Tax News For Businesses
- April – June 2016 = 28/07/2016
- July – September 2016 = 28/10/2016
- October – December 2016 = 28/02/2017
- January – March 2017 = 28/04/2017
Returns lodged after the above date will attract penalties and interest.
Business Plans – To Plan or Not To Plan?
Many advisers believe that it is essential to have a formulated business plan that sharpens the overall direction of the business. I agree whole heartedly, although sometimes I ask myself are they really necessary? Firstly, given the daily demands for the business owner, how much time should be dedicated to writing a plan. Let’s face it, a plan doesn’t get sales in the door, nor does it cut operational costs. A plan is usually in the mind of the business owner anyway, so does it really need to be put on paper. Secondly, there is an accelerating pace of change in the business environment which means that a plan written 1 year or even a month ago may be considered to be outdated today.
As a result, the plan would require updating on a regular basis thus demanding more time from the business owner and less time generating sales. Thirdly, plans tend to have a rigid approach to achieving a desired goal and often do not take into account unplanned profitable opportunities that may arise and end up blowing the business plan out of the water in the first place. Finally, research shows that very few business plans work out exactly as expected anyway so why bother in the first place!
The Director’s Duties To The Company
Being a director of a company carries with it several responsibilities towards the company, it’s shareholders, fellow officeholders and the general public at large. One of the main objectives as a company director is to direct the company throughout it’s voyage as best you can. If your actions are negligent in any way towards the company, you may be personally liable if a third party suffers injury as a result of the company’s actions.
As a director you must:
- Be honest and careful at all times;
- Ensure you keep on-top of the company’s performance;
- Make sure that debts can be met easily;
- Ensure your company retains proper financial records;
- Act in the company’s best interests at all times;
- Use the information you have obtained as a result of your position properly and accordingly; and
- Not take personal advantage of a company situation or act dishonestly towards the company in any way
Effectively Managing Cash Flow Structures
Conquering the cash flow balancing act is often the greatest challenge for the small business owner. Balancing the incomings and outgoings of a business so that there is enough profit left over to not only cover all personal expenses but to have sufficient amount for either investment or expansion is a difficult task.
One of the reasons why conquering this challenge is so illusive is despite it’s importance, it is rarely given the amount of attention that it so readily deserves. More often than not it is the job that the owner priorities when either all other responsibilities have run out or when cash reserves begin drying up. If left unaddressed until this point, the slow flowing payments from customers can quite often take a long time. It is during this period that the business becomes vulnerable and the owner’s frame of mind turns negative.
Ensuring that there is a consistent approach to invoicing, the recovery of debts and balancing cash flow in general is an important responsibility that deserves a set time slot each week without fail. In short if this responsibility is overlooked, then some period in the future will be affected by a cash flow shortage.
Here are some classic ways to triumph over the dreaded cash flow beast before it digs itself too deep.
- Ensure that the owner’s salary is reasonable and is justified according to industry averages;
- Allocate a particular time slot each week to address invoicing and collection of debts;
- Be sure of how much the business must earn to cover all expenses including owner’s return;
- Have a monthly budget in place;
- Determine whether your short-term strategy is to maximise profits or to expand the business. As a general rule, expansion or re-investment comes at the expense of the owner’s profits;
- Measure everything;
- Maintain a separate bank account for provisions such as tax, superannuation and savings;
- When times are good, rather than spending all the profits, consider putting aside cash in an investment account that you can withdraw when times are tough;
- Smooth expenses. For example, pay staff monthly rather than weekly, so that attention on this task will be reduced from 52 times a year to 12;
- Have some finance or cash reserves in place as a buffer; and
- Defer capital/expansion expenses until needed
Finally, as cash flow is the blood of the business the owner should ensure that it receives as much through its veins as possible to enable the business to live a long and healthy life.
“Benchmarking” and “best practice” are popular terms today. These concepts involve comparing similar products or processes and using the results of the best performers. Financial performance comparisons are one example of benchmarking.
Financial performance comparisons allow business owners and principals of professional firms to pool confidential information. Each firm can then compare its performance with similar sized businesses and the top profit earners.
