Tax & Super Newsletter June 2015 - June 2015

In this issue:

  • Nil activity statements must be lodged
  • GST – avoiding common errors
  • Court finds individual contractors to be employees
  • Good record keeping for small businesses
  • Time to sell?

Nil activity statements must be lodged

If you have Activity Statements to lodge, even if your Activity Statement is nil for a particular period, the Activity Statement still needs to be lodged. Failure to lodge an activity statement, even one with zero obligations, may delay processing and result in penalties.

It is good to stay on top of these obligations and obtain assistance from your tax agent to ensure you lodge your Activity Statement on time, every time.

Tip!

The ATO has published some tips for getting your Activity Statement right which you can find on the ATO website.

GST – Avoiding common errors

Avoid common errors when completing your activity statement

Errors sometimes occur when you fill out your activity statement. To complete your activity statement correctly and ensure any refund due is processed quickly, remember to:

  • check that your purchases and sales are reported in the correct tax period
    • if you report on a non-cash basis, you account for the GST payable on the sales you make in the tax period in which you issue a tax invoice or receive full or part payment (including deposits), whichever happens first
  • reconcile the figures on your activity statements with your accounting records prepared for your income tax return
  • report all your relevant transactions at the appropriate label on your activity statement
  • lodge your activity statement even if you have nothing to report, you can phone 13 72 26 and use the ATO’s automated service to lodge a nil return
  • leave boxes blank if they do not apply to you, but if a box does apply and you have nothing to report use a zero
  • lodge your activity statement through the ATO’s Business Portal as you will be prompted to correct many simple errors and you may get an extra two weeks to lodge
  • if you are paying your GST by instalments and want to vary your instalment amount provide your estimated net GST for the year and the varied amount payable for the quarter and show the correct reason code for varying your instalments
  • review your activity statement before lodging and check the amount calculated equals what you expect to pay or receive
  • if you lodge a paper activity statement:
    • lodge your original activity statement with the ATO, as they will not accept copies of your statement
    • only use black pen and provide a contact name, daytime phone number, sign and date your activity statement before you lodge it
    • round down to whole dollars and leave the cents out.

Court Finds Individual Contractors to be Employees

A recent case has highlighted the dangers of engaging individual contractors who later turn out to be employees.

Background

A family trust (the trust) carried on a commercial residential plumbing business and during the relevant periods employed 13 plumbers and 4 to 5 independent contractors.

During the relevant periods in question, the trust was audited by the ATO to ascertain whether they had met their superannuation guarantee obligations, specifically focusing on the independent contractors.

Following their enquiries, the ATO determined that these contract plumbers should be treated as employees and consequently issued assessments for superannuation guarantee shortfalls for the quarters from 1 July 2009 to 30 June 2011.

The Administrative Appeals Tribunal (AAT) found in favour of the ATO.

REASONS FOR COURT DECISION:

Contractual documentation

There was an agreement in place for each contractor. However, each contract was the same and therefore it was concluded the type of arrangement was more like what would be expected for an employee.

The important point to note is that had each contract being negotiated separately, they would have likely had different terms and conditions. If this was the case, the outcome could have been different.

Motor vehicle and tools provided by contactors

The contractors did use their own vehicles and tools, but where they were required to do specialised work, they used the trust’s vehicles and tools. Furthermore, the trust’s credit cards were given to the contractors to buy plumbing supplies as and when required.

Limited control over the contractors work

Although the trust had limited control over the contractors work, the court said that this was “not surprising given that each of the contractors was qualified and experienced”.

Right to refuse work

Though the contractors did have a right to refuse jobs, they did not in reality and they did not have to rectify any defects at their cost.

Contractors were paid an hourly rate

The unfortunate issue was that the contractor’s hourly rate was set by the trust. Also the hours were generally regular working week hours.

Contractors had ABN’s and were not required to wear clothing with a company logo

Each of the contractors did have ABN’s, but they never quoted on any jobs. They simply undertook the task based on the hourly rate set by the trust. They also did little or no work for any other plumbing businesses and almost worked exclusively for the trust.

The contractors also did not issue any invoices on their own letterhead. Even though they were not required to wear clothing with the company logo, they did indeed ear them.

Conclusion

Clearly based on these facts, the trust believed they were doing the right thing by treating these people as subcontractors rather than employees. However, when the ATO and the court examined the underlying evidence, it was obvious that these contractors should be treated as employees.

Caution should be taken to ensure that where contractors are used, the above facts are carefully considered to ensure that if the ATO undertakes an audit or review, you are safeguarded against any undue tax liabilities.

Good Recordkeeping for Small Businesses

The Australian Taxation Office (ATO) is continually focusing on small businesses operating in the cash economy and through the Small Business Benchmarks is able to identify those businesses that may not be reporting all of their income.

