Fast Growing And Start Up Businesses – What Are You Missing Out On?

It’s always difficult for Governments and regulators to keep pace with changing business models, funding approaches, and technology.  But, recent reforms and a series of new initiatives seek to free up entrepreneurs from excessive regulation, inflexible tax regimes, and unintended outcomes.  Unfortunately, few entrepreneurs are aware of what is available to them and risk limiting their options for growth. We take you through what’s available and some of the tax implications of capital raising outside of the mainstream.

Tax relief for business changing structures

It is common for a business to outgrow its business structure. Alternatively, changes in circumstances over time might mean that a business structure is no longer as effective as it could be.  Small business entities can now rollover from one business structure to another without triggering adverse implications under the income tax system.

Under new rules that apply from 1 July 2016, if your business genuinely needs to move from one structure to another for commercial reasons, you can do this without triggering a tax bill if certain conditions are met. This new form of rollover relief can provide complete income tax relief when assets are transferred to any business structure (e.g., sole trader, partnership, company or trust) if the following key conditions are satisfied: 

  • The transaction is a genuine restructure of an ongoing business.  So, the concessions can’t be used for winding down or selling a business. 
  • Each of the parties to the transaction is a small business entity (revenue under $2m, although this might be increased to $10m) or is related to a small business entity in the year the transaction occurs. The turnover test is subject to some grouping rules.
  • The business owners (the people who have ultimate economic ownership of the assets) and their share in those assets doesn’t materially change.
  • The asset being transferred is currently being used in a business carried on by the current owner or certain related parties.
  • Both the original entity and the entity the business is being transferred into need to be Australian residents.
  • The parties involved in the transaction must choose jointly to apply the rollover.
  • None of the entities involved in the transaction are a superannuation fund or exempt entity.

Employee share schemes to help fast growth companies attract talent

Employee share schemes, if structured correctly, can be an effective way of incentivising staff by linking personal reward to company growth.  They are also very useful for fast growth start-up and innovative companies that want to attract top talent but lack the capital to compete on salary alone.

Recent changes to how Employee Share Schemes (ESS) are taxed make the schemes more attractive with a common sense approach to how they are taxed.
 
Under an ESS, employers issue shares (an ownership stake) and/or options (a right to acquire shares at a later date) to their employees at a discount to the market value of the shares or rights.  In general, when an employee receives shares or rights under an ESS they are taxed on the discount they have received.  Under the new rules, it is now easier to defer the taxing point until it’s clear that the employee will actually derive an economic benefit from the shares or options they have received (this is possible under the old rules but in a narrower range of situations).

In addition, special rules exist for start-ups that allow relatively small discounts received by employees in relation to shares or rights not to be taxed at all under the ESS rules if the relevant conditions are met.  

Imminent changes to crowdfunding

Crowdfunding uses internet based platforms and other forms of social media to raise funds for projects or business ventures. Generally, the party trying to raise the funds (the

promoter) will engage an intermediary (the platform) to collect funds from contributors. There are different ways this can be done and how the crowdfunding is raised will determine the tax treatment of any funds received:

  • Donation-based – The contributor does not receive anything in return other than an acknowledgement
  • Reward-based – The promoter provides something in return for the payment (e.g., goods, services, rights, discounts etc.,)
  • Equity-based – The contribution is made in return for shares in a company
  • Debt-based- The contribution is made in the form of a loan with the promoter making interest and principal payments

A Bill that has just passed Parliament seeks to create a regulatory framework for crowdfunding. The popularity of crowdfunding as an alternate to mainstream finance has increased dramatically and at present, the Government has no viable way of protecting investors or regulating how crowdfunding is raised. These new rules bring crowdfunding under the Corporations Act while attempting to avoid onerous regulatory commitments that will stifle the flow of funds. Despite simplified reporting obligations, the changes will invariably add a layer of complexity for promoters and platforms. The rules also restrict how much Mum and Dad investors (retail clients) can invest in a single company in any one year to $10,000, and provide a cooling off period of 5 days. You can expect these changes to start coming into effect this year.

