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BUDGET 2018

In the 2017-18 Federal Budget the Government announced a number of significant changes that potentially impact on property investors and owners. Some of the key changes likely to have the widest impact are discussed below.

Travel deductions

Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 contains amendments aimed at preventing rental property owners from claiming a deduction for travel expenses.  These changes are now law and apply to travel expenses incurred from 1 July 2017.

The rules prevent a deduction from being claimed for a loss or outgoing if it relates to travel and the expense is incurred in gaining or producing assessable income from the use of residential premises as residential accommodation.  The term "residential premises" takes its meaning from the GST system.

The purpose of the travel is not really relevant under these rules.  They simply prevent a deduction from being claimed if the travel is undertaken in connection with a residential rental property, which could include travel to inspect the property, undertake repairs, collect rent or meet with real estate agents.

The restriction would apply to transport costs (regardless of the mode of transport used), meals and accommodation expenses incurred in relation to a residential rental property.  

There are some exceptions to these changes.

Firstly, the rules will not prevent a deduction from being claimed if the expense is necessarily incurred in carrying on a business.  This means that if a client carries on a business of renting properties they can still claim a deduction for travel expenses that relate to their rental activities.  Also, the rules do not apply to certain entities including:

·         Companies

·         Superannuation funds, except SMSFs

·         Managed investment trusts

·         Public unit trusts

·         Unit trusts or partnerships, but only if all unit holders or partners fall within one of the categories above.

In addition to the rules that will prevent a deduction from being claimed, the changes will also ensure that these travel expenses cannot be included in the cost base or reduced cost base of a property.

Depreciation deductions

The changes apply to depreciation deductions that would otherwise arise in the 2018 income year onwards.  However, the new rule should only apply if:

·         The asset was acquired at or after 7.30pm on 9 May 2017; or

·         The asset was acquired before this time, the asset was first used or installed ready for use in the 2017 income year or an earlier year and the asset was not used at all for a taxable purpose in the 2017 income year.

In broad terms the rules prevent depreciation deductions from being claimed in relation to these assets if any of the following apply:

·         The asset has been used by another taxpayer (other than as trading stock) before the taxpayer started the hold the asset;

·         The asset was used in the current year or a prior year in residential premises that were a residence of the taxpayer at that time (doesn't need to have been their main residence); or

·         The asset was used for a non-taxable purpose in the current year or a prior year, unless that use was occasional.

Presumably in response to concerns raised by stakeholders as part of the consultation process around these new rules the Government has introduced an exception which is intended to apply to off the plan purchases.  That is, someone who acquires a newly developed property may still be able to claim depreciation deductions for the assets that were sold to them with the property if certain conditions can be met.

 

Main residence exemption

 

In the 2017-18 Federal Budget the Government announced that the main residence would no longer be available to foreign residents or temporary residents.  While exposure draft legislation and explanatory materials were released in July 2017, we have not yet seen any legislation entered into Parliament in relation to this proposed change.

 

The way the rules are set out in the exposure draft legislation is that a taxpayer will not generally be able to claim any exemption under the main residence rules if they are a non-resident at the time of the CGT event, even if they were a resident for some (or even most) of the ownership period.  On the other hand, if the taxpayer is a resident of Australia at the time of the CGT event then the normal main residence exemption rules apply, even if they have been a non-resident for some or most of the ownership period.

 

Interestingly, while the original Budget announcement indicated that the exemption would no longer be available to temporary residents, there was no mention of temporary residents in the exposure draft legislation. It is not clear whether this means that the Government has changed its approach or whether this was merely an oversight.

 

Special amendments are also being introduced to deal with deceased estate scenarios and special disability trusts.

 

As announced in the Budget, it is expected that someone holding property at 9 May 2017 can apply the current rules if the CGT event occurs on or before 30 June 2019.  This gives non-residents some time to sell their main residence (or former main residence) and obtain some tax relief under the main residence rules.

 

Further details will be released in relation to these changes. 

 

Time Management - Is it a Myth?

Do you feel the need to be more organized ?   more productive?  Is your day spent in a frenzy of activity and afterwards you wonder why you haven't accomplished much?

