2021 Tax

It is tax time again in Australia.

I thought I would publish some questions flowing from my client base.

Samantha – Cremorne

Hi Peter. I am ready for you to do my return. What information do you require?

Hi Samantha, The ATO provides a pre-filler that outlines income earned as reported through the Single Touch Payroll (STP) system. Additionally, Private Health Funds report your details to the ATO, and dividends paid are also reported to the ATO. This covers most of what I need to start your return. These details should be through by July 15th, so stay patient and I will get on to your return when I have this.

Ben – Dee Why

Hi Peter , I heard that company contributions to super go up to 10% this year. Do I have to do anything to receive this?

Hi Ben. No Your employer is required via STP to contribute 10% of wages and salary paid. It will appear on your pay slip. You don’t have to do anything, but I recommend you check with your fund each quarter to make sure that the super has been paid. All employers must pay this within 30 days of the end of each quarter.

Tess -Company owner Collaroy

Hi Peter, we have decided to wind up the company following Covid impact. Would you please advise on the process to wind up the company?

Hi Tess, this is quite complex and is subject to any winding up provisions within the company constitution. Nevertheless, in the circumstances this is a good decision if the company is no longer required. There is no reason to continue paying regulatory and accounting fees if the company has no useful purpose. Essentially the process is this. First, we must finish the year end accounts and define the distribution any residual assets to the shareholders. Then we advise ASIC that the company is financial able to pay its debts (Form 520 Declaration of Solvency), then the directors pass a special resolution to wind up the company and submit this to ASIC (form 205). Finally, after  the distribution of residual assets, and the closure of all bank accounts, the company is officially wound up upon confirmation from ASIC.

Phil Sole Trader – Dee Why

Hi Peter, I bought a ute in June 21. How will this be treated in my tax? Can I write it off this year?

Hi Phil, well that is a good question. The instant asset write off provisions were extended and modified again in the May 21 budget. SBE depreciation including 100% write off for assets costing less than $150,000 if purchased by December 30, 2020 and installed ready for use by June 30 2021 under simplified depreciation rules. However, in an increasingly complex extension termed ‘temporary full expensing’ the effect of instant asset write off was extended to June 30, 2022. So it would appear that you are good to go. A complying asset can also be second hand. This also applies to tools and other machinery used in producing income. The rules are client specific so contact me if you have any queries.

Adriana – Randwick

Hi Peter , I recently returned from the USA where I worked in IT for 3 years in California. My previous accountant calculated a substantial tax bill here in Australia for the years that I was working overseas. Should I be paying tax to the Australian government in tax years where I received no income from Australian employers?

A good question Adriana. If you are an Australian resident for tax purposes, then your taxable income in Australia is your worldwide income. i.e. you pay income tax to the USA authorities and you also pay tax to Australian authorities after conversion to $AUS. If Australia has a tax treaty with the international body (we do with USA), then a full credit is applied for the foreign tax paid when you lodge your return. It is unusual for additional tax to be paid so I would suggest you get another professional opinion. You are entitled to a foreign tax credit on all taxes deducted as income tax on wages and salaries. The tax treaty is designed so that you do not pay double tax. N.B. I had a client in Brazil in similar circumstances. There is no tax treaty between Australia and Brazil …tough

Franco – Air BNB operator Umina Beach

Hi Peter, we let out part of our home via BNB during the year. I have all the income and expenses detail. Is there any way we can claim part of our electricity, home loan payments etc?

Thanks for the question Franco. It is sensible that you account for all income received. The ATO is vigilant this year. In principle you can claim 100% of all direct expenses relating to the area used for BNB. E.g. crockery, cutlery, heaters, BNB charges,linen.

Common expenses are deductible including all holding costs of the property used partially for commercial and private purposes. i.e. all insurance, interest on mortgage, rates and taxes, Cleaning, photography, dvd/games etc gardening, repairs, depreciation, guest linen, electricity & gas. Deductions are 100% for related costs, 50% for common area usage.

Essentially any cost directly incurred to rent an area is 100% deductible (e.g. Linen, letting fee, depreciation of rental specific new assets). All other costs must be apportioned based on the relative floor area, or if they relate to common areas e.g. garden use, kitchen, living area, balcony, they can be apportioned at 50% of the total property costs. i.e. all property holding costs.

The rental period is important. E.g. if the area was rented for 150 days of any one year, all deductions must be factored by 150/365.

Keep all receipts.

All the best for the 2021 tax season

Peter Cox

The Accountant in business development

I have had a business or two in my time

One of the joys of being an accountant is the wealth of knowledge that I have amassed over a diverse career in business, accounting , software sales and as an accountant in practice.

When I was 17 and still at secondary school, a mate and I formed a business called Beancob. We decided to grow beans and sweet corn on a vacant block of land in Auckland NZ. It was underfunded, under planned and unfenced. All disastrous components for business success. This is one of many business ventures that have been formative in my commercial experience. All of the product ripened at one time, the market was oversupplied, and the profits were non existent. We had no bloody idea.

Some 50+ years later, those two business novices have become practicing accountants. Fortunately we have experience and skillsets that distinguish us form those early days. I write of this experience to highlight the mistakes that are made in small business and the reasons for failure.