From a tax perspective, funds from crowdfunding are treated like any other form of income – the funds are likely to be taxable if:

  • The crowdfunding relates to employment activities (e.g., raising money to fund a project that is linked to existing employment duties);
  • The promoter enters into the arrangement with the intention of making a profit or gain and the project is operated in a business like way; or
  • The funds are received in the ordinary course of a business.

If funds are received for a personal project where there is no intention of making a profit (e.g., the project relates to a hobby), these funds are generally not taxable for the promoter.

When funds are received under an equity based crowdfunding model the funds would generally form part of the share capital of the company that is undertaking the project. If so, the funds should not be included in the assessable income of the company. If payments are made by the company to contributors then these would generally be treated as either dividends (it may be possible to attach franking credits to the dividends) or a return of share capital.

Likewise, when funds are received under a debt based crowdfunding model the funds would not be assessable to the company as they would simply be treated as a loan. When payments are made by the promoter to contributors the interest component might be deductible in some circumstances.

Managing the Debt Drain – the critical issues for small business

February and March are traditionally the worst cashflow months for small business – the Christmas rush is over, the Business Activity Statement is due, and payments slow down with a dip in consumer spending. You might be ok but your customers could be under pressure and often whoever wields the most influence gets paid first.

No one likes a late payer and two Government measures tackle the small business debt issue from different ends of the spectrum. We take a look at the issues and their impact on business, and what you can do about managing obstinate debtors.

ATO adding tax debt to your credit record
From 1 July 2017, the Australian Taxation Office (ATO) will inform credit rating agencies of businesses that have outstanding tax debts. Given 65.2% ($12.5 billion worth) of these late payers are small businesses, the move will put significant pressure on business operators to prioritise tax debt above other creditors.

Announced in the Mid-Year Economic and Fiscal Outlook (MYEFO), the plan will see the ATO disclose the tax debt information of businesses that have “…not effectively engaged with the ATO to manage these debts” to credit agencies. This means that if your business has a tax debt and you have not taken steps to work with the ATO, they will ensure that you cannot access new finance or potentially maintain existing finance levels without first addressing the debt to the ATO. There are two problems with this approach. The first is that once your credit rating is downgraded, it’s very difficult to repair. The second is the legitimacy of the ATO’s tax debt claim – what if the ATO is incorrect?

The measure will initially only apply to businesses with Australian Business Numbers and tax debt of more than $10,000 that is at least 90 days overdue. We have little doubt however that this measure will eventually extend to all tax payers.

The important thing is that anyone with an outstanding tax debt engage with the ATO. This will prevent the credit agency threat being triggered. If you are in this scenario, we can help by engaging the ATO on your behalf.

Why big businesses don’t pay small business on time
At the other end of the spectrum is the Payment Times and Practices Inquiry by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). The inquiry’s issue paper reveals that collectively, Australian small businesses are owed around $26 billion in unpaid debts at any one time. In the last financial year, late payments have increased for six out of ten SMEs with one in four businesses experiencing an average payment delay of 31 to 60 days past agreed terms.

Debt plays a significant factor in a business’s cashflow and survival. If larger businesses don’t pay smaller suppliers within the terms of trade, the small business often has to resort to external funding to manage the cashflow requirements of the business.

The inquiry is looking at options to improve the payment times of large business. Some of these solutions are already in play in some States such as a requirement for large projects to use supply chain finance where project bank accounts hold funds in trust to ensure supply chain participants are paid. Other solutions are in the ‘naming and shaming category’ where large businesses would be obliged to report their current payment times or for smaller businesses to report late payments.

The inquiry is expected to deliver its final report to Government in March 2017.

What to do about debt
Dealing with delinquent debtors is painful, particularly when you can’t afford to lose the customer. The most obvious tactic is to stay on top of debtors: Ensure that your contracts and invoices have clear payment terms, and you have a procedure to follow through once a customer breaks these terms. Importantly, ensure you keep a record of actions you take to recover debt. This record will come into play if you have to use a more formal resolution mechanism.

