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Investments & SMSF

Prudent investing for long-term wealth is about investing our money wisely, but with all the investment choices available it's hard to know where to invest and what to invest in. It's no longer a simple case of shares, property, fixed interest or cash.  With hundreds of combinations of asset categories, across different countries, themes and sectors the choice is staggering.

Not only that, but each person's needs and goals are different and will change over time.

A Merit Wealth Investment Adviser can talk to you about your investment objectives, both short and long term, assess your current financial position, and recommend appropriate investment options to help you achieve those goals. Over time as your circumstances change so will your Adviser's recommendations. Financial advice should be ongoing and a Merit Wealth Strategist should be part of your everyday life.

Clarke McEwan and Merit Wealth provide fee-for-service investment advice, independently owned by its principals and not associated with any financial institution.  Therefore no financial institution can pressure us to recommend its investment products or services to you. As it is our strongly held belief that investors should receive advice which is totally free of influence, all of our investment advice is provided on a fee for service basis rather than accepting commissions from financial institutions, as we believe commissions have the potential to compromise the quality of the advice. This means we are working for you, not for a financial institution. We are committed to providing an extremely high level of financial planning, financial strategy, investment advisory and superannuation services to our clients, as well as the ongoing management of investment portfolios.

Why not maximize your investment potential?  Take the time now to get your money working as hard as you are by implementing sound, tax-effective investment strategies with Clarke McEwan and Merit Wealth.

Financial Planning for Doctors

Financial planners are often the first point of contact for doctors seeking advice on investment.  A specialist medical financial adviser has the expertise to help you achieve your goals and objectives by tailoring strategies to specifically address your needs.

At Clarke McEwan we have the knowledge and skills to provide you with assistance and guidance on:

  • Education – By building your knowledge and confidence we can help you achieve a better understanding of your investments and other key financial matters.
  • Budgeting – Part of our strategies are to identify opportunities to manage debt and save money. For a review of your finances and how these measure up, contact us now.
  • Estate planning – We will also work proactively with our network of estate planning professionals to show you how best to structure your assets to benefit your estate.
  • Insurance – One of our most sought after services is assistance is in guiding clients through the maze of insurance options available to protect you, your family and your assets in the event of illness, injury, disability or death.
  • Retirement planning – helping you find answers to those complex questions such as: "Will I be able to retire comfortably now?"  "How much money do I need to retire?" and "What do I need to do before I retire?"

A well-qualified financial planner for doctors can help alleviate the worry and stress associated with your finances, leaving you with more time to enjoy life. To book an obligation free appointment about financial advice click here or call Clarke McEwan on 07 5475 4300, and our specialist financial advisers will begin to assist you in planning a better future for you and your family.

Choosing An Accountant

 Looking to Change Accountants ?  It's not just a numbers game.  

Accountants have the power to change the lives of business owners, but most of them aim for average. We're here to change all that.

How many business owners do you know that actually say "I really like working with my accountant!"?  They are out there – but more often than not, their accountant has done a shocking job at serving their customers' actual needs.

It's not a light decision to make the leap to another accountant, but if you've been meaning to change accountants for a while, make it your priority now!

We've put together some important questions that you should ask yourself when evaluating your current accountant, or choosing a new one.

Who does the accountant normally work with? 

This is important to know: Are you a good fit to the accounting firm?  Are they a good fit for you?

It's a two way street, and unfortunately most accounting firms will usually say "Yes"  to anyone – whether they can provide them with value for their money or not.

Be sure you ask for leads within your industry, and even look at their marketing material.  Don't try to be a square peg in a round hole!

What services does the accountant offer?

You need to make sure their experience and skill set matches the service that you're after.

Are you looking for business advice at an accounting firm that just pumps out tax returns? Do you need bookkeeping assistance?

In most cases, if the accounting firm cannot do what you're after, they will most likely work with someone who can.  It's also best that if you need a second adviser, for an international tax matter for instance, that you keep your accountant in the loop, or let them manage the business relationship.

