Articles

Business Health Checks – In Vogue or Necessary?

Unless you have been living under a rock you would have seen or heard the term "Business Health Check". It is used by banks, advertised in newspapers and online, and has commonly become a service provided to businesses in the advisory sector. But what does it mean and is it important to you as a business owner? 

A business health check is not just about assessing business finances. Analysing the financials is a great place to start and will highlight key issues to address. However the actions arising from these issues won't just be finance based, they should focus on a whole range of issues such as people/staffing, processes, succession, inventory, cash flow planning, risk minimisation etc. 

A thorough business health check will assess the finances of your business, make industry comparisons, and consider non-financial components such as policies, procedures, employee roles, job descriptions, work-life balance and compliance. The business health check should be followed up with a list of time based actions to ensure that the findings and issues are resolved in a timely manner. There is no point in completing an online business health check survey if the issues that arise are not dealt with. Working with an advisor to ensure that you remain focussed on actions will give a better outcome for your business. You will become answerable to your actions and this will drive the change needed to grow and strengthen your business. 

A business health check should be important to every business owner. In order to grow and be profitable, the business owner needs to understand their financial results and everything that contributes to (or hinders) business success. If you are in doubt ask yourself these questions:
  • Do you have enough cash in your business?
  • Do you want to create more profit?
  • Do you understand and manage your business risks?
  • Do you know how to manage and strengthen your cash flow?
  • Are you able to best manage your overheads?
  • Can you test the financial impact of decisions before you make them?
  • Is your business, and are your employees efficient?
Every business owner should be answering yes to these questions. If you can't answer yes then you need to consider seeking the help of a business advisor to give you the necessary information and tools. 

To learn more about how to turn your business numbers into knowledge and how Smith Thornton Accountants can help you, join us at our free seminar with keynote speaker Mark Holton from Smithink, presenting on "The Key to Strengthening Financial Decisions". 

Date: 10 March 2022 
Time: 5.00pm – 7.30pm
Venue: Hilton Garden Inn Albany
Cost: Complimentary (places are limited - please register to confirm attendance)

Smith Thornton Accountants can provide a no cost Needs Analysis meeting to business owners, (like a business health check, but better). The analysis performed not only covers the business health, but also the personal affairs of the business owner such as work life balance, succession planning, and assessing risks external to the business. Our Strategy 360 service is aimed at working with you to address issues or actions that arise from this assessment, along with regular reviews of financial performance and budgets to ensure that you remain on track to reach and exceed your goals and aspirations. Contact us to find out more.

The necessity of cash flow forecasting

Cash flow forecasts are an important tool used to predict the cash position of a business at some point in the future. Business owners are typically quite familiar with budgets or the budgeting process, which are used to show expected income and expenditure over a 12 month period. However cash flow forecasting is much more detailed and spans a longer time frame, making it representative of short and long term business plans. It also allows the business owner to test the financial impact of business decisions before they are made, which is an invaluable capability to have.

So why is it important to plan your business finances and to represent them in a cash flow forecast? The December 2020 Small Business Counts report prepared by the Australian Small Business and Family Enterprise Ombudsman found that from June 2015 to June 2019 on average only 65% of small businesses survived past the four year period. In 2018 the Australian Centre for Business Growth asked 650 CEOs of small and medium enterprise (SME) if they had ever experienced business failure and why the business failed. Of the 134 CEOs who answered yes, 14% said it was due to poor financial management. The only reason for SME failure that scored a higher percentage was inadequate marketing and market research. This demonstrates why it is so important to plan and forecast cash flow to give your business the best chance to grow, thrive and survive.

