New Family Trust Tax Rules – Will the Changes Impact You?

If your trust pays adult-child beneficiaries, then you’ll need to know how the new ATO tax guidance rules could alter your beneficiary arrangements. The proposed changes won’t affect every small business operating through a trust arrangement, but it’s important to check that existing provisions meet the new requirements.

The ATO has released several related documents as a draft package that outlines specific taxpayer arrangements it is examining. It is interested in agreements where parents benefit from trust income allocated to their children or other family members, particularly where tax avoidance could be an issue, and family member beneficiaries are unaware of the provisions.

Another area of focus is the application of Division 7A rules to trusts that pay private companies, especially with related business entities and where the trust and company are part of the same family group.

Do Your Trust Distribution Arrangements Need to Change?

Trust beneficiary arrangements can be complex, and we want to make sure your trust arrangements meet the ATO guidelines so you don’t get penalised. We’ll examine your situation in detail against the new information and advise you if any changes to trust arrangements are required.

With the ATO’s stronger position on the taxation of trust distributions, it’s essential to review arrangements before the end of this financial year. The new rules are set to apply from 1 July 2022.

Book a tax planning session with us today, so we can make sure you’ve got the best beneficiary arrangement for your business and family.


Schemes to avoid tax - a fool's errand

Much has been made recently of the ATO’s confirmation of its 2014 fact sheet position in relation to 100A. To summarise the situation for non-tax people, you can’t use discretionary trusts to stream income to tax privileged family members like university aged non-working adult children unless use & enjoyment of the cash follows the income. There are (as always) some narrow exceptions, but on the whole, streaming for tax minimisation only is now officially dead in the water.

But, why such backlash from the tax accounting community here?

Part of the answer is that it’s such a widespread and generally accepted accounting fiction, namely that family trusts could be used to distribute income to one beneficiary while the cash goes to another. Secondly, some tax practitioners may have been doing this for so long that it’s a shock to them to now discover that they may have been involved in avoidance or even evasion activity. A third reason is baked in client expectation; one client does it and talks to another and before long, if you’re the accountant who is NOT facilitating that scheme, then, you’re the guy left without any clients or at least a less profitable practice than you may otherwise have had.

Whatever the reason, “cash over there and income over here” has been comprehensively rebuked by this latest round of consultations & those who fail to heed the warning going forward have exposed themselves to clear and present audit risk.

It should also be said that, while the ATO is holding strong on their assertion that any tax driven streaming as from 1.7.14 is offensive and also NOT retrospective based on their position in the July 14 fact sheet, they have also clearly articulated that they will NOT be dedicating audit resources to hunting down historical infringements which are not already under review.

Reading between the administrative lines, where a taxpayer corrects future behaviour, the ATO will (likely) continue to let the flea infested dog sleep. If you read the 2014 fact sheet, it’s pretty hard to disagree with that position. Sure the ATO could have made more noise and forced their view down the throat of the tax community back in 2014 with more vigour. However the general premise of their position, that you must return your income, can’t be disputed. 6-5 & 6-10 make it clear that income derived by you must be declared by you.

Some accountants may argue that the trustee derived the income not the beneficiary, however trustees very rarely derive and are assessed on income. Div 7A was also covered off in that same fact sheet and has been again reaffirmed (more thoroughly) in the February 22 document package.

In short, this appears to be a clash of what’s practical vs what’s technical. Tax law is hard, but taking the ostrich approach to practice is never a good idea. Schemes to avoid or reduce tax are a fool’s game. Any element of artificiality to shift and/or reduce the tax burden of an individual or family group will ultimately be struck down one way or another.

To discuss your circumstance, call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au


6 Key Factors to Ensure Your Business Has Financial Control

It’s easy to become complacent and overlook key warning signs if you’re not watching business metrics meant to draw attention to the performance indicators of your organisation. Here are six (6) key points we go through with every one of our clients:

1) “Do it right the first time so you don’t have to do it again”. Tempted to take a shortcut with your financial controls? This can and will come back to bite you in the near future, such as at tax time or when you are looking for business financing options.

  • Remember: your business is your livelihood, and its revenue is your bread and butter. Data should be input as soon as possible and as correctly as possible; trying to memorise facts and figures about the performance of your business is completely ineffective and risky.
  • Being cautious from the outset will save you the hassle and frustration later on – which brings us to our next point…

2)  Do you mix personal and business expenses and/or assets? Accurate financial control and effective budgeting are practically impossible if it is unclear where the money originated from or if it was spent for personal or business purposes.

