Budget And Cashflow Forecast Reviews Assist In Adding Value - by Hudson Smith
It has been proven, time and time again, that the setting of a budget is the same as setting a “goal”. The fact that you have sat down with your accountant in some “isolation planning” and thought about the issues relating to your business and, from that process, have then established the goals and have seen the results on paper, implies that there is a reasonable chance that, by working hard and continually reviewing the budget and measuring actual performance against it so that you can better manage the business, will help you to achieve your overall business objectives. See more
The budget process requires some “goal setting”. What do you want to achieve in the business by way of salary for yourself and any other working owners in the business and what is your target of net profit?
You should then be able to calculate, with our assistance, realistic sales targets for the next 12 months. From the sales targets, it is then possible to calculate the required stock purchases so that, as far as possible, the level of stock directly relates to the volume of sales being made in any particular time of the year, so that the business is not tying up funds and stock unnecessarily.
The overhead expenses of the business also need to be evaluated with some questions being asked. What benefits are being received from this type of expenditure?
An important point to remember is that “profit” is not cash in the bank. Many SME owners get very disturbed to see a certain profit figure and then ask “where is the money?” Unfortunately, a significant amount of your profit will probably be tied up in the “cashflow cycle” which is the investment that you have in stock, work-in-progress and debtors.
Part of the aim of preparing Budgets and Cashflow Forecasts is so your accountant can make suggestions as to strategies to be introduced to try to reduce the number of days invested in “cashflow cycles”.
We're happy to be involved in the preparation of Budgets and Cashflow Forecasts for our clients. As well as preparing the Budgets and Cashflow Forecasts for our clients, we also prepare an Action Plan which will identify any components that we've discussed with you as part of the budget preparation which may require some fine tuning during the year, so as to improve your overall business performance.
Budgets and Cashflow Forecasts are vital tools for effective management of all types of businesses, both large and small. The key strategy is to ensure that there is a regular review of actual performance as compared to budget to determine where any adjustments should be made in the budget or to seek guidance on an actual area of operation of the business that should be subject to additional due diligence to understand what is causing a particular problem.
If you would like assistance in the preparation of Budgets and Cashflow Forecasts and in the establishment of a system to ensure ongoing monitoring of the Budgets and Cashflow Forecasts during the year, please do not hesitate in contacting us.
ATO's Targets this year
The Australian Taxation Office has announced its targets for 2011/12. This summary relates to the Taxation Office's indicated targets for individuals, micro-businesses (turnover up to $2M), small/medium enterprises (turnover $2M to $250M).
The key areas that the ATO are closely examining are:
work-related expenses - this includes claims for home office expenses, internet connection, mobile telephone costs
overseas income - remember the ATO has very sophisticated systems to track money moving overseas
split loans (business and private loans are attracting greater attention)
correct PAYG Withholding Tax deducted from wages
superannuation payments made
"sham" contracting - i.e. if someone is working for your business fulltime, it's very difficult to establish that they're a bona fide contractor
internet trading
cash businesses; and
in all cases, the ATO is comparing micro and SME businesses to the benchmarks that they've established for the various industries.
The ATO is also very concerned about Phoenix Company activities where a company is liquidated and then basically commences business under a new name the next day.
The ATO is also monitoring shareholders' loans and small business capital gains tax concessions.
If you have any concerns on any aspects of your taxation affairs, please don't hesitate to contact us.
Cash economy still on ATO’s radar
The ATO has maintained a focus on its compliance activities in relation to small business performance benchmarking and the cash economy. In a recent speech, the Commissioner of Taxation said businesses outside the relevant benchmarks are subject to ATO review and/or audit. See more.
Where businesses do not have adequate records to substantiate their performance, the Commissioner said the ATO will make a default assessment using the relevant small business benchmark.
The ATO uses a variety of tools to help it identify potential cash economy activities which include:
• collecting and comparing significant amounts of information from a number of sources, including banks, other government agencies such as Centrelink, and industry suppliers. The ATO can even collect information about purchases of major items such as cars and property; and
• comparing the performances of businesses against other similar businesses in the industry. The ATO currently has over 100 small business benchmarks for this purpose. The benchmarks are used to identify businesses that may be avoiding their tax obligations.
