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Business Conditions Still Bumpy


The Reserve Bank has announced that interest rates will remain on hold at 3%. There are some expectations by economists that the Reserve Bank could announce another cut in the next couple of months and, by later in the year, interest rates could start to rise.

The Federal election will cause some uncertainty for many businesses, especially retailers, because, traditionally, consumers reduce purchases during elections. Whether this is going to happen over the 6-month election period remains to be seen.

"An unhealthy cash flow cycle exists among Australian businesses, with 62 per cent of accounts settled late and firms taking on average, 52 days to pay their bills." – Trade Payments Analysis by Dun and Bradstreet. This statement highlights the cashflow management problem facing many small business operators.

If that's not enough, bank covenants are getting tighter. Interest cover is a minimum of two (number of times that interest charges are covered by EBIT (Earnings Before Interest and Tax)):
  • Debt Service Cover (the ratio of cash available for debt servicing for interest, principal and lease payments) – 1.5 trending up 
  • Current Ratio (the relationship between current assets and current liabilities) 2+
  • Quick Ratio (the ratio between current assets minus stock and current liabilities) 1+
If you would like our assistance in reviewing your business strategies relative to interest rates, management of debt and abiding by bank covenants, please do not hesitate to contact your Harris Black team member.


Consumer Law Update

The National Consumer Law is now administered by the Australian Competition and Consumer Commission. Some of the key issues relating to retailers are: 
  • If products purchased by a customer, which had been gifted to another person, and the gift recipient wishes to return the product to you, the recipient has the same rights as the person who purchased the goods.
  • The retailer is entitled to request the person returning the goods to produce a receipt as proof of purchase from your business.
  • If the goods are defective or do not work, the retailer will have to consider replacing, repairing or refunding the amount that was paid for that product. However, the customer or recipient is not entitled to a refund simply because they do not like the gift.
  • If a customer purchases the goods from you, and wants to change the goods, they cannot do that, unless the goods are defective, or do not work, or do not do as advertised they would. If the customer asks for a refund merely because they've changed their mind, or believes they can buy the goods cheaper elsewhere, you are entitled to say no, as this is the consumer's problem.
  • If you have sold something that is defective or is not doing what it's supposed to do, or is not safe, or the goods do not match the description of what was sold, the law requires the retailer to rectify the situation by offering a refund or exchanging the goods.
  • Depending on whether the defect is a:
    • Major problem – the product is unsafe or does not do what it was meant to do or as advertised it will do. In this case, customer will be entitled to ask for a refund.
    • Minor problem – the defect can be remedied by repairing the product – there is no requirement to agree to a refund.

Retailers have rights; you do not have to take goods back unless they are defective.

No Refunds

Under the Consumer Law, 'No Refunds' signs are illegal. It is against the law to tell consumers that they don't have any rights. 'No Refunds' signs at sales are also illegal. However, you need to make sure that, if you're selling sale items that are not first grade, such as factory seconds, damaged goods, etc., you have clearly advertised that they are not 100% perfect within your store where the sale is being conducted. If you do this, the customer's rights are somewhat limited. It will then be a good idea to take some photographs to prove that the signs were prominently placed around the store in case a disgruntled customer wants to make a claim against you.

Fair wear and tear is also a common problem. This requires a judgement call by the seller. What would a reasonable person decide? Because that's the way Australian Competition and Consumer Corporation (ACCC) or a State Department of Consumer Affairs would interpret the situation.

There will be disputes to be resolved from time to time. If the customer raises an issue with you and you are not prepared to make an instant decision and accede to the customer's demand, request the customer to advise you in writing of their concern. It is a good idea to then reply to the customer in writing, advising them of your decision. You need to be aware that, if the customer is still unhappy, they can then approach the State Department of Consumer Affairs/Fair Trading, Small Claims Tribunal or ACCC for a ruling on the complaint.


