Is the achievement of a surplus as budgeted fundamental to your day to day [...]]]> As with all Federal Budgets there are some who benefit and some who pay.  This year is no different, however it is very much a Labour Budget with a focus on taxing higher income earners and distributing to lower income earners.

Is the achievement of a surplus as budgeted fundamental to your day to day life or business? - not really. What is particularly relevant is the actual impact of specific initiatives and what should we do about them.

For a full detailed report on the 2012 Federal Budget you can access same on the following link

Federal Budget Tax Bulletin_May 2012

The main points as they apply to the majority of our clients are as follows:

 INDIVIDUAL TAX

 The tax free threshold has from 1 July 2012 risen to $18,201.00 from $6,000.00.  This on the face of it is a tax saving for low income earners, but the low tax offset already achieved pretty much the same for people earning $18,000.00 or less and this initiative will be phased out.  People on $37,000.00 per annum are better off by about $1,078.00 per annum, but as income increases this benefit diminishes and cuts out at $80,000.00.  Tax payers earning $50,000.00 per annum are approximately $750.00 better off per year.

•  The Medicare low income threshold has been marginally increased.
• The talk about standardizing tax deductions has not proceeded.
•  The Education Tax Offset has been replaced with the School Kids Bonus cash payment.  From 1 January 2013 each year families will receive $410.00 for a primary school child and $820.00 for a high school child.  No paperwork is required. Note: Only eligible if you qualify for PART A of the Family Tax Benefit.
•  The 2011-2012 Education Refund will be paid to all families as a lump sum in June 2012.  A cash BONUS!
•  A reduction in the taxing concessions of golden handshakes (Eligible Termination Payments).
•  Changes to tax offsets for dependant carers.
•  Changes to Family Tax Benefit Part A.
•  Mature Age Worker Offset to be phased out.
•  Medical expense claims to be means tested from 1 July 2012.  Taxpayers will only be able to claim once expenses reach $5,000.00 per annum.
•  Further exemptions from Flood and Cyclone Levy for affected Taxpayers.

  BUSINESS TAXATION

•  30% corporate tax rate stays.
•  Carry back losses.  If you make a loss in the 2012-13 year you will be able to ‘carry it back’ to 2011-12 and receive a refund of the tax paid.  This will also need to be managed in 2012-13 PAYG instalment variations.  For clients whom we do the bookkeeping and BAS for we will be closely monitoring PAYG instalments this coming year.  This initiative only applies to companies so the sole trader misses out!
•  Living away from home allowance changes.  Taxpayers will only be able to claim when they are actually maintaining two homes and then only for 12 months.  It doesn’t affect fly-in fly-out arrangements or short trip meal allowances up to 21 days. 
•  Changes to airline ticket fringe benefits.
•  Related Party Bad Debt write offs no longer affect tax deductibility/assessability.
•  Extra funding for Project Wickenby.
•  Extra funding for ATO debt collection.
•  The luxury car tax threshold is unchanged ($75,375.00 for fuel efficient cars and $57,466.00 for other cars).
•  CGT discounts for non residents gone.

   SUPERANNUATION

• If your taxable income is more than $300,000.00 then your contributions will now be taxed at 30%, not 15%.  This means greater incentive for higher income earners to negatively gear in Super via a Self Managed Superannuation Fund. 
•  Everyone is now limited to $25,000.00 tax deductible contributions.  This is going to put upward pressure on top end wage earners’ salaries.

  GST MEASURES

• More funds for ATO to implement compliance.

It is an entity, not unlike a [...]]]> There are a number of reasons why you would consider setting up a Self Managed Super Fund.  The main ones are control, availability to invest directly (particularly in property) and investing for tax savings.

What is a Self Managed Super Fund (Made Easy!)

It is an entity, not unlike a Unit Trust, which you control.  The fund is governed by a trust deed, which sets out the rules that must be followed.  Superannuation in Australia, since 1994 is ruled by the the provisions of the SIS Act 1993 and it is this Act with which the trust must comply. 

 An SMSF can have up to 4 members and each member must be a trustee of the fund.  You don’t have to have a company trustee, but there are many reasons why you would.

There are very stringent rules as to how to invest your super with the SMSF rules. 

It can be:

• Held in cash on deposit
• Used to purchase shares either directly or through managed funds
• Invested in derivatives and instalment warrants
• Investing in precious metals like gold, silver, etc
• Invested in property.  This can be done via property trusts or directly
• Used to buy arts and collectibles.  Whilst it is permissible they cannot be used or personally enjoyed.  We tend to recommend that our clients not get involved in these types of investments.

The fundamental of control is there because it’s your super and you are responsible.  You are the trustee and/or director of the trustee company and you are the signatory to the bank account.  There are rules and you have to stick to them otherwise there are very significant consequences – but it really doesn’t need to be all that hard to take control.

Superannuation gets tax relief.  The reason for this is to encourage the population to save for their retirement and take the pressure off the aged pension system.  Once you reach 60 years of age your SMSF can pay you a totally tax free pension.  If set up correctly then your SMSF can ensure that you don’t even pay capital gains tax.  SMSFs normally pay 15% tax on income and after discount 10% on capital gains.  Once you turn 55 your fund can start paying you a transition to retirement pension and in this case your fund doesn’t pay tax on the income it makes to pay you the pension.  It is taxable in your hands, but these tax rates are concessional and can effectively be very low depending on how you got the money into the fund in the first place. 

The golden egg really is getting your wealth into super by the time you are 60 so that the gains are tax free and so is the income if both these income sources are contributing to your pension.

