Considering taxation in the early stages of a start-up is important to long-term success. Generally, when starting up a business, the most immediate concern to new entrepreneurs is profitability, with taxation somewhat near the bottom of the priorities list.

Financial and tax advisors recommend incorporating taxation issues into start-up thinking, especially into the company structure, systems and procedures that are put in place in order to ensure smooth business flow and keep open options for the future. It is important to build some flexibility into your plans and take a long-term view as much as you can.

Here are the top tips for entrepreneurs:

1. Structure the business appropriately from the outset. A lot of Clients trade using company structure for a few years and then decide to sell the business. Problem: They don’t have a great tax structure or that, if they want to change it, it will cost them a lot of money, because if it is put into a new entity it is likely to incur costs such as stamp duty and capital gains tax.

2. Remember you are building a capital appreciating asset that may require disposal in the future. Make sure if the asset is to be disposed of in the future then the business is established from the outset in a structure through which you will be able to get capital gains tax concessions. This will more than likely mean having another entity where the individuals are able to get access to capital gains tax concessions such as a unit trust or family trust which can, for example, own the intellectual capital of the business and obtain any goodwill asset at concessional rates.

3. Research and take advantage of available concessions for small businesses. There are many types of opportunities depending on the business size and industry. Examples include grants, research and development concessions and export assistance. 

4. Are you eligible to defer your GST obligations for 12 months? The GFC affected many new and existing businesses which are now struggling to maintain a steady cash flow. In recognition of this, the Federal Government has a program for eligible applicants to defer their tax payment obligations and general interest charges for 12 months. This program began on 1 June 2009 and has been extended until 30 June 2011.

To be eligible your business must have:

• An annual turnover of less than $2 million
• Activity statement debt
• A mutually acceptable and sustainable payment arrangement with the ATO

5. Another ATO initiative is the Entrepreneurs Tax Offset. It is a tax offset equal to 25% of the income tax payable on your business income if you have an aggregated turnover of $50,000 or less. Once your turnover reaches $75,000, the Offset phases out. This is suitable for someone in their first year of business which allows them a discount on the income tax payable. It applies to a sole trader, a partner in a small business or a beneficiary of a trust which is connected to the business.

6. Let good business and investment decisions, not taxation, drive expenditure. Many business owners buy the latest and greatest version of machinery or technology in order to obtain large depreciation expenditures to keep tax bills down. Ultimately, their tax bills may be lowered but they don’t have any cash because they’re minimising their profitability. Let sensible and good business decisions drive investment, not tax. Tax should be a secondary concern to building a long-term, sustainable business.

7. It’s important to understand the benefits of management accounting information. It is about creating focus for the people who are running the business about where they need to direct their attention and their efforts. The reporting needs to be simple and understandable.  Choose accounting software that enables you to achieve basic outcomes such as meeting compliance obligations like quarterly GST payments. Many small businesses are run very successfully by using off the shelf accounting software such as that supplied by MYOB and Quicken.

8. Don’t over complicate reporting systems, or you may have trouble identifying the drivers of your profitability. Be disciplined about maintaining up-to-date data and using good accounting software. This will keep the relevant numbers fresh and ready for analysis at any time. Quarterly GST reporting also helps keep this information current.

Q: I have great sympathy for the businesses which were battered by the floods, fires and cyclones in Australia this year. These things can happen to anyone, any time. What should I do to make my business disaster-proof?

A: Identify which data and applications are critical to your business, then ensure you have them backed up off-site. Cloud-based storage facilities are ideal as they are stored securely on the internet. Always keep your back up data off-site so if something does happen to your business, you can retrieve the information after the incident.

Develop a workplace continuity plan. After a natural disaster your employees may not be able to make it to work for days or even weeks. Consider what your employees require to do their job from another location. Access to company information, data and an e-mail system may be required. Again, cloud-based systems may be the best solution for easy access.

Prepare a disaster response strategy. Work with your team to develop an evacuation procedure, develop a plan to save any key assets and securing the worksite against any damage. This type of plan will have a huge impact on the personal safety of your staff and the survival of your business.

Q: Some of my staff are happy to be paid overtime, but others prefer time off in lieu. What are the rules around this?

