Whip your business into shape now!

  • Look at your financial statements each month.  As a minimum, you need to view your Profit & Loss, Balance Sheet, Aged Receivables & Aged Payables reports.

 

  • Check your bank account. If you don’t have any money in it and are constantly relying on credit, this is a good sign you have a Cash Flow problem that must be addressed quickly
  • Tips to increase earnings:
    • Brainstorm ways to increase sales without discounting or incurring costs
    • Stop discounting
    • Calculate how much Profit Margin you are making on everything you sell
    • Work out where you can increase prices without having a negative impact on sales
    • Collect all money owed to you
    • Investigate ways to get paid immediately (COD terms)
  • Tips to slow down spending:
    • Re-negotiate better supplier terms
    • Minimise unnecessary spending on Fixed Assets before you invest in plant and equipment, determine how much sales will have to increase before you pay off the item
    • Order only as much inventory as you absolutely need. If you can get new shipments of stock in 3-5 days, there is no need to have 3 months worth of sales sitting on your shelves
    • Cut unnecessary expenses

ARE YOU BREAKING EVEN?

Wouldn’t it be great to start the new financial year knowing exactly the level of sales you need to achieve in order to meet your fixed financial commitments?

Breakeven is one of the most simple and powerful calculations that you can use to achieve profitable growth, measure your performance.  A company is said to “breakeven” for a period (usually a month) when its sales revenue catches up to its costs. Specifically, accountants talk about break-even as the point where ‘fixed costs’ (rent, salaries, etc.) are matched by ‘gross profit margin’ (sales revenue minus cost of goods sold).

Calculating your breakeven each month and knowing exactly which day of the month you breakeven, allows you to hit the sweet spot of your company and make informed, strategic decisions about how to achieve growth that is profitable for your bottom line.

Tips to Calculate Breakeven in Your Business:

  • At a minimum, breakeven must be calculated monthly.  Your key numbers (like gross profit margin and fixed costs) are changing all the time, which means that you’re break-even is also changing.
  • Break the target down into bite size pieces – i.e. how much per hour or per salesperson each day.  The target is only useful if you can track and measure it each day.
  • If you are behind target at a given point, resist the urge to put items on sale to increase revenue.  Discounting decreases your gross profit margin which makes it even harder to hit your breakeven target.
  • Post the targets somewhere prominent and demonstrate to everyone that you are serious about measuring and reporting on profitability. It is not enough to [just] break-even and cover costs – you should set and strive for a breakeven plus profit target each month.

END OF FINANCIAL YEAR GUIDELINES (EOFY)

The end of financial year is an extremely busy and demanding time for employers and staff. Follow the EOFY guidelines to minimise unnecessary accounting fees.  Check that your current bookkeeper has a checklist and that they are providing your accountant with a full set of reconciled accounts. We’ve prepared a quick checklist to help you close off the old year and get ready for the new financial year.


WHICH ACCOUNTING SOFTWARE TO REPLACE ATO E-Record?

The ATO announced that their E-Record system will not be available from July 2010.
So where does that leave small business owners?
Many of our bookkeeping clients do not have accounting software, they simply hand us the paperwork and we prepare the bookkeeping on their behalf. Companies like MYOB offer a basic software package starting at around $60 and there are other options of accounting software on the internet.

  • You can browse through the range of MYOB software HERE
  • Need MYOB Training? or Want to know if MYOB is the best for your business?

Before you rush into a new accounting software program, have a chat with us and we’ll offer some economic solutions for your business. We’ll help you determine which accounting software may be most suitable for your business, to replace ATO E-Record.

Whilst the staff at Harvey Norman and similar electrical stores sells software, they know little about accounting or bookkeeping and will endeavour to sell you the most expensive package they can!


ATO TIP FOR QUICKER ACTIVITY STATEMENT PROCESSING

When you lodge your next Activity Statement remember these two points in order to avoid delay with your refund:

  • If you are reporting a zero amount – print ‘0’ – don’t use nil, zero or leave the field blank.
  • Leave boxes blank that are not applicable to you – don’t use N/A or nil.

ATO CUTS RED TAPE FOR EMPLOYERS WITH LESS THAN 20 STAFF

The government is offering a free superannuation clearing house service to small businesses with less than 20 employees.

The Small Business Superannuation Clearing House (the Clearing house) is administered by Medicare Australia and lets employers pay their super contributions to a single location. For those of you who currently have employees belonging to different super funds this could potentially save you or your bookkeeper significant amount of time in preparing the monthly or quarterly super contributions.

The Clearing house is available from 1 July 2010.

For more information, visit www.medicareaustralia.gov.au/super or phone Medicare on 1300 660 048.

 


We hope you enjoyed the first edition of our bookkeeping & accounting tips and we look forward to sharing many more valuable tips with you in our next issue.

Calculating a Charge-Out Rate

Many service businesses find establishing a fair charge-out rate difficult. Here are some guidelines on establishing a fair but profitable rate for your business.

