Important Things to Consider When Selling a Business

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To get your business ready for sale, there a few important things you need to consider. Because of this, it is no wonder that almost 80 per cent of Australian businesses are not attractive to buyers in their present conditions and 96 per cent of business owners have not drafted a plan for generation transfer.

Good planning and preparation in terms of legal, taxation and operational matters are the ingredients to a successful sale. To ensure the success of the sale of your business, here are a number of important items to consider:

Know your buyer

To help you know the right sales strategy, whether through succession or selling on the open market, know who your likely buyer will be.

If you’re planning to sell to relatives, avoid potential familial conflict by drafting a formal family succession agreement. These kinds of agreements are typically contained in the business owner’s will.

If you intend to sell on the open market, make sure that this plan is not in conflict with the expectations of a relative who may be expecting to take over the business in the future.

State specifically the asset you’re selling

Next, make a decision on what you want to sell – your business or the underlying structure that owns the business. The latter is typically a share sale in which a company continues to operate the business. You can get major tax breaks through careful planning in the lead up to the sale.

If you are selling a small business, carefully consider the possible application of the small business concessions from the point of view of a capital gains tax. These concessions are intended to help owners of small businesses and should be utilised if applicable. To activate the small business concessions, the turnover of the business must be below $2 million or the net assets must be under $6 million.

Get rid of unwanted assets

After you have determined your sale strategy, you have to focus on the items that would affect the final price. There are times it would be to your benefit if you segregate non-core holdings, such as the land where the business is standing, from those that are crucial for the operation of the business, in order to set a price that’s within the reach of the buyer.

It is also better to pay out retained earnings to reduce the value of the company’s balance sheet. Obviously, the payments of dividends could have top-up tax consequences for the persons involved, therefore it should be handled well prior to the sale.

Conduct due diligence

Lastly, making sure the business is sale ready will entail doing due diligence or a stocktake relating to things like intellectual property and personal use assets on the balance sheet, and deciding on what terms of the sale will be satisfactory to the seller. You should also consider whether you are willing to work in the business for a period of time following settlement to assist the purchasers with a complete turn over.

Contact PJS Accountants to help you plan your strategy for a successful sale of your business. We offer a complete range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning and bookkeeping. We have been dealing with local businesses in Capalaba, Cleveland and the Redlands for over 30 years. Our team is always available to take your call and help with your business needs.

Protect your Assets through Family Trust

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A vital part in planning your will is the creation of a family trust. It can entail terms and conditions to protect your assets that you will leave behind and guide your family in handling the financial consequences of inheriting your wealth.

Testamentary trust

The Australian Tax Office (ATO) defines testamentary trust as a trust that is created in keeping with an individual’s provisions in their will. To be exact, the trust doesn’t exist till the individual who wrote instructions in their will dies.

When this happens under the provisions of the will, the beneficiaries could be offered the alternative of gaining their inheritance within a testamentary trust, instead of coming into it directly.

By creating a testamentary trust, you make sure that a trust over your estate is set up on the day you die, meaning that your fortune will not be distributed directly to your beneficiaries but will be held on behalf of your beneficiaries through a trusted organisation or person.

Testamentary trusts have different kinds. In estate planning, however, a testamentary trust is discretionary, meaning the trustee can decide which beneficiaries named will receive capital or income from the trust fund.

Why provide for the creation of a trust in your will?

Not everyone can benefit from setting up a discretionary testamentary trust. However, for people to whom it is the right option, the benefits are:

  • Tax effectiveness
  • Protection of the bequeathed assets

Tax effectiveness

As an example, a husband or a wife dies leaving behind two children and a spouse. A standard will provides that the spouse who died would leave their fortune to the surviving spouse. Normally, if both husband and wife die they will instruct that their wealth be distributed equally among their children.

In this case in which only one spouse dies, the estate’s assets would go to the surviving spouse.

The spouse still living would then be taxed on the income and capital gains made from those assets using his or her marginal tax rate. This means the amount of tax could increase considerably and any unearned earnings shared to the offspring below 18 years old would be covered by a penalty tax rate.

