As the end of financial year approaches, Jacqui Dropulic reveals what business owners need to be aware of at tax time, and how having an up-to-date business plan could make all the difference
In a perfect world, our customers delight in spending their money with us exclusively, business shows quarterly double-digit growth, and our records are always in order, ready for scrutiny at the drop of a hat. Furthermore we pay minimal tax and enjoy healthy personal returns each year.
In reality, however, running a business just isn’t that easy. Sales may be down while costs escalate, suppliers don’t always deliver and your books aren’t often ready for the audit spotlight. And if you fail to plan, you may have a larger tax bill than anticipated.
In their national study of small and medium enterprises (SMEs), Think Big, A Blueprint for SME Success, RSM Bird Cameron found 34 percent of companies did not have any formal business planning process. Concurrently, these organisations reported lower growth rates than SMEs who do plan. A major reason for this lack of planning was the belief that business owners claim they don’t have time to plan, or don't believe in its necessity.
Are you failing to plan? If you are, you could be planning to fail. A lack of adequate forecasting may mean that you look for a quick fix: the magic beans that lead you to the elusive goose with eggs of gold. But when the stakes are high—the health of your bottom line—it pays to spend at least 20 percent of your time working on your business, especially in the lead up to the end of financial year.
Careful planning and garnering expert advice could mean the difference between penalties for non-compliance or simple errors, or on the upside, tax breaks and higher profits.
So what should you be doing to get ready for the taxman? Jamie O’Rourke, co-director at accounting firm RSM Bird Cameron, has some simple strategies:
• Take stock of where you are, comparing year-to-date performance against budget. Are you ahead or behind? What is the anticipated yearly profit? Have there been unforeseen expenses that will affect your bottom line?
• Consult with your accountant and explore a range of tax planning measures that can be affected this financial year. Is there any upcoming expenditure that will bring about a tax concession? Are there any advantageous investments to be made or assets that you can sell and re-invest more profitably elsewhere?
• Decide how much wealth you want to extract from the business and your investment strategy for these funds.
"Small business is generally very good at generating profits, but too often fails in extracting those profits from the business," O’Rourke says. "Funding their exit or retirement is often totally dependent on the selling price of the business and this is risky as all of your eggs end up in the one basket."
One option for making your cash work overtime and taking advantage of tax concessions is to transfer it into superannuation. The recently passed superannuation legislation means individuals can invest up to $1,000,000 into superannuation before 30 June 2007. From 1 July, the threshold for undeducted contributions decreases dramatically to $150,000 per year. O’Rourke says many of his clients are selling assets held in their own name and transferring the proceeds to superannuation funds to take advantage of this window before it closes.
If you are planning to exit your business it’s beneficial to know there has been some relaxing of the small business CGT concessions announced in the 2006 Federal Budget. In particular, the qualifying asset threshold has increased from $5 million to $6 million (your home, superannuation and some other personal assets are excluded when measuring this threshold). Similarly the control test for businesses conducted via an entity is to be relaxed from 50 percent to 20 percent.
Then there are the common misconceptions that can give you a nasty surprise, and ignorance is by no means an excuse for non-compliance.
For example, be mindful that superannuation payments must be made within 28 days of the end of the quarter. A payment that is even a day late exempts it from being tax deductible, leading to an increase in income tax.
Is your business liable for payroll tax? Although you may be aware companies whose payroll exceeds $600,000 per annum are liable for payroll tax, it’s important to note this includes superannuation, FBT and staff bonuses. Remember too, this is calculated nationally, so should you own multiple businesses in various states of Australia and the total payroll for all businesses exceeds the threshold, you are obliged to pay the tax on the full amount.
"There is one golden rule when it comes to tax and small business. If it seems too good to be true, it is," warns O’Rourke, when it comes to those tax schemes or ‘exotic’ investments that might seem a good way to chase elusive tax deductions prior to 30 June.
There are of course legally acceptable ways to minimise your tax bill and these include main residence exemptions, concessional tax treatment in selling capital assets and the concessional tax treatment of superannuation. It is advisable to meet with your accountant well before 30 June to discuss your business plans and tax implications for 2006–07.
Seeking professional advice in order to run your business better, maximise your wealth and increase year on year growth is a good strategy.
"We advise our clients to constantly review their status, not just in the lead up to the end of the financial year. At this time, however, we encourage planning for next year’s budget including identifying resources and staffing requirements," advises O’Rourke. "It’s a tough labour market and it takes time to locate, recruit and train the right staff."
When planning for tax time, remember that as an employer you are legally obligated to issue Payment Summaries to employees by 14 July 2007. Considering the administration load at this time, you may think this is a difficult deadline to meet.
One option to assist you is to enlist the help of an outsourced provider of payroll services, such as ADP Employer Services. Its PayLine solution is especially geared towards businesses with up to 150 employees, allowing disbursement of EFT wage payments, superannuation and other employee deductions, production of pay-slips (security-sealed, printed or online) and payment summaries. Outsourced providers can also assist in the calculation of payroll tax.
The Office of Workplace Services (OWS) recently launched targeted campaigns aimed at ensuring companies are compliant with WorkChoices regulations launched in March 2006. Workplace inspectors will provide information on obligations relating to pay-slip requirements, wages and attendance records under the Workplace Relations Act 1996, and are also able to conduct preliminary audits of an employer’s records.
"It is essential that employers understand their obligations under the Act," states Nicholas Wilson, director of the OWS. "The Act requires employers to keep accurate and complete time and wages records and to issue pay-slips to each worker. The record keeping and pay-slip requirements are designed to ensure that workers receive their correct wages and conditions."
Importantly, businesses should be aware that since 27 March 2007, there have been changes to the record keeping and wage requirements as a result of adjustments to the Workplace Relations Act 1996. Retailers, restaurants and cafes, outworkers, accommodation establishments and companies in regional centres have all been targeted by specific campaigns in recent months. For more information on this visit the OWS website at www.ows.gov.au
"If you’re unsure about your obligations or options, seek expert advice," advises O’Rourke. "There are too many risks associated with a ‘go-it-alone’ mentality. A sound business plan and expert advice can go a lon
g way towards building longevity and profit."
* Jacqui Dropulic is regional alliances specialist at ADP Employer Services (www.asiapacific.adp.com)