HOW TO WORK IT OUT

These are the 5 basic steps you need to take to work out a charge-out rate for your time:
1.       Decide what income you want from your business
2.       Work out how many hours you can realistically charge out per year
3.       Work out a chargeable rate to achieve your income
4.       Work out your overhead costs
5.       Add a profit margin

1.    DECIDE WHAT INCOME YOU WANT
Assume you want an annual income of at least $48,000 (before tax) from your business.  This figure could be related to the standard of living you want or what you could earn elsewhere as a salary.
2.    HOW MANY HOURS CAN YOU REALISTICALLY CHARGE-OUT?
When you’re selling your knowledge, skills and services, you’re effectively selling time.  The key point here is that you have to be realistic about the amount of time you can actually charge out during any one year.

This is how it’s worked out:

  Weeks x Hours Total Hours
Total Year

52 x 40 

2,080

DEDUCT
Holidays

3 x 40 

120

Public Holidays

2 x 40 

80

Sick Days

1  x 40 

40

Total Hours to Deduct  

240

Balance Available  

1,840

Less Non-Chargeable Tasks

Say 25% of your time

460

TOTAL CHARGEABLE HOURS  

1,380

3. WORKING OUT YOUR CHARGE-OUT RATE TO COVER YOUR INCOME NEEDS

Annual Desired Income

$48,000

Divided by Chargeable Hours

1,380

Hourly Charge Out Rate   

$34.78

Add Appropriate Industry Levy

Say 4%

$36.50

So in order to earn a salary of $48,000 a year, you must at least charge your time out at $36.50 (rounded up). But this is only the labour component of your charge out rate. You still need to recover your office overhead which takes us to step four.

4. WORKING OUT YOUR OVERHEADS
You should know what your overhead costs are from previous profit & loss statement or if you are a new business from your business plan or budgets.
Let’s assume, for this exercise that they are something of this order:

Accounting Fees

$1,000

Advertising

$2,000

Cleaning

$500

Depreciation

$1,000

General Expenses

$700

Electricity

$1,000

Insurance

$600

Legal Fees

$800

Motor Vehicles

$3,000

Printing

$800

Rent

$6,500

Repairs & Maintenance

$900

Telephone

$1,200

TOTAL

$20,000

$20,000 divided by the 1,380 chargeable hours means you need to add another $14.49 to your hourly charge-out rate of $36.50.

5. ADDING A PROFIT MARGIN
In addition to making your target salary of $48,000 you also need to make a profit margin to cover you for replacement costs of equipment and repairs as you don’t want to be taking this out of your salary.

So the final calculation is:

Charge-out rate to cover your income requirements

$36.50

Charge-out rate to cover your business overheads

$14.49

Sub-Total

$50.99

Profit Margin (say 15%)

$7.65

Final charge-out rate

$58.64

This means that your charge-out rate should realistically be at least $58.64 an hour minimum.

 
THINGS TO CONSIDER
Is the rate competitive?
Is it lower than average?
Is it higher than average?
Do you lack confidence and undersell your services?
If your rate is well above average, you might need to look at emphasising the value-added components that justify the difference.
 

1 Article – Business In Tough Times

With marketing, there are a few questions you have to ask yourself: How good are you at marketing? Have you ever had expert help? Are you making yourself a victim of tightwad ways and false economy?

So many business owners forget that most of us get 80 per cent of our business from 20 per cent of our customers. How well do you market to your best 20 per cent? Have you ever asked them respectfully for referrals for your business?

Business speaker and customer service expert Martin Grunstein argues that so many of us in business simply don’t ask for business. We don’t even effectively communicate to our customers what we sell, he says.

I learnt this first hand when I innovated by introducing a ‘messages on hold’ tape for my clients while they were waiting on the line. This simply told my customers that our business included financial planning, business coaching and the publishing of magazines and newsletters as well as books.

It staggered me the number of people who said they didn’t know my business did all of these things. Most knew me as a media commentator and business speaker and so for years I had ignored potential markets. The cost of this innovation was small but the returns have been considerable.

When you are feeling the pressure in business, Edward de Bono, who I interviewed on my Talking Business program on Qantas, says business owners have to be lateral thinkers to be successful. He says the successful competitor thinks outside the box, and his words are even more relevant when a recession threatens.

Believe it or not, when your business is under stress for whatever reason, it could be time to seek expert guidance. Sure, saving money and killing costs are important during tough times, but the stress could be partly of your own making.

You might be working in your business too much and not on it. You might have a lot of frustrations in your business and you don’t know how to create systems to rid yourself of them. The goal is to have a business that works for you and that works even if you are not there. That’s when you have a business you can sell, franchise or that can just be a joy to own.
I remember my business coach gave me some great advice a few years back and I will share it with you.

Tough times may not seem like the best times to give bonuses, but if one of your departments is truly excelling, you can build great staff loyalty by acknowledging successful efforts monetarily, she said.

Also, listen openly to your employees and communicate honestly about business conditions. Simple courtesies like these can have long-lasting positive effects.