What does the accountant specialise in?

What is the one thing that the accountant would provide you over all other things?

Where is there best value to you as the customer? Look for statements like "we work with you, providing insight into your business and its numbers" rather than "we're really, really good at tax returns". 

After all, any firm can churn out a tax return. Business acumen and advice is another matter. 

How will the accountant charge me?

How do the dollars work?  Do they charge in a way that rewards inefficiency, or do they charge for the value that they provide and the access to knowledge? It's not always what they can do,  but rather what they know.

It's a different conversation and focus for both you and the accountant.  The attention shifts from 'be quick to reduce the fee' to 'let's focus on where the value is'.

Some questions to pose might be:

  • What does the project or subscription include?
  • Do they price each job before they start, so you can both agree to the scope and terms?
  • Do they allow you to pay by the month to spread out the burden on cash flow?

Be sure to get a good understanding of the charges and how they work – it avoids unwanted surprises and you have clarity before moving forward.

What is the response time to my questions?

How quickly will you expect to hear back from your accountant, and who will answer that query?  We regularly hear from new clients that a former accountant takes weeks to get back to them, or doesn't respond at all!

Response time is key number that we focus on – and we measure it in hours, live on our website or by return phone call the same day.

Make sure you ask for a clear understanding of how and how quickly your accountant will return your call or email.

How long does it take to get your work done?

"Turn-around time" is a common complaint heard when businesses are talking about their existing accountants.

If, after an honest look at how you provided information and followed up their queries, your accountant still takes months to finish your work without a valid reason, maybe it's time that you moved on.

What would your standards be if you ran a business that took that long?

This is one of the key numbers that we measure as the Clarke McEwan team – one that we see is important in the eyes of our clients. 

What technology does the accountant use?

It's important to know how you'll be interacting with your accountant on a regular basis.  It's all very well to throw ideas around on a whiteboard in the boardroom, but what about for the "in-between" times?

Do they use the internet, a website and technology to communicate with you or enhance web meetings to describe concepts and run scenarios? 

Be sure that the technology they use makes sense to you.

How often does the accountant talk to you each year?

At Clarke McEwan, what we really love about working with our clients is that we get to learn about their business and their lives.  Accountants can't do that if they only speak to you once or twice a year. 

This is how an accountant will be able to provide you with real insights into your business. It's important that you understand how often you'll be in touch with your accountant, and that you're comfortable with this.

Is the accountant a member of an association?

It's best to choose an accountant that is part of an association.  The three main associations in Australia are:

  • CPA Australia
  • Institute of Public Accountants Australia
  • The Institute of Chartered Accountants

All three have different levels of requirements to join, different membership levels – but all have a set of standards that members must adhere to.  If you've got a problem with an accountant, you can usually take it to their association.

Can you have a coffee or a beer with them?

It's important that you can hold a conversation with your accountant, outside of your business.  Ask whether they will meet you for a coffee to get acquainted.

By the way, John likes his coffee with a dash of milk.

How to kick-start your motivation

 

Even the most committed professionals can suffer from lapses in motivation or the strength to stay focused on monotonous but essential tasks. 

This easy five-step checklist will help boost your motivation and bring your team along with you.

1-Identify your personal motivators

Examine those factors that stimulate the desire in you to continually be interested and committed to a goal or desired outcome. Sometimes this will be a combination of both conscious and unconscious factors. It is reasonable to say that motivated people usually act in a way that goes beyond what a reasonable person would do.

So for you personally, what are your true, sustained and most powerful personal motivators? Is it achievement, recognition, competition, variation, winning or proving others wrong that fuels your desire?

2-Identify your underlying goals

Behind every motivational impulse lies a contributory factor. You may feel a great urge to do, or not to do, a particular behaviour and you continue to act this way despite the obvious disadvantages.