 

Time management is learned and by instilling some basic tips you can increase your productivity while staying Calm, Cool and Collected. Here's how:

 

Real time has only 24 hours

This is the first thing you have to understand about time management is that no matter how organized you are, there are always only 24 hours in a day.   Time doesn't change.  All you can actually manage is yourself and what you do with the time that  you have. Appreciate this. Internalize it. And move on as soon as possible to the next tip.

  

  The Time Wasters

Many of us are prey to time-wasters that steal time we could be using much more productively. What are your time bandits? Do you spend too much time 'net surfing, reading email, Facebook posting, texting, or making personal calls?

In a survey by salary.com , 89 percent of respondents admitted to wasting time every day at work:

31 percent waste roughly 30 minutes daily

31 percent waste roughly one hour daily

- 16 percent waste roughly two hours daily

-   6 percent waste roughly three hours daily 

 2 percent waste roughly four hours daily

So if you suspect you may have fallen into a time-waster pattern, try tracking your daily activities so you can form an accurate picture of how much time you spend on various activities, the first step to effective time management.

  

A Change to Behaviour

Remember, the focus of time management is actually changing your behaviours, not changing time. A good place to start is by eliminating your personal time-wasters. For one week, for example, set a goal that you're not going to take personal phone calls or respond to non-work related text messages while you're working. 

 

Find a system that works for you

Whether it's a Day-Timer, a software program or a phone app, the first step to physically managing your time is to know where it's going now and planning how you're going to spend your time in the future. A software program such as Outlook, for instance, lets you schedule events easily and can be set to remind you of events in advance, making your time management easier

 

Prioritize ruthlessly and stick to it 

    You should start each day with a session prioritizing the tasks for that day; set your performance benchmark. If you have 20 tasks for a given day, how many of them do you truly need to accomplish?

    Learn to Delegate or Outsource    

   Delegation is one of the hardest things to learn how to do for many business owners. No matter how small your business is there's no need for you to be a one-person show. You need to let other people carry some of the load.

   Establish Routines & Get in the Habit of Setting Time Limits for Tasks

   For most people, creating and following a routine lets them get right down to the tasks of the day rather than frittering away time getting started. If a crisis does arise, you'll be much more productive if you follow routines most of the time.

 Finally, set a limit of one hour a day for certain tasks and stick to it.  For instance, reading and answering email can consume your whole day if you let it.

 

The Half Way Mark

 

We find ourselves nearly mid-way through the calendar and it is only a month until another financial year will draw to a close. 

At Clarke McEwan we are about to embark on our annual round of tax planning, which is also a good time for our clients to do a reality check on how well their businesses are dealing with changed perceptions in the marketplace.

Customers today expect a great experience at all touch points, including awareness on social media, the transaction itself, and afterward. Successful businesses understand that it's more time consuming and costly to attract new clients, than it is to maintain existing ones. Unfortunately, some businesses are simply too large to remember all of their clients by name, and it can be difficult to maintain contact with their client base. However there are many digital platforms to make your own, for the purpose of maintaining awareness with your clients, and the options grow frequently.

While making plans for expenditure in the next financial year, it may be the time to budget for implementation of some of the new methods of providing client service by using some of the technology platforms that have emerged in 2018.

With a plethora of both good and poor quality products out there, it is important to set aside some time to do your research as you would when adopting any new system or technology for your business.  Here are a few ideas of where to begin:

1. Speech self service

We have seen a lot of ads about the latest Google device that responds to your voice commands. Google Home is really making inroads into our domestic situations. It still feels odd to ask the device out loud to turn on the lights and music, but children are already using it for their homework assignments. Clearly they are not shy and in time, neither will we be, as the technology continues to get smarter.

2. Digital Privacy and Safety

Just because many of us share some of our life on social media  doesn't mean we should not be concerned about safety measures online. In fact, quite the opposite is true. The digital rights and governance group at the University of Sydney conducted a survey of 1,600 people and found that even tech-savy people in their 20s and 30s were concerned. Online platforms (like FortKnoxster, a cyber-security company, specialized in developing secure and encrypted communication solutions) are taking advantage of blockchain technology, decentralized storage, and advanced encryption, and creating potential solutions to help protect user safety as it becomes more important.

