Business Bulletin
November 2005
- Succession planning for your business
- GST made easier for food retailers
- ATO’s compliance hit list
- Declaring cash from your customers
- Super Choice tips
- Issues on the horizon
- Archives
Succession planning
Ensuring ongoing success for your business is not just about tax planning – it’s important for sure, but it’s not everything.
Once you have built and grown your business, you may find yourself no longer playing a part in its management and ownership.
This may happen voluntarily (e.g., when you retire or decide to sell up), or may be forced by unexpected circumstances (e.g., bankruptcy or for health reasons).
Be prepared! It’s vital for you to have a plan about how you will transition your ownership and management of your business to your family members or other parties. |
Commonly referred to as succession planning, this is a process that’s all about handing-over your business for whatever reason. It’s an important planning process often overlooked by small businesses.
To help you understand what succession planning is all about, set out below is a checklist of some of the issues that should form part of your succession plan.
It’s a big topic to cover in a small space, so we are just outlining the bare bones of some of what’s involved.
As always, it’s best to get more detailed advice about how to develop and implement this type of plan for your business.
Identify someone to take over
Work out what skills are required to run your business and then identify someone who can do it (your successor).
If you plan to be involved in the business in some way after the hand-over, make sure you are comfortable with the succession process and are in a position to continue to be involved on terms agreeable to all parties.
TIP Start by carefully documenting how your business is managed, noting what works and what doesn’t work. Ideally, your successor should be someone who is aware of how your business works. |
Identify and maintain key relationships
Ensure all the relationships that are critical to your business’s success continue to exist after any type of hand-over.
Key relationships for your business may include your:
- suppliers
- business referral sources
- financiers
- sources of your market intelligence
- employees
- external advisers (e.g., your solicitors and accountants)
- your landlord - if you have one
TIP Once you identify your key relationships you then consider what strategies to put in place to maintain these relationships after hand-over. |
Funding for life’s events
It’s advisable to think about funding for particular events in your business and your life, especially those situations that are usually unexpected. On your planning list should be events like:
- retirement
- resignation
- forced leaving (e.g., bankruptcy)
- death
- total and permanent disablement
- trauma related events
think about insurance If you don’t already have appropriate insurance, you should be aware that you can insure against events like death, total disablement and trauma related events. |
Tax issues
At some stage, succession planning inevitably involves developing strategies to transfer your ownership and management of your business and this will have tax consequences.
These consequences can be complex and may involve not only Federal taxes (e.g., income tax and tax on any capital gains) but also State taxes (e.g., possibly some stamp duty on asset transfers).
Ultimately, any tax consequences will be directly affected by the business structure through which you operate your business. For instance, you may need to consider the best way of transferring:
- direct ownership (e.g., a sole trader)
- an interest in a partnership
- shares in a company
- units in a unit trust
Access to significant CGT reductions
Any transfer/sale of your business assets or your interest in your business may attract capital gains tax (CGT).
You should be aware that there are general CGT concessions and CGT concessions designed especially for eligible small businesses. A considered combination of these concessions can significantly reduce your tax bill.
For example, if your net assets are worth less than $5 million (excluding your family home and any superannuation), you may be in a position to consider making the most of the following concessions:
The 15-year exemption
If you continuously owned an “active asset” for a 15-year period, you may be eligible to disregard any capital gain entirely and don’t need to apply any further concessions.
What’s an active asset? Active assets are assets like plant and equipment that you use in the course of your business. Assets producing what’s called “passive income”, e.g., rental properties, are excluded. |
If you can’t take advantage of the 15-year exemption, then there are other concessions to consider:
The 50% discounts
There are a couple of CGT discounts that you may be able to rely on to reduce any CGT liability. There’s:
- a general 50% discount that applies to all eligible assets, whether owned by a small business or not; and
- a special 50% “active asset” CGT discount for eligible small businesses.
Significant tax savings Applying both of these 50% discount concessions at once can effectively shrink a taxable capital gain by a massive 75% before you work out any tax you may have to pay. |
Retirement exemption
If you plan to retire, the CGT concessions may allow a capital gain (after being reduced by any capital losses) on the sale of your business to be exempt, up to a current limit of $500,000.
Rollover exemption
This concession allows you to defer any capital gains tax liability on active assets when these assets are replaced with similar active assets.
How any of these CGT concessions relate to your business and which concession is appropriate may depend on your particular circumstances, so it’s best to get advice.
Easier gst for food retailers
If you operate a small supermarket or convenience store, there may be some relief at hand to the costly and frustrating job you have of working out your entitlement to GST input tax credits on some of your daily transactions.
One of the common frustrations you run into is working out your GST input tax credits when you convert GST-free purchases (like lettuce, tomatoes and bread) into taxable supplies (like fresh sandwiches for sale).
