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Practice Update - November 2017

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P r a c t i c e  U p d a t e

November 2017

Reporting of transfer balance account information

Editor: The recent superannuation reforms introduced the concept of a 'transfer balance account', to basically record the value of member balances moving into or out of 'retirement phase'.

In order to monitor these amounts, the ATO is introducing new reporting requirements and forms.

The ATO has released the new Transfer Balance Account Report (‘TBAR’), which is now available on ato.gov.au, and the ATO plans to have an online TBAR form available from 1 January 2018.

The TBAR is the approved form to provide data relating to transactions associated with the payment of retirement phase income streams to the ATO.

Reporting on events that affect a member’s transfer balance account is vital to minimising the taxation consequences if the transfer balance cap is exceeded.

While SMSFs will not be required to report anything until 1 July 2018, SMSFs can use the TBAR to report events that affect an individual member’s transfer balance account from 1 October 2017.

SMSFs with relatively straightforward affairs are likely to have only a few events per member to report over the life of the fund, including the commencing values of any retirement phase income streams to which an SMSF member is entitled (e.g., account based pensions, including reversionary income streams), and the value of any commutation of a retirement phase income stream by an SMSF member.

ATO's occupation-specific guides

The ATO has developed occupation-specific guides to help taxpayers understand what they can and can’t claim as work-related expenses, including:

n          car expenses;

n          home office expenses;

n          clothing expenses; and

n          self-education or professional development expenses.

The guides are available for the following occupations:

q         construction worker;

q         retail worker;

q         office worker;

q         Australian Defence Force;

q         sales and marketing;

q         nurse, midwife or carer;

q         police officer;

q         public servant;

q         teacher; and

q         truck driver.

Binding Death Benefit Nomination ('BDBN') upheld

A recent decision by the Full Court of the South Australian Supreme Court has provided guidance about the operation of BDBNs.

Editor: Members of super funds may generally make a BDBN directing the trustee of the fund to pay out their superannuation benefits after their death in a particular way and/or to particular beneficiaries.

In this case, the member had executed a BDBN that nominated his legal personal representative (‘LPR’) as the beneficiary to receive his death benefits.

Because he frequently lived outside Australia, he had also executed an enduring power of attorney (‘EPOA’) allowing his brother to be the sole director of the corporate trustee of his SMSF in his place.

Following his death, the executor of his estate (Dr Booth) brought an action for declarations that the trustee was bound by the BDBN. 

Editor: Both the executor of a will and a person acting under an EPOA are 'LPRs' for superannuation purposes.

The Full Court held that the BDBN was effective and that Dr Booth, as executor of the will, was the LPR for these purposes.

Although the brother was the LPR of the deceased during his lifetime, the EPOA was terminated upon his death.

Reforms to stop companies avoiding employee entitlements

The Government will introduce new laws to stop corporate misuse of the Australian Government’s Fair Entitlements Guarantee (FEG) scheme.

The FEG scheme is an avenue of last resort that assists employees when their employer’s business fails and the employer has not made adequate provision for employee entitlements, but it is clear that some company directors are misusing the FEG scheme to meet liabilities that can and should be paid directly by the employer, rather than passed on to Australian taxpayers.

The proposed changes will:

u         Penalise company directors and other persons who engage in transactions which are directed at preventing, avoiding or reducing employer liability for employee entitlements;

u         Ensure recovery of FEG from other entities in a corporate group where it would be just and equitable and where those other entities have utilised the human resources of the insolvent entity on other than arm’s length terms; and

u         Strengthen the ability under the law to sanction directors and company officers with a track record of insolvencies where FEG is repeatedly relied upon.

These changes will be targeted to deter and punish only those who have inappropriately relied on FEG, and so should not affect the overwhelming majority of companies who are doing the right thing.

Editor: The Government has separately released a ‘Comprehensive Package of Reforms to Address Illegal Phoenixing’, which will assist regulators to better target action against those who repeatedly misuse corporate structures and enable them to take stronger action against those entities and individuals.

These reforms will include (for example) the introduction of a Director Identification Number (DIN) (to identify all directors with a unique number), and making directors personally liable for GST liabilities as part of extended director penalty provisions.

Can travel in an Uber be exempt from FBT?

Editor: The ATO has released a discussion paper to facilitate consultation regarding the definition of 'taxi' contained in the FBT Act, and the exemption from FBT for taxi travel undertaken to or from work or due to illness.

Although the provision of travel by an employer to an employee would generally be a benefit upon which FBT would be payable, employers are specifically exempted from having to pay FBT in respect of travel undertaken by their employees in a 'taxi' to or from work or due to illness of the employee.

The ATO has previously advised that this exemption "does not extend to ride-sourcing services provided in a vehicle that is not licensed to operate as a taxi."

However, in light of a recent Federal Court decision regarding Uber, and proposed changes to licensing regulations in a number of states and territories, the ATO is reviewing its interpretation of the definition of 'taxi' in the FBT Act and may adopt an interpretation that accepts that a taxi may include a ride-sourcing vehicle or other vehicle for hire.