3. Futuristic Technologies

Some of the very abilities we have only seen up until now on television or in the movies are finally making their appearance. Passwords will become a thing of the past as we start to see voice print as identification and with biometrics embedded into hand held devices, like iris scanning and face recognition. One such company, Prellis Biologics can now print organs on demand with a 3D printer. What was once the realm of sci-fi is now very real.

4. Blockchain

A major mainstream credit card company is already using blockchain, a more secure and transparent method to pay, as it is said to be a more efficient method of paying. It also removes the need to swipe a credit card. MasterCard's blockchain operates independently of a cryptocurrency, and instead accepts payments in local currency.

5. Artificial Intelligence

Artificial Intelligence is becoming more mainstream and businesses are starting to utilise it. A basic chat bot utilising an AI platform can be built in just a week and a half. The great thing is that no longer are large enterprises leading the way – anyone can be involved. Companies are now making their AI tools accessible and easy to use, so we will see more experimentation and innovation from smaller businesses. 

Paradoxically, new technologies can be both a major source of expenses for your business, as well as a method of eradicating your biggest costs.  Focus on the areas where you will see the biggest bang for your technology buck if a new technology succeeds -- but be ready to abandon the cutting edge if it cannot deliver on these promises.

If in doubt about the deductibility or tax treatment of acquiring new software or software enhancements before the end of the financial year, contact us.

 

From 1 July 2018, the Australian Government will introduce the option of contributing the proceeds of downsizing your home into superannuation.

If you are considering the sale of your dwelling which is or has been your primary residence, the new measure will apply where the exchange of contracts for the sale occurs on or after 1 July 2018. 

But before you decide to make a downsizer superannuation contribution you should check your eligibility for making the contribution . There are a number of considerations to weigh up and the devil is in the detail.  The member must be over 65 years of age.  The property itself had to be the member's residence at some time prior to disposal of the home and it must have been owned for at least 10 years.  Capital gains tax may apply if the property was rented at any time during the ownership.  For more details about the new measure see the ATO's website

The second thing to check is your Self Managed Superannuation Fund Deed and the Deed's Provisions. The Deed will need to have express working that allows its members to make these contributions. Age of the member and employment status may preclude the contribution, depending on your individual Deed.  It is important that you seek advice if you are uncertain about the wording of your Deed's provisions, or if you wish to update your current deed to take advantage of the new SMSF downsizer measure.

In addition, the Deed must provide for appropriate reporting to the Australian Taxation Office as the SMSF will need to receive advice from the SMSF and report those contributions to the ATO by submitting a downsizing contribution form.  The ATO will be running verification checks on eligibility and on the amounts contributed.  Those amounts could potentially be re-allocated as a non-concessional contributions, or may cause a member to exceed their contribution cap. The Downsizer contribution cap is the lesser of $300,000 per person or the sum of the capital proceeds. Any debt outstanding on a mortgage over the relevant property is not considered for the purpose of determining the capital proceeds.  The Downsizer contributions will not be tax deductible.

The third concern is the Age Pension.  Members who may be receiving benefits should note that any contributions and disposal of their primary residence may have an impact on their existing or future Centrelink entitlements.  You may in fact be boosting your super but reducing your benefits.  Again, we urge any super members contemplating this downsizer contribution to first see a planner or contact Centrelink for advice about their specific circumstances.    

 

 

 

 

Shares Versus Property

What is the best investment? Property and shares are the 2 most common ways of building wealth in Australia outside of superannuation.

The topic of whether to invest in property, shares (or both) often leads to heated debate. The 67% of Australians who own the house they live in are usually passionate about they believe is their best investment decision.

Shares and real estate have both generated reliable income and capital returns for Australians over the long-term.

 Source: Corelogic, Housing Market and Economic Update March 2016 

Property and shares are rarely out of the news, with weekly predictions about Australian property bubbles and busts fuelling speculation and creating confusion for the majority of investors. Against this tide of information overload, it is important to remember there are advantages and risks associated with both property and share ownership.

Property ownership

Historically there has been a belief in Australian culture that home ownership leads to an improvement in living standards, representing a symbol of success and security. Therefore people think it is the best investment for the long-term.

