Discretionary Trust v Unit Trust

When establishing either a discretionary trust or unit trust, it is important to know how each type of trust operates. The main distinction between a unit trust and discretionary trust is around how beneficiaries entitlements are determined under the trust and how this is distributed.

So what are the key differences?

With discretionary trusts the beneficiary’s entitlements are left to the discretion of the trustee, who chooses which beneficiaries receive trust distributions and how much.

A discretionary trust is often used within a family to help protect family assets or conduct a business, and the trust can make a ‘family trust election’ to take advantage of certain tax benefits by limiting the distribution pool to the family group.

The discretionary structure has the major benefit of flexibility in distributing income, as distributions can be directed to beneficiaries on lower marginal tax rates to minimise the overall tax paid. Other benefits include asset protection from creditors (but note the importance of having a corporate trustee) as the assets of a discretionary trust are separate to the assets of the beneficiaries, and the ability to carry forward losses in certain circumstances. The main disadvantages is that the trust cannot distribute outside of the family group without penalty, and the structure is “controlled” rather than owned.

Unit trusts are fixed trusts in that the beneficiaries receive distributions in proportion to the number of ‘units’ they hold. The trust allocates the units to beneficiaries for consideration, and units in the trust can be bought and sold between parties. Beneficiaries receive a set percentage of the income and/or the capital of the trust in accordance with their unit holding.

Unit trusts are similar to companies, in that much like companies have shareholders with fluctuating share prices, unit trusts have units with changing unit values, and unit holders make an initial contribution to the trust as investors.

Unit trusts benefit from simplicity – the units define exactly who is entitled to the distributions. This is generally more suitable when unit holders fall outside of one family group. Another benefit is that the units in the trust may be transferred to another beneficiary easily, or alternatively cashed in. Additionally unit trusts provide asset protection and are subject to far less regulation in comparison to a company. The main disadvantage is that unit trusts have less flexibility with income and capital distributions.

Overall discretionary trusts give the trustee far more choice in how to distribute profits, but unit trusts define ownership better. Choosing the best structure is unique to your circumstances and ultimately you’ll want to get some professional advice around this because getting it wrong at the start can cause a costly problem further down the track.

Other related blogs:

Why use a Family Trust

Author: Danielle Pomersbach
Email: [email protected]

 

 

Online software for managing personal finances

Businesses use cloud-based accounting software for their day to day bookkeeping and accounting needs, to record organise and control their finances. But cloud software is not just for businesses and can be equally useful for managing your personal finances.

If you have an accounting or bookkeeping background you can quite easily use a basic version of cloud accounting software, like MYOB Essentials or Xero for your personal use.

But additionally there’s a whole range of personal finance software and apps (click here for a list) that can help you master the basics, become more efficient at managing your money, and even help you discover ways to meet your long-term financial goals. The apps all do something slightly different so choosing the most relevant personal finance software depends on your current financial needs. Go through the list and check them out, they’re mostly free to try.

Other personal finance software can help you track your expenses (click here for a list) while others can help with investment portfolio management. There are a number of online software tools that are actually free so it’s just a matter of seeing what’s right for you.

Importantly, most software will feed in your bank and credit card information so you have live data that can allow you to analyse and pinpoint areas where you can cut back to reduce spending and increase savings. Even credit card transactions will now show categories for different items e.g: Food & drink, Health & Fitness, Groceries and Travel etc. You can then allocate your bank fed transactions and reconcile your accounts thereby allowing you to manage your cash flow.

You can run various reports but one of the most useful things to do is to set disciplined budgets, and then track your costs against those budgets to manage your personal spending.

Other related blogs:

What is your net worth and why should you monitor it?

Author: Kay Giles
Email: [email protected]

How can you access your super?

Superannuation is the savings accumulated during your working life to support you in your retirement. Your super balance is preserved, meaning that you are unable to access your super legally, until you meet a what is known as a ‘condition of release’.

The most common conditions of release are:

  • Reaching your preservation age and retiring.

Your preservation age is the age to which your super benefits are preserved, and is dependent upon your year of birth. If you were born before 1 July 1960 then your preservation age is 55. Recent legislative changes have seen the preservation age increase incrementally to where, if you were born after 1 July 1964, then you super is preserved until you reach 60.

  • Reaching your preservation age and commencing a transition to retirement income stream.