3) Do you re-invest earnings into your business? Why/why not? You will need to invest in your business, no matter how big or small, to see it expand. It is up to you to ensure that such contributions and made to help your business thrive.

  • Improve efficiency by going digital, enhance production by modernising your workspace, and manufacture better quality products by purchasing higher-quality supplies.
  • Whatever steps you take, make sure they are worthwhile. Always think about what you need and invest wisely.

4) Do you know if your invoices are being sent out as quickly and accurately as possible? When was the last time you performed an invoice audit to ensure invoice accuracy?

  • It’s important to frequently evaluate stock levels and reconcile debtors, GST, and fixed assets.

5) Are all product and service lines contributing their full value to the bottom line? Your existing reports may not provide complete visibility into your margins.

6) When was the last time you set business goals? How do you know you’re moving in the right direction?

  • Always be aware of where you stand – and how you intend to achieve your business goals. 
  • Updating broad financial performance targets every year, monitoring performance versus budget, comparing inflows and expenditure of cash, and creating profit and loss reports are all activities that will keep you aware and on target.

In Summary

One of the most crucial roles of small business owners is financial control and financial management. As a director or sole proprietor, you must assess the possible effects of your financial controls and their impacts on income, profitability cash flow, and the company’s financial health. If you do not have the time or experience to properly manage your business finances and set up proper financial controls to ensure the financial health of your business, a virtual CFO may be the perfect solution for you.

 

Speak with Philip Khao from Solve Accounting on 0412651779 or at philip@solveaccounting.com.au to find out more about Virtual CFO services.

Philip Khao is a Chartered Accountant (CA), Virtual CFO professional and Director at Solve Accounting with many years of accounting and business services experience at global accounting firms and multinational corporations. 


The Importance of Financial Control

When you operate a small business, every dollar counts – and every dollar must be tracked, monitored, and managed accurately and properly.

You work hard to ensure that your business runs smoothly and successfully and having good financial management and financial control is an important step towards continued growth.

The Difference Between “Having Control” and “Being in Control” of Your Business Finances

It is normal for a sole trader or small business owner to be reluctant to hand over control of finances to someone else, whether that someone is an external accountant or bookkeeper. Or you may already even rely on your admin staff or an in-house accounts person to file taxes, send invoices on time, and do a good job with outstanding payments. It may be the cost or even the trust factor which creates that initial hesitation of letting a total stranger manage your hard-earned cash – how can you be sure that person is doing the right thing? The answer: financial controls.

Without a doubt, you may be great at what you do as a sole trader or small business owner (whether you are a tradie, contractor, start-up, online e-commerce business or any type of small business for that matter) – but the undeniable truth of the matter is this: without the proper background and experience in accounting and financial management, you will never know if your financial reports are truly accurate or lacking in vital information about your businesses’ health.

Taking a step back and being honest with yourself about how your business’s finances are managed is important. Are you confident that you have processes and procedures in place – the “financial controls” which we’ve referred to – to ensure your income and spending is effectively managed? Without adequate financial controls, your business can be vulnerable to such things as employee fraud, cash flow problems, and even bankruptcy.

The Importance of Financial Controls for BOTH Start-Ups and Mature Small Businesses Alike

As a Start-Up

During the early phases, most businesses incur losses and have negative cash flows. During this period, financial management is critical. Directors and/or Business Owners must ensure that they have adequate cash on hand to pay staff and suppliers, even if the organisation is losing money. This means that the owner must make accurate financial projections of these negative cash flows to determine how much money will be required to support the business until it becomes profitable.

As a Growing Business or “Mature” Small Business

As a company develops and matures (no matter how long it’s been around). it will require more cash to fund its expansion. It is critical to plan for and budget for these financial requirements. Having the right finance professional is important in this stage, to guide you through potential roadblocks to growth and provide you with the information and knowledge on how to make the best decision on whether to fund expansion internally (bring in more business partners or potential investors) or take out a loan from external lenders. Financial management (which includes financial controls) covers the ability to find the most cost-effective source of finance for growth, monitor the business’s cost of capital, and prevent the balance sheet from being overly burdened with debt, which can harm the business’s credit rating.

