Eclipse Accounting Group – March E-Newsletter
This issue includes
Fringe Benefits Tax - Is your Business Liable?
How do I know how much my business is really worth?
Couples work twice as long for a house
The $88K FBT Motor Vehicle Trap
Did you claim the Small Business Tax Break for 2009?
Key Dates for March/April 2010
Fringe Benefits Tax - Is your Business Liable?
The 2009-2010 Fringe benefits Tax year ends on 31 March 2010.
According to the fringe benefits tax (FBT) legislation, a fringe benefit is a benefit provided in respect of employment. This effectively means a benefit is provided to somebody because they are an employee. The 'employee' may even be a former or future employee. An employee is a person who is entitled, or has been entitled, to receive salary or wages. However, associates of employees (including directors) are also covered by the legislation.
The terms benefit and fringe benefit have broad meanings for FBT purposes. Benefits include rights, privileges or services. For example, a fringe benefit may be provided when an employer:
• allows an employee to use a work car for private purposes;
• gives an employee a cheap loan;
• pays an employee’s gym membership;
• provides entertainment by the way of free tickets to concerts;
• reimburses an expense incurred by an employee, such as school fees; or
• provides certain benefits under a salary sacrifice arrangement with an employee.
If you believe your business may have provided fringe benefits during the last 12 months and did not lodge a FBT return last year nor account for fringe benefits in the form of employee contributions, we encourage you to complete the FBT Questionnaire on our website and fax or email it back to our office.
How do I know how much my business is really worth?
Business owners are often so invested in their business they lose sight of what the value of their business really is. If you put your heart and soul, and sweat and tears into the business you expect it will be worth the effort.
If you own a publicly listed company or an interest in one, you know what the market says your interest in that business is worth on any day of the year. A private business is very different. For most businesses, there is no ready or automatic market that will tell you what the business is worth.
So, how do you know if your perception of the value of your business is fair, below what it should be, or totally unrealistic? Knowing what your business is worth should be a fundamental of being in business not just for sale or succession. Proving the value of your business is critical if you are looking to borrow, to understand where you are growing the business, for assessing business performance and the adequacy of your profits, or if you are looking to complete a restructure.
The value of your business is a key benchmark. If you don’t know what it is worth then you have no real frame of reference against which to measure your performance and this could cost you a lifetime of under-performance.
Not all businesses are measured in the same way. One reason why many business owners misunderstand the value of their business is because they compare it to another business which may be fundamentally different. There are a number of different generally accepted valuation methods for small and medium businesses. At a high level, the majority of businesses will be valued on their earnings, their cash flow, or their assets. Different approaches will produce different results. The right answer is not the one that produces the best result but rather the one that is in line with the fundamentals of the business. For example, a business that has a limited life with a defined income stream will be valued on the cash stream it will produce. Whereas a mature business, like a wholesale business being valued as a going concern (that is, as an ongoing business), is likely to be valued on a multiple of its earnings. A business, like a farm, is more likely to be valued on its tangible assets.
Risk also influences business value. The higher the risk, in most cases, the lower the relative value. Risk impacts the ability of the business to maintain its earnings, the stability of the cash flow or the reliability of the assets. Irrespective of the valuation method employed, variations in risk will influence value. Risk is measured at an economic, industry, business and ownership level. If you want to enhance business value, then look at areas where you can ‘de-risk’ the business without impacting on earnings. Think about ways you could reduce the risk of someone looking to buy your business.
Ideally, your business should generate and grow its earnings, its free cash flow, and its asset base. These factors, and a positive growth trend, are indicators of real value and a business that is likely to be growing in value. The absence of these factors may bring into question the value that really exists.
If you are basing commercial or tax decisions on your business value, have a business valuation completed. At least then you have a third party opinion of what your business is really worth. Please contact Brett or Matt on 9531-0922 if you would like any assistance with this.
Couples work twice as long for a home
Australians have to work almost three times harder to pay off the average family home than they did 50 years ago.
Figures compiled by CommSec for The Sunday Telegraph reveal homebuyers on the average income now have to work for 19,374 hours to buy the average Australian house with the average mortgage.
Based on an eight-hour day and a five-day working week, that equates to about 10 years of work. In reality, it takes much longer to own a home, because wages must pay for all living expenses, not just housing.
In 1960, it took hombre just 7,500 hours to pay off the average mortgage.
CommSec chief economist Craig James said that half a century ago, average wage-earners took home the equivalent of $1.08 an hour. They needed to work 25 hours to meet the monthly mortgage repayment of $25, based on an average five per cent interest rate and a mortgage of $4,620.
Today, the average worker earning $30.04 an hour spends 70.7 hours - or almost two weeks of the month - at work to cover the monthly mortgage repayment for an average $283,000 loan at a 6.64 per cent interest rate.
The figures show rising costs and growing property prices have largely outstripped wages and young couples today need to work longer and harder to achieve the great Australian dream of owning their homes.