A transition to retirement income stream, or TRIS, is a pension paid from your super balance with certain limits such as a maximum annual payment amount.

  • Being 60 and over and ceasing an employment arrangement.

Ceasing an employment arrangement can include changing jobs or retiring from one job in the situation where you may have two different employers.

  • Being 65 or over.

You do not have to retire once you reach 65 to meet this condition of release.

  • Death.

Other conditions of release exist, though they have strict eligibility criteria. These include:

  • Compassionate grounds.

Super funds can be released for a specific situation such as payment of medical treatment for yourself or a dependent, payment of a loan to prevent losing your house or to cover funeral expenses of a dependent.

  • Severe financial hardship.

Eligibility for accessing super via this method includes being the recipient of government income support payments continuously for 26 weeks, and an inability to meet immediate and reasonable family living expenses.

  • Upon diagnosis of a terminal medical condition.

Super may be accessed early if you have an illness that will likely result in your death within 24 months. This diagnosis needs to have been certified by two medical practitioners, at least one of which being a specialist practicing in the area of your illness.

  • Due to temporary or permanent incapacity.

Where your inability to work due to a physical or mental medical condition is temporary then you may be able to access super payments for the period you are unable to work. If this inability to work is permanent, and you are not likely to work again due to your medical condition, then you may be able to access your super balance without limit. Certification from two medical practitioners is required to support claims of permanent incapacity.

  • A super balance of less than $200.

If you have terminated your employment, and you have a super balance of less than $200 you may access this balance. This can extend to lost super that is held by the Australian Taxation Office with a total of less than $200. No tax is payable when accessing super with balances below this limit.

  • Through the First Home Super Saving scheme.

The FHSS scheme was introduced by the Federal Government in the 2018 budget to release pressure in housing affordability. The scheme allows eligible participants to save money for their first home purchase inside their super fund. This money can be accessed when the home is purchased.

Detailed application forms are required to be submitted to request early access to your super balance.

Other related blogs:

Access super before retirement

First home super savings scheme – now legislated

Author: Brigette Liddelow
Email: [email protected]

What is your net worth and why should you monitor it?

What is your net worth?net worth

Very basically your net worth is the amount by which your assets exceed your liabilities.

For the less financially savvy you might be thinking what does that mean? Think of it as the difference between what you own and what you owe. If you own more than what you owe you have a positive net worth. If you owe more than you own you have a negative net worth.

Your assets represent anything that can be converted into cash like share investments, real estate, superannuation, personal property including cars and motorbikes and of course cash itself. Your liabilities include debts such as credit cards, mortgages and student loans for example.

So why should you monitor it?

First of all for perspective – when you see your net financial position (that is your assets minus your liabilities) it gives you perspective of where you currently stand and an initial benchmark to track against as you start to accumulate more wealth.

For most people having enough money in retirement to live a comfortable lifestyle is one of their biggest financial goals but how do you know if you are on track if you don’t even know how much money you will need or if you are progressing towards getting to that target?

If you know what kind of lifestyle you want to live in retirement you can determine how much you will need in total assets to fund that lifestyle. From then on monitoring your net worth will give you clarity as to whether or not you are on the right path.

What are some simple tips to increase your net worth?

  • Pay down your debts – start with the debts that have the highest interest rates where the interest can’t be claimed as a tax deduction. Extra repayments reduce interest and this can have a significant compounding effect. As an example an additional $5,000 payment made in the first month of a thirty-year, $500,000 mortgage will reduce the total interest over the term of the loan by about $11,000 (at current interest rates).
  • Invest in superannuation – this is the legal way to minimise the tax you pay. It will save you a lot of money over the course of your working life, it’s locked away until retirement, protected from creditors, and is a good way to force your savings.
  • Spend less and save more – setting a good budget and monitoring your ingoings and outgoings is the best way to stay accountable
  • Invest wisely in growth assets – carefully considered investments have potential to grow, but are also generally less accessible than cash investments and less likely to be drawn down

Other related blogs:

Contributing to super – options for employees

Author: Nick Vincent
Email: [email protected]

Employee or contractor – the risks of getting it wrong

employee or contractorThe difference between an employee and a contractor is not always easy to distinguish. If an employer incorrectly classifies their employee as a contractor, they could face significant penalties. Therefore it is imperative that employers understand the differences between an employee or contractor and correctly categorize their workers.