Directors And Workplace Health & Safety Issues

The Workplace Health & Safety Act imposes obligations on company officers to exercise due diligence to ensure the person conducting a business or undertaking (PCBU) is complying with the Act.
  • Due Diligence – What Steps Should Be Taken – company directors and other company officers, including managers, need to acquire knowledge of occupational health and safety matters.
  • There's a need for company officers to gain an understanding of the hazards and risks associated with the work to be undertaken – before work commences.
  • Company officers need to ensure appropriate resources and processes are available to eliminate or minimise risks.
  • Officers need to ensure there is a reporting process for health and safety issues.
  • If the company officer delegates, he/she must ensure that they have delegated with proper due diligence, ensuring that the person they have delegated to is appropriately trained and to regularly monitor the performance of that person. In other words, you cannot just say that you have asked someone to be responsible for it and not take any further notice.

There are severe penalties under the Workplace Health & Safety Act:
  • Category One – recklessly exposing of the person to risk of death or serious injury or illness
    • $3M for corporations
    • $600,000 for individual – five years imprisonment
  • Category Two – serious risk of harm without recklessness
    • $1.5M for corporations
    • $300,000 for individual
  • Category Three – fails to comply with Workplace Health & Safety duties
    • $500,000 for corporations
    • $100,000 for individual

If you would like our assistance with introducing you to a Workplace Health & Safety consultant, please contact your Harris Black team member.


Insurance - 'Devil In The Detail'

In reviewing your insurance policies, you need to be aware the policies normally contain 'averaging' or 'coinsurance' clauses. These clauses will come into play when the sum insured is significantly less than the value of the insured property.

What this means is that any of the claim you make will be reduced in proportion to the amount of the underinsurance. Many people have been caught out on this clause of an insurance policy.

For example, if you agree on the sum insured for contents insurance of $70,000, whilst the total value of the contents is, say, $110,000, the insurer will be entitled to reduce the amount of any claim made by the percentage which reflects the value by which the property was underinsured. If the amount of damages incurred is worth $44,000, the insurer may be entitled to rely on the averaging clause to reduce its liability to 63.6%, being the percentage by which the contents were underinsured, resulting in the payment of only $27,984. Where averaging clauses exists in an insurance policy, it is important to maintain a current valuation of the property and confirm that the insured amount is close to the actual value. It will assist you to keep a proper inventory of the assets you wish to cover and their value to compensate against the possibility of having an insurance claim adjusted under the averaging and coinsurance clause.

If you would like us to review your insurance covers, please do not hesitate to contact your Harris Black team member.


No Splitting Of Rental Income For Couple

The Administrative Appeals Tribunal (AAT) has refused a husband's argument that he could split his rental income with his (now estranged) wife even though the commercial property was registered under his name only.

The taxpayer had lodged tax returns on the basis that the property was shared equally between him and his wife. However, the Commissioner formed the view that as the property was in the husband's name only, the rental income from that property belonged to him alone.

The husband claimed that the property was an asset of a "tax law partnership" between him and his wife. He also argued that the property was a "joint marital asset" held by them on a 50/50 basis, that the property was purchased from joint marital funds, and that both he and his wife each applied the income from the property for their own use.

However, the AAT was not satisfied with the evidence presented before it. It noted the absence of the wife from giving evidence, as well as a lack of written documentation, to prove there was a partnership. The AAT found that there was no evidence to show that the property was "jointly owned" or that the couple was in receipt of income jointly.


Winery Losses Cannot Offset Other Income

A taxpayer has been unsuccessful before the AAT in seeking a discretion under the tax law to allow her to offset losses from a winery business against her other income.

The taxpayer had sought for the discretion to cover the income years ending 30 June 2010 to 30 June 2018. She argued, among other things, that it was acceptable commercial practice in the winery business to stagger the plantation of vines over such a period.

However, the AAT sided with the Commissioner and held that the vines could be planted and become productive within five years. It therefore held that the taxpayer was unable to satisfy the relevant test for the discretion.

