Tim Ricardo, Author at Bishop Collins

How to Successfully Apply for a Business Loan

December 7, 2022 Tim Ricardo

Tim Ricardo

Director

I’m going to start this article with a true story about a client of mine that I have looked after for almost 17 years; let’s call this client Joe.

Joe applied for a business loan to purchase a second factory bay for his business. The year was 2007 and we had recently experienced a fairly major property boom (which sounds somewhat familiar). His first factory bay had increased in value and so it looked like he would have around a 20% equity amount against both properties, so he applied for the loan with a second tier lender since the major banks were requiring a higher deposit and he didn’t have the available cash flow in his business.

The value of the two factory bays was around $750,000 and he was getting a loan of $600,000. Joe was originally offered what appeared to be a reasonable loan from the lender with a market variable interest rate which, at the time, was 8.75%.

Joe was paying his repayments on time and was not having any problems with the loan. However, in 2008 after purchasing the property, the global financial crisis occurred and the lender decided to exercise its right to re-value the property which on paper was now worth less than $700,000. This means the loan of $600,000 was now above 80% of the value of the property and subsequently the lender increased their loan interest rate to the default interest rate of around 15%. The loan fine-print stipulated that the lender was allowed to do this, and Joe, with no available cash and no other lenders available given his situation, had no option but to pay the additional interest. This crippled his business for over 10 years until it had the financial capacity to refinance the loan to a lender with more reasonable rates.

I wanted to write this as a warning to businesses when applying for business lending to make sure they are aware of how lenders look at loans. As the applicant, it is on you to understand the terms and risks associated with a business loan. With that out of the way, let’s take a further look at how to apply for a business loan.

Why Do You Need a Business Loan?

Businesses from time to time require funding for various purposes. It’s the very nature of doing business. When asked “How to Apply for a Business Loan?” the common response is, “what is the purpose of the loan?” Answering this question is important because the purpose of your loan will guide the way forward in your application.

You may be looking at expanding your business, purchasing or replacing equipment or just seeking some additional cash for the purpose of improving general business cash flow. It may be any combination of these purposes, but most loans will have one of these in mind.

When you apply for a business loan to the bank, you are often confronted with a long list of questions and information requests which business owners find frustrating. You may ask yourself: why do they need all this information? You may have been the most reliable and responsible customer in the past, however ultimately through all the forms and questions they will be looking for two things: Serviceability and Security. I will explain these two concepts further below, but it is important to understand that your lending rates and terms will depend on how you stack up with your Serviceability and Security.

Loan Serviceability

Lenders often refer to your ability to make repayments as serviceability, meaning your ability to service or pay for a loan.

Loans have three main variables which affect the repayment:

Loan Amount
Term of the Loan
Interest Rate

Loan repayments are a result of these variables and your business’s free cash flow will determine whether you can afford the repayments on the loan. The bank will request your profit and loss statement and tax returns to show how much income you are generating over and above expenses to help work out servicing.

The purpose of a loan is a major factor that drives the term of the loan and can have a major effect on serviceability. For example, if you are purchasing a vehicle the loan term would generally be up to five years, however, if you are purchasing property the loan term is commonly 25-30 years. You may be able to afford paying off a vehicle over 30 years, however, this would not be appropriate if the life of the vehicle is only five years.

Interest rates will affect the loan repayment and this is often the main variable that banks advertise. It is something that the banks will negotiate based on your strength or risk as a customer. Credit history, along with the loan security will be considered by the bank when negotiating this rate.

Loan Security

When applying for a business loan, the security you have or asset behind the loan will impact firstly whether the bank will give you the loan, and then secondly, the interest rate they are charging as part of the loan.

When assessing the risk of the loan, the bank will want to see what they can secure the loan with. This is basically what they can draw on should you not pay your loan.

For example if you have a car and you don’t pay your car loan, it is easy for them to repossess the car and sell it at auction to pay off the loan. In this example the car would be considered the security for the loan.

Unsecured vs Secured Lending

As discussed above, an asset may be offered as direct security for a loan and this will reduce the bank’s risk and the interest rate you pay on your loan. When applying for a business loan, you can also apply for an unsecured loan. This basically means that the bank is not taking a direct charge over an asset but will rely on your business goodwill or trading history to support the loan. You can pay a significantly higher interest rate as a penalty for an unsecured loan, so business owners should consider the loan cost before applying for an unsecured loan.

With secured lending, another way to drop the interest rate is to reduce the loan amount against the secured asset. For example if you have an asset worth $50,000 and only borrow $40,000, then you are only borrowing 80% of the value of the asset. This is called the ‘loan-to-value’ ratio (LVR) and reducing the LVR can make your loan significantly cheaper.

With business lending, the other way banks can reduce the risk is for the directors of the business to provide a personal guarantee. If the business doesn’t have much in the way of assets but the directors personally have many assets, then a personal guarantee gives the bank a lower risk on the loan. Once again if you are not specifically providing an asset as direct security, this could still be classified as an ‘unsecured loan’ because the bank doesn’t have a specific asset that they can sell if you default on the loan. So, while it may help reduce your interest rate it may not be a large saving. Directors need to be very careful when providing personal guarantees and should always consult professional advice prior, as these go beyond the protections involved with liquidation of businesses and could make business owners personally liable.

Interest Rates: Fixed or Variable?