There are many factors which help determine whether a worker is an employee or contractor. A few of these are listed below.

Factors that may indicate you are an employee:

  • The employer has a high degree of control over you. The employer determines what, how and where the work needs to be done.
  • You are paid at an hourly or daily rate.
  • The employer bears the risk of injury, insurance and rectification costs.
  • You wear a company uniform.

Factors that may indicate you are a contractor:

  • You have the discretion to decide what, how and where the work needs to be done and have the right to delegate your work to someone else.
  • You are only paid to achieve a result.
  • You have to fix mistakes at your own cost – you do not get paid to fix your errors.
  • You provide your own tools or assets necessary to complete the job.

If an employer incorrectly classifies an employee as a contractor, the employee would not have received the 9.5% super guarantee that they should have been entitled to. Because the employer has failed to make these superannuation payments, they will be liable to pay the super guarantee charge. This is made of the following components:

  • The employee’s super shortfall,
  • Interest of 10% per annum, and
  • An administration fee of $20 per employee per quarter.

As a further penalty, unlike normal super guarantee contributions, the super guarantee charge amounts are not tax deductible to the employer.

Further, businesses can also be liable to pay PAYG withholding penalty for failing to deduct the tax from an employee’s payments and an additional super guarantee charge of up to 200%.

Given the severity of the penalties, it is extremely important for businesses to ensure they correctly classify their workers as employees or contractors. The ATO has a decision tool that can assist you with this on their website.

Pro Tip:

Apprentices, trainees, labourers and trades assistants are always treated as employees as per the ATO.

Related blogs:

When do I need to pay super for contractors?
Do I need to pay payroll tax?

Email: [email protected]

 

Can I claim expenses when salary packaging a car?

Salary packaging a car through a novated lease arrangement has become a popular choice for employees and under the right conditions this can improve an individual’s overall tax position. However, it is important to be aware of the rules that apply to these arrangements.salary packaging a car

Firstly, it’s important to understand the arrangements for salary packaging a car.

When purchasing a car, there will be an arrangement between the employee, the employer and a finance company. This is known as a novated lease arrangement. The finance company owns the vehicle and the employee is leasing it from them. The employer generally makes the car repayments as well as running costs on the employee’s behalf. The employee’s wage is reduced to offset the costs paid by the employer. This is known as salary packaging.

Salary packaging may save the employee from paying some income tax, however it does open up another tax regime known as Fringe Benefits Tax (FBT). This is tax payable by the employer on the private portion of a benefit, and is usually passed on to the employee.

Depending on the arrangement between the employer and the employee, either can be expected to pay the running costs of the vehicle such as the fuel and services. In a situation where the employee pays the running costs of the car, some would expect that they would be entitled to claim a deduction for these expense. However, a fundamental factor in being able to claim motor vehicle expenses as a tax deduction is that the individual must own the vehicle. As mentioned earlier, under a novated lease arrangement, the finance company owns the vehicle, not the employer. As such, a tax deduction would be denied.

Even though the employee cannot claim the out of pocket running costs as a tax deduction, there can still be a benefit. The expenses should be recorded and given to your employer to reduce the FBT payable. Less FBT means more salary in the hand.

There is usually a fairly complex calculation to try to work out the arrangement that will give the best result to the employee, taking into account the type and value of the vehicle, estimated running costs, potential tax savings, and FBT costs. Employers may need to engage their accountants or novated lease companies to make these calculations.

Other related blogs:

New Guidelines for FBT Exempt Motor Vehicles

Author: Georgia Burgess
Email: [email protected]

 

You need a business roadmap

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

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

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

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

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

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

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

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

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

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

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

Other related blogs:

Cash is king

Email:[email protected]

 

Buying Bitcoin – Will I pay tax?

The Bitcoin frenzy in late 2017 was quickly followed by a crash over the next year that saw it drop from above AUD$25,000 to less than $4,500. Although we have no view on cryptocurrency performance, recent predictions from crypto analysts suggest the upward trend this year may be set to continue, with Bitcoin prices reaching upwards of $18,000 in the last month. This bull market is set to catch the eye of more and more Australians if this recent trend continues, raising many questions for the everyday taxpayer who may be looking to try their luck at investing in this unusual market.

If you invest or trade in cyptocurrency, it’s vital that you understand the tax consequences.