TIP: Under the tax law, an individual conducting a business (either alone or in a partnership) may offset losses from the business against income from other sources, such as wages, but only if certain tests are met. If the individual does not meet any of the tests, the individual may seek the Tax Commissioner's discretion to allow him or her to claim the loss. Note that there are exceptions for primary producers and artists under the rules. Please contact our office if you have any questions.


Property Developers Denied GST Margin Scheme

The AAT has affirmed GST assessments levied at two property developers associated with the sale of real property between 2008 and 2009. The taxpayers had purchased property, which was eventually subdivided and on-sold. The taxpayers said they "never had an intention of not including GST in returns or defrauding the Commissioner" and that "they wanted their returns to be correct".

However, the AAT affirmed the Commissioner's assessments. It also decided that the margin scheme could not apply in the circumstances as there was no agreement in writing between the vendor and purchaser that the margin scheme was to apply to the property transaction.

TIP: The use of the margin scheme can provide a lower GST cost to the supplier than would normally be the case under the general GST rules. However, in addition to meeting various eligibility requirements, there must be an agreement in writing between the supplier and recipient that the margin scheme is to apply. Please contact our office for further information.


Superannuation Top-Up Brings On 93% Tax

The AAT has affirmed an individual's excess superannuation contributions tax liability. On 27 June 2008, the individual's employer made a "top-up" superannuation contribution to a clearing account. However, the funds were not allocated to the individual's superannuation account until 23 July 2008.

The AAT considered that the payment could not be said to have been "made" in the 2008 income year. This resulted in a $69,665 excess superannuation contributions tax liability for the individual, representing an effective tax rate of 93%!

The AAT also decided that there were no "special circumstances" in this case to warrant the Commissioner's discretion under the tax law to reallocate the amount to the 2008 year. The AAT said that the imposition of a tax under the tax laws – even a large tax such as the effective 93% tax rate in this case – is not in itself "special circumstances". There must be some "special circumstances" that exist beyond that in order to warrant the Commissioner's discretion.

TIP: This case highlights the importance of managing the timing of all concessional contributions against an individual's contribution caps for each financial year.  As if this was not challenging enough, the concessional contributions cap has been frozen at $25,000 for 2012–2013 and 2013–2014, regardless of age. This unfortunately sets a trap for the unwary that could generate unexpected tax liabilities if contributions intended for June in a particular financial year are not "received" by the fund until July in the following financial year.


In-house Fringe Benefits - Rule Changes On The Way

The Government has recently said that the existing fringe benefits tax (FBT) concessions in the law were not intended to allow employees to purchase goods and services (usually sold by the employer to the public) from their pre-tax income through salary packaging arrangements. According to the Government, these employees are receiving tax-free, non-cash remuneration benefits for goods and services, while other employees who do not have access to such salary packaging arrangements must pay for the goods and services from their after-tax income.

The Government has introduced a Bill into Parliament in order to deal with this issue. It proposes to remove the concessional treatment for such "in-house fringe benefits" accessed by way of a salary packaging arrangement.

If implemented, the changes will apply to all salary-sacrifice arrangements entered into on or after 22 October 2012. For pre-existing arrangements, the new measures will not apply until 1 April 2014 – but the renewal of, or changes to, an arrangement will trigger the new provisions.

TIP: This proposed change means that employees will lose their ability to pay for in-house benefits with pre-tax salary without their employer incurring FBT.   However, it is essential to note that the concessional treatment of in-house benefits will be retained where the benefits are not provided via salary sacrifice. If you have any questions, please contact our office.


Goods Taken From Private Stock

The ATO has updated the amounts the Commissioner will accept for 2012–2013 as estimates of the value of goods taken from trading stock for private use by taxpayers in certain specified industries.

For example, for a restaurant/cafe (licensed), the Commissioner will accept $4,350 (excluding GST) for each adult or child over 16 years of age. Note that the ATO intends to adjust the values annually.

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