Ultimately, some customers will not pay you even if your terms are clear and you have done everything in your power to recover the debt. Often small businesses just give up and don’t deal with the customer in question again. Some of the other options available to you are:

• Final letters of demand with the relevant court documents attached. Sometimes the letter will be enough to trigger action from the debtor to pay but you must have the intent of following through.
• Engage a debt recovery agency. Commission rates for debt collection services vary between 5% and 30% of the value of the debt.
• Sell the debt for a small percentage of the owing value.

Penalty rates and the impact of change

The Fair Work Commission (FWC) has moved to cut Sunday and public holiday penalty rates.

The changes to penalty rates are not yet in force – see When will the changes take effect?

Flagged back in 2014, the review into penalty rates was part of the FWC’s four yearly review of all Modern Awards. Hearings, submissions and reviews have been ongoing since 2015. The outcome of that process (see AM2014/305 Penalty rates case) is to reduce Sunday and public holiday rates in the following Modern Awards:

• Hospitality Industry (General) Award 2010 [MA000009]
• Registered and Licensed Clubs Award 2010 [MA000058]
• Restaurant Industry Award 2010 [MA000119]
• Fast Food Industry Award 2010 [MA000003]
• General Retail Industry Award 2010 [MA000004]
• Hair and Beauty Industry Award 2010 [MA000005]
• Pharmacy Industry Award 2010 [MA000012]

When will the changes take effect?
The public holiday penalty rate reduction will come into effect from 1 July 2017 with the exception of the Clubs Award, which remains unchanged.

For the reduction in Sunday penalty rates, transitional measures will be put in place from 1 July 2017. The FWC has flagged that the reduction may be via a series of annual instalments so the full impact of the reduction will be graduated. The decision on how penalty rates will be reduced and over what time period won’t be known until May 2017.

Not everything is as simple as it seems with some penalty rate changes only impacting on employees at certain levels. For example, in the Fast Food Industry Award, Sunday penalty rates for Level 1 employees will decrease from 150% to 125% for full and part-time employees, and from 175% to 150% for casual employees. Level 2 and Level 3 employees are unaffected.

There are also some minor variations to the early/late night work loadings in the Restaurant and Fast Food Awards that will take effect in late March 2017. These variations don’t change the loading but do change the spread of hours; changing it from midnight to 7am to midnight to 6am.

It will be important for all employers affected by the Award changes to not only understand what Award their employees are covered by, but also at what level. While nothing needs to be done now, keep an eye out for the finalised Awards and other changes from May.

End of the Instant Asset Write-off (i.e. the $20k depreciable asset write-off)

We have mentioned previously that the immediate deduction for the purchase of depreciable assets costing less than $20,000 will come to an end on 30 June 2017. The measure was first introduced in May 2015 to help provide economic stimulus.
The deduction is only available to small businesses that use the small business pooling method to calculate depreciation. If you have any doubt about your eligibility, please contact us for clarification.

What happens after 30 June 2017?
The instant asset write-off limit will revert to the previous limit which was $1,000. This means that any purchases over this amount will be subject to the normal rules of small business pooling depreciation.
Keep this in mind if you are considering any depreciable asset purchases for your business over the next four months because the taxation treatment will vary substantially for assets purchased before and after 30 June.

Paid parental leave. Where are we up to?

How did paid parental leave get to be so contentious? The current debate is not about parental leave in general; the entitlement to 12 months with a potential for 24 months of unpaid leave with your job guaranteed (or an equivalent position) remains. It’s about who pays for paid leave.

In Australia, paid parental leave is available for up to 18 weeks for eligible parents paid by the Government at the minimum wage. Eligible working dads and partners also get access to two weeks paid leave at the minimum wage.

At the moment, if your employer provides paid parental leave then you can still claim the Government scheme. One is unaffected by the other.

