A New Government

There are many challenges facing the new LNP government, and they will need to get down to work very quickly to solve significant problems which are affecting small businesses throughout Australia. Key issues continuing to confront SME operators, besides the unreasonable amount of paperwork required by the government, are:
  • Cashflow Management
  • Debtors' Days Outstanding - now at 55 days – far too high   
  • Lower Interest Rates - this doesn't mean that the banks are going to be more lenient. In fact, recent articles indicate that the banks are becoming tougher in their dealing with small businesses.
The other big issue is change that is occurring within the economy. The Deloitte's 'Digital Disruption – Short-Fuse, Big Bang?' report identified industries, which they believe would be significantly affected over the next three years. These include:

  • Retail Trade
  • Finance
  • Arts and Recreation
  • Information Communication Technology            
  • Professional Services
  • Real Estate
  • Media           
If you are in any of these businesses, now is the time to start thinking about some strategies to reduce the impact of the digital disruption and, hopefully, create real opportunities for your business. These strategies could include:
  • Re-Calibrating Cost Structure – What changes need to be made in terms of people, supply chains and overheads, to radically re-think costs, so you are able to compete with the digitally powered, low-cost newcomers.
  • Replenishing Revenue Streams – Do you need to build new sources of revenue across different segments from what you're relied on in the past? Should different revenue streams be developed for different geographies and business models, as your traditional streams of income are subjected to competitor pressure from businesses utilising the new technologies?
  • Consider Reshaping Your Own Corporate Strategies - This could include disposal of some assets that are no longer being fully utilised or changing your business operations.
Now that the election is out of the way, this is a good time to start thinking about some of these issues.

If you have any matters relative to your business operations that you would like to discuss with us, please do not hesitate to contact your Harris Black team member.

Fair Work Australia – Action Over Contractor

A recent court case, involving Fair Work Australia and a business, has highlighted the necessity for businesses to be very careful, with regard to the classification of people who work for the business as contractors. There are legal implications if classifications are incorrect.

The employment relationship revolves around 'control'. In a normal employer-employee relationship, the employer has the ability to control how work is done by the worker.

With an independent contractor relationship, the business principal will not have 'total control' over the work being undertaken by an independent contractor. The contractor is responsible for his/her own performance, and the supply of tools, equipment, devices and materials to the job site.

Another very important test, as to whether a worker is an employee or a contractor, is how 'prominent' the worker figures in the organisational chart/structure for the business. If the person is branded as part of the organisation, it would probably be difficult to argue that the person is not an employee. If they are a contractor, they should be retaining their own identity.

Fair Work Australia has the right to prosecute 'employers', and they did so in this case, on the basis that Fair Work Australia alleged the persons were not contractors and that they were employees. The court found that the 'people' were not contractors but employees, and fined the business $170,000, and the company director who was responsible for the engagement of the persons, $28,000.

Fair Work Australia targets various industries from time to time, and may demand to see employment records. Complaints can also be made to Fair Work Australia by disgruntled employees, past or present.

The message in this case is, employers need to be very careful in hiring people who are going to be regularly involved with the business, and who will be accepting directions from the business' management relating to the performance of their duties. Management should ensure that proper systems are in place, to ensure that a potentially 'dubious engagement' is referred to senior management before being finalised. Questions might relate to:
  • The 'person's' estimated working hours per week.
  • The control and reporting obligations of the 'person'.
If the 'person' is being engaged on similar terms and conditions to those which relate to a 'normal employee', then senior management should seriously consider whether it's worth the risk to engage someone as a 'contractor'.

The employer could also face action from the Australian Taxation Office, because PAYG tax has not been deducted, and superannuation has not been paid. This is a real area of 'risk management' for businesses. It is advisable that, any person engaged under independent contractor agreements, should be reviewed every six months, to ensure the engagement process is appropriate for the work being undertaken by the 'person' during that time.

When engaging a 'person', who you believe is a legitimate contractor, it is very important to document the contractual obligation; who will the 'person' report to, what are the contract milestones and how are they going to be paid. Proper written documentation is also required between the employer and the contractor's entity, which clearly identifies the commercial agreement that has been reached.

Another area that the employer should be monitoring closely is the situation where a decision is made to terminate an employee, and then engage that former employee as a contractor within a reasonably short period of their termination as an employee. This is a high-risk area that needs to be closely managed and scrutinised to ensure the person being engaged as a contractor is a legitimate contractor. Does the new contractor have:

  •  public liability insurance;
  •  come and go as they wish;
  •  sickness and accident insurance;
  •  report as a contractor;
  •  professional indemnity insurance (if appropriate);
  •  milestone that are achieved; or
  •  supply own tools, computers and research materials;
  •  are they being supervised on an hourly basis,
    as is they were an employee?
For more information please read our White Paper Contractors Vs Employees; Under the ATO Spotlight or contact your Harris Black team member.

Do You Have Outstanding Tax Returns From 2012 Or Earlier?

We have recently written to some clients who have outstanding tax returns from 2012 and earlier.

