Monthly Archives: October 2018
Companies beware – Division 7A changes
Division 7A is the area of tax law that requires shareholders or their associates (which includes family members and trusts) to repay loans to companies. Current laws been in place for 21 years but remain incapable of being fully understood by a reasonable person.
We therefore welcomed the announcement within the 2016 Federal Budget that the government would simplify Division 7A with effect from July 2018.
July 2018 has obviously come and gone.
However, Treasury has finally released a consultation paper.
Treasury alleges that it is based on the recommendations by the Board of Taxation. It is anything but.
In fact it’s downright scary!
Announcements from the 2016 Federal budget which have found their way into the Treasury consultation paper include:-
- All loans to be placed on 10 year terms.
- Removal of the need for a formal agreement.
Those aside, other changes are nasty to say the least and include:-
- Repayments in early years will be higher annual instalments to be equal.
- The interest rate will be calculated off a different base and will increase by some 3%. In other words, it costs individuals more and the company pays more tax.
- Repayments during the year will be disregarded so interest will be based off the opening balance. How unfair and unrealistic can you get?
- Pre-1997 loans that are not treated under the current system will be required to adhere to Division 7A.
- Division 7A currently only applies where there is an excess of assets over liabilities. This exemption will be removed.
- Unpaid distributions by trusts to companies will be required to be on 10 year loan term from 2019.
- Private use assets of the company will be required to be valued under a formula and subject to a market valuation every five years.
- The period of review under which the ATO can go back and review the situation will be increased to 14 years. Other than fraud (where the ATO can go back as far as I like), no area of tax law has a period of review anywhere near as long as this.
The 2016 Federal Budget announcement was made under the guise that there would be a simplification of Division 7A. This is not a simplification. This is dramatic shift under which the implications are far more onerous and costly.
Treasury’s consultation paper has caused a storm within the profession. It such a dramatic shift that it will be hard for the profession to retain current positions. There is also remarkably short period of time to do so as the amendments are to apply from July 2019.
We will keep our affected clients informed. Moreover, we will be actively be taking corrective stances before July 2019. We do though welcome any query you may have now.
Exempt fringes benefits – mobiles & other electronic devices
A small business can provide an employee with a portable electronic device every year and do so free of Fringe Benefits Tax. They qualify as exempt fringes benefits.
That could be a mobile, lap-top or tablet.
The limit is one per year but it must be used for work purposes.
It probably doesn’t mean as much to the owner of a small business as they are going to get a deduction under the $20,000 asset write-off concession (but which is due to expire come 30th June 2019). But if you are an employee, it is a cost effective way of buying such items.
Want to know a few more tips – then call us.
Or better yet, meet with us as our initial meeting with business clients is free of cost or obligation.
Single touch payroll for small businesses
Single touch payroll for small businesses is not far away.
Come July 2019, every small business in the country will need to report their payroll to the ATO at the time of payment. No longer will a business report total wages and tax on an activity statement and then confirm what was paid to whom by issuing PAYG Payment Summaries (group certificates) after year end.
Instead, at the time of payment, a business will need to report to the ATO:-
- How much was paid to each employee, and
- What the tax withheld was and what super is required to be paid.
This will allow the ATO to better chase up unpaid PAYG Withholding. Moreover, by matching super contributions received as reported by super funds, the ATO will be better placed to chase the almost $3 billion of unpaid SG super. And don’t think the ATO and the government aren’t serious about this. They have already announced an intention to legislate 12 months jail terms for unpaid super (presumably of some significant amount).
Not that directors don’t want to not pay PAYG Withholding and SG super. Since July 2012, PAYG Withholding and SG super unreported and unpaid after 3 months becomes a personal tax liability of a director.
This is not something to be left to July or that last minute.
Please pay attention to our progressive information and training.
The ATO has announced that small businesses don’t need to have a payroll program (and presumably they will release some on line version). But a payroll program will make it easier.
As stated above, we will educate and assist our clients to comply. If you have another accountant, then we welcome the chance to explain to you how we can help you in this area and other ways we can assist you to improve your business and to make you more successful and secure.
You may also wish to watch the following introductory ATO video.
Cash flow – state actual due date on invoice
Instead of stating terms such as 14 days on an invoice, we suggest stating the actual due date – such as Monday Nov 5.
We have found that other clients that have moved away from number of days to the actual due date have experienced earlier receipts from customers.
How to improve your cash flow
Xero’s latest Business Insights reports that as of August, only 53.5% of businesses were cash flow positive.
That means that almost half of Australian businesses have more money going out the door than in. That is a lot of stress, sleepless nights and extra interest to fund.
Together with our years of experience, our businesses analysis dashboards can reveal where you’re at and what will be the impact of making changes to the business. More to the point, we can show you on a rolling basis what your cash flow will be like in the months ahead.
Sleep easier by giving us a call to discuss your situation and opportunities.
Super Guarantee
Friday 26th October is the end date for satisfying Super Guarantee (SG) super obligations for the September 2018 quarter.
Super guarantee is payable on most forms of remuneration including:-
- Commissions.
- Bonuses (but see below).
- Directors’ fees and all other forms of remuneration to directors.
- Allowances (except where fully expended).
- Contractors paid mainly for their labour.
