Posts Categorized: Tax

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.

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.

Upcoming deadlines for Dec 14 qtr

For those of you who are employers, Wednesday 28th January is the end date for satisfying your SGC super obligation for the December quarter.  Late payments will attract substantial interest and penalties.  Furthermore, a tax deduction can’t be claimed for the late payment.  This is therefore the most important obligation to be paid.  I therefore recommend that payments be made by Friday 23rd at the latest to guard against processing delays.

For those who lodge a quarterly BAS or IAS, your December quarter activity statement is due to be lodged by 3rd March.  As these quarterly activity statements already receive a one month extension, the ATO doesn’t grant any further extensions.  Please remember that from 30th June 2014, electronic lodgement of any activity statement will result in no further paper activity statements being issued.  We again recommend businesses to register for the ATO Taxpayer Portal to enable electronic lodgement and to more easily liaise with the ATO, check various tax records and transact in a more efficient manner.

Please note that lodgement of an activity statement (even if it is nil statement) and payment are two separate requirements.  Late lodgement attracts a minimum non-deductible fine of $170 for every 28 days that a form is lodged late whereas as late payment results in an interest levy.  Not that we encourage it, but should you not be able to pay an activity statement in full, do not defer lodgement as the possible fines are significant.  The ATO will of course in time identify that an activity statement liability has not been paid and follow it up; but by this time though the liability should be paid in full anyway and at worst, incur a deductible interest charge far less than any late lodgement penalty.  The ATO still seem to be granting payment arrangements on reasonable terms (although not as easily as before).

What Your Accountant Should Do For You

Ask now what you can do for your accountant…
…ask what your accountant can do for you.

Running a business consumes your life and requires expertise and guidance in respect of so many matters. How much more successful would you be if your accountant was focused on your long term success and security?

Does your accountant

  1. Have an interest in your business?
  2. Or do they just prepare Tax Returns and BAS’s for you?
  3. Meet with you regularly?
  4. Come to your office (if not how do they understand what you do)?
  5. Set up your accounting system so that it reports on your business?Or do they just use it to prepare Tax Returns and BAS’s)?
  6. Modified your reporting system to monitor the key drivers within your business?Can they show you the outcome of making changes to those key drivers?Or are you just going to keep doing tomorrow what you did yesterday (and somehow expect a different result)?
  7. Send you a free newsletter, e-mail reminders and other educational material as well as the opportunity to attend seminars & workshops?
  8. Have ever changing staff?
  9. Return calls and e-mails promptly?
  10. Have a panel of trusted advisors to assist with other specialised areas?

If your answers are mainly no and you would like an accountant whose focus is your future success and security, then don’t hesitate to call Alex on 9899-7511 to arrange an obligation free 1 & ½ hour meeting.Our clients can answer yes to these and other questions.