Archive for June, 2013

Important end of financial year issues for your business

Friday, June 28th, 2013

With the end of the 2013 financial year just around the corner, it’s time for businesses to take stock, both to ensure your company is operating tax effectively and to put your business finances in order for the coming financial year.

Review the tax benefits of packaging cars

Employers should review cases where employees have foregone gross salary to obtain a packaged car.

Essentially the fringe benefit tax (FBT) rules changed in respect to new vehicle contracts entered into on or after 10 May 2011. Under complex transitional rules, a 20 per cent flat rate will apply to all new vehicle contracts effective from 1 April 2014, regardless of the total number of kilometres the vehicle travels annually. This means that for those who travel more than 25,000 kilometres a year, the tax savings associated with packaging a car are likely to have significantly reduced.

Employees who travel less than 25,000 kilometres annually may wish to consider packaging a new car, as there are now potential tax savings available since the taxable value of their car fringe benefit has typically decreased following the introduction of the 20 per cent flat FBT rate.

Make trust resolutions by 30 June

A trustee of a discretionary trust is required to make and document a resolution as to how income of the trust estate for the 2012-13 year is to be distributed among beneficiaries on or before 30 June 2013.

Broadly, where a valid resolution is not made before 30 June 2013, any default beneficiaries under the trust deed will become presently entitled to trust income and thus subject to tax (even where they do not receive any cash distribution), or the trustee will be assessed on any taxable income typically at the highest marginal rate of 46.5 per cent.

In practice, a trustee must be able to evidence the making of an effective resolution in draft minutes, file notes or an exchange of correspondence has been documented before year end.

Stream trust capital gains and franked dividends

Very broadly, a trustee of a discretionary trust will be able to stream capital gains and franked dividends among different beneficiaries where the trust deed allows the trustee to make a beneficiary specifically entitled to those amounts and the beneficiary receives or is entitled to receive an amount equal to the net financial benefit of that gain or dividend.

The balance of the trust’s taxable income, excluding such gains and dividends, will be proportionally assessed to beneficiaries to the extent to which the trustee has made the beneficiaries presently entitled to a share of trust income.

The trustee will therefore only be assessed on the trust’s taxable income at a rate of 46.5 per cent to the extent to which beneficiaries are neither presently entitled to trust income or specifically entitled to a capital gain or franked dividend.

Comply with private company rules

The Australian Taxation Office is vigilant in cracking down on businesses that use either the funds or assets of a private company for private purposes. Any personal expenses (e.g. school fees) paid by a private company in respect of a shareholder or an associate (e.g. spouse) of the company, or any funds withdrawn from the private company by that shareholder as a loan, may be treated as a deemed dividend to the shareholder.

Where such a payment or loan has not been repaid by 30 June, a deemed dividend can only typically be prevented if a complying loan agreement to repay an amount equal to the payment or loan is put in place before the earlier of the actual or due date of lodgement of the private company’s tax return for the year ended 30 June 2013.

Prevent deemed dividends in respect of unpaid trust distributions

An unpaid distribution owed by a trust to a related private company beneficiary that arises on or after 1 July 2012 will, broadly, be treated as a loan where the trustee and the company are controlled by the same family group. In these circumstances, the associated trust may be taken to have derived a deemed dividend for the amount of the unpaid trust distribution.

A deemed dividend may be prevented if the unpaid distribution is paid out, or a complying loan agreement is entered into before the earlier of the actual or due date of lodgement of the private company’s 2013 income tax return.

Alternatively, a deemed dividend will not arise if the amount of the unpaid distribution is held on a sub-trust for the sole benefit of the private company beneficiary who receives an “agreed return” on the unpaid distribution as well as ultimately a repayment of the principal funds representing the unpaid distribution.

Typically, such a sub-trust will arise where the principal funds representing the unpaid distribution are repaid by the end of a seven- or 10-year term with annual interest payable at stipulated benchmark rates under private company rules.

Write off bad debts

Businesses can only obtain income tax deductions for bad debts where various conditions are met.

