You might have seen the recent spate of media freedom advertisements as part of the Your Right to Know campaign. The prime-time advertising states that the Australian Tax Office (ATO) can take money from your account without you knowing. The question is, do you really know what powers the ATO have.

The ATO is one of the most powerful institutions in Australia with very broad and encompassing powers. Over the last few years the approach has been to work with taxpayers to ensure that the tax they owe is paid. But this level of understanding only lasts so long and they will take action where taxpayers are unwilling to work with them, repeatedly default on an agreed payment plan, or don’t take steps to resolve the situation (these steps include an expectation that you go into debt to clear your tax debt). And, there are also circumstances where the ATO can swoop in where they believe there is a need to secure assets such as bank accounts if there is a risk of disposal or flight risk.

The ATO’s principal purpose is to collect the majority of the Federal Government’s revenue. According to an Inspector-General of Taxation’s report earlier this year, in 2016-17:

– 88% of tax payments owing were made by the due date

– 7% ($33.4bn) was paid within 90 days after the due date

– 1.3% ($6.1bn) was paid within a year after the due date, and

– $15 billion was left unpaid after a year.

At the end of the 2016-17 financial year, the total of undisputed collectable tax debt was $20.9 billion

Here are just a few of the ATO’s powers to ensure that tax owing is collected:

Issue a garnishee notice to someone holding money on your behalf – for example a bank. For salary and wage earners, the ATO can require your employer to take part of your salary and pay it to them until your tax debt is paid. This is generally limited to a maximum of 30% of your salary. If you are a business, the ATO can go as far as accessing your merchant facility if you have credit owing.

Director penalty notice – Directors can personally incur penalties equal to their company’s unpaid PAYG withholding liabilities or superannuation guarantee charge. The Government wants to expand this to cover unpaid GST liabilities as well. If this debt is not paid, the ATO may issue a director penalty notice to start legal proceedings (and withhold any refunds due to the director).

Direction to pay super guarantee – if employers receive a direction to pay superannuation guarantee, any outstanding Superannuation Guarantee Charge must be paid within the period specified. It’s a criminal offence not to comply with this notice and may result in enforced penalties and/or imprisonment.

Impose a freezing order – for example, on your bank accounts. That is, without notice the ATO can freeze and then if required strip your accounts, particularly where they believe you have alternative sources of income. This freezing order cannot be initiated by the ATO but must be granted by a court.

Issue writs or warrants of execution, or warrants of seizure and sale. For example, they can force you to sell certain assets to pay your tax debts.

Winding up – liquidate your company or bankrupt you. Most taxpayers don’t believe how strongly the ATO will act. The ATO can commence winding up procedures before any dispute is decided. In 2017-18 the ATO bankrupted 470 taxpayers and wound up 1,282 entities. The ATO would argue that in many cases the wind up forces the inevitable and prevents further debt being incurred either to the ATO or other parties.

The message is, make sure you are on top of your paperwork. If the ATO has queries or suspects something is not right, you need to be able to respond. The longer you take or a lack of evidence will only escalate the situation.

So, can the ATO take money out of your account without advising you first? With the support of the courts, absolutely and a whole lot more.

The Government has resurrected the Superannuation Guarantee (SG) amnesty giving employers that have fallen behind with their SG obligations the ability to “self-correct.” This time however, the incentive of the amnesty is strengthened by harsh penalties for those that fail to take action.

Originally announced in May 2018 and running between 24 May 2018 until 23 May 2019, the amnesty failed to secure its passage through Parliament after facing a backlash from those that believed the amnesty was too lenient on recalcitrant employers.

Since the original announcement, the Government reports that over 7,000 employers have come forward to voluntarily disclose historical unpaid super. The SG tax gap is estimated at around $2.85 billion in late or missing SG payments.

When does the amnesty apply?

Legislation enabling the amnesty is currently before Parliament and if enacted, will apply from the date of the original amnesty announcement, 24 May 2018, until 6 months after the legislation has passed Parliament. Employers will have this period to voluntarily disclose underpaid or unpaid SG payment to the Commissioner of Taxation.

The amnesty applies to historical underpaid or unpaid SG for any period up to the March 2018 quarter.

Qualifying for the amnesty

To qualify for the amnesty, employers must disclose the outstanding SG to the Tax Commissioner. You either pay the full amount owing, or if the business cannot pay the full amount, enter into a payment plan with the ATO. If you agree to a payment plan and do not meet the payments, the amnesty will no longer apply.

Keep in mind that the amnesty only applies to “voluntary” disclosures. The ATO will continue its compliance activities during the amnesty period so if they discover the underpayment first, full penalties apply. The amnesty also does not apply to amounts that have already been identified as owing or where the employer is subject to an ATO audit.

What do employers pay under the amnesty?

Normally, if an employer fails to meet their quarterly SG payment on time, they pay the SG charge (SGC) and lodge a Superannuation Guarantee Statement. The SGC applies even if you pay the outstanding SG soon after the deadline.

Under the quarterly superannuation guarantee, the interest component is calculated on an employer’s quarterly shortfall amount from the first day of the relevant quarter to the date when the SG charge would be payable (not from the date the SG was overdue).

What employers pay for failing to meet SG obligations
No Amnesty	Amnesty
SGC comprised of:	SGC comprised of:
The outstanding SG entitlements (this component might be higher than what it would have been had the entitlements been paid on time)	The outstanding SG entitlements
Interest of 10% per annum	Interest of 10% per annum
An administration fee of $20 for each employee with a shortfall per quarter	No administration fees
Penalties of up to 200% of the amount of the underlying SG charge (minimum 100% for quarters covered by the amnesty)	No penalties
A general interest charge if the SGC or penalties are not paid by the due date	A general interest charge
SGC amount is not deductible – even if you pay the outstanding amount	SGC amount is deductible

Special provisions exist within the legislation to automatically protect employees from inadvertently breaching concessional contribution cap limits if the unpaid SG is paid to the Commissioner and then transferred to the employee’s superannuation fund. Where the employer makes the payment directly into the employee’s fund, the individual would need to apply to the Commissioner requesting the exercise of discretion to either disregard the concessional contributions or allocate them to another financial year.

What happens if you do not take advantage of the amnesty?

If an employer fails to take advantage of the amnesty and is found to have underpaid employee SG, they are required to pay the SGC which includes penalties of up to 200%. However, the ATO has the power to reduce the penalty in whole or part.

The legislation enabling the amnesty imposes tougher penalties on employers that do not voluntarily correct underpaid or unpaid SG by removing the ATO’s capacity to reduce these penalties below 100%. In effect, the Commissioner would lose the power for leniency even in cases where an employer has made a genuine mistake.

Where to from here?

Even if you do not believe that your business has an SG underpayment issue, it is worth undertaking a payroll audit to ensure that your payroll calculations are correct, and employees are being paid at a rate that is consistent with their entitlements under workplace laws and awards.

If your business has fallen behind on its SG obligations and is eligible for the amnesty, you need to start working through the issues now or contact us to work through the issues for you. There are several calculations that need to be completed and these may take some time to complete.

If your business has engaged any contractors during the period covered by the amnesty, then the arrangements will need to be reviewed as it is common for workers to be classified as employees under the SG provisions even if the parties have agreed that the worker should be treated as a contractor. You cannot contract out of SG obligations.

If a problem is revealed, you can correct it without excessive penalties applying. If you are uncertain about what Award and pay rates apply to employees, the FairWork Ombudsman’s website has a pay calculator or you can contact them online or call them on 13 13 94.

ATO take ‘gloves off’ on overseas income

Five years ago, the Australian Taxation Office (ATO) offered a penalty amnesty on undisclosed foreign income. Five years on, the ATO has again flagged that underreporting of foreign income is an issue but this time the gloves are off.

