It’s generally accepted that a company provides a level of asset protection, because a company is a separate legal entity. From the time a company is first registered with ASIC up until it’s final deregistration date, it is viewed as having separate legal status, property, rights and liabilities.

This gives directors some protection and makes a company a good structure for running a business , but it doesn’t fully absolve directors from being responsible for a company’s liabilities and debts. Directors can be found to be personally responsible for debts and liabilities in certain instances, and these obligations continue even after the company is deregistered.

The Australian Investment and Securities Commission (ASIC) is in charge of assessing the liability of directors in accordance with the Corporations Act 2001.  Examples of instances where directors may be found to be personally liable for company debts include;

Insolvent Trading

Directors have a duty to ensure that companies do not trade while insolvent. If this duty is breached directors may face civil and criminal provisions or become liable for company debts. A company is classified as insolvent if it is unable to pay its debts as and when they fall due.

To determine insolvency, both the cash flow and financial position of the company need to be assessed. If the company is deemed to be trading while insolvent, potential director defences include;

  • The director had reasonable grounds to expect solvency at the time the debt was incurred
  • The director had reasonable grounds to believe a competent and reliable person provided adequate information that identified the company as being solvent
  • The director did not participant in management due to illness or good reason at the time the debt was incurred
  • The director took all reasonable steps to prevent the incurring of the debt

Company Losses

If directors breach their duties and this causes the company to suffer a loss they can be found personally liable.

Potential consequences of breaching duties may find directors as having acted illegally and not in accordance with the Corporations Act, they may face civil and criminal provisions or be made to compensate the company for the losses incurred.

Guarantee and Security

Directors may provide personal guarantees or collateral to secure company liabilities (e.g. to finance a bank loan). If a company defaults and is unable to fulfil their liabilities, directors may lose collateral assets (e.g. their home) or be made to repay company liabilities personally.

Company Tax Debt

Directors have a responsibility to ensure companies meet their PAYG withholding and Super Guarantee Charge obligations. A consequence of non-compliance may find directors personally liable for a penalty equal to the company obligations.

Phoenix Activity

Directors can’t establish a new company to continue the activity of an existing company that has been placed into administration or liquidation to avoid paying outstanding entitlements. As a result directors may face civil and criminal punishment as well as imprisonment.

Trustee

Where a company is acting as a trustee of a trust, directors may be liable for a company’s breach in trust terms, acting outside the scope of its powers and where the terms of the trust limit the company from being protected against the liabilities.

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Author: Elena Rear
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The ATO provides tax incentives for early stage investors, sometimes referred to as ‘angel investors’, that invest in start up companies. These incentives include a non-refundable tax offset of 20% of the amount invested and the disregarding of certain capital gains made on the investment.

For an investor to be entitled to the tax incentives, the company must qualify as an early stage innovation company (ESIC) immediately after it issues shares to an investor.

For a company to qualify as an ESIC it must not be a foreign company and must meet the following two tests:

  • The early stage test
  • Either the 100-point innovation test or principles-based innovation test

Early stage test

To meet this test the company must meet the following four requirements immediately after issuing the shares to the investor:

  • The company must have been incorporated or registered in the Australian Business Register
  • The company must have total expenses of $1 million or less in the previous income year
  • The company must have assessable income of $200,000 or less in the previous income year
  • The company’s equity interests (shares or units) are not listed on an Australian or foreign country stock exchange

100-point innovation test

To qualify under this test, the company must obtain at least 100 points by meeting various innovation criteria listed on ATO website. These criteria include activities that relate to start-ups including expenditure on Research and Development, registering patents, and issuing share capital. In practice this is likely to be the simplest way to determine eligibility when compared to alternate principles-based innovation test.

Principles-based innovation test

To meet this test the company must meet five requirements and demonstrate how it meets them using existing documentation, such as business plan or competition analysis:

  • The company must be genuinely focused on developing significantly improved innovations
  • The related business has high growth potential
  • The company must demonstrate that it has potential to be able to successfully scale up this business
  • The company must demonstrate that it has the potential to address a broader market including global markets
  • The company must demonstrate it has the potential to be able to have competitive advantage

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A tax deduction is something you claim in your tax return that reduces your assessable income, meaning you pay less income tax and therefore get a bigger tax refund (or reduce your tax bill).