According to the OECD, across the board, Australian mothers receive 42% of their previous earnings while on parental leave. This is largely eligible public sector employees who receive employer funded paid parental leave up to their ordinary rate of pay, and corporates. Of those who receive both employer sponsored paid parental leave and claim the Government’s paid parental leave scheme, 60% are employed by the public sector and 40% are corporates.

Reforms currently before Parliament seek to curb the capacity for parents to receive both employer and Government funded parental leave payments instead moving to a ‘top up’ system. In effect, the reforms remove the capacity for private and public sector parental payments to co-exist. That is, if someone is entitled to paid employer leave of less than 18 weeks, then the Government will top up this payment to reach the maximum 18 week entitlement at the minimum wage. Senate figures reveal that only 6% of women who claimed the Government funded paid parental leave were on salaries above $100,000. The median income of those claiming the scheme was $47,730.

The proposed 1 January 2017 implementation date of the reforms is also contentious, as it would leave women who are currently pregnant in potentially very different circumstances to what they believed when they fell pregnant. However, it is unlikely that this date will be agreed by the Senate.

The reforms also amend how employers interact with paid parental leave. At present, paid parental leave is paid via the employer. Under the reforms, parental leave would be paid by the Government unless the employer opts-in to make the payments.

The reforms are expected to save around $1.2 billion across the forward estimates.

What’s involved in selling your business?

Selling your business can be a stressful time and unless you’ve done it before, it’s hard to know what to expect or what’s required to get the right result. We’ve put together the top issues for business owners or investors to maximise their results.

Understand what you are selling and the tax implications

What you are selling and how you are selling it will have quite different tax consequences.

For example, let’s say the business is operated through a company structure. If the company sells the assets of the business (e.g., goodwill, equipment, intangible items etc.,) then the immediate tax impact rests with the company. If your intention is then to flow the proceeds of the sale to the shareholders, then there is another taxing point that needs to be understood and managed. Depending on the circumstances there may be options for managing this in a more tax efficient way.

However, if the shareholders are selling their shares in the company, then the tax impact is managed at the shareholder level and dealt with by each of the shareholders.

The overall outcome from a tax and cashflow point of view could be quite different. It’s important that you get good advice as soon as you are thinking of selling the business to understand the taxing points triggered by the sale and what options might be available to improve the overall outcome, including the availability of any concessions and the conditions that need to be met to qualify for them.

The GST implications of any sale also need to be established up front. If the business is sold as a going concern, that is, it’s ‘business as usual’ despite the sale, then the sale is generally GST-free. But, to ensure the sale is GST-free the parties have to agree in writing that certain strict conditions have been satisfied. If this issue is not dealt with, the vendor may be left with an unexpected GST liability that will basically come out of the sale proceeds.

Finally, consider the liabilities. For example, if you sell your business but not all of the staff are staying on with the new owners, the vendors will generally be responsible for the cost of redundancies and other employment costs.

Get your house in order

Most purchasers will undertake some form of due diligence on your business. If you understand what the likely purchasers are looking for, you have the opportunity to ensure that your business is positioned the best possible way. This may mean cleaning up your balance sheet or sorting out other parts of the business in advance of the sale. This way, you remove possible objections to the sale and improve your chances of achieving a favourable sale price. 

Control the flow of information

During the sale process it’s not unusual to be asked for a myriad of information about your business, its performance, and for your financials. Just remember that not all prospective buyers are buyers – many will be looking for market knowledge and intelligence. It’s important to cascade information through to prospective buyers as required to limit the potential of over-sharing with competitors. Generally, sensitive information should only be released under due diligence once key terms have been agreed.

Warranties and indemnities

Warranties and indemnities are a standard part of most sales agreements to protect the purchaser against declining performance and significant changes in conditions from what has been declared. It is essential that you understand what you are signing up to even if the chances of the trigger event occurring are slim. This includes limiting the dollar quantum of any indemnity and its time period. In most contracts if you disclose information during the due diligence phase a warranty claim cannot be made against you – there can be an art in disclosure!