So why are you reluctant in these situations when it is a genuine opportunity to position yourself ? Do you, for example, have an underlying fear of not knowing what you need to know, or a fear of providing feedback that may be inaccurate? Or perhaps you are uncomfortable with sharing an opinion that is unpopular and which goes against the grain of what is considered conventional wisdom? 

3-Address the gaps between your current and ideal motivational mix

Now that you have identified what may be stopping you, this new awareness is the basis for change and will provide you with the insight to understand what adjustments you need to make.  

These gaps can occur for several reasons and over a lengthy period, but once the issue is identified and appropriate is action taken, the solution to bridging this gap can occur quickly and successfully.

4-Identify the valued alternative outcomes that these missing motivators will bring you

Start to envisage the alternative outcome that a behavioural change will provide over time, and how these new outcomes will benefit and drive greater achievement and success for you and your team.

Once it becomes apparent that the processes being followed are the right ones to gain future success regardless of what they might be, you can move to the final step.

5-Establish your new behaviours

Behavioural science has clearly demonstrated repeatedly that around three to four weeks of continuous focus on a new behaviour will lead to it becoming ingrained as new habits that delete and replace earlier, unwanted habits, be they professionally based or otherwise. Therefore, as you establish your new behaviour sets to these revised motivations, and focus on the value that those alternative outcomes will provide you over time, your motivations become a self-perpetuating process.

It is important to always remember that people are different and will have different types of motivation and to different degrees. There should be no judgement made here as there is no right or wrong, however you can make simple observations of those outcomes and a logical analysis made of how well, or otherwise they align to your stated goals.

 

How Successful People Spend Their Weekends

 

Successful people know the importance of shifting gears on the weekend to relaxing and rejuvenating activities. They use their weekends to create a better week ahead. This is easier said than done, so here's some help.

The following list contains 10 things that successful people do to find balance on the weekend and to come into work at 110% on Monday morning.

 1. Wake Up at the Same Time

It's tempting to sleep in on the weekend to catch up on your sleep. Though it feels good temporarily, having an inconsistent wake-up time disturbs your circadian rhythm. Your body cycles through an elaborate series of sleep phases in order for you to wake up rested and refreshed. One of these phases involves preparing your mind to be awake and alert, which is why people often wake up just before their alarm clock goes off (the brain is trained and ready). When you sleep past your regular wake-up time on the weekend, you end up feeling groggy and tired. This isn't just disruptive to your day off work, it also makes you less productive on Monday because your brain isn't ready to wake up at your regular time. If you need to catch up on sleep, just go to bed earlier.

2. Designate Mornings as "Me" Time

It can be difficult to get time to yourself on the weekends, especially if you have family. Finding a way to engage in an activity you're passionate about first thing in the morning can pay massive dividends in happiness and cleanliness of mind. It's also a great way to perfect your circadian rhythm by forcing yourself to wake up at the same time you do on weekdays. Your mind achieves peak performance two-to-four hours after you wake up, so get up early to do something physical, and then sit down and engage in something mental while your mind is at its peak.

3. Schedule Micro-Adventures

Buy tickets to a concert or play, or get reservations for that cool new hotel that just opened downtown. Instead of running on a treadmill, plan a hike. Try something you haven't done before or perhaps something you haven't done in a long time. Studies show that anticipating something good to come is a significant part of what makes the activity pleasurable. Knowing that you have something interesting planned for Saturday will not only be fun come Saturday, but it will significantly improve your mood throughout the week.

4. Pursue Your Passion

You might be surprised what happens when you pursue something you're passionate about on weekends. Indulging your passions is a great way to escape stress and to open your mind to new ways of thinking. Things like playing music, reading, writing, painting, or even playing catch with your kids can help stimulate different modes of thought that can reap huge dividends over the coming week.

5. Disconnect

Disconnecting is the most important weekend strategy on this list, because if you can't find a way to remove yourself electronically from your work Friday evening through Monday morning, then you've never really left work.