Finally, now is the time to really talk to and listen to your customers it’s the best way to keep them and get more business from them. It is also the time to objectively ask if you need help from experts to make your business more professional.

Tips

– Make sure customers know everything your business offers.
– Ask for business
– Get guidance to ensure your business is running to its maximum potential.

Is a Bookkeeper a Luxury?

For a small business, paying a bookkeeper might seem like an extravagance. In reality, the time and stress of DIY bookkeeping may be affecting the growth of your business.

Since July 2000 there has been a new dance in the business world. It’s called the Business Activity Statement, commonly known as the BAS. The BAS isn’t easy to get the hang of. Many small business owners are still trying to teach themselves the steps. Worse, doing the BAS is only one of a number of bookkeeping routines that have to be learned if the show is to go on.

It’s an aspect of running a business that gets a lot of people down. Keeping up with day-to-day financial management, submitting regular BAS reports to the tax office, and preparing end-of-year information for the accountant are all on the ‘Yuk’ list for many small business owners. As a result, these things are often left to the last minute — or not done at all.

It’s no wonder. Bookkeeping is an expertise and it’s time-consuming. Learning how to correctly enter data into a software program, making sure GST is recorded properly, keeping up with tax office rulings on payroll and Super, and producing accurate cashflow reports can be unwelcome distractions from the work you are passionate about.

If this sounds like you, perhaps it’s time to consider hiring a bookkeeper.

Bookkeeping is different from accounting. Bookkeeping is about day-to-day management of the finances. An accountant can do that, but may charge a lot more than a bookkeeper. An accountant is valuable for preparation of tax returns, conducting an overview of the business and providing financial planning.

During the year, the bookkeeper will, at the very least, keep up-to-date records of payments your business makes to suppliers and income received from sales of products and services to clients. This information will be used by the bookkeeper to prepare the BAS statement which goes to the tax office, usually every quarter.

Bookkeepers can do more. They can maintain inventory records, manage a payroll, and provide you with regular management reports so you know how your business is going now and will be going in a week, month or year from now. It’s up to you how involved you want your bookkeeper to be.

Bookkeepers don’t need to be employees or even work at your office. These days many bookkeepers run their own business, often from home. They will organise a secure system to regularly pick up receipts and other documents which they return to you when they’ve recorded the information.

There is a huge range in the hourly rate contract bookkeepers charge, from $45 to $80 per hour. Like any service, paying the least doesn’t mean you are getting less and paying the most doesn’t mean you are getting the best. It depends on what qualifications a bookkeeper has, whether they have overheads, whether you’re getting an account manager as well as a bookkeeper for the hourly rate and how complex the work is that you want done.

To date the bookkeeping industry has been unregulated so there has been no specific qualification, amount of experience or association membership required for someone to call themselves a bookkeeper. Anyone could complete a few hours of training and claim to be qualified. This year the legislation is changing and bookkeepers providing BAS services will be required to have, at least, a Certificate IV in Financial Services (Accounting).

There is no standard amount of time a bookkeeper spends on entering data or preparing a BAS, so it’s impossible to suggest how much your bookkeeping might cost. A guess can be based on the number of purchases and sales made per week or month and how big your payroll is, but there are so many varying factors that you won’t really know the cost until your bookkeeper gets going. It always takes a bookkeeper longer in the beginning as they set up systems and generally get to know how your business works.

Hiring a bookkeeper can be tricky, especially if bookkeeping is something you don’t really understand. As with any recruitment process, you base your decision on qualifications, references, length of experience and personality. Knowledge of your particular industry can be a bonus but it’s not necessary. A highly experienced, well-qualified bookkeeper will ask the right questions and learn quickly.

You might pay more, but it can be worthwhile using a bookkeeping company rather than a sole operator. A bookkeeping company will have a few bookkeepers on staff, should conduct regular reviews of its bookkeepers’ work, should ensure their bookkeepers are up to date on all tax office rulings and software changes and will be able to supply a fill-in should your regular bookkeeper take leave for any reason.

The lowest-cost option for getting your BAS prepared and keeping basic financial records is for a bookkeeper to work directly from your bank statements. You note which are business and which are personal expenses, and the bookkeeper will enter and code the information. Some companies offer packaged fees for this, so the costs are set and there are no surprises. With this option, you can still get the regular reports that businesses benefit from, such as profit and loss and cashflow reports, as well as end-of-year reports for the accountant, which may make your tax returns less expensive.

Whichever style of bookkeeping service you choose, knowing that your financial records are being kept accurately and that you’re doing everything right as far as the tax office is concerned will give you peace of mind. More than that, the time you used to spend dancing clumsily around ATO deadlines can now be spent catching up on industry developments, training staff and, most importantly, growing your business.

More News

How to Get Your Bills Paid by Christmas

No one likes to do it, but sometimes it’s necessary to get nasty with customers that have not paid your bills. Unfortunately, given the time of year and the state of the economy, now’s the time to get nasty. There are a heap of different things you can do to discipline unruly debtors. The trick is to start hammering them as soon as invoices fall due.