How you are taxed and what you are taxed on depends on your residency status for tax purposes. As tax residency can be different to your general residency status it’s important to seek clarification. The residency tests don’t necessarily work on ‘common sense.’ For tax purposes:

–Australian resident – taxed on worldwide income including money earned overseas (such as employment income, directors fees, consulting fees, income from investments, rental income, and gains from the sale of assets).

–Foreign resident – taxed on their Australian sourced income and some capital gains. Unlike Australian resident taxpayers, non-resident taxpayers pay tax on every dollar of taxable income earned in Australia starting at 32.5% although lower rates can apply to some investment income like interest and dividends.

There is no tax-free threshold. Australian sourced income might include Australian rental income and income for work performed in Australia.

–Temporary resident – Generally, those who have come to work in Australia on a temporary visa and whose spouse is not a permanent resident or citizen of Australia. Temporary residents are taxed on Australian sourced income but not on foreign sourced income. In addition, gains from non-Australian property are excluded from capital gains tax.

Just because you work outside of Australia for a period of time does not mean you are not a resident for tax purposes during that period. And, for those with international investments, it’s important to understand the tax status of earnings from those assets. Just because the asset might be located overseas does not mean they are safe from Australian tax law, even if the cash stays outside Australia. Don’t assume that just because your foreign income has already been taxed overseas or qualifies for an exemption overseas that it is not taxable in Australia.

How your money is being tracked

A lot of Australians have international dealings in one form or another. The ATO’s analysis shows China, the United Kingdom, Switzerland, Singapore and the United States are popular countries for Australians.

The ATO shares the data of foreign tax residents with over 65 foreign tax jurisdictions. This includes information on account holders, balances, interest and dividend payments, proceeds from the sale of assets, and other income. There is also data obtained from information exchange agreements with foreign jurisdictions.

In addition, the Australian Transaction Reporting and Analysis Centre (AUSTRAC) provides data to the ATO (and the Department of Human Services) on flows of money to identify individuals that are not declaring income or paying their tax.

It’s not uncommon for taxpayers to forget to declare income from a foreign investment like a rental property or a business because they have had it for a long time and deal with it in the local jurisdiction with income earned ‘parked’ in that country. However, problems occur when the taxpayer wants to bring that income to Australia, AUSTRAC or the ATO’s data matching picks up on the transaction and then the taxpayer is contacted about the nature of the income. If the income is identifiable as taxable income (for example, from a property sale or income from a business), you can expect the ATO to look very closely at the details with an assessment and potentially penalties and interest charges following not long after.  There is no point telling the ATO the money is a gift if it wasn’t, they can generally find the source of the transaction and will know it’s not from a very generous grandmother – misdirection is only going to annoy them and ensure that there is no leniency.

What you need to declare in your tax return

If you are an Australian resident, you need to declare all worldwide income in your tax return unless a specific exemption applies, although in some cases even exempt income needs to be reported. Income is anything you earn from:

-Employment (including consulting fees)

-Pensions, annuities and Government payments

-Business, partnership or trust income

-Crowdfunding

-The sharing economy (AirBnB, Uber, AirTasker etc.)

-Foreign income (pensions and annuities, business income, employment income and consulting fees, assets and investment income including offshore bank accounts, and capital gains on overseas assets)

-Some prizes and awards (including any gains you made if you won a prize and then sold it for a gain), and

-Some insurance or workers compensation payments (generally for loss of income).

You do not need to declare prizes such as lotto or game show prizes, or ad-hoc gifts.

Do I need to declare money from family overseas?

A gift of money is generally not taxable but there are limits to what is considered a gift and what is income. If the ‘gift’ is from an entity (such as a distribution from a company or trust), if it is regular and supports your lifestyle, or is in exchange for your services, then the ATO may not consider this money to be a genuine gift.

I have overseas assets that I have not declared

Your only two choices are to do nothing (and be prepared to face the full weight of the law) or work with the ATO to make a voluntary disclosure. Disclosing undeclared assets and income will often significantly reduce penalties and interest charges, particularly where the oversight is a genuine mistake.

How to repatriate income or assets

Before moving funds out of an overseas account, company or trust it is important to ensure that you seek advice on the implications in Australia and the other country involved. This is a complex area and the interaction between the tax laws of different countries requires careful consideration to avoid unexpected consequences.

If you need to clarify your residency status for tax purposes or are uncertain about the tax treatment of income, please contact us today.

Confusion over personal income tax changes – what are you really entitled to?

The recent income tax cuts that passed through Parliament do not mean everyone automatically gets $1,080 back from the Government as soon as they lodge their income tax return. The Australian Taxation Office (ATO) has been inundated with calls from taxpayers wanting to know where their money is and how they can access the $1,080 they now believe is owing to them.

What changed?

From 1 July 2018

A low and middle income tax offset (LMITO), first introduced in the 2018-19 Federal Budget, provides a tax benefit to those with taxable incomes below $125,333. Recent changes increase the LMITO from a maximum of $530 to $1,080 and the base amount from $200 to $255, and make it applicable to a greater number of taxpayers by increasing the threshold from $125,333 to $126,000.

The first thing to remember is that this is a tax offset; you need to owe tax to offset the tax. And, if you owe tax, the offset will be first used to reduce the tax you owe. It is not a cash back – a point the ATO is at pains to point out stating on its website that, “It doesn’t mean that you will get an extra $1,080 in your tax return.”

The offset applies for a limited time. In this case, the offset applies to the 2018-19, 2019-20, 2020-21 and 2021-22 income years. So, if you are eligible to receive the offset, it applies to the taxable income you earned last financial year (2018-19) and you will receive any offset owing once you have lodged your tax return.

Taxable income*	Offset minimum	Offset maximum
<$37,000	$255	$255
>$37,000 – <$48,000**	$255	$1,080
>$48,000 – <$90,000		$1,080
>$90,000 – <$126,000***		$1,080
$126,000+	$0	$0

 * Your taxable income is the income you earn less any deductions you claim – not your salary.

** offset entitlement is $255, plus 7.5% of the excess to a maximum of $1,080.

*** offset entitlement is $1,080, less 3% of the excess on taxable income above $90,000.

If you earned taxable income in 2018-19 of:-

– Less than $21,885, while you have an entitlement to LMITO of $255, you do not pay personal income tax and therefore cannot utilise the offset.

– $45,000, you will receive a tax reduction of $855 ($255 plus 7.5% on every dollar between $37,000 and $45,000, in this case $8,000). You may also be eligible for the low income tax offset (LITO), see below.

– $85,000, you will receive a tax reduction of $1,080.

The LMITO is in addition to the existing low income tax offset (LITO). The LITO is available to those with taxable income of less than $66,667. The maximum offset is $445 for those with taxable incomes of $37,000 or less. Any amount you earn above $37,000 up to the threshold of $66,667 reduces the offset by 1.5%. Once again, the LITO is a tax offset to reduce the amount of tax you pay. If you do not pay personal income tax, you do not receive the offset as a cash refund.

From 1 July 2022

Two things occur from 1 July 2022:

– Income tax rate thresholds change – the top threshold of the 19% personal income tax bracket increases to $45,000 (currently $37,000), effectively providing a tax cut to all taxpayers earning over $18,200. The tax rate change applies to resident taxpayers and working holiday makers.

– The low-income tax offset (LITO) increases – for those with taxable income of less than $66,667, the LITO base amount will increase from $445 to $700. However, the LITO will reduce quicker than it currently applies with amounts above $37,500 reducing by 5% for amounts up to $45,000, then 1.5% to $66,667.