When there are children or grandchildren below 18, inheriting assets under a testamentary trust can provide more tax advantages. The reason is that Division 6AA of Part III of the Income Tax Assessment Act provides that a child below 18 years of age who get income from a trust created through a will would be covered by adult tax free threshold of $18,200, for 2012-2013 and 2014/2015, and marginal tax rates.

Protection of assets

What this means is the wish to make sure that the wealth is kept in the family for the gain of immediate loved ones.

Asset protection is also important in the event of a marital breakdown. People prefer that their wealth is inherited by their lineal descendants and not to worry about half of their fortune being given to a child’s former spouse.

Another motivating factor in creating a testamentary trust is the protection against a child’s bankruptcy, as the assets are held by a trust instead of turning into the direct asset of the child.

Another case where a testamentary trust may be useful is when there is a child with disability. It allows for the assets to be utilised for the benefit of the disabled child who may not be capable to managing financial matters after their parents die.

Things to consider when setting up a trust

Before setting up a testamentary trust, here are a few things to consider:

  1. Know the amount of asset it becomes beneficial to create a testamentary trust. Testamentary trusts basically bring the biggest advantage for massive estates with several children.
  2. Work out who you will name as the trust’s trustee – of which you are allowed to name more than one. One trustee can be an independent third party such as an accountant or a lawyer, and the other trustee is the trust’s main beneficiary.

There are people creating a will who may want to think about naming an independent trustee because they want to make sure that every beneficiary’s best interests are taken care of and the sharing of assets is not affected by factors like family politics. Doing this offers an additional level of safeguard over assets.

On the matter of considering the structure of the trust, it is best to consult an expert, such as an qualified accountant specialising in estate planning or an estate planning lawyer.

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

ATO Eyes Sharing Economy

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The Tax Office is setting its sights on the $500 million sharing economy, which consists of various platforms that let hundreds of thousands of Australian earn a bit of cash on the side by renting their spare rooms and parking spaces, lending their cars and driving people around the city.

In 2015, the ATO hit Uber with GST duties. And there are whispers that Airbnb will be hit next.

The sharing economy is turning out to be a significant player in the country’s economy. According to a study by Deloitte Access Economics, 53 per cent of Australian consumers had engaged in some type of sharing economy in 2015, and 63 per cent intended to do the same in the near term, as sharing rises in popularity as a form of business.

With an increasing number of players earning half a billion dollars annually, the ATO wants its share of the pie.

Declare every cent

Concealing income from the ATO is not only illegal, but also very risky in the digital age, according to CPA Australia Head of Policy Paul Drum. Now, the ATO has the capability to review transaction data with just a flip of a switch. Data matching can easily uncover how much each Uber driver or Airbnb host earned over a financial year based on the amount of commissions Uber or Airbnb received from each ride or stay.

There is no truth to the common belief that you don’t need to declare irregular or on-off transactions. Everything you earn from the first dollar is taxable income.

For Airbnb hosts, the only exemption from having to declare income would be if the gross income from all sources is less than the tax free threshold of $18,200.

Also, Airbnb hosts don’t need to be concerned about registering for GST, because residential lodgings are exempted. However, Uber drivers are required to pay GST on each dollar.

Homeowners who rent out a room may also not be aware that they risk missing out on their capital gains tax exemption if they choose to sell up in the future.

The exemption for Airbnb hosts varies on a pro rata basis, depending on the size of the space rented out and how long the bookings are. If you plan to be a host, you have to consider this in your financial modelling, and determine whether your side business is worth it in the end.

On the positive side, hosts are entitled to deductions for costs incurred the entire year if the home is listed on Airbnb the entire time – though they only received one or two bookings that year.

Tax tips

Here are some of the rules that sharing economy participants should follow:

1. Never conceal your income

Whether you earn extra cash or get your main income as an Airbnb host or Uber driver, you are required to declare these moneys on your tax return. Record your income and don’t cheat on your tax return. If you cheat, you may end up owing back taxes and be made to pay fines, penalties and interest charges.

