Succession planning for family businesses

For most family businesses as well as private groups, succession planning (sometimes known as transition planning) involves considerations around the eventual sale of your business, or the passing of control of it to other family members when you retire. Depending on your circumstances, this may include realising assets and making other changes to ownership, but is certainly tied up with retirement planning and estate planning. 

Adopting a sound tax governance framework can help you manage tax issues around succession planning before they present a problem. Though succession planning may not have an immediate tax impact, it’s important to include tax considerations in your plan. This will avoid unexpected tax issues arising down the track when you implement your plan.

Transferring control of your business to family members may involve restructuring your business operations – changes to share structure, changes to the trustee and appointor of a trust, changes to partnership structures – or transferring assets to family members via the creation of trusts or other entities. Remember that these sorts of events can have legal and tax implications that need to be carefully considered. A common assumption with business owners is that the transaction being considered is a single “sale” — that of the business — whereas it is actually many sales of individual assets that need to be accounted for, possibly with different tax outcomes.

For example, when you dispose of or transfer your business assets there will likely be capital gains tax (CGT) consequences. The sale of a business can also trigger liabilities in relation to GST and, where applicable, wine equalisation tax, fuel tax credits and excise duty.

Where pre-CGT assets are involved, you should also understand and document the tax consequences for you and your beneficiaries. Issues for consideration include whether changes in the business operations may affect the pre-CGT status of the assets or shares and the availability of carried-forward losses.

Any significant changes to your business structures or operations (including any asset disposals) should be fully documented, along with their tax impact. Ensure information on your assets (such as acquisition dates and cost base) is properly documented. This will also ensure that any subsequent disposals of the assets can be treated correctly for tax purposes. Different strategies will have different tax consequences for the owner and beneficiaries. Consider each strategy and identify (and keep records of) significant transactions.

For example, say, as the owner of a successful family business, you prepared a basic succession plan many years ago, but since then your business has expanded and your children have grown up. One of them may work with you in the business and you would like to see them take over when you retire. The discussion you could have with this office would be how best to transfer the business and make the transition to retirement.

One option could be to restructure your business as a family trust, so you can still have some control of the business while reducing your involvement in the day-to-day operations. We can explain the tax consequences of this strategy, while also alerting you to other options and tax considerations. Once you decide on your strategy, you update your succession plan, which now includes a section detailing the tax treatment and tax payable on transfer.

Whatever strategies you use to transfer your business onto the next generation, make sure your plans are documented and you seek advice from professional advisers where needed. This will reduce the risk of incorrect tax treatment and outcomes, and possibly consequent penalties.

Rental properties – traps and pitfalls

Following the ATO’s claims that nine out of ten residential rental property investors who have been audited have been getting their returns wrong, it might be worth touching on some of the tax traps and pitfalls to be wary of. In no particular order, these include:

Apportionment of rental income and deductions

Where a rental property is jointly owned by two or more people, the income and deductions are split according to the owners’ respective shares of the legal ownership of the property. Joint tenancy between spouses is the most common situation, meaning a 50:50 split. In those situations there is no legal basis for the spouse with the higher marginal tax rate claiming a disproportionate share of the deductions for mortgage interest, rates, land tax, insurances, repairs and maintenance in their own return – even where they fund the payments from their own bank account.

Private use

Interest and other outgoings are not deductible to the extent the property was used for private purposes – eg. while you or a relative or friend lived in it for no or nominal consideration.

Interest deductions

Where the acquisition of a rental property has been funded by way of debt, the associated interest costs will be deductible. However, where a loan (or part of a loan) that is secured over a rental property is used for private purposes, such as buying a car or renovating the house you live in, interest can only be claimed on a pro rata basis.

Care needs to be taken when refinancing debt to ensure the tax deductibility of interest attributable to the rental property is not jeopardised. 

Repairs vs improvements

The cost of genuine repairs to fix something that is broken or worn down due to wear and tear that happened while the property was tenanted is immediately deductible. Work that involves replacing the entirety of an asset would be a capital improvement and is deductible at 2½ %.