These changes assume that the Government does not pare back the income tax changes in a future Budget.

From 1 July 2024

From 1 July 2024, the 32.5% marginal tax rate will reduce to 30% and the number of taxpayers it applies to will increase with the maximum threshold moving from $120,000 to $200,000. The tax rate change applies to resident taxpayers and working holiday makers. Once again, this assumes that this tax rate and threshold change is not amended in a future Federal Budget.

From 1 July 2019, new laws prevent superannuation providers from eroding member balances with unwanted or unnecessary insurance and exit fees. Plus, inactive accounts with low balances will be moved to the ATO to try and unite the unclaimed super with its owner.

These changes do not apply to self-managed superannuation funds or small APRA funds.

Insurance inside your fund

Up until 30 June 2019, superannuation providers were required to provide members with appropriate life and total and permanent disability (TPD) insurance inside superannuation on an ‘opt out’ basis. That is, the insurance was automatically put into place when you became a member of the fund.

The problem is that for a lot of people, such as young people with no dependants and those with insurance cover elsewhere, these default insurance premiums are a key factor in eroding their superannuation balances. And in many cases, people simply did not realise they had insurance inside their funds.

New laws that came into effect on 1 July 2019 prevent superannuation providers from maintaining ‘default insurance’ for any member with an account that has been inactive for a continuous period of 16 months unless that person has elected to maintain the insurance. An inactive account is one where no contributions or rollovers have been received in the previous 16 month period.

For everyone else, insurance will remain a default on new and existing superannuation funds unless you specifically opt out.

What to do if you are affected

If you are affected, you need to make a decision about whether the insurance held in your fund is valuable to you. Often insurance cover through superannuation is cheaper than what you might be able to access elsewhere. Also, the premiums come out of your fund so they don’t impact on your cashflow. However, if the insurance is unnecessary or duplicated, the premiums will simply erode your account.

Employer default super funds generally provide death and TPD cover. This basic cover may be available without health checks. You can usually increase, decrease, or cancel your default insurance cover. Your super fund’s website will have a product disclosure statement (PDS) which explains the insurer they use and details of the cover available.

If you are affected, the insurance you hold inside your super fund may be cancelled unless you take action. If you choose to, you can keep your insurance by contacting your insurer (login to your insurer’s website and follow the links or call them to find out how to make the election) or by making a contribution. The election cannot be made over the phone to your fund.

Your superannuation provider is obliged to let you know if your insurance is about to be cancelled.

Low balance super accounts moved to ATO

Australians have over $17.5 billion in unclaimed superannuation. From 1 July 2019, superannuation providers will be required to report and pay inactive low-balance accounts to the ATO. Twice a year, super funds will report and pay:

– unclaimed super of members aged 65 years or older, non-member spouses and deceased members.

– unclaimed super of former temporary residents.

– small lost member accounts and insoluble lost member accounts.

– inactive low-balance accounts.

 

A low balance account is one with less than $6,000. These new rules mean that if your superannuation account has less than $6,000, and the account has been inactive for 16 months, the balance will be transferred to the ATO who will attempt to consolidate your superannuation.

Reducing fees and charges

From 1 July 2019, exit fees including fees on partial withdrawals have been abolished for all superannuation fund members regardless of their superannuation account balance.

Where a superannuation fund member’s final account balance is less than $6,000 in a year, new caps apply to the fees that providers can charge. From 1 July 2019, administration and investment fees and other prescribed costs on these accounts will be capped at 3%. If the fund has charged more than 3%, the excess needs to be refunded within 3 months.

Tax time: what you need to know

A consistent theme this tax time is overclaiming and under reporting. With the Australian Taxation Office (ATO) getting more and more sophisticated in its data matching approaches, taxpayers can expect greater scrutiny where their claims are greater than what is expected. We take a look at the key issues for you, your business and your SMSF.

For you

Work related deductions

Last financial year, over 8.8 million taxpayers claimed $21.98 billion in deductions for work related expenses. It’s an area under intense review by the ATO. If you claim work-related deductions, it’s important to ensure that you are able to substantiate any claim you make.

To claim a deduction, you need to have incurred the expense yourself and not been reimbursed by your employer or business, in most cases you need a record proving you incurred the expense, and the expense has to be directly related to how you earn your income – that is, the expense is directly (not sort of) related to your work. This also means ensuring that you only claim the work-related portion of items you use personally, such as mobile phones or internet services.

When you don’t have to keep records

If your claim for work related deductions is below $300 you do not have to keep a record of the expense, such as a receipt. Work related clothing has a $150 record keeping limit. However, the ATO is concerned that taxpayers are ‘automatically’ claiming these deductions without incurring any expenses because of a belief that you don’t have to support the claim. If you have claimed an amount up to the record keeping threshold, you may find that the ATO will ask you to explain how you came to that amount. If you don’t have diary entries or a good explanation, your claim might be denied.

Working from home

If you don’t have a dedicated work area but you do some work on the couch or at the dining room table, you can claim some of your expenses like the work-related portion of your phone and internet expenses and the decline in value of your computer. If you have a dedicated work area, there are a few more expenses you can claim including some of the running costs of your home such as a portion of your electricity expenses and the decline in value of office equipment.

If your home is your principal place of business, you might be able to claim a range of expenses related to the portion of your home set aside for your business. What the ATO is looking for is an identifiable area of the home used for business.

Ensure any claims are in proportion to the work related use. You can’t, for example, claim all of your internet expenses because you do a bit of work from home in the evenings and need the internet.

Work related clothing

In general, you cannot claim the cost of your work clothes or dry cleaning expenses unless the clothes are occupation specific, such as chefs whites or a uniform with a logo, or protective gear because your workplace has hazards (jeans don’t count as protective wear). Just because you have to wear a suit to work does not make it deductible.

Cryptocurrency

The ATO has a special taskforce dealing specifically with cryptocurrency. Cryptocurrency is considered an asset for tax purposes, rather than a form of currency. This means that gains or losses made on disposal or exchange of cryptocurrency will often be captured under the tax system – regardless of whether you’re switching between currencies or ‘cashing out’ your asset into AUD.

You will need to keep records of all of your trades in order to work out whether you’ve made a taxable gain or loss each time you dispose of an asset.

Capital gains tax can be complex and this is an area that the ATO is looking very closely at, particularly where taxpayers are claiming large losses. Also, some disposals can be taxed as ordinary income which means the CGT discount cannot apply and capital losses cannot be applied against the gains that have been made.

Rental property deductions

In the 2017-18 financial year, more than 2.2 million Australians claimed over $47 billon in deductions and the ATO believes that is too much – one in ten is estimated to contain errors.

What you can claim for your rental property has been significantly curbed. For example, you can no longer claim deductions for the cost of travelling to inspect the property. And, you can no longer claim depreciation deductions for second hand plant and equipment. Previously, you could for example, buy a rental property from someone else and then claim depreciation on the assets already in the property such as the kitchen appliances and carpet. From 1 July 2017, you can only claim deductions for new assets you purchase and install in the property.

4,500 audits of rental property deductions will be undertaken this year with the focus on over-claimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others, and omitted income from accommodation sharing. Deliberate cases of over-claiming are treated harshly with penalties of up to 75% of the claim.

When you own a share in a property

For tax purposes, rental income and expenses need to be recognised in line with the legal ownership of the property, except in very limited circumstances where it can be shown that the equitable interest in the property is different from the legal title. The ATO will assume that where the taxpayers are related, the equitable right is the same as the legal title (unless there is evidence to suggest otherwise such as a deed of trust etc.,).

This means that if you hold a 25% legal interest in a property then you should recognise 25% of the rental income and rental expenses in your tax returns even if you pay most or all of the rental property expenses (the ATO would treat this as a private arrangement between the owners).

