Many start-ups and established small business owners may be familiar with the experience of restrained finances.

Two of the commonly considered options for raising funds are to apply for a loan or find willing investors (the FFF-method; friends, family and fools). But there is an alternative source of capital that many small businesses often do not consider, which under the right circumstances will not even have to be paid back. This source of capital is government grants – from both federal and state sources.

There are a multitude of grants and assistance programs out there to help businesses either get on their feet or launch a commercial idea that just needs funding to take off. For fledgling businesses especially, this “free” money can be a make-or-break infusion of capital.

Now the reason the word “free” is in quotation marks is that government grants are generally targeted to specific businesses. This can be either for certain industries or areas in which the government is keen to encourage innovation and development, or specific groups or types of organisations or activities.

Government departments may also have particular “projects” within their ambit that are budgeted for through funding grants. For example, the New and Developing Plant Industries program, run by Rural Industries Research and Development Corporation, provides funding for the development of new industries based on plants or plant products that have commercial potential.

Then there is Commercialisation Australia’s Experienced Executives assistance scheme, which provides up to $350,000 over two years for smaller innovative companies to engage an experienced chief executive or other senior executive talent to ensure a new product, process or service is successfully launched in the market. Funding however needs to be matched by the successful applicant business (for example, $50,000 from the participant and $50,000 from Commercialisation Australia).

Obtaining such grants however requires intense homework – a sound business plan, solid numbers, and well-supported research. A trusted adviser and accountant will be essential, so consult this office if you need assistance in applying for a particular government grant. It is also important that any grant money received is used for the purpose originally stated in your application and business plan.

What’s on offer?

There are many grants and assistance programs to search through, but some examples include the New Enterprise Incentive Scheme (NEIS). This can provide eligible unemployed who are interested in starting and running a small business with training, business mentoring and support, rental assistance for up to 26 weeks if eligible, as well as ongoing income support for up to 52 weeks.

The Proof of Concept program will provide successful applicants with grants from $50,000 to $250,000 to test the commercial viability of a product, process or service. Participants have 12 months to complete this component and like the Experienced Executives assistance scheme, participants are required to match the grant funding on a 50:50 basis.

And the Researchers in Business grant supports the placement of researchers from universities or public research agencies into businesses to help develop and implement a new idea with commercial potential. Funding comprises up to 50% of salary costs, to a maximum of $50,000, for each placement for between two and 12 months.

For these and many more grant schemes as well as assistance programs, see the federal government’s Grants & Financial Assistance page. You can also search on Business.gov.au’s Grants Finder, which lists all active schemes by state and territory and provides links to them.

The post Government grants: The “other” lifeline to fund your business appeared first on Alan Lewis Accountants.

More than 11,000 individuals and businesses who may be evading their tax obligations through various online selling websites such as eBay and Gumtree will be targeted by the ATO as a part of its data matching program. Individuals who are involved in selling goods and services of a total value of $20,000 or greater will be targeted.  In light of these activities, it is crucial that taxpayers know the distinction between a “hobby” and “business” when it comes to online selling.

The cautionary tale of the turtle seller

A court case in 2010 highlighted the importance of taxpayers knowing the difference between performing a hobby and carrying on an online business. The case centred around a  taxpayer that raised and sold over 1,200 turtles. They were sold after being purchased from an interstate supplier and advertised on the internet; payments were then received in both cash and direct deposit. Gross sales were in excess of $100,000 over a three-year period and were not reported on income tax returns.

Although the taxpayer claimed that he was simply enjoying a pastime, the court concluded that he was conducting an online business and therefore the gross income was assessable income.  The individual was required to pay the primary tax and additional penalties and costs.

The conviction of the turtle seller serves as a warning of what happens if taxpayers fail to correctly identify that they are carrying on a business.

Checklist for online selling

We have provided a checklist from the Tax Office below which should help you determine if your online selling constitutes a business or a hobby.

1)    Did you set up your online sales with the intention of being a business? Does it have a significant commercial purpose or character?

If you set up a “shop” on an online trading or auction site, you may be carrying on a business – this is more likely if you paid fees to operate this “shop”. You are also more likely to be considered a business if it involves commercial sales of product rather than sales to relatives and friends.

2)    Do you have more than just the intention to engage in business?

If the online space you sell on looks like a shop, has a brand name, a proper business name and any other signs that people would likely consider to be a business, then you are most probably carrying on a business – again, this is more likely if you paid fees for this to occur.

3)    Is your main intention to make a profit?