2. Don’t squander your money

You may find it appealing to consider the extra cash you made through Uber or Airbnb as a perk toward your rent, paying off your car or even as a reason to indulge in shopping. But just as your earnings are increased by using Uber or Airbnb, so is the tax that you must pay. You might be in for a surprise at tax time if you fail to save some of your income. To minimise your risk, save at least 30 per cent, even 40 per cent, of what you earn from Uber driving or Airbnb rental during the first year.

3. Monitor your spending

If you have to purchase an item to operate your Uber or Airbnb, you are entitled to claim a part (or the whole) of that amount at tax time. What you need to remember is to save a record of your spending for you to file a claim.

4. Identify what you are entitled to claim

If you are leasing out a space or an entire apartment, you are entitled to claim expenses and deductions for that part of your house that was rented out, for the length of time it was occupied. These items include internet and phone bills, utility and council rates, and depreciation of furniture.

As for ridesharing drivers, they are entitled to work-related costs such as insurance and registration expenses, car maintenance, repairs and cleaning expenses, as well as mints, water and music streaming costs. If you are using Airbnb, you are entitled to claim other extras, but one critical item you should claim is your mortgage interest.

5. Be aware of your tax duties

You should know how the sharing economy affects your tax duties, else you could get lost in the process. One important thing to remember is to hire the services of a good accountant if you are not sure what your tax obligations are.

For tax advice, contact PJS Accountants. We offer expertise in managing your tax affairs with a full range of compliance, corporate and individual tax services, whether you are a large company, SME, family business or individual. Tax laws and requirements change constantly, potentially putting you or your businesses at risk. Chat with one of our expert advisers now and ensure you are meeting your tax obligations.

The Basics of Trust and Business Asset Protection

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Trust

A trust structure is a tool that provides flexibility to investors and businesses. It is a way for income to be distributed to lower income earners, assets to be safeguarded and wealth to be passed on to the next generation with little trouble and minimal or zero tax.

There is no “one-size-fits-all” form of trust, so be careful of someone who tells you there is. There are several factors to consider when determining the right type of trust for you. These include the type of business or asset, income type, financing, marital status, and vulnerability to being sued.

A trust is essentially a promise or an agreement. It involves a company or an individual agreeing to hold assets for the benefit of another. The trustee is the one who holds the assets, while beneficiaries are those who benefit.

Having legal control, though merely legal title, allows the trustee to purchase and sell asset, but has no right to own or enjoy the benefits of ownership. All legal documents, bank accounts, etc. contain the trustee’s name.

Such documents do not mention the beneficiaries’ name. They have beneficial ownership, meaning they enjoy usage, income, profits and other benefits of ownership, though the legal title is in the trustee’s name.

A trust is created to put a distinction between control and ownership. This way, assets are protected and profits are dispensed with in the most tax efficient manner.

Business asset protection

It is a sad reality that some industries and professionals are more vulnerable to being sued than others. Asset protection can benefit all business owners, but not all businesses.

Doctors, soloists and other professionals with significant plant or equipment, or maybe intellectual property, are types of businesses that must think about setting up some method of asset protection.

But remember – get sufficient insurance as a stop-gap before considering asset protection.

A business that owns plenty of expensive machinery, equipment or intellectual property should maintain these items separately from the trading entity.

In case a professional or business undergoes litigation, their holdings are safe as they are held by a different entity and utilised under a license agreement.

In such a case, what the owners have to do is to just wind up the trading entity, create a new one and draft another licence agreement.

A good analogy to use is likening a business to a tree, with the most vital part being the main trunk. Though branches may sometimes fall but the trunk continues to grow. All things possible are done to keep the tree growing and not let anything hurt it. Like a business or in investing, never neglecting it and always protecting it.