To prepare cash flow forecasts you will need to consider all income and costs relevant to your business. You might start with reviewing previous years financial performance however you will need to consider all factors that might impact income and costs going forward. If you are a start-up business owner, you will need to base your cash flow forecasts on industry research, market research and the income or costs known or locked in. Some key questions we would ask clients when preparing cash flow forecasts include:
  • Was income last year representative of a typical year? Do you expect this sales trend to continue? Were there any unusual sales or income sources that won't continue year on year? For a farming client we need to prepare livestock schedules and consider crop rotations to accurately forecast income.
  • Has your rent been recently renegotiated?
  • Are your current staffing levels sustainable going forward? Will wages remain the same, increase or decrease? For some businesses with many employees it might even be necessary to forecast wages by person or role to ensure the forecast is accurate.
  • What are your payment arrangements for insurance? Do you pay it monthly or in a lump sum? Do you take out insurance premium funding? 
  • Were your gross profit margins or cost of goods sold margins last year normal? Do you know what the industry benchmarks are and how you are performing against these?
  • Were there any overheads last year that were unusually low or high? For example during the COVID pandemic, did you receive electricity credits? Did you receive reduced rent? Did you have to pay wage top ups under JobKeeper?
  • What are your business plans for the next five years? Are you planning on changing suppliers, entering new markets, growing sales etc.?
  • What do you typically spend per month on capital replacements? This might include store shelving, computers, chairs, desks etc.
  • Do you have any major capital expenses planned over the next five years? Do you need a new tractor or car? Does your premises need major upgrades such as roofing or a new carpark?
  • What loans do you have, what are the terms of these loans and are you planning on financing any capital expenses?
The timing of the income and expenses discussed above is critical in order to predict a cash balance for your business each month over a three to five year period. As such it is also important that your cash flow forecast also considers things like PAYG withholding, superannuation, GST and income tax, which all have specified payment arrangements.

Once you have gone through this process you will not only have a fairly accurate understanding of your cash needs and your ability to pay bills, but you will also have a better understanding of your business plans going forward. It is also important to review your cash flow forecast regularly (ideally quarterly) to ensure that any changes in your business are reflected, and to monitor any variances in your forecasting against your actuals. If your cash balance looks low at some point in the future you can plan for this, make changes if possible, or contact your bank early to discuss your overdraft needs. 

If you would like to discuss cash flow forecasting or the monitoring of your performance against budget please contact our Business Services Advisor Jenna van Nierop on 9842 5155 or by email: Jennav@smiththornton.com.au

Key Performance Indicators – Help or Hindrance?

When Key Performance Indicators or KPIs are mentioned to business owners the response can be quite varied. Some are indifferent or curious as they haven't heard of them before. They want to learn about them and how they could help drive improvement within their business. Some get excited as they have heard of KPIs previously but have never found the time to implement or monitor them. For others their eyes glaze over, often because it is their honest opinion that KPIs are either time intensive, that their time could be better spent on other business tasks, or that they promote a bad working environment.

So which response is right? Are KPIs a help or a hindrance to a business?

The answer is simple – setting the right KPIs for your business, and implementing and monitoring them in an effective way will help improve efficiencies and the financial success of your business. They can also be one of the most important gifts you can give to your staff to help them improve and thrive. However, setting KPIs that are not suited to your business, or the use of poorly implemented or monitored KPIs won't result in improvement – and who wants to spend time on something in their business that doesn't have a positive impact?

This is why it is so important to go through the correct process when setting, implementing and monitoring KPIs. Here are some key points to remember when considering KPIs for your business.
  • You need to first analyse your business. What areas are doing well and what needs improvement? This can involve financial analysis but also consideration of things like workplace culture, wastage, staff productivity, customer satisfaction, brand awareness etc. Some of these might be hard to measure but they are equally important as (and contribute to) the financial performance of your business. You might need to conduct staff surveys (possibly anonymously), ask for client feedback (sometimes a prize can entice customer engagement) or perform detailed analysis of information from your POS or accounting software.
  • KPIs can then be used to overcome issues identified, but also to maintain those things that are working well for your business. If you spend all of your time fixing the issues you run the risk of shifting staff focus solely to problems – make sure you measure and celebrate the positives too!
  • Once you have identified the issues you want to resolve, or the successes you want to maintain, determine what would indicate improvement or success, and how you can measure the performance of these indicators. You need to be able to source information on these indicators easily and regularly to monitor success.

