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Unwrapping the joys and pitfalls of giving

Christmas is a time of giving, when thoughts turn to family and to helping those less fortunate. To gift in a meaningful way that maximises the benefits, it's important to consider tax.

While Australia doesn't have a gift tax, there are tax considerations nonetheless for both the giver and the recipient.

Buying a toy for your grandchild is one thing but many parents wish to help their adult children or grandchildren with more substantial gifts such as a home deposit or a car. If you receive a Centrelink age pension now or are within five years of retiring, that "gift" will be counted as an asset and could affect your pension.

Helping family

Gifting with the potential to impact your Age Pension entitlements comes in many guises. It might be donating 10 per cent of your salary to your church, buying a car for your daughter or selling her a rental property you own for less than market value.

If you gift more than $10,000 a year or a total of $30,000 over a five-year period, then the excess will be counted as an asset by Centrelink for five years, when it assesses your eligibility for an aged pension.

Your gift won't just count in the assets test but deeming may also be applied under the income test. Deeming rules are used to work out how much income your earn from your financial assets, irrespective of their actual earnings.i

Deeming rates have recently fallen to 1 per cent for a certain level of your total financial assets, and 3 per cent above that level. Even so, this can easily eat into your retirement income.

How do the gifting rules work?

Say you lend your daughter $50,000 to by a home two years before you retire. Centrelink would view the first $10,000 as an allowable gift and it would make no difference to your situation. However, it would treat the remaining $40,000 as a deprived asset subject to the gifting rules.

What's worse, if your daughter were to repay $40,000 in two years, then not only would the original $40,000 be counted in the assets test and deemed under the income test but now the $40,000 she repays would be added to this sum.

That's $80,000 treated as an asset and deemed to earn income.

Can you afford to give?

Clearly, it's wonderful to give with a warm heart and help relatives when they need it and you can see the joy it brings. Even so, you need to be very mindful of the repercussions for your own wellbeing.

Are you sure you won't need the money to finance your retirement? Life expectancy has increased greatly so that many people can now expect to live well into their 80s and beyond.

It may be that you don't qualify for a pension on retirement, but what if you give away a sizeable sum and then need to fall back on the pension sooner than anticipated? If the help were needed within five years of your gift giving, then the amount would be subject to the gifting rules.

Of course, if you are not in receipt of a Centrelink pension nor expect to be, then you can gift away to your heart's content, provided you have the means.

Tax implications for children

It's not just the giver who can run into problems. You need to be mindful of any repercussions for the recipient of your generosity. It's natural to want to give money to your grandchildren, perhaps to help kickstart a savings plan for their future, but there are tax implications if they're under 16.

If they earn less than $120 in interest from a savings account, then the financial institution will not withhold tax; if they earn between $120 and $240 the financial institution will withhold tax at 47 per cent if you don't provide their date of birth or a tax file number. If they want a refund, then they will need to lodge a tax return.

Depending on your circumstances, we may be able to help you find a more tax friendly investment to suit the needs of both you and your young family members.

Giving to charity

Giving to charity is often top of mind at Christmas too. Any donation over $2 is tax deductible but this has no bearing if you are retired and not paying tax. Of course, the reason for giving should never be predicated on tax considerations, although it may be handy.

A tax deduction only applies if the charity is a deductible gift recipient (DGR) endorsed by the ATO or listed by name in the tax law, so you need to check that the charity has DGR endorsement.

Giving to those in need or to those you love can be a rewarding experience no matter what time of year, but it's important to understand the implications for both giver and receiver.

If you would like to know more about how gift giving will impact on your financial wellbeing and that of your family, then give us a call.

https://www.humanservices.gov.au/individuals/topics/deeming/29656

Tax Alert: December 2019

If the introduction of Single Touch Payroll (STP) wasn't a big enough challenge, small businesses can now look forward to the arrival of e-invoicing and changes to the Superannuation Guarantee (SG) rules.

Here's a roundup of some of the latest tax developments:

E-invoicing to be rolled out

Small businesses can look forward to increasing use of e-invoicing following the ATO's appointment as the local Peppol authority. Currently being used in 34 countries, the Peppol framework provides a standardised e-invoice for both domestic and international trade.

With e-invoicing, invoices are directly exchanged between the supplier's and the buyer's accounting systems - even if they use different software.