For example, your rental property might have an original 1960s bathroom, with leaky pipes and tiles that are broken or coming away. Fixing the leaks and replacing the tiles (even with something a little more modern) would fall on the repairs side of the line and be deductible outright. On the other hand, gutting the whole bathroom and replacing all the fittings with something out of Home Beautiful would be a capital upgrade and deductible at 2½ % per annum.

Initial repairs

Any deductions for repairs to your rental property have to be attributable to the time you were earning rental income from the property. If you buy a property that requires initial repairs before you can put tenants in, the cost of those repairs will not be deductible. You should still keep track of the amount you’ve spent on initial repairs as it will trigger off a capital loss when you sell the property down the track.

Certain initial repair works may be unavoidable, but defer non-urgent work if possible. So if your newly acquired rental property is in need of a coat of paint, maybe wait two or three years before contacting a painter.

Travel costs

The cost of traveling to visit your rental property to attend to things is no longer deductible. This matters especially to investors who have bought property interstate. There is an exception where an investor is in the business of letting rental properties – but very few are.

Depreciation

Second-hand depreciating assets acquired as part of the rental property can’t be written off against rental income, again unless you are in the business of letting rental properties. But the unclaimed depreciation can trigger off a capital loss on the eventual sale of the property. It’s important to keep track of these amounts in the meantime.

Cash jobs

It’s not unheard of for the tradesperson offering the best quote for a repair or maintenance job on your rental property to ask for payment in cash. Before rushing in to accept such a quote, just make sure they’re not keeping the job completely off the books and that you’ll still be getting an invoice that satisfies the substantiation rules. Otherwise you could end up blowing your cost savings (and maybe more) because you won’t be entitled to a tax deduction for the cash you’ve handed over.

What your tradie does in relation to his tax affairs is a matter between them and the Commissioner, but it shouldn’t cost you a tax deduction. Always insist on getting an invoice.

Holiday homes

Own a holiday home? Great for family holidays, but if the property is also offered for short-term rentals there are a few wrinkles you need to be aware of.

The main one is that the property needs to be genuinely available for rent, and not just at times when demand is seasonally low. So if you book the place out for yourself or family and friends for all or most of the school holidays and other peak times, the ATO will take the view that you’re not seriously trying to make a profit from any rental income you receive and will limit your deductions for mortgage interest, rates and land taxes, repairs and maintenance, insurance etc to the amount of your rental income. Likewise if you only charge mates’ rates when family and friends come to stay.

Some holiday house owners have even pretended to market their property by demanding excessive rents or imposing unrealistic conditions for short-term stays (eg. references, no pets, no kids). That is not likely to pass muster either.

Some limited personal use of the property is acceptable to the ATO, as long as you’re genuinely trying to turn a profit. Where this is the case, the deductions claimed need to be pro-rated to reflect the time the property was let or was genuinely available for rent.

Any disallowed deductions won’t be wasted entirely as they will create a capital loss on the sale of the property.

Please contact us if any of these issues raise concerns for you.

Getting the most benefit from fringe benefits

The most cost-efficient benefit an employer can give an employee is one that is both deductible for income tax purposes and exempt from Fringe Benefits Tax (FBT).  

One such type of benefit is the ‘work-related item’ FBT exemption.  

Like all concessions, there are some requirements that must be met to take advantage of it.

What is as a work-related item?

For FBT purposes, a work-related item is a portable electronic device, an item of computer software, an item of protective clothing, a briefcase, or a tool of trade.  

In practice, most of these are self-explanatory and need no further explanation – the exception being the first category of items, portable electronic devices.  

What is a portable electronic device?

A portable electronic device is one that is easily portable, designed to be used away from an office, small and light, able to be operated without an external power supply and be designed as a complete unit. Examples include mobile phones, calculators, electronic diaries, personal digital assistants, laptops, and portable printers.  Portable display monitors, GPS navigation receivers and smart watches can also qualify. 

Internal component upgrades at time of purchase of a computer are further examples, such as additional memory or an internal modem, but external modems and other peripheral items are not (although these items may be exempt as a minor benefit).

