Newsletter

GROW ACHIEVE PROTECT with Brentnalls WA – Newsletter, May 2019

tips for reducing tax for businesses

Key Actions That Business Owners Should Take Before 30 June to Reduce Tax

By Chris Smith

For businesses to maximise their cash position, they should consider the following tax planning opportunities before 30 June.

  1. Prepay expenses before the end of the year:
    • If turnover is < $10m, you can claim 100% deduction in the year an expense is paid
  2. Bring forward the purchase of plant & equipment if you are a small business:
    • Equipment costing less than $30k, and installed and ready for use by 30 June 2019 will be fully tax deductible in the current year
  3. Maximise your tax-deductible debt:
    • Loans for private purposes are not tax deductible
    • Review whether refinance options may be available to increase the split of deductible vs non-deductible debt
    • Consider whether Div 7A loans can be restructured
    • New rules limit the deductions available against vacant land, so investigate whether restructures to repayments on loans can be made
  4. Maximise superannuation contributions
    • Super is only deductible if paid by 30 June
    • Annual concessional contribution caps are $25k
    • Salary earners can now make concessional member contributions as the previous restriction (10% rule) no longer applies
  5. Write off bad debts:
    • If debtors are not recoverable, and all action has been taken to resolve then write off the bad debt before 30 June to bring to account the expense
    • Ensure GST is adjusted
  6. Write off slow-moving or obsolete stock
    • Review your stock holding
    • If the market value is lower than the cost of the stock, a deduction can be realised for the difference
  7. Utilise unrealised capital losses:
    • Ensure you take advantage of capital losses within your group
    • Consider whether distribution minutes can be prepared in a way to utilise group losses
  8. Review plant & equipment:
    • Review depreciation schedule for any scrapped plant & equipment that can be written off
    • Review the effective lives of equipment and consider whether appropriate to increase rate of depreciation
  9. Review remuneration to owners:
    • Are dividends or profit share a more appropriate way to remunerate business owners
    • Can result in reduced payroll tax
    • Can result in reduced PAYG withholding, provide a cash flow benefit and deferral of tax
    • If the business is making a loss, you could be unnecessarily paying tax on wages
  10. Plan for 2020 with introduction of Single Touch Payroll:
    • Consider stopping all owner salaries from 1 July 2019 when real time reporting of salaries are made to the ATO
    • This will allow for more flexibility for tax planning 2020 whether salary or other types of remuneration are most tax effective for owners
    • It will be difficult to amend and change salary payments that have already been reported to the ATO, so be ready for the change from 1 July
  11. Repayment of Div 7A loans:
    • Cash repayments can reduce the requirement for dividends to be declared
  12. Review tax rate applying to companies:
    • Base rate companies pay tax at 27.5% while all others pay tax at 30%
    • Review any planning that could occur to achieve the desired tax rate (may be lower to reduce tax, may be higher to maximise franking credits on dividends)
  13. Review for access to refundable franking credits:
    • Labor have a policy to remove refunds relating to excess franking credits
    • Review for opportunities ahead of 30 June 2019 to access any refundable franking credits
    • Consider whether any loss entities could result in a flow of highly franked income resulting in a refund
  14. Claim and document your Research & Development activities:
    • When engaged in R&D activities, clearly document the activities and costs relating to those activities to take advantage of R&D Tax Offsets
  15. Review your tax position prior to 30 June:
    • Understand your options to reduce or defer tax
    • Plan the cash flow for instalments of tax, and the tax due on lodgement of tax returns
    • Identify opportunities to very tax instalments and improve cash flow
    • Implement above tax planning and other savings
    • Finalise trust distribution minutes before 30 June

If you need any help with your tax planning, please do not hesitate to contact myself or your client advisor.

 

Brentnalls Conference Melbourne

Brentnalls Affiliation Conference May 2019

By Chris Mandzufas

At our recent Brentnalls Affiliation Conference in Melbourne, we focused on the ways in which each of the Brentnalls Affiliates could better support and help their clients grow.

In early May the directors and managers of Brentnalls WA attended the bi-annual Brentnalls Affiliation Conference in Melbourne. As it has been in the past, it was a great opportunity to network and share knowledge with other like-minded business advisors from across the Affiliation, which is positive for the Brentnalls WA team and all our clients.

This conference was once more focused on the various ways in which each of the Brentnalls Affiliated offices could better support and help their clients grow their businesses. More specifically a whole day and a half was dedicated to building better advisory capability within each Affiliate office in order to better solve blockages that clients may have in growing sustainable profitable businesses.

 

Ship on foggy ocean

Do I Need to Prepare a Budget or a Forecast or Both?

By Tony Monisse

Do you know the difference between a budget and a forecast? Is one more important than the other? Which one should you prepare and why? Read on to learn about all of this and more…

There has been a lot of criticism of budgets.  In fact, there is a school of thought that believes you should not prepare budgets and you should only prepare forecasts.

In the table below, I have summarized the key attributes of forecasts versus budgets.

 

BUDGETSFORECASTS
NatureNegotiated and fixed at a point in time. Budgets become out of date quickly, particularly if there is a major event – e.g. win a new contract or lose a major customer.Continuous and adaptive based on the current business environment.
Measure of performanceAgainst a target fixed at point of time – usually the end of the financial year.Track positive and negative trends against targets set.
GoalAn aspiration.An expectation.
Timeframe12-month planning cycle to coincide with the financial year.Tied to decision making lead-times (e.g. weekly or quarterly) and refreshed at the rate of change in the environment.
PurposeGenerally part of the business planning cycle and is used to incentivise key employees.To identify gaps in targets set (including budgets) and to stimulate changes to plans and actions required.
Resources requiredCan be a lengthy process and consume a significant amount of resources.Is an agile and quick process, therefore not resource heavy.

