ATO provides further guidance on SMSF related party arrangements

The ATO has provided further guidance regarding limited recourse borrowing arrangements (LRBAs) and when non-arm’s length income (NALI) rules apply to a related party LRBA.

The Tax Office recently released a Taxation Determination (TD 2016/16) and updated their Practical Compliance Guideline (PCG 2016/5/) to provide further clarification concerning the circumstances where a self-managed super fund with a related party LRBA would attract a higher marginal tax rate of 47 per cent under NALI provisions.

The ATO will continue to use the “safe harbour” terms for LRBAs set out in PCG 2016/15. The “safe habour” terms are designed as a safety net for SMSF trustees to ensure their LRBAs meet the guidelines.

Limited recourse borrowing arrangements (LRBAs) must be sustainable on normal commercial rates and structured in accordance with the ATO’s “safe harbour” guidelines to ensure the NALI provisions (47 per cent tax) do not apply.

Furthermore, the Tax Office will assess whether an arrangement was on arm’s length terms by assessing if the SMSF has derived more ordinary or statutory income under the scheme then it might be expected to derive if the parties had been dealing with each other on an arm’s length basis.

The ATO will assess what the terms of the borrowing arrangement may have been if the parties were dealing with each other at arm’s length (hypothetical borrowing arrangement). It is then necessary to establish whether it is reasonable to conclude that the SMSF could have and would have entered into the hypothetical borrowing arrangement.

If the SMSF could not have or would not have entered into the hypothetical borrowing arrangement, the SMSF will have derived more ordinary or statutory income under the scheme than under the hypothetical borrowing arrangement. In this instance, the ordinary or statutory income derived is NALI.

SMSF trustees have until 31 January 2017 to ensure they meet the “safe harbour” terms set out in the Practical Compliance Guideline (PCG 2016/15).

Tips for creating a healthy business culture

Building a healthy business culture is key to creating a thriving business – it can improve employee retention, productivity and a business’ overall reputation. However, many workplaces are stuck in old routines and fail to invest in their staff.

Poor workplace culture can create a multitude of problems, such as high turnover, absenteeism, poor health and workplace stress. Fortunately, business culture can be reinvigorated; here are three tips to help create and maintain a healthy business culture:

• Hire the right people

Employees form a significant part of a business’ culture, so it pays to recruit the right people. When hiring new staff make sure they share the same values as your business and will fit into your existing culture. A bad hire can damage employee morale and potentially affect relationships with dozens of customers, which can be detrimental to your business’ culture.

• Define your vision

A clearly-defined vision for your business will help set your business apart in the job market and attract high quality employees. Make sure existing employees are on board with your business’ values, mission and overall vision. Familiarise new employees with your brand’s vision and values as early as possible to make sure they understand your expectations and are committed to the mission.

• Value employee opinions

Encouraging team contributions helps to create a positive working environment that is open to new ideas and provides employee freedom. Many businesses thrive on teamwork where individuals communicate regularly, encourage one another and pitch in where needed.

Tap into the spending season

The holiday season provides the perfect opportunity to connect with customers and leverage off the seasonal shopping period.

For many businesses, the upcoming Christmas season presents a peak in sales and revenue. Businesses that fail to maximise the holiday shopping season can miss out on a huge revenue opportunity and risk losing customers to competition.

It pays to adjust your marketing based on seasonal sales opportunities. A marketing campaign that capitalises on the upcoming season provides businesses with the opportunity to position themselves as an adaptive and quick-to-react business.

When crafting your holiday marketing campaign, it is not a good idea to leave planning and execution to the last minute. Here are five ways to boost sales and awareness this holiday season:

• Pick the right opportunities

Ensure your marketing campaign meets the needs of your target market. Understanding your target market and their purchasing behaviour will help to hone into the festivities that may appeal to them and allows you to design your marketing campaign based around their wants and needs.

• Advertise ahead of the holidays

Consider offering special discounts, increasing your availability for appointments (if you are a service based business), and introducing early bird offers to attract customers who like to shop ahead. Promoting your holiday sale early helps to prime customers to choose your business as a default shopping destination before your competitors get a chance.

• Integrate with social media

Successful holiday campaigns integrate social media to increase reach and engagement. A strong social media strategy will help brands increase their social subscribers while encouraging customers to purchase. Consider enticing customers to subscribe with special offers such as free shipping or percentage discounts.

• Reuse, recycle

As marketing efforts can be relatively expensive, consider reusing past marketing campaigns that were successful. Past campaigns may be recycled if they are still relevant or only need a few minor amendments. When developing a seasonal marketing campaign avoid time-specific references so the content can be used again.