If the answer is “yes”, you may be carrying on a business. However, even if you do not make a profit, you may still be carrying on a business. If you deliberately buy items to sell online for more money than you paid, then you are likely to be carrying on a business. Conversely, if you sell household goods that you do not want anymore – although you may get a “good price” – it is unlikely to be a business.

4)    Do you make repeated or regular sales?

If you sell a number of items every week (or month) for an extended period of time, you may be carrying on a business. These sales could be to the same customer, or a number of different customers.

5)    Do you sell your online items for more than cost price?

If your answer is “yes”, you are most likely carrying on a business. For instance, if you make or buy an item cheaply and then sell it online for significantly more than you paid for it, you have made a profit and may need to declare that income.

6)    Do you manage your online selling as if it were a business?

In the ATO’s view, you are most likely carrying on an online business if any of the following applies:

•  your online selling activity is organised, methodical, and has systems and processes in place

•  your activity has characteristics of size, scale and permanency

•  you have invested sufficient capital in the activity

•  you advertise your online space

•  you give quotes and supply invoices, and keep some or all of your records

•  you have a business plan

•  you use specialised knowledge or skills

•  you have prior experience in the activity’s area

•  you have conducted ample market research

•  you spend a significant amount of time on the online activity

•  the activity is your main income-earning activity rather than a part-time sideline project

•  you sell your items in a similar manner to other businesses in your industry instead of in an ad hoc manner, and

•  your activity is better described as a business, rather than a hobby, recreation or sporting activity. Common areas where people are likely to carry out a hobby rather than a business include hobby farming, motor car/bike racing, and hobby ceramics.

7)    Is what you are selling online similar or the same as to what might be sold in a “bricks and mortar” business?

If the items or services you are selling are reasonably easy to find in an offline store, then you are probably carrying on a business and these sales should be included as business income.

Note: Each time you answer “yes” to a question, the likelihood that you are carrying out a business increases. However, all the questions need to be considered together to get an accurate picture of your situation as no one indicator is decisive – consult this office to discuss your personal circumstances.

The post Seller beware: ATO targets eBay sales appeared first on Alan Lewis Accountants.

Business owners often deal with the inevitable pressures that accompany business failure, compounded by ill-conceived myths and inaccurate conclusions about insolvency, according to many specialist solvency experts.

According to many insolvency specialists that have guided and helped business owners deal with business failure and the insolvency process, a large part of providing a better understanding is to clear away the misconceptions that abound. Because, according to the experts who deal with failing businesses, although the practice of insolvency involves the interpretation and application of regulation and legislation, and although it has to do with balance sheets, ledgers and accounts, at its base it is real people who pay the price and feel the pain.

In the interests of demystifying the topic of insolvency in general, top consultants in the field have come up with a list of the seven most-assumed insolvency “facts” that are actually myths.

Myth 1: The ATO gets priority for tax debts

This is one that many consultants say they still hear quite often, despite the ATO’s priority for tax debt payment ceasing in 1993. Since then, all debts due to the ATO rank equally with other unsecured creditors. The only claim for which the ATO has a priority is in respect of unpaid superannuation guarantee charges.

Myth 2: Insolvency practitioners always get paid first

Contrary to what some believe, insolvency practitioners don’t always get paid first, and practitioners claim that often they don’t get paid at all. In court liquidations and bankruptcies, petitioning creditor’s costs rank ahead of most other claims, including an insolvency practitioner’s remuneration. The extent of secured creditors in an administration (how many creditors are “secured” and how many are not, which can vary greatly) will also have a bearing on the funds available to meet remuneration.

Often there are no assets available to be realised and no other recovery actions capable of being pursued. In those cases insolvency practitioners still have many statutory obligations that they must attend to, notwithstanding there may be no funds available to meet any remuneration and disbursement needs.

Myth 3: A bankrupt cannot operate a business

It is possible for a bankrupt to operate a business while they are bankrupt. The main restrictions in relation to operating a business include that the bankrupt must trade under their own name, or if they trade under an alternative name they must inform everyone that they deal with that they are bankrupt.

In addition, while there is no restriction on a bankrupt incurring credit when they are bankrupt, they are obliged to disclose their bankruptcy status to any prospective credit provider if the amount involved exceeds a prescribed limit.

Myth 4: If your company goes into liquidation, you will go bankrupt too

Some company directors are under the impression that the liquidation of their company means that they are also made bankrupt. The personal financial affairs of the director are separate and distinct from those of the company of which they have been a director, and while bankruptcy may be inevitable in some cases, is it not automatic and will depend upon the director’s own financial position and the extent to which they may have guaranteed any liabilities of their company. There are also some obligations, such as meeting the Superannuation Guarantee for employees, for which a director can be held personally liable.