The main exception is that if the parties have separately borrowed money to acquire their interest in the property then they would claim their own interest deductions.

Earning money from the sharing economy

Income earned from the sharing economy, AirBNB, Uber, AirTasker etc., must be declared in your tax return. But you may also be able to claim proportional expenses associated to providing the service. Ensure that any deductions you claim are related to providing the service itself (not just switching on the app or making yourself available).

If you are a driver with Uber or another platform, you will need to be registered for GST regardless of how often you drive.

Your business

There are around 3.8 million small businesses, including 1.6 million sole traders in Australia. They employ around 5.5 million people and contribute $380bn to the economy. Small business is also in debt to the ATO to the tune of $15bn.

This tax time, the ATO has stated they are looking closely at taxpayers:
– setting up or changing to a company structure
– claiming motor vehicle expenses
– who may not be correctly apportioning between personal and business use

There are a multitude of data-matching programs and benchmarks to catch out those attempting to rort the system.

For wealthy groups and medium businesses, the focus is on structuring to avoid tax:

– international risk – international profit shifting and corporate restructuring
– inappropriate arrangements that seek to extract profits or capital without the right amount of tax being paid
– high risk trust arrangements attempting to gain advantage beyond ordinary trust arrangements or tax planning associated with genuine business or family dealings.

If the ATO suspect there is a problem, you may be contacted to justify why decisions were made to structure your affairs or the affairs of your company in a particular way.

No tax deductions if you don’t meet your tax obligations

From 1 July 2019, if taxpayers do not meet their PAYG withholding and reporting obligations, they will not be able to claim a tax deduction for payments:

– of salary, wages, commissions, bonuses or allowances to an employee;
– of directors’ fees;
– to a religious practitioner;
– under a labour hire arrangement; or
– made for services where the supplier does not provide their ABN.

The main exception is where you realise there is a mistake and voluntarily correct it before the ATO begins a review or audit. In these circumstances, a deduction may still be available if you voluntarily correct the problem but penalties may still apply for the failure to withhold the correct amount of tax. There is also an exception for situations where you make payments to a contractor but then later realise that they should have been paid as an employee, as long as the worker has provided an ABN.

The Government has also proposed that from 1 July 2021, the ABNs of those required to lodge a tax return but have not done so will be cancelled, and from 1 July 2022, ABN holders will be required to confirm the accuracy of their Australian Business Register details each year.

Recording payments to contractors

The taxable payments reporting system requires businesses in certain industries to record and report payments made to contractors to the ATO.

From 1 July 2019, security providers and investigation services, road freight transport, and computer system design and related services businesses will need to collect specific information in relation to payments made to contractors (individual payments and total for the year). These businesses will need to lodge an additional report to the ATO with this information. The first report will be due by 28 August 2020.

Businesses within the building and construction industry, cleaning, and courier services need to report payments to contractors in the year ending 30 June 2019 by 28 August 2019.

This reporting requirement is focused on industries identified as active participants in the black economy, raising around $2.7bn per year in income and GST liabilities.

Your trust

Timing of resolutions

Trustees (or directors of a trustee company) need to consider and decide on the distributions they plan to make by 30 June 2019 at the latest (the trust deed may actually require this to be done earlier).  Decisions made by the trustees should be documented in writing, preferably by 30 June 2019.

If valid resolutions are not in place by 30 June 2019, the risk is that the taxable income of the trust will be assessed in the hands of a default beneficiary (if the trust deed provides for this) or the trustee (in which case the highest marginal rate of tax would normally apply).

TFN reporting

Has your trust lodged TFN reports for all beneficiaries?

Trustees of closely held trusts have some additional reporting obligations outside the lodgement of the trust tax return each year. The ATO is currently reviewing trustees to ensure their compliance with these obligations, particularly the requirement to lodge TFN reports for beneficiaries.

Where beneficiaries have quoted their TFN to the trustee, trustees are required to lodge a TFN report for each beneficiary. The TFN report must be lodged by the end of the month following the end of the quarter in which a beneficiary quoted their TFN. For example, if the trustee receives a beneficiary’s TFN in April, they must lodge a TFN report by the end of July.

Where a TFN has not been provided by a beneficiary, the trustee is required to withhold tax at a rate of 47% and pay this to the ATO. The trustee must also lodge an annual report of all amounts withheld.

Failure to comply with the TFN reporting and withholding requirements may incur penalties.

Your superannuation

Not making your full superannuation contribution? Now you can catch up

This year is the first year of new measures that enable people who have been out of the work force, like new Mums, to top up their superannuation.

If you have:

– A total superannuation balance below $500,000 as at 30 June; and
– Not utilised your entire concessional contributions cap ($25,000) for the year

then you can ‘carry forward’ the unused amount on a rolling 5 year basis.

For example, if your total concessional contributions in the 2018-19 financial year were $10,000 and you meet the eligibility criteria, then you can carry forward the unused $15,000 over the next 5 years. You may then be able to make a higher deductible personal contribution in a later financial year. If you are selling an asset and likely to make a taxable capital gain, a higher deductible personal contribution may assist in reducing your tax liability in the year of sale.

Remember:

– Your total superannuation balance must be below $500,000 as at 30 June of the prior year before you utilise any carried forward amount (within the 5 year term); and
– In some cases, an additional 15% tax can apply (30% total) to concessional contributions made to super where income and concessional contributions exceeds certain thresholds ($250,000 in 2018-19). Your income could be higher than usual in the year when you sell an asset for a capital gain.

One of main tax related items in the recent Federal Budget related to the expansion of the immediate deduction rules for depreciating assets. The amendments in this area received Royal Assent on 6 April 2019 and are law.

There are two major aspects of the changes.

Firstly, the legislation increases the immediate deduction threshold for small business entities (SBEs) in two stages and extends the rules through to 30 June 2020. For the 2019 income year there will actually be three separate immediate deduction thresholds that apply to SBEs that are using the simplified depreciation rules, which are summarised below:

– The immediate write-off threshold is $20,000 for assets first used or installed ready for use before 29 January 2019;

– The immediate write-off threshold is increased from $20,000 to $25,000 if the asset is first used or installed ready for use at or after 29 January 2019 and before 7.30pm ACT time on 2 April 2019;

– The immediate write-off threshold is increased again from $25,000 to $30,000 if the asset is first used or installed ready for use at or after 7.30pm ACT time on 2 April 2019.

The threshold for writing off a remaining SBE pool balance has been increased to $30,000 for the years ending 30 June 2019 and 30 June 2020.

In addition to this, the amendments also permit a business with aggregated annual turnover of at least $10m but less than $50m to claim an immediate deduction for depreciating assets with a cost (i.e. first element plus second element of cost) of less than $30,000 that it acquires after 7.30 pm AEST on 2 April 2019 for a tax year that ends on or after that date and on or before 30 June 2020.

Interestingly, some of the restrictions that apply to SBEs when it comes to claiming an immediate deduction don’t appear to apply to these larger businesses. For example, SBEs cannot apply the immediate asset write-off rules to horticultural plants (eg, grapevines) or assets used mainly to generate rental income. However, these restrictions don’t appear to apply to medium businesses which means that as long as the entity carries on a business under general principles and is under the $50m turnover threshold it could claim a deduction for assets used in residential or commercial rental properties.

It is with great pleasure we are able to announce that Dean Sammut has won one of Australia’s top industry awards. Presented at a black tie event at the Sofitel Wentworth, Dean was presented with the Rising Star of the Year Award at the 2017 Australian Accounting Awards.