According to the ATO, by adopting e-invoicing businesses of all sizes can expect to see improved cashflow and quicker payments, easier processing and cost savings, fewer errors and reduced risk of compromised invoices.

The ATO will now work with digital service providers to deliver a range of e-invoicing products for local businesses.

Inactive ABNs will be cancelled

Inactive Australian Business Numbers (ABNs) are an increasing area of interest for the ATO. If the tax man believes your business is no longer carrying on an enterprise, you face the risk it could decide to cancel your ABN.

To determine if an ABN is still being used, the ATO is checking the ABN holder's tax return, whether their compliance and lodgment documents are up-to-date and a range of third party information.

If your ABN is mistakenly cancelled, you can reapply for the same ABN if your business structure remains the same. But if the structure is different - such as a sole trader now operating as a company - you will receive a different ABN.

Rule change for salary sacrifice and SG

Legislation to prevent employers from using employee salary sacrificed amounts to reduce their minimum Superannuation Guarantee (SG) payments has passed Parliament and will apply from 1 July 2020.

The new rules mean an employer can no longer count the amount salary sacrificed by an employee as part of the amount the employer is required to pay in SG contributions.

Also, the base amount on which SG contributions are calculated can no longer be reduced by any salary sacrificed amounts.

Limiting deductions for vacant land

Tax deductions for losses or outgoings (such as interest costs) incurred when holding vacant land not genuinely being used to earn assessable income have been reduced under new legislation.

The changes limit the claimable deductions for holding vacant land on or after 1 July 2019 - even if the land was held prior to that date.

Tax deductions are not affected if the land is held by a corporate tax entity, used for carrying on a business, used for primary product and leased, or where exceptional circumstances have affected a permanent structure on the land.

ATO tip-offs on the rise

Small businesses in the café and restaurant industry are more likely to be subject to a tip-off and subsequent investigation by a specialised team, according to the ATO's Tax Integrity Centre (TIC).

There are also high volumes of tip-offs about black economy behaviour in the hairdressing and beauty, building and construction, and cleaning industries.

The TIC is receiving 230 tip-offs a day about black economy activities by small businesses such as undeclared income, paying workers cash in hand and not reporting sales.

Tax man focussing on SG compliance

With the ATO currently checking SG contribution payments for around 400,000 employers for the 2018-19 financial year, small businesses will need to stay in top of their obligations in this area.

The ATO is now "heavily focussed on reducing the incidence of non-payment of SG" courtesy of new Single Touch Payroll information, according to deputy commissioner, James O'Halloran.

With an "unprecedented level of 'visability' of super information at the account and transaction level", the ATO plans to increase checks of SG payments and follow up employers not paying on time.

 

Tax and the festive season

As the festive season approaches it's time to start thinking about celebrations and spending time with friends and family.

For most business owners, it also means it's time to start thinking about saying thanks to your employees for another year of hard work.

But it's important to be aware of the tax implications of any gifts and celebrations you provide, as the rules can be complex.

Good gifts for tax purposes

If you decide to give your staff a Christmas present, the easiest way to avoid having to think about tax is to ensure your gift costs under $300 (inclusive of GST) and is considered a minor benefit by the ATO.

This means the gift must be given on an infrequent or irregular basis - like every six months - and is not considered a reward for service.

It's also essential that the present is not considered entertainment.

Examples of qualifying non-entertainment gifts include Christmas hampers, gift baskets, department store gift cards or vouchers, skincare and beauty products, sealed bottles of alcohol and flowers.

If your gift meets all of these criteria, it is exempt from any Fringe Benefit Tax (FBT) and you can also claim a tax deduction for it, plus the GST input tax credit if you are registered for GST.

Tax and entertainment

If you are conscious of paying extra tax on employee gifts, keep in mind that presents classed as entertainment may not be tax deductible.

The ATO considers gifts like restaurant meals, holiday accommodation and tickets to movies, sporting events and concerts as entertainment, so they do not make great Christmas presents if you want to escape adding to your tax bill.

If entertainment-type gifts cost less than $300 (inclusive of GST) FBT is not payable, but they are not tax deductible. You are also not permitted to claim the GST input credits.

When entertainment gifts are given to clients over the holiday season, they are not subject to FBT but there is no tax deduction and the GST input credit cannot be claimed.

