I love the heading on page 6 of the Financial Review of Friday 4^th May, Abracadabra – surplus. This says it all. It starts off by stating that accounting tricks are so commonly used by governments around the world the International Monetary Fund provided a menu of the most popular one in a report released in March.

Titled “Accounting devices and Fiscal Illusions” the paper explains dryly how governments create surpluses where none exist. 

Take this on board and then read what Jennifer Hewitt has to say on Page 2 of the Financial Review of Tuesday 8^th May, still many hours before the budget is released. Ms Hewitt writes” ‘Wayne swan will be selling his budget tonight to a public that now identifies Labor with a union leadership whose financial records would make a Greek government blush.” But then again wasn’t Wayne brought up through the union ranks. Maybe his treasury skills were honed in a pseudo HSU type union.

The Sunday Telegraph on 6^th May, big heading: ‘$820 Gillard’s gift for school kids in your bank account next month’. WOW. Only a few things wrong with this; 1) It is not Gillard’s money to give away; 2) it will not end up in my bank account; 3) it is not a gift; 4) it is theft and deceit.

What our Julia is doing is spending some of her 2013 budget now so that it does not have to be reported as spending in the 2012/2013 financial year thus allowing Wayne to report a surplus.

Other tricks he has up his sleeve are: do not count the billions being spent on the NBN as government money, pay more bills before the end of June so that they do not have to be paid for in the 2012/2013 year. Defer some payments until 2013/2014 so that they do not have to be reported in the 21012/2013 tax year. Count as income money that has not yet been received, such as the carbon tax which will be received in much later years, but who gives a damn.

Another strange thing is this promise to change the rules so that companies that have been profitable can now run at a loss and then claim back tax paid in a prior year. Tough luck if you are a sole trader or Partnership, you can go whistle. After all Swannee already abolished the Entrepreneurs tax rebate which was real money in your hand for some airy fairy depreciation crap which meant you had to spend more money in order to pay less tax. He must have grown up in the union ranks and has never worked for himself.

If you can claim back tax paid in an earlier year, what happens if you have paid a fully franked dividend, this means you have already used up that tax payment. Unfortunately this will really mess up the calculations but then again that is for someone else to work out. Mister swan is only after votes.

Financial statements consist mainly of two documents, the Profit & Loss statement (P&L) or as it is now known, the Income Statement, and the Balance Sheet. These two documents represent as complete as financial picture as you can get. With this financial information we can develop a set of measurements that will allow you to monitor both your current position and your progress. A lot of this information is also included as part of your tax return when it is prepared and lodged. These numbers are used by the Tax Office to determine as to whether or not you are declaring sufficient income to cover the expenses you are claiming. We will cover that in the next couple of weeks, but first a couple of definitions.

The P & L is the easiest to explain and the easiest to understand. This document simply shows the income of the business at the top, followed by the expenses incurred by the business (the spending), which, when deducted from the income gives the profit (or loss) made by the business.  This document is used to determine the ability of the business to fund additional borrowings so if your business is mainly cash transactions it helps to account for this cash so as to be able to borrow to expand or acquire new assets, such as that work vehicle.

The Balance Sheet is a different monster in that it lists what the business owns and what the business owes. A balance sheet tells a story at a particular point in time and therefore it is important to be aware of the implications associated with this document on a regular basis. A good time to review it is each quarter when you do your GST reporting (BAS).

The Balance Sheet is divided into three parts, Assets, Liabilities and Equity. The Assets are what the business owns. The Liabilities are what the business owes and Equity is the difference.

Assets are divided into several categories but we will simplify this into two categories, Current assets and Fixed (or long term) assets. Current assets include cash at bank; amounts owed by customers (accounts receivable or debtors); stock on hand, this may be finished goods or raw materials and work in progress such as costs on jobs not yet completed. Fixed assets include assets such as motor vehicles, plant & equipment, office furniture, land & buildings and goodwill.

Similarly, liabilities indicate what the business owes and this is also divided into two categories being Current Liabilities and Long Term (or non-current) liabilities. Current liabilities include bank over-draft, amounts owed to suppliers (accounts payable or creditors), taxes owed such as GST and PAYG, staff superannuation owed. Long term liabilities would include staff entitlements and long term mortgage debt. The examples cited here are but the tip of the iceberg. To get a better feel for what is included in a balance sheet check out big corporations such as BHP, Qantas, etc. Their balance sheets contain more than a few categories.

No tax will be payable on income earned up to an amount of $18,200. Apparently this is an increase from the current tax free threshold of $6,000. What he did not mention was that he will abolish the low income rebate of $1,500 which meant that the current situation was that no income was payable on income earned up to $16,000. The tax cuts give most taxpayers an extra $303 per year until you get to $68,000 from where it gradually drops to a saving of $3.00 at $80,000 and beyond.

Mr Swan claimed that low income earners will be so much better off under the new tax structure, that is, unless you earn between $26,450 and $37,000 because in this range you will be paying more tax.  On $30,000 you are currently paying $2,100 per annum tax (plus the Medicare levy). Under the new tax scales implemented from 1 July 2012 you will be paying $2,242.00 tax on the same income.

Now I am willing to be proved wrong on these calculations, and once the budget is released the anomalies may have been fixed, but as it now stands you are worse off. On an income of $35,000 you currently pay $3,050 tax and after 1 July 2012 you will be paying $3,192.00, an extra $142.00.