A: Firstly, check the conditions of employment in the relevant award or enterprise agreement. If there is nothing in there in relation to how overtime is to be handled, you should go by the default position of the National Employment Standards. This states that all employees must be paid for their overtime. Remember it is you or your manager’s responsibility to approve all overtime before it is worked.

Generally, employees covered by the same employment instrument (an award or an enterprise agreement) should be treated the same way: either they all get paid overtime or they all get access to time in lieu. Obviously what works for one employee may not work for another. You can offer both options to your employees. Just remember you will need to keep separate records for those who are paid overtime and those who receive time in lieu. So only do this if you are prepared to do so.

Time off in lieu is calculated at the ordinary time rate. For example, an hour of overtime equals to an hour off work. However, some of the modernised awards, employees are to be given up to two hours of time off for each hour of overtime worked. To look up the detail of the award covering your employees, for to www.fwa.gov.au which is the website of Fair Work Australia, the national workplace relations tribunal.

Three men were today sentenced to over eleven years combined jail time for their involvement in tax fraud worth more $4.5 million.

Ian Henke, Robin Huston and Brian Fox were each charged with conspiracy to defraud the Commonwealth for their role as promoters of an asset-stripping scheme which mirrored elements of the infamous ‘bottom of the harbour’ schemes of the 1970s and 80s.

Through use of an intricate arrangement the Vanuatu based asset-stripping scheme was designed to leave Australian companies in a position where they were unable to pay their tax liabilities. Almost 70 companies in Australia participated in the arrangement.

“Australia will not stand for these types of illegal scheme arrangements,” Tax Commissioner Michael D’Ascenzo said after the hearing today.

“This finding shows scheme promoters that regardless of the type of scheme they use, it will be exposed and justice will be served.

“Those who participate and promote these schemes burden the majority of Australian taxpayers who do the right thing. Tax funds vital community and government programs that the community relies upon.

“If you are participating in an illegal scheme, particularly those using overseas tax secrecy jurisdictions, it is only a matter of time before we find you. This is the same clear message that we are sending to the community through Project Wickenby.”

Reduced penalties can apply for those who come forward to the ATO. To discuss your situation or to make an offshore voluntary disclosure, contact the ATO on 1300 132 346.

Ian Henke was sentenced to four and a half years jail with a non-parole period of 12 months, Robin Huston was sentenced to four years jail with a non-parole period of ten months and Brian Fox was sentenced to three years and nine months jail with a non-parole period of nine months.

Further information about offshore schemes and ATO compliance processes including Project Wickenby can be found at www.ato.gov.au.

“Trying to stop thinking in the negative or towards the risks, is like telling someone to stop thinking about a green horse. The more they try to stop thinking about a green horse the more they think about it. The best approach is not to fight thoughts, but to acknowledge them.”

 So let’s look at a few investments before tax, fees and inflation:

1. THE STOCKMARKET

Expected return of 12.01% (All Ords accumulation index compound return since 1979). Risk four out of 10.

2. BONDS

10 year return of 5.5%. Risk zero

3. PAYING OFF THE MORTGAGE

Pretax return of 7.81% (Standard variable rate) which grosses up to 10.6% pretax. Risk zero

4. LOTTO

Expected return of one million percent. Risk of 100% loss is 9.99999999999 out of 10.

5. MARRIAGE

Expected average return of one extra income, zero to four kids, two possible inheritances, a free life coach even if you don’t need one, onerous school fees and a dog. Risk = long term love, fulfillment and satisfaction.

6. DIVORCE

Expected return of minus 50%. Risks unknown.

Lawyer

If you want a loan, expect a grilling from the lender.
Here’s what every lender will want to see.

1.  Operational Strength: The Commonwealth Bank told us, “The aim is to ensure that the business is healthy and growing, or is a start-up with great prospects. Having up-to-date information is important. Customers with a financial year ending in June should be thinking about putting forward trading results to June 2010 and also management figures, if available, for the months between June and the current date.
    
2.  Cash flow: CBA says, “Your business banker will need to check that you can meet ongoing repayments and this can be an area where businesses have difficulty. A good way to help overcome this is to put together a realistic cash-flow forecast.”
    
3. Security: This is all about risk. You will enjoy a lower interest rate if you put up residential property as security.
      