Seek advice and guidance from professionals regarding trusts and business asset protection. PJS Accountants offers a full range of services, including tax planning and compliance, accounting and SMSF services, and bookkeeping. For enquiries regarding our services, contact PJS Accountants.

What Small Business Qualifies for the CGT Rollover Relief?

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The Australian government has passed a law allowing small businesses to amend their legal structure without making them liable for capital gains tax (CGT).

According to Small Business and Assistant Treasurer Kelly O’Dwyer, small businesses that discover that their current legal structure no longer suits them don’t have to be stuck with it. With this legislation, they can restructure without incurring an instant CGT liability.

The law is intended to be enforced beginning 1 July 2016, and affects:

  • Handovers of depreciating assets, provided the balancing adjustment event as a result of the handover happens on or after 1 July.
  • Handover of trading stock or revenue assets, provided the handover occurs subsequent to 1 July; and
  • Handover of CGT assets, provided the CGT event from this handover is subsequent to the same date.

This relief can be claimed should a small business hand over an active asset to another small business unit as part of a “real” business restructure without affecting the asset’s economic ownership.

Gains and losses resulting from the handover of active assets that are CGT assets, depreciating assets, trading stock or revenue assets between business organisations will be covered by the CGT rollover relief.

To meet the requirements of the rollover relief, the handover of the asset or assets should be part of a “real” restructure of an existing business, versus “unethically tax-motivated strategies.”

The “genuineness” of the restructure will be determined using facts and situations. Some of the pertinent aspects are:

  • Whether it is an authentic commercial plan executed to improve the efficiency of the business;
  • Whether the re-assigned assets remain in the business; and
  • Whether or not it is an initial move to, as the legislation words it, “facilitate the economic realisation of assets.”

All parties to the handover should do either of the following to be eligible for the rollover:

  • A small business organisation with a turnover of $2 million or below for the income year when the transfer happens
  • An organisation that has an affiliate that is a small business unit for that income year
    “linked” to an organisation that is a small business unit for that income year, or
  • A partner in a partnership that is a small business unit for that income year

If you need tax advice or guidance, contact PJS Accountants. We offer expertise in managing your tax affairs with a complete range of compliance, corporate and individual tax services. Our clients include large companies, SMEs, family businesses and individuals. Putting nothing to chance! Talk to one of our team members now!

Tips to Write Off Bad Small Business Debts

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Before the financial year ends is the best time for small and medium sized businesses to assess outstanding invoices and bad debts. Many SMEs are no stranger to bad debts. As a business owner, you most likely have had customers who failed to pay for your goods and services.

You’ve performed the work, invoiced the customer, fixed a due date, waited for payment, but you waited in vain. You should write off these amounts.

A large business will typically have a payments team to pursue any invoices that are unpaid and receive payment. Small businesses may simply send out a few emails or make phone calls and then wait for payment.

What if the situation is your customer is unable to pay the money they owe you because of they are in a tough financial situation? Or if you had the misfortune of encountering a customer that makes it a habit to evade paying their debts?

You are not likely to be repaid because this is bad debt. So what remedies are available to you? One thing you can do is write it off as bad debt, as this may entitle you to a tax deductible expense.

Outstanding Invoices

If you own your own business you probably would have had experience problems in collecting payments on time. This kind of problem doesn’t just happen in Australia. In a survey performed by the Commercial Collection Agency Association in the USA, it was found that the chances of getting payment for the whole amount significantly decrease as time goes by.

The results showed that although most invoices are fully paid prior to the due date, the chances that you will receive payment at all has now declined by more than 50% by the time the due date arrives. After 30 days, this has declined even more to just 89.9% and 90 days following the due date, just 69.6% of invoice payments are received. It goes without saying that the number will go down from that point. Results showed that two year following the due date, the chances of getting paid for overdue invoices declines to just 9.3%.

An invoice blackhole is created, causing significant cash flow issues for businesses. This issue has been in existence ever since there have been standard business practices.

How to write off a bad debt

What are the steps for writing off bad debts? First, you must wait 12 months for the invoice to be overdue. After this period, the ATO will recognise that you are unlikely to get paid and let you write it off.