Editor: Until this matter is resolved, private travel (including between home and work) undertaken using ride-sourcing vehicles and other vehicles for hire may possibly be exempt from FBT under the minor benefits exemption.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

A NEW ALLIANCE!

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We have recently created an alliance with a financial planning partner that allows us to bring you an even wider range of services. The alliance lets us concentrate on the things that we do best, while ensuring that you get the same high-quality service when you need any form of financial planning. 

Please click HERE for more information or contact us at info@middlewise.com.au.

Practice Update - September 2017

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P r a c t i c e  U p d a t e

September 2017

ALP announces massive (potential) changes to trust taxation

Editor: Although we don't normally report on Opposition tax policies, this policy change is so fundamental, and the existing state of the Federal Parliament is so chaotic, that we believe it's worth bringing this to your attention.

The Leader of the Opposition, Bill Shorten, has announced that a Labor Government (should they be elected) will introduce a standard minimum 30% tax rate for discretionary trust distributions to "mature beneficiaries" (i.e., people aged 18 and over).

Although the ALP acknowledges that individuals and businesses use trusts for a range of legitimate reasons, such as asset protection and business succession, "in some cases, trusts are used solely for tax minimisation."

Labor’s policy will only apply to discretionary trusts, so other trusts – such as special disability trusts, deceased estates and fixed trusts – will not be affected by this change.

Labor’s policy will also not apply to farm trusts and charitable trusts, and other exemptions will apply, such as for people with disability (the Commissioner of Taxation will be given discretionary powers to manage this). 

Their announcement also reiterated their other policies regarding tax reform, including further changes to superannuation, changes to negative gearing and CGT, and limiting deductions for managing tax affairs.

Single Touch Payroll update

A limited release of 'Single Touch Payroll' began for a small number of digital service providers and their clients on 1 July 2017, with Single Touch Payroll operating with limited functionality for a select number of employers.

Editor: Single Touch Payroll will effectively require some employers to report information regarding payments to employees (or to their super funds)in 'real time', via their payroll software.

The following timeline sets out what is happening in the lead-up to the mandatory commencement of Single Tough Payroll next year.

September 2017 – the ATO will write to all employers with 20 or more employees to inform them of their reporting obligations under Single Touch Payroll.

1 April 2018 – employers will need to do a headcount of the number of employees they have, to determine if they need to report through Single Touch Payroll.

From 1 July 2018 – Single Touch Payroll reporting will be mandatory for employers with 20 or more employees.

 

Keeping ABN details up to date

The ATO finds that businesses tend to forget to update their Australian business number (ABN) details in the Australian Business Register (ABR) when their circumstances or details change, so they have asked that we contact our clients to help keep your ABN details up to date and reduce unnecessary contact from the ATO.

In particular, the ATO says that many partnership and trust ABNs are not in operation, or their business structures have changed, so please let us know if:

n    your business is no longer in operation (so we can cancel the ABN); or

n   if your business structure has changed (so we can cancel the ABN for the old
 structure before applying for a new one).

The ATO also recommends that we add alternative contacts to clients' ABN records (so please provide us with alternative contact information, if possible), and to update the ABN records where any contact details have changed.

Register trading names with ASIC

By 31 October 2018, businesses will need to register any existing or old trading names as a business name with the Australian Securities & Investments Commission (ASIC) in order to continue operating with it.

The ABN Lookup website will reflect these changes and will only display business names registered with ASIC from this date.

 

Limited opportunity to avoid 'transfer balance cap' problems

If the total value of a superannuation fund member's pensions exceeded $1.6 million on 1 July 2017, they may face adverse tax consequences.

However, there is a transitional provision that permits a minor excess over $1.6 million to be ignored, subject to certain conditions being met.

Basically, this will be satisfied if the value of their pension interests on 1 July 2017 exceeded $1.6 million by no more than $100,000 (i.e., their total value did not exceed $1.7 million), but the member is able to commute the pension(s) by an amount that is at least equal to that excess no later than 31 December 2017. 

This will mean that no 'transfer balance cap' consequences arise (e.g., no 'excess transfer balance earnings' will accrue on the excess and no 'excess transfer balance tax' will become payable).

Therefore, it is important that this issue is identified and, if applicable, dealt with promptly.

Editor: Please contact us if you believe this may affect you and you need more information.

New Approved Occupational Clothing Guidelines 2017

The government has issued new guidelines to set out criteria for tax deductible non-compulsory uniforms.

Editor: The taxation law only allows a deduction to employees for expenditure on uniforms or wardrobes where either:

u    the clothing is in the nature of occupation specific, or protective clothing; or

u    the wearing of the clothing is a compulsory condition of employment for employees
       and the clothing is not conventional in nature; or

u   where the wearing of the clothing is not compulsory, the design of the clothing is
       entered on the Register of Approved Occupational Clothing.