The most common reason for business failure is the lack of a viable business model.

Starting a business

So, you want to start your own business.

I have had several businesses throughout my life. Let me give you some advice that may save you time and money.

Do not mortgage your home to start or expand a business.

Do not risk anything that you are not prepared to lose.

Please ensure that you have ticked the boxes for the following minimum steps in starting a business:

Business model. The business has a proven business model.

Controlling interest. You are the controlling investor/owner.

Capital. You have sufficient capital to start and maintain the business for 6 months. (preferably 12)

Intellectual property. You own it or you are it.

Business Model

Many businesses have failed before they start and the rate of failure within 6 months is high. If you can get past the first year your chances of survival are looking better. Most businesses fail within 5 years.

The key to initial business success is a clear business model/plan that is proven in the marketplace. The essentials are

A market for your services.

Proven profitability.

Capacity to deliver and scale.

A clear forecast and realistic budget.

Competitive analysis.

Controlling Interest.

There is no point in leaving your secure job to start a business if you must answer to a greater god. If someone has a majority interest in your new venture, then you are just changing from one boss to the other. It is important that you have a structure of operational control that has you as the boss. You may be an employee but make sure that you are also in charge.

All your investment and ongoing effort should be to build a capital asset that has a market value and can be sold for real money. You will only achieve your goals if you have control of the outcome.  You will only control the outcome if you are the boss and not accountable to anyone else.

Always think of your business as a cash flow generating operation that can be sold to someone else. Small businesses have a re-sale value that is generally calculated and based on a proven cash flow. If you think of your business this way then it will be worth something to someone else.

Capital

Most start-ups fail because they run out of money. Many businesses run out of money because it took longer to achieve their objectives than they had originally planned. If this happens you will need other investors or loans. This increases the potential for you to cease becoming the boss.

This is a big subject in itself and one which needs careful consultation with your accountant or business adviser. However, much like having a contingency amount when building a house, or a capital reserve in a company operation, it is always prudent to put money aside for those unexpected events that upset the forecasts.

It is also important to distinguish between start-up or seed capital and working capital.

Start-up capital is the funds required to launch the business. It may include motor vehicles, buildings, tools, implements and other devices. Licences, company/business registration and other compliance requirements.

It is the investment required to arm the business with assets that are needed to generate profit. I advise that in addition to start-up, start a contingency fund for capital items that may need to be purchased in the short term after business commencement.

Working capital is the money required to keep the business running. At any one time, it is the net difference between current assets and current liabilities.

A.Current assets are those that you expect to cash in within 30 days. These include cash, stock, debtors (those who owe you money).

B.Current liabilities are those liabilities that are payable within 30 days. They include, loans (short term component), employee wages, creditors – (those to whom you owe money).

Working Capital = A-B (surplus of A over B)

This is a simplistic explanation of working capital and a basic knowledge of working capital is essential when you start a business. In principle, your working capital should be adequate to fund the business on an ongoing basis. Most small businesses require a working capital ratio of 2:1. i.e., you should have twice the level of current assets compared with current liabilities.

Intellectual Property

This is the asset that underpins the unique strength and viability of the business. It is the smarts that no-one else has and it could be as simple as the value that you bring to the business as its founder and mentor. It is often that which gives the business and its products/services a competitive differentiation (what you offer that is not able to be offered by your competitors).

In some businesses there may be registered defensible IP rights. There are various types of IP rights

https://www.business.gov.au/Planning/Intellectual-Property/Intellectual-Property-explained

Patents protect inventions and new processes.

Trademarks protect logos, words, and other branding.

Copyright protects art, writing, music, film, and computer programs.

Registered designs protect the visual design of a product.

Circuit layout rights protect layout designs or plans of integrated circuits used in computer-generated designs.

Plant breeders’ rights protect the commercial rights of new plant varieties.

Regardless of the IP, you need to own it or own its use. If you are the key to the business and you offer a unique idea that is productive and you are the sole creator, then it can be registered as your intellectual property (IP).

A business name is not IP. A registered trademark is an example of IP.

If you are starting business with an idea that no-one else has registered, then find a way to protect your idea and you will protect the future of your business that depends on that idea.

Starting a Business

Starting a business

So, you want to start your own business.

I have had several businesses throughout my life. Let me give you some advice that may save you time and money.

Do not mortgage your home to start or expand a business.

Do not risk anything that you are not prepared to lose.

Please ensure that you have ticked the boxes for the following minimum steps in starting a business:

Business model. The business has a proven business model.

Controlling interest. You are the controlling investor/owner.

Capital. You have sufficient capital to start and maintain the business for 6 months. (preferably 12)

Intellectual property. You own it or you are it.

Business Model

Many businesses have failed before they start and the rate of failure within 6 months is high. If you can get past the first year your chances of survival are looking better. Most businesses fail within 5 years.

The key to initial business success is a clear business model/plan that is proven in the marketplace. The essentials are

A market for your services.

Proven profitability.

Capacity to deliver and scale.

A clear forecast and realistic budget.

Competitive analysis.

