Tips to Avert Cash Flow Problems that Could Hurt your Business

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There is no doubt that cash flow is very important. However, how much power does it actually have? Well, cash flow problems kill businesses. According to studies, nine out of 10 small businesses fail because of their failure to manage cash flow properly.

Cash flow management is not complicated. Basically, it means making sure money goes into your business as fast as possible and goes out as gradually as possible. Also, it means keeping the future in mind and implementing actions to ease any possible problems that may arise along the way.

Of course, everything is not easy, that’s why there is a high rate of business failures due to cash flow issues. If you don’t want to become another statistic, here are 7 ways to avoid cash flow surprises:

1. Profitability Does Not Translate to Cash

Money-making businesses are just as likely to fail due to cash flow problems as businesses that are not making money. You can quickly compromise your business if your costs are excessive or you are spending the profits of your business.

2. Forecast, Forecast, Forecast

Gather as much foreknowledge as you can relating to when cash is expected to go in and go out the business. For this, you need cash flow forecasting. The benefits of having a cash flow forecast is to assist you in making sense of your future cash circumstances and help you identify any surprises and do something to avoid them.

3. It only becomes revenue when it is already in the bank

You may have a balanced monthly budget and a great P&L statement, but if you don’t get paid by your clients in time for you to pay your monthly bills, then you may have issues with cash flow, though short term.

4. Learning about Seasonality

Cash flow is heavily influenced by business seasonality. If you operate a seasonal business, a lot of your inventory purchases, employee expenses and other outgoings are incurred before you make a sale. Make plans beforehand and study trends carefully so you will know when business is up and when it is down. This will help you manage your stock and employment expenses better.

5. Be Prepared for Surprises

Your bottom line can be affected by unplanned expenses and emergencies like a natural disaster, the loss of your star salesperson, illness, etc. Plan for the unexpected, whether it is business insurance, a financial cushion, or cross-training of key sales staff.

6. Have an efficient invoicing and collections systems

Small businesses have problems with clients who don’t pay on time. Take a look at some of these figures:

  • Just 50% of businesses pay on schedule (D&B)
  • 64% of small companies said that invoices are left unpaid for no less than 60 days (NFIB)
  • 14% of small companies listed late payments are the No.1 problem (Kauffman Foundation)

There are several ways to solve this problem, including being prompt in sending invoices out, arranging invoice reminders, and practicing an effective invoicing system. Follow up with payments as soon as you sense that they will be delayed.

7. Be Prepared for Expansion

Growth is accompanied by extra expenditures – marketing campaigns, equipment, inventory, and so on, Be ready for growth, without putting your cash flow at risk, by learning to deal with challenges that hinder business expansion, including cash.

Don’t let your business be impeded by poor cash flow management. Enlist the help of professionals for setting up a good invoicing system for your business. PJS Accountants provides a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. We have spent more than 30 years dealing with local businesses in Capalaba, Cleveland and the Redlands. Our team is always available to take your call and assist you in whatever business needs. For enquiries, contact PJS Accountants.

Learning About Capital Gains Tax

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The word “tax” never fails to make us feel scared or worried. Yes, it’s a bit stressful seeing a part of your hard-earned income vanish. But you don’t have to feel this way about paying taxes, in general – if you do it properly.

With regards to Capital Gains Tax (CGT), you have to know just how much you are obligated to pay and what percentage of your profits is considered taxable income.

CGT Explained

Any profits you earn from selling an asset are taxable. This form of tax is called CGT. One of the types of assets that trigger this form of tax, which is collected by the Federal Government through the Australian Taxation Office (ATO), is property.

With regards to real estate, CGT only applies to the property you own that isn’t your main place of residence, or where you live most of the time. Examples are investment properties and holiday homes. Your family home is exempted from CGT.

For properties that served as your primary residence for a period of time but you also leased, CGT is required only for those periods when you didn’t live there.

How to Calculate CGT

You can compute CGT in three ways, which are all based on the length of time you were an occupant in the property. You are charged at marginal tax rate at all three methods.

If you own a property for less than 12 months and you sell it, you are required to pay the maximum rate of CGT on any profits you earn from the sale. But if you owned it for over a year, even for one day more, you can claim a 50% discount in the CGT you are required to pay. So it is practical to consider that when making investment plans.

For people who’ve had a property since prior to 21 September 1999, the cost base for a property can be increased by using indexation, which results in the reduction of capital gain.