Businesses can evaluate their:
- Overall profitability and efficiency;
- Performance productivity of staff;
- Control of costs;
- Use of equipment and other assets;
- Salary structure; and so on, against the benchmarks being achieved by the rest of their industry
Comparisons usually collect profit and loss account or balance sheet information. The inclusion of staff numbers, or the amount of floor space, or hours worked by personnel allows much greater analysis of revenue generation, time utilization and productivity levels.
Other criteria can be easily incorporated, for example:
- State location;
- Regional location (city centre, suburban, regional, rural);
- Business situation (shopping centre, main street, etc);
- Rate of growth in turnover; and
- Type of business
Benchmarking is a way of analysing your firms’ performance in comparison with other firms within the same industry and, in doing so; identify ways in which it can be improved and pinpoint opportunities for growth.
It is an exercise in “working on your business, not working in your business”
You can choose to measure and compare your business with similar businesses that may either be in the same industry or you may choose to make comparisons with a broader range of industry sectors, as most business processes are shared across many industry sectors. For example, take Human Resources (HR) – there are shared HR processes in virtually all firms for appointing and developing staff. Therefore, effective business benchmarking can be undertaken within your own industry as well as across other industry segments with comparable business processes.
What are the benefits of benchmarking your firm?
The potential benefits offered by benchmarking your firm may include but is not limited to the following:
- You can evaluate the results of your SWOT (strengths, weaknesses, opportunities, threats) analysis in terms of your business performance;
- You can incorporate best practice in many different targeted key performance areas; and
- You can identify ways to improve financial performance and profitability, operational performance and service delivery, which consequently results in increased client satisfaction and loyalty.
Ongoing benchmarking practices and the adoption of ‘best practice’ methods will keep your firm as competitive and profitable as possible.
What Documents Do I Need To Bring for my BAS?
It is important that you refer to the document checklist before coming in for your appointment. Alternatively, if this is inconvenient, why not do what many other clients do, forward your information to us by mail, fax or email . In order to ensure that you have included all items necessary for your BAS, please download and review the BAS Checklist.
Tax Debts For Small Business Raging Out Of Control!
With small businesses placing low priority on the payment of their current and past tax debts, experts have warned that without careful observation these debts may be rampantly growing out of control. Currently, small business owners owe up to an amount of approximately $6.5 billion in tax.
This attitude has meant that many businesses are slowly accumulating substantial tax debts because they are simply opting to pay other creditors rather than settling their debt with the Australian Taxation Office first. Business owners should ensure ATO tax payments are met on time to avoid late payment interest and penalty charges.
Taxation planning involves correctly structuring your income and/or investments to maximize taxation opportunities and to reduce paying unnecessary taxes.
Tax planning strategies include but are not limited to:
- Negative Gearing Property;
- Negative Gearing Shares;
- Self Managed Superannuation Fund;
- Family Tax Planning;
- Investment Tax Planning; and
- Business Tax Planning
Tax Planning needs to be distinguished from tax avoidance on one hand and tax evasion on the other. Tax evasion is illegal and generally involves taxpayers entering into transactions that are prohibited or forbidden under the tax legislation. Tax avoidance is not illegal and could be defined as a deliberate misuse of the tax laws rather than a disregard for them. It involves the exploitation of structural loopholes that achieve outcomes that were not within the spirit of the legislation.
Tax Planning could be defined as ensuring that the taxpayer is aware of the features of the tax legislation and as such is able to take advantage of and achieve the best possible tax result that is available under the law.
Social & Environmental Accounting
This type of accounting involves the process of communicating the social and environmental effects of organisations to society. As such, it involves extending the accountability of organisations (particularly companies) beyond the traditional role of providing a financial account to the shareholders. Such an extension is based upon the assumption that companies do have wider responsibilities than simply to make money for their shareholders.
Certain environmental reports are being encouraged by accountants and accounting associations but are not yet mandatory. Full disclosure of environmental effects as a result of economic actions is an issue that Hill & Co firmly supports.
The trust structure dates back to the feudal times when wealthy English knights would leave their land in trust for their family so that they could go off and fight in battle. The modern day trust is based on these early principles and works much in the same way.