• Include a call-to-action

Seasonal campaigns will often have a deadline due to the nature of the campaign and therefore require a call-to-action. Encourage customers to contact your business via email, telephone or social media in your campaign and include deadlines for any special offers to create a sense of urgency. If uptake on promotions is not as expected you may extend offers for additional time.

Government passes ‘fairer’ super changes

The Australian Government has recently passed what it is calling the ‘most significant superannuation reforms in a decade’.

The reforms include the introduction of a $1.6 million transfer balance cap, which places a limit on the amount an individual can transfer into the tax-free earnings retirement phase and the introduction of the Low Income Superannuation Tax Offset, which is expected to boost the retirement incomes of around 3.1 million low income earners.

Under the confirmed changes, which will come into effect on 1 July 2017, the cap on concessional (before-tax) contributions will be decreased from $30,000 (for those under the age of 50) or $35,000 (for those aged 50 years old and over) to the flat rate of $25,000 per year.

From 1 July 2018, individuals with less than $500,000 in their superannuation accounts will also be allowed to make ‘catch-up’ concessional contributions. This is designed to help those with broken work patterns – many of whom are women – better save for their retirement. Previously, this option did not exist for those who had left the workforce.

The tax rate of 15 per cent for those who earn up to $300,000 and 30 per cent for those who earn income above that amount has also been changed. The new income threshold at which the higher tax rate will start will be $250,000.

The overall changes to concessional contributions are designed to level the playing field and provide more Australians with the opportunity to make full use of their concessional contributions cap.

The new annual cap for non-concessional (after-tax) contributions will be reduced from $180,000 to $100,000, and a new lifetime cap of $1.6 million will be introduced. Individuals under the age of 65 will be able to bring-forward three years of contributions.

The tax offset for spouse contributions will be allowed where the spouse’s annual income is less than $40,000. Previously, this offset was only allowed where the recipient’s income was less than $10,800.

After 1 July 2017, the tax-free transfer limit for a fund in pension phase will change to $1.6 million. Earnings will also be tax-free for those with balances of up to $1.6 million and balances above the $1.6 million mark will be taxed at 15 per cent.

The removal of the ‘10 per cent rule’ will also help ensure a level playing field for access to superannuation tax concessions irrespective of a person’s employment situation. According to the Government, this will be of particular help to contractors who also draw income from salary and wages.

Managing employee absenteeism

Employers must be mindful of the legal consequences that may occur if they terminate an employee on the basis of excessive absenteeism.

Under the Fair Work Act 2009 (Cth) an employee whose employment has been terminated on the grounds of excessive use of sick leave may bring a claim alleging unfair dismissal, discrimination or adverse action.

An employer is in breach of the Fair Work Act if an employee is terminated on account of the employee being temporarily absent from work due to a prescribed kind of illness or injury.

However, it is not a prescribed kind of illness or injury if the illness or injury extends for more than three months or the total absences of the employee within a 12-month period have been more than three months and the employee is not on personal/carer’s leave for the duration of the absence.

Employers can minimise their risk of legal action by adopting a policy for dealing with absenteeism. A well-defined policy will explain the processes for taking sick leave and what will happen in cases of excessive sick leave. The policy should clearly state where medical evidence, such as a medical certificate, is needed and the consequences for misuse of sick days.

If you find certain employees are taking frequent sick days, it may be a good idea to have a chat to them about what is going on and if necessary, offer flexible working arrangements. Be sure to address employees who have established a pattern of taking particular days off, such as Mondays or Fridays, to let them know you have noticed their behaviour and it is putting pressure on your business.

Even if you do have the grounds to terminate an employee for excessive sick leave, it is a good idea to obtain professional advice before taking any steps to terminate an employee as many legal ramifications may still arise.

Three ways to keep audiences on your website

Most businesses spend time blogging to reach the ultimate goal of attracting more people to their website or blog. However, it is one thing to get people to visit your business’s website; it is quite another to keep them there.

In the perfect world, potential and current customers would spend lots of time on a business’s website. But in the real world, internet users only spend seconds – minutes if the business is lucky – on a website.

But there are ways to get users to stay on your website for longer periods of time. Here are three tips to keep in mind next time you log in to blog on your website:

Developing a code of conduct

A well-written code of conduct is essential for every business – it can provide guidance to staff as well as stating your business’ values and ethical principles.

A code of conduct provides staff with clear guidelines for expected behaviour in a variety of situations, for example, attending work-related social events or taking business trips. A workplace code of conduct can cover any areas of behaviour and generally includes a standard of conduct and practice, values, ethical principles, accountability and disciplinary actions for violation of the code.

