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Finding safe harbour when business is rough

Australia's economy is growing at a slower pace than many would like, with small businesses in some sectors doing it tough. Recognising the warning signs of potential insolvency is key to trading through difficult times.

Basically, an insolvent company is one that is unable to pay its debts when they fall due.

A company can't go bankrupt; only an individual can be a bankrupt. However, some individuals may become bankrupt because of small debts incurred in their business. According to government statistics, in the June quarter 2019, 18 per cent of personal insolvencies were business-related.i

There are many reasons why your company may be heading in this direction and it's not all down to the economy.

Recognise the signs

Challenges to old business models and new technology may both contribute to a downturn in your business. Signals that your company may be facing problems include ongoing losses, poor cash flow, unpaid creditors, inadequate financial records and problems obtaining finance.

If you recognise any of these signs in your business, then the key is to act promptly because there can be penalties if you are trading insolvent and continue to incur debt.ii

These include civil penalties up to $200,000, compensation proceedings and, in some cases, if you are found to have acted dishonestly, criminal charges including up to five years' imprisonment.

However, in recent times, the Federal Government has introduced safe harbour provisions to help alleviate the problems.

Finding safe harbour

These provisions give directors an exception from insolvent trading liability where they are developing a course of action which is reasonably likely to lead to a better outcome than administration or liquidation.

The legislation is aimed at encouraging a culture of restructuring to deliver a better outcome when a company is in financial distress.

If, however, there is no way forward for your company, then the choices are voluntary administration, liquidation or receivership.

Voluntary administration is where an administrator is appointed to take control of your company to try and get it back on track.

Liquidation is what happens if your company can't be saved by the administrator. The company will be wound up and debts repaid either in full or in part.

Receivership is when a secured creditor decides to appoint someone to collect and sell your company's assets to recover their monies.

Strategies to stay afloat

It's estimated there are 2.1 million small businesses in Australia. In the 2017-18 year 54,992 businesses unfortunately went under, with the retail sector the most vulnerable. Retail companies folded at 1.5 times the rate of other small businesses, which was an increase of 12.7 per cent over the previous year.iii

Hopefully, you can arrest any problems before it comes to this and there are a number of strategies you can introduce to get your company back on track.

They include things as simple as making sure you have a good system so you can monitor your income and expenditure. In addition, you should keep a regular eye on your company's performance so you can identify problem areas swiftly. And seeking advice from us early in the piece can ensure that you nip any problems in the bud.

Preparing weekly cash flow forecasts can also help you monitor what has to be paid and when it is due. It will stop debts getting the better of you.

You might want to consider selling old or excess stock to help improve your cash flow. And you should have solid procedures to collect outstanding debts and stick with your strategy.

Seek help

You also have the option to freeze your debts for a period of 21 days through a declaration of intention.iv This may give you time to consider how to manage your debt.

Your bank might offer an overdraft to help you over a rocky patch.

If you have any financial concerns about your business, then call us sooner rather than later to see if we can help you weather the storm and keep your business afloat.

https://www.afsa.gov.au/statistics/business-and-non-business-statistics

ii https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-consequences-of-insolvent-trading/#1

iii https://www.abc.net.au/news/2018-10-31/small-business-failures-on-the-rise/10447846

iv https://www.business.gov.au/closing/bankruptcy

Employee or contractor? What's the difference?

With the rise of the share economy, correctly working out whether you are hiring an employee or simply engaging an independent contractor has never been more important. Getting it wrong can be costly, as a recent court ruling shows.

A Perth accommodation business was fined $60,000 after the High Court upheld an appeal by the Fair Work Ombudsman. It was alleged the company had contravened the sham arrangement provisions of workplace laws when it purported to convert three employees into contractors.i

This is not an isolated case. Employers need to ensure their working arrangements are correct as some industries are seeing a rise in claims by former contractors seeking compensation for not being paid their full entitlements as an 'employee'.

What's the distinction?

Deciding if someone is an employee or a contractor is not always straightforward, but a key difference is an employee works in the business and is part of it, while independent contractors and subcontractors run their own businesses and are only supplying a service. They can choose their own hours of work and must pay for their own insurance, sick leave, holidays and super contributions.

Before bringing any new worker or contractor on-board, always check whether the working arrangement is legally deemed to be employment or a contract. To help you decide, the ATO has an employee or contractor decision tool on its website.

Myths about contractors

There are many misconceptions about hiring an independent contractor, according to the ATO.

