Being in small business is tough. Sometimes it feels like every force is opposing you. High rents, on-line competition, staffing issues, government or council policy, foot traffic, economic conditions and the list goes on.

Some of these factors are within your control and some aren’t, and understanding this is critical to your success. You can’t fix what you can’t control.

On many occasions I have seen business owners put more energy into complaining about conditions than trying to do something about them.

One of the best things you can do for your business is stop ‘doing’ and start planning – you know the old adage “work on your business rather than in it”. Allowing yourself regular planning time away from your business gives you an opportunity to think openly and logically about where your business is now, where you want it to go, and how to get there. For me this means a regular trip to my local coffee shop with nothing other than a notebook and an open mind.

The first thing I do is to categorise my challenges into those that I can control, and those that I can’t. And I know that you can influence almost anything if you’re determined enough, but you need to put your energy into the easiest wins. I could spend a load of time lobbying to reduce council rates and I might eventually be successful, but I would have been far better spending that time developing a new product or service that has potential to bring recurring revenue, or reviewing current processes to find an efficiency.

The sort of things you can control or influence include sales, marketing, culture, team satisfaction, efficiency, costs, on-line presence, risk management, products and customer service.

But you are unlikely to have much influence over foot traffic, economic conditions, government policies or the rate of technological change. So accept these for what they are, and find ways to be successful within those parameters.

I’m a big fan of simple but focused business plans. Importantly, the business planning process forces you to spend time thinking strategically about your business. The completed plan gives you focus and direction. Sharing your ideas with others gives you motivation and accountability.

But if you’re looking for guidance on how to write a business plan, don’t google ‘business plan template’. You’ll end up with a 100 page document that addresses a heap of issues not necessarily relevant to your business. A business plan should address what’s important to you, and it may well fit on two or three pages. Maybe it will have three headings, “Where am I Now?”, “Where do I Want to be?”, and “How Do I Get There?” At FAJ we like to call this a Business Roadmap.

My key messages are to make some time to plan, focus only on what you can control and don’t over-complicate the solution. If you can identify three or four significant actions and stay focused on implementing these, you will make a positive difference to the success of your business.

Preparing a Business Roadmap is one of FAJ’s new Planning and Growth services. Click here for more information.

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Cash is king

Email:mark@faj.com.au

 

Being an Uber driver is a relatively new and unique way of earning money and can be an option for many people with a driver’s license and a good car. Unfortunately a lot of Uber drivers do not realise the income tax and GST implications.    

The Australian Taxation Office (ATO) has stated that all Uber drivers must be registered for GST. Unlike other industries, it does not matter how much income you earn through Uber driving; from your first dollar earned you must register. Once registered for GST, you will need to start lodging quarterly Business Activity Statements and pay GST of 1/11th of your gross fares, less expenses to the ATO.

As well as remitting GST on earnings, you will also have to declare your net Uber income in your annual tax return. Uber earnings work like any other business income or contract work done under an ABN in that tax is applied at your marginal tax rate. It is important to plan for the tax payable on this income and to look at saving a percentage of earnings to cover the inevitable year-end tax bill.

There is a large range of expenses you can claim as an Uber driver to reduce your GST liability and income tax payable.

Expenses which relate to your motor vehicle include:

• Fuel
• Registration
• Insurance
• Repairs
• Tyres
• Maintenance Costs
• Cleaning
• Depreciation based on the original cost of your car
• Interest if the vehicle is financed

To claim these costs you must keep a logbook for three months recording all travel. After this period you can use the log book to calculate your work-use percentage and claim a proportion of car expenses based on this percentage. For full time Uber drivers the business use percentage will be high which entitles them to claim a large proportion of these costs.

Other expenses that could be claimable include mints and water for passengers, mobile phone costs and stationery.

In order to claim the above expenses you will need to keep appropriate records as evidence. A good start is to open a new bank account and only use it for Uber income and expenses. All relevant information for completing an annual tax return and quarterly BAS obligations will all be in one location. Don’t forget you must also keep all receipts.