Here are some tips for writing a code of conduct:

Involve all staff and management
Consult staff members and management from all departments for their input on ethical guidelines and performance. A good way to get employees involved is to hold a meeting to discuss your ideas and encourage feedback.

Be specific
Provide specific scenarios of acceptable and unacceptable behaviour to clarify your points and make the code easier to understand. Ensure your examples are relevant to the situations your employees are likely to encounter.

Deal with breaches promptly
Enforcing the code demonstrates your business’ commitment to implementing the code. Any breaches to the code should be dealt with promptly and must be consistent across the board. Set a good example by ensuring you and senior staff members follow the code – this ensures credibility of the code as a formal policy.

Succession planning for SMSFs

A mandatory component of managing a self-managed super fund (SMSF) is planning out what will happen to the fund if its trustee was to pass away.

While succession planning may not be one of the first responsibilities that comes to mind when managing an SMSF, it is a necessity that can provide certainty and peace of mind for a deceased trustee’s family.

It is also especially important in cases where one trustee, for example, a husband, takes a more active role in the management of an SMSF than his wife and fellow trustee, and wants to reduce any potential burdens involved in the fund’s administration and compliance if he was to pass away.

Succession planning can become quite complex if little or no attention is paid to it on an ongoing basis, but there are ways trustees can ensure the best outcome for both the fund and their family.

One option for a sole member fund is to appoint another trustee. Please note that the non-member trustee cannot be the employer of the member unless they are related. This would not be an option for a fund with two members as the available exemptions only apply to single member funds.

Those who appoint a family member or close friend must consider first whether they are suitable for a role; running an SMSF requires expertise and knowledge, and appointing someone with limited experience may not be in the best interest of the fund’s future.

Some SMSF trustees may also choose to appoint an enduring power of attorney. An enduring power of attorney is someone who makes decisions on the trustee’s behalf, if they become incapacitated or pass away. Common power of attorneys include accountants, financial advisors and lawyers; basically those who understand SMSF management and the associated challenges.

Another option is to have a binding death benefit nomination (BDBN) in place. Since a person’s superannuation does not make up part of their estate and is therefore not automatically covered by their Will, a BDBN is often a good solution to help with the distribution of super member benefits.

There are alternative strategies that may be more appropriate than an SMSF, depending on your individual financial situation. As usual any investment decision is best made with the input of an appropriate financial advisor.

ATO crackdown on trusts

The ATO is currently targeting contrived trust arrangements that minimise tax by creating artificial differences between the taxable net income and distributable income of closely held trusts.

Arrangements where trustees are engineering a reduction in trust income to improperly gain favourable tax breaks or pay no tax at all are being targeted by the Tax Office.

Trustees of these arrangements exploit the differences to have the net income assessed to individuals and businesses that pay little or no tax and allow others to enjoy the economic benefits of the net income free-of-tax.

The ATO identified these arrangements through ongoing monitoring and reviews by the Trusts Taskforce. The Trusts Taskforce was established in 2013 to undertake targeted compliance action against people involved in tax avoidance or evasion using trusts.

More than $40 million of lost revenue has been found in ten of the cases examined by the ATO, which go far beyond legitimate tax planning.

The Tax Office is looking closely to see if arrangements comply with trust law, constitute a sham or are captured by anti-avoidance provisions or integrity rules.

Any taxpayer who has entered, or are planning to enter, into a similar arrangement are encouraged to seek independent advice, review their arrangement, or discuss their situation with the ATO.

Unfair contract terms now underway

Small business owners are now protected from unfair terms in standard form contracts by a new law introduced 12 November 2016.

A standard form contract is one that has been prepared by one party to the contract and where the other party has little or no opportunity to negotiate the terms. Small businesses enter into and renew standard form contracts regularly, especially between large suppliers such as lenders, insurance companies and telecommunications.

The new law will apply to a standard form contract entered into or renewed on or after 12 November 2016, where:

• it is for the supply of goods and services or the sale or grant of an interest in land

• at least one of the parties is a small business (employs less than 20 people)

• the upfront price payable under the contract is no more than $300,000 or $1 million if the contract is for more than 12 months

Under the new law, a contract’s terms may be considered unfair if:

• terms enable one party (but not another) to avoid or limit their obligations

• terms enable one party (but not another) to terminate the contract

• terms penalise one party (but not another) for breaching or terminating the contract

• terms enable one party (but not another) to vary the terms of the contract.

From 12 November 2016, small businesses will have a higher level of protection so business owners should carefully review all terms of any contracts they enter into. If you believe the terms of a standard form contract are unfair, ask the other party to remove the term or amend it so it is no longer unfair. For those businesses drafting a standard form contract, be sure to carefully review your terms and, if in doubt, seek professional advice.