To trade as a business, you need to meet the right compliance requirements. It’s certainly not the most exciting part of creating a business, but setting up the right legal, accounting and tax compliance foundations ensures that you’re doing everything by the letter of the law.

Here are the main compliance steps to think about, and why they’re so important to the smooth running of your business.

Decide on a legal structure for the business

First off, you’ll need to make a decision about the legal structure of the company. There are two key choices here – incorporated (a limited company) or unincorporated (usually either a sole trader or a partnership). The key difference here is around liability. In other words, do you want your business to be a limited company, where you and the business are treated as separate legal entities? Or do you want to be unincorporated, like a sole trader, where you and your business are seen as one single entity.

Most startups will opt for the incorporated limited company route, keeping your personal and business finances separate and lowering your personal liability and risk.

Open a business bank account

To trade, take payments and pay your suppliers, you need to have a business bank account that’s separate from your own current account. This helps to create a tangible divide between the money you’ve generated from the business, and your own personal cash.

Most high-street banks won’t let you use a personal current account for business purposes. Banks will offer a variety of different business accounts, with varying levels of fees, overdraft levels and additional business features. Set up the business account and then use this account for ALL transactions going in or out of the company.

Set up a bookkeeping and accounting system

It’s a legal requirement for your limited company to keep adequate records and to submit annual statutory accounts. To be able to meet these requirements, it’s essential that you have a bookkeeping process and a reliable accounting system in place.

There’s a dazzling choice of different cloud-based accounting platforms aimed at the ambitious startup owner. Xero, QuickBooks, MYOB and Sage are big names in this space, and all offer easy-to-use systems that make the accounting process relatively straightforward. It’s a good idea to engage an accountant, right from the start, to get the best possible accounting advice.

Register for the relevant business taxes

Tax is an unavoidable part of running any business. It’s mandatory for you to register for the relevant business taxes, and you’ll also need to factor in that a certain percentage of your startup’s profits will end up going to the tax authorities at the end of each financial year.

If you’ve opted for the limited company route, you must register for corporation tax in your home territory. Corporation tax is paid based on a percentage of your year-end profits, once reliefs and other allowances have been taken into account. Approximately a quarter of your end profits will end up being paid over in tax, so it’s imperative that you put this money away in a separate tax accounting, or ring-fence it in your accounts, so you have the money to pay the bill at year-end.

Other taxes to register for include:

• Self-assessment income tax – although you’ll pay corporation tax on your company’s profits, directors are also taxed on their own personal earnings too. If you’re an unincorporated sole trader, this is also the way you’ll be taxed on your business profits, as your personal and business income are treated as the same thing.
• Goods & Services Tax (GST) – GST (or VAT in the UK and Europe) is an indirect value-added tax or consumption tax for goods and services. If you sell products or services that qualify for GST/VAT, you’re responsible for collecting these taxes and paying them to the tax authority on a monthly, quarterly or annual basis.
• Pay-as-you-earn(PAYE)/Pay-as-you-go (PAYG) – if you have employees, and your home territory operates a PAYE/PAYG system, you’ll need to make income tax deductions from your employees’ wages and pay these taxes directly to the relevant tax authority. This is all done via your regular payroll run.

Get in touch to talk through your compliance needs. We’ll help you understand which taxes apply and how you register for them.

The Australian super system is a bit of a double-edged sword for all of us. Specifically, retail super funds make the member admin passive, but trading active, while self-managed super funds do the opposite. So, unless a member enjoys administration, there is no obvious path to low turnover / buy and hold superannuation. But this situation may not be a bad thing. Allow me to explain….

Retail – admin passive

When someone joins a plain vanilla balanced investment option in one of the big retail funds, which pretty much everyone does at some point in time, they don’t have to do much at all. It’s a similar process to opening a bank account. Just fill in the forms on some website, get your ID verified and sit back and wait for the paperwork to start rolling in. Quarterly statements, monthly newsletters, annual tax summaries – these are all prepared for the retail member without that person ever having to do anything at all. As far as the retail member knows, their balance is being diligently and carefully managed by a highly qualified (but costless) professional investment team every member of which is scrupulously focused with lazer like precision on minimizing costs, and maximising returns. They agonize over every decision, toiling after hours with the clients best interests always at very front of heart & mind! At least, that’s the necessary illusion.