For a donation to be tax deductible, it must be for $2 or more and made to an organisation that is ‘endorsed’ by the Australian Tax Office (ATO) as a Deductible Gift Recipient (DGR). It must also be a genuine gift, you cannot receive any benefit from the donation. If you receive something in exchange for the donation (e.g. a raffle ticket, items, entertainment or food) then it doesn’t qualify as a tax deduction. The Tax Office defines this as a transaction where you receive a good or service in return for the money donated.

Organisations have to apply to the ATO to get DGR status, and there are a majority of registered charities that don’t have DGR endorsement. Not being able to offer a tax deduction for a donation as a DGR is not an indication that the charity is illegitimate or that its cause isn’t valuable. DGR endorsement is just a tax concession that some charities have applied for and are entitled to.

For some people, being able to claim the donation back on their personal tax return is important in making a decision to donate, but for others it isn’t. To determine if a charity has DGR status, you can visit the ACNC Charity Register.

Author: Natasha Woodvine

Email: natasha@faj.com.au    

The amount you might need in super to retire depends on the type of lifestyle you plan to live post retirement.

As per studies conducted by the Australian Institute of Health and Welfare, the average life expectancy of males and females born in Australia have increased over the years to an average life expectancy of 80 years for males, and 85 years for females. The growing trend of increases in life expectancy means that more savings is likely to be required at retirement in the future, therefore highlighting the importance of sound financial planning.

Although there is no direct answer on how much savings is required at retirement, the Australian Financial Security Authority (AFSA) provides a benchmark of how much singles and couples need to save to support their chosen lifestyle.

 

Households Modest Lifestyle Comfortable Lifestyle
Single $27,902 a year $43,687 a year
Couple $40,380 a year $61,909 a year

A modest retirement lifestyle is considered as only being able to afford fairly basic activities. A comfortable retirement lifestyle considers the retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things such as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and occasionally holiday travel.

ASFA estimates that $545,000 ($640,000 for couples) in super at retirement will provide enough for a comfortable lifestyle, and $70,000 will provide for a moderate lifestyle. Both calculations assume that retirees will also receive a full or part pension to supplement their super.  

It is also important to remember that for most people, their home is their biggest asset and so they can always use this to downsize in the future for income needs as well.

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Trend analysis uses past data in order to predict the future of your business and the environment in which it operates. It’s a simple tool you can use to assist you in planning and setting strategy for your business.

It involves the examination of business data over time to identify trends and develop strategies that are in line with your business goals and objectives. A very simple example might be to plot your sales of various product categories over the last 5 years. Which product groups are trending up, and which are trending down? Once you know that you might make some business decisions about your product lines based on the results.

Trend analysis helps to highlight the strengths and weaknesses of your business, aiding in improving areas of underperformance and maintaining those that are successful. It can also assist in industry comparisons by benchmarking against competitors, maintaining adequate cash flow and profitability levels.

The main form of measurement is known as a Key Performance Indicator (KPI’s). As the name suggests, KPI’s are performance measures aligned with the strategic goals of your organisation. To assist in developing effective KPI’s it is recommend they reflect the balance scorecard of the business, covering the following four factors; Financial, Customer, Internal Business Processes and Learning & Growth. Examples of KPI’s that achieve each quadrant of the balanced scorecard include;

  • Financial
    • Ratios measuring profitability (gross profit margin), cost effectiveness (net profit margin) and cash flow (quick asset ratio)
  • Customer
    • Customer satisfaction (surveys) and customer retention (number of repeat purchases)
  • Internal Business Processes
    • Quality control, inventory turnover and safety record
  • Learning & Growth
    • Employee training, turnover and skills

Once your business has identified which trends to measure, you can establish thresholds to trigger further investigation (e.g. an increase/decrease of over 15% in KPI). The business will then need to consider causation of the trend (internal or external factors) and how to manage this trend in line with the strategic business goals.

To optimise the benefits of trend analysis for your business you’ll need accurate and timely records, full employee participation and clarity of data. It’s also important to recognise that trend analysis only involves the analysis of past data and thus, is limited by its historical nature.

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Author: Georgia Burgess
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As the threat of a second wave of coronavirus looms in Western Australia it’s never been more crucial for businesses to ensure they have strategies in place to best cope with any potential changes in trading environments.

A SWOT analysis is a simple yet powerful means of reviewing aspects of an organisation that need to be addressed to ensure profitability and survival into the foreseeable future.