To help you avoid having to tally individual tax invoices in situations like this, the ATO is now prepared to accept an estimate of your GST input tax credit, using what’s called the sales percentage method.
How does it work?
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Your supermarket or convenience store business can use this method for tax periods starting on or after 1 October 2005 where your business:
- has an annual turnover of $2 million or less
- has adequate point of sale equipment
- only converts a minimal amount of goods (5% or less of sales)
As with all things in tax, there are some limitations on who can use this method (e.g., it doesn’t apply to convenience stores in petrol stations), so it’s best to get advice about how to use this method if you are eligible.
ATO’s Compliance Hit List
Since our last newsletter, the ATO has published its Compliance Program for the current tax year (2005-06).
Small business taxpayers have attracted quite a bit of attention, along with all other classes of taxpayers.
You will find that the ATO is taking a particular interest in the following aspects of your business this year:
Keeping proper business records
It’s good sense to keep proper records and the ATO has already checked record keeping practices in 12,000 small businesses and will be checking another 7,000 businesses.
Declaring capital gains
Recent data matching by the ATO has shown many small businesses are overlooking declaring capital gains, particularly on property and share sales.
Claiming GST refunds
If your business is entitled to a GST refund, it’s important to make sure that it’s calculated correctly.
Paying your tax on time
Whilst the ATO may recognise that your business has temporary cash flow problems, it’s getting tough on collecting unpaid tax debts.
Meeting employee obligations
In particular, the Tax Office wants to make sure that your Superannuation Guarantee and Superannuation Choice obligations are being met.
Managing your own Super
If you have a Self Managed Superannuation Fund it’s important to make sure the fund’s trustees are meeting their obligations.
There’s no need to panic! Don’t be put off or worried by the ATO’s attention to small business. It’s not only to your advantage to know what the ATO is up to, but this knowledge can help you survive an ATO query - should there be one. |
Declaring cash transactions from your customers
When you read about some aspects of the ATO’s Compliance Program above , there’s a risk you may feel that not much has changed. You may even be tempted to ask:
If the ATO has never bothered me with a review or audit up to now, why should I worry?
It’s a fair enough question, particularly if your tax affairs are in order. However, what has really changed this year is the length to which the ATO is prepared to go in tracking down unreported transactions.
In particular, if you are in a business where discounts for cash are common, the ATO is zeroing in on businesses trying to reduce their taxable income by not reporting cash received from householders and other customers.
Cash discounts aren’t wrong There’s nothing wrong with offering a cash discount. The Tax Office is only concerned if the transaction isn’t properly reported. |
This could be of particular interest to you if you are in the building and construction industry. For example, the ATO is currently:
- matching information from plasterboard suppliers with tax returns from fixers
- comparing concrete deliveries with returns from concreters
- checking appointment and quote books to invoices for householders
- tracing owner-builder transactions using local council records
- matching accounts from trade outlets to businesses
Even if you are not in the building and construction industry, the ATO is likely to be thinking about similar types of investigation strategies for your particular type of business.
Super Choice tips
As an employer, you should have been providing Superannuation Choice to your eligible employees since 1 July 2005.
As we have reported in previous newsletters on how you implement Super Choice, here are a couple of tips that address some common problems that have arisen since Super Choice was introduced:
Do I have to provide Super Choice to an employee covered by an Award?
No, if super contributions are being made to a fund under and in accordance with an eligible State award or Australian Workplace Agreement.
However, don’t assume you are automatically exempt from providing Super Choice because an employee is covered by an eligible Award. Not all Awards specify that superannuation must be paid for an employee.
When do I have to hand out a Standard Choice Form from now on?
You need to provide a Standard Choice Form to new eligible employees starting after 1 July 2005 within 28 days of their start date – unless the employee chooses a fund and gives you the required information when they start work.
A word to the wise An employee doesn’t have to provide you with the required information on the Standard Choice Form provided by the Tax Office. As long as your employees provide you with all this information in writing, then a valid choice has been made on which you must act. |
What happens if your employer fund changes?
If your employer fund changes after the initial offer of Super Choice to eligible employees, then another Standard Choice Form needs to be provided within 28 days of the change of fund to all employees having contributions made to the employer fund.
How many times can your employees choose?
You don’t need to accept an employee’s request to choose another fund if you have accepted a request within the previous 12 months. You can, of course, accept more than one choice per employee in a 12 month period if you choose to.
On the horizon
Our next newsletter will be in February 2006 and we will continue to cover a range of current tax topics relevant for small business.
If the proposed Workplace Relations System gets off the ground, we will be having a look at its impact on small business, including whether there will be any particular tax impact.
DISCLAIMER: The contents of this publication are general in nature and we accept no responsibility for persons acting on information contained herein without first consulting us.