The ATO has recently implemented changes to their lodgment framework for Tax Agents. Accordingly, Harris Black must now meet a performance target for the timely lodgment of Income Tax Returns for those clients on our ATO Lodgment Program List. In particular, the ATO has requested we lodge overdue tax returns for these clients prior to 31 October 2013.

Removal from our ATO Lodgment Program List will result in Harris Black no longer being registered as your tax agent. All future communication in relation to outstanding Income Tax Returns and other taxation matters will be made direct from the ATO. You will however still remain a client of Harris Black and we will be more than happy to assist you where required, including any future preparation of outstanding tax returns.

This is our final reminder to send your work in to Harris Black otherwise we will be obliged to remove you from our Australian Taxation Office (ATO) Lodgement Program List. We appreciate that it can be a daunting (possibly boring) exercise to put your tax work together but a quick call to your Harris Black team member can help simplify the process and get you up to date again.

Characteristics Of A Well Run Business

To run a business well you need excellent systems that give you current information on:
  • bank balance; 
  • work in progress; 
  • sales made yesterday;
  • debtors' days outstanding
  • amount owed by debtors;
  • amount owed to creditors;
  • stock on hand;
  • last week's results compared to budget; and
  • stock turn; 
  • cashflow problems likely to be encountered in the future.
And than you need to analyse the results using;
  • analysed monthly financial accounts (including detailed profit and loss account);
  • comparison of periodic financial accounts to budgets and cashflow forecast;
  • key performance indicator report for every segment of the business;
  • benchmarking comparison to other businesses in your industry; and
  • regular team meetings to analyse performance.
Whilst this sounds like a lot of work it can be generally be summarised into a one page report prepared on a regular timely basis.

If you would like help determining what to monitor and help analysing your figures on a regular basis contact your Harris Black team member.

Lifetime Value Of A Customer

Businesses need to ensure that there is ongoing education of their team on the lifetime value of a new customer.

Customers represent repeat business. Repeat business equals profit. Businesses need to install appropriate systems so every customer becomes a lifetime customer.

Many businesses find that, with good service, a customer will stick with them for 7-10 years. If you assume that the lifetime value of a customer is 7 years on average, multiply the average sale by the number of times you expect to see the customer each year, and then multiply the projected annual sale by the number of years expectancy for 'lifetime value'. This will give you an idea of what the customer's potential worth is to your business.

One of the most effective ways of marketing your business is to increase the number of visits your long-term customers make to your business. This will add to the lifetime value of your customer.

How do you develop lifetime customers?
  • improve your referral system;
  • create outstanding service to all customers to encourage them to become lifetime customers;
  • create a database of customers and offer them outstanding service;
  • keep improving your level of service;
  • offer special events and promotions to your customers;
  • get them to say "WOW!".

Succession Planning – Have You Thought About It?

Succession planning is a very personal thing for most business operators. Firstly, you need to consider what you want to achieve from the business. This could include:

  • Will the business survive with the reduced reliance on 'you'?
  • Could you hand the business on to another family member to run?
  • Develop the business you can move on to another business?
  • Could you appoint an external CEO to run the business on behalf of the family?
  • Providing inheritance to your children and your grandchildren?
  • Could you negotiate a 'trade sale' with a competitor or large organisation?
  • Getting the business ready for sale so you can sell and retire?
  • Do you want to develop the business so you under an Initial Public Offer (IPO) to list on the stock exchange?
  • Have you though your options for exiting the business?
  • Do you think the business is 'exit ready' or 'succession ready'?
  • Would a partner buy you out?
  • What retirement needs do you have that will need to be supplied through the business?
  • Could you introduce a new partner/shareholder into the business and then exit?
  • Creating a legacy?
Items which might affect 'you' and the business include:
  • is the business name your name?;
  • a large percentage of the clients perceive that they have a direct link to you; and
  • could you effectively make yourself 'redundant', to enable other team members and management to take over the roles previously undertaken by you?
These are some of the questions that need to be considered in planning a succession strategy for business operators. If you would like to have a discussion with us relative to your succession planning, please do not hesitate to contact your Harris Black team member.

An Annual Legal Check Up Can Help

There are many areas that the law can affect the operation of your business. Many SME operators receive assistance with the development of strategies for their business, from marketing consultants, advertising consultants and their accountant. One area that many business people overlook is having an annual consultation with their commercial solicitor, to ascertain whether their business is complying with all of the laws, and to ensure they are aware of any recent court decisions or changes in the interpretation of the law which may affect their business operations.

There are a large number of laws which can affect all business operators. By having an annual meeting with your commercial solicitor, you have the opportunity to update your knowledge of the law, particularly as it relates to your business. This will also enable your commercial solicitor to gain more knowledge of your business operations, hopefully encourage your commercial solicitor to be mindful of contacting you during the year if they notice any developments in the law that may have an effect on your business operations.

'What' Questions
  • What would you do if we could help you find more time to do the things you really love to do?
  • What would it mean to you if we could work with you to change it?
  • What impact would that have on your business?
  • What would need to happen (change) for you to achieve that?
  • What is your number one priority in your business right now?

What Medical Expenses Can I Claim For?