However, if you have recorded the amount as part of your assessable income either for the current year’s tax assessment return or for any past year, you may lodge the updated information about the non-payment to the ATO as part of your assessable income tax return. Make sure to lodge all the required papers prior to the conclusion of the financial year to avoid hindering the process.

Points to keep in mind

Per the Income Tax Assessment Act 1997, section 25-35:

“You can deduct a debt (or part of a debt) that you write off as bad in the income year if: (a) it was included in your assessable income for the income year or for an earlier income, or; (b) it is in respect of money that you lent in the ordinary course of your business of lending money.”

Don’t forget this when you are writing off bad debts. Below are some tips to help you through the process.

  • Finish the process of writing off bad debts prior to the conclusion of the financial year. Though this reminder may seem obvious, you can easily forget about it when you consider all your accounting and tax responsibilities.
  • You are only permitted to write off a debt that is bad to make sure you can claim a deduction. This means the debt is not likely to be paid.
  • You must have documentation to support all debts that you will write off.
  • The amount that you write off are subtracted from your profits, so be careful when writing off bad debts.
  • You may claim a refund of the GST paid to the ATO on sales if you report your income on an accrual basis.
  • When the amount has been overdue for over 12 months, it can be written off and GST credits claimed.

Before deciding to write off a bad debt, ensure you try all alternatives for collecting your Accounts Receivable balance. This is because it will affect profitability. Always remember to write off bad debts during the year and not when the financial year has ended.

Consult your accountant to help you in the process of writing off a bad debt. PJS Accountants offers accounting, taxation and other services to help you run your business affairs efficiently and in compliance with laws. Contact PJS Accountants for enquiries.

What you Need to Know About Inheriting Property

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Because of the relentless increase in property prices, many prospective home buyers could be excused for thinking that the only way they could own a home is through inheritance.

What occurs when you find out you’ve inherited property.

In Australia, unlike in other countries, there are no death duties or inheritance tax. However, it does not mean that the taxman will just simply allow you to have the property. Wills and inheritance are covered by state and territory laws, but they may also be subject to federal taxes and regulations. Capital gains tax (CGT) is the primary one.

The rules on CGT as it applies to inherited property vary significantly and are dependent on several factors:

  • How you are related to the individual from whom you inherited the property
  • When they died
  • What the property was used for – for instance, whether the property was the person’s residence or if you’re a co-owner of the property.

Viability of owning the property

Before making any decision, make sure to find out the value of the property you’ve inherited:

  • Get the property valued by a professional; it wouldn’t hurt to also have a building survey done on the property, or a strata survey, if the property is some type of common title like an apartment.
  • Instruct your accountant to familiarise you with the tax implications and go over how taking ownership of the property would impact your financial situation.
  • Adopt a tactical, long-term outlook of the property and if you are able to fund its maintenance. Certain short-term expenses may actually put you in good financial position in the long run.
  • Be level headed, especially if the person who left the property to you is close to you, such as a partner or a parent. The sense of obligation to keep the property may be strong, regardless of the financial cost to you. However, try to remove your emotional connection to the property and be objective when viewing it.

Unwelcome inheritance

You are not obligated to keep your inherited property. You have options: either sell it promptly as a deceased estate, or make it a renovation project (and possibly make a profit from selling it after renovations are done).

In case the property was the dead’s person’s main place of residence, you don’t need to pay any tax from selling it, if you’re able to sell it within two years from the date you inherited it.

You can also rent out the property. This option would earn you an income, or at least allow you to use the rent to fund the upkeep of the property.

Of course, you don’t have to do either of those things and just decline the inheritance. This is not common, but it absolves you of the obligation and expenses of becoming the owner of the property.

You don’t need to fear inheriting a property. Just don’t forget to factor in all implications of taking ownership and maintain records of the inherited property to reduce your tax obligations.

Inheriting a property comes with different tax and legal obligations. Aside from consulting with your lawyer, be sure by talk to your accountant to discuss the tax and financial side of things.