Another consideration when applying for a business loan is whether to fix an interest rate or leave it variable. As most of us would have experienced, when the Reserve Bank of Australia increases an interest rate the banks inevitably increase their variable lending rate. This will then adjust your loan repayment to ensure it is paid off within the loan term. Fixed rate lending is usually offered on equipment finance and repayments do not change over the term of the loan. Both can have advantages and disadvantages and there is no right or wrong here; it is just an additional consideration of the risks involved with interest rates increasing to ensure you will still be able to service the loan.

Commercial Lending is More Risky than Personal Lending

In Australia, lending is generally considered more risky when lending as a business. Business owners should be careful when seeking loans from sub-prime lenders. This is because personally, we have the protections of Australian Consumer Law, and most people have heard of the ‘Australian Competition and Consumer Commission’, or the ACCC as it’s commonly referred to. So, when applying for business loans be aware that the lender has fewer restrictions and less of an obligation when offering you a loan. At face value, the loan may look okay, but the fine print can give them the ability to increase interest rates for all sorts of reasons.

Tips for a Successful Business Loan Application

Whether you’re the director of a large business, or you’re wondering how to apply for a small business loan, there are a few additional considerations. Apart from the obvious warning of watching out for hidden fees associated with your loan, you should always consider what will be the cheapest form of finance with what you have available. The following are some of the pointers I give clients when applying for a business loan:

Shop around and always get a quote from other lenders such as your major business bank, as they are often the most responsible and best value. Second tier lenders have a purpose, but are often going to have less favourable terms (like in Joe’s example above!)
If possible, use secured finance to reduce the interest rate. If you require funding for unsecured cash flow purposes, perhaps you can find something tangible you can offer as security such as equipment to keep the interest rate down.
See if you can get a discount for providing a deposit toward the finance to reduce the risk for the lender.
Never push finance right to the limit. If banks do not want to lend to you, then don’t take it personally. Try to understand if you are lacking in serviceability; it is better not to take the loan than not be able to repay it.
Remember that brokers and banks are being paid to get you the loan which is potentially a conflict of interest, so it is always best to talk to an independent source like your accountant.

Where to from Here?

If you’re looking for advice on how to apply for a business loan or how to apply for a small business loan, then getting professional financial advice is a smart course of action. The team at Bishop Collins are experts in every aspect of business accounting and provide solutions to protect your assets and assist you with minimising the financial risk to your business.

Please reach out to us at Bishop Collins if you would like to seek professional advice on how to apply for a business loan.

person doing single touch payroll laptop

Bookkeeping

A Practical Guide to Single Touch Payroll Phase 2

October 18, 2022 Tim Ricardo

Tim Ricardo

Director

For many employers, it’s been months since the implementation of Single Touch Payroll Phase 2, however for many businesses who use Xero this has only just started to come onto the radar. The Single Touch Payroll (STP) Phase 2 deadline was initially 1 January 2022. Xero, being one of the largest small business payroll providers, was given a 12 month extension to 1 January 2023.

What is Single Touch Payroll?

A few years ago, businesses were required to start reporting certain information to the ATO. This included Gross Pay, Allowances, Superannuation and Tax Withheld. At the time this was a gigantic leap and probably the largest change in payroll reporting in the history of Australia. The fact that at any given time the ATO knows exactly what every single worker in Australia is being paid in real time is enormous! The conspiracy theorists and tin-foil hatters were on high alert and anyone would agree that the government was spoiled with their new pool of information, with ATO Auditors ready to dive in and have a swim around. Most parents could have predicted that spoiling anyone never satisfies and so sure enough, a few years later we found ourselves staring down the barrel of STP Phase 2.

What is Single Touch Payroll Phase 2?

In a nutshell, Single Touch Payroll Phase 2 provides more information to the ATO in your regular STP lodgement. So, employers will need to take extra care in their payroll lodgements to make sure that each pay is correctly broken down for each employee. The ATO website suggests that STP2 “will reduce reporting burden for employers who need to report information about their employees to multiple government agencies”. This statement may be true but the elephant in the room is that it will no-doubt increase the reporting burden for every business in their payroll reporting.

Let’s imagine you work at a desk on the tenth floor, but your desk is across the other side of the room. That means you can catch the elevator to the tenth floor, but would unfortunately have to walk 10 paces to your desk. Your boss has now removed access to the elevator but the stairs enter right next to your desk so it would be true for your boss to say that for those employees who had to walk 10 paces to their desk we have reduced this burden and ‘streamlined’ your desk access once arriving at our floor. Without wanting to sound too critical, exercise is good for any individual and likewise, businesses should also take the time to make sure their employees are all being paid properly.

So let’s break down what information is going to be added to reporting in Single Touch Payroll Phase 2. While I’ve aimed to make this article as informative as possible, the ATO goes into more detail about what each of these categories are here.

Income Types

Your payroll software should break down the income types which need to be taxed differently. There will be a code used to differentiate what category of payment you are receiving. A few examples of these are:

SAW (salary and wages): This is the standard that captures the bulk of employees
CHP (closely held payees): This covers some small business related payees who have certain exemptions that allow them to lodge once per quarter instead of every payrun.
WHM (working holiday makers): This covers workers under 417 or 462 visas. Farmers will often use these.

Disaggregation of Gross

As mentioned above, businesses are already providing the gross payment in their regular STP lodgement. The first part of Single Touch Payroll Phase 2 will be breaking up this gross payment and the ATO have labelled this the ‘disaggregation of gross’. Once you have setup your payroll accordingly the ATO will be receiving the following:

Gross
Paid Leave
Allowances
Bonuses and commissions
Directors fees
Lump sum
Salary Sacrifice

Employment Taxing Conditions

Previously you would keep records when commencing and ending an employee’s engagement. The most obvious change is that previously you would lodge a ‘TFN declaration’ (generally electronically) to the ATO. Instead of doing this as a separate task this will be sent within the STP2 information. You will still need to get the employee to fill one of these in when you employ them however it will not need to be lodged separately.

