Autumn 2002 Newsletter

CASH ECONOMY: UNDER FIRE FROM ATO

As part of the Tax Office’s drive to rein in the cash economy, they are sending out letters direct to taxpayers who have high volumes of cash transactions.

Recently, the ATO has sent out 44,000 letters to businesses in the retail, construction and consumer service industries.

The letters have also been directed to businesses that have reported a low or negative cash flow which may indicate they are under-reporting income.

As it is likely that some of these businesses will be subject to further review, the ATO is encouraging

their tax agents to assist any clients identified under this program.

Editor: So please contact us if you receive one of these letters, and would like us to help you review your circumstances.

FIRST HOME SAVER ACCOUNTS (FHSAs)

Editor: The ATO has provided a Fact Sheet on its website regarding first home saver accounts which financial institutions are now providing.

Please contact us if you would like us to provide more detailed information.

Why open an FHSA?

Basically, the government will contribute a certain percentage/amount in the FHSA provided the taxpayer is eligible for the concession.

Taxpayers can receive a tax-free amount of up to $850 in 2008/09 (calculated at the rate of 17% of contributions (up to $5,000) made to the FHSA.)

Taxpayers must make contributions (from after-tax income) of at least $1,000 for each of four financial years (not necessarily consecutive) before they can withdraw their money. Other pople can contribute to the account.

Earnings on FHSAs are only taxed at 15% and the account provider (bank) is liable to pay it.

If a taxpayer decides not to go ahead with buying or building their first home, they must contribute the funds deposited to the FHSA into their superannuation fund.

What about the First Home Owners Grant?

Taxpayers are still entitled to apply for a First Home Owners Grant if they decide to open an FHSA.

GENUINE REDUNDANCY PAYMENTS

The Tax Office has issued a ruling that shows that even taxpayers who operate their own business (through a company or trust) can be paid out “genuine redundancy payments” which are concessionally taxed.

Example: Husband and wife company

Edsel Design Pty Ltd provides car design services

to Aussie Autos. Bill and Mary Edsel are directors of Edsel Design, which employs 20 people in its operations. Bill is the Administration and Marketing Manager and Mary is the Design Manager.

After several years of losses, Aussie Autos decides to cease operations.

As Aussie Autos is Edsel Design’s sole client and other opportunities are not realistically available, Bill and Mary also decide to cease the operations of Edsel Design.

Redundancy payments are made to all employees, including Bill and Mary, equal to eight weeks pay over and above unused leave entitlements. None of the employees is entitled to redundancy payments under their employment arrangements.

The ATO accepts that the payments may be treated as genuine redundancy payments as it is clear that Bill and Mary’s employment terminated because of redundancy. In their capacity as directors, they had no real choice but to terminate their own employment along with the other employees.

FBT ON LAPTOPS AND GPS RECEIVERS

The Tax Office has confirmed that, after the Government’s changes to the FBT laws from 13 May 2008, a GPS navigation receiver provided to an employee can be a ‘portable electronic device’ and can therefore be exempt from FBT as an ‘eligible work related item’.

Also, a laptop provided to an employee can still be ‘primarily for use’ in their employment, and exempt, even if they sometimes use it for private purposes and the employer has no private use policy.

FBT AND CHRISTMAS PARTIES

The ATO have recently released a factsheet entitled “FBT and Christmas Parties”. This can be found on the ATO’s website at the following link:

http://www.ato.gov.au/print.asp?=/content/51481.htm.

We encourage you to read this factsheet if you are going to hold a Christmas function for your employees. It will explain the FBT implications for your business. If you are unsure whether there are any FBT implications relating to the function you are holding please contact our office.

SMSF’S AND LOANS TO MEMBERS AND

RELATED PARTIES

The Tax Office has reported that, when it comes to the investment restrictions that apply to SMSFs, the most common contravention continues to be loans to members of funds and their relatives.

In additions, many SMSF trustees are claiming their loan arrangements are arm’s length loans to non-related parties. However, the ATO has found that, in over 20% of its audit cases, the loan arrangements had not been conducted at arm’s length.

Case Study – accessing funds to prop up a business

Editor: The following example provided by the ATO highlights an instance of non-compliance and what they did about it.

The approved auditor of a fund reported a contravention because the fund had made a loan to a related party for the year ended 30 June 2005.