Retail – trading active

Behind the curtain, the reality is less inspiring. Office towers full of well-paid employees endlessly shuffle paper to justify their jobs. Compliance alone is a massive cost for big funds. These are tasks which subtract significant value from the clients’ portfolio but are required by massive amounts of law & regulation. Actual investment managers who work for the retail funds furiously trade various shares, bonds and other alternatives in a highly pressurized but ultimately futile attempt to outperform whatever market they profess specialised expertise in. This clan then trumpet their purported “superiority” in various ways – mainly via the marketing machine which is the primary megaphone used to amplify the good and minimise the bad. Those glossy full-page ads & middle of the cricket TV commercials all have to be thought up and produced usually by expensive spin agencies. The unwitting member pays (dearly) for this corporate bureaucracy that grinds along like an iceberg shaping the landscape.

Self-managed – admin active

The above retail super situation can be starkly contrasted with the self-managed super realm. Opening a SMSF is kinda tricky. Which structure for the trustee? Which bank for the cash management platform? Which broker for the shares account? How do I roll my existing super balance into my SMSF? Will the ATO even let me open a SMSF? These are just a few of the questions which have to be grappled with. On top of that, most self managed members will need to appoint an accountant to assist with both the setup and the ongoing administration of the fund. Then, every year, the member will need to provide data to said accountant and/or upload information to a client portal sufficient to discharge all the duties that are hidden from view in the retail sphere. Suffice to say, the actual administration of a SMSF forces the members to actively engage with the compliance workload even if they refuse to invest the cash itself.

Self-managed – trading passive

Putting all the setup stuff to one side, the newly minted SMSF trustee member must then make the biggest decision of all; how do I invest this cash I now directly control and am responsible for? Without a firm grasp of the investment basics and the income tax laws that apply to both superfunds and ASX listed companies, its practically impossible to proceed with confidence here. It’s usually a process of trial and error which involves sliding down the scale from active trading in the early days/years, to buy and hold as youth gives way to wisdom.

The fact is that most people lack the practical logic, equanimity & patience which is required to invest successfully over the long term. Much of the time, people start out investing  their own super thinking that they can trade their way to riches playing musical chairs with other like-minded players. Those with high investment IQ may be smart enough to pick a workable strategy and stick to it. There are also certain “God level” people who recognize their limitations here and simply buy and hold the market via low cost, broad based index funds. These people tend to focus on the vastly reduced costs of self management and also often simply track a market or 2, periodically buying more and fully reinvesting all distributions. While this is arguably the end game, we must also recognize that no one can rightly lay claim to the ultimate truth and we must proceed with an open mind, always willing to learn and adapt/adjust. Wherever an individual lies on the spectrum, the fact is that self management tends to reduce portfolio turnover over time simply because individuals lack the energy to make 20+ decisions per week or month or year.

Conclusion / Observation

The Australian super system has options for everyone, and, the people who are most truthful with themselves about their own investment strengths and weaknesses will perform best. Self-deception is a bad thing which is what makes our system a good thing. It forces people to confront themselves and make a choice thereby cleansing the population of financial self-deception (to some extent). Specifically, telling yourself that you have what it takes to run a SMSF when you don’t is just as bad as staying in retail super when you do. Figuring out who you are is the key.

To discover yourself, Call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au

So, another day, another retail superfund disaster for its members.

This time, one of Australia’s biggest retail superfunds, Colonial First State (“CFS”), has settled a class action filed by Maurice Blackburn Lawyers on behalf of around 100,000 CFS members. While admitting no wrongdoing, CFS agreed to pay $56.3M (about $563 each) to the aggrieved members. The basis of the action was that CFS failed to implement a switch out of high fee accounts with low investment returns quick enough. This affected some members who were left paying trailing commissions to originating financial planners for no service, possibly due to historical CFS dealings which prioritised the sales force (planners) rather than the members.