Having an Australian Business Number (ABN) or a registered business name

A common myth is that this automatically make a person a contractor. In fact, having an ABN or being paid after submitting an invoice makes no difference to whether an employment arrangement is a contract or employment.

The length of the job

Another widespread myth is that the length of the job, or how regular the work is, determines whether someone is an employee or a contractor. Both employees and contractors can be used for casual, temporary, on-call or infrequent work.

The percentage of annual income paid

Businesses sometimes think if they paid less than 80 percent of the employee's annual income they're not their employer. This so-called '80 percent rule' is only relevant for the ATO's assessment of personal services income (PSI) and whether or not a contractor can claim business tax deductions.

Personal preference

Legally, it's not a matter of choice as employment status is determined by the working arrangement and specific terms and conditions of the job.

Signing a work contract stating an individual is a contractor does not override the true employment relationship and relevant legislation. It also doesn't remove Pay-As-You-Go tax withholding and super obligations.

Dangers or 'sham contracting'

Sham contracts are usually offered by employers trying to disguise an employment relationship as a contract to avoid paying the required employee entitlements.

Both the ATO and Fair Work Ombudsman can impose significant penalties if they determine the worker is an employee. Businesses also run the risk that they will have to foot the bill for back-pay to cover the employees' unpaid leave and employment entitlements.

Protecting your employment rights

It's also in the interests of employees and individual contractors to check their work status is correct. Otherwise they risk missing out on significant financial benefits and the employment protections they are entitled to.

Under current legislation it's illegal for employers to misrepresent a current or proposed employment relationship as an independent contracting arrangement, or to dismiss or threaten to dismiss an employee so they can be re-hired as a contractor. It's also illegal to make misleading statements to an employee to try to persuade them to take on a contract arrangement for similar work they performed as an employee.

Employees and contractors can request assistance from the Fair Work Ombudsman if they believe their rights have been breached.

Call us if you would like to discuss your employment status, or to check whether you are meeting all your tax and superannuation obligations for someone who works for you.

i Fair Work Ombudsman, 12 June 2017, https://www.fairwork.gov.au/about-us/news-and-media-releases/2017-media-releases/june-2017/20170612-quest-penalty

5 signs of a well run business

Every small business owner wants their business to thrive, but it can be tough to keep the money coming in the door while staying on top of all the necessary paperwork.

One way to ensure success is to understand the behaviours that separate a well-managed business from one that's just muddling through.

Surprising as it may sound, the ATO is keen to help small business owners prosper and to share its insights on running a successful business.

Getting the basics right

Since it's charged with keeping an eye on almost four million Aussie small businesses, the tax regulator is well placed to know what works and what doesn't when it comes to keeping the doors open.

According to the ATO, when a small business is operating well, it tends to get the basics right. That means keeping good records and having in place effective tools so you can easily reconcile your business's income and expenses.

Here are five simple steps you can take to ensure your business is running smoothly:

1. Keep informed

The ATO finds business owners who are operating effectively take the time to understand their tax and super obligations and to keep on top of any changes affecting their business's processes.

2. Know your cash flow

Small businesses that are well managed use a cash flow projection or budget tool, as this is the main reason small businesses fail. If you don't have clear insights into your cash flow position and are not carefully managing the business's income and expenses, it can be a recipe for trouble.

The cash flow projection or budget tool can be an off-the-shelf product, or talk to us about how we can work with you to use the ATO's new Cash Flow Coaching Kit to improve your management of this area.i

3. Declare all income

Well-run businesses declare all their income - including any cash income - in their income tax return. Although it's the ATO's job to collect tax, it argues small businesses not declaring all their income are heading for trouble down the track.

4. Split your expenses

It's important to carefully apportion (or split) your business expenses between private and business use.

5. Keep up to date

The final market of a well-run business is that all its details are up to date - particularly with the ATO. That means keeping your ABN details, contact information and bank details current and easy to find.

Although many of these indicators are straightforward, it's surprising how many small businesses don't take these simple actions.

Behaviours to avoid

Just as there are habits that mark a well-run business, there are behaviours common to operations heading for trouble.

Businesses that omit income by depositing it into private accounts or mortgages, or that don't declare cash sales or record director's fees correctly, are not on top of things.

The same goes for failing to account correctly for private use of business assets or funds. If you are claiming an excessive business portion of an expense with both personal and business use, it's a sign of poor management. As is claiming private expenses as a business expense, or not having the necessary records to substantiate your claims.

Making errors because you don't understand your tax responsibilities is also a sign that things are not being well-run.

