Money and Melodrama

With all that has gone on in the Australian finance industry, the current financial year is playing out like a reality television series. Between the Royal Commission exposing salacious acts, rogue banks caught out cheating on investors, the staunch housing market starting to soften and interest rates staying strong in the face of weak inflation, this financial year has featured twists and turns that would make the producers of the Kardashian’s salivate… and we’re not even at the half-way point!

Given all the action and industry overhauls, it’s easy for tax strategy to slip off the radar. However, now is the perfect time to revisit your plan and assess if it is helping you navigate the path to your financial goals or sending you up the creek without a paddle. Let’s look at some practices you can implement now to maximise your taxation and accounting position.

Smart Business Structures – Your Framework for Success 

How your business is structured has multiple implications and, while you can always update and change your structure at any time, it is a key decision in determining the direction and potential viability of your company.

The structure you select will be based on a number of factors, including the size, scale and type of business you operate, your personal circumstances and your plans and aspirations for growth and diversification as the business develops.

On top of all this, your structure will also determine:

• Your tax liabilities
• Responsibilities as a business owner
• Personal liability
• Asset protection
• Operational costs
• Amount of paperwork and administration required

To enhance clarity around the options available, here we explore some structures to consider in order to create strong foundations for your company.

Sole Trader 

A Sole Trader is an individual operating their business on their own.

When you choose to operate your business as a sole trader, it pays to be aware of the following parameters applying to the structure:

• You are required to use your individual tax file number when lodging your income tax return
• You must report all your income in your individual tax return, using the section for business items to show your business income and expenses – BEWARE: There is no separate business tax return for sole traders!
• Before doing business, you must apply for an ABN and use it for all your business dealings – including both invoicing and purchasing
• You must register for GST if your annual turnover is $75,000 or more – For small business, it is important to note that many larger organisations will choose suppliers registered for GST over those that are not as it benefits their taxation position
• Sole traders pay tax at the same income tax rates as individual taxpayers – However! You may be eligible for the small business tax offset which helps keep cash in your coffers rather than handing it over to the ATO
• A strong tip to avoid nasty surprises at the end of financial year, in addition to staying up to date with PAYG instalments, put aside money to cover your income tax and GST – The key here is to always be aware of how your cash flow is tracking and keeping on top of working capital – that means everything! Don’t overlook any element, all the way down to day-to-day operational expenses
• A huge advantage as a Sole Trader is the ability to claim a deduction for any personal super contributions made, as long as the nominated fund is notified
• A major thing to remember is that you CAN NOT claim deductions for money “drawn” from the business – Even if you take money from the business for wages, you must note that for tax purposes the ATO does not deem them as wage expenses, so unfortunately they are non-deductable

Partnerships

A Partnership is a collective of people or entities running a business together, but not as a company.

Partnerships can be exciting and facilitate a dynamic business management approach. However, from a tax perspective, businesses using a Partnership structure should be aware of the following:

• Any and all income, losses and control of the business are shared among the partners – The definition of partner is broad and can include an individual, a company, a trust, etc
• The partnership has its own TFN and must lodge an annual partnership return – This MUST show ALL income and deductions of the business so implementing a strong reconciliation system is imperative
• The partnership does not pay income tax on the profit it earns – However, each partner or partnership entity (e.g. a trust) must report their share of the partnership income in their tax return
• Each partner pays tax on their share of the partnership profit at the individual tax rate – It is worthwhile checking with your taxation specialist whether you are eligible for the small business tax offset as this can definitely help make tax time a happier experience!
• The partnership must apply for an ABN and use it for all business dealings
• The partnership must be registered for GST if its annual GST turnover is $75,000 or more
• As a partner you can’t claim deductions for money drawn from the business – As with Sole Traders, any amounts you take from a partnership are not considered wages for tax purposes

Company

A Company is a business that is considered a legal entity separate from its owners or ownership group.

Setting up and running a company carries with it a range of benefits, but also a litany of potential traps without savvy taxation and accounting planning and practices.

• A Company must apply for a tax file number (TFN) and use it when lodging its annual tax return
• A Company is entitled to an ABN if it is registered under the Corporations Act 2001
• A Company must be registered for GST if its annual GST turnover is $75,000 or more
• The company owns the money that the business earns – This means that the individuals who control the business CANNOT take money out of the business, except for wages or as a formal distribution of profits
• A Company must lodge an annual company tax return – Income tax is usually paid through instalments via the PAYG system
• They pay tax at the company tax rate or lower company tax rate, if operating as a base-rate entity – It’s important to note that they may be eligible for small business concessions, so being up to date on what is acceptable is a great way of reducing tax burden
• A Company must pay super guarantee contributions (SGC) for any eligible workers including any and all company directors – BEWARE! In some instances “eligible workers” will include contractors!
• If the PSI rules apply, the income will be treated as personal income for tax purposes – This also has direct implications for the deductions you can claim

Trusts

A trust is an entity that retains and in many instances manages income or property for the benefit of others.