Essentially, the deduction will only be available where the debt is still in existence at the time it is written off. Thus, if the debt is forgiven or compromised before it is written off as bad in the accounts, no deduction will be available. Moreover, the debt must be effectively irrecoverable and written off in the accounts as bad in the year in which the deduction is claimed.

The amount representing the bad debt must have been previously brought to account as assessable income or lent in the ordinary course of carrying on a money lending business. Certain additional requirements must be met where the creditor is either a company or trust.

Maximise depreciation deductions

A taxpayer that is an eligible small business entity (SBE) may elect to claim deductions for depreciating assets on a simpler and more concessional basis than other business taxpayers.

An SBE can claim an immediate deduction for a depreciating asset which cost less than A$6500 in the 2012-13 tax year to the extent it is used for income producing purposes where it is used or installed ready for use by year-end.

Depreciating assets costing A$6500 or more which are acquired by an SBE can also be depreciated at a flat rate of 15 per cent in the year of acquisition to the extent the asset is used for income producing purposes and it is used or installed ready for use by 30 June.
Thereafter the adjustable value of such an asset can be depreciated on that basis at 30 per cent in subsequent years.

Claim an immediate deduction for work car purchases

An eligible SBE can claim an immediate deduction for a vehicle if its cost is less than A$6500 where the car is used or installed ready for use to the extent it used for income producing purposes.

Where the car costs A$6500 or more, an immediate deduction of A$5000 plus 15 per cent of the balance of the cost can be claimed in the year of acquisition to the extent the car is used for income-producing purposes and it is used or installed ready for use by 30 June. For subsequent years, the car is depreciated at a rate of 30 per cent to the extent it is proportionally used to derive assessable income in subsequent years.

This concession does not apply to tractors, graders, road rollers, combine harvesters, trailers and earthmoving vehicles.

Source: CPA Australia

For further information, don’t hesitate to contact MDB.

Important business indicators that will improve your business

Friday, June 28th, 2013

CPA Australia have identified some key important indicators that you need to be aware of to help improve your business.

1. DO A FINANCIAL HEALTH CHECK OF YOUR BUSINESS

In tough times, you should regularly analyse the financial position of your business. You can get a lot of information on the health of your business by analysing your financial statements. Pay attention to financial ratios such as liquidity ratios, solvency ratios, profitability ratios and return on investment ratios, and compare these ratios and indicators with prior year figures and similar businesses in your industry.

2. IMPROVE YOUR CASH FLOW

In tough times, one of the most significant problems faced by business is poor cash flow. Many things can be done to improve cash flow, these include: collecting outstanding debts promptly, preparing regular cash flow forecasts, skewing promotions to products or services that can be turned into cash quickly, rewarding staff behaviour that improves cash flow, selling unnecessary assets, reducing stock levels, replacing slow-moving and obsolete stock with stock that has a faster turnover and making full use of your terms of trade.

Also ensure that personal drawings from the business do not get out of hand, and that finance from external sources is sought on reasonable terms.

3. IMPROVE OR RETURN YOUR BUSINESS TO PROFITABILITY

A profitable business is typically a successful business. Therefore it is important that while you improve the cash position of the business, you also aim to be profitable. Ideas to improve or return your business to profitability include: focusing on sales that give you the highest margin, not discounting low margin products or services, not discounting unless you can achieve the same or better gross profit through increased sales volume, controlling costs, being flexible with staffing arrangements and ensuring that only profitable sales are chased.

4. IMPROVE YOUR ACCESS TO FINANCE

All businesses need finance to grow. Finance can be provided from debt, equity and internal sources. Ideas for improving your chances of accessing external finance include: disclosing all necessary information required by the bank, seeking finance as soon as you identify a need and remaining sensible about the amount you actually need to borrow.

Take time when preparing finance applications, as a well prepared business proposition is a good sign of a borrower’s commitment to a prospective lender. If you fail in your loan application, find out why.

5. TAKE STOCK OF WHERE YOUR BUSINESS IS AT

In tough times, you should adopt a risk management mindset and take stock of your business more broadly. It is good practise to conduct research to find out if your customers and competitors are also experiencing tough times, and if so, how they are responding. Be careful not to starve your business of essential investment, and regularly review your business operations to look improvements.