Bring in the professionals

With so many rules and regulations, it's not surprising that business owners may occasionally overlook some of their obligations. There is an easy solution though.

Well-run small businesses seek professional advice when they need it. We can work with you to improve your business overall, not just to meet your tax obligations.

In fact, the ATO's 2017-18 research and audit work with around 120,000 small businesses indicated that those who have regular contact with a tax professional are more likely to report correctly.ii

For business owners who make the odd mistake, the regulator is keep to provide support and guidance. As ATO deputy commissioner, Deborah Jenkins, noted recently: "We want small businesses to feel comfortable to approach us if they realise they have made a mistake, because we want to support them to work through that and get on top of things."

Her top three tips for effectively managing your business are to maintain good business records, keep an eye on your competition using the ATO's Small Business Benchmarks and to take care of your mental health because running a small business can be very stressful.

If you think your business could do with a financial tune-up, give us a call today.

  Tips for keeping your business records 
  Good record keeping is critical to business success, not just in ensuring your tax and super affairs remain compliant.
  To keep high-quality records and avoid mistakes:
  • Keep all your business records (including income, expenses, bank and GST records) for five years, although some will need to be kept longer.
  • Ensure your business records contain enough information to calculate and support the amounts you claim in BAS and tax returns.
  • Include all cash, online, EFTPOS, bank statements, credit and debit card transactions in your business records.
  • Check the tax invoices you receive for purchases that include GST are valid.
  • Keep records showing when business purchases were used for private purposes. This will help you work out the portion claimable as a business deduction.
  • Keep business records separate from personal records to avoid confusion.
  • Take pictures of paper receipts to avoid faded receipts.
  • Store a copy of all records electronically and have a backup system in place, where possible.
  • Check all your information is transferred correctly if you change your record-keeping software during the year.
  Source: ATO

 

https://www.ato.gov.au/About-ATO/Managing-the-tax-and-super-system/Insight--building-trust-and-confidence/Big-pictures/Small-business/#Whatattractsourattention

ii https://www.ato.gov.au/Media-centre/Speeches/Other/The-ATO-s-current-focus-areas-in-the-small-business-market/

Managing your side hustle

Whether it's to pursue a passion or to make a little extra money, more Australians than ever now have a side hustle. But while freelancing, moonlighting and pursuing passion projects can be a great way to add value to your life, they can sometimes complicate how you go about managing both your time and finances.

What's causing the shift

Wage stagnation and underemployment have contributed to the growth of the side hustle, but they are not the only factors. For many, the main motivator is that working on something that is separate to your primary job can give a sense of fulfilment that may be lacking in the 9-5.

Technological advances also play a huge role here. It's easier and cheaper than ever to present and promote your services professionally. Anyone with a computer can create a website to sell their wares. And most people with a fairly new car can participate in the rideshare economy.

Managing your time

While side hustles can no doubt add value to your life, it's sensible to make sure you're managing your time accordingly to ensure you're still getting adequate rest and leisure.

Know your boundaries and keep a diary. It may even be worthwhile looking into some time management apps to help keep things running smoothly. It's also important to get in the habit of recording the time taken on all related tasks, even the menial admin ones. This not only helps you to quote accurately, it also gives you an idea of what tasks generate the most income and what don't. You can then choose to focus your energy either where the money is coming in, or on what gives you the most satisfaction. If your side hustle is not generating the desired level of income or is proving burdensome, it might be worth re-evaluating how much time you spend on it.

As your side hustle grows, it may require an increasing amount of your time, so much so, that you need to reduce your hours in your primary job. Before taking this step, you want to be certain that you will be adequately remunerated, and if not, that you can accept the lifestyle changes a reduction in income entails.

Managing your finances

How do you go about managing the money you earn from and spend on your side hustle will depend on the nature of the services you're offering.

For some, a side hustle is merely a way to bolster income and reach their financial goals sooner. For others, it's a creative outlet. Understanding the purpose it serves will help you decide your tolerance for how much (or how little) you are making for your efforts. Creative pursuits for example might even run at a loss. And if the money you're making off rideshare is only covering your petrol money, it may be time to reassess.

There are however a few general rules for managing the finances related to your sidle hustle that you should consider:

  • Keep a separate bank account for your side project
  • Set aside enough money for tax
  • Stay on top of your invoicing - apps can help
  • Talk to us about eligible deductions
  • Consider making additional super contributions
  • Separate business and domestic expenses if you run the business from home

It's all about structure

As your operation grows, it's worth giving some thought to how you structure your affairs. Most moonlighters operate as sole-traders, but company structures and trusts may also warrant consideration. Before making any decisions about which option will best suit your needs, talk to us as there are a lot of things you need to be mindful of.