4. Your Experience. Your vision. The reason for the funding – and what it will deliver.
     
5. The lender will check your past credit history. Order a copy of your credit file at Dun & Bradstreet (www.dnb.com.au) or Veda Advantage (www.vedaadvantage.com). Make sure you correct any errors on the file.
     
6. Tax returns for the business for the past two years, plus personal tax rturns for the past two years.
     
7. Be prepared to deal with tighter credit terms. Lenders may cut the loan-to-valuation ratio or impose stricter repayment terms. Work out how you would manage with a smaller loan.
     
8. Be honest. A significant number of borrowers mislead credit providers (as many as 10 percent of applicants, according to Veda Advantage’s 2010 Australian Debt Study). Lenders are alert to the problem, and if you are found out, you won’t get the finance.

If you’re a small business with an annual turnover of less than $2 million you may qualify for the extra 50% business tax break on eligible assets. But how do you know what is eligible?

Meet Maria, a small business owner who wants to buy a new computer for her shop. She wants to know – Is the computer eligible for the extra 50% tax break? What about software? By when does she have to buy it and by when does she need to start using it to get the extra deduction? How much will her deduction be?

After phoning Taxwise, she knows the computer is eligible as long as it is new, costs more than $1,000, is purchased by 31 December 2009 and is installed or first used by 31 December 2010. Assets must be tangible and as software is not a tangible asset it is not eligible for the tax break.

Maria buys the computer for $2,400 (excluding GST and the cost of the software used on the computer). She will be able to claim an additional $1,200 tax deduction (50% of $2,400) in her business income tax return for the year in which she installed or first used the computer. This is in addition to the decline in value deductions she would normally claim for such business assets.

After applying the 30% company tax rate (the rate which applies to Maria’s business), this tax deduction would reduce the amount of tax Maria’s business would have to pay by $360.

If you’re like Maria and thinking about taking advantage of the business tax break, you need to check the facts before you buy. Phone Taxwise on 9248 8124.

The May Federal Government Budget announcement included important changes to the way salary sacrifice to super will be treated.

The first change affects super contributions maximums, or caps. In the 2009 – 2010 financial year, the concessional contributions cap (for employer contributions, including salary sacrifice) will reduce to $25, 000 per person. For those aged 50 and over, the cap will reduce to $50,000. The non-concessional contributions cap (for after tax contributions) will be calculated at six times the concessional cap, so it remains at $150,000 in 2009 – 2010.

Note that the reduced limits apply to contributions received during 2009 – 2010, even if some of those contributions relate to employment before 1 July 2009.

The second change will see some forms of salary sacrifice super contributions included as ‘non-wage remuneration’ in various income tests for individuals. These include contributions that have been made by an employer or associate of the employer, for which the individual has or might reasonably be expected to influence the size of the contribution or the way the amount is contributed.

These contributions are called Reportable Employer Superannuation Contributions, or R E S C s, and from 1 July 2009, you’ll be required to report RESCs in PAYG annual withholding reports and employees’ PAYG summaries.

Speak to Taxwise (08-9248-8124) or our resident financial adviser, Mark Christie (08-9344-6495) to make sure you’re prepared for these changes, and that any affected employees are aware of the potential taxation implications of their salary sacrifice to super.

What employers need to know about pay-as-you-go (PAYG) withholding.

Getting the help you need:

As an employer, you have certain tax and super obligations you need to be aware of. These obligations include:

• pay as you go (PAYG) withholding
• Super
• fringe benefits tax (FBT)

Running a business or a non-profit organisation gets more complex when you have employees or independent contractors. When you make payment to employees or contractors, you may be required to withhold an amount and send it to the ATO at regular intervals. The ATO calls this process PAYG withholding.

To comply with your PAYG withholding obligations you need to:

• register for PAYG withholding
• work out the status of your workers
• become familiar with the types of payments you need to withhold from
• work out the amount to withhold
• report and pay withheld amount to the ATO
• provide payment summaries and lodge an annual report at the end of each income year.

Under the PAYG withholding system:

• the business, non-profit organisation or individual making the payments is called the payer, and
• the individual being paid is called the payee.

What you need to know about PAYG withholding.