Where the business is found to be operating outside of these benchmarks, it may expect to receive a letter from the ATO under the cash economy letter program asking the business to review its records to ensure that income has been correctly recorded. If a discrepancy is discovered the business should amend its income tax returns and business activity statements to include the income that has not been recorded.

If the business is ultimately selected for a review or audit, it is likely that the ATO will focus not only on the recording of income, but may also examine the deductibility of certain expenses (e.g. repairs & maintenance) and compliance with the fringe benefits tax, superannuation guarantee and PAYG withholding laws.

Maintaining good records of your transactions and tax invoices will help you to manage your cash flow and make sound business decisions. It will also make it easier for you to meet your tax obligations, and potentially save you time and money in the future.

Businesses need to keep a number of records including:

Income and sales records

Records of all sales transactions, for example, invoices including tax invoices, receipt books, cash register tapes and records of cash sales.

Expense or purchase records

Records of all business expenses, including cash purchases. Records could include receipts, invoices including tax invoices, cheque book receipts, credit card vouchers and diaries to record small cash expenses. Plus records showing how any private use of an expense was calculated.

Year-end records

These include lists of creditors, debtors, fixed assets, stocktake sheets, capital gains tax records, bank and loan statements, credit card statements, travel diaries, car logbooks etc.

GST records

The main GST records are tax invoices from your suppliers. A tax invoice is generally required to claim GST credits.

Employee & contractor records

For employees and contractors, you need to keep:

  • tax file number (TFN) declaration forms or withholding declaration forms
  • records of wages, allowances and other payments made
  • superannuation records, including payments made and records showing that superannuation obligations have been met
  • records of fringe benefits provided
  • copies of employee and contractor agreements

How long records need to be kept

For taxation purposes records generally need to be kept:

  • For five years after they are prepared, obtained or the transactions completed (whichever occurs later).
  • In English, or in a form that can be used to determine the tax liability of the taxpayer.

Under the Corporations Act, companies are required to maintain records including financial statements, journals and asset registers for seven years from the end of the financial year.

Time to Sell?

Planning and preparation is the key to a successful sale or transition of ownership that gains maximum value for the owner. It can’t be done in a matter of months and developing a succession plan needs to be started years before retirement as it will take time to put in place.

The main options for business owners looking to sell their business are:

Family takeover

If children or other family members want to work in the business then the succession part of the planning is half way there. However it can be hard to step aside and let children take over and at the same time put a satisfactory financial approach in place for the owner to take out capital from the business.

There may also be some well-founded concerns about whether the children are really ready to run, or indeed be capable of running, the business.

Planning ahead will enable business owners to put into place ways of overcoming issues that may turn into problems. This could include training programs to help equip children to better run the business, or recruiting someone with complementary talents.

On the other hand, owners shouldn’t assume their children will want to take over the business one day as they may have no desire to do so.

Passing on the business to the next generation is a dream for many business owners, but this can impact on the viability of the business if they are not suitable.

Business decisions become clouded by emotive issues and the focus of a business decision may be shifted from what is best for the business to what is best for individual family members.

Selling to employees

Owners rarely consider selling to employees but it can be a very satisfying option for those who have developed good working relationships over the years.

There are several ways it can be financed, through venture capital (another alternative in its own right) or “buy-out” arrangement where the owner is paid out of future profits of the business

In these circumstances the business owner should look at some security over future payments, such as holding a mortgage over the business.

Owners should also consider Employee Share Plans. They are not just the domain of publicly listed companies, although business owners need to be careful and watch the capital gains tax considerations.

Selling to another business

Another third party approach could be selling to another business. This usually means a competitor even though an owner may be instinctively against this approach. It could also mean a business wanting to expand into your industry, or individuals wanting to take over an existing profitable enterprise.

Often, a competitor is likely to make the best offer as they know the industry and good planning can help make the business more attractive as a trade sale.

Another business is also likely to make the best financial arrangements for the purchase helping the owner set up their retirement.

Venture capitalist

Depending on the size of the business, owners could find it an attractive option for a venture capitalist.

This can give an immediate return on their investment in the business, and also help fund planned growth of the business.

If set up a few years before retirement, then use of venture capital will also instil discipline into the management of the business and give access to expert and experienced external advice.

Going public

Obtaining a public listing on the Australian Stock Exchange is another way for business owners to capitalise on their investment in the business.

There are a number of examples of successful family businesses that are listed on the ASX where the family still has some control over the running of the business.

However, seeking a public listing is not a short-term project and there are considerable costs involved.

A long-term view must be taken by the business owner involving advisers and ensuring the business is set up for a successful listing at a good price.

Also owners must be prepared for greater public scrutiny of their business finances than they were used to.


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