Income splitting

Income splitting refers to ensuring income is legally earned by a partner or family member and taxed at their lower tax rate.

In respect of share investments, we often find that new clients have done that.

It often surprises me though, indeed just as it is with a new client, how often the high income earner has all the bank accounts and term deposits earning interest in their own name. Having such accounts in joint names is half as bad. The tax burden would be a lot less if held in the name of the spouse name on the lower marginal tax rate (and almost always will still be treated as a joint asset for family law purposes). Same income, better tax result.

Negatively geared properties however require detailed consideration. Negative gearing refers to the situation where the interest and other expenses incurred on an investment exceed the income from that investment. The tax break on negative gearing often dictates that the investment be made in the name of the high income earner. That said, with the 10 year bond yield under 1%, interest aren’t going up in a hurry – which means that properties become more quickly positively geared than they have in recent years. In other words, getting a tax break doesn’t last for that long and actually becomes a tax problem relatively quickly.

The other factor for consideration is when will the property be sold.

If in retirement, the tax burden may be low; if whilst working the tax could be eye watering.

We welcome any tax question you may have.

ATO threatening SMSFs

Last week the ATO wrote to 17,700 self managed super funds (SMSFs) and threatened fines of up to $4,200. That’s one in every 33 SMSFs! The threat was issued to trustees where their SMSF had more than 90% of its assets in one asset class.

But that in itself is not a breach.

As all SMSF trustees will know:-

Their fund must have an investment strategy, and
An investment strategy must consider investments, providing retirement benefits, risk and diversification, and
That SMSFs are audited (and the ATO have already audited the auditors).

You might well therefore ask why the threat. And more to the point, why threaten trustees and do so with significant fines.

Whilst this approach seems unnecessary, some funds may need to better evidence their decisions.

There is nothing wrong with having the bulk of your SMSF assets in just one class. You just need to make sure your investment strategy evidences that and the reasons why.

If there is an issue it remains in respect of property owned by a fund in, or largely in, pension mode. There comes a point for some SMSFs paying pensions that the rate of return (i.e. net rent) is below minimum pension levels. Pension payments are based off market values, so in time cash reserves can be drained (noting that the minimum pension rate is 6% of asset values from age 75, 7% from age 80 with escalating increases thereafter). The problem escalates if the property becomes untenanted.

In closing, I’d like to make three points:-

Investment strategies are not set and forget documents. They were introduced to force trustees to evaluate and monitor all investments.
Measuring SMSFs investment mix/percentages based off numbers as they are 30^th June is prone to error. Accumulation funds are often flushed with cash at 30^th June with last minute contributions (although not so true today with such low concessional contribution caps). Conversely, pension funds are typically low on cash at 30^th June as many SMSFs only pay pensions in the back end of June.
This is again a reminder of the many reasons as to why the trustee of a super fund should be a company and not individuals. If the ATO is successful in fining the corporate trustee of a SMSF over this matter then the fine will be $4,200. If individuals are trustees, the fine will be $4,200 per trustee. Four trustees means the ATO will pocket $16,800! And remember that such fines must be paid personally; the fund can’t pay it on the trustees behalf.

We will be contacting our SMSF trustees who may receive such letters. If you do though have any questions, please don’t hesitate to call us.

The ATO are auditing Healesville (and Hornsby)

The ATO’s audit and review processes continue to expand – both in number and the way they are conducted. The ATO has just announced that it is heading off to Healesville where it will visit 400 small businesses within the next month.

They are also off to Hornsby.in Sydney.

The ATO’s press relates states that “people from the Healesville area have told us about some building construction businesses getting an unfair advantage over their honest competitors by not paying by the rules.” Their press release went on to talk about taking action against the black economy and specifically about non-compliance employer obligations.

At the same time, the ATO are running information sessions to assist small businesses; including Single Touch Payroll (STP).

So if the focus is on building and construction within a smallish country town, then it looks like they will match up all the transactions between businesses that operate within that sector.

Such a pilot program was undertaken in the Hunter Valley some years ago. It focused solely on plasterers – both plasterers themselves and those that provided good or services to them. It was so successful that it lead to the reporting of all contractor payments (Taxable Payments Reporting) within the building and construction industry. And that system has been so successful, i.e. raised money and fines and interest, that it has now been expanded to include couriers, security and computer programmers.

One can only suspect that if they find under declared wages then they will rightly notify WorkCover.

It will be interesting to hear what they find.

National Scam Awareness Week

The National Scam Awareness Week was actually last week. However conversations with clients and others revealed just how exposed we all are. It should also be said that being aware and protecting oneself from scams is an ongoing task and not just and activity for last week.

That said, one can largely protect themselves through just common sense, awareness up-to-date software and scanning programs.

The Australian Competition and Consumer Commission (ACCC) has a terrific homepage.

And from accounting perspective, always remember the ATO is not in a ring and ask you for personal details nor ask you to pay a debt immediately over the phone.

We are also happy to recommend an IT specialist to set up and monitor your computer system.

What you will doesn’t cover

Do you know what your will doesn’t cover? Many people don’t.