TIP: Undertaking a review of business records may help to identify whether you are at risk of review by the ATO. According to the ATO, taxpayers may be given concessional treatment in relation to penalties and interest, should they make a voluntary disclosure of a mistake
Carbon tax to commence on 1 July 2012
The Prime Minister has announced details of the Government’s plans to put a price on carbon. The plan, to commence on 1 July 2012, proposes to set a price of $23 for each tonne of carbon pollution released into the atmosphere by Australia’s biggest polluters. It is proposed that around 500 businesses will be required to pay for their pollution under the carbon pricing mechanism. The Prime Minister also announced tax cuts to assist households and support measures for businesses to assist them in adapting to the new carbon tax.
TIP: Although the carbon tax scheme will not commence until next year, businesses should consider how they may be affected both directly and indirectly by the scheme and whether they are able to access some of the compensation and support measures announced as part of the scheme.
Government set on countering phoenix activities
The Government has proposed tax law changes to counter fraudulent phoenix activities by company directors. Such activities involve the deliberate liquidation of a company to avoid paying tax liabilities and employee superannuation. The business then “rises” again and continues operations controlled by the same person, but under another corporate entity and free of debts. The proposed tax law changes include making directors personally liable for unpaid employee superannuation, and allowing the Australian Taxation Office (ATO) to pursue directors where certain tax debts remain unpaid and unreported three months after the due day
. TIP: The changes would place additional pressure on directors to ensure that their company’s tax risk management policies and systems are up-to-date. It should also be noted that the ATO, as part of its Compliance Program for this year, intends to detect potential phoenix activities sooner through a targeted program of reviews and audits of directors.
New restrictions on SMSF investment in artworks
New regulations have been made to prevent self-managed superannuation fund (SMSF) trustees from gaining current day benefit from an investment in collectables and other personal use assets, for example artwork, jewellery, antiques, coins and stamps, wine or spirits and motor vehicles. The regulations are designed to ensure such investments are made for genuine retirement income purposes only.
TIP: The new regulations commenced on 1 July 2011, however, there is a five-year transitional period for assets that were held by an SMSF as at 30 June 2011.
ATO targets FBT avoidance using employee share trusts
The ATO has warned taxpayers of an arrangement whereby effective after-tax benefits are provided to employees without a corresponding fringe benefits tax (FBT) liability to the employer. Under the arrangement, employees acquire share units in an employee share trust, which is funded by a loan from the trustee, which is in turn repaid by the employer from amounts salary sacrificed by the employee; however, the employer does not include the taxable value of the benefits provided as part of its FBT liability. The ATO says failure to include the benefit may trigger specific “anti-avoidance” rules under the FBT law.
No GST on damages paid for lost scaffolding
A taxpayer has been successful before the Federal Court in obtaining orders that there is no GST payable on damages it recovered when it lost its scaffolding to other parties. The taxpayer was in the business of hiring out its scaffolding in the building and construction industry. However, after various events, the scaffolding became intermingled with scaffolding belonging to another company. The taxpayer sued and won damages for the loss of its scaffolding. However, the Commissioner claimed GST was payable as a result of the ownership of the scaffolding vesting in the defendant. The Federal Court though disagreed and held the taxpayer in the circumstances did not make a “taxable supply” under the GST law. (Note the Commissioner has appealed against the decision to the Full Federal Court.) Division 7A benchmark interest rate
The ATO has advised that, for the income year that commenced on 1 July 2011, the benchmark interest rate to be used in calculating the interest component on the repayment of a private company loan received by a shareholder (or the associate of the shareholder) is 7.8%.
Reasonable travel and meal allowance amounts
The ATO has announced the amounts the Commissioner considers are reasonable for the
2011–2012 income year in relation to claims made for: overtime meal allowance expenses; domestic travel allowance expenses; travel allowance expenses for employee truck drivers; and overseas travel allowance expenses.