Restraints

Restraints are also a common part of a sale of business process particularly where the sale includes goodwill. Restraint clauses prevent you from selling your business then immediately starting a new business or becoming a part of a competitors business using the goodwill you established. Where restraint clauses are involved, it’s important to understand how long you are going to be out of the market for.

Update to Superannuation Reforms

 

Making sense of the super reforms

When enacted, the reforms will represent the single biggest change to superannuation since its inception. While there has been a softening of the original Budget announcements, there are still some very big changes coming your way.

Accumulators: Under 65s
The reforms likely to impact on you are:

Reduction in non-concessional contribution caps
If you are close to retirement age and looking to build your super balance, this change is incredibly important. From 1 July 2017, the annual non-concessional contributions cap will be reduced to $100,000 (from the current $180,000).

This means that if you are approaching retirement age, you have until 30 June 2017 to use the current caps and contribute up to $540,000 this financial year. You can do this using the ‘bring forward’ rule. This rule allows you to bring forward up to three years worth of non-concessional contributions in one year (and then make no or limited contributions for the next two years until you reach your three year cap). The advantage of using the bring forward rule now is that your three years worth of contributions utilise the current caps. If you contribute more than $180,000 this financial year but not the full $540,000, you still trigger the bring forward rule but any further contributions from 1 July 2017 are subject to the new $100,000 cap. That is, instead of your cap being $540,000 across three years, it might be $460,000 or $380,000. And, if you wait until after 1 July 2017 to trigger the bring forward rule, you will only be able to contribute up to $300,000.

If you want to make in-specie contributions – that is, contributions to super that are not cash such as listed shares, etc., then you should look at whether the cap reduction affects your ability to do this.

People with Large Super Balances & High Income Earners

The Government thinks that you are not using superannuation for its intended purpose – to fund retirement. As a result, the reforms introduce a whole series of measures that pare back the tax advantages for people with large super balances:

Non-concessional contributions capped at $1.6 million
Once your super balance has reached $1.6m, from 1 July 2017 you will no longer be able to make non-concessional contributions to super. So, you have until then to maximise your contributions (see Reduction in non-concessional contribution caps). Going forward, your super balance will be assessed at 30 June each year.

Concessional contributions cap reduced
From 1 July 2017, the annual concessional contribution cap will be reduced to $25,000 for everyone (currently $30,000 for those aged under 50 and $35,000 for those aged 50 and over).

30% tax on super extended to more taxpayers
High income earners with incomes of $300,000 or more pay 30% tax on contributions they make. From 1 July 2017, this threshold will reduce to $250,000.

Retirees and those Transitioning to Retirement

The reforms likely to impact on you are:

Tax concessions limited to pension balances up to $1.6 million
The reforms introduce a $1.6m ‘transfer cap’ on the amount you can hold in a superannuation pension. This means that if you are in pension phase, the balance of your pension needs to be no more than $1.6m. If not, from 1 July 2017 the Tax Commissioner will direct your fund to reduce your retirement phase interests back to $1.6m and you will be subject to an excess transfer balance tax. Your overall super balance can be more than $1.6m but only $1.6m can be transferred into a tax-free pension. Keeping the excess balance in super may still be worthwhile because of the low 15% tax rate.

If your spouse has a low superannuation balance, it might be worth thinking about how you can maximise your returns as a couple.

Earnings on fund income no longer tax-free
From 1 July 2017, the income from assets supporting transition to retirement income streams will no longer be exempt from tax but included in the fund’s assessable income. For example, if your super fund earns interest from a term deposit, that interest is currently tax-free in a transition to retirement pension. From 1 July, that interest will be included in the fund’s assessable income.

Still Going: Over 65 and Still Working

Currently, if you are 65 or over, your superannuation fund can only accept contributions from you if you work at least 40 hours in a 30 consecutive day period in the financial year. The original Budget announcements abolished this work test. Unfortunately, this reform is not progressing and the work test will remain.

Wages & Self-Employed

There is good news if you are partially self-employed and partially a wage earner. Currently, to claim a tax deduction for your super contributions you need to earn less than 10% of your income from salary or wages. From 1 July 2017, the 10% rule will be abolished.