Where an employee is provided with the use, but not ownership of, a mobile phone or laptop by the employer, the exemption can also extend to the phone and wireless internet access charges incurred by the employer relating to the use of these devices.  However, the exemption does not extend to the payment or reimbursement of monthly use charges where the account is held in the name of the employee.

Primarily for use in the employee’s employment

A work-related item is only eligible for the FBT exemption where it is provided “primarily for use in the employee’s employment”. (For this reason a laptop or a mobile phone, for example, provided to your employee’s spouse or child will generally not be exempt from FBT as a work related item.)

This requirement looks to the principal reason the item was provided to an employee at the time it was provided – not to their later use of it.  That is, the employer does not need to monitor whether the item is being used by their employee more than 50% for work on an ongoing basis, so long as when the item was first provided to the employee, it was intended for use by them principally in carrying out their employment duties (remember you will need to keep evidence to support this!).

‘One per year’ rule

You cannot give more than one exempt work-related item to the same employee in any one FBT year (the ‘one per year’ rule). 

But there are some important exceptions to this rule.  More than one exempt work-related item can be given to an employee in the same FBT year where one of the following exceptions apply:

Employees may need a reminder they cannot claim a personal tax deduction in their income tax return for a work-related item that has been provided to them as an exempt fringe benefit by their employer!

Can’t meet the requirements?

If you have provided an employee with a work-related item but haven’t been able to meet all the requirements above, remember another FBT concession may be available (for example, the ‘’otherwise deductible rule” or the minor benefit exemption).

If you would like to know more about the work-related item FBT exemption or wish to discuss FBT more generally, please give our team a call.

Trusts – are they still worth it?

The recent ATO crackdown on trusts will no doubt have some business owners (and even some advisors) asking themselves the question: Is this structure for business purposes still worth it?

To recap, trust distributions have been under the ATO microscope in recent years. The latest ATO crackdown was in February 2022 when it updated its guidance around trust distributions especially those made to adult children, corporate beneficiaries and entities that are carrying losses. 

Depending on the structure of these arrangements, the ATO may potentially take an unfavourable view on what were previously understood to be legitimate distribution arrangements. The ATO is chiefly targeting arrangements under section 100A of the Tax Act; specifically, where trust distributions are made to a low-rate tax beneficiary, but the real benefit of the distribution is transferred or paid to another beneficiary usually with a higher tax rate. In this regard, the ATO’s Taxpayer Alert (TA 2022/1) illustrates how section 100A can apply to the quite common scenario where a parent benefits from a trust distribution to their adult children.

Despite this new ATO interpretation and the wider crackdown on trusts in recent years, the choice of a trust as a business structure still has a range of benefits including:

If you have questions around your trust structure, or your business structure more generally, touch base with us.

Time for a restructure?

The new financial year can be a time where business owners look at their operating structure and consider whether it still meets their needs. Choosing a structure is not simply about minimising tax, rather a range of factors should be considered as such as asset protection, establishment and ongoing compliance costs, succession planning, and your understanding of each structure etc.

Most small businesses operate as a sole trader, company, trust, or partnership.  The following table is a comparative snapshot of each of the four structures:

You may find that, as your business grows or as your priorities change, your chosen structure no longer serves your needs. For example, a number of people commence businesses as sole traders (often for reasons of simplicity as well as keeping start-up costs to a minimum) but later find that this structure is no longer appropriate. From an income tax perspective, a drawback with sole traders is that income from the business is assessed personally to you at your marginal tax rates. As your business grows and the revenue generated increases, your tax rate also increases. 

The take-home message is that you should periodically review your structure to ensure it continues to serve your needs. Be mindful however that changing structures can have CGT and stamp duty consequences – these one-off costs need to be taken into account when making the decision whether to change. Also note that under the small business rollover provisions, it may be possible for you to change your structure without incurring CGT.

Talk to us if you are contemplating changing your business operating structure.

Super contribution caps to increase 1st July 2024

For the first time in three years, the superannuation contributions are set to increase from 1 July 2024. 