Since 1961, home ownership has been relatively stable at around 70%, with a decline in recent years to 67% due to stretched affordability. Home ownership tends to increase with age, alongside general increases in wealth.

However, recent analysis shows a rise in the proportion of renters, as buying a home become less affordable due to rapidly increasing prices.

Both Sydney and Melbourne property prices have enjoyed strong price growth between 2012 and 2016, however despite recent price rises, there are significant risks associated with taking on a large mortgage including interest rate risk and lack of diversification.. 

 

Sources: CoreLogic RPData; RBA

Share ownership

Australia has one of the world's highest share ownership rates, with around 36% of adults owning shares outside of their superannuation.

Owning shares doesn't typically have the same level of personal attachment when compared to property, as the part-ownership of a business is less tangible than a physical house. Notwithstanding, shares have generated reliable income and returns for Australians over the long-run.

Over the 30 years to 2015, Australian shares have generated an average return of 10.8% per year including dividends.

 

 Sources: ASX

 Factors to consider

There are many factors to consider before deciding what is the best investment for you.

  • Your budget for living and investing has limits. Look at what you can afford and test different interest rate scenarios before making a major investment decision.
  • Compare whether you would be better to buy or rent.
  • What is your attitude to share market movements? Would you have the discipline to stay invested even during periods of market volatility?
  • How stable is your income? Would you be able to continue paying a mortgage if something changed to you or your partner's work situation?
  • How much of your decision is impacted by tax? Tax law changes regarding property (negative gearing) and shares (franking credits and capital gains tax) could occur at any point in time.
  • Consider your lifestyle, whether or not you have dependents and the kind of area that would be best to live in. Buying a property in an area with access to desired facilities such as public transport and schools may not always be immediately affordable.
  • Can you commit the required time to maintain a property?
  • Personal values and situations affect your decisions about opportunity costs and risk appetite for investing decisions. Social pressure can push individuals into making choices that are not best suited for them, even though these choices may have worked out well for others.
  • Rather than buying property to live-in, some people buy property as an investment to rent out. This brings another whole other set of potential advantages and disadvantages. Two of the most common are negative gearing and landlord costs.

Property vs shares

Investing in property or shares both have advantages and disadvantages. Below are some factors to consider before making a decision to invest in either.

Consider

Property

Shares

General

Pros:
– Peace of mind and stable place of residence.
– Flexibility to renovate.

Cons:
– Lack of liquidity and unable to quickly change mind after the initial commitment.

Pros:
– Easily bought and sold.
– Regular income from dividends.

Cons:
– Not a physical asset.
– Generally more volatile in the short-term.

Diversification

Pros:
– Lack of correlation with other asset classes and good protection against inflation.

Cons:
– Poor diversification and highly concentrated in a single asset.

Pros:
– Easy to gain exposure to the entire index of thousands of companies to reduce risk.

Cons:
– The entire market can also have periods of weak performance.

Leverage risk

Pros:
– Able to borrow more and leverage returns which can be great during times of low interest rates.

Cons:
– Higher repayments if interest rates rise.
– Leverage magnifies losses so you can lose more than you invested.

Pros:
– No leverage means you can't lose more than you invested.
– Interest rates typically have less impact on share prices.

Cons:
– No benefits of higher leverage during periods of high growth.

Taxes and transaction costs

Pros:
– Potential for negative gearing benefits.

Cons:
– Relatively high transaction costs associated with buying, selling and property maintenance.

Pros:
– Potential for franked dividend benefits.
– Transaction costs and fees can be low.
– Involves very little ongoing effort after an initial investment.

Cons:
– Capital gains tax when shares are sold.

 

 

Inheritance Centrelink and Wills

 

By the pure nature of it, receiving an inheritance tends to come at a time when we are grieving, and at this distressing time, we need to understand whether the inheritance itself impacts a Centrelink aged pension benefit.

 

The key to this is the size of the inheritance, and is dependent on one's existing wealth and how this wealth is structured.

 

The Age Pension payment will stay the same if you are under the assets test and receive a small inheritance.

 

It could reduce the Age Pension, or in the worst case, cancel the Age Pension if you are over these limits.

 

The pension will be cancelled if total assets exceed the upper threshold limit of  $556,500 for a single homeowner or $837,000 for a couple homeowner.