SWOT stands for Strengths, Weaknesses, Opportunities, and Threats, and your business may undertake a SWOT analysis as a method for assessing and evaluating these four aspects.

By collating information relating to each category an organisation can integrate findings into its own business strategy to build on the existing strengths of the organisation, minimise weaknesses, seize opportunities and mitigate threats.

How do you prepare a SWOT analysis?

A SWOT analysis should be a collaboration between multiple people with varying perspectives of an organisation. A brain storm is a great forum for this. Here’s some things you might consider;

Strengths
– Things your company does well
– Qualities that separate you from your competitors
– Internal resources such as knowledgeable staff
– Intangible assets such as intellectual property, capital proprietary technologies etc.

Weaknesses
– Things your company lacks
– Things your competitors do better than you
– Resource limitations

Opportunities
– Underserved markets for specific products
– Social or regulatory changes creating a market for a new product or service
– Media coverage of your company

Threats
– Emerging competitors
– Negative press/ media coverage
– Social or regulatory changes eliminating markets you currently service

Once you’ve examined all four aspects of SWOT you will have a long list of potential actions your organisation can take.

The biggest limitation of a SWOT analysis is that it provides no actionable tasks for your organisation, this places the responsibility on business owners to implement an actionable strategy based upon significant findings uncovered by the SWOT analysis.

At Francis A Jones we are here to help with more than just tax returns. If you need assistance with creating a SWOT analysis or a strategic plan get in contact with one of our specialists.

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Monthly budgeting is an essential tool to help you make strategic business decisions that will result in a success. It gives you a better understanding of your business and where you stand going forward, and has never been as important as it is in the current economic environment.

Budgeting identifies current available capital, provides an estimate of expenditure and anticipates incoming revenue. By referring to the budget businesses can measure performance against expenditure and ensure that resources are available for initiatives that support business growth and development. It enables the business owner to concentrate on cash flow, reducing costs, improving profits and increasing returns on investment.

Setting up your budget:

Nearly all accounting software providers will provide you with some sort of budgeting feature. It will set out a format where you can provide your business inflows and outflows and show you where your business money is going on one document. You can then test out different scenarios for your business. E.g what if sales go up by 10%, what if I lose a big client or can I afford to hire more staff.

It is important to review your budget constantly and monthly is generally a good time frame. As future events become more known you should update the budget accordingly. Since a budget applies a lot of estimating and forecasting for future events it’s important to update these figures to make sure the budget is as accurate as possible, especially in rapidly changing conditions.. This will give you better information to make informed business decisions.

But most of all, a budget gives you more certainty and confidence. You get a clearer picture of the state of your business and you know where you stand. You’ll be able to see the obstacles and find your way around them.

Preparing a budget is one of FAJ’s Planning and Growth services. If you would like any assistance please contact us.

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GST recently reached the ripe old age of twenty. Hip-hip hooray.

I remember its birth well. First of July 2000. Actually, the recent COVID-19 stimulus measures reminded me of the introduction of GST, albeit that GST was implemented in a more controlled and measured fashion. As accountants we had no experience to draw on, and spent hours reading and interpreting draft legislation that came with very little practical explanation and certainly no legal precedents to follow.

Much like the situation during COVID, accountants were heavily relied on to steer our clients through the uncertainty. It was a stressful and busy time. We’d just mitigated an imaginary millennial bug and were distracted by dot com developments. Google hardly existed and dialling up Jeeves was less than helpful.

The original GST concept was simple. Scrap the complicated sales tax system, put 10% GST on everything and distribute the proceeds to the states. Truly a broad based tax. But to gain senate approval and get it over the line, the Government was forced to make last minute concessions around food, healthcare, education and childcare.

These carve-outs meant the new tax system didn’t raise the revenue it was expected to, and made the GST system incredibly complex. It’s been troubled ever since – there are currently 45 separate rulings regarding cakes and decorations. No wonder John Hewson struggled.

Although more recent changes have brought overseas companies like Netflix into the mix, GST revenue in Australia represents only 3.4% of GDP, compared with the OECD average of 6.8%.

There’s been many calls to increase the GST rate to 12.5% or 15% over recent years. I would much rather see an increase to the base – back to how it was designed in the first place. 10% on everything, no exceptions, nice and simple. It’s been estimated that making those excluded items taxable would increase GST revenues by $22 billion, which would increase our total take by about one third.