Step 1 – don’t sit on late invoices
As soon as an invoice falls due there should be a process in place so that a reminder is sent to the customer whose account is in arrears, with a request for payment by a specific date – say five days from the time of the first reminder notice. If the invoice isn’t paid after that, telephone the errant client and find out why the invoice has not been paid. Then, set another payment date or, if the customer is having financial difficulties, arrive at an agreement about a payment plan. If the customer misses the next date for payment, it might be prudent to chase the account through more formal means.

Step 2 – use a debt collector
If the invoice in question is sizeable enough, it’s worth appointing a debt collector to chase it. This sends a message to the customer you are serious about collecting the money – just the sight of a debt collector can scare some late payers into meeting their obligations.

Step 3 – tighten your credit policy
If you’re constantly finding your customers are late paying their debts, it could mean you need to tighten your credit policy. It’s an idea to shorten your payment terms, perhaps from a month to 14 days. It might also be an idea to review your appetite for offering credit to customers, and only offer credit to those you know have the capacity to pay their accounts. So thoroughly vet new customers’ ability to pay your invoices when they first become customers. This means formally checking their credit record and credit references, rather than simply hoping they can pay their bills.

Step 4 – fire customers who don’t pay their accounts
Don’t keep doing business with customers that are regular late payers. These people are not making you money, will never make you money and are just wasting your time. Letting non-paying customers go only opens up room in the business for new customers that will pay your invoices. When the economy was booming, many of these steps were simply unnecessary because most customers could pay their bills on time. But times have changed and businesses that don’t recognise this and tighten their credit policies accordingly could see themselves unable to pay their own bills, the worst case scenario by anyone’s measure.

2011 Year End FBT Planning

With the FBT year ending on 31 March 2011, business owners and managers should now start planning and preparing to ensure they are compliant, and minimise the possibility of an audit.

As a result of a high level of non-compliance amongst many small and medium sized businesses, the ATO is monitoring Fringe Benefits Tax (FBT) returns closely.

One of the ATO’s concerns is that large numbers of employers have not submitted FBT returns, although they have provided “taxable” employee fringe benefits. An employer cannot avoid fringe benefits tax by choosing not to claim a tax deduction for a particular expense.

The ATO’s major focus areas include:

  • cars and in particular luxury cars with high business use claims;
  • cars that are garaged at home;
  • car parking;
  • living-away-from-home allowances;
  • benefits provided to employees by third parties;
  • entertainment;
  • benefits provided under the $300.00 minor exemption; and
  • accounting for employee contributions.

It is increasingly likely that the ATO will audit businesses that are not complying. In a world of sophisticated computer programs and data matching software, businesses can easily be caught. For example, if cars are provided to employees, data-matching against state road authority records, questionnaires and compliance verification will be key trigger points for an ATO audit.

Important issues that business owners need to consider in 2011 are:

Documentation and Calculation of Benefits

  • Have all the odometer readings at 31 March been recorded and signed?
  • Have all declarations been received to ensure that FBT claims are valid? For example, the “living away from home” or “business use” declarations must be signed and be in order.
  • If the ‘actual’ method for car benefits is used, has a log book been kept for a continuous period of 12 weeks? Is the log book more than 5 years old? If so, it is no longer valid and a new log book will need to be kept for another 12 weeks.
  • If the ‘statutory method” for car benefits is used, has the correct cost price been calculated and is inclusive of GST?
  • Ensure that working papers, invoices and other documentation (e.g. travel diaries) have been kept and are up-to-date.
  • Undertake a review of certain accounts in the general ledger (e.g. office expenses, staff amenities and subscriptions) to identify any private expenses paid on behalf of employees which are subject to FBT. Your bookkeeper or accountant should be given this task.
  • Have the FBT concessions been correctly applied? For example, management may decide that all meal entertainment benefits are under $300 for each employee for the purpose of the minor benefits exemption, but are they in fact minor benefits? i.e. are they provided infrequently and irregularly? If not, the benefits are subject to FBT.
  • If the business is claiming an FBT exempt commercial vehicle, is it listed in an ATO ruling?

Employers are entitled to rely on the documentation provided by employees (e.g. car log books) when preparing the FBT return. However, this reliance does not prevent the ATO from making adjustments in an audit where the documentation is found to be false or incorrect and imposing extra tax together with interest and penalties.

Eligible Work-Related Items

These are very tax effective benefits that can be provided to employees as the items are fully tax deductible and exempt from FBT if certain conditions are satisfied. Examples include a laptop computer, mobile phone, briefcase, electronic diary, computer software, and tools of trade.

The FBT exemption is limited to one item of each type per employee every FBT year and the item has to be used “primarily for work purposes”. For example, an employer can provide an employee with a laptop computer, mobile phone and an electronic diary every FBT year.

If the first item was lost, stolen, destroyed, or is replaced due to developments in technology, the employee can be provided with a replacement item in the same FBT year and still obtain the FBT exemption.