Myth 5: If you go bankrupt, you will lose everything

Despite what some may think when they first seek advice from insolvency practitioners regarding bankruptcy, they will not lose everything they own as there is certain property a bankrupt is entitled to retain. This is known as non-divisible property.

In addition to being able to retain normal household furniture, clothing and so forth, a bankrupt is entitled to retain tools of trade and motor vehicles up to certain prescribed values.

The Bankruptcy Act also restricts other property — including superannuation and proceeds from personal injury claims — from being divisible, subject to certain criteria being met.

Myth 6: Administrators and liquidators work for the directors

Although an insolvency practitioner may be appointed by the directors of a company (as may occur in a voluntary administration), or the company’s shareholders (such as a voluntary liquidation), the appointed practitioner is bound to act in accordance with the Corporations Act and must act in the interests of all creditors.

Experts point out that this is different to a receivership, where the appointed receiver is generally working for their appointor, which is typically a bank or another financier.

Myth 7: Being a director of a company in liquidation restricts you from being a director of other companies

Generally a person can be a director of as many companies as they wish, subject to restrictions within the Corporations Act that specifically disqualify certain people from managing a corporation (such as those convicted of an offence).

The Corporations Act however does provide for the automatic disqualification of people from managing corporations where a person has been convicted of certain offences relating to contraventions of the Act or dishonesty, they are an undischarged bankrupt, or they are subject to a “personal insolvency agreement” under Part X of the Bankruptcy Act. These automatic disqualifications apply unless the person has obtained the leave of a court to manage a corporation.

Insolvency practitioners say that once a person is discharged from bankruptcy they can be a director again. Similarly, once a person subject to a personal insolvency agreement has fully complied with the terms of the agreement, they can also be a director again.

However in addition to being automatically disqualified in the circumstances mentioned above, the Australian Securities and Investments Commission (ASIC) does have the power to seek a banning order against a person from managing corporations where they have been involved in two or more failed companies.

The post Seven myths and misconceptions of insolvency appeared first on Alan Lewis Accountants.

Have you ever been under pressure with cash flow problems and wondered how long the ATO is able to hold on to your goods and services tax (GST) dollars?

Up until relatively recently, the common practice with regard to GST credit refunds, should something about the return seem to the ATO to be untoward or downright suspicious, was to hold on to that refund pending further investigation. If the ATO had reasonable grounds to suspect that, for example, input tax credits claimed in a business’s business activity statement (BAS) were not entirely legitimate, or should be further investigated, the claimed amounts could be held back while verified.

Retaining a refund, as practiced up until now, was undertaken after the ATO considered the impact such an action would have on the taxpaying entity’s financial position. And it was generally held that any such retention of refunds, and related investigations, would not go beyond timeframes that would be considered “reasonable”.

However new draft legislation was issued early in 2012 which seemed to stretch the definition of “reasonable” to its limits — some would say to breaking point. This proposed change to the law, in its draft form, would have allowed the ATO to withhold a GST refund for up to 60 days (after being required to notify the taxpayer, often within 30 days). A request for further information from the ATO could result in that refund being held beyond this 60 days, and should yet further verification be warranted in the opinion of the ATO, the holding period could also be extended.

The negative impact on the cash flow position of a small business in this situation may be obvious to many readers, however (and this was a sticking point for many) the only factor in the proposed new process that considered the circumstances of the taxpayer was for the ATO to consider “the impact of retaining the amount on the entity’s financial position”. And the proposed legislation only required the ATO to consider this when looking to extend the holding period beyond 60 days — no doubt terminally late for some businesses.

The law that has now passed has taken what many would deem to be a more realistic stance on the retention of GST refunds.

The relevant case

The proposed changes had their genesis in a reaction from the ATO (some would say an overreaction) after it lost an appeal in relation to a particular case involving GST refunds. The business involved, a buyer and seller of mobile phones and other such equipment called Multiflex, had claimed net GST refunds due to acquisitions of electronic goods in Australia which were then exported as GST-free supplies. The ATO decided that any refunds, which were sizeable, should be withheld as it had reasonable grounds to suspect that the input credits claimed were not legitimate. It was also of the view that any “reasonable” period (which, remember, it was required to consider) would take into account the time taken for investigations.

The Federal Court found that any reasonable period should generally only involve the time taken for administrative processes, and should not encompass the time that investigations require — and therefore the ATO was directed by the court to pay the GST refunds to Multiflex. The court found that the continuing delay in relation to paying out the company’s GST refunds was likely to have a significant impact on its ability to continue trading.