The ATO offers a lot of information for calculating capital gain and the amount you may have to pay. It also provides video guides on tax effects for lessors.

Complicated rules

One aspect that always brings misunderstanding is when an individual has occupied the property for just a time when they’ve owned it.

The rules on principal residence are rather complex and technical.

For instance, an individual bought property for $200,000 in 1995 and occupied it for 15 years. The property was rented out in 2009 when the individual migrated to the UK. In 2014, they occupied the property for six months before divesting the home for $850,000.

You can still claim for the principal residence exemption, if the owner occupies the home again for three months before selling it. This results in the owner not paying CGT for selling the property.

Clearly it would benefit you to hire a tax specialist to be in charge of your CGT affairs. Not forgetting that CGT doesn’t apply on family home is a first step towards understanding your tax obligations on any capital gains and always be compliant with ATO rules.

See a qualified tax advisor, accountant or bookkeeper for tax enquiries, including capital tax gains. PJS Accountants can help you organise your tax affairs. We work with large companies, SMEs, family businesses and individuals. For enquiries, contact PJS Accountants.

Understanding Taxation for Property Investors

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Property investors are aware of the various specialised tax breaks they are entitled to, but are also liable for some taxes that the majority of non-investor property owners are not, including land tax and capital gains tax (CGT).

In this article, we will talk about allowable tax deductions, CGT and purchasing property using a self-managed superannuation fund (SMSF) to help property investors gain more knowledge of their taxation duties.

Maximising deductions

A wide range of rental property deductions can be claimed by property investors, that is, if they keep the correct documentation and invoices.  Here are some of the common expenses that you, as a property investor, can claim in relation to owning a rental property:

  • Advertising for tenants
  • Cleaning expenses
  • Council and water rates
  • Electricity and gas
  • Gardening expenses
  • Insurance (building, contents, etc.)
  • Interest on the investment loan
  • Land tax
  • Real estate management fees
  • Repairs and maintenance
  • Reasonable travel costs (for inspection of property)

You can claim the money you spent on things such as white goods, furniture and air conditioners, but they will still be covered by depreciation. The useful life of the item in question is to be utilised to claim the appropriate deduction over a period of years.

Building, construction and borrowing costs

Though not deductible, you can claim building and construction costs under the special building write-off guidelines. Generally, for a rental property constructed after 15 September 1987, a part of the construction costs that is still unclaimed at the date the property was purchased can be claimed.

You can write off the cost at 2.5% every year over 40 years. However, you have to determine the cost of the construction work and the date it was carried out. You can obtain this information from the previous owner, or you can have an estimate provided by a qualified expert, such as a quantity surveyor. If it is a new property, you can get the appropriate cost information from the builder or a quantity surveyor.

Also considered as allowable tax deductions are loan procurement fees and other borrowing costs. However, you can usually claim them over five years.

Non-deductible

Some expenses cannot be claimed as a deduction, but are allowed to be included as part of the cost base of a property if it is sold, for CGT purposes.

Together with the original purchase price, below are some items you can add to the cost base:

  • Stamp duty on purchase
  • Valuer’s fees on acquisition
  • Legal costs that are incurred on the purchase and sale of the property
  • Advertising expenses on sale
  • Auctioneer’s fee
  • Capital expenditure on improvements that escalate or maintain the asset’s value (e.g. building a new garage)

Deduction tips for property investors

When negatively gearing, you may want to get an interest-only loan for your rental home because this type of loan guarantees that interest expenses are kept at high levels while not decreasing the loan’s principal. This can benefit you as it will let you offset the interest against your total taxable income. But the decision to take this loan should be determined by your financial situation at the moment and in the future.

If you travel to your property to manage it, you may deduct the travel costs while checking out the property. This would only include, for example, the costs of airline tickets to inspect the property one day and going back home the next day. If you travel to you property and stay for a week-long holiday, tax rules will require you to allocate expenses between deductible and non-deductible items.

CGT and investment property

You need to remember that an investment property that was used in the past as your primary residence can still be considered as primary residence and thus remain CGT exempt for a maximum of six years after the house has ceased to be your family home, as long as you do not own any other primary residence.

Sale of investment property and CGT

You may have to pay CGT for selling a rental property, provided that asset was purchased on or after 19 September 1985.

