine to block the supply of goods or services to a third party  Or combine to block the acquisition of goods or services from a third party Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

25. Primary Boycott Situations Situation 1 Situation 2 Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia Competitor Business A Competitor Business B Business C (Target) Competitor Business A Competitor Business B Business C (Target) to block supply to to block acquisition from Figure 12.1

26. Misuse of Market Power Misuse of market power usually involves a dominant business in a market cutting prices or limiting dealings to prevent competition in its market or some other market Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

27. Exclusive Dealing  A supplier refuses to supply a customer if they buy goods or services from a competitor of the supplier. –This requirement is imposed by the supplier as a condition of supply  A buyer refuses to buy from a supplier who supplies competitors of the buyer. –This requirement is imposed by the buyer as a condition of buying  A supplier refuses to supply a customer unless the customer agrees to acquire complementary goods or services from the supplier (full-line forcing) or from a third party related to the supplier (third-line forcing) –These extra dealings are a condition of supply Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

28. Resale Price Maintenance Occurs when suppliers specify minimum prices to resell their goods or otherwise they refuse to supply  Suppliers may not impose a minimum resale price upon resellers as a condition of supply  Suppliers can stipulate a maximum price at which to resell their goods  Suppliers can also recommend - not stipulate - resale prices to resellers of their goods – e.g. recommended retail price of $8.00 Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

29. Mergers and Takeovers Mergers and takeovers of companies are generally prohibited if they are likely to have the effect of substantially lessening competition in a market, unless they are for the public benefit Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

30. Remedies for Breaches  Companies can apply to the ACCC for authorisation to engage in any restrictive trade practice - except misuse of market power  Authorisation may be granted if it is in the public interest to do so  Adverse decisions of the ACCC can be appealed against to the Australian Competition Tribunal There are legal consequences for any company that breaches Part IV of the Trade Practices Act:  Legal actions are heard in the Federal Court  The ACCC prosecutes companies for breaches of Part IV  The time limit for such actions is six years after the breach  Civil penalties (fines) for Part IV breaches are much heavier than for Part V penalties  The civil penalties that are paid to the Commonwealth are: –For companies—up to $10 million fine –For individuals—up to $500,000 fine Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

31. Supplying Defectives Products - 1 The seller’s liability:  Similar sale of goods legislation exists in each state and territory to regulate sale of goods dealings between sellers and buyers  Legislation implies condition terms into contracts for the sale of goods  Some implied condition terms apply automatically and cannot be excluded in contracts made by businesses with consumers who are not businesses  Generally, this applies to implied condition terms that protect consumers who buy defective or faulty goods  These implied condition terms are: –The goods sold must be fit for the purpose required –The goods sold must be of merchantable quality Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

32. Supplying Defectives Products - 2  The implied condition of fitness for purpose will apply where: –Buyer tells seller the particular purpose the goods are required for –Buyer relies on the seller’s judgement –Seller is in the business of selling the type of goods sold  The implied condition of merchantable quality applies where: –Goods are sold by description - that is, buyer describes the goods they require to the seller –Seller is in the business of selling the type of goods sold –No defects were revealed where the buyer examined the goods before buying them  A business seller who sells defective or faulty goods may breach both of the implied conditions above Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

33. Supplying Defectives Products - 3 The manufacturer’s liability: Part V of the Trade Practices Act:  Gives consumers direct rights against Australian manufacturers (or importers) of defective goods. These rights exist even though the consumer did not buy the goods from the manufacturer or importer  Consumers can sue manufacturers (or importers) of defective goods for breaching the implied conditions of fitness for purpose and merchantable quality  Manufacturers (or importers) of defective products may be liable for any losses - such as personal injury or property damage - caused by their defective goods  Allows the federal minister of consumer affairs to establish safety and information standards for products sold by companies to consumers  The federal minister of consumer affairs can ban products or declare them as unsafe if they do not comply with any relevant product safety or information standards  It is a criminal offence for a company to supply products that have been banned or declared unsafe or that do not comply with relevant product safety and information standards  Criminal penalties apply Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

34. Consumer Claim Bodies -1 Table.12.3 State/territoryTribunal /courtMaximum claim New South Wales Victoria Queensland Western Australia South Australia Tasmania Australia Capital Territory Northern Territory Fair Trading Tribunal Small claims division of local court Victorian Civil and administrative Tribunal Small Claims Tribunal Small claims division of magistrates court Small claims division of local court $25,000 $10,000 $7,500 $6,000 $5,000 $3,000 $10,000 Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

35. Consumer Claim Bodies - 2 Under consumer protection legislation, consumers can sue businesses in the appropriate court to recover any losses A consumer is generally anyone who buys goods or services from a business for private use  Consumer claim bodies are alternatives to courts: –They provide consumers with an alternative procedure for disputes with businesses that supply faulty goods or services –They comprise consumer protection tribunals and small claims divisions of lower state courts –They hear most small consumer claims against businesses  Procedures of tribunals and small claims divisions of lower courts are much simpler than formal court proceedings: –A consumer lodges an application with a nominal fee for a hearing –The hearing is before a referee or an assessor who is usually legally qualified while; court hearings are before a magistrate Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