The new guidelines outline (among other things):

q    the steps that need to be undertaken by employers to have designs of occupational       
  clothing registered; and

q    the factors that will be considered in determining whether designs of occupational
  clothing may be registered.

The guidelines commence on 1 October 2017, and the previous Guidelines are revoked with effect from the same day.

 

Ability to lodge nil activity statements in advance

The ATO generally issues activity statements by the end of the relevant month under their normal processes, allowing the statement to be lodged by 21 days after the end of the month, or 28 days after the end of the relevant quarter (as appropriate).

However, the ATO recognises that there may be a specific reason for a taxpayer to access their activity statements early, so activity statements can be generated early in some cases, such as where the taxpayer is going to be absent from their place of business before the end of the reporting period (and the business will not be trading during that period), or if the taxpayer's entity is under some form of administration, or the business has ceased.

Editor: There are certain eligibility requirements to take advantage of this service, so please contact us if this is of interest to you.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

Practice Update - July 2017

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P r a c t i c e  U p d a t e

July 2017

Removal of the Temporary Budget Repair Levy from the 2017/18 income year

The 2% Temporary Budget Repair Levy (or ‘TBRL’), which has applied to individuals with a taxable income exceeding $180,000 since 1 July 2014, is repealed with effect from 1 July 2017. 

Up until 30 June 2017, including the TBRL and the Medicare Levy, individuals earning more than $180,000 faced a marginal tax rate of 49%.

With the benefit of the removal of the 2% TBRL, from 1 July 2017, individuals with a taxable income exceeding $180,000 face a marginal tax rate of 47% (including the Medicare Levy). 

Editor: Don’t forget to add another 1.5% for the Medicare Levy Surcharge for certain individuals that don’t have Private Health Insurance.

 

Extension of the $20,000 SBE Immediate Deduction Threshold

In the 2017/18 Federal Budget handed down on 9 May 2017, the Federal Government announced that it intended to extend the ability of Small Business Entity (or ‘SBE’) taxpayers to claim an outright deduction for depreciating assets costing less than $20,000 until 30 June 2018.  This Budget Night announcement has now been passed into law.

Prior to the relevant legislation being passed into law, the outright deduction threshold for SBEs in relation to depreciating assets was scheduled to revert back to $1,000 as of 1 July 2017.  Now that this change has become law, the threshold is scheduled to revert back to $1,000 as of 1 July 2018.

To qualify for an immediate deduction for depreciating assets purchased by an SBE taxpayer costing less than $20,000, the asset needs to be first used or installed ready for use on or before 30 June 2018.

Editor:  The ‘aggregated turnover’ threshold to satisfy the requirements to be an SBE taxpayer has increased from $2 million to $10 million, as of 1 July 2016.  As a result, more business taxpayers than ever before will be eligible for the $20,000 immediate deduction for depreciating assets. 

Please contact our office if you need any assistance in determining if your business is an SBE, whether an asset purchase you are considering will qualify as a “depreciating asset” and/or what constitutes being “used or installed ready for use”.

  

Simpler BAS is coming soon

The ATO is reducing the amount of information needed to be included in the business activity statement (or ‘BAS’) to simplify GST reporting.

From 1 July 2017, Simpler BAS will be the default GST reporting method for small businesses with a GST turnover of less than $10 million.

In relation to GST, small businesses will only need to report:

G1 - Total sales

1A - GST on sales

1B - GST on purchases.

This will not change a business’ reporting cycle, record keeping requirements, or the way a business reports other taxes on its BAS.

Simpler BAS is intended to make it easier for businesses to lodge their BAS.  It should also reduce the time spent on form-filling and making changes that don't impact the final GST amount.

The ATO will automatically transition eligible small business' GST reporting methods to Simpler BAS from 1 July 2017.

Small businesses can choose whether to change their GST accounting software settings to reduce the number of GST tax classification codes.

Editor:  Call our office if you need help with the transition to Simpler BAS or to decide whether your business will use reduced or detailed GST tax code settings in its GST accounting software.

 

Changes to the foreign resident withholding regime for sales of Australian real estate

Since 1 July 2016, where a foreign resident has disposed of real estate located in Australia, the purchaser has had to withhold 10% of the purchase price upon settlement and remit this amount to the ATO, where the market value of the property was $2,000,000 or greater. 

As a result of another 2017/18 Budget Night announcement becoming law, in relation to acquisitions of real estate that occur on or after 1 July 2017, the withholding rate has increased to 12.5% and the market value of the real estate, below which there is no need to withhold, has been reduced to $750,000. 

Editor:  Unfortunately, even if a sale of real estate with a market value of $750,000 was to take place between two siblings on or after 1 July 2017 (both of whom have been Australian residents for 50 plus years), withholding must occur unless the vendor obtains a ‘clearance certificate’ from the ATO – despite the two siblings clearly knowing the residency status of each other!

These changes highlight the need to obtain clearance certificates where the vendor is an Australian resident and the real estate is worth $750,000 or more - not a high exemption threshold given the sky-rocketing values of Australian real estate!  If you are buying or selling real estate worth $750,000 or more (including a residential property, i.e., home) please call our office to see if a clearance certificate is needed.

