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 they it is wrong?

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 debtors.

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 - Final letters of demand with the relevant court documents attached.  Legal document provider LawCentral has a clever product for this that takes you through the Letter of Demand to the appropriate court documentation.  Sometimes the letter will be enough to trigger action from the debtor to pay but you must have the intent of following through.  These kits are available for NSW, QLD, VIC and  WA
  •  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. 
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The global economy is picking up and Australia is about to secure the global record for the longest period a country has gone without a recession. But with the focus on the political environment, there is an uneasiness in the market and with uneasiness comes a reticence to take risks. The fortunes of Australians this year will have much to do with how you or your business is positioned and how you respond to challenges. Here are our top predictions:

 

1. Trumponomics will impact on our region

Business is business - either an opportunity makes sense or it doesn’t. The biggest pressure from the new US President is unlikely to be the much discussed Trans-Pacific Partnership (Australia’s current Free Trade Agreement with the US (AUSFTA) has been in place since 2005), or President Trump’s controversial immigration policies, but the plan to cut the US Federal company tax rate from 35% to boost competitiveness. If the US drops its company tax rate below 30%, Australia will be the one of the most expensive countries in its region to do business and globally uncompetitive. The 2016-17 Federal Budget announcement to reduce Australia’s company tax rate progressively to 25% for all businesses has stalled in the Parliament with voter perception that it is a gift to ‘big business’ at the expense of more deserving elements of the community.

The US is Australia’s second largest two-way trading partner at around $69 billion and our third largest export market at $22 billion* (we import around $47 billion in US goods and services). Australia’s trade relationship with China however swamps this volume with $150 billion in two-way trade of which almost $86 billion is in exports. These trade statistics are important to remember when we look at the geopolitical landscape of the Asia-Pacific region and in particular the increasingly antagonistic relationship between the United States and China.

Australia is too small an economy to successfully survive on its domestic market alone. Strong regional alliances and competitiveness are critical.

2. For business: Innovate or Perish

Economists widely predict that residential construction and exports - the mainstay of Australia’s domestic economic growth - will slow in 2017. Part of this is the Chinese Government’s concern about investment outflows (Australia has been a significant beneficiary with Chinese Direct Foreign Investment growing by 72.5% over 2010-15). So, where is growth going to come from?

One of the most alarming statistics comes from the Boston Consulting Group Global Manufacturing Cost-Competitiveness Index.  

The BCG analysis demonstrates that Australia was the least competitive of the top 25 global manufacturers between 2004-14 – Australia’s direct manufacturing costs, for example, were just under 30% higher than the US. Manufacturing wages grew 48% in Australia over this period while labour productivity fell 1%. While this was a period of abnormal events with the mining boom, the Australian dollar at parity with the US, and a GFC, it still creates a stark picture of why a focus on productivity is important.

Over the last two decades we have seen a global trend towards offshoring to reduce labour costs to achieve productivity gains. Now, gains are being achieved through innovation to reduce costs. This is an area where Government policy is there to support business. These incentives include:

  ·       Small business rollover relief that removes the tax impediments associated with changing your business structure.

·       Tax incentives for investors in early stage innovation companies.

·       Broadened tax incentives for early stage venture capital limited partnerships and venture capital limited partnerships.

·       More generous employee share scheme arrangements particularly for high growth start-ups.

·       Immediate deductions for start-up businesses.

·       Reduced company tax rates for small businesses.

·       Plus there is also the R&D incentives for innovative companies.

For survival, all business operators need to look at the trends in their industry. Advances in technology in particular will make some operators unsustainable and give others the capacity to change the very nature of their sector either through production efficiencies or disruption. After all, tech company Uber started in 2009, spreading exponentially around the world well before it launched in Australia in 2014. Real Estate Agents may be next with companies like Purplebricks.

The bottom line is that you cannot rely on the stability of your business model to sustain over time.

3. For you: Superannuation knee-jerk reactions will disadvantage some

2017 will be a watershed year for superannuation in Australia. With many of the reforms coming into effect on 1 July 2017, there will be a temptation for many to ‘do something’ before the deadline.