If you are planning on doing some Uber driving to earn some additional income or you are already an Uber driver and have not considered your GST and income tax obligations it is highly recommended to see an accountant or tax agent. A tax agent can register you for GST, help prepare quarterly business activity statements, plan how much to save for your upcoming tax bill and lodge your tax return.

The ATO has recently stated that they are targeting Uber drivers for undeclared income and GST. They have access to third party data from Uber for matching against the income you declare. So if you are an Uber driver and haven’t got your tax affairs in order you should do so as soon as possible.

Other related blogs:

Do I need to register for GST?
The sharing economy and taxation

Author: Rhys Frewin
Email: rhys@faj.com.au

 

Following the 2018 – 2019 Federal Budget, the government has now deferred the start date of the proposed changes to Division 7A until 1 July 2020.  These amendments were originally to apply from 1 July 2019, which gives us another year grace period.

Division 7A is one of the most complicated areas of tax law and these new measures could result in increased tax burdens that may be difficult to fund.

Division 7A (Div 7A)– what is it?

In broad terms, Div 7A applies when shareholders borrow or take money from a company with little or no interest and repayments.  Under the law, the borrowed money is treated as a dividend and therefore is taxable unless a formal written loan agreement for interest and repayment is in place, and it’s conditions are met.  Previously the term of these loans could have a maximum of 7 years (unsecured loans) or 25 years (secured loans).  Interest rates for these loans had to meet a benchmark interest rate (currently 5.2% for 2019).

Proposed rules for new loans

• There is a maximum 10 year repayment period, from 30 June of the year the loan was made
• Formal written loan agreements are no longer required
• The principal mus be paid equally over the life of the loan (yearly repayments still include principal and interest though)
• Interest is calculated on the remaining balance at 30 June, regardless of when repayments are made
• Interest for year 1 has to be paid on the full amount of the loan for the full financial year, even if it is paid back in full before lodgement of the company tax return (previously no interest was paid if the loan was paid in full before tax return lodgement).
• Interest is payable at the overdraft rate (currently 8.3% for 2019).

Other adjustments (existing loans)

• 25 year loans will be exempt from the new rules until 30 June 2021 (except for the change in interest rate), when they will be converted to the above 10 year loans
• 7 year loans will have to comply with the above new rules from 1 July 2020 (although the original term of the loan will remain)
• All pre 4 December 1997 loans that were previously exempt from Div 7A will now have to comply with the new rules from 1 July 2021
• The requirement to have a distributable surplus (e.g. retained earnings) is removed. Previously the deemed dividend rules were avoided where a company had no distributable surplus
• The amendment period for a Div 7A application is extended to 14 years after the year the loan was made

Undrawn Present Entitlements 

An undrawn present entitlement (UPE) occurs when a trust distributes profits to a company but the actual cash owed to the company from that distribution is not paid.

From 30 June 2009, companies had the choice of putting UPEs under a subtrust (a special loan where only interest is paid for 7 or 10 years, after which the loan must be repaid in full), or a Div 7A loan agreement if the loan remained unpaid at tax lodgement date.  From 1 July 2020, UPEs will have the same requirements as all other loans under the proposed changes to Division 7A.

Existing UPEs under subtrust agreements will also be required to be placed under the same 10 year loan agreement from 30 June 2020.  At the moment it is unclear whether the existing term will remain, or be reset to 10 years from 30 June 2020.

At this stage, UPEs prior to 16 December 2009 are not required to comply with the new rules but may be subject to transitional rules in the future.

Other related blogs:

What is Division 7A?

Author: Stacey Walker
Email: stacey@faj.com.au

 

 

Discretionary trusts are a type of structure commonly used as an effective way to share business or investment profits among family members, to minimise tax liabilities and to protect a family’s assets.

A discretionary trust can be further classified as a “family trust” for tax purposes. This occurs when the trust makes a Family Trust Election on it’s tax return. So why use a family trust?