The awards were hosted by Accountants Daily, Australia’s top publication for the accounting industry and were judged by a panel of 21 business leaders across Australia. There were a record number of finalists and submissions for this year’s awards, and all judges commented on the “standout” quality of the entrants.

“We broadened the awards program this year to better recognise the breadth and depth of the talent in this industry. For those who have made it to the finalist stage, congratulations, you have secured your place amongst Australia’s leading accounting professionals,” said Terry Braithwaite, head of partnerships at Accountants Daily.

Dean, a Partner at MMT Accountants + Advisers said he was humbled by the award. “Our recognition for the excellent contribution to the Sydney small business scene reinforces the strength of our brand in connecting with the community and engaging with our customers,” He added.

Featured in a publication in Accountants Daily, Dean believes it’s the MMT team’s ability to explain complex accounting areas to clients as a key success for the firm. “Where we differentiate ourselves from our competitors, is the ability to provide value in explaining their numbers to allow them to make smart decisions”.

Dean has further called on Universities to help train students to develop these important soft skills. “Definitely at university is where it needs to start. I actually don’t think the current courses have really adapted to the changes that are happening in accounting, and it’s happening pretty quickly,” he said. You can read further about the article in Accountants Daily here

We at MMT Accountants + Advisers are here to help you make smart financial decisions now so you can have a beautiful financial future. One way we do that is through careful tax planning! If you haven’t met with us yet, now is the time to contact us to arrange a tax planning meeting, so we can help you limit your tax payments, and grow your wealth.

In prior years, there were many changes to superannuation and small business taxation. This year’s Budget only had a few changes in these areas.

Here’s a brief summary of what the MMT team believes are the key changes that may affect many of our clients.

Taxation

Small business depreciation
The Government will extend by 12 months (to 30 June 2018) the ability for businesses with aggregated annual turnover less than $10 million to immediately deduct purchases of eligible assets costing less than $20,000, first used or installed ready for use by 30 June 2018. Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool (the pool) and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the closing balance of the pool at 30 June 2018 is less than $20,000 (including existing pools). From 1 July 2018, the immediate deductibility threshold will reduce back to $1,000.

Increase in Medicare levy
From July 2019, the Medicare levy will increase by half a percentage point from 2.0 to 2.5 % of taxable income. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased.

Lower threshold for HELP debt repayments
From 1 July 2018, a new minimum threshold of $42,000 will be established with a 1% repayment rate and a maximum threshold of $119,882 with a 10% repayment rate.

Disallow certain deductions for residential rental property
From 1 July 2017, the Government will disallow deductions for travel expenses related to inspecting maintaining or collecting rent for residential rental property. Also, plant and equipment depreciation deductions will be limited to outlays actually incurred by the investors in residential real estate properties. These changes will apply on the prospective basis, with existing investments grandfathered. Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either investor no longer owns the asset, or the asset reaches the end of its effective life. Subsequent owners will no longer be able to claim deductions for plant and equipment purchased by its previous owner.

Capital gains tax changes for foreign investors
From 7:30PM (AEST) on 9 May 2017, Australia’s foreign resident capital gains tax (CGT) regime will be extended to deny foreign and temporary tax residents access to the CGT main residence exemption. However, existing properties held prior to this date will be grandfathered until 30 June 2019.
From 1 July 2017, there will be an increase in the CGT withholding rate foreign tax residents from 10% to 12.5%, and a reduction of the CGT withholding threshold from $2 million to $750,000.

Taxable payments reporting
From 1 July 2018, the courier and cleaning industries will join the building and construction industry in needing to complete taxable payments reporting each year. More red tape!

Cash economy crack-down
The ATO now have an additional $32 million to target the cash economy. Expect more ATO audits with the data matching capabilities. Cafés, restaurants and other businesses that accept cash should ensure their point of sale systems have proper audit trails that match their cash deposits.

GST on new residential property and sub-divisions
In an approach designed to crack down on some property developers failing to make GST payments to the ATO, property developers will no longer manage the GST on sales of newly constructed residential properties or new subdivisions. Instead, the Government will require purchasers to remit the GST directly to the ATO as part of the settlement process.

Superannuation

Contribute the proceeds of downsizing to superannuation for older Australians
From 1 July 2018, a person aged 65 or over will be able to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home. These contributions will be in addition to those currently allowed under the existing rules and caps and will be exempt from the existing age test, work test and the $1.6 million balance test for making non-concessional contributions.

* This measure will apply to sales of a principal residence owned for the past 10 or more years and both members of a couple will be able to take advantage for the qualifying home. *

First Home Super Save Scheme
To encourage home ownership, voluntary contributions to superannuation made by first home buyers from 1 July 2017 can be withdrawn for a first home deposit, along with associated deemed earnings. Concessional contributions and earnings that are withdrawn will be taxed at marginal rates less a 30% offset. Under the measure, up to $15,000 per year and $30,000 in total can be contributed (within existing contribution caps). Contributions can be made from 1 July 2017. Withdrawals will be allowed from 1 July 2018 onwards. Both members of a couple can take advantage of this measure to buy their first home together.

Foreign Workers

There has been lots of news recently about the removal of the 457 visa program. Businesses that employ foreign workers on certain skilled visas will pay a levy that will be channelled into the Skilling Australians Fund. From 1 March 2018, Businesses with turnover of less than $10 million per year will make an upfront payment of $1,200 per visa per year for each employee on a Temporary Skill Shortage visa and make a one-off payment of $3,000 for each employee being sponsored for a permanent Employer Nomination Scheme.

Book in your End of Financial Year Meeting with us Today!

This is just a general summary of how the Budget may affect you. If you haven’t met with us yet, now is the time to contact us to arrange an End of Financial Year meeting, so we can help you limit your tax payments,
discuss your goals and plans for the next year, and grow your wealth. Remember, we both need time to implement any appropriate tax savings strategies for you well before 30 June 2017.

General advice disclaimer
General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.

Dean Sammut has been shortlisted for the prestigious Australian Accounting Awards, partnered by Thomson Reuters.

Dean is in the running to take out one of Australia’s top industry awards and has been shortlisted as a finalist to win the Rising Star of the Year at the 2017 Australian Accounting Awards, hosted by Accountants Daily, Australia’s top publication for the accounting industry.

Now in its fourth consecutive year, the Australian Accounting Awards, which covers 26 categories, recognises individual excellence in accounting, from the profession’s most senior ranks to its rising stars.
Winners in the individual categories will automatically be shortlisted for the coveted Accountants Daily Excellence Award. In addition, Dean will be in the running for the Editor’s Choice Award, which recognises an individual’s outstanding contribution to the Accounting Industry.

“We broadened the awards program this year to better recognise the breadth and depth of the talent in this industry. For those who have made it to the finalist stage, congratulations, you have secured your place amongst Australia’s leading accounting professionals,” said Terry Braithwaite, head of partnerships at Accountants Daily.

“We are set for a superb evening when the awards are presented. The judges have a tough job on their hands this year and there no doubt will be huge excitement to hear their verdicts.”

Dean, a Partner at MMT Accountants + Advisers said he was humbled by the nomination. “Our recognition for the excellent contribution to the Sydney small business scene reinforces the strength of our brand in connecting with the community and engaging with our customers,” He added.

The winners will be announced at a black tie awards dinner on Friday, 26 May at the Sofitel Sydney Wentworth.

We love hearing the success stories of our clients and with the passion and drive of the Glenn Simpson Landscapes team, it is no wonder they are doing so well.

Glenn Simpson Landscapes won the “COMMERCIAL & CIVIL CONSTRUCTION UP TO $3 MILLION” Silver Award at the LNA 2016 LANDSCAPE EXCELLENCE AWARDS for the Alice Lane, Newtown Bioretention Basin.