A Trust involves a legal right for the trustee to hold assets for the benefit of the beneficiaries of the trust. A trust deed spells out the rules and conditions of the arrangement and the trustee must act in accordance with these guidelines. The precise wording of the document will be influenced by the taste of the solicitor or accountant drafting the document, however in general, most trust deeds bare many of the same clauses. These days trusts are becoming more and more popular and are no longer strictly for the top end of the town. The benefits of a Family Trust include:
- Parents giving children some of the family wealth without losing control over the assets;
- Protection certain key assets from potential creditors;
- Creating a tax effective structure for income;
- Creating a tax effective structure for capital gains;
- Assisting in retirement planning; and
- Providing privacy of ownership as ownership details of a trust are kept out of the public eye
As a counterpoint, there are also many disadvantages of trusts that include complexity, administration headaches and costs.
When determining the most tax-effective structure for an investment property, shares or business activity, one should not overlook the advantages associated with a Hybrid Trust.
A Hybrid Trust takes the best features of a discretionary trust and the best features of a unity trust, and blends them together to create a unique tax-planning vehicle. In its broadest sense, a Hybrid trust allows a unit holder’s rights to be respected while at the same time maintains income and capital distribution flexibility. Hybrid trusts attract less legal, accounting and administrative costs than companies and are often the tax specialist’s preferred option for property and share investments.
The most common advantages associated with Hybrid Trusts include:
- Negative Gearing Tax Effectiveness for Unit Holders;
- Stamp Duty savings for property transfers;
- Asset Protection for discretionary beneficiaries;
- Cost Effectiveness in comparison to companies; and
- Flexible nature and ease of operation.
Self-Managed Superannuation Funds
Do you want more control over your super? You should consider having your own self managed super fund (SMSF). This sector has grown at a 20% compound rate over the past 10 years, with almost 300,000 SMSFs now in existence controlling $110 billion.
You may have up to 4 members who are also the trustees of your fund. This means that you are entrusted to direct operations of your own fund. As a result you need to have a well considered investment strategy covering diversification, risk, liquidity, tax etc. After all, it’s your future. To gain the benefits you must also follow the rules as severe penalties apply if these are disregarded.
One of the main rules is that SMSF assets must be regarded as being held solely to fund your retirement. This means you cannot benefit from them until you retire. Under recently proposed legislation, on reaching retirement age after July 1st 2005 you may be able to keep working and still access your SMSF money.
Having your own SMSF has several advantages with alternative investments then becoming available. For instance your SMSF can (part) own the business premises from which your company operates, if this is in line with your investment strategy.
Low tax is a feature of the super environment. The tax on super contributions (for which a tax deduction is obtained) and earnings are usually only 15% with tax reduced to 10% for capital gains. When you retire, tax reduces to zero. For example, if you are to sell an investment property owned by your SMSF after you retire, the proceeds of this are then CGT free.
Tax structuring is not about evading or avoiding tax, it’s about ensuring that the taxpayer does not pay any more tax than they need to. However, there is no point in having an elaborate tax saving structure if those savings are exposed to a successful creditor.
Money and assets are hard enough to accumulate, so when establishing a business or investment structure a key concern should be asset protection. Asset protection deals with minimising the exposure of your investment to risk, being the risk of losing assets.
The optimum strategy for asset protection is to establish layers of protection. The first layer should minimise your level of risk. For this the business owner may be required to keep abreast with current rules and legislation, developing adequate systems and having a safe working environment. The second layer is to ensure that you have adequate insurance cover and seek expert advice where necessary.
The third layer involves trading from a protection structure such as a company that provides the business owner with limited liability. The fourth and final layer is when the business owner owns little or no assets in their name so that if the creditor is successful, there is no gold at the rainbow anyway. Safeguarding your assets is extremely important.
Weaknesses of Small Business Operators
- Not appreciating the components of the costs of labour and the need to take into account direct labour costs such as sick and holiday pay, holiday pay loading, work care premium, payroll tax, long service leave, superannuation and productivity percentages actually obtained for the particular employee.