The decision was appealed unsuccessfully to higher courts, and in the end the ATO was obliged to pay a GST refund within the time it takes to undertake the necessary administrative processes for a taxpayer’s return and to make the payment, despite concerns the ATO may hold over the veracity of facts or the validity of a refund claimed. This was in no small part due as a consequence of the relatively recent introduction of a self-assessment system for indirect taxes (again which need not be covered in too much detail here, however ask this office if you’re interested).

The consequences

So the ATO was faced with an obligation to pay out GST refunds claimed once a business’s return had been processed, and then seek to recover any payouts if subsequent checks found these amounts claimed to be in error, overstated, or outright fraudulent. As with many such circumstances of course, there is risk in paying first and verifying later, and so the ATO maintained the view that whatever the reasons for incorrect GST refund claims — whether carelessness, recklessness or fraud — it would be necessary regardless for there to be an integrity requirement to enable the ATO to delay some refunds in certain circumstances.

In short, there are now new provisions and amendments, which interestingly considered New Zealand legislative provisions and a British judicial approach in developing the new GST refund laws.

The provisions continue to allow for the previous practice of retaining a refund should circumstances dictate that the ATO may be best served by doing so, however there are now important statutory conditions imposed. If the ATO has reasonable grounds to require verification of information provided relating to a GST refund (and/or the taxpaying entity requests verification), the ATO must have regard to certain factors. These are:

• the impact on the taxpayer’s financial position
• the impact on its revenue
• the likelihood there is fraud or evasion, intentional disregard or recklessness with regard to tax law.

If the ATO considers that an amount should be retained after an initial period (14 or 30 days, depending if the amount relates to a “running balance account” surplus or a credit in the taxpayer’s favour), the taxpayer must be informed before that time is up. The same tests of reasonableness apply if more time is subsequently required. Objections can be lodged after the designated period of retention is expired.

Timeframes written into the law as it stands provides that the ATO can only retain a refund until the time it would no longer seem to be reasonable to ask for verification of information. It also cannot hold on to a refund (beyond the notification period) if it fails to actually notify the taxpayer that this is a possibility, nor if the relevant tax assessment has been amended (an amendment ends the retention period allowed).

So while there is an upfront obligation on the ATO to refund GST credits upon an assessment being issued, there are also provisions to retain refunds in particular circumstances. One requirement that must be met however is that the ATO must be able to show reasonable grounds for it to request verification of information that relates to a refund. Ask this office for more guidance and advice.

The post How long can the ATO hold on to your GST refund? appeared first on Alan Lewis Accountants.

Providing certain benefits to staff instead of cash as part of their remuneration is fairly common practice. The usual outcome for employers is an exposure to the joys of fringe benefits tax — at the FBT rate of 46.5%. There is also the added bother of keeping appropriate records, accounting for the benefits provided, and lodging an FBT return every year.

There exists however, in the maze of the ATO’s legal database, a legitimate way to provide remuneration to employees in a form other than cash while not being required to account for these benefits via the fringe benefits tax regime.

Positives for employers include:

•   no need to lodge an annual FBT return (a notice of non-lodgement may be required)

•   the portion of remuneration represented by the benefit will be taxed at the employer’s rate of tax instead of 46.5%, and

•   mitigating the risk of an FBT tax audit exposure.

This may be particularly attractive to people with a business that is a company or trust where they are an employee of that company or trust, or to closely held groups where a closely held company or trust employs related parties.

The secret to this tax and headache saving tactic is contained in a “miscellaneous taxation ruling” (ruling MT2050). The basic premise of the ruling is that a benefit provided to an employee, where the employee agrees to kick-in something towards the tax cost of the said benefit (known as the “recipient’s contribution”), can be accounted for via journal entry in some situations — that is, the benefit can be dealt with in the business’s books and income tax return, needing no separate FBT return. The employee does not need to physically pay an amount in order to provide the contribution under this ruling.

The ruling states that such journal entries are permitted in the employer accounts if the following conditions are met:

a)  the employee has an obligation to make a contribution to the employer towards a fringe benefit

b)  the employer has an obligation to make a payment to the employee (for instance a pre-existing loan account or some other obligation)

c)   the employer and employee agree to set-off the employee’s obligation to the employer against the employer’s obligation to the employee.

The end result, tax-wise, is that the amount involved is counted as assessable income of the employer for income tax purposes (and may be subject to GST if the employer is registered), and so generally attracts income tax at the employer’s rate of tax (which can be less than the 46.5% payable under the FBT rules).

The employer could use this ruling for example in regards to a motor vehicle acquired for their employee. The private use portion associated with it could be eliminated as the FBT provisions apply, with the employee contribution available to reduce the taxable benefit.