Post FBT Lodgement Issues

Following lodgement of the FBT return, a number of other issues need to be considered including:

GST & Income Tax
There needs to be consistent treatment between income tax, GST and FBT. For example, if the business is not entitled to claim entertainment expenses, then it cannot claim GST credits.

Where an employee has made a contribution (or payment) towards a fringe benefit, there is a requirement to report and remit GST of 1/11th on the business activity statement. The GST exclusive value of the contribution also needs to be reported on the income tax return.

Payroll
An employer is required to report certain frin ge benefits on an employee’s PAYG Payment Summary where the taxable value of these benefits exceeds $2,000 per employee.

Salary Packaging
The salary packages of employees needs to be reconciled. For example, in relation to a car benefit, this includes all lease and running costs and also the FBT charge.

Workcover & Payroll Tax
The amount of taxable wages for workcover and payroll tax purposes is the grossed-up value of fringe benefits provided. This imposes an additional compliance burden on employers and exposes them to penalties and interest where they have understated their workcover and payroll tax obligations.

Where is your Break Even Point?

Where is your Break Even Point

Courtesy of (ABN) Australian Bookkeepers Network Tax Tuesday Highlight

The break even point for any business is probably the most critical number that goes ignored by most start up businesses. And even if some analysis is done by a potential business owner, it is usually only done on direct costs and not including overheads. However, not only is it important to know for start up business, but it’s a critical number to understand for all business. It is a guide, a minimum standard if you will, that will allow you to understand the point in time that you cross over from loss to profit (or vice versa).

Imagine a slowing economy or a business experiencing decline (not too hard to imagine in the last few years). Knowing your break even point allows you greater understanding and the ability to manage your finances in a more effective way. As things decline you can be acutely aware of the minimum standard that must be reached and also, forecast with more accuracy (and more easily) the losses that may be made if the declining trend continues. This is of most importance if you need to seek external finance to prop up cashflow.

A break even analysis can form the basis of so many calculations:

  • Sales targets for your sales team
  • Cashflow predictions
  • Profit analysis
  • Trend analysis
  • Many many more

Break even points can be calculated over any time period. Most people want a critical understanding of their monthly numbers. Therefore, knowing your break even point on a monthly basis. To work out your break even point you need to know the following for each month:

  • Average price of each product/ service sold
  • Average cost of each product/ service to sell
  • Fixed costs for the month

Using these numbers, we can calculate a crude break even point that you can keep in the “basic toolkit” of your business.

For more information contact allthatcounts on 02 8850 1491

12 common myths – Employee or contractor?

There are several myths and assumptions by both workers and employers when it comes to trying to decide whether or not someone is a contractor or an employee.

Here are 12 common myths that often get both businesses and workers into hot water.

  1. Having an Australian business number (ABN)

Myth: If a worker has an ABN they are a contractor.

Fact: Just because a worker has an ABN does not mean they will be a contractor for every job. Whether the worker has or quotes an ABN makes no difference and will not change the worker into a contractor. To determine whether a worker is an employee or contractor, you need to look at the whole working arrangement and examine the specific terms and conditions under which the work is performed.

  1. Common industry practice

Myth: “Everyone in my industry takes on workers as contractors, so my business should too.”

Fact: Just because “everyone” in an industry uses contractors does not mean they’re correct. Don’t use “common industry practice” to make determinations.

  1. Short-term work

Myth: Employees cannot be used for short jobs or to get extra work done during busy periods.

Fact: The length of a job (short or long duration) or regularity of work makes no difference to whether a worker is an employee or contractor. Both employees and contractors can be used for:

  • casual, temporary, on call and infrequent work
  • busy periods
  • short jobs, specific tasks and projects.

To determine whether a worker is an employee or contractor, you need to look at the whole working arrangement and examine the specific terms and conditions under which the work is performed.

  1. The 80% rule

Myth: A worker cannot work more than 80% of their time for one business if they want to be considered a contractor.

Fact: The 80% rule, or 80/20 rule as it is sometimes called, relates to personal services income (PSI) and how a contractor:

  • reports their income in their own tax return
  • determines if they can claim some business-like deductions.

It is not a factor a business should consider when they determine whether a worker is an employee or contractor.

  1. Past use of contractors

Myth: “My business has always used contractors, so we do not need to check whether new workers are employees or contractors.”

Fact: Before engaging a new worker (and entering into any agreement or contract), a business should always check whether the worker is an employee or contractor by examining the working arrangement. Unless a working arrangement (including the specific terms and conditions under which the work is performed) are identical to previous arrangements, it could change the outcome of whether the worker is an employee or contractor.

Sometimes a business may also have incorrectly determined their worker is a contractor. Continuing to rely on the original “contractor” decision would mean the business is incorrectly treating all future workers as contractors when they are employees.

  1. Registered business name

Myth: If a worker has a registered business name, they are a contractor.

Fact: Having a registered business name makes no difference to whether a worker should be an employee or contractor for a particular job. Just because a worker has registered their business name does not mean they will be a contractor for every job or working arrangement.