The biggest impact of the reforms is likely to be on those with large super balances close to or exceeding $1.6 million. And, it’s not just the wealthy with large super balances. Many SME business operators utilise the business real property exception to hold their business premises inside their SMSF, which can significantly increase the asset value of the fund. For anyone close to or exceeding the $1.6m cap, it’s essential that you have current valuations for your assets to know exactly where you stand.

One of the key decision points for those with large balances is how Capital Gains Tax applies where assets supporting pension payments exceed the new $1.6m pension transfer limits and need to be moved back into accumulation phase.

Knee-jerk reactions to the management of your fund’s assets - like quickly selling assets pre 1 July - may result in your fund being in a much worse position. With the risk of sounding conflicted, good advice is essential.

4. International is still a dirty word

If you are an individual or a business that transfers money internationally, you will continue to be a target. For individuals, if you work overseas be careful of residency issues. The residency tests don’t necessarily work on ‘common sense’. Just because you work outside of Australia for a period of time does not mean you are not a resident for tax purposes. And, for those with international investments, it’s important to understand the tax status of earnings from those assets. Just because the asset and the earnings from those assets are overseas does not mean they are safe from Australian tax law, even if the cash stays outside Australia.

For business, Government regulation is increasingly cynical about those using low taxing jurisdictions, paying large management fees between international entities, and parking large debts in Australian entities.

Like every other tax authority, the Australian Tax Office wants its share of profits earned from Australian consumers. You can see this trend in the new GST rules (dubbed the 'Netflix tax') which come into effect on 1 July 2017 - although for many the requirement for foreign entities to charge GST on services and digital products provided to Australian consumers has already come into effect. On the other hand, changes to the GST treatment of international transactions that apply from 1 October 2016 are intended to make life easier for both Australian and overseas businesses, but these rules can become quite complex to apply in real life.


No one likes uncertainty and 2017 is shaping up to be a year where people feel unsettled. Take a breath, think strategically, look beyond your personal experience, and take advantage of the opportunities that are available to you.

 

Credit: Knowledge Shop February 2017

*2015-16 figures Austrade Why Australia Benchmark Report 2017.

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It’s not uncommon for friends and relatives to band together to capitalise on the investment property market.  But what happens when it all goes wrong? 

The Housing Industry Association shows that it now takes 2.04 average full time salaries to comfortably service a standard mortgage on a median priced detached house in Sydney.  So why not pool your assets?

The tax issues

Capital Gains Tax applies to any change of ownership of a CGT asset, unless the asset was acquired before 20 September 1985 when the CGT rules first came into effect. 

In general, if you jointly own an investment property, your individual exposure to CGT will depend on how the property is owned.  If the property is held as tenants in common then any CGT exposure is in line with your ownership interest – this might be 50/50 or some other configuration. If the property is owned as joint tenants then each owner is treated as holding an equal interest in the property for CGT purposes.

Like CGT, how the expenses and income from the investment property is represented in your tax return also depends on how the property is held.  For example, if you and a family member each own a 50% interest in the property you will need to split the rental income and expenses 50/50 when preparing your tax returns. 

The main exceptions to this are where you are carrying on a rental property business (e.g., you own a significant number of rental properties and manage this in a business-like manner) in which case a partnership agreement will generally determine how the income and expenses are split or where one owner has borrowed money to acquire their interest in the property in which case they can claim a deduction for their own interest expenses (these do not need to be split with other owners who may have used their own savings to acquire the property). 

The legal issues

Disputes between friends and relatives can occur very easily. One area that often triggers a dispute is when one party wants to take some form of action and the other doesn’t – like selling the property or investing in expensive renovations. If the problem cannot be resolved the issue may be taken to court to force a resolution.  State laws allow for one party (a co-owner) to make an application to the Supreme Court for the sale or partition of the property. Following an application under the partition laws of each State and Territory, a court may make an order for partition or sale of the property. 

This is where a legal agreement, a Co-owners Agreement, to underpin the terms of ownership can really help – even for the best of friends or the closest of relatives.  Legal issues covered include: 

  • Ways to resolve disputes;
  • What share each party owns;
  • When you can sell;
  • Who pays the bills;
  • What happens when a party dies;
  • What happens if a party becomes bankrupt;
  • When you can exit the agreement; and
  • When you can buy the other party out.

For assistance in the above matters, please contact our office on 02 6813 0799.


Credit: Knowledge Shop 1216

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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 cash flow 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.