But super guarantee is not payable on the following items of remuneration:-
- Overtime.
- Reimbursements.
- Unused annual leave on termination.
- Remuneration of less than $450 in a month.
- Bonuses that are only in respect of overtime.
- Bonuses that are ex-gratia but have nothing to do with hours worked (harder to satisfy than what you might think).
- In respect of employees younger than 18.
- Employees carrying our duties of a private or domestic nature for less than 30 hours in a week (such as nannies).
- On quarterly remuneration greater than $51,620.
- Non-residents performing work for an Australian business outside Australia.
SGC super should never be paid late as late payments attract substantial interest and penalties. Furthermore, and SG (and BAS) liabilities that remain unreported and unpaid after 3 months automatically become personal debts of directors.
The SGC rate remains at 9.50%.
Please ensure that you make your payment with sufficient time through your Super Stream gateway. A SG commitment is only satisfied when the money is received by the fund; not when paid to the gateway. Whilst some gateways pay into the respective super funds the next working days (such as the ATO’s free gateway), other gateways take up to 5 working days.
We welcome any question you might have.
Savings from a company tax rate cut?
So Scott Morrison has said that they wish to accelerate the company tax rate cuts for small business. So what are the savings from a company tax rate?
Not much if you intend to pay out profits as dividends.
In fact you might be worse off.
For more, read our previous blog at:-
SMSF – minimum balances
ASIC is considering mandating a minimum balance for a self managed super fund (SMSF) to be opened.
Certainly there is good reason for this given reports as to how many SMSFs have unviable balances.
What is most important though is that one receives financial planning advice as to the appropriateness of opening a SMSF.
Home office expenses
You can claim home office expenses if you:-
- Run a business from your home, or
- Undertake work duties from home.
Substantiating a claim to the ATO’s satisfaction is paramount.
A classic case of running a business from home is a doctor. To one side of the house will be a shingle, an entrance, reception, waiting rooms and doctors’ rooms. It may be run from home but it looks like a business. In such cases, a claim for occupancy expenses can be claimed. A claim can also be made for running expenses as can someone who simply undertakes some of their work at home.
What home office expenses can be claimed for a place of business?
- Running costs of heat light & power.
- Occupancy costs – such as rent, or mortgage interest, rates as insurance.
- Other costs such as phone costs, depreciation of fittings.
If not separately metered, some of these costs will need to be apportioned. Apportionment can be made on a percentage area basis or by tracking business usage.
Where home is a place or work, travel from the work place for work purposes is deductible (whereas travelling from home to work is private).
A word of warning though
If home is a place of business, then the home will lose part of its capital gains tax exemption. Tax will only be payable when the home is sold (but note that Capital Gains Tax does not apply to assets bought before 19th September 1985).
That said, the gain may not be that significant. If the work area was say 20% of the home area and only used that way for 5 years out of the 30 years the home was owned, then the taxable gain would only be 3.33% of the total gain (before any loss is offset or 50% Capital Gains Tax discount applied).
The ATO outlines some of the basis in the following e-mail.
We would welcome the opportunity to discuss your situation with you.
We will examine running expenses in a future blog.
How we can add 137% to a client’s profit
How we can add 137% to a client’s profit
But first, let me address the process and why we are different.
Firstly, in our annual general meetings with business clients, we work through a series of high level performance analysis reports (some of those reports are used in conjunction with other tools for our more regular meetings).
Secondly, we have regular discussions with our clients (even if only briefly). With cloud accounting, we know what is happening now and can identify and address trends as they occur. Analysis and meetings keep our clients moving towards their goals.
Thirdly, our focus is your long term success and your security. Our work and focus does not end with the preparation of an annual Tax Return.
So how did we work out how to add 137% to a client’s profit?
- Firstly our analysis tools identified that small 1% changes in key areas would deliver a profit of 30%. What areas – whilst straight forward, that will be explored in another blog.A 1% change is not difficult to implement for most businesses. A 30% uplift in profit (with a corresponding improvement in cash flow) is a big reward for small effort.
- We then identified that a 5% price increase on its own will add 68% to the bottom line. In our client’s case this should not be difficult as they haven’t reviewed their prices for a little while.
- We then explored a 10% price increase. Our software revealed that a 10% price increase would increase the bottom line by 137%.
- We then, and here is the key to all this, our software revealed what their fall back positon will be. Our software determined that they would have to lose more 24% of their existing customers to make less than under the existing price structure. Our client sells a unique and quality personal product that people buy on emotion and are guided more by outcomes & quality than they are on price. They might lose some customers, but they will not lose anything like one out of every four customers (which they will be tracking anyway).
- Even if they lost 10% of their customers in response to a 10% price increase they would still improve their profit by 80%. 80% more for doing 10% less – sounds attractive doesn’t it?
Our modelling software takes the guess work out of decisions. Such big decisions can be taken confidently. Our client can now review their prices confident of the outcome. They will not be lying awake at night worrying nor will they procrastinate or not make any change at all.
And if that isn’t enough!
Based off a likely maintainable business profits multiplier, their business will be worth up to $240,000 more.
We welcome the opportunity to discuss with you how we can help you to improve your business. Our initial meeting is free of cost or obligation. Call us now on 9899 7511.