- Calculation of charge-out rates for the sale of materials and for the sale of labour.
- Control of the business overhead costs and a full knowledge of what those overhead costs are.
- Knowledge of the break-even level of operations.
- Cashflow Control – especially relating to GST, BAS and PAYG Tax.
- In the manufacturing, building industries and professional practices inadequate control to highlight the cost of current projects within the work in process ledger.
- Continual review of Government decisions that might affect the industry.
- Taxation Office requirements for Withholding Tax to be deducted from all wages payments including Directors’ fees and remitted in the Business Activity Statement by the due date to the Taxation Office.
- Lack of appreciation of the power that the Taxation Office has for the imposition of fines for late remittance of Withholding Tax and Income Tax.
- Non-recording of important matters on paper.
- Funding of debtors, stock and work-in-progress.
- Lack of appreciation of the needs for small business to be adequately informed of its current performance by the receipt of regular periodic accounting reports during the year on a monthly and three monthly basis.
- Lack of appreciation of the need to prepare Budgets, Cash-flow Forecasts and other management estimates.
- Not understanding the need for a long-term business plan.
- Non-utilization of a Board of Directors/Board of Advice or Customers Advisory Committee.
- Not appreciating that there is a need for targets and goals in a small business.
- Lack of quality control in the business.
- Keeping records in a “shoebox”.
How Do You Succeed In Small Business?
Ensuring that the following has been done will considerably enhance your chances of success: –
- Obtain advice before you start in the business;
- Prepare a business plan;
- Prepare a Budget and Cashflow Forecast;
- Maintain appropriate accounting records;
- Ensure that you receive financial reports on your business on a regular basis;
- Review your Budgets and Cashflow Forecasts regularly – at least quarterly;
- Conduct a market survey before commencing in order to understand your customer preferences;
- Develop contacts with your customers;
- Closely examine whether your business location is satisfactory;
- Continuously update your product and technology knowledge;
- Review on an ongoing basis your quality control procedures;
- Hire and keep good staff; and
- Use your financial data for managing the business
- Know your customers
Particular Problems Facing Small Business
- Inadequate planning – It is of the utmost importance that adequate consideration is given to planning when starting a small business. The initial planning stage should include discussions with a financial institution, solicitor and professional accountant
- Lack of professional advice (especially from Accounting Firms) when a small business is being commenced. This is one of the most significant reasons for the high failure rate of small business
- Insufficient capital at commencement of business
- Inadequate management especially in the areas that are not the strong points of the owner/manager
- Ineffective bookkeeping systems
- Adverse accounting systems to highlight performance results
- Lack of understanding of the term ‘cash-flow’ and the significant role it plays within the business’ operation, in particular to the payment of GST (Goods and Services Tax) and PAYG (Pay As You Go) tax
- Insufficient capital for growth and expansion
- Over-dependence on debt financing
- Poor cash management
- Deducting funds from business income, especially in the beginning. Living too high!
- Not understanding the meaning of profit
- Poor debtor, stock and work in progress control
- Inadequate bank relationships
- Poor location
- Unsuccessful choice of a partner
- Failure to delegate
- Implications caused by larger exterior organisations
- Disinterest by owners (often the second generation)
- Owner´s inability to lead a management team – need for people management
- Lack of sources of equity finance for “larger” small firms
- Failure of owners to provide for succession
- Not allocating adequate time to address potential problems and solutions faced by the business
- Not separating spending on personal needs from business expenditure
- Poor staff relationships – Lack of acceptance of the need to build a committed staff team
- Lack of contact with major customers
- Not determining what business you are really in
- Not understanding the market
- Need to be careful with the employment of relations
- No formal Business Plan
- No Budget of Cash-flow Forecasts
- Lack of effective outside advice
- No strategic planning sessions
- Having not developed empathy with customers
Trading While Insolvent
Business news has recently been dominated by tales of high profile directors entering the netherworld of the insolvent trading provisions of the Corporations Act. From the trials and tribulations of John Elliot in the Water Wheel case to the principals of One Tel stumping up to be publicly examined it is arguable that insolvent trading and its attendant personal liability has never had a higher profile since its introduction. So what is insolvent trading, how is it policed and who is implicated? A matter of definition
The legal definition of insolvency is different from the accounting definition, which is based on the ‘going concern’ principle – that an entity will realise its assets and extinguish its liabilities in the normal course of business. Under the Corporations Act, a company is considered to be insolvent when it is unable to pay its debts as and when they fall due. Clarifying the terms The courts have expanded upon this definition through development of a number of indicators of insolvency.