Controlling Interest.

There is no point in leaving your secure job to start a business if you must answer to a greater god. If someone has a majority interest in your new venture, then you are just changing from one boss to the other. It is important that you have a structure of operational control that has you as the boss. You may be an employee but make sure that you are also in charge.

All your investment and ongoing effort should be to build a capital asset that has a market value and can be sold for real money. You will only achieve your goals if you have control of the outcome.  You will only control the outcome if you are the boss and not accountable to anyone else.

Always think of your business as a cash flow generating operation that can be sold to someone else. Small businesses have a re-sale value that is generally calculated and based on a proven cash flow. If you think of your business this way then it will be worth something to someone else.

Capital

Most start-ups fail because they run out of money. Many businesses run out of money because it took longer to achieve their objectives than they had originally planned. If this happens you will need other investors or loans. This increases the potential for you to cease becoming the boss.

This is a big subject in itself and one which needs careful consultation with your accountant or business adviser. However, much like having a contingency amount when building a house, or a capital reserve in a company operation, it is always prudent to put money aside for those unexpected events that upset the forecasts.

It is also important to distinguish between start-up or seed capital and working capital.

Start-up capital is the funds required to launch the business. It may include motor vehicles, buildings, tools, implements and other devices. Licences, company/business registration and other compliance requirements.

It is the investment required to arm the business with assets that are needed to generate profit. I advise that in addition to start-up, start a contingency fund for capital items that may need to be purchased in the short term after business commencement.

Working capital is the money required to keep the business running. At any one time, it is the net difference between current assets and current liabilities.

A.Current assets are those that you expect to cash in within 30 days. These include cash, stock, debtors (those who owe you money).

B.Current liabilities are those liabilities that are payable within 30 days. They include, loans (short term component), employee wages, creditors – (those to whom you owe money).

Working Capital = A-B (surplus of A over B)

This is a simplistic explanation of working capital and a basic knowledge of working capital is essential when you start a business. In principle, your working capital should be adequate to fund the business on an ongoing basis. Most small businesses require a working capital ratio of 2:1. i.e., you should have twice the level of current assets compared with current liabilities.

Intellectual Property

This is the asset that underpins the unique strength and viability of the business. It is the smarts that no-one else has and it could be as simple as the value that you bring to the business as its founder and mentor. It is often that which gives the business and its products/services a competitive differentiation (what you offer that is not able to be offered by your competitors).

In some businesses there may be registered defensible IP rights. There are various types of IP rights

https://www.business.gov.au/Planning/Intellectual-Property/Intellectual-Property-explained

Patents protect inventions and new processes.

Trademarks protect logos, words, and other branding.

Copyright protects art, writing, music, film, and computer programs.

Registered designs protect the visual design of a product.

Circuit layout rights protect layout designs or plans of integrated circuits used in computer-generated designs.

Plant breeders’ rights protect the commercial rights of new plant varieties.

Regardless of the IP, you need to own it or own its use. If you are the key to the business and you offer a unique idea that is productive and you are the sole creator, then it can be registered as your intellectual property (IP).

A business name is not IP. A registered trademark is an example of IP.

If you are starting business with an idea that no-one else has registered, then find a way to protect your idea and you will protect the future of your business that depends on that idea.

A Sydney accountant with super thoughts

When COVID-19 hit us in February 2020, I like most had no idea what was about to happen.

At the time, it was called the corona virus and the world largely had no insight of the death, destruction and economic disruption that was about to be unleashed on the unsuspecting world.

As a practicing accountant, I instinctively reached out to my clients offering assistance with government initiatives such as Cash Flow Payment Boost, Job Keeper, Job Seeker, and general compliance in businesses that had ‘hit a wall’ overnight.

it was awful, largely unchargeable work and somewhat depressing.

So what did I do. I wrote a book about the decisions we take and the outcome that we create. ‘Lifes Equation – Decide for a better outcome’ was a covid inspired (if thats the right word’) account of my take on learning from our mistakes as we travel through lifes journey. What would I have done differently, given the benefit of hindsight.

In pursuing a common thread that decisions lead to outcomes, , I explore the need to understand the capital/revenue dilemma that many do not consider as they waste away their important capital resources that will underpin their quality of retirement.

I talk about the conduits for capital growth, the importance of owning the home in which you live, and the widely disregarded capital resource that is superannuation. You see far too many people regard super as something their employer has to pay and they place little value on the money until they do not have enough in retirement.

In Lifes Equation – Decide for a better outcome, I show with financial modelling, how a decision to top up super through salary sacrifice to optimise tax breaks up to $25,000 per year, will potentially double your super over a lifetime. I break it down into the age group steps in lifes journey outlining where you should be financially depending on your age and what you should be thinking about.

I talk about shares, investment properties, AirBNB, self managed super funds, marriage breakdowns and understanding business structure and funding.

I round out the book with a chapter on COVID-19 and the outrageous early release of super.

As an accountant, I do a lot more than tax returns. I care about the well-being and financial future of my clients. I commend the book to you or anyone in your family who cares enough about their future to do something about it…value your super.

Peter Cox – Harbour Accounting