The Alice Lane, Newtown Bioretention Basin is an initiative undertaken by Inner West Council as part of its Waterevolution Living Lanes program. The program includes stormwater biofiltration systems, planting and revegetation, and cultural elements reflecting the nearby community, consequently applying sustainable urban water management principles to catchments.

Completed on behalf of Inner West Council, the Alice Lane, Newtown Bioretention Basin was an extremely rewarding and technically complex project, with the added satisfaction of enriching our environment!

“We are honoured and privileged to receive this esteemed Award as it was voted and awarded by a highly qualified and experienced LNA judging panel, among an outstanding number of quality entries.” said Glenn Simpson.

It has been dubbed, without a doubt, the most successful awards season yet with a greater variation of winners than ever before!

To read more about this project and their other fantastic work visit: http://glennsimpsonlandscapes.com.au/projects/ecosystem-protection-triumph

Hair & Beauty Australia are partnering with beyondblue for this luxury prize draw, valued at over $77,000 – all for charity!

You could be driving away in your brand new 5-door Hatch Mercedes-Benz A180, or wearing your beautiful new Diamond Tennis Bracelet, and most importantly supporting beyondblue.

Three million Australians are currently experiencing anxiety or depression. Every day, nearly eight people take their own lives – and beyondblue want to change that.

beyondblue provides information and support to help everyone in
Australia achieve their best possible mental health, whatever their age and wherever they live.

That’s why HABA are proud to donate all profits from this campaign to beyondblue, to help all Australians.

For tickets visit askhaba.com.au/beyond-blue-draw/

The global economy is picking up and Australia is about to secure the global record for the longest period a country has gone without a recession. But with the focus on the political environment, there is an uneasiness in the market and with uneasiness comes a reticence to take risks.

The fortunes of Australians this year will have much to do with how you or your business is positioned and how you respond to challenges.

Here are our top predictions:

Trumponomics will impact on our region

Business is business – either an opportunity makes sense or it doesn’t. The biggest pressure from the new US President is unlikely to be the much discussed Trans-Pacific Partnership (Australia’s current Free Trade Agreement with the US (AUSFTA) has been in place since 2005), or President Trump’s controversial immigration policies, but the plan to cut the US Federal company tax rate from 35% to boost competitiveness. If the US drops its company tax rate below 30%, Australia will be the one of the most expensive countries in its region to do business and globally uncompetitive. The 2016-17 Federal Budget announcement to reduce Australia’s company tax rate progressively to 25% for all businesses has stalled in the Parliament with voter perception that it is a gift to ‘big business’ at the expense of more deserving elements of the community.

The US is Australia’s second largest two-way trading partner at around $69 billion and our third largest export market at $22 billion* (we import around $47 billion in US goods and services). Australia’s trade relationship with China however swamps this volume with $150 billion in two-way trade of which almost $86 billion is in exports. These trade statistics are important to remember when we look at the geopolitical landscape of the Asia-Pacific region and in particular the increasingly antagonistic relationship between the United States and China.

Australia is too small an economy to successfully survive on its domestic market alone. Strong regional alliances and competitiveness are critical.

For business: Innovate or Perish

Economists widely predict that residential construction and exports – the mainstay of Australia’s domestic economic growth – will slow in 2017. Part of this is the Chinese Government’s concern about investment outflows (Australia has been a significant beneficiary with Chinese Direct Foreign Investment growing by 72.5% over 2010-15). So, where is growth going to come from?

One of the most alarming statistics comes from the Boston Consulting Group Global Manufacturing Cost-Competitiveness Index.

Advances in technology in particular will make some operators unsustainable and give others the capacity to change the very nature of their sector either through production efficiencies or disruption. After all, tech company Uber started in 2009, spreading exponentially around the world well before it launched in Australia in 2014. Real Estate Agents may be next with companies like Purplebricks.

The bottom line is that you cannot rely on the stability of your business model to sustain over time.

For you: Superannuation knee-jerk reactions will disadvantage some

2017 will be a watershed year for superannuation in Australia. With many of the reforms coming into effect on 1 July 2017, there will be a temptation for many to ‘do something’ before the deadline.

The biggest impact of the reforms is likely to be on those with large super balances close to or exceeding $1.6 million. And, it’s not just the wealthy with large super balances. Many SME business operators utilise the business real property exception to hold their business premises inside their SMSF, which can significantly increase the asset value of the fund. For anyone close to or exceeding the $1.6m cap, it’s essential that you have current valuations for your assets to know exactly where you stand.

One of the key decision points for those with large balances is how Capital Gains Tax applies where assets supporting pension payments exceed the new $1.6m pension transfer limits and need to be moved back into accumulation phase.

Knee-jerk reactions to the management of your fund’s assets – like quickly selling assets pre 1 July – may result in your fund being in a much worse position. With the risk of sounding conflicted, good advice is essential.

International is still a dirty word

If you are an individual or a business that transfers money internationally, you will continue to be a target. For individuals, if you work overseas be careful of residency issues. The residency tests don’t necessarily work on ‘common sense’. Just because you work outside of Australia for a period of time does not mean you are not a resident for tax purposes. And, for those with international investments, it’s important to understand the tax status of earnings from those assets. Just because the asset and the earnings from those assets are overseas does not mean they are safe from Australian tax law, even if the cash stays outside Australia.

Innovation

The BCG analysis demonstrates that Australia was the least competitive of the top 25 global manufacturers between 2004-14 – Australia’s direct manufacturing costs, for example, were just under 30% higher than the US. Manufacturing wages grew 48% in Australia over this period while labour productivity fell 1%. While this was a period of abnormal events with the mining boom, the Australian dollar at parity with the US, and a GFC, it still creates a stark picture of why a focus on productivity is important.

Over the last two decades we have seen a global trend towards offshoring to reduce labour costs to achieve productivity gains. Now, gains are being achieved through innovation to reduce costs. This is an area where Government policy is there to support business. These incentives include:-

– Small business rollover relief that removes the tax impediments associated with changing your business structure.
– Tax incentives for investors in early stage innovation companies.
– Broadened tax incentives for early stage venture capital limited partnerships and venture capital limited partnerships.
– More generous employee share scheme arrangements particularly for high growth start-ups.
– Immediate deductions for start-up businesses.
– Reduced company tax rates for small businesses.
– Plus there is also the R&D incentives for innovative companies.

For survival, all business operators need to look at the trends in their industry.

For business, Government regulation is increasingly cynical about those using low taxing jurisdictions, paying large management fees between international entities, and parking large debts in Australian entities.

Like every other tax authority, the Australian Tax Office wants its share of profits earned from Australian consumers. You can see this trend in the new GST rules (dubbed the ‘Netflix tax’) which come into effect on 1 July 2017 – although for many the requirement for foreign entities to charge GST on services and digital products provided to Australian consumers has already come into effect. On the other hand, changes to the GST treatment of international transactions that apply from 1 October 2016 are intended to make life easier for both Australian and overseas businesses, but these rules can become quite complex to apply in real life.

No one likes uncertainty and 2017 is shaping up to be a year where people feel unsettled. Take a breath, think strategically, look beyond your personal experience, and take advantage of the opportunities that are available to you.

 

*2015-16 figures Austrade Why Australia Benchmark Report 2017.

Many business owners don’t realise that the business has outgrown its structure until something comes up – and this something is usually something negative.

Are your assets at risk?

Legal action by employees, customers and suppliers as well as divorce are the two primary risk issues for many business operators. If you have been operating as a sole trade or as a partner in a partnership or have simply been holding all business assets in a single entity, your structure may not provide sufficient asset protection. If any personal assets or valuable assets of the business are held in the same entity which carries on the trading operations of the business, those assets may be at risk. To protect your assets it is generally preferable to separate as many valuable assets as possible from the trading operations.