    For example, you might have noticed wage costs are high in comparison to industry peers and relative turnover. This could suggest that staff productivity is low or that you pay staff too much. You could review wages and set thresholds for new hires, or you determine how to best measure staff productivity in your business.

    You might notice that lots of staff are leaving and you are always training new hires. This might be because staff satisfaction or morale is low. Measuring staff satisfaction can be done by conducting and analysing regular staff surveys, reviewing staff turnover, or even having regular one on one conversations with staff and assessing issues raised.
  • Setting KPIs alone won't always work – you need to develop actions that will drive the improvement of the KPIs. For example, setting productivity targets and measuring them regularly might be the push your staff need to work harder. Sometimes though, there might be problems causing the lack of productivity (wrong person for the role, old technology, poor working conditions, wrong team mix). Similarly staff satisfaction won't be improved simply by meeting with them regularly. You need to determine why they are unhappy, analyse the results of surveys or discussions, and determine what actions you can take to resolve concerns.
  • Don't set too many KPIs – target areas that will have the biggest impact on your business and focus on these first. Too many KPIs become too time intensive to monitor and often get forgotten.
  • All business owners should have a strategy or plan for their business. It is important that you choose some KPIs that align with your business plan as they will help drive your success in achieving the goals you have set.
  • Linking KPIs to incentives can work at times, but it can also result in a "me" focus instead of a "team" focus, or can entice staff to manipulate data or hours to get the desired outcome. The true purpose of a KPI is to clearly set and articulate direction for the business and staff, not to create competition or bad behaviour.
  • As a business owner you need to be involved in creating the KPIs for your business. If you don't have involvement in the KPI decision making process, you won't feel ownership of the KPIs created. If you don't feel ownership you won't use them.
  • Talk to your staff about the business KPIs, why they are important and what they are being used for. It is important that you get positive involvement from your staff and that they feel informed.
  • Analyse the KPIs regularly, don't set them and forget them. This doesn't mean you run the numbers and summarise them in a table. You need to get the data, analyse it and determine what is working and what is not. KPIs are meant to create action, not just a discussion point at your weekly meeting.
  • Update your KPIs as your business changes or as new issues arise. A regular review of your KPIs (annually) should be performed to ensure that they are still relevant for your business and worth the time involved in measuring them.
If you would like to discuss your business and KPIs please feel free to contact Jenna van Nierop at Smith Thornton on (08) 9842 5510.
STP2 begins from 1 January 2022 unless a deferral is in place.  

What is STP2?

STP2 is an increased level of reporting each time a pay run is processed. STP1 was all about reporting gross wages, tax withheld and superannuation to the ATO. STP2 will incorporate more information so that other Government Departments can streamline their services. Separation Certificates will no longer need to be provided to employees on termination, child support deductions will be automatically reported and income and allowance will automatically be reported to Services Australia, meaning that employers will no longer need to verify employment status and income for employees.

What does it mean for employers?

Most software providers are already compliant with the new requirements and will be ready for the transition on 1 January 2022. Xero has a deferral in place to December 2022, which means that their clients have until then to begin reporting. Some software providers will transition their clients progressively to avoid system issues caused by too many users trying to lodge at the same time.

Your software payroll settings need to be accurate that the correct items are being reported. This may require a re-mapping of payroll codes.

The ATO will write to every employer informing them of STP2 requirements by the end of November 2021, and the ATO Website has guidelines for employers.

If you would like assistance to review your payroll settings or prepare for STP2, our bookkeeping team are only too happy to assist!

Director IDs


From November 2021, company directors will need to verify their identity as a part of a new director identification number (director ID) requirement.

Directors will need to apply for their ID themselves to verify their identity. No one can apply on their behalf.

The director ID confirms identity and traces relationships to the relevant companies. 

Directors can apply from November 2021, and new company directors can apply before being appointed.