Now, this blatant breach of ethics is nothing new in retail super – if you recall, there was a recent Royal Commission on the quagmire. Also, the structure of the industry pretty much guarantees that this type of malfeasance will continue indefinitely. But, there are several important points to note here:

1. It is highly unlikely the members who were ripped off will see anywhere near $563 each (in aggregate) after the lawyer fees & other costs are extracted from the pool.
2. CFS would have consumed significant internal resources and possibly paid big legal fees to external firms and/or barristers, to respond to, defend and ultimately settle this action.
3. The CFS members who were not part of this class action have effectively cross subsidised CFS’ defence against it so, even if some affected members “win”, the members of CFS in aggregate clearly lose.
4. The only winners out of this mess are the lawyers.
5. Where does the cash to pay the $56.3M settlement amount actually come from?

That last point is worth re-reading & reflecting upon. Can CFS use other member balances or raise fees thereon to pay the settlement amount? If CFS is insured against this risk, what will be the hike in premiums going forward on that policy to continue to provide protection and will long suffering members have to fork out those increased premiums and if so, for how long? Or is there some “contingency reserve” sitting on the balance sheet of either the CFS “master trust” or whatever management company was responsible for this debacle?

Regardless of the answers to these important questions, the point is this; to exit this swamp, ALL CFS members should consider establishing a low cost self-managed superfund.

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

NOTE: the above is NOT personal financial advice. Solve is NOT a financial planner is not holding itself out to be one. Solve Accounting is a low cost, fixed fee for service SMSF administrator which operates wholly within the rules outlined in ASIC info sheet 216.

The Federal Treasurer, Mr Josh Frydenberg, handed down the 2022–23 Federal Budget at 7:30 pm (AEDT) on 29 March 2022.

In an economy emerging from the pandemic, the Treasurer has confirmed an unemployment rate of 4% and an expected budget deficit of $78 billion for 2022–23. As international uncertainties add pressure on the cost of living, key measures in the Budget provide cost of living relief in the form of an increased Low and Middle Income Tax Offset, a one off $250 payment for welfare recipients and pensioners and a 6-month fuel excise relief.

Other measures for business seek to promote innovation, with expanded “patent box” tax concessions proposed, and provide tax incentives for small business to invest in the skills of their employees. A lower GDP uplift rate for PAYG and GST instalments has also been proposed to support cash flows of small and medium businesses.

The full Budget papers are available at www.budget.gov.au and the Treasury ministers’ media releases are available at ministers.treasury.gov.au. The tax, superannuation and social security highlights are set out below.

Individuals

• The low and middle income tax offset will be increased by $420 in the 2021–22 income year to ease the current cost of living pressures.
• A one-off payment of $250 will be made to individuals who are currently in receipt of Australian government social security payments, including pensions, to ease cost of living pressures.
• Additional funding will be provided over 5 years to support older Australians in the aged care sector with managing the impacts of the COVID-19 pandemic.
• Costs of taking a COVID-19 test to attend a place of work will be tax deductible for individuals and exempt from fringe benefits tax from 1 July 2021.
• A single Paid Parental Leave scheme of up to 20 weeks paid leave will replace the existing system of 2 separate payments.
• CPI indexed Medicare levy low-income threshold amounts for singles, families, and seniors and pensioners for the 2021–22 year announced.
• The number of guarantees under the Home Guarantee Scheme will be increased to 50,000 per year to assist home buyers who have a lower deposit.

Business

• Additional state and territory COVID-19 business support grant programs will be eligible for tax treatment as non-assessable non-exempt income until 30 June 2022.
• Small and medium businesses will be able to deduct an additional 20% of expenditure incurred on external training courses provided to their employees.
• Small and medium businesses will be able to deduct an additional 20% of eligible expenditure supporting digital adoption.
• The Boosting Apprenticeship Commencements wage subsidy will be extended by 3 months.
• Concessional tax treatment will apply from 1 July 2022 for primary producers selling Australian Carbon Credit Units and biodiversity certificates.
• Access to employee share schemes in unlisted companies will be expanded.
• The PAYG instalment system is set for a structural overhaul with a set GDP uplift of 2% to apply for the 2022–23 income year.
• Additional funding will be provided to further reform insolvency arrangements, including the insolvent trading “safe harbour”.
• Business registry fees will be streamlined over 3 years from 2023–24.
• Wholly owned Australian incorporated subsidiaries of the Future Fund Board of Guardians will be exempt from corporate income tax.