Change to deductions for personal super contributions

Up until 30 June 2017, an individual (mainly those who are self-employed) could claim a deduction for personal super contributions where they meet certain conditions. One of these conditions is that less than 10% of their income is from salary and wages.  This was known as the “10% test”.

From 1 July 2017, the 10% test has been removed.  This means most people under 75 years old will be able to claim a tax deduction for personal super contributions (including those aged 65 to 74 who meet the work test).

Editor: Call our office if you need assistance in relation to the application of the work test for a client that is aged 65 to 74.

Eligibility rules

An individual can claim a deduction for personal super contributions made on or after 1 July 2017 if:

r         A contribution is made to a complying super fund or a retirement savings account that is not a Commonwealth public sector superannuation scheme in which an individual has a defined benefit interest or a Constitutionally Protected Fund;

r         The age restrictions are met;

r         The fund member notifies their fund in writing of the amount they intend to claim as a deduction; and

r         The fund acknowledges the notice of intent to claim a deduction in writing.

Concessional contributions cap

Broadly speaking, contributions to super that are deductible to an employer or an individual, count towards an individual’s 'concessional contributions cap'. 

The contributions claimed by an individual as a deduction will count towards their concessional contributions cap, which for the year commencing 1 July 2017 is $25,000, regardless of age.  If an individual’s cap is exceeded, they will have to pay extra tax.

Editor:  Call our office to discuss the eligibility criteria and tax consequences of claiming a tax deduction for a personal contribution to super for the year commencing 1 July 2017.

Please Note: Many of the comments in this publication are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

Financial Misery or Financial Happiness. What Makes the Difference?

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Most people will quite literally earn millions of dollars in their lifetime. Yet many people struggle financially and live from one pay period to the next.

With the ageing population and many Baby Boomers now continuing to work—at least on a part-time basis—past the traditional retirement age, people are working more years than ever. Even if a person works only 40 years, at average earnings, that's a lot of money.

It is said, “Money talks”, but for many, all it ever says is, “Hello, and Good-bye”.

Have you ever found that the month lasts longer than the money? Or have you ever got your tax return and looked at all the money you have earned over the past 12 months and then thought, “Where has it all gone?”

You're not alone. And the good news is, now there's a simple solution.

There's a great quote from Charles Dickens’ book David Copperfield where the character Mr. Micawber says to Copperfield, “Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

This is so true, regardless of the income level.

Yet keeping track of what you spend your money on, for many, is too hard, too laborious. The benefits of doing so are obvious to anyone, yet the discipline to keep all your receipts, enter the information into a program like Quicken Personal or MS Money (or just to write it into a paper ledger), and keep that going consistently over time is beyond most of us.

Well ... and here's the good news ... what if a piece of software could track and categorise what you spent your money on, but it involved very little effort by you?

Imagine the clarity you'd get if you knew exactly how much you have spent and what percentage of your income is going on the various areas including mortgage/rent, vehicles, groceries, schooling/education, eating out, entertaining, mobile phones and internet, medical and pharmaceutical, and so on.

For most people, it would be a real eye opener.

It is said that knowledge equals power.

That is very true when it comes to your personal finances.

Once you can objectively see exactly how your lifestyle and your habits—that is, you—are spending your money each year, and month-to-month as you go, you then have the power to make decisions on where you can change your spending (and saving!) habits.

In this information age and electronic era, many of us use credit cards, debit cards and EFT when buying things. We have now reached a point for the first time in history where more money is exchanged electronically than through cash transactions.

That's a lot of transactions. And it's a lot of data.

This data is available to be analysed on a societal basis, industry basis, business basis and ... a personal basis.

And that's where a brilliant tool comes into play: Xero Cashbook

Here's how it works ...

Xero Cashbook is online software. It's the non-tax-tracking version of the Xero software used by businesses.

It analyses and categorises all your electronic transactions to give you a snapshot of your complete financial position in an instant. This also organises a view of all your bank accounts and credit card accounts in one place. Very handy.

This is precisely what a lot of people have been waiting for: An easy way to track and control your finances.

Xero Cashbook categorises your spending and saving, so you can tell whether your money is being used for essentials or you're splashing out on other things.

If you are concerned about security, Xero protects your financial data with 128-bit SSL encryption, the same as online banking. Your data is well protected.

You can also invite people you trust, such as your spouse, accountant or other financial advisor, to access your Xero reports for free. This means that as your advisors we can see the true picture of your finances and spending habits, and help you stay on track.

This allows us to help you plan ahead and make the most of your money.

You will never before have felt so in control of your personal finances.

Being web-based, rather than being stuck on one computer like traditional software, you can access Xero from home, work and even on your smartphone such as an iPhone and Android device.

If you'd like us to step you through getting set up with Xero Cashbook, or their Xero equivalent for Business, or both, get in touch and we'll hand hold you through the process. It's not difficult, and once your bank accounts are set up, it happens automatically from there.