The date at which each company director must have a director ID depends on when a director was appointed:
  • Existing directors appointed before 31 October 2021, must apply by 30 November 2022.
  • Directors appointed between 1 November 2021 and 4 April 2022, must apply within 28 days of appointment.
  • Directors appointed after 5 April 2022, must have a director ID before appointment.
To apply for a director ID, there are three options:
  1. Online: Set up a myGovID (if you do not already have one). myGovID is different from myGov, it is an app that can be downloaded to a smart device which lets each individual prove who they are and log in to a range of government online services. Once all the necessary identification is confirmed, they can log in to: www.abrs.gov.au/director-identification-number/apply-director-identification-number and apply for a director ID. The application process should take less than five minutes.
  2. Phone: Call the Australian Business Registry Services (ABSR) from November 2021 (ready with all identification confirmation details).
  3. Postal: Application forms will be available for download from the ABSR website in November 2021. The identification confirmation details will need to be certified copies if using a paper form.
Identification Confirmation details are required to provide evidence of identity including TFN, residential address and two other verification documents such as a bank statement, ATO assessment, dividend statement etc.

If you need any guidance in applying for your director ID, please contact us for further assistance, we are only too happy to help.

Super Stapling starts 1st November 2021

What is Stapling and why is it being introduced?

Stapling is an Australian Government superannuation reform that will be introduced from 1 November 2021 and applies to new employees (it cannot be used for existing employees).

Aimed at avoiding the creation of multiple unintended super accounts that are eroded away with fees and charges, the ATO will have a record of every employee's eligible super fund and these details are "stapled" to the employee.

What is it replacing?

Currently if an employee does not provide super fund details or they are incorrect, an employer must pay eligible super contributions into the employer's nominated default fund. From 1st November 2021, this will no longer be the case.

What does stapling means for employers?

Under the new reform, an employer MUST contact the ATO and obtain the details of the new employee's stapled fund if the employee does not provide you with their super details or nominate a choice fund.

You will be able to request your employee's stapled super fund after you have lodged a Tax File Number (TFN) declaration or a Single Touch Payroll (STP) pay event for the employee. 

How can an employer obtain the stapled fund details?

  1. Log into ATO online service (For Business)
  2. Request Stapled fund and enter employee details
You will receive a response on-screen within minutes. The ATO will notify your employee of the request and the fund details provided to you. The ATO will also be monitoring this service to ensure employers are using it appropriately and are making genuine requests.

Stay tuned for updates that are sure to come as the ATO refine the process!

What is a non-arm's length transaction?

Parties are usually 'at arm's length' if they are unrelated and neither entity is effectively controlled by the other. If you are dealing with a related entity or associate, all transactions are considered to be non-arm's length and can be scrutinised to ensure that the ATO has not missed out on a taxing opportunity.

Meaning of related entity

A related entity or associate is any of the following:
  • your relative (the person's spouse, parent , grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendent or adopted child of that person, or of that person's spouse; or the spouse of a person referred to here).
  • a partnership in which your relative is a partner. 
  • the relative of a partner in the partnership;
  • an individual who is or has been a director of a company for the income year;
  • an entity that is or has been a shareholder in a company of that kind;
  • the relative of an individual who is or has been a director or shareholder of a company of that kind;
  • a beneficiary of a trust;
  • the relative of a beneficiary of a trust;
And the list goes on!

How is this treated for Income Tax purposes?

There is specific legislation that requires market value substitution for non-arm's length transactions, including for purchasing trading stock, remuneration to associates (such as relatives, shareholders and directors), and international transactions (known as transfer pricing).

Generally, you can only claim a deduction for the market value of a cost, regardless of how much you pay to a related entity. And vice versa with income, you must declare income for sale of an item at market value, regardless of how much you sold it for to a related entity. 

How is this treated for Capital Gains Tax (CGT) purposes?

Where a CGT asset is acquired or disposed of at less or more than fair market value in a non-arm's length transaction, the asset will be deemed to be acquired/disposed of at fair market value for capital gains tax purposes. This means that where you are dealing with a related entity when purchasing or selling a CGT asset, you must have supporting evidence of market value, you cannot simply rely on the agreed value or financial exchange as a basis for calculating any capital gains tax liability. This happens more often than you realise, with CGT assets being passed between family members or transferred from one entity structure to another for discounted or no consideration.

There are some concessions for small businesses who are transferring assets to an alternative structure that can be adopted if appropriate.