There will be a capital gain from selling the property when the proceeds from the transaction are higher than the cost base of the property. You will incur a capital loss if the proceeds are lower than the cost base.

If there is a capital gain, you have to apply any capital losses from the present or past year. You may further reduce any remaining net capital gain by using the 50% CGT discount for individuals who have had the home for over 12 months. If the home has been owned for less than a year, the 50% CGT discount can’t be claimed and thus the entire net gain is treated as income and is taxable.

To help pay a possible large CGT tax, always put aside part of the sale proceeds from your rental property.

The effect of building depreciation claims on the cost base of a property

Capital works deductions may decrease the property’s cost base for CGT purposes, if such deductions have been claimed in relation to a rental property. Any depreciable buildings sold with property are subject to special rules.

Investing in property through SMSF

It is not recommended that an SMSF be set up for the simple reason of wanting to invest in property without properly weighing all the risks, benefits and related expenses involved.

Because of the high cost of property, the SMSF may be heavily invested in one type of asset. In this case, it is the duty of the SMSF trustees to consider diversification as one of their investment strategies. If one type of asset underperforms, you can limit your risks with diversification.

There are several tax benefits from investing in property using an SMSF. First, you can claim a 15% maximum tax rate on net rental income when the SMSF is in accumulation mode and 0% while full pension mode. In addition, if the property is sold after being owned for over 12 months, any consequent capital gain will be subject to a maximum capital gains rate of 10% or 0% if in pension mode.

For any deductions for losses or expenses for a rental property acquired using an SMSF, the rate is a maximum of 15%.

For most investors, it may be more beneficial tax-wise to buy a rental property using other structures or under their own names rather than through an SMSF.

Common pitfalls to watch out for

It is common for investors to group different properties under one loan umbrella. For instance, one mortgage may have been taken to finance both the home and the rental property. In this situation, ensure that the loan is structured so that will make it easy for you (and the ATO in the event you’re audited) to identify what part of the loan is for the rental property. After this, you can identify which part of the interest you can claim as an outgoing against your rental income.

You also have to remember that you’re not entitled to a deduction for interest you pay or for any outgoing you gain after the property is no longer being rented, or the part of the loan utilised for private reasons.

Determine all qualified outgoings to be made part of the cost base of the property, because it could potentially cut down any capital gain and raise any capital loss that can be passed on indefinitely to be used against any capital gains incurred in the future.

PJS Accountants offer expertise in managing your tax affairs with a complete range of compliance, corporate and individual tax services. We serve large companies, SMEs, family businesses and individuals. The ever-changing tax laws and requirements could put businesses and individuals at risk. Putting nothing to chance! If you need tax advice or guidance, contact PJS Accountants.

What are the Signs that you Need a Bookkeeper?

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Many business owners may have had the time to oversee all aspects of their business when they were just starting out. But when their business begins to expand, it is time to weigh things up. Is outsourcing certain tasks the way to go?

It is more important that business owners concentrate more on the areas of the business that can benefit from their expertise – and assign other jobs to other experts.

One of the tasks that business owners can allocate to experts is the financial record keeping. Think about engaging the services of a good bookkeeper. However, when can you say it is the right time to hire one?

Here are 4 signs that you need a bookkeeper:

1. You are spending more time doing the books than managing your business.

It is time to hire yourself a bookkeeper if you find yourself spending a significant part of your day or week doing financial tasks such as keeping financial records of the business.

There are many tasks that a bookkeeper can take on, including pursuing customers with debts, checking vendor invoices, reviewing bank account balances and transactions and ordering stock. Having these tasks off your shoulders will allow you to pay more attention on other areas of your business.

2. You are failing to keep up to date with all business operations.

Growing paperwork and record keeping goes with a growing business.

Many business owners are pressed for time, resulting in them leaving the vital task of updating the records to the last minute – typically for tax time or BAS. If records are not kept updated and there are financial problems that are not seen early, you are in for major problem and you won’t even be aware of it.

Failing to keep up to date with records is definitely a sign that you need to hire a bookkeeper.

3. You doubt that you are keeping records properly.

It’s time to get yourself a bookkeeper if you are spending time checking your books and questioning whether the figures are accurate or correct.

You can save yourself a lot of hassle and give yourself more time to strengthen other aspects of the business by using the knowledge and experience of a good bookkeeper.