 

Credit: Knowledge Shop, Your Knowledge 1116

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If you are waiting for the superannuation reforms announced in the Budget to pass Parliament before working out what they mean to you, you might miss out on any opportunities available.

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. 

Lump sum withdrawals no longer meet minimum pension requirements

The Government has closed a quirk in the superannuation system that allowed people under 60 to withdraw from their pension and in certain circumstances have that withdrawal treated as a tax-free lump sum.  From 1 July 2017, the ability to take a lump sum from an account based pension will be removed.  Generally, from age 60 these pension payments become tax-free.

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.

Contractors & 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 change will be useful for contractors who hold their insurance through super as they will be able to claim a personal tax deduction for these insurance premium contributions.  The caveat here is that these 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.


Source: Knowledge Shop: 1016 Your Knowledge

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Most people are not surprised when a start up business fails. But it’s not just start ups that grow to death; it’s also a common cause of business failure for mature businesses. 

Start-up businesses often fail because they are undercapitalised.  They grow until the money runs out and then they can’t afford to fund further growth.  The banks refuse to lend to them as they have no history and no assets to leverage, and then they die. It’s an easy trap to fall into. The entrepreneurial spirit that drives people to start up a business is often the same spirit that keeps them focussed on a growth path.  The mentality is that the faster you drive sales and bring in the cash, the more successful the business (and the entrepreneur) will be.  However, this cycle of sales and profit is missing two key components; financial, and cash flow management. A successful and sustaining business has all of these elements.

For the more mature business, growing to death is often the result of unplanned growth opportunities. It’s ironic that seizing a major sales contract or a big new client can be your business’s ruin but it’s more common than you think.  More often than not it’s an issue that business operators don’t identify until it is too late. 

Many business operators are very good at what they do.  Most have an excellent knowledge of the business they conduct and understand their products and services.  Most also have an in-depth knowledge of sales performance and revenue.  Few however have a high level of financial management expertise, so when a big new opportunity presents, critical financial questions are not asked.  As a result, there can be a sudden and unintended impact on their financial position. A rush of sales might be a great thing but it is not always counterbalanced by a rush of income and profit. Free cash and liquidity are the victims.

Big one-off opportunities can also be dangerous because they are rare. For businesses without strong financial management and control, there is simply no way of understanding what impact the opportunity will have until they have experienced it. With no background history to rely on, the warning signs of impending financial crisis don’t appear. 

Sudden growth comes at a cost. That cost can be at a profit or at a cash flow level. Profit and cash flow are not the same and where operators don’t have a lot of financial expertise they generally rely on profit analysis without considering the cash flow implications. You need to understand the cash cycle and its timing within your business.

The first step is to understand that sudden change creates a different dynamic and brings cost and cash flow implications with it. It’s essential not to embark on sudden change without identifying what these implications are.

Let’s look at an example:  Jonathon runs a typical small business. Since taking over the established business a year ago growth has accelerated. The primary product of the business is brought in from overseas. The business is predicated on a budgeted turnover of $70,000 - $100,000 per month. The working capital in place accommodates the business operating at this level which is already a step up from where it was when he bought it.

Jonathon knows the business has a lot of potential and he’s been working hard to fulfil its promise. He’s ecstatic because he’s brought in five major sales all within the $50,000 - $200,000 range and all expect delivery within the coming 3 months. While the big sales required a dip in the gross profit margin, it’s still doable.

If all of the orders come through, the impact of the new sales will take his turnover from its current level of $100,000 per month to an average of $250,000 per month for the next 3 or 4 months. If you imagine yourself in Jonathon’s place, it would be hard not to be impressed with your efforts wouldn’t it? What a boost to the company. 

Now add in another factor. The primary product is purchased from the supplier without trading terms so the outlay for any major sale is in advance. As a result, the cash flow implications of the time between each sale, the purchase of the product from the supplier, fulfilment and payment by the customer is critical to understand.  For Jonathon, the highest risk is the major outlay of cash required to fulfil the sale. He cannot buy time.

When Jonathon had a cash flow analysis put in place to determine the impact of the new sales it revealed that he needed $200,000 to $300,000 more cash than he had. He knew it might be tight but didn’t realise the situation was that stark. As a result of the analysis, Jonathon was able to work with the customers to stage the orders and manage the cash flow requirements.