 

There are a number of strategies that can be applied in planning for a Centrelink entitlement  reduction  as a result of an inheritance receipt, the main two most people have used in the past are:

1.       Gifting or transferring their entitlement to another person

2.       Retaining money in the deceased estate for a prolonged period.

 

The above strategies generally have limited impact and have limited  benefit as Centrelink  has  rules  on  the  amount you can gift.  Amounts gifted  above  $10,000 per   financial year  and $30,000 over  5 financial  years  are  considered as an  asset and deemed to earn income for the next 5 years. Transferring your entitlement  to another person is also considered a gift in the eyes of Centrelink.

 

Once the estate proceeds are able to be paid, Centrelink will look to assess your entitlement as an asset. Most people are not aware Centrelink can assess funds held in an estate and as such keeping funds in the estate for a prolonged  period may not be a viable option.

 

One  strategy that  is effective is to spend on the  things  a lack of capital  has  previously  made difficult. We often  see  clients complete renovations on their house, take their dream holiday or invest in assets that are either exempt or have limited Centrelink penalty.

 

The advice of a financial planner can help minimise the chances of Centrelink issuing the dreaded request for repayment of overpaid entitlements.  Contact us for an appointment if you have concerns.

 

A well documented business plan can be an effective management tool if it is designed to suit the structure and needs of your business.  Putting one together need not be as complicated as it sounds.  There is no set formula that you have to follow and each business will have different points to address and elaborate on.

To design your own business plan you first need to  identify the reasons why you need planning.  Sometimes a concept that starts as a rough idea needs to be fleshed out and certain criteria to be identified before it can move forward.   The most effective approach could be to set business goals and objectives, establish performance benchmarks, and communication to people inside or outside the business.

Sample Business Plan Structures

A business plan usually serves a number of purposes. It is a good idea to identify the purposes you'd like your business plan to achieve because this could affect how you choose to structure and write your plan. For example, you're likely to focus on different information depending on whether your plan is intended as in internal document for management to refer to, or for raising finances from an external source.

Use the three business plan structures in the table below to find the best structure for your business. Because there is no set way to structure a business plan, the format is one of personal preference. You might find one outline is more suited to your business than another.

 

Structure 1

Structure 2

Structure 3

Cover page

Cover page

Cover page

Table of contents

Executive summary

Brief statement

Executive summary

Table of contents

The market

The Business

Business overview

Personnel skills and resources

Marketing

Market overview

The benefits of your product

Staffing

Business goals/objectives

Business goals/objectives

Purchasing

Requirements overview

Long-term plans and needs

Production

Operations overview

Financial targets

Finances

Sales and marketing overview

Business history

Supporting documents

Financial overview

Supporting documents

 

If you're writing your business plan as part of the process of applying for a loan, it is a good idea to include a one-page cover letter. The cover letter should include the following.

  • The type of loan you are looking for
  • The amount of the loan and period you wish to borrow the money
  • What you need the money for
  • A reference to the business plan attached

If you are applying for a loan, you will probably also need to include more detailed personal information, including your tax returns, bank account statements, assets, liabilities and other business interests.

Writing your business plan

Keep your business plan as short and simple as possible. Use simple language and short sentences so that it is easy to understand, and edit your draft to remove unnecessary words. Use bullet points or tables if this makes ideas easier to read or understand.

Present your facts and information so that they flow logically rather than jump around, and make sure that the information presented in different sections supports each other. You don't want to present information that does not add up or raises questions about the accuracy of your plan.

Do not give in to the temptation to overstate the truth, and bear in mind that the figures you present will need to back up the words in your business plan.

Start by jotting down points and ideas under each of the headings you plan to include in your business plan. Then sort these ideas so that there is a logical flow. At the same time, look out for any gaps or weaknesses and fill them in with the necessary research.

Start writing your business plan as soon as possible and keep refining and editing your work to keep it as short, simple and easy to understand as possible.

Writing your executive summary

Your executive summary is a very important part of your business plan. It is the first section people will read, and provides a brief but complete overview of your entire business plan. Because it contains reference to the entire business plan, the executive summary is usually written towards the end of the business plan writing process.

