Travel expenses

 

Travel expenses area tax auditor’s delight.  So what do you need to do?  The basics are:-

  • One must keep written or scanned evidence of all expenses when away from home for more than one night.
  • If one is travelling overseas or away for more than six nights within Australia, then a travel diary must be keep. Note the word must; it is not an optional requirement.  No diary, no claim.
  • Travel diaries can be bought at most newsagents. The simplest things to say is fill in each column to each row, but it is worth noting that one must record:-  – the nature of the activity.  – the day and time that the business activity commenced.  – how long the business activity lasted.  – the name of the place where you engaged in the business activity.
  • Collect as many business cards and brochures as you can. Photos are also great proof of what you did.

What if the trip is partly private and how might costs be split?  These are my views as the ATO provides surprising little clarity on this matter:-

  • If one goes for a conference to say Europe, then such a long haul means that it is unreasonable to expect one to fly in the day before and then spend say four days sitting in a darkened room. Arriving say two days early does not in my view change the purpose of the trip.  Consequently, the cost of the whole flight remains fully deductible.
  • In my view, if one stays on for a day and/or it coincides with a weekend, the trip remains fully deductible.
  • The costs incurred on the work/conference days are deductible such as accommodation and food (but not excessive alcohol).
  • Sight seeing trips are not deductible.
  • What if one attends a week long conference but enjoys a week’s holiday beforehand or afterwards? Clearly the holiday is not deductible.  However, it also raises a question as to whether the whole air fare can be claimed.  Unless there is some compelling counter argument, the air fare would need to be apportioned on a proportional days basis.
  • What if one’s partner comes along to the conference or business trip. One method is to only claim half of the accommodation costs.  Another method which I subscribe to is to find out the single rate and claim that – as that is what would have been incurred but not for the partner.  In some cases, it is the same rate.  Make sure you keep the evidence of the alternative room rate.

A common problem is obtaining receipts in some countries.  Thankfully, the ATO provides relief to this problem by allowing employers to pay their employees (which can includes the directors of a company) a daily travel allowance.  The ATO annually sets out daily rates that employers can pay employees to cover their daily travel costs of food, travel and other incidental expenses.  There are rates for Australia (which include accommodation) and overseas (which do not include accommodation costs as they must be fully substantiated).  Please ask us if you would like a copy of the current year rates.  There are differing rates for different areas with higher rates applying to higher costs centres and levels of salary.  Moreover, an employee is exempt from substantiation if they do not claim more than the allowance paid to them.

As it is an allowance, it must be treated as such in your payroll system, be reported within W1 on the next BAS and shown as an allowance on the end of year PAYG Payment Summary.  Please ask us if you would like help in setting this up correctly.

Please remember that as it is an allowance, this method can’t be used by those running a business in their own name or by partners in a partnership.

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

Choice of super fund

Offering employees choice of super fund has been compulsory for most employers since July 2005.  It was introduced for two major reasons:-

  • To enable employees to dictate where their super savings where invested, and
  • Overcome the problem of departing employees not being able to continue their existing life insurance – not ideal for one over 45 years of age.

An employer not excluded from the choice system must provide an employee with a Standard Choice Form within 28 days:-

  • To a new employee.
  • To an existing employee who requests to make another nomination.
  • Where you change the default fund.
  • You are unable to contribute to the nominated employee’s fund.
  • The employee’s fund becomes a non-complying fund.

The form must offer a default fund into which contributions will be made if the employee doesn’t nominate a different complying super fund (which can be the employee’s own self managed super fund).  If the employee exercises choice, they must complete the form and return it with certain information as set out on the form.  You can obtain a copy of the form by clicking on the following link:-

http://tinyurl.com/pcnj3oc

Once an employee exercises choice by nominating a fund, an employer has 2 months to arrange for contributions to be made into the nominated fund.

Which funds can an employer use a default fund?  It must:-

  • Be a complying fund,
  • Be registered by APRA to offer a MySuper product,
  • Provide a minimum level of life insurance as set out in the regulations.

If you would like to know more, please call us or ask for a copy of the last edition of our Tips and Traps newsletter which explored this area in more detail.

Getting the job done

Often the most interesting discussions with clients are the ones about how they do what they do. 

Common discussion points that we have with our clients include:-

  • Do you have standard processes and systems?
  • Do these systems handle permutations and identify exceptions?
  • Is your team properly trained?
  • Does your team have proper tools and equipment?
  • Does you hold sufficient raw materials?
  • Do you agree to start the work only when your customer/client has supplied all the necessary instructions/information/specifications?
  • Do you need checklists for particular tasks or clients?
  • Do you meet with team members to check how client/customer work is progressing?
  • How do you communicate progress and issues with clients/customers?
  • Is the completed work reviewed before it is delivered?

These are just 10 common questions (and they often lead to many other questions and considerations). There of course many other considerations and some that are unique to certain industries.

How well have you addressed the issues that relate to your business? Some people are consumed by being too busy and never stand back to address such important issues such as these. We have many years experience with a wide range of clients and can help you both discover the key issues in your business and provide options and solutions.  We welcome your call.

 

 

Unclaimed monies

In 2012, we sent out a warning e-mail to our clients in respect of the then new unclaimed monies regulations.

Since then, the balance of any bank account unused for more than 3 years is transferred to the government.

As it is not easy to reclaim one’s money as what one might think and as it’s coming up for 3 years since our reminder, we again remind you to either transact on any dormant account or close it. Please remember that charges debited or interest credited by a bank to your account do not keep an account active. You need to either make a payment from or deposit into an account for it to be considered active.

If you want to know more or undertake a search on a closed bank account, go to http://tinyurl.com/qjozgon

 

Salary packaging a car

It never ceases to amaze how many new business clients have their cars owned the wrong way.  Not that they should know – but their former accountant should have, but for some unknown reason, never bothered to advise their client!

So what is the best way to salary package a car?  There is no single answer that applies to all.  It is simply a matter of analysing a client’s situation to work out what is best for them.

If one is provided with a passenger car by one’s own business run through a company or trust, then Fringe Benefits Tax (FBT) tax rules apply.  There are two stages in determining the outcome – and two chances to maximise the outcome.

The first step is to choose which of the two methods to use to determine the value of the car fringe benefit.  The benefit can be valued under either the log book method or the statutory formula method.  I view the log book method as it is what it is.  The only advantage of having a car provided by one’s own business rather than in one’s name is that is that GST can be claimed back.  For many though, the statutory formula can be most generous.  All that matters is how many kilometres are travelled annually; the actual split between business and private doesn’t matter as an implied business use is assumed.  For those with a low percentage of work travel, they can effectively claim a much higher work percentage – and it is audit proof (provided the right declarations are completed).

The second step is to determine the best way to extinguish the fringe benefit value.  Paying FBT tax is rarely the best option as it equates to the highest marginal tax rate.

That said, we recently advised a client on how to salary package their next car.  They were looking at an expensive car and were in the top marginal tax rate.  By structuring the package in the most optimal way, we estimate the client will be $1,800 to $2,800 better off in each of the next 4 years.  So after 4 years, they will have had an average of $9,200 more in their pocket.  Quite a good result indeed.

We would welcome your call to see how we can make you better off.

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.