Newsletter October 2021

It’s October and with grand finals season almost over the countdown to summer begins.

The 1st quarter of the financial year is already over! Are you on target to achieving your goals for this financial year? You should be 25% of the way there. Contact us if you need someone to help you achieve your goals, keep you accountable & be there by your side. In less than 3 months, half of the financial year will be over. Start now on achieving your goals.

Despite ongoing lockdowns, rising vaccination rates are paving the way for the re-opening of borders and business. Are you ready to take advantage of the changes ahead?

Now that SMSFs can have up to six members, some people may be wondering whether including adult children in their fund might help with the transfer of wealth to the next generation. In this month’s article below, we look at the pros and cons.

Have you completed your tax return? Do you still have prior years to complete? Call us today to have us start on getting you up to date. Let us help you!

As always, contact us if you would like to discuss the tax and other implications of your Business, SMSF & Personal tax & accounting matters.

Five signs of a well-run small business

Every small business owner wants their business to thrive, but it can be tough to keep the money coming in the door while staying on top of all the necessary paperwork.

One way to ensure success is to understand the behaviours that separate a well-managed business from one that’s just muddling through.

Surprising as it may sound, the ATO is keen to help small business owners prosper and to share its insights on running a successful business.

Getting the basics right

Since it’s charged with keeping an eye on almost four million Aussie small businesses, the tax regulator is well placed to know what works and what doesn’t when it comes to keeping the doors open.

According to the ATO, when a small business is operating well, it tends to get the basics right. That means keeping good records and having in place effective tools so you can easily reconcile your business’s income and expenses.

Here are five simple steps you can take to ensure your business is running smoothly:

1. Keep informed

The ATO finds business owners who are operating effectively take the time to understand their tax and super obligations and to keep on top of any changes affecting their business’s processes.

2. Know your cash flow

Small businesses that are well managed use a cash flow projection or budget tool, as this is the main reason small businesses fail. If you don’t have clear insights into your cash flow position and are not carefully managing the business’s income and expenses, it can be a recipe for trouble.

The cash flow projection or budget tool can be an off-the-shelf product, or talk to us about how we can work with you to use the ATO’s new Cash Flow Coaching Kit to improve your management of this area.

3. Declare all income

Well-run businesses declare all their income – including any cash income – in their income tax return. Although it’s the ATO’s job to collect tax, it argues small businesses not declaring all their income are heading for trouble down the track.

4. Split your expenses

It’s important to carefully apportion (or split) your business expenses between private and business use.

5. Keep up to date

The final marker of a well-run business is that all its details are up to date – particularly with the ATO. That means keeping your ABN details, contact information and bank details current and easy to find.

Although many of these indicators are straightforward, it’s surprising how many small businesses don’t take these simple actions.

Behaviours to avoid

Just as there are habits that mark a well-run business, there are behaviours common to operations heading for trouble.

Businesses that omit income by depositing it into private accounts or mortgages, or that don’t declare cash sales or record director’s fees correctly, are not on top of things.

The same goes for failing to account correctly for private use of business assets or funds. If you are claiming an excessive business portion of an expense with both personal and business use, it’s a sign of poor management. As is claiming private expenses as a business expense, or not having the necessary records to substantiate your claims.

Making errors because you don’t understand your tax responsibilities is also a sign that things are not being well-run.

Bring in the professionals

With so many rules and regulations, it’s not surprising that business owners may occasionally overlook some of their obligations. There is an easy solution though.

Well-run small businesses seek professional advice when they need it. We can work with you to improve your business overall, not just to meet your tax obligations.

In fact, the ATO’s 2017-18 research and audit work with around 120,000 small businesses indicated that those who have regular contact with a tax professional are more likely to report correctly.

ATO deputy commissioner, Deborah Jenkins recently gave her top three tips for effectively managing your business: maintain good business records, keep an eye on your competition using the ATO’s Small Business Benchmarks and take care of your mental health because running a small business can be very stressful.

If you think your business could do with a financial tune-up, give us a call today.

Your SMSF: Wind it up or pass it on?

Now that new legislation allows a maximum of six members in an SMSF, some fund trustees may be wondering if this could be an easy way to ensure a smooth transfer of their super to the next generation.

The simple answer is yes, but before you start adding your children and their spouses to your fund, it’s essential to develop a detailed SMSF succession plan to head off any potential problems.

Why make a SMSF succession plan?

Most SMSF trustees understand the concept of estate planning and the importance of deciding how you want your assets distributed when you pass away. But many overlook the importance of a succession plan.

Although your estate plan will cover who gets your assets when you die, your Will doesn’t determine who receives your super, or who takes control of your SMSF. The issue of control is also important if you become seriously ill or lose mental capacity.

By putting a detailed succession plan in place, you can ensure a smooth transition in the control of your SMSF and the payment of your super death benefits to your nominated beneficiaries. It also reduces the potential for the fund to become non-compliant and provides opportunities for death benefits to be paid tax effectively.

Whether to wind up your fund

Traditionally, most two-trustee SMSFs were wound up as members got older and became less keen on undertaking the myriad tasks involved in keeping a super fund compliant.

Super law requires SMSFs with an individual trustee structure to have a minimum of two trustees, so many funds are automatically wound up after the death or incapacity of a trustee.