Information for Single Touch Payroll Phase 2 includes:

Employment basis, i.e. casual, part-time, permanent
What withholding is required for each employee, e.g. tax free threshold, HECS/HELP and Student loans.
Details of when and why an employee leaves

Child Support Garnishes and Deductions

This is one of the instances which may reduce reporting with Child Support however it is an optional feature.

What do I Need to do to be Compliant with Single Touch Payroll Phase 2?

This will depend on your payroll digital service provider. Some employers are already reporting through Single Touch Payroll Phase 2 however, I have many businesses on Xero and these are facing this for the first time. For those lodging through Xero you have until the 31st December 2022 to update your pay items and check your payroll setup to be compliant with STP2. As per usual, Xero has done a good job of trying to simplify this process and once you go into the Single Touch Payroll under the menu you can go to the STP2 menu and follow through the steps.

After updating the employees, the next step is to update the pay items. As mentioned this is part of the “disaggregation of gross” discussed earlier. At this step it starts getting a bit complicated and is what triggered my writing of this article. Most instructions don’t go into detail of what is required here. Every employee comes under an award and most employers, when setting up their employee, should look up the award and make sure their employees are being paid the minimum rate of pay. The problem is that most employers don’t usually go through and break down what that pay is made up of and this could cause a problem with this step for most employers that manage their own payroll.

Small business owners generally don’t have a payroll department and although they might check they are paying the minimum wage, they will often just set their pays for themselves and their employees above the minimum rate so there doesn’t need to be constant adjustments. This eases their administrative burden.

Let’s take a look at an example:

Luke is a builder and is just paying wages for him and an apprentice.

Luke will go onto the fair work calculator (known as the P.A.C.T) to help find the rate of his and his apprentice’s pay, which can be found here.

He has decided that he is under the Building and Construction Award as a Level 8 Construction Worker and supervises 1 Level 3 Construction Worker. This means that his minimum gross hourly rate is $31.26. This includes ‘all purpose allowances’ as follows:

Industry allowance $1.19 per hour
Leading hand allowance $0.68 per hour
Tool allowance $0.92 per hour

Luke, however, has set his pay at $40 per hour. Previously, we would just set his hourly rate as $40 in his payroll system and that would be the end of it.

Now, under Single Touch Payroll Phase 2, Luke will need to change his setup to separate the ‘all purpose allowances’ and his remaining gross pay so it can be submitted properly and in accordance with STP 2.

Luke will need to keep an eye on the minimum pay rates because every time they go up, he will need to change his pay template for each of his staff to make sure he is paying over the minimum allowances in accordance with the award. Otherwise, his employee could complain to Fair Work Australia and he may need to pay the shortfall. Presently, I am unsure if the ATO will be sharing this information with Fair Work Australia, however, employers should take care to not submit incorrect pay breakdown information or this may cause problems in an employee dispute.

For illustration here would be a snippet of the base weekly pay from a xero payrun: table

While trying to keep ahead of the administrative burden, Luke may decide to set up his pay with his ‘all purpose allowances’ set at amounts well over the award and balance his $40 per hour in the ordinary hours section by deducting the allowance rates.

As you can see, for employers to go through this process for each of their employees is time consuming. I can appreciate that to do this properly is a challenging prospect depending on the award your employees are under.

Super Guarantee is still a Focus of Single Touch Payroll

One of the underlying compliance purposes of Single Touch Payroll is to ensure that super is paid on the correct pay items and the ATO will continue to monitor super payments and reported wages to make sure that employers are paying the correct amounts of super.

Employers will have to carefully work through and correctly classify overtime and overtime allowances because super guarantee is not payable on overtime, so be sure the overtime is in accordance with your employer obligations.

When to Seek Professional Help

There are two main issues that need to be dealt with here:

Firstly, there is the human resource (HR) component. If you are unsure about your employee awards or interpreting these correctly you may need to obtain professional HR support. We are seeing a rise in HR service offerings and this may be yet another push away from self-managing your HR. The good news is that there are now low-cost options for most employers and they can get some legal guidance under a per employee subscription that doesn’t break the bank.

Secondly, once you know your award and minimum pays you need to ensure that you are reporting things correctly. This is where your accountant and bookkeeper come in. We are seeing a number of businesses who know they are paying the correct rates however, need to make sure they are set up correctly through their payroll provider. The cost here will vary depending on how many employees you have and the complexity of the award.

Please reach out to us at Bishop Collins if you would like to seek professional help to update your payroll reporting.

Taxation & Tax Tips

What Is Voluntary Redundancy and How Does It Work?

September 26, 2022 Tim Ricardo

Tim Ricardo

Director

We’ve all heard of the industrial revolution, when mankind took that leap forward into machine manufacturing. Looking back we all agree this was a necessary step to advance our civilisation. However at the time it meant businesses had to reduce large parts of their workforce.

In many of these tragic circumstances employees were left without work as their skills were no longer in demand, so the only option was to, at their own cost, change their skill-set to find employment in different areas. These days, there are more protections for workers and opportunities to either be compensated or re-trained in new areas by their employers.