The way we see it, the more clients we help keep track of their finances in such an easy way, the more clients who will prosper and find financial happiness instead of financial misery, to paraphrase Dickens' Mr. Micawber.

Your next step... Get in touch with us to make a time to meet and discuss your options. We'll then outline the costs so you know exactly what lies ahead.

It's time to stop saying "good-bye" to so much of your money each year!

Business Owners: Why Cash is King, Profit is Theory

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There’s a saying in business, “You can go broke making a profit.” And another, “Cash is king. Profit is theory.”

As you know only too well, you don’t pay rent, meet payroll or pay your bills with profit.

You pay them with cash.

A business can make a lot of sales, have a book full of orders, have delighted customers and clients, have a great reputation, be growing, and yet still go broke.

Why? Cash flow.

The business might be profitable on paper, but have no money left in the bank. They cannot pay their bills and they become insolvent.

A growing business is often hungry for cash ... hungry for inputs so it can make the business’ outputs, be they physical products, services or a combination of both.

The tragedy in this is that cash flow crises can often be averted. They can be predicted, planned for, and then contingency measures put in place.

For example, if a business has seasonal effects where some months are busier than others, or if a business knows it has some jumps in expenses or fixed costs approaching—such as moving to a larger premises or hiring more staff to cope with growth—then these expenses can be planned for and compared with the planned income in those months.

Which would you prefer to do?

(A) Call your bank manager and ask for a short-term loan or increase in overdraft when you are urgently in need of the cash (and therefore stressed, and desperate, and not in a great frame of mind to negotiate good terms), or

(B) Call your bank manager 6 months in advance and meet with him or her to explain the coming cash crunch, the reasons behind it, and plan for the funding in a calm, relaxed, totally-in-control manner?

Not only would you get the loan, you’d impress the bank manager and strengthen the relationship for further funding, should it be needed to support your growth.

The bank manager would see you are a professional operator with a planned approach to your business, not a fly-by-the-seat-of-your-pants operator. (They see a lot of those. They don’t like doing business with them.)

Apart from the relationship with your bank, there’s the immediate effect of sleeping better at night.

We all seek a level of certainty to comfort us. Knowing what lies ahead in business and planning your cash flow gives you peace of mind and confidence in your day-to-day work that will rub off on those around you...

...in your workplace and at home. It’s a good feeling.

This is one of the reasons we are so passionate about helping our clients put together cash flow forecasts, to help them keep their business on track and to avoid any stressful, unpleasant surprises in the coming months.

It doesn’t matter whether a business is a one-person hairdressing or lawn mowing business, or a 10 person, 20 or 200+ person business.

Every business needs a cash flow forecast.

Running your business without a cash flow forecast is like driving a car at night along a dark country road with only your normal headlights on. It’s hard to see what lies ahead. Some wildlife might come right out in front of you, leaving no time for you to react. CRASH!

On the other hand, a cash flow forecast is like driving along that country road with high beam on. You can see so much more. You can drive with much more confidence. Less stress. And avoid the CRASH!

Another thing we often find in helping our clients build realistic cash flow forecasts, is that we can spot problems and make suggestions that help improve the business’ cash cycle. This puts money in your bank account.

For example, a combination of negotiating better terms with suppliers, tightening up or at least clarifying and enforcing your business’ own credit terms, and reducing stock holding and waste can have a powerful positive effect on your cash flow.

So, if a cash flow forecast is so crucial, why do many businesses not have one?

Simple. Business owners get busy. Busy pleasing customers or clients. Busy dealing with staff. Busy paying suppliers. Busy generating sales.

Also, it’s easy to get ‘too close’ to your own business. “You can’t see the forest for the trees,” as the saying goes.

Having an independent and fresh pair of eyes come in and look at your business—especially cash flow which is its life blood—allows opportunities for improvements to be identified. Things that are there, but difficult for the business owner to see amidst the ‘busy-ness’ of it all.

So, what should do about it? Call us. Take action. A cash flow forecast costs less than you think.

It’s time to turn those high beams on!

Your next step ... Contact us here to make a time to meet and discuss your options. We’ll then outline the costs so you know exactly what lies ahead.

Hope for the Best, Plan for the Worst: Why a Business Succession Plan Is Essential

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While everyone wants their businesses to be successful and operate for a long time, you may not necessarily want to remain at the helm.

As some point, you may want to pass the business on to your children, or to someone else in the company. You may want to sell your share to your business partner. Or you may want to sell the business to another person or company, and retire on the proceeds.

Ideally, you will choose the timing and method of your exit from the business. However, the way life unfolds sometimes, business owners do not always have a choice in what happens, or when.

For example, what would happen if you or your business partner suddenly passed away or became incapacitated?

That’s a stressful enough time for everyone as it is, without having the business (and the financial well-being of the families involved) suffer as a consequence.

To ensure the future of your business, and to cater for loved ones, you need to plan for a range of possible exit scenarios.

This is what’s known a Business Succession Plan.