But the introduction of six-member SMSFs provides families with more flexibility to use their fund as a tool for intergenerational wealth transfer.

Adding your adult children to an SMSF means they can take over some of the administrative burden as you age. It can also simplify the transfer of assets to younger family members.

There are potential downsides that need to be considered, however, as the trustees in control of your SMSF after your death, are the ones making decisions about the distribution of your super death benefits.

Appointing a power of attorney

Ensuring you have a fully documented Enduring Power of Attorney (EPOA) in place in the event of serious illness, death or loss of mental capacity is an essential element in a good SMSF succession plan.

Having an EPOA makes it much easier to keep a fund operating smoothly, as the attorney can step in as trustee and take over administering the fund, together with making decisions about fund investments and payment of death benefits.

Developing an effective succession plan

With a carefully constructed SMSF succession plan, you can reduce the potential for disputes and ensure a smooth transition of control to the next generation.

It’s important to remember any instructions you leave in your Will about payment of your super benefits – or control of your SMSF – are not binding on the fund’s trustees after your death.

That’s why it’s essential to have a binding death benefit nomination (preferably non-lapsing).

Part of your regular succession planning should be to review your SMSF’s trust deed and check it includes the necessary powers to achieve your estate planning goals. These powers include the ability to provide income streams to beneficiaries and appoint the executor of your Will to take your place as fund trustee.

Tax and your SMSF

Tax is also a vital consideration in estate and SMSF succession planning.

Super and tax laws use different definitions of who is and isn’t considered a dependant and how the benefits they receive are taxed, so this needs to be carefully managed.

An SMSF can pay super death benefits to both your dependants and non-dependants, but the tax implications vary. Super benefits generally have both tax-free and taxable components, so talk to us before nominating a beneficiary to ensure your super will be paid tax-effectively.

Nominating a reversionary beneficiary for your super benefit can also be tax effective. A reversionary pension means your beneficiary (usually your spouse), automatically receives your super pension so fund assets won’t need to be sold to pay the benefit. Asset sales can create a CGT bill.

If you would like to discuss your SMSF succession plan, give us a call today.

GST and the sale of your business property

Selling your business property is a big decision and it’s easy to focus on the sale price, but this can be a costly error.

Many owners forget to factor GST into their thinking. But if you do, you could find yourself left with a big tax bill to pay.

There are also valuable opportunities to claim GST credits on your transaction costs, so it’s important to retain all your paperwork in order to satisfy the ATO when tax time rolls around.

GST and commercial property

In general, if you sell business property such as a shop or factory and are registered – or required to be registered – for GST, you must apply GST to the sale amount and include it in your business activity statement (BAS). For example, if you sell an office suite for $1,100,000 (GST inclusive), you need to pay $100,000 to the ATO for GST.

If you are unregistered but liable for GST and fail to make your sales price GST inclusive, you will be forced to pay the GST liability from your own pocket.

As a vendor, you can claim GST credits on any costs involved in selling your business property, such as the GST included in the fees you pay to your real estate agent. If there are settlement adjustments for costs such as council and water rates when you sell, these must be included in your BAS.

The eligibility rules for claiming your credits include that:
• GST was paid at settlement,

• • Both you and the purchaser are GST registered,

• • Tax invoices are available for the goods and services you are claiming, and

• Your deduction claim is lodged within four years.

Going concern sales

One way around the GST requirement is if you sell your enterprise and business property as a ‘going concern‘. These sales are GST-free, but to qualify the ATO will require the business to continue operating into the foreseeable future and be appropriately resourced.

To be eligible for this concession, the business sale must be for payment, the purchaser must be registered for GST, and both you and the purchaser must agree in writing the sale is for a ‘going concern’.

In this situation, although there is no GST liability on the sale, both you and the purchaser may be able to claim GST credits on any related expenses.

It’s worth noting that in a going concern sale, a purchaser may pay less stamp duty, as this is normally calculated on the GST-free price, rather than GST-inclusive price.

Using a margin scheme

If you are eligible, you may also be able to use a margin scheme to reduce the amount of GST owed on your property sale.

Under the margin scheme, the 10 per cent GST payable on the sale amount is calculated on the sale margin (which is usually the sale price less the amount for which the property was originally purchased), rather than the full sale price.

Although it can be worthwhile using the margin scheme, the rules around eligibility are complex, so talk to us before reaching an agreement with your purchaser.

If you are considering trying to avoid the GST issue, remember the ATO regularly receives data relating to purchases and sales of properties around Australia and matches this against activity statements. If you fail to report a sale in your BAS, the ATO will likely catch you out.

Tools to help

To make things a little easier for vendors, the ATO has a GST property decision tool that helps determine the GST implications of property-related transactions.

The online tool asks a series of questions to work out the GST classification of a property transaction and establish eligibility for the margin scheme.

The ATO’s property decision tool requires you to enter information on the date you acquired the property, planned settlement date, amount you paid to acquire the property, past transactions for the property and whether GST was applied, and whether you are registered for GST.

Call us if you are planning to sell a business property and would like to know more about the GST implications.

Important Dates October 2021

Business

Company Tax

31 October: 2021 Tax return due for lodgment for many individuals, companies & trusts