How is this treated for GST purposes?

A basic principle of GST is that, for there to be a taxable supply, the supply must have been made for consideration.

However the GST Act provides that the fact that a supply to your associate is without consideration does not stop the supply being a taxable supply if either your associate is not registered for GST or the supply is not solely for a creditable purpose (that is not input taxed or private in nature).

Where a taxable supply is made to an associate for less than the market value, the taxable supply will be treated as if it were made for market value, rather than the actual consideration received.

What is Market value substitution?

The ordinary meaning of Market Value is the price that a willing but not anxious buyer would have to pay to a willing but not anxious seller for the item. Market value has also been described as the best price that may reasonably be obtained for a property if sold in the general market. In addition, all possible buyers should be taken into account, even a buyer who, for their own reasons, is prepared to pay an excessive price.

If shares are listed on a stock exchange, the most appropriate market to use for determining value is normally the stock exchange market. If considerable amounts are involved, a tax payer would be prudent to obtain the services of a qualified value where there is any doubt as to the fair market value.

The take away message

Take care when recording and documenting transactions with relatives and associates and consider whether the market value should be ascertained and documented for evidential purposes (especially when acquiring assets that might be subject to future capital gains tax). If you are unsure if this poses an issue for you, please give us a call to chat about your particular circumstances.

Cryptocurrency

With cryptocurrency becoming more prominent in today's world, it's a good time to touch on what this looks like for you in regards to your tax return. 

Cryptocurrency is an area which is evolving rapidly, and given its complexity and the increased investment across Australia it has well and truly got the attention of the Australian Taxation Office (ATO). The ATO is using more tools that are available to track cryptocurrency transactions and some are now appearing on Pre-Filling reports to notify Tax Agents of transactions. Some of the tools the ATO is using include data matching programs using designated service providers (DSP's), and in total have over 60 sophisticated identity matching techniques. 

In the last year, the ATO has written to more than 100,000 taxpayers regarding cryptocurrency, and is expecting to prompt over 300,000 people in relation to the 2021 tax returns.

Given how vast and complex the area of cryptocurrency is, this article's sole intention is to provide some background information and perhaps get you thinking about your situation. This article doesn't explore many other aspects, including what it means for self-managed superannuation funds (SMSF's).

By now I'm sure you may have heard of Bitcoin, but for those not as familiar with the cryptocurrency world, there are now approximately 6,000 active cryptocurrencies, and it is estimated over 600,000 Australians have invested in the market.

Whether or not the sale of cryptocurrency is ordinary assessable income, a Capital Gains Tax event or a personal use asset will depend on the intent in buying and selling, the commercial (or non-commercial) manner in which you do so, and the scale and approach you take to trading cryptocurrency. 

For the vast majority of us who buy cryptocurrency, it will be a Capital Gains Tax (CGT) event when it is sold or disposed of.  It is important to know that a disposal of cryptocurrency can include;
  • Selling or gifting it to someone else
  • Trading or exchanging it with someone else (including exchanging one cryptocurrency with another cryptocurrency)
  • Converting cryptocurrency to Australian dollars, (or any fiat currency i.e. any currency established by government regulation or law)
  • Using cryptocurrency to buy goods or services, 
In the cases where you exchange cryptocurrency for another cryptocurrency, you are disposing of one cryptocurrency and acquiring another. The market value you receive is effectively the sale price of the cryptocurrency being sold. 

Each cryptocurrency is its own asset, similar to owning shares in ASX listed companies for example.

Cost Base

The cost base of your cryptocurrency may include;
  • Brokerage Fees
  • Transfer Costs
  • Platform Costs
  • Borrowing Expenses
  • Legal Fees
  • Interest on Loans
  • Software costs

Record Keeping

It is worth looking at the record keeping requirements for cryptocurrency, as the reporting systems may not be as sophisticated as traditional investments that have buy and sell contracts, or the year end investment report packages. The information that will have to be recorded includes;
  • The type of coin purchased
  • Purchase price in AUD
  • The date and time of the transaction
  • Records of any exchanges for other coins
  • Details about your digital wallet and keys 
  • Details of any Commissions or brokerage fees paid
  • Receipts of transactions 
You will need to maintain these records for a period of five (5) years, and if you have a capital loss you will need to keep them for two years after offsetting against a capital gain.