Making yourself available to your work 24/7 exposes you to a constant barrage of stressors that prevent you from refocusing and recharging. If taking the entire weekend off handling work e-mails and calls isn't realistic, try designating specific times on Saturday and Sunday for checking e-mails and responding to voicemails. For example, check your messages on Saturday afternoon while your kids are getting a haircut and on Sunday evenings after dinner. Scheduling short blocks of time will alleviate stress without sacrificing availability

6. Minimize Chores

Chores have a funny habit of completely taking over your weekends. When this happens you lose the opportunity to relax and reflect. What's worse is that a lot of chores feel like work, and if you spend all weekend doing them, you just put in a seven-day work-week. To keep this from happening, you need to schedule your chores like you would anything else during the week, and if you don't complete them during the allotted time, you move on and finish them the following weekend.

7. Exercise

No time to exercise during the week? You have 48 hours every weekend to make it happen. Getting your body moving for as little as 10 minutes releases GABA, a soothing neurotransmitter that reduces stress. Exercise is also a great way to come up with new ideas. Innovators and other successful people know that being outdoors often sparks creativity.

Whether you're running, cycling, or gardening, exercise leads to endorphin-fueled introspection. The key is to find a physical activity that does this for you and then to make it an important part of your weekend routine.

8. Reflect

Weekly reflection is a powerful tool for improvement. Use the weekend to contemplate the larger forces that are shaping your industry, your organization, and your job. Without the distractions of Monday to Friday busy work, you should be able to see things in a whole new light. Use this insight to alter your approach to the coming week, improving the efficiency and efficacy of your work.

9. Spend Quality Time with Family

Spending quality time with your family on the weekend is essential if you want to recharge and relax. Weekdays are so hectic that the entire week can fly by with little quality family time. Don't let this bleed into your weekends. Take your kids to the park, take your spouse to his or her favorite restaurant, and go visit your parents. You'll be glad you did.

10. Prepare for the Upcoming Week

The weekend is a great time to spend a few moments planning your upcoming week. As little as 30 minutes of planning can yield significant gains in productivity and reduced stress. The week feels a lot more manageable when you go into it with a plan because all you have to do is execute it.

The risks of dropping personal insurance

People often take out personal insurance early in their working career, but if it is done without adequate advice and knowledge, a significant proportion will then drop their coverage later in life at the very time they are most likely to need it.

When paying off debt, funding lifestyle needs and saving for retirement are competing with the cost of holding personal insurance, the former are often treated as a priority, particularly as the cost of some personal insurance premiums rises substantially in later years.

Many only realise in hindsight that different personal insurance planning decisions made earlier in life would have made a significant financial difference.

Long-term understanding of premiums

In the early years of a working life, understanding how best to fund personal insurance can significantly affect the ability to retain cover while still being able to save for a quality retirement, or meet other expenses.

The two most common premium-funding options are level premiums and stepped premiums.

With a level premium, the cost of the cover remains the same of over the lifetime of the policy except for CPI increases in cover.

With a stepped premium, the cost of cover starts lower than level premium, however the rates increase each year based on the insured person's age plus CPI increases in cover.

Under either funding option, the insurer can also increase the rate charged over and above the annual rate change.

While a level premium seems more expensive than a stepped premium when first starting out, a long-term view shows a significant difference over the life of a policy.

For instance, as the table below shows, the year-on-year increase in a stepped premium policy in the early years is not as steep as in later years.

Average year-on-year increases for stepped insurance premiums, nil indexation

 

       (TPD = Total and Permanent Disability, IP = Income Protection)

In addition, the percentage increases will have more of an impact at an older age when the premiums are higher. For example, a 5% increase on a $100 per month premium is $5, which is more palatable than a 15% increase on $600 per month, or $90. What's more, with a 15% year-on-year increase, the premiums will double every five years.

