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Firm Journal

June 25, 2020

What to consider before opening another business location

Expanding your business to open in multiple locations can offer more opportunities and profitability. However, managing one location can be challenging enough, so it is crucial to examine and prepare for the implications of opening up a second store. Here are some considerations that business owners need to keep in mind before deciding to open up a new branch.

How successful is your current business?

Your current business should be stable and successful before you open up multiple stores. If your business is struggling in key areas such as cash flow, sales, employee skill sets, and customer retention, then it’s a good idea to address these needs first, otherwise, your new locations are likely to face the same issues. Assess your current store’s shortcomings and consider whether they will also put your new locations at risk.

What are the characteristics of the new locations?

Choosing the right business location plays a key role in the success of your business. Before branching out, research potential locations and consider how areas could affect your business due to factors such as popularity, business competition, demographics, transport accessibility, rent prices, and attractiveness to employees. Assess whether the differences between your current and potential new locations will require you to make any changes to your business – perhaps you will have to adjust your marketing strategy, prices, or products/services depending on your new demographic.

Do you have the resources to expand?

Expanding your business will require extra financial commitments for rent, utility bills, more inventory and equipment, employees, insurance, and extra advertising. While your income may increase with your new location, remember that it may take months to make the returns required for expansion. It is therefore important that you are already financially secure before opening up a new store to avoid overextending your funds and putting your business at risk. If you don’t have the assets required, a business loan is an option provided that you can prove your financial ability to repay the loan.

Opening up a new location also means that you will have to manage your time between the two branches. This may require delegating business responsibilities, hiring managers, or promoting current employees to management positions. To keep your new business on track and identify early risks, you may also have to initially spend more time at your new location.

Carrying on a business in an SMSF

Self-managed super funds can carry on a business providing the business is allowed under the trust deed and operated for the sole purpose of providing retirement benefits for fund members.

Carrying on a business through an SMSF does have restrictions that other businesses do not have, such as entering into credit arrangements or having overdrafts.

SMSF trustees that carry on a business through their fund must adhere to the sole purpose test. The ATO looks for cases where:

The same regulatory provisions still apply to funds that carry on a business, i.e, SMSF investments must be made on a commercial ‘arm’s length’ basis, business activities must be conducted in accordance with the SMSF’s investment strategy, collectables and personal use assets cannot be displayed at the business premises and so on.

The SMSF cannot be involved in the following business activities:

Cars and taxes for 2020-21 financial year

New car threshold amounts will be implemented from 1 July 2020. Understanding the new thresholds and how they may affect your small business operations and vehicle usage will be important in preparing you for the financial year ahead.

Income tax:

There is an upper limit on the cost you use to work out the depreciation for the business use of your car or station wagon (including four-wheel drives). The maximum value you can use for calculating your depreciation claim is the car limit (irrespective of any amount you were paid for a trade-in) in the year in which you first used or leased the car.

For the 2020-21 financial year, the upper cost limit is $59,136 including GST.

Goods and services tax (GST):

Businesses registered for GST with motor vehicles used solely for business purposes are entitled to claim a credit for the GST included in the price of the vehicle, provided they have a tax invoice.

In the event that you purchase a car and the price is more than the car threshold, the maximum amount of GST credit you can claim is one-eleventh of your car limit amount. Keep in mind that you cannot claim a GST credit for any luxury car tax you pay when you purchase a luxury car, regardless of how much you use the car in carrying on your business.

Luxury car tax (LCT):

You are required to pay LCT if you’re registered or required to be registered for GST and you sell or import a luxury car.

LCT applies to motor vehicles designed to carry a load of less than two tonnes and fewer than nine passengers. LCT also applies to a car purchased by a person with a disability even if the car is GST-free. However, disability-related modifications are not subject to LCT. The LCT value of a car includes the value of any parts, accessories or attachments supplied or imported at the same time as the car.

Cars with LCT over the LCT threshold attract an LCT rate of 33%. From 1 July 2020, the LCT threshold will increase to $68,740. Additionally, the LCT threshold for fuel efficient cars will increase to $77,565 for the 2020-21 financial year.

June 18, 2020

Avoiding bad debts from your clients

Running a business is challenging enough, and having to deal with bad debts can add an unneeded layer of stress for you and your team. The easiest way to handle bad debts is to avoid them in the first place – here’s how.

Do a background check:
Before you enter into an agreement with a client or other businesses, make sure that you know who you’re dealing with and do some research. Make sure they are legitimate, still in operation and look for any bad reviews and feedback concerning other people’s experiences with them. Take into consideration whether they ask you for discounts or complain that your fees are too high. If you get the idea that the client may not pay, it might be safer to avoid the job instead.