6. REVISIT YOUR MARKETING PLAN

In difficult times there is generally less money available for marketing. It is therefore important that your marketing plan is focused on achieving key objectives to get you through those tough times, particularly improving your cash position. Ideas for marketing in tough times include: focusing on sales that have a high margin and bring in cash quickly, rewarding staff for sales of products with a higher margin, only paying staff commission when payment is received, measuring the success of each promotional activity or campaign so as to gauge its efficiency and focusing on encouraging customers to pay a he point of purchase or to pay as early as possible.

7. ADOPT APPROPRIATE RISK MANAGEMENT STRATEGIES

Tough times can expose risks which were not previously apparent. Such risks include: relying too heavily on a small number of major customers, relying too heavily on one supplier, selling on credit and fraud.

8. TAKE ADVANTAGE OF OPPORTUNITIES

Don’t turn a blind eye to new opportunities that are consistent with your strategic direction and can be properly funded.

9. OTHER COMMERCIAL CONSIDERATIONS

During tough times, take care not to breach your loan terms and conditions. If you do, inform your lender promptly.

Also, ensure any asset protection steps are effective. Be wary of entering a payment arrangement with the ATO as this could impact your ability to raise finance with a lender.

CONCLUSION

Businesses that are well run use these ideas during both the good times and bad in order to maximise their profits, grow and minimise risk. Using them now can help your business to emerge in a much improved condition, which will likely  lead to long-term growth.

Contact MDB today to help you

  • get the best interest rate by shopping around all the Banks
  • conduct a deep analysis of your key business indicators such as Break Even Points, Debtor Days, Stock Turnover Days through its Business Analyser program and help you move forward

Bank account details must now be provided for Tax Refunds

Friday, June 21st, 2013

From 1 July 2013, the ATO will not be issuing Tax Refund cheques.

To ensure that there are no delays in processing your individual Income Tax Return, please provide your nominated Australian bank account details.

Superannuation redeposit during GFC results in tax bill of $31,620

Thursday, June 20th, 2013

A taxpayer, a retiree, who withdrew and re-deposited his superannuation savings during the global financial crisis has been hit with excess contributions tax of $31,620 after the AAT agreed with the Tax Commissioner that there were no “special circumstances” to disregard the excess contributions under the tax law.

After observing a significant decline in his superannuation savings in a matter of months and following the government’s announcement that it would guarantee bank deposits, the retiree withdrew his superannuation savings in early 2009 and deposited the amounts in term deposits. When the term deposits matured six months later, he re-deposited the money back into his superannuation.

In May 2012, the Tax Commissioner informed the taxpayer that he had exceeded his non-concessional contributions cap for the 2009–2010 financial year. The taxpayer argued that the imposition of excess contributions tax was “unfair” and that he had not obtained a tax advantage.

However, while noting that the taxpayer had made an unfortunate error, the AAT still ruled that there was nothing “unique” or “special” to allow the relief sought. It also considered that it was reasonably foreseeable that the re-depositing would result in excess contributions.

TIP: Managing an individual’s contributions caps for any year is a critical consideration to ensure that any tax benefits of superannuation contributions are not later reversed (and punished) via the imposition of excess contributions tax.

Given the constant tinkering with the contributions caps, extreme care is needed with the amount and precise timing of contributions.

Losses from farming activities to be deferred for medical doctor

Thursday, June 20th, 2013

A medical doctor has been unsuccessful before the AAT in arguing that the Tax Commissioner should exercise his discretion to allow the doctor to claim non-commercial business losses of his cattle and sheep farming activities against his medical practice income.

The taxpayer had applied to the ATO for a private binding ruling, requesting that the Commissioner allow him to claim the losses from the farming activities against his medical practice income. However, the Commissioner issued a private ruling in which he refused to exercise the discretion sought. Notwithstanding the ruling, the taxpayer then lodged his 2010 tax return and claimed losses in relation to the farming business.

The AAT affirmed the Commissioner’s decision and found that the taxpayer had not discharged the onus of proving that the conditions of the relief sought had been met. Accordingly, the AAT held that the losses incurred must be deferred until those activities produce assessable income against which the deductions could be claimed.