The total stepped premiums for a 40-year-old male taking out $1,000,000 Life and TPD cover (with nil CPI increases) until age 65 will cost $266,249 while level premiums will cost only $74,461.

The following chart illustrates graphically the difference in cost between stepped and level premiums over the lifetime of the policy. After age 52, the age when people are most likely to need cover, the cost of the stepped premium rises dramatically.

 As a general rule, for a 40-year-old with Life and TPD cover for $1,000,000, not indexed to inflation, it will take eight years for stepped premiums to catch up to level premiums, and another five years on top of that to reach the break-even cumulative point.

For example, a specific insurer provides this table although the general principles apply.

 

 

If all cover is held to age 65, the savings on a level premium can be hundreds of thousands of dollars.

Minimising the burden of insurance policies

Steps can be taken to ensure insurances are retained that might otherwise become such a financial burden that the cover is reduced or given up entirely when most needed. They include:

  • Life cover and TPD – in early years with a young family, ongoing income and mortgage debt is higher than it is as children get older and debt is paid down.

Solution: place a portion of cover on stepped premiums and maintain for 15–20 years, with the remainder on a level premium ensuring this cover remains affordable in later years.

  • Income protection – generally the cover will be required across an entire working life.

Solution: maintain a level premium until policy expiry at either age 65 or 70.

  • Trauma cover – in the early years of greater family financial commitments, cover may need to be higher than in later years.

Solution: place a portion of the cover on stepped premiums to manage cash flow with some cover on level premiums for the longer term.

Risks with level premiums

Level premiums offer long-term financial benefits but other factors must be considered:

  • Product may become obsolete: the insured person is locked in with a single insurer and product series and could be left in an old or closed product. Medical definitions and premium rates for the policy may not be up to date with the current market.
  • Rates are not guaranteed: Insurers always reserve the right to increase base premium rates at any time (this is applicable under both stepped and level options).
  • Inflation cover can change the original premium rate: If inflation-proof cover is chosen with CPI increases in cover each year, some insurers will charge the original level premium rate when the policy commenced but a new level premium rate for each age range for the increased portion of cover.

Nevertheless, forward planning of insurances and a sensible approach of using a blend of stepped and level premiums could have good financial outcomes.

When obtaining advice it is important to be furnished with the complete illustration of the stepped and levels options of the insurer to enable an understanding of the long-term overall cost.

Insurance discussions with adult working children

As people grow older and their children make their own way in life, they do not give much thought to the impact as a parent if the child became disabled due to sickness or accident. What often happens is the parent steps in to support the child. The financial burden could be huge and impact significantly on retirement savings.

Increasingly, we are seeing parents step in and fund the personal insurances for their adult children, at least in the early years. If a 25-year-old is earning $50,000 a year, the income could be insured for as little as $40 per month. In the event of a disability, if the benefit period was to age 65, they could receive $2,800,000 with claims indexation of 3%. This is a small price to pay to ensure retirement assets are protected, and the child can take over the premium payments at a later stage.

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How to Steer Clear of Office Drama

 

Many young professionals, no matter how hardworking and dedicated, find it hard to avoid the inevitable water-cooler chitchat. They're often caught off-guard when colleagues use these talks as a forum to criticize others and office drama ensues. Gossip and drama occur for many reasons: frustration with the boss or peers, the need for human connection, the desire to belittle others to feel better about oneself, boredom, or the need to talk about something.

What's more, added Dave Molenda, business coach of Positive Polarity, most professionals spend more time at work than home, with people they might not choose to interact with in other settings. "When two personalities clash, whether in a relationship outside the office or inside the office, you tend to have drama and disagreements, and tend to have conflict," he said.

But if left unchecked, office gossip and drama can lead to professional discord, reduced productivity, lower morale, and a breakdown of teamwork, collaboration, and good customer service. Office gossip can also derail a person's career if  s/he becomes known as a rumour-monger or someone who talks badly about others. "It's like a cavity or cancer-if you don't deal with it or address it, it rarely gets better by itself," Molenda added.