 

Based on the above you may ask why prepare a budget if it is going to be out of date quickly, particularly if it has been prepared some time before the commencement of the financial year.

The  main reasons for preparing a budget are:

  • It is an important part of the planning cycle and it creates a bridge between strategic targets set and operational delivery of those targets.  In a recent strategic planning session we facilitated, the preparation of the budgets was important for the sales and production teams who required a more detailed plan on how to achieve the financial targets set by the senior management group.
  • It is often required by key stakeholders, including shareholders and financiers.
  • It is used as a base to assess the performance incentives of the management team.

In my opinion, a key point about budgets is that you need to be aware of the resources you are willing to commit to prepare them.

Based on my experience, I believe that it is important that businesses also prepare forecasts (learn more in “Why preparing three way forecasts is so vital?).  I often see organisations that do not prepare forecasts, are “in the fog” and find it difficult to make decisions.

Once a forecast is prepared, the fog is lifted and there is more clarity on the key decisions necessary to achieve targets in the current operating environment.

If you would like to discuss this process further, please do not hesitate to contact myself or your client advisor.

 

Business forecasting cogs

Why Preparing Three Way Forecasts is So Vital?

By Tony Monisse

Learn why it is important to forecast the profit & loss, cash flow and balance sheet.

As I see it, a budget is merely a forecast prepared at a point in time.  This point in time is usually tied to the end of the financial year and the business’ planning cycle.

In contrast, a forecast is frequently updated based on the changes in the operating environment e.g. winning a new contract, losing a key customer or a change in the staffing situation.

The goal for any business should be to make the budgeting process the same as the forecast process, so that minimum resources are committed to an outcome that can quickly become out of date.  Please refer the accompanying article on why it is important to prepare a budget.

The forecasting process should be owned by the key stakeholders, not just the finance team.  For example, the sales forecast should be prepared and owned by the sales team and the production team should determine the production levels and the operating margins.

The forecast process should always be tied to a time period necessary to make decisions. In my experience, businesses should prepare two types of forecasts:

  • 13 week rolling forecast, which is used to manage short term cashflow;
  • 4 quarter rolling forecast, which is used to measure performance against targets, including the budget and to take corrective action.

It is important to prepare three way forecast. Early in my career, I learnt to never look at a profit and cash flow forecast without a balance sheet forecast. The balance sheet forecast is proof that the cash flow forecast makes sense.

The key steps to preparing a three way forecast are described below.

PROFIT AND LOSS

1. Forecast sales based on past KPI activity or a projected sales pipeline. I often hear businesses say they cannot forecast because their revenue is too unpredictable.  In these cases, I think a better outcome is to forecast sales required to acheive an acceptable profit level.

2. Review the cost assumptions, including breaking down costs between variable costs (which are tied to the sales forecasts) and fixed costs (or overheads) that do not change.

3. Review if fixed costs will need to change based on changes in capacity required to deliver on the sales forecast e.g., new premises or additional head office staff.

CASHFLOW

4. Review the assumptions for working capital, in particular, in what period will trade debts be collected, how much inventory will you need to hold and when will you pay your trade creditors?

5. Determine distributions to owners, including wages, drawings and dividends.

6. Review the timing of tax payments.

7. Allow for the purchase and divestment of plant and equipment required to achieve the sales forecasts.

8. Review the finance requirements for new plant and equipment as well as existing finance commitments.

BALANCE SHEET

9. Review if the forecast balance sheet makes sense, including does the working capital look right, is the amount of debt relative to the business assets reasonable and do the shareholder loan accounts look correct?

I have found if a business uses the above process to update its forecast periodically (preferably quarterly), it is better able to anticipate changes in the operating environment, make better decisions and take action to protect its cash flow and achieve its targets.

If you would like to discuss this process further, please do not hesitate to contact myself or your client advisor.

 

Business profits graph

The Importance of Budgeting in Business

By Chris Mandzufas

A realistic and detailed budget is crucial for guiding your business to tackle unexpected challenges and to ensure you stay on track to grow. Learn more about benefits of correct budgeting from this article. 

It may seem obvious that business growth can only occur when there is money available for reinvestment but it is surprising how many businesses do not budget and do not track their performance against a budget.

A realistic and detailed budget is a very important tool for providing valuable information, guiding your business to tackle unexpected challenges and most importantly ensure you stay on track to grow.

Not having a budget could be like driving a car in the dark without lights on – how do you know where your business is going?  A robust budget will help you identify the cash from operations you can generate, identify the capital you need to grow your business and consider any debt and income tax obligations you need to consider as your business moves forward.

Another way of thinking about your budget is as a way of measuring your business’ performance against expectations. That is, each month tracking actual revenue and expenses and comparing them to what you had budgeted.

For example, if your sales are lower than you had budgeted you have the opportunity to review and debate why and take corrective action immediately.  Conversely, if you exceed your sales targets you can review the key reasons why and focus more energy in leveraging that knowledge in future periods.

If you are running your business without a budget, you may find you are actually wasting energy, being inefficient and not meeting your long-term goals. By taking the time to set a proper budget and manage that budget, you will give your business the best chance of achieving its full potential.

If you need any help with your budgeting process, please do not hesitate to contact myself or your client advisor.

 

Federal Budget update

Key Takeaways from Federal Budget for 2019/2020

By Chris Smith

In case you have missed it, here is the key information on the recently announced Federal Budget for the next financial year. 

Read the key takeaways from the federal budget update.