This would mean 100% of the expenses of the motor vehicle would be claimable to the employer using this method (rather than an apportionment based on a mix of private and business use). If the taxable value of the car is less than the total expenses of running it, the employee contribution added to assessable income may well be less than the deductible expenses incurred on the car.

It is important that the arrangement is set up correctly (we can help with this), and that the conditions mentioned above are satisfied. But once put in place, and assuming the arrangement suits your circumstances, both

•   apportioning the deduction for costs incurred in respect of motor vehicles provided to employees, and

•   lodging FBT returns,

 could eventually become a dim memory.

The beaut ute

The fact that motor vehicles are hugely attractive as a fringe benefit places another opportunity at the feet of employers in the form of another miscellaneous taxation ruling (MT2024 this time).

This ruling basically states that a dual cab vehicle may be eligible for an exemption to FBT where private use is limited to certain work-related travel. It will more than likely be preferable to have a declaration prepared to cover the relevant facts, which we can help draft for you. It is a taxpayer’s responsibility to ensure that any statements made in a declaration are true and correct.

Again, see this office for more information if this tactic seems to suit your business’s circumstances.

The post Employee motor vehicles, FBT-free? Yes please! appeared first on Alan Lewis Accountants.

The ATO regularly warns self-managed superannuation funds (SMSFs) of the perils of investing in artwork, but do trustees know about the significant risks of motor vehicle investments?

Common questions SMSF trustees need answers to include:

•   is a vehicle such as a Harley Davidson considered a motor vehicle under the government’s new Superannuation Industry (Supervision) Amendment Regulations 2011 (No.2)?

•   are you allowed to take your motor vehicle investment out for a ride to keep it in good health?, and

•   can you keep it in your garage if you buy it as an SMSF investment?

Trustees will find that motor vehicles include, but are not limited to, motor cars and motorcycles such as the Harley Davidson. As for taking the motor vehicle out for a run to maintain its value and storing it in a personal garage, neither is permitted under new regulations.

Maintenance drive for a motor vehicle investment

The ATO states that: “The regulations do not allow for any use of the motor vehicle by a related party of the fund regardless of the purpose for that use. This means you cannot drive the vehicle for any reason, including taking it for a maintenance drive or to have restoration work undertaken.” That aside, a person who is not a member of an SMSF or a related party is allowed to drive the motor vehicle for maintenance purposes.

Storage of motor vehicle investment

A motor vehicle cannot be stored or displayed in the “private residence” of any related party of the fund – including all above and below ground premises of a private dwelling due to it being considered a personal use asset under SMSF regulations. The definition of “private residence” was expanded under new regulations to include land on which the private residence is situated and all other buildings on that land, such as garages or sheds.

There is an exception to that rule. SMSF trustees are permitted to store personal use assets in premises owned by a related party, such as a purpose-built storage facility, provided the premises are not part of the private residence of the related party.

Buyers will have to have storage arranged before they add a motor vehicle to the fund however, and a written record of the decision related to the storage is mandatory and must be kept for 10 years. The written record could be documented in the minutes of a meeting of the trustees and can be either in hard copy or electronic format.

Regulations dictate that the asset cannot be displayed in any way if it is stored at a related party’s business premises. Displaying a Harley Davidson in the foyer of a related party’s office where it is visible to clients and employees is therefore strictly prohibited, similar to how a painting cannot be displayed in a company boardroom.

Who is a related party?

A related party of a fund is defined to include:

1)   members of the fund

2)   relatives and any partnerships of member, including other partners in a partnership. Relatives are further divided into:

a)    parents

b)   spouses

c)    grandparents

d)   siblings

e)   uncles and aunts

f)    nephews and nieces

g)    lineal descendants

h)   adopted children of a fund member or a fund member’s spouse

i)     spouse of any individual (other than a member).

Such exhaustive definitions ensure any personal use of a collectable investment is strictly prohibited.

Additional features of the new regulations

Below is a list of the other important requirements SMSF motor vehicle investors should take heed of:

•   Leeway period. If a fund owned a motor vehicle acquired before the new regime came into effect on July 1, 2011, the trustees have until July 1, 2016 to comply with the new rules.

•   Ensure your asset is professionally valued. This is important if a fund wishes to sell an asset, including to a related party, which it can do. The transfer of ownership of collectables and personal use assets to a related party of an SMSF must be done at a market price determined by a qualified independent valuer – usually a member of a relevant professional body or trade association.