So how can you steer clear of-or manage-office drama and gossip? Here are some tips from Molenda:

Know yourself.

Many professionals do not realize their role in perpetuating workplace gossip or drama and have blind spots when it comes to their own character traits. Ask yourself tough questions: Are you ever an instigator? Do you try to stop gossip or communicate with the person starting it?

Recognize gossip, then refrain or redirect.

Friendly banter happens at most organizations, but sometimes banter can turn negative and critical. It's important to identify when someone crosses the line and goes too far.

If gossip or drama is making you uncomfortable, leave the conversation or attempt to change the subject. Tell your colleagues you are busy and have work to do. Having the courage to remove yourself from these situations is a behavioural trait of great leaders.
 
Be professional and painstaking.

Colleagues are unlikely to gossip about you if you work hard for the benefit of the organization, your colleagues, and yourself.  Always be courteous and professional when talking with colleagues or clients, and listen more than you speak. Be polite and respectful of differences in opinion.

Try to find the right outlet.

If your co-worker complains about or criticizes a colleague and you feel compelled to weigh in, find a different way to route that energy.

Ask for advice.

If you are the subject of gossip, or if office drama is affecting the organization or a colleague in a serious way, it may be time to talk to a manager or supervisor whom you trust. Ask your superior how you should approach a situation and how you can possibly resolve it. "If it's something you can't work through, then that's the point where you've got to start getting somebody else involved," Molenda said.

Managers, set the stage.

Gossiping and drama cause stress and division within teams, so supervisors must act as examples in terms of how to handle such problems in the workplace.

Establish a no-gossip policy early on  and talk with any gossipmongers directly, rather than in a roundabout way, to nip the problems in the bud. State you have heard them talking about someone and that it makes you uncomfortable.

Intellectual Property

Your Intellectual Property, known as "IP" is an important asset in today's knowledge economy that needs to be strategically managed.

 

Increasingly, Australian businesses are realising that intangible assets are often more valuable than their physical assets.

Protecting and managing your IP is important and is often the difference between success and failure in your market. 

So, what can be considered IP?

According to IP Australia, it is defined as your creative and intellectual output or in other words, "the property of your mind or proprietary knowledge.  Basically, the productive new ideas you create. It can be an invention, trade mark, design, brand, or the application of your idea."

In fact, your IP assets could be vital to the success of your business which means that any business owner should periodically review what might make up those assets and then take appropriate steps to secure ownership.

Cost of protecting IP

Any method to reduce the cost of IP needs to be balanced against the value of proper protection. There is a real danger that short-cutting protection measures will result in the IP not being properly protected. There are various other methods of protecting your IP but necessarily they do not rely upon the statutory methods of registration. For example, confidential information, unregistered trademarks and reliance upon fiduciary obligations, which invariably rely upon a court protecting the unregistered rights of the owner. However, these unregistered rights will always be subject to another party's registered rights.

If you are unable to justify the preliminary costs, then it's feasible that the IP has no immediate or future value to you and registration is unwarranted. This can be compared to taking out life insurance -- you hope you will never have to access life insurance but it's there to provide protection against unforeseen events. A similar attitude should be applied to the protection of your IP.

At Clarke McEwan we have access to resources that have been developed in consultation with IP Australia.  IP Australia is the Australian Government agency that administers intellectual property rights and legislation relating to patents, trade marks, designs and the like.

If you have concerns that you may have valuable IP that is not adequately protected under Australian Law, talk to us at  Clarke McEwan for more advice.

Employee or Contractor ? Getting it Right

It is crucial to understand the differences between employees and contractors because as an employer, you will be held responsible for getting it right.

 

Coping with the typical ebbs and flows of running a small business sometimes requires an extra pair of hands. 

