Financial Criteria of the Travel Compensation Fund
The travel compensation fund (TCF) was instituted to reimburse a consumer if a travel agency failed. All travel agencies are required to inject cash into the fund, and also meet minimum financial requirements in addition to what is normally required of a business.
Audited Accounts (Annual Financial Review)
Travel agents are obligated to have audited financial statements each year by a registered company auditor and an accountant. The requirement is the financials are prepared and submitted within 3 months of the end of the reporting period. For example, if your financial year ends 30th June, you are expected to lodge your accounts with the TCF by the 30th of September. An extension of time can be granted with a small fee payable if you need to go beyond that.
The Annual Financial Review then needs to be electronically lodged on the Travel Compensation Fund website.
Trust Account for Travel Agents
It is possible to setup a trust account to deposit customer’s monies. There are stringent guidelines on how the account is to be maintained, as well as a requirement for it to be audited annually.
The financial criteria to remain as a registered travel agency is founded on a point based system. Participants must score at least 10 out of 20 points in tests 1 – 3, and meet the minimum capital requirements with test 4.
There are also alternative tests, and it depends on which industry you are in as to whether the alternative tests apply. The alternative measures take into account the varying risk levels and patterns of financing of each industry. The discrete categories include Airlines, Bus & Coach Operators, Consolidators, Corporate Agencies, General Sales Agents, Inbound Tour Operators, Shipping & Cruise Operators, and Tour Wholesalers.
There are four standard tests for existing agencies which are:
• Trust Account
• Working Capital
• Net Tangible Assets
• Net Capital & Reserves
Four points will be obtained if the trust account is properly maintained.
Working capital is the surplus of current assets over current liabilities. The greater the working capital, the more points that are awarded - up to a maximum of 8 points.
Net Tangible Assets
The net tangible assets (essentially excluding goodwill) are divided by sales. The higher the net tangible asset ratio is the more points that are awarded.
Net Capital & Reserves
The TCF requires a minimum level equity/capital based on turnover (sales). Those with a turnover less than $1.5 million must maintain $25,000 of reserves as a minimum. Those with a turnover in excess of $1.5 million must maintain minimum reserves of $35,000. Care must be taken with the definition of capital value of the entity as a downward adjusted is made for various items such as Goodwill and loans to related parties.
Startup travel agents have to gain at least 5 points for both tests 2 and 3, after providing for other commencement costs.
If you do not meet the financial criteria
You can do several things to rectify the situation if you do not meet the financial criteria including injecting further capital into the business, having a bank guarantee in place, or a Contractors Bonding Ltd guarantee. There are also alternative tests for Airlines, Bus & coach operators, consolidators, corporate travel agencies and inbound tour operators.
What to do next
Further information can be found on the TCF website www.tcf.org.au or call/email our office if you would like one of our partners to discuss your affairs further. More information about our travel agent accounting service can be found here
This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.