Every business needs a succession plan, just as every person needs a professionally prepared Will and Estate Plan.

Horror stories happen. Don’t be one of them.

You may not think you need a succession plan. After all, you may have children old enough to take over the reins. Or perhaps you have people in your company who’d love to run the business.

But without a business succession plan, anything could happen.

Imagine this scenario…

A business with two partners or shareholders suddenly experiences the loss of one of the partners in a car accident. Without a succession plan in place, the surviving partner automatically goes into business with the deceased partner’s spouse. They might have had a great relationship on a personal basis, but running a business together and making financial decisions changes the nature of the relationship, instantly. The partners may not agree on the direction of the business, the growth plans for the business, or on how much various people in the business should be paid.

It’s a recipe for conflict.

Or perhaps the surviving spouse wants nothing to do with the business and wants to be bought out of the business as soon as possible.

But what if the surviving business partner does not have the available funds to buy the remaining share in the business, despite being offered a very reasonable price.

They’re stuck. The business–and their stress levels–will suffer.

So, what can you do to avoid such horror stories?

Passing on the baton

So who will be your successor? Will it be someone in your family? A senior employee of your company? Another business owner?

While you may want to “keep it in the family”, it might not be such a good idea with research showing that more than 65% of family businesses fail in the hands of the second generation and another 20% fail when the business passes to the third generation.

Your successor needs two things above anything else: a passion for the business and the skills to run it. And while you can bring them on board early to learn the skills, passion is something you can’t create for them. They either have it or they don’t.

If it turns out someone in your family is passionate about the business, and they have the skills needed to run it (or can learn them), then great. But if that’s not the case, you may be better off handing the baton on to someone else.

Plan early, plan often

So when should you create your business succession plan? According to Craig West, chief executive and president of the Australian chapter of the Exit Planning Institute, you should have started about two years ago.

In an interview with Startup Smart, West says it can take up to two years to get a business ready for sale, and to find the right buyer. “It takes 18 months to two years to exit successfully. If you do it quicker, you’ll leave money on the table,” he says. So if you don’t have a succession plan in place for your business, you need to get started now. (If you’re not sure how to get started, get in touch so we can help.)

And like nearly all business documents, a succession plan needs to be kept up-to-date. Families grow and mature, employees come and go, and your plan needs to take all of that into account. There’s no point in planning to appoint a son who’s lost interest in the business, or a senior employee who has since left the business. Review your plan annually.

But first things first… you need to document your Business Succession Plan.

We can guide you in developing an effective succession plan and also ensure you have insurances in place that, for example, can fund the purchase of a deceased or incapacitated partner’s share in a business.

A well thought out and properly funded (insured) Business Succession Plan will make sure the business can continue to operate as smoothly as possible, and conflicts between surviving business partners and spouses, avoided.

You’ve worked hard to build your business. Don’t let it all fall apart once you move on.

Why Business Budgeting is More About Being Accountable, than it is About Accounting

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For many, the word ‘budget’ is about as appealing as the word ‘diet’.

It seems to imply what you will go without, rather than what you will achieve.

To a successful business owner, however, the word ‘budget’ has a very different meaning.

It’s more like a map than a diet. It’s an outline of where you want to take the business, and what you need to achieve to get there.

Running a business without a budget is like a ship’s captain setting off on a voyage without a map. Sounds ridiculous, doesn’t it. Who would do that?

Yet this is, figuratively speaking, what many business owners do.

Successful business owners, on the other hand, not only set clear targets and budgets each year, they monitor them closely each month, even each week, and adjust them as they go throughout the year.

Here are 3 compelling reasons your business needs a budget, now:

One: If you don’t know where you’re going, how do you know you’re not already there?

If you’re not satisfied with how your business is performing, unless you set clear goals for where you want to take it, it’s probably as good as it is ever going to get. At best, it will just meander along, subject to the whims and vagaries of the economy and general market conditions.

The good news is that your business doesn’t need to meander along.

The first step in charting a clear course for growing and developing your business is objectively measuring ‘where it’s at’ right now.

And the numbers do tell a story.

For some, they act as a wake up call. For others, they just confirm the journey’s starting point.

It’s paradoxical that a large part of the value in a business budget is not in the numbers themselves. It’s in the realisation and acceptance of where you are and where you want to be.

The numbers are just the signposts for the journey.

A factual look at the numbers that describe where your business is right now takes away all the subjectivity, opinions and ‘reasons’ (often excuses, disguised as reasons).

This is the naked truth.

In fact, it is like standing on the scales, naked, looking at yourself in a full length mirror. That may or may not be a pretty sight!

For your business, these factual numbers are the sales, the variable costs, the margins, the overheads, and, lastly, the profit. After all your work, this is the reward you’re left with.

Then comes the first of a series of ‘hard questions’…

  • Are you happy with that profit?
  • Is it worth it? Or are you dissatisfied? Then …
  • What do you want those figures to look like?

Answer those questions, and you’ve just described where you want to be. Congratulations! You have charted your course, which is the first step to maximising your success.