Your executive summary should be less than three pages, simply written and to the point, with an emphasis on the key issues of your business plan and a focus on the areas that will make your business successful in a competitive market.

Use your plan's table of contents to map out your summary, and elaborate on the areas that are important. It is a good idea to end your executive summary with a short statement of why your business is poised to be a success.

The table of contents

The table of contents will appear before or after the executive summary. It is a list of headings with page number references that help your reader locate specific information in your plan. The numbering of the headings in your table of contents is one of the last things you will do when finalizing your business plan.

The presentation of your business plan

The presentation of your business plan could be one of the first impressions someone gets of your business. It is a good idea to include a cover page and to bind your business plan with a cardboard or plastic front and back cover so that it is professionally presented.

It is also important that the layout is neat and professional looking and that the pages are numbered. Spend a little extra time on the presentation of your business plan to ensure it presents your business in the best possible light.

Does my business plan need an external review?

Your business plan does not need to be approved or verified by anyone, but it is a good idea to let a few people read your draft business plan before you finish it and print it out.

Paying to have your business plan professionally proof read will ensure that it is free of embarrassing spelling and grammatical errors. Asking your accountant and a few business acquaintances or mentors to read through your plan will also help to identify any inconsistencies or gaps in the information.

***

 

How does the ATO treat Uber, Airbnb style services? What you need to know

 

Uber is calling for drivers, Airbnb is seeking more hosts but what are the implications of becoming part of the sharing economy? 

With the ATO increasingly relying on data matching and other online resources to target untaxed income and the cash economy, it is important to understand the tax implications of your arrangement.

 

The basics of tax apply regardless of how you earn money. That is, even though you may be earning income from different sources or using different platforms to generate income, the fundamental tax issues remain the same. You don't have to be carrying on a business to pay tax on income you earn.

 

And, given that so many of these services are through sharing platforms, the Australian Tax Office (ATO) has the capacity to data match money flowing through to financial institutions specifically from these platforms.

 

'Sharing' a room or an entire house

Sharing a room or your house through services such as Airbnb can be a great way to earn income from an existing asset. The tax treatment of what you earn from these services is the same as any other residential rental property arrangement. This means you must include the rental income in your income tax return. For example, if a husband and wife jointly own a property that they rent out through a sharing service, whatever they earn needs to be declared on their income tax returns in the same proportion as the ownership of the house in the year they earned the income.

Hosts can also claim tax deductions for expenses associated to the rental, such as the interest on your home loan, professional cleaning, fees charged by the facilitator, council rates, insurance, etc. But, these deductions need to be in proportion to how much and how long you rent your home out. For example, if you rent your home for two months of the financial year, then you can only claim up to 1/6th of expenses such as interest on your home loan as a deduction. This would need to be further reduced if you only rented out a specific portion of the home.   GST does not generally apply to residential rental income.

Be aware that renting out your home may have a direct impact on your tax-free main residence exemption for capital gains tax (CGT) purposes. In general, your home is exempt from CGT when you sell it. However, if you use your home to earn assessable income, then you might only qualify for a partial exemption on the sale unless special concessions apply. If you are renting out part of your home while still living in the property, then it is unlikely that any gain you make on your home will be fully CGT-free. You might also need to obtain a valuation of your home at the time it was first used to generate rental income.

 

Hosting for investors

A number of investors are generating income from renting residential investment properties exclusively on sharing services rather than traditional longer-term rental arrangements – rental income can be higher for short-term accommodation and the host has the capacity to increase prices easily for peak periods. Just a quick look at properties available around the world on sharing sites shows how quickly this style of arrangement has attracted investors, particularly where the property is located in high demand tourist areas.

But what are the tax implications if you own one or multiple investment properties and rent them on a sharing service? Firstly, it's important to get good advice as this can be a complex area and being on the wrong side of the tax law can have significant implications. For example, if the ATO deems you to be providing commercial residential accommodation, they will treat your activities in the same way as hotels and motels meaning that the rent could trigger a GST liability for you (although you might be able to claim back some GST credits on expenses you pay). Broadly, accommodation falling into this category would have multiple occupancies such as a block of apartments, central management of the properties, and provide services to the guests beyond the accommodation such as breakfast or room servicing.