Solve Accounting – Your Trusted Financial Controls Adviser

A Virtual CFO has the skills of a professional accountant and financial controller, without the need to hire extra staff. They can provide you with the advice to set up adequate financial controls and can help you better manage your cash flow, reduce operating costs, and identify growth opportunities – working with you to better understand your business’s finances.

Speak with Philip Khao from Solve Accounting on 0412651779 or at philip@solveaccounting.com.au to find out more about Virtual CFO services.

Philip Khao is a Chartered Accountant (CA), Virtual CFO professional and Director at Solve Accounting with many years of accounting and business services experience at global accounting firms and multinational corporations. 


What’s your net worth?

Calculating your net worth can be a quick and easy way to get an outline of your financial position. By working out your net worth each year, you can get a sense of whether your finances are going in the right direction.

Tracking your net worth can also help you focus on the big picture during those times when it seems like you’re going backwards at a rapid rate – when your car or an appliance breaks down or you dip into your savings to cover an essential but unexpected expense.

How to calculate your net worth

Net worth is assets minus liabilities. The simplest way to work out your net worth is to jot down the value of your assets and then all your debts. Subtract the total value of the debts from the total value of the assets and that’s your net worth.

What should your net worth be?

Net worth tends to increase over time, and there are various formulas saying what you ‘should’ be worth for your age. For example, one estimate says that by age 30 your net worth should be half of your annual income; by 40 your net worth should be double your annual income; by 50 it should be four times your income; and by 60 it should be six times your annual income.

But rather than comparing yourself to a formula, net worth is more useful as a way to monitor your progress. If it’s increasing steadily over time, you’re doing something right.

Want to talk about hitting your financial targets?

If you’d like to talk about reaching your financial goals, either personally or in your business, get in touch. We’ve got lots of ideas and strategies for maximising your income and minimising your costs, and we’d love to hear from you.


Land; a complex investment

 

Having been in the public practice of income tax compliance for close to 20 years, I am not so sure about this pithy chunk of logic. It belies deep complexity.

From my perspective, land is a tricky thing to invest in. This is particularly true in Australia because:

  1. The price of land in any major city or centre is very high.
  2. Land is the only asset which is taxed at every level of government.
  3. Transaction costs are very high.
  4. Holding costs are very high.
  5. Tax settings distort the entire market.
  6. Policy settings which favour land stifle innovation.

This is a highly summarised list of the fraught nature of property investment in Australia. Yet pretty much everyone has to play this game to some extent.

Despite the complexities, there are a few simple truths that apply to land investment in Australia. What can be said for sure is that a strong understanding of the local, State & Federal tax laws that apply to any particular interest in land is a massive benefit in building a tax efficient property portfolio, even if that portfolio consists of a single property. It is also true that in Australia, the single most important investment most families will ever make is in their main residence. The house you live in is a politically protected asset class and it is by far the most important non-productive asset an Australian resident taxpayer or citizen can hold.

To plan for a smart land purchase, whether it be your first or subsequent, it is important to seek the advice of a tax accountant who is also an experienced land investor.

Call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au to discuss your plans.


Extension of the temporary full expensing regime for your business

Currently, your business is eligible to claim an outright deduction for the cost and installation of new and second-hand assets.

The outright deduction is known as temporary full expensing.

Under legislation enacted by the federal government, a business must hold and use a business asset before 30 June 2023 to qualify for temporary full expensing.

If your business is below the turnover limit of $50 million, you will qualify for temporary full expensing for both new and second-hand assets. This means that, unlike previous rules on instant asset write-offs, no limit applies to the cost of an asset under the temporary full expensing rules (with the exception of cars costing more than the luxury car limit).

What the rules mean for your business

Any eligible new or second-hand assets purchased this year can be immediately written-off. Also, if you are using a small business depreciation pool for depreciation, the entire balance will also be written-off. Unfortunately, small businesses that use the small business depreciation rules cannot “opt out” of the full expensing rules.

This large deduction may not be something you want to claim all at once and would rather smooth out over a number of years. Options available to you in this situation include leasing assets, rather than purchasing them, over the next couple of years.

Alternatively, we may reduce your income tax instalments accordingly so that you can adequately account for cash flow over the year.

Please contact us if you wish to discuss this further, including other options available for your business this year.