Have clear payment terms:
In your client agreement or contract, include payment terms that clearly state payment dates penalties for late payments. Both parties should agree on these payment terms prior to entering into a contract. Conditions for late payments could include interest fees, fines, or the cessation of supplying your goods and services to them within a specified time period.

Ask for a deposit:
When you ask for a deposit and the client does not want to pay, it shows that they are probably not trustworthy and may not be willing to make a full payment. If the client does pay you a deposit or but does not make a final payment, then at the very least you will not have lost as much money as you would have without an initial payment.

Automate payments:
Setting up an automatic payment system for your clients eliminates the chances of them forgetting to pay or refusing to pay unless they actively cancel their payments. Automatic payments can work well if you have instalment fees or a subscription-based service that requires periodic payments.

Follow up quickly:
Making contact with clients soon after a missed payment will demonstrate your expectations to be paid in a timely manner. Often, this means that clients managing cash flow problems are more likely to prioritise payments to your business rather than their other creditors who have more relaxed payment systems.

How your business can benefit from flexible workplace arrangements

Businesses working from home due to social distancing restrictions can take the opportunity to learn from the experience and consider new work structures coming out of COVID-19. This could mean increased flexibility for employees when it comes to working remotely and adaptable hours. Here’s why flexible work arrangements with your employees may be beneficial for your business in the long term.

Increased productivity
Flexible work arrangements can increase the productivity of employees by allowing them to work when they feel most motivated. Some people may naturally be more productive at night time and do their work then, which would not be possible with regular office hour restrictions. Remote work also saves time on excessive staff chatter and workplace distractions, such as ringing telephones and colleague drop-ins. Offering flexible work arrangements can show your employees that their lives are valued, which can lead to higher levels of performance and hard work to justify the flexible arrangements.

Reduced expenses
When employees are working from home more frequently, it means that your office doesn’t have to sustain as many people and you can reduce rent and utility expenses. This doesn’t mean that your employees have to pay too much more; the ATO has introduced an easier way of deducting work from home costs during the COVID-19 period called the ‘shortcut method.’ This allows employees to deduct 80c per hour they work from home to compensate for running expenses.

Attract talent
Businesses that exclusively depend on employees being physically present may be missing out on ideal workers who live too far or require more flexible arrangements. Modern job seekers are often on the lookout for positions that offer greater flexibility, rather than the regular 9 to 5 in the office. Highlighting workplace flexibility in your job advertisements can attract more prospective talent as physical barriers are eliminated.

Improved wellbeing
Remote work can improve the overall physical and mental wellbeing of your employees. One perk is that they may be able to be better rested and eat a proper breakfast in replacement of the morning commute. Work flexibility will also enable them to work around family commitments, which can boost their quality of life and happiness. This can raise morale and improve their quality of work by reducing the risks of fatigue and burnout.

Employee retention
Workplaces that allow employees to maintain a healthy work-life balance are more likely to retain their employees for long terms. This can benefit businesses by reducing the frequency of hiring and training periods, which can save a lot of money and productivity while continuing to grow corporate knowledge in existing employees.

How to transfer a business property into your SMSF

Employers with a self-managed super fund (SMSF) looking to protect their business assets can consider transferring their business real property into their SMSF.

Transferring business property into your SMSF is useful to protect your assets in the event of your business failing or facing litigation. It is possible for SMSF members to transfer business real property (land and buildings used exclusively for the business) to their SMSF by using a combination of methods.

In-species transfer
An in-species transfer in the context of a business property refers to the ownership transfer of a property from one entity to another without the need to convert it into cash. During an in-species transfer, the value of the property is considered a contribution to your SMSF and is restricted by CGT regulations and contribution caps.

Cashing in your SMSF
You can use the cash available in your SMSF to buy your business property at market value as a normal cash purchase. The property must first be valued by an independent and qualified party before this is allowable. SMSFs that do not have enough sufficient capital to do this may consider using their non-concessional contributions cap to cover the outstanding balance.

Limited recourse borrowing arrangement (LRBA)
In the event that you do not have enough cash in your SMSF to outright buy your business property, you can apply for a loan using an LRBA. An LRBA can be obtained through a third-party lender, including your own business. You can borrow funds for your SMSF under an LRBA from your own business. However, before applying for an LRBA, consider its legal complexities and whether your SMSF will be able to maintain loan repayment fees on top of existing fees you may have, such as member pensions and accounting and auditor fees.