Can you introduce new business partners or investors?

If you want to provide key employees or investors with an equity interest in your business, your current business structure may not allow for this. For example, it is not generally possible to provide fixed entitlements to the profits of a business operated by a discretionary trust.

Entities such as companies and unit trusts are a much more effective vehicle to facilitate the introduction of new equity partners as they can provide a fixed interest in the income and capital gains generated by the business. New investors can also potentially claim interest deductions on funds borrowed to invest in the company or unit trust.

Reinvesting in growth

Reinvesting profits in your business is important if you have or expect a strong growth path. Some business structures however don’t readily facilitate profits being retained by the business. For example, it is generally more difficult for a trust to retain profits, as the trustee of a trust is taxed on these profits at penalty tax rates if they are not distributed to the beneficiaries of the trust each year. This is compared to private companies where profits are taxed at a maximum rate of 30% or 28.5% and can be retained in the company without the need to distribute these profits annually.

Can you take money out of the business?

When you first established your business, it’s hard to know what your profits are going to be and for many, there are a few lean years of losses to get things up and running. Your personal circumstances might have changed as well – marriage, children, a spouse, etc. These changes can drive the need for change. The structure of your business has a direct impact on how money flows through it to the investors. For example, one of the benefits of a discretionary trust is that the income of the trust can be distributed to any of the beneficiaries of the trust in any proportion, and that proportion can change annually.

Impeding international expansion

If you are contemplating expanding overseas this can significantly increase the complexity of your operations. All of a sudden you will be exposed to a new set of Australian tax rules in addition to the legal and regulatory requirements that will need to be considered in the foreign jurisdiction. On top of the complexity, control may also become an issue. The right business structure can limit your exposure to risk.

Access to tax incentives and concessions

Research & Development (R&D) concessions are only available to companies. If you have a significant level of R&D activity that could potentially qualify for the tax incentives, it’s worth exploring your options if you are not already in a company structure.

Can you exit your business?

The business lifecycle has shortened considerably with less business owners seeking to create empires but more opportunistic business models. The wrong structure will limit your ability to sell your business interests and may have a dramatic and detrimental impact on the amount of tax you pay on the sale proceeds. It’s important that you explore this issue well before you actually plan to sell or reduce your stake in the business.

Is your business structure working for you? Contact MMT Accountants + Advisers to discuss whether your structure is right for long term goals.

 

Most people are not surprised when a start up business fails. But it’s not just start ups that grow to death; it’s also a common cause of business failure for mature businesses.

Start-up businesses often fail because they are undercapitalised. They grow until the money runs out and then they can’t afford to fund further growth. The banks refuse to lend to them as they have no history and no assets to leverage, and then they die. It’s an easy trap to fall into. The entrepreneurial spirit that drives people to start up a business is often the same spirit that keeps them focussed on a growth path. The mentality is that the faster you drive sales and bring in the cash, the more successful the business (and the entrepreneur) will be. However, this cycle of sales and profit is missing two key components; financial, and cash flow management. A successful and sustaining business has all of these elements.

For the more mature business, growing to death is often the result of unplanned growth opportunities. It’s ironic that seizing a major sales contract or a big new client can be your business’s ruin but it’s more common than you think. More often than not it’s an issue that business operators don’t identify until it is too late.

Many business operators are very good at what they do. Most have an excellent knowledge of the business they conduct and understand their products and services. Most also have an in-depth knowledge of sales performance and revenue. Few however have a high level of financial management expertise, so when a big new opportunity presents, critical financial questions are not asked. As a result, there can be a sudden and unintended impact on their financial position. A rush of sales might be a great thing but it is not always counterbalanced by a rush of income and profit. Free cash and liquidity are the victims.

Big one-off opportunities can also be dangerous because they are rare. For businesses without strong financial management and control, there is simply no way of understanding what impact the opportunity will have until they have experienced it. With no background history to rely on, the warning signs of impending financial crisis don’t appear.

Sudden growth comes at a cost. That cost can be at a profit or at a cash flow level. Profit and cash flow are not the same and where operators don’t have a lot of financial expertise they generally rely on profit analysis without considering the cash flow implications. You need to understand the cash cycle and its timing within your business.

The first step is to understand that sudden change creates a different dynamic and brings cost and cash flow implications with it. It’s essential not to embark on sudden change without identifying what these implications are.

Let’s look at an example: Jonathon runs a typical small business. Since taking over the established business a year ago growth has accelerated. The primary product of the business is brought in from overseas. The business is predicated on a budgeted turnover of $70,000 – $100,000 per month. The working capital in place accommodates the business operating at this level which is already a step up from where it was when he bought it.

Jonathon knows the business has a lot of potential and he’s been working hard to fulfil its promise. He’s ecstatic because he’s brought in five major sales all within the $50,000 – $200,000 range and all expect delivery within the coming 3 months. While the big sales required a dip in the gross profit margin, it’s still doable.

If all of the orders come through, the impact of the new sales will take his turnover from its current level of $100,000 per month to an average of $250,000 per month for the next 3 or 4 months. If you imagine yourself in Jonathon’s place, it would be hard not to be impressed with your efforts wouldn’t it? What a boost to the company.

Now add in another factor. The primary product is purchased from the supplier without trading terms so the outlay for any major sale is in advance. As a result, the cash flow implications of the time between each sale, the purchase of the product from the supplier, fulfilment and payment by the customer is critical to understand. For Jonathon, the highest risk is the major outlay of cash required to fulfil the sale. He cannot buy time.

When Jonathon had a cash flow analysis put in place to determine the impact of the new sales it revealed that he needed $200,000 to $300,000 more cash than he had. He knew it might be tight but didn’t realise the situation was that stark. As a result of the analysis, Jonathon was able to work with the customers to stage the orders and manage the cash flow requirements.

Had he fulfilled the sales without the analysis, he would have had a funding gap of approximately 60 days where he was exposed by $250,000 without the capital base to support him.

While the details might be different, situations like Jonathon’s are not uncommon. The problem is that unless you have strong security, the chance of any bank giving you an increase in funding is unlikely. Banks want to lend to businesses that have good financial management. If you approach them once a problem such as Jonathon’s has occurred, you have already proven the case in the negative and set yourself up for rejection.

In the example above, cash flow was the major issue. In others it is profit. Large customers with large orders may expect you to cut your margin. Or, they might ask you to discount if they ‘up the order’. The danger is that you, or your sales people, get carried away with the headline number and don’t look at the profit contribution. Some sales, even big sales are simply not worth it as you can’t trade below a certain profit level. For businesses with higher fixed costs your ability to negotiate your margin is less flexible than those with higher variable costs. The key is to know your break-even point before entering into any deals.

And, discounting can be its own trap. For example, if your margin is 40 per cent and you reduce your price by 10 per cent, you need a 33 per cent increase in sales volume to maintain your profit level!

The good news is we’re here to help and taking steps before these problems arise can help your business proposer.

Over the past six months I have constantly made reference to the fact that we are in a low interest, low return, and volatile investment cycle; but what does this mean for investors, particularly those who see themselves as conservative?

