Common mistakes at year-end

Businesses should be aware of their responsibilities at the year-end.

Businesses that are unorganised, or make mistakes in their tax return, can lose out on significant tax savings, as well as find themselves liable for penalties.

Below is some common mistakes that small businesses often make at year-end:

Paying superannuation

A job that is often forgotten by employers is superannuation contributions.  Super is payable 28 days after the end of the quarter. However, it is important to remember, that to claim a deduction for the super contribution the employer must have made the contribution before June 30.

Not paying super by the due date will also lead to a penalty imposed by the ATO.

Lodging group certificates

A common mistake made by business owners is issuing group certificates late and incorrectly reporting the figures.

Employers are required to issue their payment summaries to their employees by July 14 and to the ATO by August 14.

ATO benchmarking

Small business benchmarks are financial ratios that have been developed by the ATO to help compare the performance of similar businesses in an industry. Benchmarks allow the ATO to identify businesses that may be avoiding their tax obligations.

Businesses should take a look at their financials and review their management accounts before June 30. They should be focusing on any unusual large amounts that have been reported as this could be an indicator of an accounting error, or a more serious problem.

Check up on savings

Older individuals often forget to perform checks on their retirement savings.

It is essential that individuals check that their retirement savings are on track to finance their planned standard of living in retirement. Otherwise, they could be left short when they are ready to retire.

A common time to perform these checks is in the final decade before the date of intended retirement; however, it is a good idea to perform them throughout a person’s working life.

Performing these checks can also allow an individual to focus on maximising their super in the countdown to their retirement.

Policymakers are also interested in retirement savings checks as it allows them to gain an understanding of whether Australia’s retirement savings will be adequate, or if there will be strong demand for the age pension.

Guide to successful business borrowing

It is important for businesses to maintain a good relationship with their bank in order to safeguard their future access to funds.

1. Prepare a strong business plan.

This is one of the first steps to ensure that the bank will identify it as a low risk business and therefore someone they are willing to give funds to. A solid business plan highlights the viability of the business, information about the experience and success of the owners and managers, expenses which the loan will cover,as well as detailed sales expectations.

2. Establishing a personal relationship.

Over time, an owner establishes key contacts within their bank that are familiar with their business and financial needs. Keeping these contacts informed of any changes to the business or cash flow projections before it comes as a surprise will build trust between the bank and the business.

3. Knowing your business inside out.

By keeping themselves updated of their own financial status, by obtaining credit reports and public records, business owners will know what research the banks will obtain when deciding on the amount, if any, to loan to the business.

4. Learn the banking language.

Understanding banking terms such as credit ratings, cost of capital and other financial drivers will place business owners in a strong position when negotiating the terms of their loans.

5. Keep the adviser informed.

Financial advisers are there to advise and will have an intimate knowledge of bank processes. Keeping them posted of any plans or changes will allow them to better advise the business on the best course of action, and ensure that the business will continue to prosper.

Getting customers to settle debts

Good credit management is an important business strategy to maintain cash flow and stable finances. A cornerstone of managing credit is not only making sure an invoice gets paid, but gets paid on time.

Before a debt recovery process commences, which may delay payment further and damage a relationship with a customer, it is worthwhile for businesses to put a few processes in place to avoid customer debt in the first place.

1. Prepare customers. Making sure the customers understand their payment terms from the start is the first step in training them to keep track of outstanding invoices and payment due dates.

2. Keep detailed records. Businesses should keep all customer records such as payment term agreements, customer limits and outstanding sales.

3. Follow up regularly. Starting following up procedures once a payment becomes overdue will help speed up the process. It is also very important to know exactly who to speak to about payment matters.

4. Implement payment-in-full. Most businesses adopt this policy in regards to payment procedures. This way the customer has a full amount to pay by a concrete due date. Sometimes ‘making it easier’ for the customer by staggering payments and due dates can confuse and delay payments even further.

5. Upfront payments. For labour and time intensive work, some businesses ask for a part payment or deposit up front. This works as a way of showing that the customer is financially committed to the project and also allows a business to better manage cash flow.

Division 7a in detail

Business owners sometimes borrow money from their own company for a variety of personal and financial reasons. However, there can be an issue with tax law compliance if the proper steps are not carried out in treating the transaction correctly.

Division 7a is an integrity measure of tax legislation that comes into effect when there is a loan by a company to the business’ owners and associates, i.e. the shareholders of the company. Associates are broadly defined and can include family members and other related entities.

Specifically, this tax law covers any monetary benefits including:

-payments made to a shareholder (or associate) by a private company, including transfers or uses of property for less than market value

-loans made without specific loan agreements

-debt forgiveness

These transactions may come under the Division 7a provisions and as such are treated as assessable unfranked dividends to the shareholder or associate, and are taxed accordingly.

An assessable unfranked dividend means that there are no franking credits available to the recipient, so the franking tax offset will not apply and the recipient will have to pay tax on the dividends at the usual marginal rate.

However, there a few instances in which Division 7a will not apply:

-if the payment is made to a shareholder or associate who is also an employee of the company, than the dividend may be treated as a fringe benefit instead.

-to payments of genuine debts

-if the loan is entered into formally with a written agreement outlining minimum interest rates and maximum term criteria. However, minimum yearly re- payments of the loan are required in order to avoid the amount’s being treated as dividends arising in later years.