Christmas gifts to others (and yourself)

It's worth remembering the minor benefits exemption for gifts costing less than $300 also applies to gifts provided to customers and business associates. This means you can also use it to provide a separate Christmas gift to the spouse or partner of an employee.

Also, keep in mind that you can't use these tax rules to give yourself a Christmas gift. If you operate as a sole proprietor or a partner in a partnership, you can't be your own employee, so you aren't eligible for these employee benefits.

Christmas parties and FBT

If you plan to hold a work Christmas party for employees or clients, you also need to follow the rules if you want to avoid paying FBT.

The ATO hasn't killed off the workplace Christmas party, as you are free to take advantage of the same $300 (including GST) minor and infrequent benefit exemption to hold a celebratory function for current employees and their family. The party does, however, need to be held on your premises during a business day.

To be free of FBT, the cost of food and drink consumed by current employees and family at the event must be less than $300 per head. However, there is no tax deduction or GST input credit claimable.

If the cost of the on-site party is over $300 (GST inclusive) per head, then there is still no FBT payable for employees and clients but it is payable for any family members attending.

Once you head off to a restaurant or club, there is still no FBT payable if the costs remain under $300 per head, as this is also considered a minor benefit. But once the per head cost rises over the $300 threshold, FBT is payable for employees and any family, but not for clients attending.

There's still time to plan your end -of-year gift-giving and celebrations, but the clock is ticking. If you would like to find out more about tax deductions or your FBT reporting requirements, call us today.

Too often businesses fall short of their goals because they don't understand how to acquire and interpret data. Some cling to outdated reports that don't reflect the contemporary market. Some get bogged down in so much information that it becomes meaningless. And others don't report at all, preferring to rely on instinct, or just roll with the punches.

The truth is it's never been easier to create sophisticated reports on many different aspects of your business. If you're wanting to improve your business health, it may be time to change or elevate your metrics.

Start with the fundamentals

When it comes to reporting, you've got to start with the basics: profitability, costs and mission. These indicators give you a pretty good idea of the health of your business. What they don't provide however, is answers.

The right questions

If you want helpful answers, you need to be asking the right questions.

  • Why are sales down in the year to June?
  • What is the cost of new client acquisition versus client retention?
  • Which tasks are taking up the most of my employees' time and do they generate revenue?

Being specific with your line of enquiry will allow you to attain better data. But good data's not enough. Ultimately, you're trying to identify patterns of cause and effect, determining which business decision lead to which outcomes.

A great example of this is in the movie Money Ball, where Brad Pitt's Coach Beane pulls together a team of baseball's misfits and careers on to victory. The reason: he understood the data. Previously baseballers were paid top salaries because of their batting average. But that doesn't necessarily mean you get runs. Getting on base means you get runs. So, by calculating how often a player got on base and dividing it by their salary, he was able to put together a winning team on a shoestring budget. By finding the same links in your reporting, you may be able to shift your strategy and improve outcomes.

Tech provides solutions

So, we get the premise. But how do you actually generate the reports? Data acquisition is always the first step, and luckily, with modern technology it's easier than ever to attain and analyse.

Most of you will be using a CRM, but potentially not making use of its full functionality. Explore how it can measure and quantify workflow. This will help put the right staff on the right projects, and assist you to understand exactly what tasks are generating revenue and which are work for no reward.

In terms of online marketing, Google AdWords and Facebook Ad Manager provide you with detailed insights about what posts people like, and what content leads to conversions.

The other thing you might want to consider is automated reporting. There are all sorts of options out there and rather than reporting weekly or monthly, you can often do it in real time, saving on data entry in the process.

Soft metrics

Soft metrics are gaining traction as companies move beyond profitability as the sole benchmark of success. Usually they  relate to notions that are not so easily quantifiable such as brand perception, social impact and employee satisfaction. Obtaining data for these metrics is also different, as it may require surveys or face to face interviews or even the services of an external consulting or analytics firm. In terms of brand perception however, modern software has advanced to a point that you can now aggregate online mentions to give some sense of how things are tracking.

Moving forward

Any good company strategy should have in place robust reporting structures that are agile enough to move with a changing market and workplace. Aim to review your metrics at least annually to make sure you're getting the full story. Change your line of questioning, and report on things outside the box to see if they provide any insights or unusual revelations.

The only certainty in business is change. Luckily, we live in a world of big data, and if you know how to report on it, you could well be on your way to business success.