Trusts are a great way of protecting business (and family) assets and overseeing funds and wealth development activity on behalf of trustees.

• A Trust must have its own tax file number (TFN) for lodging an annual tax return
• A Trust must apply for an ABN and use it for all business dealings
• Trusts must be registered for GST if annual GST turnover is $75,000 or more
• A Trust may be liable to pay tax – This is dependent on the wording of its deed and whether any income the trust earns is distributed to beneficiaries
• Some Trusts may be able to access small business tax concessions
• A Trust must pay super for any of its employees – Don’t forget that this may include the trustee if they are also employed by the trust

Business Building Boosts

While structure is integral in the administration of your business, there are other taxation and accounting opportunities available that can completely revolutionise the way you operate – and take your business to the next level.

Export Market Development Grant

Export Market Development Grants (EMDG) is a government administered financial assistance programme for businesses that either currently or aspire to export or promote Australian business’ goods and services directly overseas.

The fundamental mechanics of the scheme are aimed at helping businesses expand their reach and open up international and potentially global markets. Key elements of the EMDG scheme are:

• Small to medium sized Australian businesses are encouraged to apply to not only develop their export markets but start to forge a pipeline for future opportunities
• The scheme reimburses up to 50% of eligible export promotion expenses in excess of $5,000 – Only if the total expenses add up to a minimum of $15,000
• Each applicant can access up to eight grants

As with any grant or financial assistance program, there are eligibility criteria that must be met in order to be considered for an EMDG.

• The business’ income must not exceed $50 million within the grant year (July to June, as per the financial year)
• Eligible expenses of more than $15,000 must have been spent – If applying for the first time, businesses can combine two years’ worth of expenses)
• The business must have engaged in one or more of the following initiatives: – The export of goods and/or services | Inbound tourism | The export of intellectual property or skilled labour | Conferences or events hosted domestically in Australia

The EMDG scheme was created to give Aussie businesses a leg up when trying to crack international markets and can be an outstanding way of obtaining the funds needed to establish a reliable export sales pipeline.

However, if you want to take part you better get your skates on as your business must complete and submit the EMDG application by 20 November! For help with the application process, please do not hesitate to contact Chetan and his team for more detailed advice.

Small Business Restructure Rollover

When running a small business, if you are unsure if your current tax structure is the right one for you, any cash movements and transactions can be rife with loopholes and stress. However, with a Small Business Restructure Rollover (SBRR), businesses are able to transfer active assets from one entity to one or more other entities without attracting unwanted income tax liability.

The SBRR concession is only accessible for businesses with an aggregated annual turnover of less than $10 million and applies only to the transfer of active CGT assets, trading stock, revenue assets or depreciating assets.

It should be noted that, to be eligible for an SBRR, any transactions must not impact ultimate economic ownership of the assets that are transferred. In other words, any transferral of money is not considered a sale of the asset – more a strategic movement of finances that can improve a business’ prospects from a tax perspective.

SBRR’s, associated legislation and general management of the rollover can prove to be exceptionally difficult terrain to navigate. If you want to explore the possible benefits of this strategy for you business, the best practice is always to speak to your Financial Decisions Adviser before making any moves.

Service Entity Arrangements

Service Entity Arrangements (SEA) came into being back in 2006 and unfortunately that was probably the last time many businesses examined their arrangements and confirmed compliance.

SEA’s are typically for business entities that are more prone to litigation and financial claims arising throughout the course of conducting their business. Doctors, solicitors, accountants, pharmacists, medical specialists and the like are all subject to legal and financial risks, and SEA’s are a means of mitigating as much of that risk as possible.

Somewhat complicated in terms of structure, a SEA operates along the following lines:

Practice Owner:

• Operates a business providing goods or services to consumers
• Enters into an agreement with an associated service entity, usually controlled by an associate of the Practice Owner

Associated Service Entity:

• Provides core resources like staff, equipment, property leases and other various services to the Practice Owner
• The Associated Service Entity charges the Practice Owner Service fees, often with a significant mark-up

ATO

• Practice Owner claims deductions for service fees and charges as expenditure incurred in the course of conducting business
• Any profits made by the Associate Service Entity are generally either retained by that entity or distributed to the Practice Owner. In some instances the operator of the Associate Service Entity will take on the tax burden as part of their partnership with the Practice Owner

Protecting hard-earned resources in these professions can prove deceptively difficult, but ensuring you have a legally binding and comprehensive SEA is a big step towards providing much needed security for business assets.

Bringing it all Together

Ultimately, while these strategies will definitely provide some tax relief and potentially positively impact the future prospects of a business, there are multiple considerations of which owner operators should be cognisant.

To ensure best practice and to optimise your tax strategy – both business and personal – contact Chetan and his team on 9997 4647 to discuss how they can help create and protect your finances with their wealth of knowledge and experience.