- Ability to pay debts as and when they fall due is not a balance sheet test. A simple mechanical comparison of assets less liabilities is not considered appropriate for determining insolvency. The question that matters is whether a debtor is able to pay debts due with moneys actually available.
- The legal test of insolvency does not require cash to be on hand. Regard must be held to an entity’s available realisable assets in order to determine solvency/insolvency, ie, cash does not necessarily have to be on hand to pay all debts as and when they fall due.
- The legal test of insolvency includes money raised through the selling and mortgaging of assets but excludes asset realisation programs. When determining if a debtor has available resources from which debts can be paid (and thus prove solvency) included in this amount should be funds raised through the realisation of assets (not the sale of core assets or the business itself) or the raising of funds from the ready mortgaging of property.
- Payment terms – the meaning of ‘due and payable’. It is the current view that debts are due and payable when they fall outside agreed terms (such as 30 days) unless there is an express or implied agreement to extend those terms. It is not enough to suggest a debt is not ‘due and owing’ simply because a creditor has not followed it up.
Depending on the circumstances, available realisable assets could include:
- Cash at bank
- Undrawn overdraft
- Equity in mortgaged assets capable of being drawn upon
An ounce of prevention…
Any insolvency accountant or lawyer will tell you that proving insolvency is a notoriously difficult task. In reality, the majority of cases sitting on an insolvency accountant’s desk are insolvent. They would not be there otherwise. The real science (some would say art) is identifying when a trading company strays into the territory of insolvency. Companies are reliant upon their accountants and bookkeepers – both external and internal – to spot the warning signs and sound the alert.
Symptoms of financial ill-health
From its work in the National Insolvent Trading Program, the Australian Securities and Investment Commission (ASIC) has identified some key operational and financial practices which, in combination with other practices, indicate a company is at significant risk of insolvency. The list of indicators, which is not exhaustive includes:
- Poor cashflow, or no cashflow forecast
- Disorganised internal accounting procedures
- Incomplete financial records
- Absence of budgets and corporate plans
- Continued loss-making activity
- Accumulating debt and excess liabilities over assets
- Default on loan or interest payments
- Outstanding creditors of more than 90 days
- Increased monitoring and/or involvement of financiar
- Instalment arrangements entered into to repay trade creditors
- Judgement debts
- Significant unpaid tax and superannuation liabilities
- Difficulties in realising current assets (eg, stock, debtors)
- Loss of key management personnel
Who Is Liable?
- Directors – Under sections 588G and 588M of the Act, a liquidator can recover from a director of a company, as a debt due to the company, compensation equal to the amount of the loss or damage suffered by the company after a time that it is shown that a reasonable person would have suspected that the company could not pay its debts as and when they fall due
- Holding Company – A holding company may also be held liable for the debts of its subsidiaries under Section 588V of the Act, where the holding company, or one its directors, is aware at the time of the company incurring debts that the company is insolvent or is likely to become insolvent by incurring the debt
Early intervention is crucial
A director of a company has a duty to prevent the company from incurring a debt when the company is insolvent or there are reasonable grounds to suspect that the company is or would become insolvent. A director would fail to fulfil that duty if he/she was aware that there are grounds for suspecting the company is or would become insolvent or a reasonable person in a like position would be aware of such grounds. Internal accountants and/or bookkeepers are ideally placed to identify problem symptoms in a business and recommend appropriate corrective strategies. The earlier intervention with respect to solvency difficulties, the more likely a successful turnaround can be implemented. The longer the problems are allowed to fester, the more likely the condition will be terminal and some unpleasant consequences may become reality.
Disclaimer: This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in this website is for guidance only and should not be relied upon without obtaining professional advice having regard to your specific circumstances.