  1. Contracting on different jobs

Myth: If a worker is a contractor for one job, they will be a contractor for all jobs.

Fact: If a worker is a contractor for one job, it does not guarantee they will be a contractor for every job. The working arrangement and specific terms and conditions under which the work is performed will determine whether a worker is an employee or contractor for each job.

Depending on the working arrangement, a worker could be an:

  • employee for one job and a contractor for the next job
  • employee and a contractor if completing two jobs at the same time for different businesses.
  1. Paying super

Myth: “My business should only take on contractors so we do not have to worry about super.”

Fact: A business always needs to look at the working arrangement and examine the specific terms and conditions under which the work is performed to determine whether a worker is an employee or contractor. A business cannot decide to treat a worker as a contractor when they are an employee.

Additionally, businesses may be required to pay super for their contractors. If you pay an individual contractor under a contract that is wholly or principally for the labour of the person, you have to pay super contributions for them.

  1. Specialist skills or qualifications

Myth: Workers used for their specialist skills or qualifications should be engaged as contractors.

Fact: If a business takes on a worker for their specialist skills or qualifications it does not automatically mean they are a contractor. A worker with specialist skills or qualifications can either be an employee or contractor depending on the terms and conditions under which the work is performed. Qualifications or the level of skill a worker has (including whether they are “blue” or “white” collar) makes no difference to whether a worker is an employee or contractor.

  1. Worker wants to be a contractor

Myth: “My worker wants to be a contractor, so my business should take them on as a contractor.”

Fact: Just because a worker has a preference to work as a contractor does not mean your business should engage them as such. Whether a worker is an employee or contractor is not a matter of choice, but depends entirely on the working arrangement and the specific terms and conditions under which the work is done.

If you give into pressure and agree to treat an employee as a contractor, you can face penalties, interest and charges for not meeting your tax and super obligations.

  1. Using invoices

Myth: “If a worker submits an invoice for their work, they are a contractor.”

Fact: Submitting an invoice for work done or being “paid on invoice” does not automatically make a worker a contractor.

To determine whether a worker is an employee or contractor, you need to look at the whole working arrangement and examine the specific terms and conditions under which the work is performed. If based on the working arrangement a worker is an employee, submitting an invoice or being paid on the basis of an invoice will not change the worker into a contractor.

  1. Contracts

Myth: “If a worker’s contract has a section that says they are a contractor, then legally they are a contractor.”

Fact: If a worker is legally an employee, a contract saying the worker is a contractor will not make the worker a contractor at law. Businesses and workers will sometimes include specific words in a written contract to say that the working arrangement is contracting in the mistaken belief that this will make the worker (who is an employee) a contractor at law.

If a worker is legally an employee, a contract specifying the worker is a contractor makes no difference and will not:

    • override the employment relationship or change the worker into a contractor
    • change the PAYG withholding and super obligations a business is required to meet

 

I know it’s confusing but if you are unsure the ATO has a fabulous tool which can be found here which can help you and best of all you can rely on the result.

It’s Fringe Benefits Tax time

FBT — your business basics

If you own a business that employs staff, and provide remuneration to your employees in a form other than straight salary, you may be up for fringe benefits tax (FBT). The upside for your workers is that they do not then have to pay income tax on the value of the benefits provided to them.

FBT is separate to income tax.  The FBT regime has its own tax year, from April 1 to March 31 (with the FBT return lodgement deadline being May 21, but longer if you use the services of this office).

FBT is calculated using a “grossed-up taxable value” of the relevant benefit provided. It is payable at the current FBT rate of 47% for the FBT year ended March 31, 2015.  Note that the rate increases to 49% as a result of the Temporary Budget Repair Levy for the 2016 and 2017 FBT years.

Under the FBT law, a fringe benefit typically arises when one of the categories of benefits (see below) is provided by an employer, an “associate” of an employer, or a third party under arrangement with either of the former.

An employer is providing a fringe benefit if, for example:

  • it allows a staff member to use a work vehicle for private purposes
  • provides a loan to the employee with interest charged (even a minimal level of interest), or
  • reimburses a worker for a private expense, such as school fees.

Fringe benefit categories

The FBT law has several different categories of fringe benefits, which include:

  • car fringe benefit
  • debt waiver
  • loan fringe benefit
  • expense payment
  • housing fringe benefit
  • living away from home allowance
  • airline transport
  • board (accommodation)
  • entertainment
  • tax-exempt body entertainment
  • car parking
  • property fringe benefit, and
  • residual benefits (that is, other benefits not covered by the above).

Salary of course is not a fringe benefit, and neither is a super contribution. Entitlements under employee share acquisition schemes are not deemed to be a fringe benefit, nor are termination payments.

Calculating FBT

The rules for calculating the grossed-up taxable value of a fringe benefit are subject to two separate “gross-up” rates – a higher and a lower gross-up rate.

