Welcome To 2010/11 – Happy New Financial Year!
Are You Preparing For A Stop/Start Boom?
The MYOB Business Monitor Report released in April 2010 summarised what 1,000 SME operators had identified as the main pressures on business owners in the next 12 months. These included:
The survey indicated that "54% of business owners surveyed by MYOB expect economic recovery to begin to improve from its present position in the next 12 months". The SME operators identified 6 areas which currently present them with the most difficulty:
- fuel prices
- cashflow management
- price margins and profitability
- interest rates
- competitor activity
- customer late payments
The Dun and Bradstreet Business Expectation Survey identified the following areas of concern for SMEs: "access to credit, interest rates, and wages growth."
- "knowing which government legislation and compliance changes are relevant to your business;
- tracking and chasing up late payments;
- knowing what changes to make to achieve your business goals;
- managing the cashflow in and out of your business;
- getting the right information to make informed business decisions; and
- preparing the quarterly Business Activity Statement (BAS)."
Even through banks slightly increased lending to businesses in May 2010, access to credit is still identified as a major problem. Now is the time to review your 2010/2011 forecast factoring in how the foregoing issues affect your business, but there are also some other issues to consider.
Firstly, the good news!
- The government has revised unemployment forecasts... now expected to be 5%, instead of 6.7%.
- The Reserve Bank has left the prime bank interest rates at 4.5% (7 July 2010) with an increase expected at the end of 2010.
Not so good news:
So overall it is likely to be a stop/start boom. There will be winners; but unfortunately there will also be losers. Now is the time to update and prepare your documentation and systems to ensure your success in business. This relates to budget, cashflow forecasts, business plans and then use these documents to negotiate with your banks and lenders to ensure you have sufficient funding available to fund debtors, stock, work in progress and capital expenditure. It is also a good time to get your team ready so you're able to service your customers' demands from the emerging boom. If you would like our assistance in helping you plan for the 2010/11 fiscal year, please contact us.
- inflation risks remain;
- sovereign debt issues in Europe remain a potential major problem for the world;
- China slow down; and
- a federal election will be a confidence negative for business until the result is known.
Do You Operate Through A Trust?
The Australian Taxation Office has released a Taxation Ruling - Division 7A Loans: Trust Entitlements. The ruling expresses the Commissioner of Taxation's opinion on the circumstances in which a private company with a “present entitlement to an amount from an associated trust”, makes a loan through not receiving the trust distribution from that trust in circumstances where funds representing that present entitlement remain intermingled with funds of the trust.
Division 7A is a provision of the Income Tax Act which involves companies and non-company tax payers. In very broad terms, it creates a loan between a company and an associated tax payer whenever the company does any of the following with the associated tax payer:
Where a Division 7A loan arises, then it will become a “deemed dividend” to the associated tax payer, unless a seven year unsecured or 25 year secured loan agreement is put in place before the relevant income tax return is lodged.
- loans money;
- advances money;
- provides credit to or any other form of financial accommodation; or
- makes a payment on their behalf.
If you currently conduct business via a trust structure, this ruling may affect you.
At the end of the year, you may distribute profits to a company, but do not actually give the company the physical cash. This specific scenario is identified in the Taxation Office ruling and will be treated as a Division 7A loan which will result in an “automatic deemed dividend” being paid by the company to the associated tax payer, ie the Trust.
This applies for trust distribution to companies made after 16 December 2009. You can avoid the treatment of the distribution as a dividend if you implement a new Division 7A loan agreement each financial year – but this may lead to other problems.
If you are operating your business through a trust, this is a complex matter and will have major implications regarding your trust 2010 and future income tax returns, and possibly your current business structure. If you are operating through a trust, we recommend you contact us for reviews of the matters as it affects your particular circumstances at your earliest opportunity.
New Research & Development Bill Not Passed
The Federal government was unable to have its new research and development legislation passed by the Senate, prior to the Senate rising for the winter recess.
The new legislation was scheduled to commence on the 1st July 2010. The government is saying that the legislation will be reintroduced when the Senate next meets; with a retrospective date back to the 1st July 2010. Many commentators however have raised strong objections to retrospective legislation. Also, it is far from certain that the legislation will be passed by the Senate as the Opposition has a number of outstanding issues relating to the legislation. It would appear that, at this stage, the best advice is that the current research and development scheme is the scheme that was operating up to 30th June 2010 i.e:
For companies with turnovers in excess of $5M, it is recommended that you continue to claim R & D expenditure at 125% or, for the component applicable, at 175%.
- for companies with turnovers under $5M - R & D expenditure up to $2M can be claimed at 125% of R & D expenditure or 175% for the excess over a three year average;
- if the company is trading at a loss - a rebate calculated at 37.5% of actual R & D expenditure, will be paid by the Australian Taxation Office; and
- if the R & D expenditure has exceeded a three year average - that component will be paid at 52.5%.
If you are planning a major research and development project and you were relying on the proposed new legislation, (companies with turnovers under $20M were to receive a tax rebate of 45 cents in the dollar on the R & D expenditure and companies with turnovers of $20M + were to receive a taxation credit of 40 cents in the dollar of the R & D expenditure) we recommend that, before committing substantial funds to research and development projects, you contact us for our advice.
Have You A Plan If A Business Partner Dies?
What would happen if your business partner died suddenly? Indeed, what would happen if you died?
Planning for the death of a partner in a business must be looked at from both sides of the equation. What are the needs and expectations of the survivors in the business and the members of the deceased estate?
Contingency plans for the death of a business partner can be incorporated into a Buy/Sell Agreement. A properly drafted Buy/Sell Agreement with appropriate insurance covers should ensure that there is sufficient cash to enable the deceased partner’s estate to be paid out. What you need to do is periodically update the Buy/Sell Agreement.
Make sure it reflects the current value of the business and try and get insurance covers on the partners that reflect the value of their share in the business. It is very important that a commercial solicitor drafts the Buy/Sell Agreement, checks the company documentation and Wills to ensure that, in the unfortunate event of a premature death, the business will be able to survive and the deceased partner’s estate will be able to be paid out.
The start of a new financial year is a great time for some planning as to where your business is headed in 2010/11, including:
- Taxation Audit Insurance
- Debtors' Management
- Cashflow Forecast
- Business Plan