Strong record keeping is critical and reasonable care needs to be taken.

As mentioned earlier, this is just a brief summary on cryptocurrency and some areas we haven't covered include;
  1. Cryptocurrency that may be a personal use asset (non taxable)
  2. Cryptocurrency held in a self managed super fund
  3. Cryptocurrency for use in business transactions, such as buying supplies, or accepting it as a form of payment
  4. Using cryptocurrency to pay Salary and Wages to employees
The information in this article is for general information purposes only. It is not intended as financial or investment advice.

If you would like to discuss your specific tax requirements, please contact our team on 08 9842 5155.
Do your lifestyle tastes extend to fine art or thoroughbred horses? The ATO is interested too…

The ATO regularly collects information about certain categories of lifestyle assets, using data extracted from insurance policies. It singles out assets with values exceeding:
  • Marine vessels value exceeding $100,000
  • Motor vehicles value exceeding $65,000
  • Thoroughbred horses value exceeding $65,000
  • Fine art value exceeding $100,000
  • Aircraft value exceeding $150,000
This information is generally used by the ATO when identifying audit targets, particularly under what could loosely be termed as its 'cash economy' audit program. They use this data to compare with personal income, and identify those who may seem to be living beyond their means.

Release from Tax Debt

In a same-but-different example, an individual taxpayer was denied relief from a tax debt on grounds of serious hardship.

The taxpayer was unable to work due to injuries suffered whilst at work and her husband has suffered health issues and a subsequent reduction in his income.

They applied for relief from an $18,000 tax debt on grounds of serious hardship.

Upon scrutiny, it was found they had incurred significant discretionary spending, including the purchase of a new car for $37,500, a European trip for herself and her family and the provision of financial assistance to other members of her family.

The taxpayer was denied tax debt relief, because they had demonstrated: "… a willingness to put personal discretionary spending ahead of her obligation to the Australian community to pay her tax liabilities…"

Reference: SYRF and Federal Commissioner of Taxation (2021) AAT 1845

If you would like to talk to one of our accountants, contact us to discuss your specific requirements.


The Smith Thornton team celebrated the end of the financial year in style at Garrison Restaurant on 3rd July. There were many reasons to smile, with the end of a hectic year, the celebration of Smith Thornton's 25 year anniversary and a chance to unwind with our comrades. Garrison certainly put on a show with delicious morsels to delight us and fabulous cocktails that looked as good as they tasted. There were a few speeches to be made, especially given the 25 year milestone and thanks, of course, to our hosts and the organisers of the event.


We couldn't be happier with the way the evening turned out, there were many laughs to be had and a chance to shake off the year that was. We recognised special staff members that had come and gone (and some who have stayed) as well as some very select clients who have been with us from the beginning. Mention was also made of some significant events over the years, it has certainly been a journey and we wouldn't have it any other way. We even had a photo display of what current staff looked like 25 years ago – given our youngest staff member, Sam Wilson, is only 22, this proved to be quite an interesting exercise! He is pictured here (centre) with Melinda Hudson (left) who has just seen out her 20 year anniversary and Nancy Lembo (right) who has been on board from day dot. Of the evening, Sam said "A great time shared with a great crew!", while Nancy, who has attended her fair share of these events to say the least, said "A lot of wonderful memories flooded back as we prepared for our special EOFY Party in celebrating the business's 25 year anniversary.  There was lots of fun and laughter on the night reminiscing the many years together and recalling many funny stories to those newer team members to Smith Thornton."

Bring on the next 25 years!!!


   

 

  


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Office Location

234 Stirling Tce
Albany, WA 6330
Australia

Postal Address

PO Box 5445
Albany, WA 6332
Australia

Contact Numbers

Phone 08 9842 5155
Fax 08 9842 5510
Email mail@smiththornton.com.au

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