Excise and customs duty

• Excise and excise-equivalent customs duty on petrol and diesel will be reduced by 50% from 30 March 2022 for 6 months.
• The temporary tariff concession for COVID-19 related medical and hygiene products will be made permanent.
• Administration of fuel and alcohol excise, and excise-equivalent customs duty will be streamlined.

Superannuation

• The 50% reduction of the superannuation minimum drawdown requirements for account-based pensions will be extended for an additional year.

Innovation

• Corporate income from the commercialisation of patents, issued from 29 March 2022, in respect to agricultural and veterinary (agvet) chemical products will be taxed at an effective rate of 17% for income years starting from 1 July 2023.
• The effective tax rate of 17% for the “patent box” regime will also be expanded to include patents that have the potential to lower emissions.
• Following on from the 2021 Federal Budget announcement of the “patent box” regime for medical and biotechnology innovations, the concessional tax treatment will be expanded to include certain overseas jurisdictions with equivalent patent regimes.

Tax administration

• Companies will be able to choose to have their PAYG instalments calculated based on current financial performance, extracted from business accounting software, with some tax adjustments.
• Businesses will be allowed the option to report taxable payments reporting system data (via accounting software) on the same lodgment cycle as their activity statements.
• Trust and beneficiary income reporting and processing will be digitalised.
• IT infrastructure will be developed to allow the ATO to share single touch payroll data with state and territory revenue offices.
• The ATO will be given funding to extend the operation of the Tax Avoidance Taskforce by 2 years.
• The start date of the 2019–20 Budget measure for holders of Australian Business Numbers will be deferred by 12 months.

Not-for-profits

• Melbourne Business School Ltd, Advance Global Australians Ltd, Leaders Institute South Australia Inc, St Patrick’s Cathedral Melbourne Restoration Fund, and various entities related to Community Foundations Australia, have been added to the list of specifically DGRs for a period beginning 1 July 2022.

Indirect tax

• The Indirect Tax Concession Scheme (ITCS) has been granted or extended to various diplomatic and consular representations.

Reflecting on the 22 Federal budget as a tax accountant in public practice with a growing self managed super fund client base, something really struck me more so than it has done in the past. The thing that struck me was this: As time goes on, if you are an Australian tax resident and you don’t understand how Super can be used to benefit you and the various individual members of your family group, you will (likely) be placed at a material financial disadvantage versus people and family groups who get it.

To go back to the very start of superannuation, it was set up primarily as a tax privileged retirement savings system. What we’re seeing with this constant tweaking and fiddling of the super rules is that superannuation is becoming a vehicle which the federal government is using to achieve various policy and equity objectives – some of which have nothing to do with retirement savings.

Housing, women & ageing are 3 areas where actual or proposed super rules are targeted to achieve specific non-retirement goals. True, it could be argued that the purchase of your first house (for example) is a key step toward securing a person’s retirement. However it’s highly unlikely that the first home a person buys will be the residence they live out their retirement years in. This is just one example of where the $50K first home super saver scheme can be used by a smart family group to give their kids a leg up into their first investment property. It’s highly likely that wealthier, better advised and more investment aware families will use this to their advantage.

Another obvious one which has recently been changed to be even more concessional, is the downsizer contribution. Again, generally wealthier families can use this to stuff another $600k into their Christmas stocking regardless of the other limits and thresholds which may apply to their super balances. Again, there are policy arguments in support of this position; getting oldies/”empty nesters” out of bigger family homes frees up supply of larger houses in urban centres and cities for younger growing families.

Regardless of the merits of that underlying policy, combining the first home super scheme and the downsizer contribution in the same family group, we can see how well informed and financially savvy family groups can significantly increase their tax efficiency with an understanding of the super basics and a wolf pack mentality to investment. This intergenerational mentality is very rare but is becoming more and more important as time and super rule complexity grows.

Key to exploiting super is understanding it. Key to understanding it, is engaging with a superannuation accountant who takes a step back and seeks to understand the broader view of your family group and how the various members of the family can benefit from the complex rules at play.

Call Chris at Solve on 0414 985 724 or email chris@solveaccounting.com.au to discuss your super and family group situation.

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.

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

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.