Grossing-up means increasing the taxable value of benefits you provide to reflect the gross salary employees would have to earn at the highest marginal tax rate (including Medicare levy) if they were to buy the benefits after paying tax.

The higher gross-up rate (2.0802 for the 2014-15 FBT year, and 2.1463 for the 2015-16 FBT year) is used where you are entitled to claim a GST credit for GST paid on benefits provided to an employee, known as GST-creditable benefits. The lower gross-up rate (1.8868 for 2014-15 and 1.9608 for 2015-16) is used where there is no entitlement to a GST credit.

 

Consequences of increased FBT and gross-up rates

With the temporary increase to the FBT rate, there could be a case for employers to reconsider their current fringe benefit arrangements with affected employees in light of the increase.

For employees on packages of less than $180,000 a year, it may end up that upon examination from April 1, 2015 it will be more beneficial to provide remuneration via salary and allowances rather than fringe benefits. Where employers provide fully taxable benefits, such as paying for an employee’s private health insurance, it may be a better option to provide additional salary, which would be taxed at a substantially lower rate than 49%.

The increase in both the FBT rate and the gross-up factors means that employers should reconsider all current fringe benefits arrangements with their staff to limit the impact of possible additional costs and ensure that any arrangement is still as beneficial as possible for both employee and employer.  Employers should also note that the value of taxable fringe benefits once grossed-up are included in the calculation of taxable wages for payroll tax purposes.

Exemptions from FBT

Minor benefits

Minor benefits (that is benefits that have a GST-inclusive value of $300 or less) are generally exempt from FBT. However one of the conditions to maintain this exemption is that minor benefits must be offered with “infrequency and irregularity”. There can also be other conditions (check with us). Examples of minor benefits can include the occasional lunch, birthday gifts, flowers on special occasions, the Christmas party, or a one-off interest free loan. Note also that there can be multiple minor benefits (that is, each can have a value of less than $300).

Certain exempt vehicles

There are also circumstances when private use of a car may be exempt from FBT. An employee’s private use of a taxi, panel van or a utility designed to carry less than one tonne, or any other road vehicle designed to carry a load of less than one tonne (that is, one not designed principally to carry passengers) is exempt if their private use of such a vehicle is limited to:

  • travel between home and work
  • travel that is incidental to travel in the course of performing employment-related duties
  • non-work-related use that is minor, infrequent and irregular – for example, occasional use of the vehicle to remove domestic rubbish.

Certain work-related items

Providing certain work-related items to staff will not make a business liable for FBT. These include protective clothing, a briefcase, calculator or tools of trade, portable computer (limited to one per year for each employee) and other items. There are other benefits that escape the FBT net, which you can ask this office about, but generally a condition of exemption is that the benefit or item is primarily used to enable your employee to do their job.

Record keeping

The Tax Office has relaxed the FBT record keeping regime for small businesses to some extent by creating a value of benefits threshold under which full records need not be kept.  You will still however need to show the value of benefits on employee payment summaries.

The threshold for the 2014-15 FBT year is $7,965, but it increases each year. As long as benefits paid do not exceed 20% on top of the previous year, the exemption can still apply for subsequent years.

For businesses, it makes no difference whether you are a sole trader, partnership, trustee, corporation, unincorporated association or government body, or whether you pay other taxes such as income tax – as an employer providing taxable benefits by way of remuneration to an employee, you are required to cover FBT. And remember your business will be liable even if that benefit is provided by an associate or by a third party – for example, you may deal with a supplier that, in turn, provides free goods to your employees.

All that is required is that the employee receives the benefit in their capacity as an employee of the business.  Also an employee is deemed to have received a fringe benefit if that benefit is directly received by the employee’s “associate” – in the main, these would be family members and relatives. So this catches the school fees paid for an employee’s children or the interest-free loan made out in a spouse’s name.

While an item’s “primary use” is important to determine if a taxable benefit has been provided, the Tax Office bases its decisions on the employee’s “intended use” at the time the benefit is provided. This means that you do not have to record the actual use of every item – you must however be able to provide a “reasonable basis” that would show that a benefit has been provided to facilitate employment; for example via job descriptions, duty statements or employment contracts.

Other documentation and declaration requirements can seem very particular. For travel, for example, a diary of the trip will need to be kept only if the employee is away for six continuous nights or more, but documentary evidence of travel expenses need to be kept no matter the duration of travel. If the trip is within Australia and not entirely for business purposes, receipts must be kept for food, drink, accommodation and incidentals. But if the trip is deemed to be entirely for business, these are not needed. And if the trip is overseas and solely for business, only accommodation receipts are required.

Can you pay less FBT?

There are options for businesses wanting to reduce the amount of FBT they are required to pay. The most obvious of course is to replace fringe benefits with straight salary, or simply focus on providing only those fringe benefits that are deemed exempt under FBT law.

Alternatively, FBT could be reduced if the employee shares some of the cost of the benefit provided with their employer.  This is commonly referred to as an “employee contribution”.

