News Update May 2012

Welcome to the Simeoni Monthly News Update.
This month we look at the following topics:
- Expectation & Reality: the budget & your business
- Hasta la Vista: when you should exit your business
- Quote of the Month
                                

May News Update

Expectation & Reality:
the budget & your business
  
 

There is a big gap between what politicians say and what is happening ‘on the ground.’  It’s like they’re playing with the map and we’re driving on the roads.  We are the ones who experience the road blocks and the pot-holes, the redirection, and changing traffic conditions.  While a new road might be announced to resolve some of the issues, you still have to wait for it to be built.  So, it is with the Federal Budget. 

Here’s what the road ahead looks like for business:  

The ATO
Since we’re flogging the road analogy, let’s call the ATO the police. 

In the Budget speech, Treasurer Wayne Swan pointed out that tax receipts are down $150bn since the GFC.  Tax as a proportion of GDP in 2011/2012 and the previous two years is the lowest it has been since 1993/1994.  As accountants, we are already seeing the implications of this reduction in tax revenue in the approach and direction of the ATO.  The ATO’s approach is much more aggressive – both in practical ways and in policy decisions - than previous years where industry insiders would joke about tax debt as being the “Rudd Bank.” 

If you have outstanding tax debt that is not being managed, fail to lodge returns on time, receive large amounts of cash from overseas, have dealings with related overseas entities, claim large tax refunds, sell assets and claim the small business CGT concessions, or operate well outside of industry benchmarks, you are the equivalent of a P plater in a hotted up Nissan: a massive target for the police.  You might be squeaky clean but from the ATO’s perspective, you’re worth a closer look.

In the Budget, the ATO received $378m in funding directed to compliance programs including the extension of Project Wikenby style inter agency investigations.  What all this means is that the ATO presence, like the police on an Easter weekend, will be more visible than ever in your daily life.

Relieving cash congestion
Many of the upcoming reforms are designed to free up cash that would ordinarily be sitting with the ATO.  They are the equivalent of someone suddenly opening a lane on a congested road.  And with more cash, comes the incentive to spend it, thus stimulating business investment. 

Loss carry back scheme
Just prior to the Budget the Government announced a company loss carry back scheme.  If your company makes a tax loss next financial year, this scheme will enable you to carry back that loss (up to $1m) and claim it against tax you have paid this financial year.

Here’s an example: 
ABC Pty Ltd has been operating for a number of years and paid tax of $75,000 in the 2012 income year (i.e., taxable income of $250,000). The company had no carried forward tax losses at the end of the 2012 year.
 
In the 2013 year the company makes a tax loss of $200,000 because of a significant investment in new plant and equipment and weaker trading conditions.  The company has a franking account balance of $400,000.

The company’s refund under the loss carry back rules is limited to the lesser of the following (assuming a 30% tax rate):

- The tax value of the current year loss (i.e., 30% x $200,000 = $60,000)
- The tax value of the statutory cap (i.e., 30% x $1m =$300,000)
- The franking account balance (i.e., $400,000); and
- The tax paid in the carry back period (i.e., $75,000).

In this case, the company can carry back its full tax loss for the 2013 year against the tax paid in the prior year and will receive a cash refund of $60,000. This brings forward the cash flow benefit of the losses rather than having to wait until the company makes taxable profits in future years.

Instant write-offs
Last year, the Government announced two significant concessions for small business that will enable your business, assuming it qualifies, to claim an immediate deduction:

- Motor vehicles – you can claim an instant tax write-off for the first $5,000 for any motor vehicle that you buy in the upcoming financial year (2012/2013).
- Other assets – you can claim an immediate write-off of all assets under $6,500 from 1 July 2012.

Plus, the Government has simplified how other forms of write-offs are managed.  The change will allow small business to write-off other assets (except buildings) at a single rate (normally multiple rates apply depending on the type of asset).

Talk to us today and let us help you navigate the road ahead!

Hasta la Vista:
When you should exit your business

Knowing the right time to exit your business is more important than the decision to start one up.

When you start a business it’s often with an idea, a limited amount of capital, and a load of enthusiasm. By the time the business has grown and developed, it is likely to be worth far more than at the start.  But, a lot of business owners get the exit decision wrong and pay the price for it.

While you might hand your business onto your kids, most businesses either fail, or are sold.  Timing your exit is about understanding:

- The best time to realise that value
- Whether your business has outgrown you
- Whether the business model is changing (for the worse)
- Whether you have outgrown the business

A strong business with good prospects is always easier to sell and a buyer is likely to pay a premium for their expectation of the future value to be created.  Smart owners monitor not only the value of their business but also the expectations for the future.  You need to have a good sense of where you are on the value curve.

Some businesses outgrow their owners.  Some people are great at running micro businesses, some are great at running small businesses and some are great at mid size businesses.  Success at one level is not an automatic guarantee of success at the next level.  The skills sets required are different at each level. 

Normally, the smaller the business the more important it is for you to be skilled at what the business does. The larger the business the more important it is that you are a good manager – strong in finance, strategy and business planning. If your business is outgrowing you, then it might be time to exit before the next stage of growth puts pressure on both you and the business.

Don’t believe that your business model will be forever constant. Business models change. The owners can drive this change or it might be driven by changes in the industry or evolution.  For most business owners, the danger is that their business model is changing and they don’t realise it. If you are in an industry where the business model is changing you need a good radar system to detect this, and then be able to assess whether it is for the better or worse.  If your model is changing you need to be at the front end of the change or to exit the industry before the change takes over. You can get squashed in the middle.

And, in the same way that your business can outgrow you, you may be outgrowing it.  This does not apply to everyone but some business owners lose their enthusiasm once the business has grown to a certain stage. Where they relished the challenge of growing the business they are bored with the sameness of a mature model.

Doing a periodic health check on your business strategy and forward direction might tell you when your time is up.  Talk to us today about doing a health check and plotting your exit strategy.

 

 

 Quote of the Month

Don’t limit yourself. Many people limit themselves to what they think they can do. You can go as far as your mind lets you. What you believe, remember, you can achieve.”

Mary Kay Ash

Suites 101-104, 118 Great North Road, Five Dock, NSW, 2046
PO Box 725, Five Dock, NSW, 2046
P: (02) 9370 0400 | F: (02) 9370 0444 | E: simeonico@simeoni.com.au
 

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