Two: What’s more important to treat? Symptoms or causes?

As you well know, sales just don’t happen. Costs don’t just drop because you want them to. Sales and costs are a result of other underlying factors. Put another way, they are symptoms of causes.

The business budgeting process quantifies the symptoms, and by asking a series of ‘What leads to this number?’ questions, it also identifies the underlying causes.

For example, underlying factors contributing to a sales (revenue) figure could include:

  • the number of calls made,
*
  • the number of customers walking through the door,
*
  • the percentage of conversions of enquiries or walk-ins to sales, the dollar value of the average transaction, or simply
*
  • where your marketing is targeted.

These are all called drivers.
The sales figures are simply a result of these drivers. Costs are no different.

For example, the rent paid may be a result of the storage you need for your stock levels. Wages costs may be blowing out as a result of overtime paid but underlying that may be inefficient staff. Or a lack of clear processes. Or both.

So in reality what came first was not the sale or the cost, but their underlying drivers. The budgeting process forces you to name and to quantify these underlying drivers.

That’s one of the most valuable aspects of preparing your budget. Not the budget itself, per se, but identifying your business’ drivers.

Why?

Because then you can focus on improving them.

That’s what will produce the improved results in your business. No focusing on last quarter’s figures. That’s history.

It’s more fun to create history. And that is, in essence, what you are doing when you are in your own business. You are captain of your own destiny, and you can steer it in any direction you want.

Note that word … direction. A key point is to have one.

You will enjoy how effectively the budgeting and planning process will get you crystal clear on your direction.

Three: Budgeting is not about accounting. It’s about being accountable.

Once you are clear on the handful of drivers that creates your business’ results, the next question is…

What are you going to do about it?

Your budget won’t just give you a monthly sales target, for example, it will help you quantify the drivers that will produce the result.

For example, if next month’s sales target is $120,000, that end-result figure is not your focus. Not on a day-to-day basis. Knowing the underlying drivers, your focus will instead become, for example:

  • 25 calls per day (Driver No.1)
  • At 80% conversion rate (Driver No.2), with
  • Each customer buying an average of $300 worth of products (Driver No. 3).

Now you and your staff have a clear focus and are 100% accountable.

That’s good for them, and good for you and your business.

People in a business want a clear scoreboard and a ‘game to play’ so they know whether or not they are winning. Research has found that a lack of measurement in a job is demotivating to a staff member. Patrick Lencioni’s book ‘3 Signs of a Miserable Job’ gives some great examples of this.

Knowing these drivers, and quantifying a target for each you can then ask questions like:

  • Have the 25 calls been made today?
  • If not, why not? Is the target realistic?
  • Does the team need training?
  • Do they need better telephone equipment or dialing software?
  • Or just more focus?
  • Or guidance on what their task priorities should be?
  • Or a combination of these?
  • Are we being effective and converting 80% of the calls?
  • Again, if not, why not?

You can then decide to improve skills, or systems, or attitude, or all three!

As you can see, the power of the budget is in the process of preparing it, and then the budget itself is a tool to hold you accountable to the measurable indicators you’ve chosen.

An added layer of accountability is… us.

We work with a number of clients where, on either a monthly or quarterly basis, we act as a sounding board and independent party to ask you the hard questions about the drivers and the results. This focuses your mind, allows you to form a clear Action Plan to improve results, and then increases your chances of success because you know you need to report in to us next time.

It’s a powerful process that you’ll enjoy due to the focus it creates and, in turn, the results that focus achieves in your business.

To take more control of your business and its performance, get in touch to make a time to come in and see us. Depending on the size of your business, we might work out that a quarterly process might work best (and be the most feasible, cost-wise), or your business might be at a point where monthly or even weekly guidance would be ideal.

Either way, we’ll outline your options and your costs so you know precisely what’s involved.

We look forward to helping you chart your course, helping to get a clear direction, and then keeping you and your business on course.

After all, you won’t end up at the ideal destination by drifting.

The Most Common Mistake Business Owners Make When Structuring Their Business

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As a business owner, there are plenty of things you need to manage, and two of the most important of these are assets and risks.

In other words, building your wealth and protecting your wealth.

There’s no point building a lot of wealth if behind the scenes you have things structured in a way that means someone could take your assets away from you.
 
Sadly, many business owners are in precisely this predicament, without knowing it!

Following are some crucial concepts that, if you as a business owner don’t understand them and put protective measures in place, your family home (and all personal assets of you and your family) are at risk of being lost if someone decided to take legal action against your business.