-payments or loans excluded by virtue of other tax provisions

Tax certainty after death for super funds

Recent government amendments have provided tax certainty for superannuation funds upon the death of members in receipt of a superannuation income stream.

This amendment effectively allows a superannuation fund trustee to dispose of pension assets on a tax-free basis to fund the payment of death benefits.

Also, the meaning of ‘superannuation income stream benefit’ now allows the superannuation fund to continue to be entitled to the earnings tax exemption in the period of the member’s death until their benefits have been paid out by:

-paying them out as a lump sum

-and/or commencing a new income stream

This is subject to the benefits being cashed as soon as possible following the member’s death.

This amendment also allows the tax-free proportion of that superannuation income stream to be used in calculating the tax components of those benefits.

Power of attorney and guardianship

As people get older they need to make arrangements on how to handle their estate, and their personal interests in the event of sickness or death.

These include:

Enduring guardianship

A guardian is essentially a legally appointed substitute decision-maker. A guardian is granted powers only as is necessary to accomplish what an individual cannot do independently.

Individuals can choose to create a legal document called an ‘enduring power of guardianship’ that authorises a person to make personal, lifestyle or treatment decisions on behalf of themselves.  A guardian can also be appointed by the courts. Unlike the power of attorney, each state has a guardianship board or tribunal which supervises the guardian.

The most common functions of a guardian are making decisions on accommodation, health care and medical and dental treatment.

Enduring power of attorney (financial)

A financial ‘enduring power of attorney’ is a legal document that remains valid if the nominator becomes mentally incompetent.  The agent who is appointed can make any legal or financial decisions on the nominator’s behalf.

The appointed attorney is able to make a decision on property or financial affairs, for example, operate bank accounts, pay bills and purchase and sell property.

Enduring power of attorney (medical treatment)

An enduring power of attorney for medical treatment authorises the agent to make decisions about an individual’s medical care and treatment. This power takes effect if, and when, the nominator becomes incapacitated, whether temporarily or permanently.

ACCC targeting franchises

Late 2013 the Australian Competition and Consumer Commission (ACCC) announced that it would begin targeting franchises in the Health and Fitness and Takeaway Food industries.

A new round of audits will be performed on these businesses to ensure that the franchisors are complying with the Franchising Code of Conduct.

It is important that all franchisors of all industries- not just Health and Fitness and Takeaway Food, review their compliance with the Franchising Code of Conduct.

The ACCC has the power to audit any documents required to be generated under the Franchising Code, such as disclosure statements, marketing statements and franchise agreements. When an audit begins franchisors will be required to produce these documents immediately.

The audit is currently focused on the Health and Fitness and Takeaway Food industries as these industries received the highest number of franchise-related complaints in 2012-13.

However, the ACCC has stated that the audits are not just restricted to these two sectors and that no franchisor is safe from a surprise audit.

How to hire the right employee

Hiring a new employee to join the business is an important task that shouldn’t be taken lightly. Employers should scout out talent in the same way that a good sales person hunts for new clients.

Here are a few ideas to help employers land the right employee:

Screen for organisational fit

Successful companies believe that having a candidate fit into the organisational culture is more important than the candidate’s skills. This is because employers can teach job skills; however, they cannot teach character.

Screen for the right job skills

It is also important to screen candidates to determine if they have the necessary job skills. Companies should avoid screening candidates on outdated or generic job descriptions as candidates will be prepared for the standard interview questions, such as their strengths and weaknesses.

The best predictor of success is a candidate’s past behaviour and results, not their interview expertise. Ask about the candidate’s successes at past jobs and what they achieved after six months, one year and three years.

Verify credentials

A key step in hiring a new employee is to verify their credentials and ensure that they have achieved what they are claiming.

It is important to spend the time and money performing background checks and assessments as it will only cost more in the long term if the candidate is not the right fit.

Trustee obligations of a disqualified person

There are ramifications when a trustee in a self managed super fund (SMSF) becomes a disqualified person.

An individual can become a disqualified person if any of the following conditions apply. If they:

-have been convicted of an offence involving dishonesty

-have been subject to a civil penalty order under the super laws

-are insolvent under administration

-have been disqualified by a court or regulator

A company is a disqualified person if any of the following conditions apply:

-a responsible officer of the company (such as a director, secretary, or executive officer) is a disqualified person

-a receiver, official manager, or provisional liquidator has been appointed to the company

-action has been taken to wind up the company

Under superannuation laws, if an individual becomes a disqualified person they must notify the ATO immediately of their disqualification- unless they were disqualified by the ATO- and cease being, or acting as, a trustee.

It is an offence for a disqualified person, who is aware of their status of being disqualified, to continue to be, and act, as a trustee of the SMSF.  Penalties for this can include fines and in some cases, imprisonment.

To determine whether a disqualified person can again become an individual trustee of a SMSF depends on how they were made disqualified:

Convicted of an offence involving dishonesty

An individual may apply for a declaration waiving their disqualified status within 14 days of the date of their conviction, and only if the penalty or prison term is less than stated in the legislation

Insolvent under administration

Once the individual is no longer insolvent under administration they are no longer a disqualified person

Disqualified by a court or regulator

Legislation sets out the circumstances in which an individual can request their disqualification to be revoked.