•   Immediate insurance of DIY fund collectables. While a fund is permitted to lease a collectable such as a Harley to a showroom, so long as there is no member or related party link and the lease is on arm’s length terms, the Harley is still required to be insured in the name of the SMSF fund. An SMSF fund is unable to rely on the insurance policy held by a showroom.  The new regulations state that a trustee must ensure that the Harley is insured within seven days of the date of purchase by the fund. If an unexpected problem occurs, trustees either need to sell out of the investment or they will commit an offence that leaves them personally liable to a $2,200 fine. Artwork that is not insured may also end in the ATO declaring the fund to be non-compliant.

Consult this office to ensure your SMSF stays compliant with the plethora of rules and regulations that pertain to motor vehicles as well as artwork investments.

The post Hankering for a Harley? Think again, SMSFs appeared first on Alan Lewis Accountants.

If you haven’t heard of “blackhole” expenditure before, it is a term used to describe some legitimate capital business expenditure that, by accident, design or otherwise, falls outside of the ambit of other provisions of Australia’s tax legislation. It broadly refers to certain outgoings that are neither depreciable nor deductible in general terms, and that are not included in the cost base of a CGT asset.

In other words, it is expenditure that is not covered by any other income tax laws. The present rules apply to expenditure incurred from July 1, 2005.

Business taxpayers are allowed by law to deduct particular business capital expenditure, in equal proportions over five years, where:

•   the expenditure is not otherwise taken into account in some way elsewhere in the income tax provisions, such as a deduction, an addition to the cost base of a depreciating or CGT asset or in relation to a CGT event

•   a deduction is not specifically denied by some other provision of the tax law, and

•   the business is, was, or is proposed to be carried on for a taxable purpose.

The five year period must start in the year that the expenditure is incurred, and the deduction must be taken over five consecutive years at 20% a year.

This deduction for blackhole expenditure may be available to a taxpayer that used to run a business, a taxpayer that is setting up a prospective business, or a business that is currently operating, provided the expenditure is capital in nature.

If the expenditure is for a proposed business, there must be a serious plan for the business to be initiated within a reasonable time — that is, not be merely a “pie-in-the-sky” dream – in order to qualify for a deduction. There is even provision for a taxpayer themselves to seek a claim for a proposed enterprise, even if a business structure has yet to be initiated.

However even blackhole provisions have exceptions. The types of business capital expenditure that cannot form part of a blackhole deduction include if the expenditure:

•   forms part of the cost of land
•   is in relation to a lease or other legal or equitable right
•   is expenditure of a private or domestic nature
•   is incurred in relation to gaining or producing exempt income or non-assessable non-exempt income
•   is incurred by way of returning an amount the taxpayer has received, and
•   is for another entity, a return on an equity interest, or debt interest that is an obligation of the taxpayer.

Note that the non-commercial loss provisions for an individual may apply where a blackhole deduction results in a business loss for an individual taxpayer.  This will effectively quarantine the business loss to be carried forward and offset against future business profits.

You may also qualify for blackhole deductions if you are a shareholder in a company, a partner in a partnership, or a beneficiary of a trust that carried on a business, and you personally incur the capital expense to wind-up the entity.

A blackhole expenditure deduction may be made available so that taxpayers obtain some tax relief for business-related capital expenditure where no other relief is available under the tax laws. But make sure that the expenditure in question is capital in nature before taking this path, and remember that there are limitations and exceptions.

Advice from a tax professional will most likely be very worthwhile.

The post Can your business dig a deduction out of expenditure’s “blackhole”? appeared first on Alan Lewis Accountants.

Business owners of private companies often borrow money from their own companies for all sorts of reasons. However there is an area of the tax law that covers situations in which private companies dole out money to those within a business, in a form other than salary, that needs to be understood by business owners. This is known as Division 7A.

What is Division 7A?

Division 7A exists as an integrity measure, and deals with benefits such as payments, loans, or even debt forgiveness made by private companies. The Division 7A law prevents private companies making tax-free profit distributions to shareholders (and their associates).

Such transactions can include:

•   amounts paid by a private company to a shareholder (or associate), including transfers or uses of property for less than market value

•   amounts lent to the same without specific loan agreement (not loans fully re-paid by lodgement day*)

•   debts the business forgives.

Through the Division 7A rules applying, such loans, debt forgiveness or other payments are treated as assessable unfranked dividends to the shareholder (or associate), and taxed accordingly in their hands.

Who does Division 7A apply to?

“Private companies” are covered by Div 7A. The rules thereby apply to the shareholders of such companies (typically, the principals of the business) and their “associates”.  This last term is widely defined and can include family members and related entities. Employees may be affected if they are shareholders (although fringe benefits rules may also apply in preference).