Car depreciation limit and luxury car tax threshold
The ATO has released the following limits and thresholds for the 2011–2012 income year:
• car depreciation limit and luxury car tax threshold – $57,466;
• fuel efficient car limit – $75,375.
Don’t take the bait on tax avoidance schemes
The ATO has recently identified a number of tax avoidance schemes which it says are a risk to small businesses. These include:
• complex arrangements involving trusts to provide loans to individuals;
• abusive labour hire schemes;
• claims by companies for a deduction for unpaid directors fees; and
• avoidance of fringe benefits tax.
TIP: Not all tax avoidance schemes are obvious and many can look legitimate. Only on close examination do higher risk features start to appear.
Capital gains tax bills for failing test The Administrative Appeals Tribunal has recently handed down two separate decisions concerning capital gains tax (CGT) concessions for small businesses. The tax law offers a range of tax concessions for small businesses that have made a capital gain on a "CGT asset" that has been used in the business. The concessions can reduce, eliminate or roll-over a capital gain. However, the concessions are only available if certain tests are met. The main issue before the Tribunal was whether the taxpayers satisfied the "maximum net asset value" test. The test would be satisfied if, just before the "CGT event", the value of the assets of the taxpayers and their connected entities did not exceed $5 million.
Broadly, the Tribunal held the taxpayers did not meet the then "maximum net asset value" test in order to qualify for the concessions. The taxpayers did not satisfy the onus of proving that the "maximum net asset value" of the assets of the taxpayers and their connected entities were less than $5 million. In the first case, the Tribunal denied the taxpayer the concessions with respect to the sale of a marina for $8.9 million. In the second case, the Tribunal also refused the taxpayer the concessions in respect of a gain he made on selling two $1 shares in a company for $4.9 million.
TIP: There have been changes to the relevant rules. For example, the amount for the "maximum net asset value" test increased to $6 million. If you have any questions please contact our office.
Share trading business existed, says Tribunal
In an unusual decision, the Administrative Appeals Tribunal held a taxpayer was not a passive investor in relation to share trading activities and was carrying on a business of share trading for the year ended 30 June 2008. The taxpayer was a chief executive of a services company and traded shares in his own name on the share market. The Commissioner argued the taxpayer was not conducting a share trading business as he did not have a formal business plan and did not sell many shares during the relevant period. The taxpayer argued that the only reason he did not sell much of his portfolio during the period was due to the global financial crisis.
Taxpayer loses excess super contributions tax appeal
A taxpayer has been unsuccessful before the Federal Court in appealing against a decision of the Administrative Appeals Tribunal. The Tribunal had affirmed a superannuation excess non-concessional contributions tax assessment of $86,867 against her for breaching the $1 million non-concessional contributions cap during the transitional period to 30 June 2007 (which existed at the time). The taxpayer had argued that a $355,000 payment from her personal superannuation fund in June 2007 was received by her in a capacity as trustee before being on-paid to her new superannuation fund and therefore should be treated as a roll-over superannuation benefit. However, the Court broadly agreed with the findings made by the Tribunal.
TIP: As part of the 2011–2012 Budget, the Government proposed that eligible individuals be given a once-only option to have excess concessional contributions up to $10,000 refunded and assessed at their marginal tax rate for the financial year in which the contribution was made. The refund option is proposed to only apply for the first year in which the concessional contributions cap is breached, commencing from 2011–2012. If you have any questions please contact our office.
SMSFs warned on improper lending of money
The ATO says it is concerned that some self-managed superannuation fund (SMSF) trustees are lending money on favourable terms from their SMSFs to people who provide advice or assist in the running in the fund. It warns that this arrangement may lead to the loss of the complying status of the fund and concessional tax rates. The ATO says trustees should ensure that loan terms comply with the law and fit their investment strategy.
TIP: Decisions to lend money from an SMSF should be backed by the appropriate documentation such as an appropriate loan agreement.
Joke of the quarter
A man was on a beach when he discovered an old lamp in the sand. He rubbed it and a genie popped out. The genie said "I will grant you three wishes. The only condition is that you cannot wish for more wishes." "Alright," said the man, "I wish for more genies."