Finally, check if there are council restrictions, and ensure that you have the right insurance in place and if in doubt be sure to Contact us  before you start hosting or driving.  

Will your business be audited?

How the ATO identifies audit targets

The ATO is very upfront when it comes to their compliance activity. Every year they publish small business benchmarks that outline what a typical business 'looks like' in different industries. If your business falls outside of those benchmarks, the ATO is likely to take a closer look at why that is.

 

Falling outside of the benchmarks might not indicate a tax related problem. It might mean that your business has a different business model to the norm or is performing poorly relative to others in the industry. If your business does fall outside of the benchmark however, it is important to ensure that the reasons why can be clearly articulated (preferably documented) and the reason for those differences is not tax evasion. If there is no proof as to why the business is outside of the benchmarks, the ATO is likely to simply apply the benchmark ratio and issue a revised tax assessment.

 

The ATO look at:

·         cost of sales to turnover (excluding labour)

·         total expenses to turnover

·         rent to turnover

·         labour to turnover

·         motor vehicle expenses to turnover

·         non-capital purchases to total sales, and

·         GST-free sales to total sales.

 

For example, for a veterinary practice with a turnover between $300,001 and $800,00, the cost of sales to turnover ratio is expected to be between 25% and 29% (averaging at 27%), and average total expenses are 78%. The cost of labour to turnover ratio is between 21% and 29% and rent is between 5% and 8%.

 

The benchmarks are also a useful tool for anyone wanting to understand what is typical in their industry and how they perform against the average. It might also indicate opportunities for improvement and where the business is falling behind its competitors.

 

If you have any concerns about your record keeping, please contact us for advice or consult our website under the Client Resources section and Compliance.

 

Why you shouldn't feel bad about renting

The property market is rarely out of the news in Australia, with regular predictions of house prices collapsing being followed by weekends of record auctions and prices.

Property has certainly had a good run.  Over the past 10 years property prices in some of Australian major cities have skyrocketed and as property has become less affordable, more people are looking at a popular alternative which is to rent and invest their savings in a portfolio of shares instead.

Despite similar long-term returns, property and shares are always at different points in their own market cycles. When looking to invest for the next 5 years, it's worth thinking about where each is positioned in their own cycle and what that could mean about the future. Since the financial crisis in 2008-2009, property has been in the recovery and then boom stages, helped by low interest rates and supply shortages.

 

But which is better today, shares or property?

History has shown that investments are often most popular near the top of their cycle. This is when the market is hot and there is high confidence that prices will keep on rising. Silly stuff happens at the top of the cycle like was seen in the US property market in 2006-2008.

Today property investing is 3 times as popular as buying Australian shares. This shows how confident people are about real estate investment right now. High confidence around an investment often comes before periods of flat or falling prices as reality catches up to everyone's excitement. For example, US shares were at their most popular ever in 1999 – just before the infamous tech crash.

That said, confidence levels can remain elevated for a long time and it's always hard to pick the peak. Stock analysts were calling the top of the US tech boom years before it actually ended, just as many commentators have been predicting Australian house prices to fall for a decade now.

In any boom you can be sure that many people will try to pick the top but few will succeed with their timing without the benefit of hindsight!

Then there are shares, which have become less popular in recent years with only 7.8% of people surveyed thinking shares are the best place to invest, which is half the long term average.

 

Based on excitement levels, those who are renting and investing in shares currently have the upper hand since they're likely to be investing at a better point in the cycle. Australian shares are still below the levels they reached 10 years ago in 2007 so they are still in the recovery stage.

People who are renting and investing their extra savings in shares are able to quietly squirrel away savings and pay low rents while everyone else is jumping over each other to buy a house. But patience is a virtue for those renting since the strongest temptation to get involved in an investment usually comes around the top when everyone else is most excited. That's when FOMO (fear of missing out) is at its hardest to resist.

All markets move in cycles. It's tempting to get involved when confidence and excitement are high, but doing what's less popular can be the safer and smarter bet in anticipation of when returns inevitably go back to normal.

For more points to ponder on renting vs. buying... visit the article Shares Vs Property further down this page where we discuss the returns of shares vs. property. 


Contact Clarke McEwan