If you find yourself in circumstances where there is a possibility of Div 7A provisions applying, and the tax consequences that go along with it, consult this office.

What commonly triggers Division 7A?

Most commonly, Div 7A applies where there is a loan by the company to the business’s owners (that is, shareholders). A loan will generally be treated as a dividend if a company lends money to a shareholder (or associate) in an income year and the loan is not fully repaid by the lodgement day* of the same income year.

Another example, which is not all that uncommon, is where an asset of the company is made available for use of the shareholders — a holiday house owned by the company is a typical example.

Where shareholders of the private company use that holiday house for free over a certain period, this will likely trigger Div 7A as a “payment”, as this use is viewed as having a commercial value. That value is deemed to be a distribution to shareholders that would otherwise be tax-free were it not for the Div 7A provisions.

What can be the consequences of Division 7A?

Any loans, payments and debt forgiveness from the business to its shareholders (or associates) may be deemed to be an assessable dividend to tax in the hands of the shareholder (or their associates) typically at their marginal tax rate, under the Div 7A rules. The dividend is “unfranked” meaning that there are no franking credits available to the recipient (unless the Commissioner exercises his discretion to the contrary).

But one important aspect of Div 7A, broadly speaking, is that there needs to be “profits” from which the business can make payments. This is referred to as a “distributable surplus”.

In general terms, provided there is a sufficient distributable surplus in the company, all payments made by a private company to a shareholder (or their associate) to which Div 7A applies are treated as dividends at the end of the income year.

Can you avoid Division 7A?

To avoid the Div 7A provisions, such transactions must be arranged correctly and at “arm’s length”. In particular there are certain payments, loans and debt forgiveness that are not always treated as dividends.

Certain payments are not always treated as dividends:

•   the repayment of a genuine debt owed to the shareholder
•   a payment to a company (not acting as trustee)
•   any payment that is otherwise assessable for tax
•   a payment made to a shareholder in the capacity of an employee (including their associates)
•   a liquidator’s distribution.

The following loans are not treated as dividends:

•   a loan fully repaid within an income year
•   loan to a company (if it is not acting as a trustee)
•   loans made “in the ordinary course of business” on commercial terms
•   a loan made to buy shares or rights under an employee share scheme
•   any loan that is otherwise assessable for tax
•   a loan that is put under a special type of loan agreement called a “Division 7A loan agreement” before the lodgement day of the company’s tax return*
•   other types of loans that meet the definition of “excluded loans” for Div 7A (see this office).

And not all debts that are forgiven end up being treated as dividends, such as:

•   where the debtor is a company
•   if the debt is forgiven because the shareholder becomes bankrupt
•   where the loan that created the debt is itself treated as a dividend
•   if the Tax Commissioner exercises discretion due to being satisfied that the shareholder would otherwise suffer undue hardship.

Borrowing money from a private company, even if it is your own business, can have serious pitfalls if not carried out correctly.  It may be necessary to put in place a Div 7A loan agreement. Seek advice from this office if you find yourself in such circumstances.

*the earlier of the due date for, or actual date of, lodgement of the company’s return.

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The last thing on your mind when you first go into a business is the day you lock the door and walk away for the last time. But whether through selling up, retirement, or even due to health reasons, it’s inevitable that you will one day need to consider what is involved in winding up the business, and have some idea about what loose ends may need to be tidied up.

Registrations to cancel

As part of the process, you need to cancel your registrations with the ATO when you sell or cease trading. You are required to notify the Australian Business Register within 28 days of ceasing business and cancel, where applicable, registrations for the following:

Australian business number (ABN)

goods and services tax

fuel tax credits

luxury car tax

pay-as-you-go (PAYG) withholding.

A note of caution however — it’s best to make sure all activity statements are lodged (even if there is “nil” to report) as well as PAYG withholding reports before cancelling your ABN. Your GST registration needs to be cancelled 21 days from ceasing trading, and the final activity statement will need to show any sales or purchases for that period (including the sale of the business, if applicable).

Final tax returns

A final tax return will need to be prepared for the business if operating from a structure such as a company or trust.  The return will need to cover the portion of the financial year up to when the business folds. Further, you should still keep your records. The tax law says they need to be kept for five years for all sales, purchases, and payments to employees and other businesses.

GST loose ends

The sale of a “going concern” will generally be GST-free, subject to certain conditions. One of these conditions is that “all things necessary for the continued operation of the enterprise” is made. If not all assets are sold as part of the continuing business (for example, essential plant and equipment are sold separately), there is a risk is that you may lose the going concern GST exemption.