You will never pay tax at the point of purchase when it comes to Bitcoin or other cryptocurrencies, or if there is a change in the market value of your current holdings. Yet you may have to pay capital gains tax (CGT) when you sell or dispose of cyptocurrency later on.

Cryptocurrencies such as Bitcoin can be used to pay for goods and services all over the world, and have become a popular online payment method. If you have predominantly purchased Bitcoin to purchase items for your own personal use or consumption, there will usually be no tax to pay on disposal. An exception to this is if you acquire more than $10,000 for personal use and make a capital gain. But if you acquire more than $10,000 for personal use and make a capital loss, this will be disregarded. It is less likely the ATO will deem cryptocurrency a personal use asset if it is held for an extended period of time before any personal use transactions are made.

If you trade between cryptocurrencies, CGT will need to be calculated for the first asset held as it is deemed you have disposed of it before acquiring the second asset. This is achieved by taking the market value in Australian Dollars at the time of the disposal.

If you hold cryptocurrency as an investment for more than 12 months, you may be entitled to a 50% CGT discount upon disposal. It is important to note that this 12 month period resets every time you sell one cryptocurrency for another.

There are some cases where the trading of cryptocurrency will be treated as trading stock which takes it out of the CGT rules whereby proceeds are deemed as ordinary income. This form of trading will have to satisfy various conditions that suggest the activity is that of a business by nature.

Proper record keeping is essential. At our practice we’ve seen the consequences of poor record keeping around cryptocurrencies. The sheer volume of trades can make accounting for these difficult, and a lack of records can result in extra accounting fees or inaccurate tax records. It’s important to keep all purchase and sale documents, exchange records, and digital wallet codes and keys which hold important information such as transaction dates, costs, proceeds and who and what the transactions were for.

Author: Jake Solomon
Email: [email protected]

 

Uber drivers and tax

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

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

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

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

Expenses which relate to your motor vehicle include:

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

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

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

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

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

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

Other related blogs:

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

Author: Rhys Frewin
Email: [email protected]

 

Cash is king

I’ve seen plenty of businesses with cash flow problems. It usually starts with deferred payment of creditors, followed by missed employee super obligations, then late payment of the quarterly BAS. And by the time it gets to this point, it’s difficult to break the cycle.

Cash is king. We all know the saying, and it’s true. A profitable business with strong cash flow and healthy cash reserves is far more likely to be successful and weather the storms that invariably hit businesses.

There are loads of technical tools and software designed to help you manage your business cash flow. But that’s all they are – tools. They don’t solve your cash flow problems. This requires a concerted effort from you, the business owner, and some strong discipline.

But first things first – cash flow management won’t save an unprofitable business. If your business has no prospect of making sustainable profits, you should immediately seek advice around your strategy, operations and costs.

If you’re profitable, then disciplined cash flow management will guide you through the known seasonal fluctuations and prepare your business to cope with other unforeseen circumstances.

The first step to good cash flow management is to prepare a monthly forecast. This is essential. You might choose to forecast cash flow or profit, or even set a budget and work out your break-even sales level. This will show you when the dips are coming and give you a benchmark to compare to on a regular basis. Any variances can then be used to regularly analyse and improve your trading performance.

Your forecast doesn’t need to be complicated. You might manage this yourself, or your accountant or a good bookkeeper will be able to help.

While analysing your results, you’ll be constantly looking for ways to improve cash flow. Here’s some things you might look for:

  • Are you invoicing your clients immediately?
  • Do your invoices show a clear due date for payment?
  • Can you encourage more credit card sales? They settle quicker.
  • Can you introduce and promote pre-paid sales vouchers?
  • Have you thought about using after-pay services (but weigh up the costs)?
  • Do you offer multiple payment methods?
  • Do you hold stale stock (if so, discount it and move it on)?
  • Are you incurring heavy interest charges on credit cards?
  • Can you trim some excess costs?
  • Is there a more efficient way to do things?

Most accounting software now offers budgeting features, auto reminders for debtors, daily bank feeds, automated posting rules, and mobile device invoicing. These features can be used to ensure your data is always up to date so you can monitor your performance and make informed decisions immediately.

And make sure your software is in the cloud, so you can share your data with us, and get instant advice when it’s needed most.

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

Other related blogs:

Record keeping for small business

Email:[email protected]