A will cover assets in your own name.

It therefore doesn’t cover:-

Jointly held assets such as bank accounts and the family home they go straight to the surviving partner).
Assets held within discretionary trusts.
Super (see future article).
Life insurance policy (goes to the owner).

Some people own everything in their own name.

On the other hand, other people have little in their own name. It is no uncommon to see a millionaire under age 65 have little in their own name, particularly if they are in business or can be sued for other reasons.

Everyone should have a will. It is your chance to set out who your assets are to be distributed to. Proper planning ensures this is done in the most efficient and tax effective manner. You therefore not only need a lawyer but often a financial planner as well. It should never be done on the cheap if the bulk of your toil and investments reside in a trust or self managed super fund.

Bad debts are death

Bad debts are death particularly if you trade on narrow margins.

A bad debt of a $1,100 invoice will not have a GST impact if you are registered on a cash basis. But a $1,000 of income at a 20% margin will require another $5,000 of sales to cover that loss.

So think twice before selling to customer who you doubt will pay you.

Or perhaps take payment up front.

Or perhaps set up a payment facility and don’t do anything until accepted.

Or ring us as we have dozens and dozens of solutions and strategies gained from years of dealing with different clients in all sorts of industries.

STP and super payments

The roll-out of Single Touch Payroll (STP) has proved to be an interesting process!

For some, it just meant clicking another button or two within their payroll program.

For others it meant changing the whole way they processed their payroll.

It has also uncovered some interesting practices.

We have been somewhat surprised to find that some clients weren’t making their employee SG super payments through a SuperStream, nor using a super clearing house. The former is the payment method, the latter is the notification of employee’s contributions. We have also been surprised to learn that super funds, like some of the really big ones, have still been accepting cheques.

There are free solutions out there but the best solution is almost always the one built within your payroll software. Whilst there may be a cost, it is nominal and avoids double handling.

Please call us if you would like to discuss your situation and needs.

WorkCover remuneration certification

It may be time to complete your 2019 WorkCover remuneration certification. Large employers are required to submit early.

Other employers have delayed lodgement dates. That said, it still may be in your interest to lodge soon. This is particularly the case if your remuneration will be significantly less in 2019/20 than for 2018/19.

You will get back what you over pay based off their estimate; but why over pay in the first place.

You will also ensure it is lodged. Many employers forget to lodge and suffer from WorkCover’s default 20% annual increase. So get it done now when you have finalised and issued the PAYG Payment Summaries.

When growth is bad (and running out of cash)

The following is a re-post from February 2015. It has been re-posted as it has been a topic of discussion with a couple of existing clients as well as potential new clients.

With our existing clients, we are planning around how fast they can grow and the issues around including cash flow, cash reserves, need to borrow as well as many other issues including their staffing and training. We have created a clear picture of what sustainable growth will look like, can measure how we are tracking and are dedicating the necessary resources in a planned roll-out.

On the other hand, some potential clients have come to us and they have found themselves, as you could say, in a pickle. Sadly with no proper planning they didn’t see it coming. It has come as a very rude and great shock. Pity their accountants didn’t provide such planning and cash flow assistance.

Last week I queried whether your plan will work and touched upon good and bad growth.

Increasing sales is not the answer to everything. It is not uncommon to see a business solely concentrating on increasing sales fall part if they haven’t ensured the business has the right team and systems in place to support greater turnover.

Worse still, some businesses even fail as they run out of cash due to the increased revenue not being enough to fund greater expenses and the greater amount of money locked up in debtors and stock.

Consider this……

Take a business that doubles its sales from $1,000,000 to $2,000,000 and everything else doubles from:-

Cost of goods sold from $700,000
Overheads from $175,000
Net profit from $75,000 (average tax rate remains at 40%)
Debtors from $125,000
Stock from $160,000
Creditors from $75,000.

Sounds good?

Actually, it’s a disaster.

Why – because the working capital required has doubled from $210,000 to $420,000 whilst the doubling of profit after tax has only generated an extra $150,000 – of which $60,000 will go in tax. What seems to be a new dawn will actually prove to be a nightmare. The business owner in such a case might think they are going forward in the right direction but there is something coming awfully big and fast straight at them!

The problem here is that the owner has concentrated on sales and sales alone. The outcome would be quite different if other key drives such as debtors, stock and creditors turnover were addressed (and for which we have many strategies from our many years of experience and supporting tools).

We were a member of the Principa accountants network (from which this example was generated) as well as other accounting groups that provide tools to assist our clients with cash flow control and planning – and for many other areas as well.

Why not refer to our web page’s article on business improvement potential. Or better yet, why not ring Alex Stewart and make a time to sit down and have an obligation free meeting to discuss how we can help your business.

So again I ask, will your plan work?

Other STP tasks

Single Touch Payroll (STP) started for all non-large businesses two weeks ago. So all business should by now be reporting wages at the time of payment.

For some this has meant using a payroll software program for the first time. This was the perfect opportunity to ensure that all other HR employment requirements had been attended to.

If you are still struggling with all of this then please contact us so we can discuss ways in which we can help you.