Contribution caps to increase

Due to indexation, the contribution caps will increase on 1 July 2024 as follows:

What are concessional contributions?

Concessional contributions (CC) are before-tax contributions and are generally taxed at 15%. This is the most common type of contribution individuals receive as it includes superannuation guarantee (SG) payments your employer makes into your fund on your behalf. Other types of CCs include salary sacrifice contributions and tax-deductible personal contributions.

The government sets limits on how much money you can add to your superannuation each year. Currently, the annual CC cap is $27,500 in 2023/24.

What are non-concessional contributions?

Non-concessional contributions (NCC) are voluntary contributions you can make from your after-tax dollars. For example, you may wish to make extra contributions using funds from your bank account or other savings. 

As such, NCCs are an after-tax contribution because your employer has already taken out the tax you need to pay on your income. Currently, the annual NCC cap is $110,000 in 2023/24.

What are the bring forward rules? 

The bring forward rules apply to NCCs and allow you to make up to three years of NCCs in a single financial year, if you’re eligible. This means you can put in up to three times the annual cap of $110,000, which means you may be able to top up your superannuation by $330,000 within the same financial year. 

Using the bring forward rules can be beneficial for individuals who have a large amount of cash to invest which may have come from an inheritance or from the sale of an asset/property.  

However, how much you can make as a NCC will depend on your total superannuation balance (TSB) as at 30 June of the previous financial year (see table below).

The table below shows the TSB thresholds that apply to determine how much you can contribute under the bring forward rules: 

Bring forward NCC amounts will also increase 

In addition to the contribution caps increasing, the maximum NCC cap under the bring forward rules will also increase on 1 July 2024.

Take care before you contribute 

The increase to the NCC cap under the bring forward rules will not apply to individuals who have already triggered the bring forward rule in either this year (2023/24) or last year (2022/23) and are still in their bring forward period. This is because the NCC cap that applies to an individual is calculated with reference to the standard NCC cap when they triggered the bring forward rule in their first year. 

For example, if the NCC cap in the second and third year of a bring forward period changed to $120,000 due to indexation, your NCC cap will still be $330,000 ($110,000 x 3 years) and not $350,000 ($110,000 + $120,000 + $120,000).

For this reason, if you want to maximise your NCCs using the bring forward rule, you may wish to consider restricting your NCCs this year to $110,000 or less so you do not trigger the bring forward rule this year.

However, how much you can contribute and whether your fund is allowed to accept your contribution can depend on your age, your TSB and other eligibility criteria. The rules are complex and making contributions to superannuation that exceed the contribution caps can result in excess tax. Give us a call if you need any further information or would like to chat about your options.

GST refresher for your business

Most businesses are familiar with how GST works. But here’s a few reminders to make sure you’re being compliant and maximising your GST claims. 

GST is paid at each step in the supply chain and business charge GST in the price of goods, services or anything else they supply. If an entity is registered for GST, it can claim input tax credits from the ATO for any GST included in the price paid for goods, services or anything else bought for the business. However, for GST registered enterprises, the liability to pay GST rests on the supplier of goods and services, not on the consumer. In other words, even if the business does not include the GST in the price of goods and services supplied, it is still liable to pay it to the ATO.

Coffee or cars anyone?

As we move into a new financial year, you may be thinking of rewarding the office with an impressive new coffee machine for the staff room, or perhaps you are thinking a bit bigger, say a new vehicle. Either way you may want to keep some of these GST issues in mind:

1. Second-hand goods* 

Buying second-hand can often be cheaper. However, if you purchase from a non-registered seller (eg, a friend, or privately via Gumtree, eBay etc) unless the seller is a re-seller of second-hand goods registered for GST, in most cases you will not be able to claim GST on the purchase. (And if you are registered for GST, don’t forget to charge GST when you sell your business assets regardless of whether the purchaser is registered for GST or not).