Downsizing is a difficult and stressful time for both employers and employees alike. For employers reducing their employees, there needs to be careful consideration of employment law, employee rights and also morale and productivity within what is left of your workforce. Getting it wrong can be costly for employers and so voluntary redundancy has become a useful strategy to consider when dealing with the messy business of downsizing.

What is Redundancy?

This is when an employer no longer requires an employee to fill their position. Most of us have heard examples of redundancy through innovation and technology changes however redundancy can occur for a number of reasons such as new processes, reduced demand for product, a business closing or simply a business relocating.

Under the National Employment Standards (NES) certain employers are required to offer compensation to employees when their position has become redundant. The amount of redundancy entitlements differ between the different industry awards. The entitlements generally consist of a number of weeks of pay and a number of weeks of notice depending on years of service.

Example: Standard Clerical Roles

If you have worked over 2 years the redundancy pay will be 6 weeks of pay with 2 weeks of notice.

For more information on your specific industry you can search on the Fair Work Australia website.

What is Voluntary Redundancy?

Let’s take a look at what constitutes voluntary redundancy. When a business has excess staff and requires reduction in their labour force (for various reasons), they can approach employees to resign and in return offer a redundancy payment to the employee.

In this way the employee voluntarily accepts the redundancy rather than being forced by their employer. There are a number of up-sides to this because in these situations an employer is more protected from a claim against the employer. In return for accepting the financial payment they sign a legal document that protects the employer from any wrongdoing. There is also less hassle to the employer because they can offer redundancy to workers that may be retiring soon or are less satisfied with their job. This in turn can come across better for morale and helps with the remaining staff relationships.

As most employers know, not all employees are equal in their talent and work ethic. Most employers would be able to immediately identify their key staff and so they need to be careful in offering a blanket voluntary redundancy to all employees. If their key employees leave the business, they may be left in a worse situation than before the redundancy.

Who isn’t entitled to Redundancy?

There are a few categories of workers that Fair Work Australia excludes from being entitled to redundancy. These are employees:

with less than 12 months service
on contract for a specific period, task or season
terminated for serious misconduct
engaged as casual employees
as trainees under a trainee agreement and apprentices
under some Small Businesses

If a small business has less than 15 employees and under section 121 of Fair Work Australia Act 2009, they generally do not have to pay redundancy for their employees. There are a few awards that still require redundancy within a small business so check with Fair Work Australia if considering this as an option.

Genuine Redundancy and Taxes

Up until this point you might be thinking that it is the obvious choice to enact a voluntary redundancy, however when considering voluntary redundancy as an employee, you must also take into account the tax you would pay. It should be noted that if you leave voluntarily your redundancy may not be considered “Genuine”.

Any redundancy article would not be complete without looking at how redundancy works with regards to tax. Under Income Tax we generally will pay tax on wages, however when receiving a redundancy there is the possibility of receiving the payment tax free if it is a genuine redundancy.

A non-genuine redundancy occurs when, as an employee:

Your dismissal is because you reached retirement age
You’re at or over aged pension age on the day of dismissal
You leave voluntarily
Your leaving on termination of your contract
Your dismissal is for disciplinary or inefficiency reasons

A non-genuine redundancy is generally taxed at a lower rate than your normal income, however if the redundancy is genuine then the tax free threshold is currently $10,638 + ($5,320 x years of service).

To receive the payment tax free is a considerable benefit and should be considered when thinking of accepting a redundancy.

For more information on genuine redundancy, visit the Australian Taxation Office website.

Casual Employment

Understanding the Casual Employment Information Statement and Its Impact on Your Business

August 29, 2022 Tim Ricardo

Tim Ricardo

Director

What is a Casual Employment Information Statement?

A Casual Employee Information Statement (CEIS) is a relatively new publication that Fair Work Australia produced in 2021. Since March 2021 all employers have been required to provide this document to their new and existing casual employees. So if you have casual workers, then quite simply, yes, this affects you.

To understand what the CEIS is, we need to bring you back to one of the most commonly asked questions by business owners – Should I employ someone as casual or permanent?

The resounding reply has always been “It Depends” which isn’t usually much help when trying to find the right way forward for your casual employment information statement and how it affects your business. First, we need to look at the pay structure.

All Modern Awards under the National Employment Standards (NES) require a casual loading (pegged at 25%) to be paid to casual employees. The rate of pay was found by taking the permanent award rate of pay and adding 25%. According to the employer, this loading was hoped to be sufficient to compensate the employee, so they only needed to pay their hourly rate for real time worked and not for any leave or public holidays.

It appears on the surface to be a simple system and many employers were happy to pay a little extra to avoid the burden of tracking and paying for annual and personal leave and other permanent entitlements.

The Main Challenges with the Casual Employment Information Statement

The issue is that often there would be disputes about whether an employee was really a casual employee and it was left up to the courts to decipher each arrangement. In many cases, employers found themselves still having to pay leave entitlements. There was a possibility of double dipping to occur when an employee is paid the Casual loading but also ordered to pay leave entitlements on top of this amount.

So until 2021, the answer to this question was shrouded in a haze of uncertainty. Prior to this there wasn’t a statutory definition of what a casual employee was. Therefore, as of March 2021, the Fair Work Act 2009 was amended to the following definition of a casual employee being an employee who was:

Offered employment on the basis that the employer makes “no firm advance commitment to continuing and indefinite work”
The person accepts such an offer
The person is an employee as a result of that acceptance.

The amendment bill went even further to attempt to remove the double-dipping concern and allowed employers to offset any relevant entitlements owed to the employee by using the 25% loading already paid. These entitlements include all forms of leave, public holidays and termination pay. This is not a straightforward process because you need to be specific in identifying the loading amount and what leave it was to offset. To this point, business owners need employment contracts to be drafted by a professional and updated to include the current changes in the law.