4. It is no longer simple doing your tax and/or other compliance.

Complying with rules and other requirements, such as accreditation, are very important for your business, but performing these responsibilities can take a lot of time.

You have to be up to date with regulatory changes and bring your business processes and records up to date to keep in step with those changes. A good bookkeeper can help your business remain compliant.

It’s not always easy telling when the right time is to enlist outside help for your business. When you see the first sign of trouble, make things easier yourself and hire a good bookkeeper.

PJS Accountants offer a full range of services, including tax planning and compliance, accounting and SMSF services, and bookkeeping. For enquiries, contact PJS Accountants.

How to Fund your Small Business when Interest Rates Increase

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When the economy improves, interest rates tend to rise over time. While interest rates have been on hold at low record levels for many months, this will not be the case forever.

For small business owners, an increase in interest rates means securing their sources of capital earlier rather than later. This would allow them to have a facility available when they need extra cash flow.

There are 5 funding options available for small business owners:

Factoring of receivables

When a business is paid cash in return for the legal rights to monies payable to it from a sale, or its accounts receivables, this is called factoring. With this method businesses that have normally lengthy receivable arrangements can get more cash faster than it otherwise would. Businesses need to ensure that they have sufficient margins to take in the cost as cash obtained from factoring is a mark down from your invoice amount.

Pre-selling of products or services

This method of funding is commonly seen in crowdfunding campaigns, or in tasks that will need large resources to accomplish. Pre-selling of goods or services is when a business asks to be paid upfront, before they deliver the product or services. Businesses can use the cash to complete the delivery to the customer without incurring any financing costs. They are also not selling equity, which is advantageous. On the other hand, they are inputted as a liability to the customer on the business’ books until they deliver the product or service. Both customers and businesses can make this a win-win situation by setting clear and upfront terms.

Traditional lending

Though banks may be open to extend a loan to small businesses, they normally ask for three years’ worth of financial statements and for tangible assets to guarantee the loan, in case of a default. With credit cards, however, the requirements may be minimal but you may have to pay much more. These funding sources may be suitable for some businesses, but may not be easily available to others.

Alternative lending

Small businesses can avail of private investments from Funding Circle, Dealstruck, Kabbage and others without the rules and requirements normally requested by financial institutions. These sources of funds can be useful in taking a business to the next level. However, expect to deal with a range of costs. Also, rates can be higher compared to traditional loans.

Equity Investments

Smart investors understand the benefits of diversifying their portfolios. Owners of small businesses may have a large portion of their wealth invested in their business. Aside from helping owners “take some chips off the table” and spread their personal wealth, equity investments can also build strategic relationships and knowledge that trigger business expansion. But you should always have a main purpose other than money when selecting your equity partner.

When you are considering options on how to finance your business, always remember not to assume too many risks. Make sure you do not overextend yourself in your pursuit of funding. So, consider establishing an orderly repayment plan that is founded on real data and practical expectations.

Get up to date financials from your accountant and use the data to gain a clearer image of what stage your business is in and what it requires. You can also use it when making a decision on debt or equity facilities.

PJS Accountants provides a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. For enquiries, contact PJS Accountants.

The Receipts and Expense Records that you Must Keep

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The scene is the same every year, despite making a promise to be better organised; you find yourself dashing from room to room, looking into drawers and folders for receipts. Why are you even doing this? Your accountant and the tax agency never requests for them anyway, right? Well, a reputable accountant will always ask their clients to substantiate their expenses. In addition, if you ever become unlucky enough to be audited by the tax office, you’d wish that you kept those receipts.

So, what records do you have to keep? Don’t throw away records showing work-related work spending, car costs, and work-related travel spending. You are obligated to hold on to them for five years.

What are work- or business-related costs? These are outgoings you incur in generating your business income or wages.

Here are records you need to keep:

Receipts and other written substantiation

The following must be found in the receipts:

  • The supplier’s name or business
  • The amount of the expense (shown in the currency of the country where it was incurred)
  • The type of the products or services
  • The date it was purchased
  • The date the receipt was created
  • Information about the GST charged

List of secondary costs

Cost per item should be $10 or less, and as much as $200 all in all. A diary or logbook should be used to record the expenses. Include the date you made the entry. No need to sign entries in the logbook.

Business or work use percentage

If you use a product or service for both business and personal purposes, the deduction you can claim is the portion used for work or business. This means you need to come up with a business use percentage, then pro rata the expenses. You can only claim the business usage percentage, not the personal usage percentage.