This means that salary and wage earners will be able to contribute to super and claim a tax deduction for their personal contributions. The caveat here is that these contributions together with employer contributions must remain within the reduced $25,000 concessional cap.

People with Low Super Balances and Broken Employment

There is a lot in the reforms for people who have not had the opportunity to build their super balances. The reforms likely to impact on you are:

‘Catch up’ super contributions
Normally, annual caps limit what you can contribute to superannuation. The reforms allow people with broken work patterns to ‘catch up’ their concessional super contributions. From 1 July 2018, people with super balances below $500,000 will be able to rollover their unused concessional caps for up to 5 years. Unused cap amounts can be carried forward from the 2018-19 financial year; which means the first opportunity to use these new rules will be 2019-20.

Tax offset for low income earners
A new tax offset will be available for people earning less than $37,000. The offset refunds any tax paid on super contributions.

Tax offset for topping up your spouse’s super
Currently, if your spouse earns less than $10,800, you can claim a tax offset of up to $540 if you make super contributions on their behalf. This offset is being extended to spouses who earn up to $40,000.

 

The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
 

 

Changes to PAYG tax tables from 1st October 2016

In the May 2016 Budget, the government announced changes to the PAYG rates that mean the marginal tax rate of 37 per cent will start at $87,000 instead of $80,000 as of 1st July 2016.
Due to the election, the necessary legislation was delayed until August, and so the implementation of this change doesn’t actually come into force until 1st October 2016.

This means that from 1st October, anyone earning over $80,000 will have the amount of tax withheld from their wage reduced in line with the new PAYG tax thresholds.
Any extra tax that has been paid between 1st July and 1st October will be credited back to you when you lodge your 2017 income tax return.

Employers using electronic payroll systems will be advised on how to update their systems by their software provider. For employers who manually calculate wages, new tax tables can be found on the ATO website.

2016/17 Federal Budget Summary

The 2016-17 Federal Budget was handed down on Tuesday, 3rd May 2016.
This budget was designed to promote the governments focus on jobs and growth, and beginning to move away from the economies reliance on mining.
The budget contained a range of measures including tax cuts for businesses, significant changes to superannuation concessions, funding for infrastructure projects and a crackdown on multi-nationals channelling profits out of Australia.

A detailed budget summary can be found here.

 

The SuperStream Deadline is Fast Approaching!

Small businesses with employees must be SuperStream compliant by 30th June 2016. With just 2 months before this deadline, the ATO have announced that to date, more than 60% of small businesses are already SuperStream compliant.

This means that if you aren’t already compliant, it’s important that you take steps now to become SuperStream compliant by the deadline.

SuperStream is the standardisation of how employers make superannuation payments on behalf of their employees. Under SuperStream, superannuation payments for your employees must be made electronically, in a standard format.

There are a variety of ways you can make compliant payments:

  • If you are using payroll software, your software provider will provide details on how to make SuperStream compliant payments using their software, so make sure your software is up to date.
  • Your default superannuation fund provider can act as a clearing house for your superannuation payments. Typically that will allow you to make one payment to your superannuation fund provider and they will distribute the money to other funds on behalf of your employees.
  • Use the ATO Clearing House. The ATO provides a free clearing house service for small business (under 19 employees or under $2 million turnover). You can provide the ATO with the details of the employee payments you need to make via their online portal, do a bank transfer for the total amount, and the ATO will distribute the funds to the appropriate superannuation funds on your behalf.

There is some basic information you will need from your employees to set them up in any of these systems. You will need their Tax File Number, details of their superannuation fund and their member number, as well as the funds Unique Super Identifier number (USI) or fund ABN.

An employer checklist is available on the ATO website that provides more information on becoming SuperStream compliant. https://www.ato.gov.au/Super/Superstream/Employers/Employer-checklist–a-step-by-step-guide/?sbn

If you have any questions about Superstream, or how to become compliant, please contact our office for further advice.