Converting Casual to FullTime Employees Using the Casual Employment Information Statement as a Guide.

So now you have some background to specifically answer the question, what is the casual employment information statement? It is a document that provides information about the new definitions and rights of the employee in regards to their casual employment. As discussed above, it will include the definition and break down what “no firm advance commitment” means. It will also include a “how to become a permanent employee if you are casual”. This process is called “casual conversion”.

Casual conversion is different depending on if you work for a small or large employer (15 or more employees). Specifically, it looks at the pattern of your employment and provides a pathway to permanent employment if an employee meets the following:

You’ve been employed for 12 months
You’ve worked a regular pattern of hours on an ongoing basis for at least the last 6 months
You could continue working that regular pattern of hours as a permanent employee without significant changes.

For large employers they must offer this to their employees, whereas small employers are not required to make this offer; however, the employee can request to become permanent if they meet the above criteria. Even if requested by the employee, casual conversion is still currently optional for small employers.

A casual employment information statement is quite a simple document and it is easy to provide this to your casual employees. Most business owners would agree that certainty in their obligations is very important and this document can make answering the difficult questions much easier. You may find a link to a Casual Employment Information Statement here.

Taxation & Tax Tips

What Triggers an ATO Audit?

August 3, 2022 Tim Ricardo

Tim Ricardo

Director

What Triggers an ATO Audit?

Hearing the words “ATO Audit” often evokes one of two reactions; either the burying-of-heads-in-the-sand or a call to action.

As an accountant, I can say with some authority that taxpayers who are proactive about their tax returns are in a much better position to handle an ATO Audit, and are most likely to avoid an ATO audit altogether. The reason for this is to do with what has been included or excluded in your tax return; for example, attempting to reduce taxes by not correctly including income or incorrectly overclaiming deductions can trigger an ATO Audit. Remember, as the taxpayer you are responsible for what is lodged in your return – not your accountant or tax agent, you.

When you are preparing your tax documents for your accountant or lodging anything with the ATO, make sure you are paying attention! Of course, everyone makes mistakes from time to time; however a mistake on your tax can be costly – especially now, as the ATO moves out of their COVID “sympathetic and understanding” approach to their compliance program.

The list of ATO audit triggers is endless, and indeed we have looked at this topic previously, however, I would like to look in detail at just one of the major ATO audit triggers: data-matching and ATO prefilling. Here’s some top tips for you to take note on what triggers an ATO audit!

ATO Data Matching

The ATO is ramping up its data matching activities, big time. They’re tapping into more and more sources every year.

Single Touch Payroll

The ATO brought in Single Touch Payroll (STP) a few years back and are just beginning to tap into potential ATO audit trigger points. This data provides your payroll information to the ATO progressively for every pay throughout the year.

Superannuation compliance has already begun with the ATO cross checking super payments with STP data. So it is very important to pay your super on time. I have already had clients receive automated letters here suggesting they may have incorrectly paid super and to lodge a superannuation guarantee charge (SGC) statement imposing crippling penalties on businesses for mistakes or only slightly late payments.
Centrelink: cross-checking your income estimates and amounts reported to Centrelink can be done on a live basis now.
Business activity statements (BAS): PAYG withholding incorrectly reported on BAS can be reviewed, and easily cross-checked by the ATO.

Lifestyle Assets

The ATO is continuing to expand previous data-matching activities such as the 2020 “Lifestyle assets data-matching program”. This program has been gathering information from insurance providers and state governments in relation to boats, cars, art, horses and aircraft, to name a few things. This program has a few triggers affecting almost every possible tax:

Income tax: If you are accumulating lifestyle assets and your income isn’t sufficient then the ATO will come knocking.
GST: If you are claiming GST on lifestyle assets without being a legitimate business then you could be a target.
FBT (Fringe Benefits Tax): If lifestyle assets are being claimed in businesses but are being used personally then this could trigger an FBT audit.
CGT (Capital Gains Tax): If lifestyle assets are disposed of then the ATO will check your return for CGT being reported. You can still be liable for CGT on personal use assets if the acquisition cost of an asset is more than $10,000.

Cryptocurrency

The ATO has recently brought to focus an extension on their Cryptocurrency data-matching program. The ATO collects information from major exchanges and any crypto-designated service provider. The primary triggers are as follows:

CGT: Since crypto is mostly treated as a capital asset the ATO will be looking for CGT being reported on your return if you have sold crypto in an income year.
Income tax: In some circumstances, you can receive income from carrying out a “business” of trading crypto currency. The quantity and the process of trading can mean the ATO can require you to report this as ordinary income.
FBT: If businesses use crypto and are passing it on to an employee or associate, you could be staring down the barrel of a 47% fringe benefit tax by using business money to purchase crypto in your individual name.

Property Income

This is a new data-matching program that the ATO has announced which involves collecting data from real estate property management software. Rental properties are being brought to the fore as the ATO has recently announced a high error rate from rental property audits conducted in recent years. 1.6million taxpayers will be affected by this program. People often choose Rental Properties as investments to reduce income tax. This may be the case when negatively geared, however, not reporting rental income and expenses correctly can cost you.

This new program will add to the rental bond data-matching program already being conducted. The ATO will be looking at:

Income tax: Ensuring that all rental income and deductions have been included in the return.
CGT: Ensuring that any disposals have been recorded on a taxpayers individual return.
Lodgment: Ensuring that taxpayers are lodging returns when there is rental income.