Register for PAYG withholding -

You will need to register for PAYG withholding as soon as you know you need to withhold. You can register:

• online at www.ato.gov.au/onlineservices
• by phoning 13 28 66 between 8:00am and 6:00pm Monday to Friday
• by completing an Add a new business account (NAT 2954) form

Work out the status of your workers -

You have different obligations depending on whether your payee is an:

• employee, or
• independant contractor.

The status of your worker depends on your working relationship and is usually worked out by the contracual arrangements made between the two of you.

NOTE: To help you work out the status of your workers, the ATO have developed a decision making tool. To use the decision tool, visit www.ato.gov.au/employers and selecct ‘Contractor or employer?’ – ‘Employee/contractor decision tool’.

Work out the amount to withhold.

The ATO produces tax tables to help you work out how much to withhold from your payments to your payees.

These PAYG withholding tax tables are available for weekely, fortnightly, monthly and quarterly pay periods. You can also get tax tables for particular types of payments, such as payments made under voluntary agreement.

NOTE: The ATO has an electronic calculator to help you work out the withholding amount and the employment termination payment withholding amount. To use the calculator, visit www.ato.gov.au/employers and select:

• tax withheld calculator - this calculator will help you work out the correct amount to be withheld, and
• employment termination payment calculator – this calculator will help you work out the tax-free and taxable amounts of an employment termination payment made on or after 1 July 2007.

To work out how much to withhold, use information your payee gives you on their Tax file number declaration (NAT 3092) and, if applicable, Withholdong declaration (NAT 3093). For example, they may be claiming the tax-free threshold that is shown on their Tax file number declaration, or they may be entitled to a dependent spouse tax offset that is shown on their Withholding declaration.

If your payee is under a voluntary agreement, use the information provided in the agreement to work out the amount to withhold.

Report and pay the withheld amounts.

How often you report and pay amounts depends on whether you are a small, medium or large withholder.

The ATO will tell you what type of withholder you are after you register.

Prepare payment summaries and lodge annual report.

Within 14 days after the end of each financial year (30 June), you need to give each of your payees a payment summary that shows how much you:

• paid, and
• withheld.

You need to also provide the ATO with a PAYG withholding payment summary annual report and you can print the individual payment summaries on plain paper.

If you don’t report electronically, the ATO will give you blank payment summary forms and a personalised PAYG payment summary statement to use.

NOTE: The ATO will send this stationery to you around May each year.

Payment summaries.

There are different payment summary forms depeding on the type of payment. Examples include payment summaries for:

• individual non-business payments
• labour hire and other specified payments
• voluntary agreement payments
• employment termination payments
• personal services attributed income payments
• payments where ABN not quoted.

It’s important you use the appropriate payment summary.

NOTE: To order payment summaries:

• visit the ATO website at www.ato.gov.au and select ‘Find a form od publication’ – ‘Online ordering’, or
• call the ATO’s automised self help ordering service on 13 72 26 and press 4. You’ll need your Australian business number (ABN) and the names of the publications you wish to order.

The ATO provides instructions for completing these payment summaries. To obtain copies, visit the ATO website

PAYG withholding payment summary annual report.

If you have payroll software that meets the ATO’s specifications, you can submit your PAYG withholding payment summary annual report using electronic commerce interface (ECI).

If not, use the stationery the ATO send you so you can provide them with the following:

• a completed personalised PAYG payment summary statement (NAT 7885)
• the originals of all the payment summaries you issued for the financial year.

If you misplace your personalised payemnt summary statement or it contains an error, you can use a generic PAYG payment summary statement.

Compulsory acquisition of an asset.
This section explains your CGT obligations if your CGT asset is lost, destroyed or compulsorily acquired.

Generally, there are no CGT obligations for assets acquired before 20 September 1985 (pre-CGT).

There may be a situation where you receive money or another CGT asset (or both) as compensation when you dispose of an asset involuntarily (or under an insurance policy against the risk of such an event happening). In this case, you may be able to choose to:

• defer your liability to pay tax on any capital gain arising on the disposal, or
• get a CGT exemption for any replacement asset if you acquired the original asset before 20 September 1985.