The major thing that your SMSF can do which industry and retails funds can’t do for you is allow you to invest directly in property.  Accessing both the balance of your super now and those funds which are contributed in the future to help get you into the investment property market and pay the property off over the coming years.  Before you get too excited though this only relates to property for investment purposes – you can’t live in the property.  If it’s commercial you can rent it at market rates to a related party (even you).  But if it is  residential, it must be arms length – not even used for holidays.

Your SMSF can borrow to purchase a property, using the funds in your super as the deposit.  The fund can borrow from a bank or even borrow from you or a related party so long as it is all at market and commercial rates.  The law sounds complex but really it’s not that difficult with some decent advice.

If you are thinking about buying an investment property you can borrow funds outside super and lend it in or contribute it into super, then buy the property in super using both the property inside and outside as security.  There is no real difference in the fundamental investment, but properly executed you can create your wealth in a lower tax environment.

There are rules of course and one is that the property in super cannot be used as security for loans outside super that were not used to buy the ‘in super’ property. This needs to be managed on an on-going basis.

There are lots of strategies that work when you buy property in super:

• You can renovate to add value (but not with borrowed money – just get the cash structure correct up front)
• You can sell for a profit, leave the profit in super and only pay 10% CGT paying back any loans, even to you or a related party.
• You can sell the family farm (or business premises) into super and then rent it back.  Subject to limits, pay no CGT on the way in, and get a tax deduction for the rent at company rates (30%) and only pay 15% on the rent going into the fund. (Or 0% if the members are over 60).  This is a great way for Mum and Dad to pass the farm or commercial property on to the next generation and still have a tax free income for the rest of their life.

I find that each case is always slightly different and using SMSF you can effect a strategy that can give clients great benefits they can’t achieve elsewhere.  It’s  a case of applying the facts, thinking outside the box whilst at the same time making sure it complies with all the rules and regulations.

It doesn’t matter what age you are so long as you don’t need all the income from the investment to live on now, you can control your own wealth creation and utilize the tax benefits of super and an SMSF to get ahead.

Images courtesy of: Piggy Banks, Golden Egg, Shopping Basket, 

 Here we are talking [...]]]> Obviously if you have decided to sell your business and (for whatever reason) you are going to want to maximize its realizable value. Check out our article ‘How to Place a Value on Your Small Business.’

 Here we are talking about getting sale ready and achieving the best price you can. Timeframe to sale required will often dictate as to how far you can go.

Industry

You’re in the industry that you are in. The first thing to do it to take a step back and have a good look at the wider industry to see how you rate against your competition. Where are you placed? What is the direction of the industry and how is your business placed to meet the challenges? Are you in a dying industry? What’s happening in the external environment within which your business operates?  Look at ways you can position your business within the industry to best position you in the mind of a potential purchaser.

Can we make your Intangible Assets more Tangible?

If we can achieve this then the underlying risks in your business are lessened and its value increased justifiably. When we are talking intangibles we are talking goodwill, exclusive products or regions, customer loyalty, processes or products that can’t be replicated by your competitors. In order to make these assets more tangible:

• Make sure business name registrations are up to date
• Register trademarks and patents
• Put documented systems in place
• Contract with your key employees for longevity

 Utilize your Assets to Their Best Available Use

A tow truck owned and used in your business once a week and being held in the yard the rest of the time is not earning its keep. Options could be sell it and contract from someone else on a use basis or find new income streams to put its use to. Unutilized assets increase unnecessarily the capital required to be employed in the business and therefore reduce the effective return on investment that you are getting. You may be able to sell the asset separately and not affect the price you get for the business at all.

Can you Streamline Costs?

Look at your expenses to see if you are spending needlessly. Remember, don’t skimp on those costs that are drivers of income – be realistic. Start with the small things as they all add up. Over the years I have found that the level of expenditure on stationary in business is always a good indicator of the level of control management has over the entire process of business operation. If the small cost centres are out of control then generally the larger ones are too. Don’t control for controls sake though.

New Income Streams

Check out the opportunities to develop new income streams in the business. Remember you don’t necessarily have to develop them as often surprisingly people will pay for ‘blue sky’.

Get your Numbers Correct and Justifiable

The old story, you can’t have your cake and eat it too. If there is a cash component to your business and you are not declaring it, not only do you run the risk of the tax man catching up with you, how do you substantiate quantity to an arms length potential purchaser? The better order your books and records are in, the more comfortable a potential purchaser (or their accountant on due diligence) will be.

Check your Contracts

Make sure all your contractual obligations and assets are in place. Is your lease renewed and have time to run? Have you negotiated the next level of rises (or drops!) in rent? If you have designated customer zones, are these contractually protected?

Have a Clean Up

Remember first impressions last. If the workshop is a mess then there is a good chance people will think your services/product delivery also is lacking. Make sure not only the books and records are tidy, accurate and up to date, make sure the office is organized and efficient.

How Happy are your customers?

If necessary, partake in some formal customer loyalty research with your customer base. If it is not appropriate to do this expenditure, look at:

• Customer turnover rates
• Spread of customers. It is good to be getting smaller customers from larger numbers than the majority from just a few.
• How often does the same customer transact?

Look at the potential of getting some customer testimonials.

Are YOU the Business?

All too often small business success is directly linked to the owner. This happens because it is generally the working owner who has the motivation to go the extra mile. This is only natural. Start setting up systems to bring other key players into contact with customers but at the same time don’t just reposition the you with someone else. Be aware that in a lot of instances, if employees were always as good as you would like them to be then they would be working for themselves. Take the focus off of you and focus it on systems and ‘teams’ is the way to go.

The Bottom Line!

The bottom line is if you want to maximize the value of your business for a pending sale then:

• Get your house in order and tidy
• Create opportunity for growth
• Minimize the risks where ever possible

 Images courtesy of:  Sell, Income Stream, Happy Customers