Motor vehicle expenses

Vehicle expenses can be claimed in four ways:

  1. Log book
  2. Set rate for each km
  3. One-third of expenses
  4. 12 per cent cost of the vehicle

The number of kilometres you travel for work or business determines the method you can use. Also, you have to satisfy the record keeping conditions for the method you use. For instance, for the log book method, you have to keep the log book itself for a minimum of 12 representative weeks to compute the business use percentage. The log book is valid for five years. In addition, you have to have receipts to prove all car maintenance costs.

For the set rate per kilometre method, the claim that you can make is limited to 5,000 kilometres. Keeping records of the car maintenance costs is not needed. However, you have to be able to prove that the car travel was made for income generating purposes.

You can use the one-third of actual expenses method if you travel over 5,000 kilometres. However, you have to maintain all records of car maintenance costs.

The 12% of the original cost method is also appropriate when you travel over 5,000 kilometres. You don’t have to record the running costs of the vehicle, but you have to prove that the car travel was made for income generating purposes.

Domestic or international travel

If you travel for over 5 nights, keep a diary and include the following details:

  • The type of activity
  • The date and time the activity happened
  • The length of time of the activity
  • The location where the activity happened

The $300 cap for employees

You don’t have to provide written evidence if the overall sum of employment related work spending is $300 or less. However, claims for travel allowance expenses and food allowance expenses are not included.

The following claims are excluded:

  • Taxi fares or similar expenses
  • Car expenses in respect of overseas travel
  • Phone, computer and internet expenses (pro rated based on employment related use)
  • Laundry expenses (You can claim up to $150 without written evidence.)
  • Depreciation of property owned and used (or installed and ready for use)
  • Home office (You can claim 45 cents per hour worked.)

The $300 cap excludes:

  • Travel allowance expenses
  • Reasonable overtime meal allowance expenses
  • Car expenses in Australia
  • Award transport expenses

The employee has to produce written evidence to get these claims.

If you file claims of over $300 in business related deductions, you have to substantiate all expenses with a receipt. If you can’t present the receipt if asked by the tax office, you will not be allowed to claim the deductions.

Enlist the help of professionals to help you on your tax affairs. PJS Accountants provides a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. For enquiries, contact PJS Accountants.

Small Business Owners: Planning for Retirement

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On the subject of retirement planning, the most typical answers among small business owners are: “I don’t intend to retire” or “my business is my retirement fund.” However, the reality is that slowing down or retiring is in the cards sometime in the future, or you will have no choice but to do so due to health reasons or shifts in your industry.

It is difficult to save for retirement when you’re paying ongoing expenses and intend to expand or finance your business operations. A few employees use a percentage of their current income to approximate their retirement income requirements. However, this is not the right method for small business owners who are building their business and waiving additional income to create long term wealth.

Your retirement fund requirement at 60.

There is a ballpark figure you can use as a base for retirement planning, courtesy of ASFA & Westpac. Every six months, they give out a survey to find out the amount retirees are spending and the things they are spending their money on. The data provides a single person or a married couple an idea of what amount they would need to live a comfortable life upon retirement.

Finances for different living standards and households as of June quarter 2015:

Modest lifestyle

– single

 Modest lifestyle

– couple

 Comfortable lifestyle

– single

 Comfortable lifestyle

– couple
Total per week $455 $654 $824 $1130
Total per year $23,662 $34,051 $42,861 $58,784

Source: ASFA Retirement Standard

The numbers in every situation assume that the retired person(s) lives in their own home, and the amounts equal to expenses by the household (for couples). The budgets can be higher than household income minus income tax where there is a drawdown throughout the extent of retirement. Figures from female respondents were used for singe calculations. Unless otherwise stated, all computations are weekly.

Follow these tips to meet your retirement fund needs:

Be responsible for your own savings.

Employees have their employers to take care of their superannuation payments. However, this is not the case for business owners who must pay their own superannuation. As a business owner, you must utilise a method of ‘paying yourself’ and start as early as possible even if the amount is only $20 per week (this is sufficient to obtain the government co-contribution) while getting minimum income from your own business. Raise the amount by 5% every six months and increase it further during the good years after you have come up with a tax plan with the help of your financial planner or accountant.

The foundation of your retirement plan will normally be a business retirement or exit plan. Don’t think that you will have to close down your business. But one aspect of your superannuation planning may involve selling your business.