This increase could fund the reduction of state based payroll tax systems that currently stymy employment growth.

The counter argument for extending the base is that it will increase the cost of living for those most vulnerable in our society. This is true and the challenge for our politicians is to carefully construct alternate ways to compensate those impacted, most likely through our welfare system. It’s estimated that it would cost around a third of the extra revenue raised to achieve this.

The GST system needs an overhaul to future-proof it. Spending today is not what it was twenty years ago.  We now spend proportionately more on education and health, both GST exempt under the current system.

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Author: Mark Douglas
Email: mark@faj.com.au

An employer is obligated to pay super guarantee (currently at 9.5%) for their employees by the designated due dates. Harsh penalties exist in order to discourage late payment and protect the retirement funds of employees.

With Single Touch Payroll now mandatory, the ATO’s ability to identify those employers who do not pay their super obligation has never been greater. It is therefore imperative that employers understand how they could be penalised for late payments of super and the options available to minimise the consequences. Employers who do not pay super guarantee on time will be liable for the superannuation guarantee charge (SGC). The charge is equal to the sum of:

  • the superannuation guarantee shortfall (i.e. the super not paid)
  • an interest charge of 10% per annum
  • an administration charge of $20 per employee per quarter where there is a shortfall

A tax deduction is not available for the superannuation guarantee charge. Where an employer has missed super guarantee payments by the due date, they must complete a Super Guarantee Charge Statement. The due dates for lodgement and payment are set out in the table below.  

Quarter Period Due date for SG payment Due date for lodgement of SGC Statement
1 1 July – 30 September 28 October 28 November
2 1 October – 31 December 28 January 28 February
3 1 January – 31 March 28 April 28 May
4 1 April – 30 June 28 July 28 August

If an employer fails to lodge the SGC statement on time, they may be subject to an additional penalty of up to 200% of the amount of SGC.

Be upfront and avoid penalties

For a limited time only, the ATO have introduced a super guarantee amnesty period. This is a one-off opportunity until 7th September 2020 to disclose any unpaid super and avoid administration charges during the amnesty period. A deduction for the SGC can also still be claimed for late super paid during this period. Time is quickly running out, so speak to an FAJ accountant now to take advantage of this amnesty.

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Author: Georgia Burgess
Email: georgia@faj.com.au
 

As part of the stimulus package to deal with the economic impacts of COVID-19, the Federal Government created a scheme to access your super early.

The scheme allowed people who have suffered financially to access their super in two hits – one of up to $10,000 by 30 June 2020, and another of up to $10,000 between 1 July and 31 December 2020. Eligibility factors include loss of earnings, unemployment, redundancy and access to welfare.

APRA have recently released figures showing that 2.3 million applications have been approved so far and around $17.1 billion has been withdrawn.

The scheme is intended for those under real financial stress, and in my view should be accessed as a very last resort. There’s two reasons:

Firstly, the long-term cost of the withdrawal will be huge. The younger you are, the bigger that cost will be by the time you get to retirement. At a 5% future earnings rate, a 30 year old that withdraws $10,000 now will forego around $63,000 at retirement. Those withdrawing the entire balance of their super fund may also lose valuable life insurance cover. If you’re considering the second tranche, please give it some serious thought first.

Secondly, the Tax Office is keeping a very close eye on this scheme. They are looking hard at eligibility and warning of penalties of up to $12,000 for making false and misleading statements.

They are also convinced that nobody should intentionally get a tax benefit out of this.

As long as you’re eligible, it’s ok to apply for the early access whether you truly need the money or not. Not a great idea, but legal. And in theory, if you withdraw money under the early access scheme, have a change of circumstances and no longer need it, you could re-contribute some or all of that money back into super.

The problem is that for most people that will create a tax benefit, because the money will have come out tax-free under the scheme, and will likely create a tax deduction when it goes back in. There’s a nasty little provision in the Tax Act known as Part IVA (part four A). It’s a complex section, so my more simplistic interpretation is “if the main reason for doing something is to get a tax benefit then don’t do it, or else”. Part IVA comes with big penalties, and it’s one of those guilty until proven innocent type rules.

The Tax Office are making a lot of noise about this scheme, so tread carefully if you need access to your super, but think hard about whether you really do.

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Author: Mark Douglas
Email: mark@faj.com.au