Posts Categorized: Tax

Budget – a word of warning

You have to be careful as to what you think you have heard on Budget night.

You have to mindful of three things:-

  1. They announcement are not law, they are only announcements.  It may be some time before the legislation passes, it may not ever pass or may be slightly or even substantially different.
  2. No matter who is in power, the good news items always tend to have a delayed start date; whereas the bad news items start seemingly straight away.
  3. Some of what is reported is not true or over simplified.  What seems to be an opportunity turns out not to be available or only relevant to certain groups.

At MRS, we will spend the next few days pouring through the detail before releasing our detailed analysis of the Budget and what it means to our clients.  That briefing appear will be filled with tips and traps and will be written in plain English.

Please let is know if you would like a copy e-mailed to you.

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.

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.