(*excludes goods containing valuable metals)

2. Deposits

The purchase of a significant asset often requires a deposit to be paid. If you report GST on a cash basis, you will not be entitled to claim a GST input tax credit on the deposit at the time of paying (you may be entitled to claim it if you have paid an amount in addition to the deposit, or if you report GST using the non-cash accounting method and hold a tax invoice). If you haven’t claimed GST at the time of paying the deposit, make sure to claim GST on the full purchase price, including the deposit, when the deposit is later applied towards the cost of the asset (which may occur in a later BAS reporting period). 

3. Purchasing a car for more than the car limit

Your GST input tax credit will be limited if you purchase a car with a cost that exceeds the tax car cost limit for depreciation. The car cost depreciation limit is the maximum you can claim as depreciation deductions for income tax purposes ($68,108 in 2023-24). Where the cost of your car exceeds this value, your GST claim is limited to 1/11th of the car limit ie, $6,191 (1/11th x $68,108). Importantly, there are some exceptions to this rule where your GST entitlement will not be limited, including on the purchase of a commercial vehicle (those not designed to carry passengers) or motor homes and campervans. 

Be aware, however, that on the disposal of the car there is no corresponding reduction or adjustment to the GST on the sale proceeds ie, you must pay the ATO 1/11th of the full sale proceeds. This is the case, even if your GST and depreciation claims were limited on the purchase under these rules.

4. Cancelling your GST registration

A cost that is often overlooked when considering winding up a business is the potential need to repay GST previously claimed in respect of assets you still hold. In most cases (there are a few exceptions), you must cancel your GST registration within 21 days of selling or closing your business. You can also choose to cancel your GST registration if your GST turnover is below the turnover threshold ($75,000). If, when you cancel your GST registration, you still hold business assets on which you previously claimed GST, you may need to repay some of those credits, depending on how long you have owned the asset and its original cost. The adjustment will generally be 1/11th of the GST inclusive value of the asset at the time of cancelling your registration (where this value is lower than its original cost). 

Small but not insignificant

It’s not just on these larger transactions where we can uncover GST issues. Although the dollars involved are usually more significant when buying and selling business assets, it is extremely easy to over or under claim GST on our day-to-day transactions and over time, these too can add up to a sizeable GST adjustment. For example:

Remember the best way to maximise your GST claims is by checking your tax invoices for GST paid (you have four years to claim the GST), and then keeping those and other GST records for 5 years. 

If you have any questions around GST, reach out to us.

The importance of cash flow forecasts

With many economists predicting a slowing of the economy, planning your business’s cashflow is more important than ever. 

Studies suggest that the failure to plan cash flow is one of the leading causes of small business failure. To this end, a cash flow forecast is a crucial cash management tool for operating your business effectively. 

Specifically, a cash flow forecast tracks the sources and amounts of cash coming into and out of your business over a given period. It enables you to foresee peaks and troughs of cash amounts held by your business, and therefore whether you have sufficient cash on hand to fund your debts at a particular time. 

Moreover, it alerts you to when you may need to take action – by discounting stock or getting an overdraft, for example – to ensure your business has sufficient cash to meets its needs. On the other hand, it also allows you to see when you have large cash surpluses, which may indicate that you have borrowed too much, or you have money that ought to be invested. 

In practical terms, a cash flow forecast can also: 

At this point, a distinction should be drawn between budgets and cash flow forecasts. While budgets are designed to predict how viable a business will be over a given period, unlike cash flow forecasts, they include non-cash items, such as depreciation and outstanding creditors. By contrast, cash flow forecast focus on the cash position of a business at a given period. Non-cash items do not feature. In short, while budgets will give you the profit position, cash flow forecasts will give you the cash position. 

Cash flow forecasting can be used by, and be of great assistance to, the following entities: 

A cash flow forecast is usually prepared for either the coming quarter or the coming year. Whether you choose to divide the forecast up into weekly or monthly segments will generally depend on when most of your fixed costs arise (such as salaries, for example). When you are making forecasts, it is important to use realistic estimates. This will usually involve looking at last year’s results and combining them with economic growth, and other factors unique to your line of business. When forecasting overheads, usually a forecast will list: 

Reach out to us if you would like to know more.