Monthly Archives: March 2015

The most misunderstood tax (and some opportunities)

In my experience, Fringe Benefits Tax (FBT) is the most misunderstood tax.

I say this as the ATO makes corrections in every second FBT audit.  Employers just don’t calculate the correct benefit amount and tax thereon.  It is also amazing how many clients who are employees of large employers are sacrificing salary for fringe benefits and then simply paying the FBT tax thereon without exploring alternate ways to reduce the taxable value.  How does this happen?  It happens as the employer calculates the taxable value of the fringe benefit but does not go on to see how the employee can reduce or extinguish the taxable value of the fringe benefit by making after what are called employee contributions (which they do so at their marginal tax rate).

What is FBT you may ask?  It is a tax on an employer for fringe benefits provide to an employee.  It’s basically anything other than salary or superannuation.

Some employees are lucky – their employer does not have to pay FBT so there is no corresponding adjustment to the employee’s remuneration package.  Exempt employer include public hospitals and charities.

There are also employers that pay a reduced rate of FBT; private schools being the most common example.  Otherwise, the FBT tax rate payable is a flat 49% where one is employed by a “normal” employer.  As I noted earlier, where many employees lose out is that nothing is done to reduce the amount that the FBT tax rate is applied to.

For those employed by FBT exempt employers, you will almost certainly want to salary package as many fringe benefits as possible.

So what are the benefits that those employed by their own business or “normal” employer can package:-

  • Cars.
  • Exempt fringe benefits such as lap-tops.
  • Those benefits subject to the minor, infrequent and irregular exemption.

So can you make yourself better off by sacrificing salary for fringe benefits?  We have a calculator which can show how you may benefit.  Ring us to schedule a meeting so we can show you how we can increase your after tax income.

 

At MRS, we will spend today planning for your success tomorrow.

What does your accountant cost you?

I just met with a new client on Thursday.  It staggers me what a poor level of service some accountants provide to their business clients as was the case here.

Some of the key issues were that:-

  • The client had not been told there was a big tax bill coming (and the accountant didn’t tell them as such, they just sent the client a letter telling them that they had a lot of tax to pay). The end profit and tax position should never come as a surprise and do so many months after year end.
  • Failed to undertake any sort of planning to legally minimise or defer tax where possible.
  • Provided no service other than preparing a Tax Return.
  • Presented financials in a meaningless way which did not report on the operations of the business.

This accountant’s focus was clearly limited to attending to meeting compliance obligations.  They live in the past and do not look forward as business owners must.

The accounting work was not expensive but what was the real cost of lost opportunities? 

The last two issues listed above I find particularly disappointing.

To begin with, the profit and loss clumped all expenses in together.  I identified at least 9 expenses which should have been shown separately in cost of goods sold.  By doing so, the business would know their gross margin and therefore what the true cost of making what they sell (you would be surprised that even those businesses with costings systems often still get it wrong as they don’t factor in wastage, re-working, under-capacity during quiet periods, etc.).

Furthermore, the client has never been shown:-

  • The key drivers in the business – and what the outcome would be from making changes like say increasing prices by 7% (together with a calculation of how many customers could one lose and still make the same profit).
  • Identify which costs are fixed and which are variable.
  • Which reports to run weekly, monthly and quarterly.
  • What solvency ratios to monitor to understand what the future cash flow will be like.
  • And this is just the generic matters without getting down to what is unique and particular to their industry and business.

So again I ask, what is the real cost of using that accountant?

The benefit is clearly identifiable – there was none other than the compliance work (which any accountant can do).

 

At MRS, we will spend today planning for your success tomorrow.

The best business book to read

I have read many business books.

I read the E-Myth many years ago and it changed the way I think about my clients and indeed my own business.

Good to Great by Jim Collins was a fascinating read (despite being about large American corporations, some of who have since failed).

Last year I read Simon’s Sinek’s Start With Why.  Boy did this change the way I think about our positioning and value proposition (most of which was good, but not expressed the right way).

I just re-read parts of it again over the weekend and want to share some of it with you.  You can click on the following You Tube version of Sinek’s Ted Talk on Start With Why.  It runs for only 18 minutes but encapsulates much of what the book addresses.

The examples given in this short video are fascinating as are the insights as to how the human mind works.

I reckon that after viewing this short video, the next thing you do will be to buy the book (which I strongly recommend you do).

So why do I do what I do (and why do I provide so many services in addition to normal accounting and tax services) – because I find reward and feel accomplishment when I have helped a client to maximise their income, protect that created wealth and help them plan to leave it to their beneficiaries in the most efficient manner.

https://youtu.be/sioZd3AxmnE

When industry benchmarks are useful

I have two problems when measuring against industry benchmarks:-

 

1/.        Are you really comparing apples with apples?

How many businesses make up the benchmark and just how comparable are they to each other and indeed to your own business?

Are they big & small, metropolitan &/or country based, new & old, running the same funding and operational structures and so on.

One can place faith in more common and the more identifiable businesses but otherwise, great care should be taken.  Data from well know franchises can reliably be compared against each other, but thereafter, beware.

 

2/.        I have found over the years that clients who focus on their industry benchmark fall for the trap of thinking that as they ahead or close to a benchmark, that all is OK.  Laziness and mediocrity tend to creep in (it reminds me of one of those great lines from Jim Collins seminal book Good to Great – good is the enemy of great).

More successful business owners however are more focused on improving any system and process in their business.  It’s amazing how often little changes have big results (see our blog from two weeks ago titled Greater profitability is closer than you may think).

 

So should you refer to industry benchmarks?  The answer is yes but a qualified one.  Just make sure you know what you are comparing yourself to and more importantly, place greater emphasis on improving the processes and systems within your own business.  In this regard, it is amazing how some businesses have come to dominate their industry by employing systems and processes from different industries.

 

The one benchmark though that you should not avoid is any applicable ATO’s small business industry benchmark.  Like many accountants, I question how they derive their numbers – for example, it is a blight upon my profession that many public accountants lazily declare cost of goods sold items within overheads so this must greatly distort the ATO’s gross profit margin numbers.  Questionable as these benchmarks are, they can’t be ignored as they are the ATO’s greatest business audit selection method and they target those businesses operating outside the ATO’s industry benchmarks.

What your accounting system should do for you

Sadly, for most small businesses, all that their accountant is interested in is their Tax Return and BAS’s.  As important as the past is, it is the future that is more important.

One of the many unfortunate consequences is that most small business owners (who aren’t accountants and would like help improving their business) run an accounting system of little use.  It will help the accountant prepare annual Tax Returns and generate BAS’s – but little else.

A proper accounting and reporting system will include such features as:-

  • Report on the true gross profit from your core business activity. It shames me that many of my fellow accountants let their clients exclude many of the production costs from their cost of goods sold. You have to know what you margins are!
  • Report on different segments of your business.
  • Have a system to report and monitor key numbers on a daily, weekly, monthly and quarterly basis.
  • Contain estimates for such things as depreciation and interest – the year end financials and tax should never be a surprise.
  • Monitoring of KPIs and key drivers.

Such a reporting system will enable a business owner to better understand their business and be able to focus on the matters, which if controlled, will improve the success of their business.

At MRS, we are able to build on this core need and provide further reports and coaching to help our clients towards greater success.

We invite you to look at our service offering as per the services tab of this web page.

More importantly, we welcome the opportunity to meet with you to gain an understanding of your business and determine the ways in which we can help you.  This initial meeting is free of charge.  We welcome your call.

 

At MRS, we will spend today planning for your success tomorrow.