This concession is known as a rollover. It may be available if one of the following events happens:

• all or part of your CGT asset is lost or destroyed
• your CGT asset is compulsorily acquired by an Australian government agency
• your CGT asset is compulsorily acquired by an entity (other than by an Australian government agency or a foreign government agency) under a power of compulsory acquisition conferred by an Australian or foreign law. However, the compulsory acquisition of minority interests – such as shares in a company – under the Corporations Act or similar foreign law are excluded
• you dispose of your CGT asset to an entity (other than a foreign government agency) after a notice is served on you inviting you to negotiate a sale agreement. You must have been informed that, if the negotiations are unsuccessful, the asset will be compulsorily acquired under a power of compulsory acquisition conferred by an Australian or foreign law. However, the compulsory acquisition of minority interests – such as shares in a company – under the Corporations Act or similar foreign law are excluded
• you dispose of land to an entity (other than a foreign government agency) where a mining lease was compulsorily granted over the land, the lease significantly affected your use of the land, the lease was in force immediately before the disposal and the entity to which you disposed of the land was the lessee
• you dispose of land to an entity (other than a foreign government agency) where a mining lease would have been compulsorily granted over the land, the lease would have significantly affected your use of the land and the entity to which you disposed of the land would have been the lessee
• a lease that had been granted to you by an Australian Government agency under a Commonwealth, state or territory law expires and is not renewed.

This rollover is not available for plant disposed of after 11.45am (by legal time in the ACT) on 21 September 1999 and other depreciating assets from 1 July 2001. Instead, if a depreciating asset is lost or destroyed or, acquired compulsorily or by forced negotiation (other than by a foreign government agency), the capital allowances provisions may allow for a balancing adjustment offset.

This means that rather than including an amount in your assessable income by way of a balancing adjustment, you can offset that amount against the cost of a replacement asset (or assets).

If you choose to take rollover, you do not need to lodge a written election stating your choice – it will be clear from the way you prepare your tax return.

You cannot choose to defer a capital loss but you can use it to reduce any capital gain made in the current income year or a later income year.

For rollover relief to apply, the replacement asset you receive cannot be a car, motorcycle or similar vehicle.

Further, from 1 July 2001, for rollover relief to apply, the replacement asset you receive cannot become an item of your trading stock, nor can it be a depreciating asset.

Marriage breakdown.
Read this section if your marriage or de facto marriage ended on or after 20 September 1985 and:

• you transfer an asset or a share of an asset to your spouse
• you receive an asset or a share of an asset from your spouse, or
• a company or trustee of a trust transfers an asset to you or your spouse.

When we talk about ‘your spouse’, this includes your former spouse or former de facto spouse. ‘Transfer’ of an asset means transferring ownership of an asset to the transferee spouse and includes ‘creating’ an asset in their favour (such as a right to use property). Where we talk about ‘an asset’, this includes a share of, or an interest in, a jointly owned asset.

The term ‘transferee spouse’ refers to the spouse to whom an asset is transferred, while the ‘transferor’ is the person (or a company or the trustee of a trust) who transfers an asset to the transferee spouse.

As a general rule, CGT applies to all changes of ownership of assets on or after 20 September 1985. However, if you transfer an asset to your spouse as a result of the breakdown of your marriage or de facto marriage, there is an automatic rollover in certain cases. You cannot choose whether or not it applies.

This rollover ensures the transferor spouse disregards a capital gain or capital loss that would otherwise arise. In effect, the one who receives the asset (the transferee spouse) will make the capital gain or capital loss when they subsequently dispose of the asset. If you are the transferee spouse, the cost base of the asset is transferred to you.

Deceased estates.
If you are a deceased person’s legal personal representative or a beneficiary of a deceased estate, read this section to find out about the special CGT rules that apply.

When a person dies, the assets that make up their estate can:

• pass directly to a beneficiary (or beneficiaries), or
• pass directly to their legal personal representative (for example, their executor) who may dispose of the assets or pass them to the beneficiary (or beneficiaries).
• A beneficiary is a person entitled to assets of a deceased estate. They can be named as a beneficiary in a will or they can be entitled to the assets as a result of the laws of intestacy (when a person dies without having made a will).

A legal personal representative can be either:

• the executor of a deceased estate (that is, a person appointed to wind up the estate in accordance with the will), or
• an administrator appointed to wind up the estate if the person does not leave a will.