Side hustles are a great way to expand your skills, pursue your passions or provide a little extra cash to play around with. But if approached the wrong way they can leave you burnt out or broke. Play it smart and put some boundaries around your time and finances and you should be good to go.

Positives & Negatives of Gearing

Negatively gearing an investment property is viewed by many Australians as a tax effective way to get ahead.

According to Treasury, more than 1.9 million people earned rental income in 2012-13 and of those about 1.3 million reported a new rental loss.i

So it was no surprise that many people were worried about how they would be affected if Labor had won the May 2019 federal election and negative gearing was phased out as they had proposed. With the Coalition victory, it appears negative gearing is here to stay for the foreseeable future.

While that may have brought a sign of relief for many, negative gearing is not always the best investment strategy. Your individual circumstances will determine whether negative gearing is an advisable strategy. For many, it may pay to positively gear.

So, what is gearing?

Basically, it's when you borrow money to make an investment. That goes for any investment, but property is where the strategy is most commonly used.

If the rental returns from an investment property are less than the amount you pay in interest and outgoings you can offset this loss against your other assessable income. This is what's called negative gearing.

In contrast, positive gearing is when the income from your investment is greater than the outgoings and you make a profit. When this occurs, you may be liable for tax on the net income you receive but you could still end up ahead.

While negative gearing may prove tax effective, it's dependent on the after-tax capital gain ultimately outstripping your accumulated losses.

The importance of capital gains

If your investment falls in value or doesn't appreciate, then you will be out of pocket. Not only will you have lost money all the way through the ownership by having to meet the shortfall in rental income, but you won't have made up that loss through a capital gain when you sell.

That's the key reason why you should never buy an investment property solely for tax breaks.

But if the investment does indeed grow in value, then as long as you have owned the asset for more than 12 months, you will only be taxed on 50 per cent of any increase in value.ii This is, of course, another plus.

When it pays to think positive

If you are retired and have most of your money in superannuation, negative gearing may not be so attractive. This is because all monies in your super are tax-free on withdrawal. And thanks to the Seniors and Pensioners Tax Offset (SAPTO), you may still also earn up to $32,279 as a single or $57,948 as a couple outside super before being subject to tax.iii

It makes more sense to negatively dear during your working years with the aim of being in positive territory by the time you retire so you can live off the income from your investment.

While buying the right property at a time of your life when you are working and paying reasonable amounts in tax may make negative gearing a good option, sometimes positive gearing may still be a better strategy.

Case study

ASIC's MoneySmart website compares two people each on an income of $70,000 a year.iv They each buy an investment property worth $400,000, paying interest at 6 per cent a year. Additional expenses are $5000 a year while the rental income is $500 a week.

Rod negatively gears his property, borrowing the full purchase price; Karen is positively geared with a loan of just $100,000. In terms of annual net income, Rod who negatively geared is worse off than if he had not invested in a property at all, with net income of $52,868.

Positively geared Karen ended up $10,000 ahead, with net income for the year of $64,433.

Of course, if his property grows in value over time, Rod should ultimately recoup some or all these extra payments. But if the property doesn't appreciate, then he is out of pocket.


source: MoneySmart

Claiming expenses

If you choose to go down the path of negative gearing, then it is important that you make sure you claim everything that's allowed.

For investment property, this includes advertising for tenants, body corporate fees and charges, gardening and lawn mowing, pest control and insurance along with claiming your interest payments. Of course, it's important to keep accurate records of your expenditure.

As already mentioned, negative gearing is not confined to property. You can also negatively gear investments in shares and claim a tax deduction for interest and other costs, although the risks are greater as it is a more volatile investment.

If you want to know whether negative gearing is the right strategy for you, then call us to discuss.

https://treasury.gov.au/review/tax-white-paper/negative-gearing

ii https://www.ato.gov.au/General/Capital-gains-tax/Working-out-your-capital-gain-or-loss/Working-out-your-capital-gain/

iii https://atotaxrates.info/tax-offset/senior-australians-tax-offset/

iv https://www.moneysmart.gov.au/investing/invest-smarter/negative-and-positive-gearing

Tax Alert: September 2019

The landscape of Australia's personal income tax system has changed significantly following the passage of the Morrison Government's tax legislation through the Parliament.