This has seen independent contractor appointments become a frequent alternative to traditional Pay as You Go (PAYG) employment, particularly when specialist skills cannot be readily obtained by recruiting full- or part-time employees. 

However, it is important to not rush in and hire someone without taking account of the many factors that under the Independent Contractors Act 2006 and Fair Work Act 2009 differentiate an employee from a contractor. Any such arrangements are likely to be scrutinised by industry watchdog the Fair Work Ombudsman. 

CPA Australia points out that there are dangers in engaging an individual as a contractor without properly understanding relevant legislation. You may find the person is considered an employee at law, which involves a range of legal obligations – and liabilities – if you get it wrong. 

According to the Ombudsman, the Fair Work Act contains provisions to protect the rights and entitlements of independent contractors. 

Although its website explains the factors that may differentiate an employee from an independent contractor, there is no single indicator. 

"Each determination is based on the individual merits of the work arrangement in place," the information sheet states. "Courts always look at the totality of the relationship between the parties when determining the status of a person's employment."

Common indicators that may help to ascertain a person's employment status include the degree of control they have over work performed; whether hours are standard or set by the employer (as opposed to negotiation), expectations from work performed (i.e. ongoing or for a specific task); superannuation entitlements; provision of tools and equipment (by the employer or provider); method of payment (regular or on completion of a contract or project); and if paid leave is accrued. 

Don't rush in

It's not uncommon for businesses that fail to fully appreciate the key distinctions between the two working arrangements to find themselves in hot water – and the risk is particularly high for small accounting practices that need to deal with intense periods such as end of year tax reporting.

Smaller firms and solo operators often outsource work without properly recording the terms of engagement in writing. Should a dispute arise about whether a provider was a contractor or employee – or there is disagreement between the parties about the terms of the contract – it could ultimately lead to litigation. 

Therefore, it is imperative all terms of engagement are recorded in a written contract before the start of an arrangement, and that both parties sign it. Even if you have already engaged the person, it's not too late to enter into a written contract and acknowledge that it applies retrospectively.

Professional services firm KPMG released a report last year that cited a famous Federal Court of Australia remark; namely that contracting parties "cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck."

The report, Engaging contractors: time to get your ducks in a row, explains that engaging independent contractors can have unforeseen employment law and tax consequences if the relationship has features similar to a PAYG arrangement. 

In cases where liability is proven, company directors will be held accountable, the report warns. 

Even so, KPMG senior manager Paul Hum acknowledges that working out whether an individual is an employee or contractor is not necessarily straight-forward. 

"Unless there's a sudden significant change in the arrangement between engaging parties, it's extremely difficult to draw a line in the sand at a particular point in time," Hum says.

"Our advice to businesses typically centres on developing robust procedures and policies to identify and prevent risky arrangements upfront. If an individual is not identified upfront as being a risk, the risk should be reassessed each time the arrangement is extended or changed." 

The ramifications of inappropriately categorising an employee are similarly complex, he adds.

"Employers have to comply with a whole range of different obligations which don't apply to contractor arrangements. Excluding penalties and interest, this could be anywhere between 15 and 30 per cent of amounts already paid." 

In the event a contractor is deemed to have actually been an employee, such obligations include fringe benefits tax (FBT) and the superannuation guarantee charge (SGC) to the Australian Taxation Office (ATO), payroll tax to revenue offices, workers compensation to insurers or relevant authorities, back pay (if award conditions were not met), and leave entitlements, Hum explains.

What a sham

Also, be warned that the Fair Work Ombudsman interprets sham contracting arrangements as any attempt by an employer to deliberately disguise an employment relationship as an independent contracting arrangement – usually to avoid responsibility for employee entitlements.

Under the sham contracting provisions of the Fair Work Act, an employer cannot:

  • dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor; or
  • make a knowingly false statement to persuade or influence an employee to become an independent contractor.