According to the MGI Australian Family and Private Business 2010 conducted by RMIT University, owners are depending on the sale of their business to finance their retirement, but with prices declining and available funds running out, they are forced to continue working.

Save a portion of your profits each year because the value of your business may or may not be there. Avoid reinvesting all the profits back into your business. What you need to do is build wealth inside and outside of your business as you approach retirement.

Think about starting a self-managed superannuation fund.

A number of business owners sign up for a self managed superannuation fund (SMSF) for the retirement fund plan. You can derive many benefits from SMSF including reduced tax rates, flexibility when looking at sources of income, and ability to decide what to do about your assets. In addition, you can also own the place where you run your business in your SMSF. Capital becomes available for reinvestment, and you gain a secure tenancy with your SMSF serving as the landlord. Your retirement plan, or SMSF, gets a steady rental income, frequently at the industrial or commercial property rates of 7-10%, not the 3-5% on residential rental properties or the instability of the share market.

Control your risks.

Let’s say you find yourself considering withdrawing from your business in a time like now, following GFC where there is a financial crisis, or several business owners are divesting simultaneously. If this is so, start to plan and organise your business to sell it 5 to 7 years prior to your intended retirement age, to get the highest possible value.

Get life, disability and business expenses insurance, so that you or your loved ones can employ people to assist you in operating the business. This would ensure that the sale of the business will be well planned rather than forced.

Know that superannuation is shielded from bankruptcy.

Your superannuation balance is shielded from your creditors in case of a bankruptcy, as long as you are making payments regularly. Take note that payments have to be regular and ongoing, and not look as if their sole function is to take cover from bankruptcy.

The key is advanced planning.

Retirement planning should be done as early as possible. A large number of business owners reach a plateau at some point in their working lives, or worst, they get sick or get injured and that ends their career. People are frequently very tired or preoccupied that they lack the drive to organise and market their business for sale the right way.

This gives them so little time to sell the business for maximum value, and buyers will know this and take advantage!

Commence early and focus on the end target so that your business and retirement fund will all be arranged for you. Thus, you will not be forced to decide whether to retire or continue working.

Enlist the help of professionals when planning for your retirement. If you are a business owner, then your business should be a part of that plan.

At PJS Accountants, we offer succession planning services to help you prepare and organise your business for when you eventually retire. We also offer expertise in managing SMSF, accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning, and bookkeeping. Contact PJS Accountants for enquiries.

ATO Targets Rental Property Deductions

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At the start of every year, it looks as if the Australian Taxation Office (ATO) declares its drive to zero in on a specific segment of taxation.

In 2015, the ATO has stated that it is stepping up its focus on rental property deductions. This could refer to many different kinds of deductions, but a major area of concern for income-generating property owners is tax depreciation deductions.

Some of the mistakes that are usually committed, according to the ATO, include neglecting to use a pro-rata method for deductions on a property that is only being rented for part of a year, or making a claim for deductions on properties that are not really being leased.

A significant number of property owners are willing to adhere to ATO rules, but keeping informed and understanding the various rules can be daunting.

Here are the common mistakes that property owners commit when claiming deductions – and how to avoid them:

1.  Making a claim for capital work assets as plant and equipment deductions.

There are two different categories of assets for which you can claim deductions: capital works and plant and equipment. Capital works make up the structural features of a building, such as fixed and removable assets. On the other hand, the value of plant and equipment assets decreases much faster per an effective life established by the ATO. The depreciation for each item is computed correspondingly.

Knowing which assets are suited for which category can be difficult with no guidance from a professional. In some cases, a certain asset may appear to be suited for one category, but the ATO actually pre-determines the category.

A fine example is the TV antennas in homes. It may look like antennas will wear down much faster than other parts of a structure (which is reduced in value over four decades), but the ATO still classifies them as a capital works asset. In other words, if your antennas wear out in only five years, it will still be classified as capital works with deductions at 2.5% over 40 years. You are at risk of being caught by the ATO if you write this asset off at a shorter time period.

2.  Assessing an asset’s effective life span by yourself.

This one is somewhat similar from the one above, in the sense that it can be inviting to believe that you can self-assess the effective life of an asset. Your carpet, for example, may appear old and shabby, so you may think it only has a two-year effective life. But every single asset has a specific effective life assigned by the ATO. At present, the effective lifespan of carpets is 10 years.