Here's a roundup of some of the other recent developments in the world of tax.

Tax reform legislation passes

Many Aussies are receiving a larger tax refund following passage of The Treasury Laws Amendment Act 2019, which made law the three-stage income tax cuts announced in the 2019-20 Federal Budget.

The new legislation increases the base and maximum amounts of the Low and Middle Income Tax Offset (LMITO) for the period 2018-19 to 2021-22.

It also lifts the top threshold of the 19 per cent income tax bracket from $41,000 to $45,000 from 2022-23 and reduces the 32.5 per cent tax rate to 30 per cent from the 2024-25 financial year.

Guidance on FBT exemption for taxis

Employers need to take note of new guidance released by the ATO clarifying that the existing FBT exemption for employee taxi travel does not extend to ride-sourcing services such as Uber.

Unlike its previous view, the ATO has now stated the FBT Assessment Act limits the definition of 'taxi' to a vehicle licensed to operate as a taxi by the relevant state or territory.

This definition of taxi travel is different to the one used for GST purposes.

Employee travel is still eligible for FBT relief if it involves a traditional taxi service used for a single trip beginning or ending at the employee's place of work, or if the travel is due to employee sickness or injury.

Tip-offs likely to grow with new hotline

After a record 70,000 tip-offs were received by the ATO during 2018-19, the introduction of its new Black Economy Hotline and Tax Integrity Centre (TIC) is likely to see this number rise further.

From 1 July 2019, Australian can report known or suspected tax evasion, black economy and phoenix activities via an ATO website tip-off form, the ATO app, or the new Black Economy Hotline (1800 060 062).

Behaviours such as demanding or paying for work cash-in-hand to avoid tax, not reporting or under-reporting income, underpayment of wages, ID fraud, sham contracting arrangements, GST fraud and money laundering can all be reported.

No deductions for unreported employee payments

The tax man is reminding employers that unreported cash-in-hand payments made to workers after 1 July 2019 are no longer eligible for tax deductions. In addition to the loss of a tax deduction, employers not complying with their PAYG withholding obligations may be penalised.

The new rules cover payments to employees not complying with PAYG withholding obligations as well as payments to contractors who do not provide an ABN where tax is not withheld. The change affects payments made during 2019-20 and all subsequent financial years.

As an employer, if you fail to withhold or report your PAYG obligations and voluntarily disclose this before any compliance action is taken, you won't lose your deduction. You may also be entitled to reduced penalties.

New luxury car tax thresholds

The luxury car tax (LCT) thresholds for cars imported, acquired or sold during 2019-20 have been announced by the ATO. If you buy a car with a GST inclusive value over the LCT threshold, the purchase attracts the 33 per cent tax.

For the 2019-20 financial year, the new threshold for fuel-efficient vehicles is $75,526, which is the same as in 2018-19. The LCT for other cars is $67,525, up from the 2018-19 limit of $66,331.

Escape Australia, not your student debt

Expats are being contacted by the tax man to remind them that heading offshore doesn't mean leaving their student loans behind.

Under new rules, student debtors with an income contingent loan travelling overseas need to notify the ATO of their new address and lodge an overseas travel notification. They are also required to report their worldwide income if they earn over $11,470.

Investing in time pays dividends

Time is our most valuable and finite resource. But often in this age of buzzing devices and communication overload we can feel like we just don't have enough of it. Like a hamster running around a wheel, we end up feeling simultaneously burnt out while going no-where.

But it doesn't have to be this way. Time, like money, performs best when we invest it wisely. So it makes sense that understanding the principals of time investment could leave you with more hours in the day to pursue the things you love.

Read more…

Carving up your GST


Apportioning your GST obligations

For many small businesses, reporting the GST you collect after issuing tax invoices to customers can be a headache. But there is a way to save time and make the bookkeeping process a bit easier - if you meet the ATO's eligibility criteria.

Read more…

The STP reporting clock is ticking: Are you ready?

If you're a small employer with 19 or fewer staff, the countdown to your first single touch payroll (STP) report has already begun.

The STP regime is a key part of the ATO's plan to digitise and streamline tax and super reporting, and it intends to make the reports a normal part of doing business in Australia.

Read more…

Getting on top of tax debt

Although most Aussies pay their tax bill on time, some can't - or just won't pay what they owe.

In the 2017-18 financial year, the ATO collected over $500 billion in liabilities from Australian taxpayers, with 89.5 per cent of us paying on time and 95.9 per cent paying within 90 days of the due date on their tax return.

Read more…

     
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