The related party was a company of which the trustees of the fund were also the directors. The company had run into liquidity problems so the trustee lent the money to the trading company. The loan was for $126,000, which equated to 99% of the fund’s total assets.

Attempts were made throughout the case to get the trustees to rectify the contravention, and, earlier this year, the trustees proposed an enforceable undertaking to rectify by June 2010. However, this was not accepted by the ATO as the timeframe was unreasonable, and they proceeded to make the fund non-complying.

KEEPING YOUR CASH FLOWING IN

An issue faced by most small businesses is keeping your cash flow coming in. Late payers can often sound the death knell for small businesses who often don’t have the reserves to pay their own bills in the meantime. So what can you do to keep your cash flow healthy?

A clear accounting system

It might sound like a really basic piece of advice, but it is amazing the number of small business owners who have no idea how much they are owed – and by whom. They operate on a “gut feel”. But that’s just not good enough. You should have an accounting system in place that can tell you – at the touch or a button or a click of a mouse – what you’re owed, who owes it to you and how long it has been outstanding for.

This allows you to get a clear picture of your expected cash flow. But more importantly, it allows you to track trends over time. You’ll be able to see who your errant payers are, which ones are constantly late and the clients you may need to cull.

Offer a discount or bonus for early payment

Some businesses simply operate on the assumption that they have to supply goods/services and then invoice their clients. They resign themselves to the fact they have to chase up payments months down the track. However, if you can entice your clients to pay early or prepay, they may be willing to do so if they feel you are offering them a bonus product or service – or a discount.

For example, one business owner recently offered their client a small discount if they paid an outstanding invoice by the end of the week. The client was perfectly happy with that arrangement and did just that. The business owner got an injection of cash and didn’t mind discounting the bill by a small amount.

Diversify your client base

Ensure that you are not beholden to one client. One business did almost 100 per cent of their work for a particular department store. While this was a great job, when it ended they no longer had the funds to pay the mortgage on their business premises. The director lost his house so that he could pay his debts and, even then, that wasn’t enough to cover everything he owed.

The key is to ensure you have a diversified client base. Make sure you have a few different key revenue streams supporting you so that if one goes kaput you are not left high and dry – and homeless.

Tailor your terms

Some business owners have a set rate card and set terms and conditions. That might be a useful framework to start with but the reality is that you can tailor your rates, terms and conditions to each client. Some people think that it’s important to be consistent and to apply the same “rules” on everyone. However, this is not always true. After all, why should a client who is a consistently late payer have the same privileges or terms/conditions as a client who always pays on time.

Don’t be afraid to tailor your terms and conditions to suit the behaviour of your clients. If you have a client who had reneged on a payment before, insist they pay up front from now on.

Don’t be afraid to ask

Be proactive in chasing up payment. Often, it’s the people who bother to remind clients about outstanding payments who get paid first. Be polite but firm. Call every day or every half a day if you have to – but keep your cool.

It’s true that cash flow is king – or queen. But if you stay on top of it, you can ensure you are never short of funds when you really need it.

NSW LAND TAX

The NSW Land Tax rate for 2009 remains at 1.6 per cent (plus $100) on the combined value of all taxable land in excess of the threshold.

The land tax average threshold for 2009 is $368,000 (2008 $359,000).

From 1 July 2009 a new rate of 2 per cent will apply to land tax payers with total taxable land holdings above $2.25m. The 2 per cent rate will only apply to the land holding above the threshold. Land holdings below this threshold will remain subject to the 1.6 per cent rate.

NSW Land Tax is charged on taxable land holdings held on 31 December each year. You should notify the NSW Office of State Revenue of any purchases or sales of taxable land holdings.

HALL JACKSON SERVICES

We would like to remind our clients that we offer the following services through referral to our valued contacts

· Financial planning, investment and retirement advice;

· Business succession, estate planning and risk insurance; and

· Residential and commercial lending (including short-term financial), asset purchase and refinancing.

Please contact our office if you would like to discuss any of the above services. A full list of services can be found on our website at www.halljackson.com.au

QUOTE FOR THE SEASON

“Keep your fears to yourself, but share your inspiration with others”

Robert Louis Stevenson (1850 - 1894)

HAPPY HOLIDAYS