Fair Work Inspectors can seek penalties for contraventions of sham contracting arrangements or coercing a party to enter into a reform opt-in agreement. The courts may also impose a maximum penalty of $51,000 per contravention. 

If you have any uncertainty as to whether your contractors are actually employees, contact us at Clarke McEwan.

 

Family trusts could be eligible for 'mind-boggling' tax cut

The Australian Tax Office has tweaked its view about whether companies linked to family trusts are eligible for tax relief, but industry veterans say the situation remains "utterly confused" and "mind-boggling".

A new statement on the ATO website says companies will be eligible for the lower 27.5 per cent rate afforded under the Enterprise Tax Plan even if their activities are "relatively passive".

The word "relatively" has been added since similar advice was provided in a footnote to a draft ruling earlier this year.

The footnote caused a stir among tax practitioners because it seemed to expand the range of businesses eligible for cuts to include companies holding passive investments, such as so-called bucket companies that receive income from discretionary trusts.

Revenue Minister Kelly O'Dwyer has been eager to quash the idea that wealthy families might be beneficiaries of the government's small business tax cuts, which were "not meant to apply to passive investment companies".

Tax Institute senior tax counsel Bob Deutsch said the ATO's latest statement did nothing to clear up confusion about eligibility.

"The position with all this is, in my view, utterly confused and will lead to countless errors being made by tax practitioners," he said.

"The bar appears to have been set relatively low in satisfying the requirement for carrying on a business in this context. Concrete examples would be required to give the community a better understanding of what is meant by 'relatively passive'."

Arnold Bloch Leibler tax practice chief Mark Leibler said it was obvious the tax cuts were only ever meant to apply to active trading businesses.

"I have never seen a standoff like this before between the Tax Office and Treasury and the responsible ministers," he said.

"I find this mind-boggling. What the government contemplated was people who are actually engaged in real, active business activities...not bucket companies sitting around and deriving passive income."

At present, companies with turnover of up to $25 million are eligible for the 27.5 per cent rate. The Coalition plan is for companies of all sizes to progressively qualify for the lower rate, which will then be dropped to 25 per cent.

Australian Council of Social Services senior adviser Peter Davidson said most people had the impression the tax cuts were going to businesses whose owners struggle on low incomes.

"The reality is that most of those businesses don't use companies or trusts," he said.

"Those that do are more likely to be professional such as doctors and lawyers than shopkeepers or personal trainers. And now the tax office has raised the prospect that wealthy people using bucket companies to warehouse their investment income could also benefit."

The ATO footnote said: "Generally where a company is established or maintained to make profit or gain for the shareholders it is likely to be carrying on business...this is so even if the company holds passive investments and its activities consist of receiving rents or returns on its investments and distributing them to shareholders."

Mr Davidson said the government would probably need to amend its legislation to prevent passive investors from taking advantage of the lower rate.

But the policy presented even bigger opportunities for tax planning by the wealthy and the only way to close the loopholes was to tax trusts at top marginal rates, he added.

"A common tax avoidance structure combines a trust with a private company beneficiary," he said.

"In 2015, small private companies received $17 billion in distributions from trusts."

The tax cuts also have consequences for franking credits.

Once a company moves on to the 27.5 per cent rate, dividends will be franked at the lower rate even if tax was paid at 30 per cent.

According to tax advisers BDO, this means dividends paid to shareholders on the top marginal rate will end up being taxed at 51 per cent, with the government to pocket the other 2 per cent.

Mr Leibler said the government had overlooked another element that would ultimately prove detrimental to shareholders.

"Unfortunately, what the government has done through its legislation is to provide that while a company is categorised as carrying on a small business and is being taxed at 27.5 per cent, that company can only frank to 27.5 per cent," he said.

"And that applies not only to reserves previously taxed in the hands of the company at 27.5 per cent but also distributions of all or any of the company's reserves that have previously been taxed at 30 per cent."

 
 


Contact Clarke McEwan