With a car fringe benefit, for example, an employee could agree to contribute to some of the operating costs, such as fuel, that you do not then reimburse. This then reduces the taxable value of the fringe benefit to the business.

You can also provide a benefit that your employee would normally be able to claim as an income tax deduction, had they paid for it themselves. Referred to as the “otherwise deductible” rule, you can reduce the taxable value of the fringe benefit by the amount your employee would have been able to claim. Say a staff member incurs a work expense, for example, that would have been a one-off wholly deductible amount for the employee in their own tax return. If you reimburse the employee for this expense (as an expense fringe benefit) the taxable value would be nil (but the employee won’t get the deduction).

Common mistakes

The Tax Office has released what it says are the most common mistakes regarding FBT obligations:

  • business vehicles garaged at an employee’s residence may be a car fringe benefit
  • you must keep logbooks when using the operating cost method for calculating vehicle benefits
  • when you use the operating cost method, the luxury car tax threshold does not apply when calculating the deemed interest and depreciation
  • contributions an employee makes to the employer to reduce the taxable value of a fringe benefit
    • are assessable income for income tax purposes, and
    • are possibly taxable supplies for GST purposes
  • if your employees have incurred any fuel and oil expenses they need to provide you with a declaration to substantiate these expenses
  • directors running their business through a company may be regarded as employees. This may mean that fringe benefits provided to directors result in the company having FBT obligations, and
  • when you include reportable fringe benefits on an employee’s payment summary, you must lodge an FBT return.

Note also that while the Tax Office has in the past published an annual “compliance program” spelling out areas of tax it deems to be complex or where it has detected a lot of errors being made, this is no longer available. Guidance on issues of concern to the Tax Office can now be found through its communications to consultation panels and notices issued to taxpayers.

The latest consultation with key stakeholders with regards to FBT concerns guidance around travel versus living-away-from-home allowance claims. The “21-day” rule is of particular focus, with attention being given to whether this still fits with current work trends. Consult this office if this is an area of concern.

SuperStream is here…..are you ready?

The government wants to improve the superannuation system and bring it into the modern electronic world through the introduction of SuperStream, and this includes for SMSFs.

Under the new system, employers must interact electronically using approved software. Employers with 20 or more employees should have already started using SuperStream from July 1 last year, but smaller employers (those with 19 or fewer employees) have until July 1, 2015 to start to comply. Small business owners need to get their skates on to be ready in time.One relatively easy option for small employers is to use the Small Business Superannuation Clearing House to do all your superannuation for you. This online government service is already SuperStream ready, so small employers can save themselves the hassle of implementing SuperStream.

The Tax Office has set out a nine-step process to help small employers. You are not required to follow all nine steps, but it helps get your head around what needs to be done.

Step 1: Assess your options

Find the solution that suits you best. Potential solutions identified by the Tax Office include:

  • if you have a payroll system, you should look for updated or new SuperStream-compliant products coming on to the market
  • if you rely on external partners, check what they are planning to do and scan the market for emerging products or opportunities
  • speak to your payroll software provider or clearing house about their SuperStream plans
  • if you are outsourcing, speak to your payroll or accounting services provider
  • if you rely on your default super fund for assistance with contributions, you should speak to them.

Step 2: Set a target start date

You must begin implementing SuperStream from July 1, 2015 onwards, but the Tax Office will provide flexibility for you on your start date, provided you are doing your best to implement and have a firm plan to do so by June 30, 2016.

Step 3: Collect new information

There is some new data you need to collect. Some relates to all funds, some to APRA funds (retail and industry funds) and some only apply to SMSFs. You need to collect:

 

Information required Type of fund
Fund ABN All funds (including SMSFs)
Unique superannuation identifier (USI) APRA funds (not SMSFs)
Bank account details SMSFs only
Electronic service address SMSFs only
Employee TFN All funds (including SMSFs)

 

The APRA funds will provide employers with their USI, but if not contact APRA for the information.

For existing employees, where you are paying contributions to their SMSF, your employees will need to supply the information specific to their fund. This includes the SMSF’s bank account details and their electronic service address.

Step 4: Update your payroll records

Once you’ve collected the new information, you’ll need to update your payroll records.

Step 5: Upgrade your payroll system

If you use payroll software, your software provider will be able to tell you whether an upgrade is required and, if so, when it intends to release a SuperStream-compliant version of their product.

Step 6: Connect to your provider

Depending on the solution you choose, you may need to arrange connections and security log-in credentials with your service provider or default super fund.

Step 7: Undertake a trial

Once you have done the above your service provider may provide an opportunity to test your solution.

Step 8: Make your first SuperStream contribution

You will need to:

  • run a trial payroll balance for your contributions with a subtotal for each fund
  • process your payments and generate a unique reference number associated with each payment
  • copy these reference numbers and add them back into your contribution files before you send the files as data messages.

Step 9: Refine your process

Review your process and determine if you need to make changes.  Also keep abreast of any developments in SuperStream. You need not follow all nine steps or the order suggested by the Tax Office, but it is a useful checklist.