TIP: There are rules in the tax law designed to prevent losses from a non-commercial business activity from being offset against income from other sources, unless the activity satisfies one of the commerciality tests, or the Commissioner exercises his discretion to not apply the non-commercial loss rules. However, there are strict requirements surrounding the exercise of this discretion. Note that there are specific exemptions from the non-commercial loss rules for low income primary producers and professional artists.

Also, since 1 July 2009, losses incurred by individuals with an adjusted taxable income of $250,000 or more from non-commercial business activities have been quarantined, even if they satisfy the relevant commerciality tests. The effect is that these individuals are not able to offset excess deductions from non-commercial business activities against their salary, wages or other income. Please call our office for further information.

Delivery drivers were common law employees and not contractors

Thursday, June 20th, 2013

The Administrative Appeals Tribunal (AAT) has recently affirmed tax assessments issued to a taxpayer after finding that delivery drivers hired by the taxpayer were common law “employees” and not independent contractors.

The taxpayer had contracts to deliver bakery goods to supermarkets and had engaged a number of drivers to make those deliveries. It contended that those drivers were independent contractors and were responsible for their own taxes and superannuation. However, the Tax Commissioner determined that the drivers were common law “employees” of the taxpayer.

Among other things, the Commissioner noted that the drivers did not own or lease their own vehicles, did not control or delegate any of the work, and wore uniforms (vests) identifying the taxpayer’s business name. Based on the evidence before it, the AAT was of the view that the drivers were “employees” of the taxpayer during the relevant period and held that the taxpayer had failed to withhold amounts as required under the pay-as-you-go (PAYG) withholding rules.

Tax laws changed for death of members in receipt of Superannuation income stream

Thursday, June 20th, 2013

The government has made tax law changes to provide tax certainty for superannuation trustees and deceased estates in situations where a person has died while in receipt of a superannuation income stream.

Investment earnings derived by complying superannuation funds from assets supporting current pensions are generally exempt from tax. However, a draft tax ruling issued by the ATO in 2011 caused some uncertainty over the eligibility of this tax exemption in situations following the death of a member to whom a pension was being paid.

In response to the uncertainty, the government last year announced that it would amend the law from 1 July 2012 to allow the tax exemption to continue following the death of the pension recipient until the deceased member’s benefits have been paid out of the fund (subject to the benefits being paid as soon as practicable).

ATO taskforce to target trust structures

Thursday, June 20th, 2013

In the 2013–2014 Federal Budget, the ATO was provided with $67.9 million over four years to undertake compliance activity in relation to trust structures. The taskforce will utilise intelligence systems as well as new tax return labels to gather information.

The ATO says the taskforce will not target ordinary trust arrangements or tax planning associated with genuine business or family dealings, but will focus on what it refers to as “higher-risk taxpayers”. Situations that would attract the attention of the ATO include arrangements where trusts or their beneficiaries who have received substantial income are not registered.

Closing the “dividend washing” loophole

Thursday, June 20th, 2013

The government is seeking to close what it perceives to be a loophole allowing sophisticated investors to engage in what it calls “dividend washing”. The government says “dividend washing” is a process that allows sophisticated investors to effectively trade franking credits, and can result in some shareholders receiving two sets of franking credits for the same parcel of shares.

The government has issued a discussion paper to facilitate consultation and has proposed tax law changes to take effect from 1 July 2013. The changes would aim to prevent shareholders from receiving two sets of franking credits for the same effective parcel of shares through dividend washing, and to ensure that there would be negligible impacts on legitimate market activities.

Medicare levy to increase from 1.5% to 2% from 1 July 2014

Thursday, June 20th, 2013

The Medicare levy has been increased by 0.5% to help fund the government’s National Disability Insurance Scheme, known as DisabilityCare Australia. This will take the Medicare levy from 1.5% to 2% of taxable income from 1 July 2014.

Under the changes implemented by the government, low income earners continue to receive relief from the Medicare levy through the low income thresholds for singles, families, seniors and pensioners. The exemptions from the Medicare levy for blind pensioners and sickness allowance recipients also remain in place.