36. Consumer Claim Bodies - 3 –The referee (or magistrate) hears the evidence of both sides and can ask questions of either party –Legal representation is generally not allowed –After hearing both sides, the referee (or magistrate) makes any order that is ‘just and equitable’ in the circumstances  Orders made can include: –Dismissal of the claim –Compensation be paid to the consumer –Repair work be carried out  Orders are legally enforceable through the court system  Generally, there is no right of appeal from the decisions of small claims tribunals or small claims divisions of magistrates courts

37. Industry Codes of Conduct - 1  Industry codes of conduct are developed by relevant statutory authorities usually after consulting with relevant industry bodies  Codes of conduct set minimum standards of conduct to follow for businesses in an industry  Codes of conduct generally aim to protect consumers and other participants in an industry from unfair business practices  Under Part IVB of the Trade Practices Act, industry codes of conduct may be passed to regulate the conduct of businesses operating within a selected industry Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

38. Industry Codes of Conduct - 2  Industry codes of conduct are prescribed and enforced under the Act by the ACCC  Codes of conduct may be mandatory or voluntary  Mandatory industry codes are compulsory: –They must be followed by all businesses within the industry e.g. the Franchising Code of Conduct  Voluntary codes are followed by businesses that agree to be bound by them: E.g. Codes of Banking Practice, Insurance Codes of Practice  The ACCC can enforce breaches of codes made under Part IVB  There are a wide range of court orders available for breaches of a code: injunctions, damages, corrective advertising Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

39. Food Standards National standards for food businesses and food handlers to ensure that food sold is safe and suitable for human consumption  Food Standards Australia New Zealand - www.foodstandards.gov.au - develops uniform food standards under thewww.foodstandards.gov.au Food Standards Australia New Zealand Act 1991 (Cwlth)  Food businesses generally must take all practicable steps to protect and prevent food from being contaminated at all stages of food handling.  These stages include: –Food receipt –Food packaging –Food storage –Food transportation –Food processing –Food disposal –Food display –Food recall Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

40. Obligations of Food Businesses –Not engaging food handlers known to be suffering from food borne diseases –Maintaining suitable hand-washing facilities for food handlers –Maintaining the food premises to a satisfactory standard of cleanliness –Maintaining the food premises, including utensils, in a clean and sanitary condition –Keeping food at safe temperatures –Preventing pests from entering the food premises In Australia, food standards are enforced by local authorities (local councils) under relevant state or territory food legislation It is a criminal offence to breach the food standards Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

41. Privacy Standards - 1  The Privacy Act 1988 (Cwlth) is administered by the federal Privacy Commissioner - www.privacy.gov.au –www.privacy.gov.au  Some states and territories also have specific privacy legislation  The Act applies to: –Large businesses –Health-service providers of any size –Small businesses trading in personal information  Businesses must comply with the 10 National Privacy Principles (NPP’s) stated in the Act - unless a business implements its own privacy code approved by the Privacy Commissioner  The NPP’s can be obtained from the Office of the Privacy Commissioner or viewed at the Privacy Commissioner’s website Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

42. Privacy Standards - 2  The NPP’s set minimum standards for collecting, using and disclosing personal information about individuals  The Act does not apply to employment records used for employment purposes in a business  Individuals can complain to the Privacy Commissioner if they genuinely believe that a regulated business has not complied with the NPP’s in handling their personal information  The Privacy Commissioner may investigate, conciliate and determine privacy complaints  Determinations can include: –Making an apology –Changing business practices –Awarding compensation Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

43. Spamming Spam is electronic junk mail  Spamming refers to sending unwanted commercial electronic messages via email, short message service, multimedia message service or instant messaging  The Spam Act 2003 (Cwlth) prohibits individuals and businesses from sending commercial electronic messages to or from Australia, or within Australia, without the recipient’s consent  Electronic messages are commercial if they are sent for the purpose of offering, advertising, promoting or supplying goods or services  The Australian Communications and Media Authority www.acma.gov.au can impose heavy penalties for breaches of the Act www.acma.gov.au  Relevant industry bodies have developed an Emailing Code of Practice to comply with the Act Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia

44. Defamatory Statements  Common law defamation generally refers to publishing false statements to others that can lower a specific living person’s reputation in the view of others.  Defamatory statements may be written or spoken  The plaintiff can sue the maker and/or publisher of the statement for damages  The states and territories have passed uniform defamation legislation that modifies defamation actions under general law  Companies with up to 10 employees may sue for defamation  Plaintiffs have up to one year to sue from date of the alleged defamation  There are also maximum limits for damages in defamation actions  To avoid being sued, small businesses must ensure that they do not make disparaging statements in advertising, promotions or even general conversations about competitors or rivals Legal and Taxation Aspects of your Small Business; I.Birt © 2007 Pearson Education Australia