Keeping on the right side of SMSF rules

The lure of greater control over your retirement savings with a self-managed super fund may be enticing but the freedom to chart your own destiny also comes with the responsibility to comply with the rules.

Where super is concerned, these rules can be complex and subject to change.

An SMSF is a private super fund regulated by the Australian Taxation Office that you manage yourself. You can have up to four members in your fund, each of whom has to be a trustee or, if a corporate trustee has been appointed, a director.

It's often seen as preferable to a public offer APRA-regulated fund because you have greater control over your investments. But that control can involved considerable paperwork unless you outsource some tasks to professionals.

As a trustee you are legally responsible for all the decisions made about the fund and compliance. Even if you outsource both the administration and the investment of the fund to a professional, you must still understand what they are doing because you are legally responsible.

So what are the rules an SMSF needs to follow?

5 key rules

An SMSF is a legal tax structure with the sole purpose of providing for your retirement. As a trustee, you need to set and follow an investment strategy that is appropriate for your risk profile and that has been devised to provide for your retirement needs.

It is not something you can set and forget. You need to research your investments, make sound investment decisions and budget for expenses such as professional accounting, legal and financial advice fees.

Basically, the key rules that apply to the SMSF legal tax structure include:

  • Sole purpose test

The sole purpose of an SMSF is to provide money for your retirement. It is not to give you any pre-retirement benefit. So, if you were to personally benefit from an investment in your SMSF, then you would have broken the sole purpose rule.

For example, if you bought a piece of art through your super fund then displayed it in your home, you would be in violation as you would be enjoying the benefit before retirement.

  • Separation of assets

You must keep the fund's investments completely separate from your personal assets. All assets must be held in the fund's name and not that of an individual. This policy has its benefits because if a trustee were to become a bankrupt, the assets of the fund would be protected.

  • In house assets test

The fund cannot lend to, invest in or lease to a related party of the fund if the value of the asset totals more than 5 per cent of the fund's assets.

  • Arm's length transactions

If the SMSF leases a building to an associate, for example, then it must always be on a strict commercial basis, reflecting true market value. In addition, income from investments with non-commercial conditions such as borrowing  arrangement with zero interest rate will also be considered as non-arm's length income. Any income that is non-arm's length transactions will be

taxed at the highest marginal rate.

  • Administration

Compliance also involves thorough record keeping. You must keep all records pertaining to the fund from the trust deed, through minutes of meetings to investment decisions. And some of these documents must be retained for a long time.

For instance, minutes of meetings and records of changes to trustees must be held for 10 years. Annual returns, accounting records and annual operating statements meanwhile must be retained for five years.

Other considerations

Once trustees reach retirement age, other considerations come into play. These include making sure members are paid at least the minimum pension.

It's also important to plan for the possibility that a member may be unable to continue in their role at some point in the future.

For example, a member may become incapacitated due to dementia. On in a husband and wife fund, a member may have no interest in continuing to manage their fund after the death of a spouse who handled most of the administration. If such a situation arises, you can switch to an APRA- controlled superannuation fund (not self-managed) or appoint a legal representative.

Insurance is another area you need to be mindful of. In an APRA-regulated fund, life and total and permanent disability insurance (TPD) are often included at competitive rates. However, the responsibility to arrange insurance cover rests with you if you have your own SMSF.

If you would like to discuss whether an SMSF might be suitable for you, give us a call. We can help ensure your fund meets its compliance responsibilities.

  Not following the rules of an SMSF can be costly and may result in administrative penalties or, in some cases, civil or criminal penalties. 
 

If your fund has been found to be non-compliant, this can have a significant financial impact. For every year the fund remains non-complying, its assessable income is taxed at the highest marginal tax rate.

Trustees may even be disqualified for serious violations. The ATO released details of the 257 trustees who were disqualified in 2017-18.i

  The main reasons for trustees being disqualified:
 
  • allowing early access of benefits to members or providing loans to members (124)
  • unrectified contraventions reported through ACRs (auditing report) (64)
  • taking part in tax planning arrangements such as dividend stripping (16)
  • non-lodgement of the SMSF annual return (5)

 

https://www.ato.gov.au/Media-centre/Speeches/Other/The-ATO---helping-trustees-of-self-managed-superannuation-funds-to-understand-their-role-and-meet-their-obligations/

 

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