Whereas homes were once affordable on a single wage, families now realistically need two incomes to fund a mortgage. "This is your single biggest purchase," Mr James said. “In Australia, unlike other countries, there was a lot of pressure to buy rather than rent and homeowners often saw their mortgages as a method of saving.”
"Records from the Commonwealth Bank suggest more than 70 per cent of people are paying more than they need to in terms of their home loans, so they're ahead of their loans.”
"People see the home as a way of saving; they see it as an outlet for their finances. In other parts of the world, that's not the case, but Australia has always had an affinity with the home.”
"In the 1960s, it was a simpler life. Now more money is spent on housing, computers, the internet, mobile phones, whereas before it was food, clothing, transport.
You know you’re having a bad day when you get an $88,000 Fringe Benefits Tax bill from the Tax Office for a car that you thought was exempt. This is exactly what happened to one taxpayer.
A sole director of a company bought a Lexus in June 2004 for $119,000. The Director purchased the car through his company for use in the business (100% business use by the Director). The company operated from the same block of land as the Director’s principal place of residence but the two buildings were divided by a wall and had separate driveways and letterboxes. As the car was for business use and garaged at the business, it was assumed that FBT did not apply and as a result, no FBT returns were lodged. No log books were kept evidencing the business use of the car until the Tax Office announced their intention to audit the business.
Following an FBT audit in 2009, the Tax Office gave the Director an assessment for just under $88,000 in outstanding tax. The Director challenged the Tax Office’s assessment as “excessive” but lost. The reason for the assessment is that the FBT Act states that a vehicle will be available for private use (and subject to FBT) if the car is garaged or kept “at or near a place of residence of the employee or an associate of the employee.” In this case, the Administrative Appeals Tribunal found the Lexus was kept ‘near’ the Director’s place of residence and as a result, gave rise to a car fringe benefit for each day it was garaged there.
Another complicating factor for the Director and the company was that the operating cost method, commonly called the log book method, could not be used to evidence the business use of the car. To use the operating cost method you need to make an ‘election’ to the ATO that you will be using this method and keep a log book and other appropriate records. The Director only had a partial log book compiled after the audit was announced. The Tax Office will accept the non-lodgement of an FBT return as an election if there are no taxable fringe benefits. However, and this is the important part, you still need to keep a log book and other documents to show how you arrived at a nil FBT position.
If there are no records to show how you arrived at a nil FBT position, the statutory method will apply instead. The statutory method uses a prescribed formula to calculate the FBT liability that hinges on the number of days the car fringe benefit is provided (in this case, 365 days a year!). In this case, as no election to use the operating cost method had been made, the Tax Office used the statutory method to calculate the company’s FBT liability.
While this particular case is unusual because the Director’s principal place of residence was on the same block of land the company operated from, there are a couple of key points that all employers (including the self employed) should take away:
• Always keep records to justify your tax decisions; and
• Be aware of what method you need to use for FBT and motor vehicles
As always with tax, the devil is in the detail.
For motor vehicles, it’s important to have a record of what cars are subject to FBT, when things change, periods of use, and the method being used to calculate FBT. If you use the statutory method, make sure you do an odometer reading at the end of the FBT year on 31 March, and if you have elected to use the operating cost method, make sure that your log books are current.
Don’t forget that informal arrangements between employers and employees can unintentionally give rise to an FBT liability - such as allowing employees to use company cars for private use over a weekend.
Did you claim the Small Business Tax Break for 2009?
If so, and if you are paying PAYG instalments for the 2010 year, be aware that the ATO will generally calculate PAYG instalments based on the prior year taxable income (less any capital gains income).
We recommend that all business taxpayers (companies or individuals) which made a deduction claim under the Small Business Tax Break provisions for motor vehicles or equipment purchased prior to 30 June 2009, contact us to look at estimating your 2010 taxable income and likely tax liability so as to ascertain whether you will have a large tax deficit to pay due to insufficient PAYG instalment credits. A lot of taxpayers will be caught by this. Don’t be one of them.
Key Dates for March/April 2010
• 21 March – February monthly Instalment notice & Activity Statement is due.
• 31 March – due date for lodgement of 2009 income tax returns for companies or super funds with total gross income of over $2 million. Payment of balance of 2009 tax liability is also due by this date.
• 31 March – Last day of 2009/2010 Fringe Benefits Tax year. Employers should ensure employees keep a record of car odometer readings on this day.
• 21 April – March monthly Instalment notice & Activity Statement is due
• 28 April – March quarter Instalment notice due
• 28 April - Super guarantee contributions for March quarter must be made by employers to employees’ fund by this date. Employers who do not pay minimum super contributions for the March quarter by this date must pay the super guarantee charge and lodge a “Superannuation guarantee charge statement – quarterly” with the ATO by 28 May 2010. The super guarantee charge is not tax deductible.
The material and contents provided in this publication are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.