Novated Leases

Another new data matching program through which the ATO is gaining information from major leasing providers. Possible triggers for this program are:

Income tax: If you are claiming Car Expenses in your tax return to reduce taxes and have a novated lease, these expenses are not claimable in your return because they should already be claimed by your employer.
GST: Businesses claiming GST credit for the purchase of a car when it is a novated lease is incorrect, only the GST on the repayment is claimable.
FBT: Businesses could find themselves in an FBT audit if they have not been reporting FBT but have entered into a novated lease agreement with their employees.

Benchmarking

The ATO is continuing to cross check business income against other taxpayers in their industry. This reviews your major claims such as cost of sales, motor vehicles, and labour can trigger an ATO Audit which generally looks at the inclusion of cash in your income. The ATO has been known to issue default assessments if you have not kept adequate records. They basically assume you have earned a certain amount of income based on industry benchmarks and what information they have from other parties. Not including your cash income is not the way to reduce small business taxes legally. Watch out for the common expression “is it cheaper if I pay cash?”

Late Lodgement

The ATO is always cross checking late lodgements with higher-risk taxpayers, and they are always looking for businesses and individuals that aren’t lodging tax returns on time. If you think you can get away with not lodging a tax return, think again; not only are the late lodgement penalties severe, you may also find yourself under the microscope since late lodging is like waving a red flag to a bull.

ATO Prefilling is Not Perfect

You need to avoid being complacent and blindly relying on ATO prefill data. Yes, it is reasonably accurate in many circumstances, however, it is there often as a reminder that attention needs to be given to report this income correctly. If the ATO doesn’t have something in their prefill then don’t stick your head in the sand and assume that you don’t need to declare it. For example, if your prefill doesn’t include some share investment income and you know you have share investments, then do your homework and cross-check that each tax statement has been included in the correct location on your return.

If the ATO gets it wrong then you need to be proactive and make sure that the data source is corrected. Just ignoring what the ATO has reported on their pre-filling can mean bigger penalties if the ATO audits you later and you chose to ignore income that the ATO had already included. You can find some more information straight from the horse’s mouth here.

Some of us have not experienced the burden of an ATO tax audit – those who have are generally more careful about taking the time to understand what they need to report in their tax returns. Most accountants have audit insurance offerings which can help cover professional fees through the uncomfortable process, however, this insurance doesn’t pay for penalties or increases in tax should a mistake be found. It also doesn’t reduce the likelihood of an audit. If you do find yourself in the unfortunate situation of an ATO audit, having a professional assisting you is highly advisable and does increase your chance of a more favorable outcome with the ATO as your accountant can professionally direct your responses and assist in defending your reported position. It is worth noting however that the most effective insurance you can have is to be proactive and not complacent about your income tax return.

Speak to Bishop Collins about Tax and Auditing

It’s simple; with Bishop Collins Accountants on the NSW Central Coast, there are no surprises. We listen. We educate. We deliver. We provide solutions to protect your assets, and assist you with minimising your tax and moving toward your goals.

To learn how Bishop Collins can help you with taxes and auditing, visit bishopcollins.com.au or call (02) 4353 2333.

Bookkeeping

Diary of a Nerd: A Day in the Life of a Bookkeeper

July 29, 2022 Tim Ricardo

It was only 9am and I already knew I would be eating my lunch at my desk today, but don’t get me wrong, I don’t think of this as a big deal. I love what I do and wouldn’t pass it up for anything; it’s just that from experience, I know the first week of July each year offers little to no respite. But that’s just small business bookkeeping for you!

As my calendar filled and I organised my day, I stood staring in front of my three monitors trying to recall when my life got so busy that I moved from needing one screen to three – I don’t remember ever having two, I must have skipped right past that. Now resembling the bridge of the USS Enterprise, I recall the days when my desk was tech-free and consisted of a growing pile of documents, whereas now it’s an unyielding email inbox!

I’ve seen remarkable technological changes over the years of my bookkeeping career! From pen and paper to automated cloud accounting software and everything in between – it’s incredible how things have developed. I see almost no paper these days, with banking data getting automatically transferred into clients’ ledgers and forms being digitised. Nevertheless, while nostalgic for the past, I truly value the modern ways of bookkeeping and how far we have come.

Quickly snapped out of my daydreaming by the smell of coffee, my greatest vice, I see Wendy bringing me my favourite brew, ready to get the working day off the starting line. Having worked for me for five years now, I sometimes wonder how I would survive without her; it truly is the people you have around that matter most!

Diving into my first task for the day, running the payroll for Vandelay Industries, one of my oldest clients. This needed to be completed by 11am, if not I knew there would be trouble. One thing I have learnt over the years is no matter what’s going on in your life, payroll cannot be processed late. If salaries don’t hit employees’ bank accounts the minute it’s expected, you can be sure a riot is soon to follow!

Processing the Vandelay payroll is always something I enjoy; it’s never dull and I regularly learn something new. Wow, it looks like their senior latex salesman is leaving! I wonder what happened there? This means I’ll need to calculate his end-of-employment payment and applicable tax. Having been with the company for 16 years, I imagine he’ll be entitled to a pretty penny!

10.45am and I’m just finishing the single-touch payroll reports for Vandelay. I send it off to the financial controller letting him know the payroll is done and ready for payment to all the company employees. Feeling a sense of relief having this task done by the deadline, it quickly fades on opening my Inbox.