Had he fulfilled the sales without the analysis, he would have had a funding gap of approximately 60 days where he was exposed by $250,000 without the capital base to support him. 

While the details might be different, situations like Jonathon’s are not uncommon. The problem is that unless you have strong security, the chance of any bank giving you an increase in funding is unlikely. Banks want to lend to businesses that have good financial management. If you approach them once a problem such as Jonathon’s has occurred, you have already proven the case in the negative and set yourself up for rejection. 

In the example above, cash flow was the major issue. In others it is profit. Large customers with large orders may expect you to cut your margin. Or, they might ask you to discount if they ‘up the order’. The danger is that you, or your sales people, get carried away with the headline number and don’t look at the profit contribution. Some sales, even big sales are simply not worth it as you can’t trade below a certain profit level. For businesses with higher fixed costs your ability to negotiate your margin is less flexible than those with higher variable costs. The key is to know your break-even point before entering into any deals. 

And, discounting can be its own trap. For example, if your margin is 40 per cent and you reduce your price by 10 per cent, you need a 33 per cent increase in sales volume to maintain your profit level!

Credit: Knowledge Shop: May 2016 Your Knowledge

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Many business owners don’t realise that the business has outgrown its structure until something comes up – and this something is usually something negative.

Are your assets at risk?

Legal action by employees, customers and suppliers as well as divorce are the two primary risk issues for many business operators.  If you have been operating as a sole trade or as a partner in a partnership or have simply been holding all business assets in a single entity, your structure may not provide sufficient asset protection. If any personal assets or valuable assets of the business are held in the same entity which carries on the trading operations of the business, those assets may be at risk. To protect your assets it is generally preferable to separate as many valuable assets as possible from the trading operations.

Can you introduce new business partners or investors?

If you want to provide key employees or investors with an equity interest in your business, your current business structure may not allow for this.  For example, it is not generally possible to provide fixed entitlements to the profits of a business operated by a discretionary trust.

Entities such as companies and unit trusts are a much more effective vehicle to facilitate the introduction of new equity partners as they can provide a fixed interest in the income and capital gains generated by the business. New investors can also potentially claim interest deductions on funds borrowed to invest in the company or unit trust. 

Reinvesting in growth

Reinvesting profits in your business is important if you have or expect a strong growth path.  Some business structures however don’t readily facilitate profits being retained by the business.  For example, it is generally more difficult for a trust to retain profits, as the trustee of a trust is taxed on these profits at penalty tax rates if they are not distributed to the beneficiaries of the trust each year.   This is compared to private companies where profits are taxed at a maximum rate of 30% or 28.5% and can be retained in the company without the need to distribute these profits annually. 

Can you take money out of the business?

When you first established your business, it’s hard to know what your profits are going to be and for many, there are a few lean years of losses to get things up and running.   Your personal circumstances might have changed as well – marriage, children, a spouse, etc. These changes can drive the need for change.   The structure of your business has a direct impact on how money flows through it to the investors.  For example, one of the benefits of a discretionary trust is that the income of the trust can be distributed to any of the beneficiaries of the trust in any proportion, and that proportion can change annually.

Impeding international expansion

If you are contemplating expanding overseas this can significantly increase the complexity of your operations. All of a sudden you will be exposed to a new set of Australian tax rules in addition to the legal and regulatory requirements that will need to be considered in the foreign jurisdiction.   On top of the complexity, control may also become an issue.  The right business structure can limit your exposure to risk. 

Access to tax incentives and concessions

Research & Development (R&D) concessions are only available to companies.   If you have a significant level of R&D activity that could potentially qualify for the tax incentives, it’s worth exploring your options if you are not already in a company structure. 

Can you exit your business?

The business lifecycle has shortened considerably with less business owners seeking to create empires but more opportunistic business models.  The wrong structure will limit your ability to sell your business interests and may have a dramatic and detrimental impact on the amount of tax you pay on the sale proceeds.  It’s important that you explore this issue well before you actually plan to sell or reduce your stake in the business.

Credit: Knowledge Shop, 1115 Your Knowledge

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Call us: 02 6813 0799

Email us at admin@mwata.com.au  

Visit us at Level 1 Endeavour Court 139 Macquarie St Dubbo NSW 2830

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