Consider these facts...
  • Your business faces unpredictable risks through interaction with employees, customers/clients and creditors.
  • This means there is potential to be sued by a variety of parties. Where there are agreements in place, sometimes disagreements later result. This is life. It makes sense to accept that, and plan and protect yourself, rather than hope it never happens. 
  • Litigation, sadly, is increasing each year, largely driven by lawyers offering ‘no win, no fee’ services. 
  • This encourages people to take legal action. They have nothing to lose, after all. 
  • This means you need to ‘build a wall’ between your business risks and your personal assets otherwise you risk losing it all. 
  • This ‘wall’ protects you and your family from losing assets such as your house or personal investments, if your business was to be sued. 
  • The wall is created by strategic use of companies and trusts, and also deciding who within a married couple, for example, should and should not be a Director of each company. This is a key point. One seemingly simple mistake in this area can cost a family their house. 
  • The standard type of will puts your family’s assets at risk, because if the person who dies holds the family’s personal assets in their name, ownership of these assets will revert to the person who through their Directorships in the business, is at a much higher risk of being sued.
This presents significant risk.

So what can you do about it?

If you haven’t looked at your asset protection structure in the past 12 months, you need to make that a priority.

Then this should be reviewed annually.


Why? 

As your life changes, your asset protection strategies—your ‘wall’—needs to be checked that it is still appropriate.

As part of this process we also ensure your wills and estate planning are in order. Remember, the standard type of will can bring down your wall.

In addition to wills, there are other important documents to have in order such as an enduring power of attorney. This is a legal document that can give someone else—the person you choose—the power to make personal or financial decisions on your behalf

You see, it is far more common for someone to become incapacitated through accident or trauma such as stroke, than it is to suddenly die. If this happens to you, you may not be able to communicate your wishes and make decisions when you need to. 

The consequences of this are dire and tragic. 

It’s all about choices and about ensuring you protect your family and your assets. Without sound asset protection and effective wills and estate planning in place, the legacy you have been working so hard to build may not end up in the hands of the people you intend.

The potential distressing nature of this type of scenario is why we feel so passionate about asset protection and estate planning... because it’s all about protecting the families we serve.

If you’re anything like our many other clients who have these structures in place, we think you’ll find the costs of ‘building these walls’, so to speak, relatively minor compared to the protection they give you and your family.

Your next step... Call us on 1 300 574 108 or email us to make a time to meet and discuss your options. We’ll then outline the costs so you know exactly what lies ahead.

Why Every Business Needs a CFO (and How Small Businesses Can ‘Rent a Slice’ of one)

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Larger businesses have a Chief Financial Officer (CFO) on staff. But what can small and medium sized businesses do in this regard?

Clearly, larger businesses can afford an in-house CFO. But it goes beyond an affordability issue: Large, successful businesses also understand how crucial the CFO role is to their business performance.

The CFO in a business:

  • Keeps a close eye on the numbers and trends,
  • Alerts management when preventative actions are required,
  • Helps management create sound forecasts and plans,
  • Ensures the cash inflows and outflows are managed well so the business never runs out of cash or needs to borrow in haste,
  • Reports on revenues achieved compared with targets,
  • Gives solid information on a range of Key Performance Indicators (KPIs) to the business decision makers, and also
  • Helps management with decision making.
  • This is management input that all businesses require regardless of their size. But how can small and medium sized business access CFO-level input and guidance?

    The answer: You out-source it. You get a part-time, out-sourced CFO until you can afford one full-time.

    That’s where we play a role for many of our business clients.

    Our ‘Your CFO’ service has been developed with input from our clients to make sure it’s the ideal mix of support services and affordability.

    As your CFO we roll our sleeves up and work with you in management meetings throughout the year on:

    • Cash flow – Efficient management of cash flow to provide cash for saving or investing in growth
    • Profitability – Identifying key drivers of profit and focusing on these
    • Business value – Growing a valuable and saleable business asset
    • Structure management – Staying on top of risk and taxation issues 
    As business owners we all need to measure and monitor Key Performance Indicators (KPIs). That is, the handful of numbers that really matter in running our business. 
     
    It is also important that you have a ‘KPI dashboard’ to display your KPI targets compared with your current KPI performance. This helps tremendously in monitoring and managing your business’ performance and, ultimately, hitting your targets.

    As your outsourced CFO, we will bring to each meeting that we conduct with you clear financial reports, easy-to-understand KPI information, as well as our commercial experience to interpret the information, make suggestions and help guide your decision making.

    Items we’ll discuss each meeting include:

  • Profit (historical and future)
  • Cash flow (historical and future)
  • KPIs: A mixture of focusing on Lead Indicators which drive performance and Lag Indicators that measure the outcomes
  • Marketing activity and effectiveness
  • Operational efficiencies such as work-in-progress or workflow
  • Financial indicators such as debtors, inventory, stock turn (depending on your industry and type of business)
  • Team efficiencies, knowledge management, morale and safety.

  • By helping with your forward planning for achieving the next period’s targets, and by being a sounding board for you as you strive to meet your targets, our ‘Your CFO’ service and support gives you a crystal clear focus for what needs to be done to achieve the goals of your business.

    Your next step … Call us on 1300 574 108 or email us on info@middlewise.com.au for a no cost and no obligation meeting to discuss how we can work with you as your outsourced CFO. We’ll outline for you what’s included and what costs are involved so you can see how the service can be comfortably included in your budget.

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