I know I shouldn’t still be surprised by the volume of new emails, but this time of year never ceases to surprise me. Skimming through the list, one email caught my eye. Its sender, Marian Carver, the CEO of Tet Corporation, my biggest client. I don’t recall ever receiving an email from her before; typically I’d be dealing with her staff. Marian’s email is polite and to the point. She reminds me of the monthly deadline to reconcile the Tet Corporation general ledger and to produce the BAS by 5pm. Without the need for further explanation, I understand that it’s particularly important we meet the deadline.

They’re a mysterious bunch over there at Tet. After all this time I’m still not 100% sure what exactly it is they do… But whatever it is, it’s working well!

11am is usually my scheduled time to return client calls. Taking up roughly two hours of my day, though at times I feel like a one-person call centre, supporting on all things cloud accounting and bookkeeping. I really enjoy this part of the job, it helps keep things interesting. But given the tone and that Marian emailed directly, I figured I’d jump straight into the Tet file, moving my client support calls to the afternoon.

Having worked on the Tet file for many years, the monthly reconciliation process comes naturally to me. While it’s a lot of work, it’s not complex, and I could recite the steps in my sleep: bank reconciliation, debtors, creditors, payroll, fixed assets, single touch payroll, super and BAS.

Starting to feel some stiffness in my neck and shoulders, I sense I haven’t left my chair for a couple of hours. With a quick glance at the clock, I realise what an underestimation that is 2.30pm and I’m only just finishing the last reports for Tet. I review my work, satisfied with the quality I have produced and upload the reports for the client well before the deadline. Feeling a sense of relief and anticipation as I now move on to my favourite part of the job. It’s time to chat with my clients and help them with any questions; responding to anything that has arisen for them in the past 24 hours.

As always, every enquiry my clients have is urgent. I really feel energised by this part of my job. Whether it’s solving problems or that I’m an extravert, this element of my day really helps recharge my battery! This is why I recommend outsourcing bookkeeping where you can – it enables you to stay in touch with your clients and maintain great working relationships.

Many of my clients are time-poor and they are grateful for my support. I particularly enjoyed one of my calls with Jenny from The Hard Deck Bar. We previously worked together to implement an app that helps her organise all her purchase invoices on her phone, automatically uploading them to her cloud accounting software. It’s such a great time save for her. In addition to this, we implemented a payroll app, which allows her casual staff to clock on easily. Jenny told me she intends to keep the old Bundy clock on the wall for sentimental reasons. Helping Jenny resolve some teething problems with the software integration and withholding tax rates. She is very excited as she believes this automation of her small business bookkeeping will save her up to six hours a week with her paperwork!

My final call is to Mr. Pensky. I check his file is up to date before I call him to get my head around everything that is going on for him. He wants to know what the changes in employer superannuation obligations and tax rate changes are from the 1st of July and how they would impact his business. I answer his question and he thanks me as he is closely managing the business cash flow.

Now, it’s 5.30pm and I’m trying to recall if I had lunch today or not. From the empty feeling in my stomach, I’m guessing not. Oh well, not to worry, I have a booking this evening at my favourite restaurant Jack Rabbit Slims. Can’t go past their burgers and $5 shakes.

Before I turn off my computer for the day, I post my timesheet entries for each client I worked with today. I genuinely do receive great personal rewards for supporting my clients, saving them time and helping them solve their accounting compliance problems – for me, I don’t think I could have found a better way to make a living!

Speak to Bishop Collins about our Bookkeeping Services

If you’re considering the benefits of bookkeeping, then give the team at Bishop Collins a call. Our expert team are specialists when it comes to small business bookkeeping, and our staff stand ready to assist you.

To learn how Bishop Collins can help you with our bookkeeper services, visit bishopcollins.com.au or call (02) 4353 2333.

SMSF & Superannuation

What’s involved in running a Self Managed Super Fund (SMSF)?

July 7, 2016 Tim Ricardo

SMSFs are one of the fastest growing sectors of the superannuation industry. The Australian government wants to ensure funds are managed properly in order to accumulate retirement benefits for members thereby reducing future reliance on government pensions.

Anyone who advises on SMSFs must hold an Australian Financial Services Licence and be qualified in advising superannuation trustees and fund members.

The trustee’s role

As a trustee you are solely responsible for the day-to-day operation of your fund. You can seek professional advice – for example, on administration, taxation, investing, legal, actuarial and audit matters – but if you break the superannuation rules, the “buck stops with you”, the trustee.

Getting it wrong whether by accident or carelessness can have serious ramifications.

It can mean loss of concessional tax status for your fund, fines, or civil and even criminal penalties for the trustee. It could even mean you are banned from acting as director of a company.

Increase your retirement benefits

A properly planned and operated fund should significantly increase retirement benefits. As an example, superannuation regulations require all super funds to have a written investment strategy. This will set out what the fund is trying to achieve, taking into account the circumstances of the members and any employer contributor. Typically, it will provide a benchmark asset allocation setting out the types of assets the fund will invest in to achieve its goals.

A long-term strategy is impractical unless it is monitored and reviewed regularly and this is a requirement for all SMSFs.

Although this might seem like an extra impost, the upside of regular reviews of your fund strategy is that you potentially achieve superior results from your investments.

Do it right

Sadly, many individuals and businesses have been encouraged to set up and run SMSFs for the wrong reasons, attracted by the promise of low fees. As is often the case, “you get what you pay for” and poor advice can mean trouble with the regulator and an under-performing super fund. Do it right and do it well and you will be the one who wins in the end.