There are three main circumstances where a trust could benefit by making a family trust election:

1. The trust receives franked dividends

The election bypasses restrictions in distributing franking credits, which can usually only be passed to beneficiaries if the individual receives less than $5,000 in franking credits.

2. The trust has losses

Ordinarily trusts are subject to complex measures before being allowed to deduct prior year losses from current year taxable income. However where an election has been made, the trust only needs to pass one test – known as the income injection test rather than face the four regular complex tests to recoup the loss.

3. The trust owns shares in a company that has losses.

The election allows for a more concessional treatment of the company loss recoupment rules, and may permit the offset of company losses in circumstances where a non-family trust would not.

The election must specify one person – the test individual, who forms the point of reference for defining the family group. The family group sets the maximum range of beneficiaries to whom the trustee can distribute income or capital of the trust to.

The family group includes:

• The test individual and their spouse
• Any parent, grandparent, brother or sister of the test individual or of their spouse
• Any nephew, niece, or child of the test individual or of their spouse and any lineal descendant of these individuals
• The spouse of anyone mentioned above

To make a valid election the trust must pass the Family Control Test, which ensures that only a trust controlled by that family can make a valid election.

Control mainly looks at who can control the application of income or capital of the trust. To pass the test the trust needs to be controlled by a group consisting of the test individual, their family, or their legal/financial advisors.

An Interposed Entity Election is used to make an entity, such as another family trust, a member of the family group. This election must specify the same test individual as in the family trust election.

Pro tips:

• Distributing income among beneficiaries who are on lower marginal tax rates can reduce the effective tax rate on a trust.
• As a consequence of making the family trust election you are restricting the people to which income can be distributed, and distributions to anyone outside the family group trigger tax at the highest rate (currently 47%).
• It is important to understand when the election may be required, as the absence of the above scenarios may mean there is no benefit in doing so.

Other related blogs:

Making a family trust election

Author: Danielle Pomersbach
Email: danielle@faj.com.au

 

 

In the lead up to the recent federal election the hot button topic of negative gearing was a key election point. So what is it, and what are the pros and cons of negative gearing?

Negative gearing, while commonly used in the context of real estate assets, can apply to any income producing asset including listed shares. It is essentially where the tax deductible expenditure related to the asset (including interest payments) exceeds the income the asset generates (i.e. you are spending more than you are receiving) and the amount of loss incurred is allowed to reduce your taxable income from other forms of income like wages.  This lowers overall tax payable and often results in a year end tax refund. A tax incentive to buy property should in theory stimulate economic growth and keep the housing market active.

A lot of investors who buy assets do so with the intention of making a profit on the long term growth of the asset, so while they may have negatively geared the asset during the period they held it, the intention is for the capital growth of the asset upon sale to exceed the losses they incurred while holding the property after factoring in selling costs and potential capital gains tax liabilities.

The Pros?
Every dollar of negative gearing loss can potentially get back your marginal tax rate as a tax credit (up to 47c for every dollar spent depending on your earnings)

Borrowing against an asset may allow you to purchase in higher growth that may have been out of reach with lesser borrowings.

The Cons?
The tax break you receive will for the most part never be greater than the loss, which can make cash flow an issue when it comes time to pay mortgage repayments and ongoing property expenses.

First home buyers and owner occupiers find it more difficult to secure property when the market is shared heavily with investors looking to secure a property for their portfolio.

The purpose of an investment is to make money – if you negatively gear it and then sell the property for the same or less than what you purchased it for you would be worse off financially than before you purchased the property.

Pro-tip

Already negative gearing? Don’t wait until you lodge your tax return to get the tax benefit of negative gearing. The ATO allows you to vary the amount of tax your employer withholds so you can effectively get your negative gearing benefit throughout the year.

Other related blogs:

Changes to depreciation for rental properties
Changes to rental property deductions
Less known rental property deductions

Author: Nick Vincent
Email: nick@faj.com.au