CGT retirement concession
The CGT retirement concession allows business owners exemption from CGT on business assets up to $500, 000 over a lifetime. If you are over 55, there are no associated conditions, however, if you are under 55, then you must place the money into a superannuation fund to receive the exemption.

This means that if you are under 55 and wishing to transfer a business real property into your SMSF, you can potentially do so without incurring any CGT liability (up to $500, 000).

Landlord tax obligations under COVID-19 circumstances

Property investors may have a number of tenants that have temporarily paused their rent payments or are not paying the full amount of rent owed due to being impacted by COVID-19. Regardless of rental income changes, landlords are still entitled to claim deductions on rental property expenses if they are still incurring regular rental property expenses.

Landlords who receive a back-payment of rent, or an amount of insurance as a result of a decrease in rental income, will still need to include these amounts in their assessable income for the tax year that they receive the payment.

Additionally, landlords may be faced with deferred loan repayments as a result of COVID-19. In this case, if your loan accumulates interest it will be considered as an incurred expense, meaning that you will still be able to continue claiming a deduction on your loan interest.

It is likely that landlords of short-term rental properties have had their situation compromised by COVID-19 due to cancelled bookings and low demand. If your property is used both privately and for renting out short-term accommodation, you will be able to continue deducting property expenses in the same proportion as you were entitled to prior to COVID-19. If you had begun using the property differently in the period after your latest tax return and before COVID-19, the proportion of expenses you can claim may vary. This can include situations where:

June 11, 2020

Options to consider before declaring bankruptcy

Businesses struggling with debt may feel like declaring bankruptcy is their only option. Premature bankruptcy is an unfortunately common scenario but there are ways businesses can deal with unmanageable debt before declaring bankruptcy.

Temporary Debt Protection (TDP)

Businesses with debt they can’t pay or are being taken action against by unsecured creditors can apply for TDP. TDP provides a six-month protection period where unsecured creditors can’t take enforcement action to recover the money businesses owe them. Businesses are encouraged to use this time to seek advice from the Government’s free financial counsellors, negotiate payment plans with creditors and consider other formal insolvency options which may work better for them.

Declaration of intention (DOI)

A DOI is a short-term option similar to TDP and protects businesses for 21 days from unsecured creditors. During this time, creditors can’t take further action to recover their debts.

Debt agreement

A debt agreement details how businesses will settle their debt and is a flexible way to help businesses come into an arrangement without becoming bankrupt. A debt agreement means either paying a lump sum that may be less than the original amount owed, or repaying debt in instalments. Businesses can apply for a debt agreement if they:

Debt agreements can go for up to three years.

Personal insolvency agreement (PIA)

A PIA lets businesses pay off their debt in a way that suits their financial situation. It is similar to a debt agreement but a business’ debt, income and assets do not have to be under a certain limit.

Keep in mind that while these methods are effective in helping businesses avoid bankruptcy, there are still consequences. While usually producing positive results, be sure to weigh up these options and consider whether the long-term effects of implementing them are worth avoiding bankruptcy.

Divorce and splitting your SMSF assets

Running an SMSF under regular circumstances comes with enough compliance obligations as it is. Adding divorce or separation into the equation can raise even more legal and tax issues that need to be addressed.

The breakdown of your relationship does not absolve you from your responsibilities as an SMSF trustee; you are still expected to continue acting in accordance with super laws and in the interests of all members. As a trustee, you must:

When it comes to dividing SMSF assets, separating couples can transfer assets, such as property, from one SMSF fund into another. During this process it is important to consider:

Claiming self-education expense deductions

Individuals upskilling and educating themselves during these down times may be eligible to claim a deduction for their self-education expenses. The deductions apply to self-education activities that are directly related to an individual’s work as an employee.

In the case that individuals are looking to claim self-education expenses based on a course’s relation to their work, the relation must mean:

There are many types of expenses you can claim as part of your self-education deduction, including:

Work-related self-education expenses cannot be claimed as part of a deduction. These expenses include travel expenses, child care costs related to attendance of courses and capital costs of items (e.g. computers, desk) acquired for self-education purposes.

Keep in mind that self-education courses which enable individuals to get new employment are not eligible for deduction claims. Some expenses also need to be apportioned between private purposes and use for self-education such as travel costs and depreciating assets. You will need to estimate your apportions and provide information on such expenses to be eligible to claim.

For more information on what you claim as self-education expenses, visit the ATO website or consult with a financial advisor.

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