Financial & Retirement Planning SMSF & Superannuation

Moving your Self Managed Super Fund (SMSF) into Pension Phase

July 7, 2016 Tim Ricardo

Moving accumulated superannuation benefits to pension phase is a common way to fund retirement income. If you have a self managed superannuation fund (SMSF), there are a few things you should think about when starting a pension.

What is an account-based pension?

An account-based pension is like a personal retirement income account operating in a superannuation fund. You receive regular income payments, while at the same time your account may earn investment income. Any investment income earned in pension phase is generally tax free.

Note that before you can start to receive a pension with your super benefits, you must have met a condition of release.

The most common conditions of release are:

Reaching your preservation age
Permanently retiring after reaching preservation age
Reaching age 65, or
Permanent incapacity

Your preservation age depends on when you were born:

Before 1 July 1960 (Preservation age is 55 years)
1 July 1960 – 30 June 1961 (Preservation age is 56 years)
1 July 1961 – 30 June 1962 (Preservation age is 57 years)
1 July 1962 – 30 June 1963 (Preservation age is 58 years)
1 July 1963 – 30 June 1964 (Preservation is 59 years)
After 30 June 1964 (Preservation age is 60 years)

Check your trust deed

Your SMSF’s trust deed must allow the payment of an account-based pension.

It is a good time for a general review of your trust deed, and an update, if appropriate. This will generally require a legal professional.

Consider your fund’s investment strategy

The investment strategy that suited you in accumulation phase might not be appropriate in pension phase.

One of the objectives of an account-based pension may be to have your capital last throughout your lifetime, so setting up your account based pension marks an important time to review your investment strategy.

Studies show(1) that in general the impact of negative returns can be greater when drawing down on your capital, compared to when in accumulation phase (where generally you won’t be drawing down, and may be adding to your capital), so your investment strategy should take into consideration this additional risk. Your adviser will be able to assist you in determining an appropriate investment strategy for your SMSF.

Make the minimum payments

When running an account-based pension, one of the key requirements is to ensure you draw at least the minimum payment amount each financial year. This is an important criteria in maintaining the tax-free status of your fund’s earnings in pension phase.

The minimum amount you have to draw is a percentage of your account balance based on your age, which is calculated as follows:

Required minimum payment amount = payment factor x account balance

Your minimum percentage depends on your age:

Under 65 (4% payment factor)
65 – 74 (5% payment factor)
75 – 79 (6% payment factor)
80 – 84 (7% payment factor)
85 – 89 (9% payment factor)
90 – 94 (11% payment factor)
95 and over (14% payment factor)

To calculate your minimum payment amount follow these simple steps:

Step 1: Work out the payment factor that applies to you. This will be based on your age when you started your pension (in the year of commencement) or at 1 July (for subsequent years).

Step 2: Work out the value of your pension. When starting a pension, it’s important to get a current market valuation of the assets for each member’s pension account. If you are planning to start multiple pensions, this will involve a market valuation for each pension account. Your accountant or fund administrator may be able to assist with these valuations.

The value of your account is required to calculate your minimum payment level, and to complete your fund’s tax returns.

Step 3: Calculate the minimum payment amount you need to make by multiplying the result of steps 1 and 2. This amount may be modified in certain circumstances, outlined below.

If you start your account based pension part way through the year (but not in June):

The payment factor will be applied to the account balance on the date you commenced your pension.
You are able to ‘pro rate’ your minimum pension for the number of days in the financial year that it was in place for.

If you start your account based pension in June of a given financial year:

There is no minimum pension payment amount for the remainder of that financial year

If you don’t meet the minimum payment amount requirements then the entire balance of the account based pension will be treated as if it were in accumulation phase for the whole year. This will result in assessable investment earnings being taxed at 15%, rather than being received tax free. It’s not enough for your fund to simply ‘account’ for the minimum payment through a journal entry; funds must actually be paid from your account and leave your SMSF.

Keep your records safe

SMSF trustees are required by law to keep records of transactions of the fund, including those relating to pension payments. These records will also assist your accountant in substantiating your fund’s tax position. Generally records relating to pension payments must be kept for a minimum of 5 years, but note that some records (e.g. minutes of trustee meetings) must be kept for 10 years.

Estate Planning

If you are receiving a pension from your fund, the rules of your SMSF may allow you to nominate one of your dependants (usually your spouse) to continue to receive the pension after your death, generally referred as a reversionary pension. Alternatively you may be able to nominate one of more dependants to receive either a lump sum payment or a pension after your death, or your estate to receive a lump sum payment.

Loan Serviceability

Loan Security

Commercial Lending is More Risky than Personal Lending

Where to from Here?

What is Single Touch Payroll?

What is Single Touch Payroll Phase 2?

What do I Need to do to be Compliant with Single Touch Payroll Phase 2?

Let’s take a look at an example:

Super Guarantee is still a Focus of Single Touch Payroll

When to Seek Professional Help

What is Redundancy?

Example: Standard Clerical Roles

What is Voluntary Redundancy?

Who isn’t entitled to Redundancy?

Genuine Redundancy and Taxes

What is a Casual Employment Information Statement?

The Main Challenges with the Casual Employment Information Statement

Converting Casual to FullTime Employees Using the Casual Employment Information Statement as a Guide.

What Triggers an ATO Audit?

ATO Data Matching

ATO Prefilling is Not Perfect

Speak to Bishop Collins about Tax and Auditing

Speak to Bishop Collins about our Bookkeeping Services

Business Plan Template

Tax tips

Prevent Fraud