There is a provision that allows self-assessment of an asset’s effective life, but you are in danger of setting off a review by the ATO. Many accountants believe self-assessing can prompt the ATO to launch a review of your claim, which can put property owners in danger of being found out. You can avoid this kind of trouble by enlisting a professional to help you determine the correct depreciation for your assets.

3.  Making a claim for capital improvements as repairs and maintenance.

Claims can be made by property owners on repairs and maintenance made to income-generating properties. Then again, what seems to be repairs and maintenance are actually deemed as capital improvements.

You may avoid getting caught by knowing the distinction between these two terminologies. ‘Repairs’ usually entails restoration, while ‘maintenance’ pertains to work that inhibits deterioration. The ATO says that the two have to pertain to wear and tear brought about by renting the property out.

Meanwhile, capital improvements relate to works that improve the property. Claiming deductions for this must be made at a gradual pace of capital works or as depreciation.

4.  Resorting to shortcuts.

Hiring the services of a professional quantity surveyor to create a tax depreciation schedule for you can help you avoid all of the above. You can even claim a tax deduction for the cost of having the schedule created. Then, your property will be paid a visit by qualified depreciation specialists to evaluate the correct assets that you are entitled to make a claim for. They will prepare a depreciation schedule that contains all likely deduction and they will make sure all calculations adhere entirely with ATO rules.

PJS Accountants offer expertise in managing your tax affairs with a complete range of compliance, corporate and individual tax services. We serve large companies, SMEs, family businesses and individuals. The ever-changing tax laws and requirements could put businesses and individuals at risk. Putting nothing to chance! If you need tax advice or guidance, contact PJS Accountants.

5 Key Tests to Pass When Applying for a Loan

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If you’re considering applying for a bank loan to fund the growth of your business, increase your chances of getting your loan application approved by being prepared. Banks present 5 key tests to their loan applicants. Passing these tests improves the likelihood of you being successful in your loan application. These tests are referred to as the 5 Cs by banks.

1. Character

Believe it or not, this is one of the most vital considerations for financiers. This is because the individual running the business is the one who will pay the loan.

Your personal integrity, reputation and willingness to repay the loan will be checked by the bank. To decide objectively, lenders also use financial statements.

Your character is judged by the bank by assessing your payment history with other existing or past loans. Whether you paid on time and your taxes are up to date are also checked by the bank.

Lenders also want to see how business owners have handled any past crises. They will check for a history of defaults, writs, judgments or bankruptcy.

2. Capacity

Banks will look at the ability of your business to repay the loan, because they, obviously, want to be repaid.

You will be required to submit copies of a budgeted profit and loss statement as well as a cash flow projection that spans the life of the loan.

For the two statements, remember to put the interest and repayments of the loan you’re applying for to prove that your cash flow is sufficient and you will remain profitable during the time frame of the loan.

3. Collateral

A fancy word for security, collateral is what banks will ask you to provide when you apply for a loan. The usual collateral for small business is the applicant’s home or business premises (if they own them).

The bank wants to make sure they can recoup the money they loan you if you happen to default on it. As an example, if you want to get a loan to run a café, it is not likely for the bank to accept your fit out and stock as collateral because the value of these assets will be insignificant if the business folds. This is the reason why you have to have sufficient security to cover the loan.

4. Capital

The bank will want to check your business’ financial status when you apply for a loan.

What they will check is the type and liquidity of your business’ assets and the type and nature of the business’ debts or liabilities. They would see you in a better light if you have capital that went into the business, so you and the bank are both at risk in the business.

5. Conditions

Lastly, the bank will try to find out if you and your business are capable of fulfilling all of the loan’s terms and conditions to make sure you won’t default on the loan. The proposed repayment schedule will be checked against your expected cash flow and your capability to fulfill all the requirements of the loan.

The requirements may consist of submitting quarterly financial statements, keeping certain financial percentages, and presenting proof of insurance. The insurance type may vary and may include key-man insurance in the event the business owner dies or becomes disabled.

Be prepared – this is the key to a successful loan application. Ensure that you and your business can pass these tests and you are sure to get that loan.

By presenting you with the tests that are required when you apply for a loan, we hope to help you succeed in your loan application. If you would like to seek our advice about loans for your business, or if you have any enquiries about our portfolio of chartered accounting and business services, please contact PJS Accountants.