PJS Accountants, chartered accountants, offer a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning, estate planning and bookkeeping. Contact PJS Accountants for enquiries.

Leasing vs. Buying your Business Assets

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Small business owners usually lack the money on hand to buy business assets outright without tightening their cash flow. On the other hand, ownership can also be appealing.

So, what’s the right option for you: lease or buy?

Financing choices

There may be times when you can’t get a hold of cash to purchase business assets straight away, or you are saving your cash on hand for other more important uses. When it comes to purchasing and financing business assets, several options are available to you.

Equipment loans

This is suitable if you wish to own a business asset, such as key plant or equipment, outright. In most cases, you can claim a tax deduction on the interest payable on the loan.

Hire Purchase

If you eventually wish to own the asset, but don’t want to use your available cash, then a hire purchase (HP) agreement may be more suitable. This agreement involves the bank or financier buying the asset and hires it to your business for a prescribed period of time.

Finance lease

With finance leases, the bank initially owns the equipment and leases it to you for an agreed period of time. The rental payment can be arranged with a residual value balance, which allows you to buy the asset when the agreement ends. This options lets you better manage the initial cash flow.

Perhaps, you can opt to lease equipment for a prescribed time period, which brings its own benefits such as being more flexible and being more certain with regards to your cash flow.

Is buying your premises the right decision?

Possibly one of the most important decisions confronting small businesses is whether to lease or purchase business premises. Having ownership of commercial real estate can be attractive; the premises could turn into a major asset for your business, delivering possible capital growth while you avoid paying rent to a third party. There’s also the feeling of security with owning your premises.

By buying your premises, you can also borrow against the asset and use it to expand your business. In some cases, there could also be benefits in buying business spaces using your superannuation fund.

Cons of ownership

The significant amount of money you need is one of the disadvantages of purchasing business premises. You may also be required to provide a personal guarantee by the lender or mortgage company.

There is also minimised flexibility with ownership in case you need to move your business, downsize or upsize. If the nature of your business or its operations is specialised, you may have difficulty in selling a niche asset fast.

Lastly, the infusion of money into a property purchase can possibly cost you precious opportunities; it may minimise the possibility for investment in other productive assets of your business. Small business owners should ask themselves what is more important: concentrating on their primary business competencies or on real estate ownership.

For businesses that are just starting out, the flexibility brought by a short-term lease could be more beneficial until your business is on better footing.

Tax and ownership structure implications

Before making financial decisions, make sure to get familiar with all the various tax and ownership structure implications. It is recommended that you consider seeking advice from a licensed taxation accountant or financial planner.

Other business asset classes

There are various purchase or financing strategies to choose from for different business asset classes. For instance, a novated lease agreement is suitable in cases where the staff of a business utilise cars. This type of agreement, signed between the employer, employee and financier, deliver flexibility to employees while cutting down administration costs.

In the age of information technology, leasing assets for shorter prescribed periods may be more appropriate for small businesses, as it lowers the risk of obsolescence because certain IT equipment becomes outdated fast.

Cash flow requirements

The type of business you run will offer opportunities to maximise your cash flow and ultimately decide which way you will go: rent or buy your business assets.

How and when would your business assets earn money for you? When considering the answer, keep this simple rule in mind: it is illogical to fund an asset for a period longer than the length of time it is useful.

What is the situation with your cash flow? Is your business earning a steady cash flow, or does your business experience seasonal variations? The smart thing to do is prepare comprehensive projections to compare scenarios and allow you to prepare appropriately.

The major financial decisions you have to make for your business are determining how and when to buy assets. So, seek the help of your accountant, financial planner, and in certain cases, your small business banker.

Expect to make many major decisions when running your own small business, including whether to buy or lease equipment. Before deciding, seek the advice of your accountant or a financial expert. PJS Accountants, chartered accountants, offer a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning, estate planning and bookkeeping. Contact PJS Accountants for enquiries.