Historically investors who deem themselves as conservative or those wishing to shield themselves from market volatility sort the ‘safe haven’ of bank deposits or treasury bonds, and prior to the GFC anyone could access a virtually risk free yield of 5% plus. In the wake of the GFC, in an effort to stimulate economic growth, central banks around the world have adopted a Zero or in some cases Negative Interest Rate Policy. How has this impacted investors…………………

If you were a retiree in the 90’s requiring $50,000 per annum, and you had accumulated retirement funds of a million dollars, bank or treasury deposits plus a small exposure to growth investments could achieve your income with a little growth to combat inflation, virtually risk free. If you were approaching retirement and Capital Preservation was a high priority you could wind back exposure to ‘riskier’ growth assets i.e. shares and property in favour of the safe haven of banks, and still grow your wealth even allowing for inflation. If you were concerned about the volatility in shares or property you could shift all or part of your portfolio to bank deposits to ride out the perceived storm.

What has changed? Central banks around the world have adopted a Zero or in some cases Negative Interest Rate Policy in order to stimulate economic growth, this on the surface has worked to halt economic decline and instigate economic growth. It has also allowed consumers and business’ to repair their balance sheets by paying down debt, and facilitated increased stock prices; the conundrum for the conservative investor is that it has set the foundation for persistently low and potentially below inflation, investment interest rates for the foreseeable future.

Traditionally a conservative portfolio consisted of 60% growth assets (shares & property) and 40% defensive assets (term deposits & bonds), this 60/40 portfolio was forecast to provide an overall return of 8% net of fees and charges with growth assets contributing 10% and defensive 5%; given our scenario above this return is capable of providing a retiree income to live and sufficient growth to combat inflation and maintain capital. If we now assume that the traditional portfolio returns will not be achieved in today’s environment and that returns might be closer to growth assets contributing 5% and defensive 2%; it is obvious for a retiree that the portfolio will not provide the required income and it will have to be supported with a drawdown of capital, which can have negative or disastrous consequences over the long term particularly as people are retiring earlier and living longer. For potential retirees it is important to review the level of income required, the estimated time in retirement, and a realistic portfolio return to determine the amount of capital which will be needed to retire.

For those who consider themselves as conservative investors it might be prudent to reflect on the components of your portfolio, for traditionally ‘safe haven’ investments may not be so safe if the returns struggle to beat inflation. A considered approach to portfolio construction taking into account your financial needs and objectives, available capital, surplus cash flow, and investment time frame is most likely to meet both your investment and risk-tolerance objectives.

As with any investment decision one should seek advice from your professional adviser before investing!

Important note: While every care has been taken in the preparation of this article, MMT Financial Solutions (ABN 40 147 903 526, AFSL 458115) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Does your self-managed superannuation fund (SMSF) own a motor vehicle, artwork, wine, coins, jewellery, cars or other collectibles?

More stringent rules for how these collectible and personal use assets are managed come into effect for all funds from 30 June 2016. While it’s important for all SMSFs to ensure that they are compliant with the rules, funds with collectibles purchased before 1 July 2011 have had a grace period to get their house in order. This grace period ends on 30 June 2016.

There is around $407 million worth of these collectible and personal use assets sitting in SMSFs in Australia. The Tax Office’s main concern is that it’s really easy for fund members to forget that these assets – like artwork and cars – are owned by the fund and must be held for retirement purposes. That means members of the fund (or anyone related to them) can’t use or enjoy that asset.

If you have these assets in your fund (or are looking to acquire them), here’s what you need to ensure:

1. The asset must not be leased to a related party – a related party includes a member of the fund, their relatives, business partners, the spouse or child of these business partners), or any company or trust that the fund members control or influence.

2. The asset must not be stored in the private residence of the related party – this includes sheds and garages etc.

3. The trustees must keep a written record of where, how, and why the asset is to be stored.

4. The asset must be insured in the fund (trustees) name. If your SMSF is buying a collectible, insurance needs to be in place within the first seven days. If the fund already owns the asset it must be insured in the trustees name before 1 July 2016!

5. The asset must not be used by a related party. For example, if your fund owns a vintage car, you cannot drive it for any reason, not even to go to the mechanic.

6. If the asset is sold to a related party, the asset must be sold at a market price determined by a qualified and independent valuer.

A few issues come out of these requirements. Sometimes insurance is difficult or impossible to get for collectible assets. If you can’t secure insurance, the asset may need to be sold. If a collectible asset needs to be sold because the rules can’t be met, the sale process can sometimes be protracted – this could be an issue if you need to sell the asset pre 30 June.

Before your fund acquires a collectible asset, it’s also important to ensure that the fund Trust Deed allows for collectibles to be acquired, the Investment Strategy of the fund allows for the collectible to be acquired, and that the sole purpose of acquiring the collectible is to provide retirement benefits for members.

What is a collectible and personal use asset?

The definition of a collectible is quite broad and will often capture assets that many fund members don’t realise qualify as collectibles.

A common example is motor vehicles. The definition of a collectible includes motor vehicles such as utes, not just classic cars that are generally considered collectors items.

When the Tax Office talks about collectibles, they mean:

– artwork – including paintings, sculptures, drawings, engravings and photographs;
– jewellery;
– antiques;
– artefacts;
– coins, medallions or bank notes (coins and banknotes are collectables if their value exceeds their face value, and bullion coins are collectables if their – value exceeds their face value and they are traded at a price above the spot price of their metal content);
– postage stamps or first-day covers;
– rare folios, manuscripts or books;
– memorabilia;
– wine or spirits;
– motor vehicles and motorcycles;
– recreational boats; and,
– memberships of sporting or social clubs.

If you have any questions about the above please contact your MMT Adviser on 9930-6100.

Generally 2015 was forgettable for investors with returns and volatility influenced by a plunging oil price, nervousness created by a slowing Chinese economy plus concern over emerging markets generally, tightening monetary policy in the US but stimulatory settings in other major economies including Europe, China, and Japan (and Australia).

2016 has continued where 2015 left off with indices being sold off due initially to a selloff in Chinese shares and falls in the value of the Renminbi (RMB); concerns over the strength of the Chinese economy flowed through to commodity price weakness and worries over the impact to emerging economies; softer than expected US manufacturing data; and geopolitical risk, specifically tensions between Saudi Arabia & Iran, and the North Korean nuclear tests – all this in just a few weeks!

With all this happening it is easy to capitulate, however it is important to add some perspective to these issues;
• The significant early volatility on Chinese markets were influenced by regulatory issues, specifically a scheduled ban on selling of shares by major shareholders (which has now been amended to a restrictive limit on the size of stakes which can be sold); the introduction of a circuit breaker to halt large index declines which only served to bring forward investor selling to beat the shutdown (the circuit breaker has now been suspended); plus a near 6% decline in the value of the Renminbi (RMB) since July, however there is evidence that the Peoples Bank of China has taken steps to stabilise it again.

• Whilst some data coming out of the US is soft there is still sufficient evidence to show an underlying growth of around 2%.

• We continue to see stimulatory global monetary policy settings particularly in Japan, Europe, and China; and US Federal Reserve tightening is likely to be modest.

The first few weeks of this year have focussed on China (GDP and currency), and the falling oil price; the next thing investors will be focussed on is the upcoming US reporting season where analysts are expecting lower profits on average from American corporations due to the falling oil price impacting energy companies and the stronger US dollar hurting companies with foreign earnings.

The worries outlined above will continue to drive volatility in the short term; however I refer back to previous articles in terms of fundamentals; share market corrections provide attractive valuations; a continued expectation of expansionary global monetary settings; and, sustained modest global economic growth.

In summary we expect 2016 to provide another challenging year for investors but for global markets to recover from their lows as market fears of an impending global recession fade, providing modest positive equity returns globally for 2016 with higher levels of market volatility. For investors, we believe portfolio diversification and asset allocation is the key.

As with any investment decision one should seek advice from your professional adviser before investing!

 

Important note: While every care has been taken in the preparation of this article, MMT Financial Solutions (ABN 40 147 903 526, AFSL 458115) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.