When you pay out-of-pocket medical expenses, you may be eligible for the net medical expenses tax offset. The tax offset allows you to claim back a percentage of the costs exceeding the medical expense threshold.

For the first time, the net medical expense tax offset is subject to income testing.

The amount you are entitled to claim is based on your adjusted taxable income. For more information on what medical expense you can claim view our Whitepaper What Medical Expenses Can I Claim For?

ATO Compliance Target Areas

The ATO has released its compliance program for 2013–2014, setting out key activities and focus areas for the coming year. Some key points include the following:
  • The ATO says it will pay particular attention to large work-related expense claims made by: (i) building and construction labourers, construction supervisors and project managers; and (ii) sales and marketing managers.
  • This year, the ATO will use new information sources to check correct reporting of: (i) private health insurance rebate claims; (ii) flood levy exemptions; and (iii) taxable government grants and payments.
  • The ATO has set up a new taskforce to deal with promoters, individuals and businesses that seek to misuse trusts. The ATO plans to conduct 5,000 data-matching cases and around 700 income tax reviews and audits over the next four years.

CGT Small Business Concessions Denied

The Administrative Appeals Tribunal (AAT) has held that the exclusion in the tax law from the capital gains tax (CGT) small business concessions for assets used "mainly to derive rent" applies even if the assets are used in "carrying on a business" of deriving rent.
In this case, the taxpayer argued that in interpreting the rules, it was necessary to distinguish between those assets used to derive passive investment income such as rental income, and those actively used in carrying on a business. Essentially, the taxpayer argued that the strict view that all properties that are used mainly to derive rent are automatically excluded from the concessions unfairly discriminates against small leasing businesses.
However, the AAT considered that the words in the law must be considered first and that it was not "unduly pedantic to begin with the assumption that words mean what they say".

TIP: This case demonstrates the need to be aware of the various conditions required to be satisfied in order to claim the CGT concessions for small businesses. In this case, the key issue was whether three commercial properties that the taxpayer used in carrying on a business of deriving rent qualified as "active assets" and were therefore potentially eligible for the concessions. However, the AAT found that a specific exclusion under the tax law for assets used mainly to derive rent applied. Please contact your harris black team member if you would like further information.

Deductions For Accommodation And Food Refused

An individual employed by a mining company at Port Hedland on a "fly-in fly-out" basis has been unsuccessful before the Federal Court in appealing an earlier decision that refused his deduction claim of $36,000 for accommodation and food against an allowance.

In the earlier decision, it was held that the allowance was properly characterised as a living-away-from-home allowance (LAFHA) under the fringe benefits tax (FBT) rules. As a result, it was subject to FBT in the hands of the taxpayer's employer, and travel expenses could not therefore be claimed in relation to it. In affirming the earlier decision, the Court said the expenses in relation to accommodation, food and travel were not incurred by the taxpayer in the course of gaining or producing his assessable income. Rather, the expenditure arose from the taxpayer's decision not live in Port Hedland and to instead travel to Port Hedland on a fly-in fly-out basis.

ATO Telephone Advice Does Not Excuse Wrong GST Claim

In a recent decision, the AAT has affirmed the Commissioner's decision to impose on a taxpayer an administrative penalty at the rate of 50% for "recklessness" in relation to incorrectly claimed input tax credits (ITCs). The taxpayer had lodged a claim in the relevant business activity statement (BAS) for almost $72,000 in ITCs in relation goods said to be from Hong Kong. This was despite the goods never having left the country or having been manufactured.

The taxpayer's representative claimed that he had relied on telephone conversations with the ATO in which the ATO had allegedly advised to the effect that the taxpayer could claim ITCs. However, the AAT did not accept the taxpayer's arguments in that regard and affirmed the Commissioner's decision. The AAT noted, among other things, that the discussions post-dated the filing of the BAS and, accordingly, any advice received at that time could not have influenced the making of a false or misleading statement.

TIP: Most taxpayers will, often or not, rely on spoken advice. They may contact one of the many enquiry lines that have been set up by various governmental departments, which provide callers with free and quick advice on not only the operation of the law, but also how it is being put into practice within those departments. However, taxpayers need to be cautious about relying on such advice. As the AAT said in this case, given the size of the taxpayer's claim, "a private taxation ruling, or at least informed professional advice, could and should have been sought".

Poor Record Keeping, So Fuel Tax Credit Claims Refused

A trustee of a family trust that operated a construction and earthmoving equipment business has been unsuccessful before the AAT in its claim for fuel tax credits. Following an audit of the business in 2010, the Commissioner refused the credits, citing that records maintained by the taxpayer did not accurately describe the amount of fuel acquired or used, or adequately describe the purpose for which the fuel was used.

The taxpayer acknowledged that there were problems with its record keeping but said the difficulties were caused by employee delinquency. Further, it said its true entitlements were actually much greater than the amount claimed. However, the AAT was not satisfied with estimates provided by the taxpayer. It was also critical of the taxpayer's records, saying they "were a mess". The AAT affirmed the Commissioner's decision, as well as the imposition of penalties at 25%. 

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Since 1994, Harris Black has been providing accounting and advisory services to our valued clients to help them achieve their business and personal wealth goals.


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