If this particular exemption is unavailable, an asset that is “real property”, such as land and buildings will attract GST when sold. This is set at one-eleventh of the sale price. For example, if you sell land for $88,000, the GST will be $8,000. But there is a “margin scheme” for real property you might be able to use, which sets the GST at one-eleventh of the difference between the sale price and typically how much you paid for it.  Again, there are specific conditions which apply to access this scheme. GST issues involving the sale of a business are complex; see this office for more details.

CGT loose ends

Capital gains tax (CGT) will likely come into play in the course of your business sale transaction.  Don’t forget to account for any capital losses that have been previously carried forward.

There are various CGT concessions available for the “small business” owner. For example, if you are retiring and have been in business for at least 15 years, the profits from the sale of assets may be CGT-free. Alternatively, your super fund could get a helpful boost. If the proceeds of the sale of a business CGT asset are rolled over into a super fund, the capital gain is exempt from CGT. This “retirement exemption” applies to the gains made on the sales of as many business CGT assets as you like, subject to a total lifetime limit of $500,000. And if you’re at least 55 years old, you don’t even need to put the money into a super fund to qualify for the tax exemption (ask this office for more details).

For those operating from a company, beware of doling out payments or benefits to shareholders and their families, as such distributions could trigger a tax liability for them under the “Division 7A” provisions. This section of tax law means (among many other things) that if a company makes a payment to a shareholder or associate, or even “forgives a debt”, the ATO can deem it to be a “dividend” and require tax to be paid by the recipient. This can be a complicated tax area, so tailored and specific advice will be advisable.

Helpful checklist

Tying off all the loose ends can be a lengthy, onerous process. Our office can tailor advice to your circumstances. In the meantime, there is an ATO checklist to ensure you tick all the right boxes when selling a business. Ask this office for a copy.

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Unsure of what the valuation guidelines are for your self-managed superannuation fund (SMSF)? With the end of the financial year fast approaching, we have compiled a guide on what you need to know about asset valuation – a process that became mandatory for all SMSFs from the 2012-13 income year as SMSFs are now required to use market value reporting for all their financial accounts and statements.

What is market value?

“Market value” means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:

•   the buyer and the seller dealt with each other at arm’s length in relation to the sale
•   the sale occurred after proper marketing of the asset, and
•   the buyer and the seller acted knowledgably and prudentially in relation to the sale.

What are the SMSF asset valuation requirements?

There are a few situations outlined below where SMSF assets must be revalued in a particular way (see table on the following page).

When does a valuation need to occur?

The ATO does not require SMSF trustees to undertake an external valuation for all assets each year. For instance, assets such as real property may not need an annual valuation unless a significant event (i.e. natural disaster, market volatility, macroeconomic events or changes to the character of the asset) occurred that has created the need to review the most recent valuation.

On the other hand, assets such as cash, widely-held managed funds and listed securities can be valued easily each year and should be valued at the end of each financial year. It is typically easy for auditors to value shares, managed funds and other listed investments because they can obtain daily valuations online (the value for listed securities, for instance, are easily obtainable from the security’s approved stock exchange) but SMSFs with real estate, exotic assets or investments in private companies or trusts will require additional work from auditors.

Who can value your assets?

Generally, the valuation can be undertaken by any appropriate person provided it is based on objective and supportable data.  Depending on the situation, appropriate valuers may include a registered valuer, a professional valuation service provider, a member of a recognised professional valuation body, or a person without formal valuation qualifications but who has specific experience or knowledge in a particular area.

In certain cases however, valuations must be undertaken by a qualified, independent valuer. The ATO recommends you use a qualified, independent valuer if:

•   an asset represents a significant proportion of the fund’s value, or
•   the nature of the asset indicates that the valuation is likely to be complex.

In the case of collectables and personal use assets, the valuer should be a current member of a relevant professional body or trade association such as the Australian Antique and Art Dealers Association, the Auctioneers and Valuers Association of Australia and the National Council of Jewellery Valuers. For real estate, valuations can be undertaken by a property valuation service provider – including online services or a real estate agent.

Why pay for a valuation?

Valuations are worth every cent as it is often the fastest and simplest way of ensuring your fund is complying with super laws and taking advantage of the full array of tax concessions available. The cost of not complying with super laws is more costly – penalties for not valuing assets at least once a year can be exorbitant.

Trustees should keep appropriate records of how valuations were determined, so they can be readily verified if required. As part of its compliance processes, the ATO may review an SMSF valuation and ask for evidence of the valuation method to determine if the valuation is acceptable or not. Valuations prepared by qualified, independent valuers are less likely to be challenged by the ATO.  Consult this office if you are unsure of your obligations and responsibilities when it comes to SMSF asset valuations.

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