E-invoicing protects you against invoice fraud

Is your business using e-invoicing? It’s a fantastic way to protect yourself and your customers from invoice scams, and it can help you get paid faster. E-invoices replace emailed PDF invoices or links to online invoices. Instead, e-invoices are delivered securely to your clients, even across different accounting systems.

Preventing invoice fraud

Invoice scams are surprisingly common, and can be quite sophisticated. For example, with intercepted invoices everything looks exactly right, but the bank account number has been altered. When it happens to you, your client thinks they’ve paid you, but the money has actually gone to a scammer. Notifications from suppliers that their bank account number has changed – but it’s not actually your supplier, it’s fake, and your money is going to a scammer. In the event of an invoice scam, it can be very difficult to get your money back.

E-invoicing prevents these types of scams because the invoices travel directly from one accounting or payment system to another. By directly connecting suppliers with their clients, there’s no opportunity for scammers to intercept the invoices.

Start sending and receiving e-invoices

We can help you set up your accounting software to send and receive e-invoices immediately. You can learn how to set up e-invoicing in Xero at this link, or just get in touch and we can help. You can also use e-invoicing if you don’t use an online accounting platform with one of the free e-invoicing enabled software providers.

It only takes a little bit of time to learn how to use e-invoicing, and once you have the hang of it you’re protected from invoice fraud – so it’s well worth the effort!


5 tips for chasing invoices without annoying your clients

When you’re a small business owner, sole trader or freelancer, asking for payment on overdue invoices can be a delicate matter. Without an accounts person or department, sometimes you’re trying to secure new work and chase invoices from the same person. That can be an awkward tightrope to walk.

Here are five tips for chasing payments while maintaining customer loyalty:

  1. Automate reminders – Set friendly payment reminders that go out automatically – they tell clients they’re missed a payment without making it personal. It’s like your invoicing platform is giving them a nudge, rather than you doing it yourself. You can sign it off with just your business name, rather than your own.
  2. Find out who’s behind the payments – Is there another person at the business who’s in charge of accounts or payments? Ideally, you want to be selling your services to your usual contact and chasing someone else to pay your invoices.
  3. Enlist help from a friend – If you have a friend who also has a small business, become each other’s accounts support. Set your friend up with an ‘accounts@yourwebsite.com’ address and they can send out email reminders and follow-ups to your clients, or call them about the invoice. Maybe you can do the same for them.
  4. Set expectations when you negotiate the job – Firm and clear payment terms make it easier to get paid faster and keep that cash flowing. Set out your terms up front – it’s much easier to talk about your payment expectations when you organise the job, rather than once the invoice has been sent. For persistently slow payers, consider offering an early payment discount or ask for more money upfront for the next job.
  5. Be nice, but firm – There’s no need to be rude or aggressive to your clients when chasing payment; you want to maintain a positive relationship. However, at some point you need to cut off their credit. Often saying ‘I’m very happy to do that for you, just waiting on payment of that last invoice’ will give them the impetus they need to pay you. But if they persistently don’t pay, no matter how much you like the client, you’re not providing a free service! Stop working for the client and chase those outstanding invoices more assertively.


Time to Review 2021 and Plan for 2022!

What are your business goals for 2022?

The beginning of a new calendar year is an excellent time to review the year just finished and reflect on what worked, what didn’t, what you’d like to change and new things you’d like to implement.

Last year, there were inescapable impacts on businesses, with some thriving, others failing, and others just getting by. So what kind of year was 2021 for your business?

Take the time to review the year and acknowledge all that has happened, good, bad or indifferent. Examining the year with an objective perspective can provide valuable insights to prepare for the next business year. Planning and goal setting will help provide a focus for your business efforts.

Your Yearly Business Review

  • What were the most significant impacts on your business in 2021? How well did you meet the challenges?
  • What worked well last year? What systems, technology, products or services were successful?
  • What accomplishments can you celebrate?
  • What situation, event or experience provided the biggest learning opportunity?
  • What is the biggest challenge or frustration you face as you prepare for 2022?
  • What did you most enjoy during the year? Do more of it. What did you least enjoy? Do less of it!
  • Analyse your financial reports. Are you earning what you’d like to? Is the business sustainably profitable?

Get Ready for a Great 2022

While there are many metrics you could evaluate to track business performance, we’ve given you just a few ideas to inspire your business planning for 2022.

If you’d like to chat about what you can do differently this year to enable your business to thrive, book a time with us today.