The most amazing part of the new tax scales is that on $37,000 you are $142 worse off but if you earn an extra $1.00 you are $445.00 better off.  So if it looks as though you are going to earn close to the $37,000 mark, work that extra nights overtime to generate a bigger refund. In the words of the immortal Professor Julius Sumner Miller, “Why is it so?” The $1,500 low income rebate that did apply from $1 will be deleted and a new low income rebate will be introduced. This will apply from $37,001. So on $37,000 it does not apply, on $37,001 you get $445.00. 

The new tax scales show that on an income between $0 and $18,200 no tax is payable. Between $18,201 and $37,000 tax at the rate of 19% is applied. There are no low income rebates available at this stage. As mentioned, once your income exceeds $37,000 you become eligible for a low income rebate of $445 which is reduced by 1.5 cents for every dollar earned over $37,000 phasing out at $66,667.00

The tax rate for income earned between $37,000 and $80,000 is $3,572 plus 32.5 cents in the dollar for each $ over $37,000. The next tax bracket is for income between $80,001 and $180,000 where you pay $17,547 plus 37 cents in the dollar for income over $80,000.

Over $180,000 you pay the maximum rate of 45%. On top of these tax rates is added the Medicare levy, flood levy and whatever other levies the government decides to add. The argument here is that the levy is a levy and not a tax so it can be increased at any time and you are not paying extra tax.

It is my belief that tax deductions are over rated. Why would you give someone $100 just so you could get a refund of $30 (or less).  The best thing to do about a tax deduction is to look at what you are spending and if you can turn that spend into a tax deduction then all the better.

Tax deductions for employees are limited these days and can be industry specific. One tax planning option is salary sacrifice, whereby a benefit may be derived by paying for something with pre tax dollars. The health industry is one area that has a very generous scheme going whereby they are not subject to fringe benefits tax on pre tax spending up to a predetermined amount. The rest of us have to suffer and pay the 46.5% tax. There are benefits available although not as generous. You can sacrifice part of your salary to Superannuation. This allows you to increase you super fund while at the same time reducing the tax paid on the income foregone by anything from 16.5% to 31.5%.

The benefit here can be increased if you are over 50 as you can access the salary sacrificed once you turn 55 and can actually increase the balance of your super fund whilst maintaining the same take home pay. This is known as a transition to retirement pension and can be a very effective tax saving tool.

The other big salary sacrifice area is motor vehicles whereby you can save money by salary sacrificing the acquisition of a motor vehicle.  This allows you to pay for a new car out of pre tax dollars and, depending on the various variables, can save hundreds of dollars per year on what it would have cost you to run the same car in after tax dollars.

As an employee the only other options available to you to reduce your tax, and end up with something of value, is to look at negative gearing. As stated previously, I believe tax deductions are overrated and there is no point in spending money just to get a tax deduction.  The concept behind negative gearing is that you borrow to buy an income producing asset. Now, the most popular method of negative gearing is the purchase of an investment property, which is pretty expensive, so why not start small. You can negative gear into shares.  This allows you to borrow a smaller sum, buy your shares and start that million dollar portfolio.

The interest on the loan is tax deductable whilst the income from the shares by way of dividend is usually fully franked, that is it is an after tax payment, so there may be no extra tax paid by you on that income. There is also the possibility of capital growth in the shares creating a win-win situation.

 These options cannot be created at the last minute to generate a tax deduction so if you go down this path today, you will derive the benefit next year.

If you have any questions on any of this send me an email to les@coulcher.com.au

We have clients coming every year who acknowledge that they are aware of the records they needed to keep and promise to do better next year. So what approach needs to be taken, and can we do anything in the next few weeks. At this time of year we need to assess what we have done during the course of the past 12 months to see if there is any way we can generate a tax refund when we have our tax return prepared.

Depending upon your occupation, you can claim such items as tools of trade, purchase and maintenance of protective clothing, cleaning of that protective clothing, union fees, membership of professional bodies, subscription to professional journals, education expenses related to maintaining job skills whereby the education may be a refresher course related to a specific part of the job. In my industry my staff and I attend regular tax schools whereby we are brought up to date on changes to tax rules, tax forms etc. It may be that you need to be aware of changes to occupational health & safety rules etc so you pay to attend updates on this subject. The cost of the course is tax deductible as is the cost of travel and if the course is in another city then the cost of overnight accommodation and meals may also a tax deduction.

Other self education may be deductible if it is relevant to the earning of your wages and is relevant to your current duties. Education to get a promotion or another job is not tax deductible, however the cost of education to help you perform your current tasks is an allowable tax deduction. The fact that this helps in you gaining a promotion is a tax free bonus. The cost of uniforms is usually a tax deduction but if you work for a fashion shop and the boss expects you to buy clothes from that shop then the purchase of the clothes is not a tax deduction (what a bummer). If your job requires you to travel or work outside, then the purchase of a good pair of sunglasses and perhaps some sunscreen may be allowable.

If you travel between job sites on a daily basis or the place of work changes from day to day or week to week then the cost of travel may be a tax deduction.  With any of the claims for travel you must ensure that you keep accurate records. If you use a motor vehicle then document the odometer reading at the start and finish of each journey. It is amazing how many people rip themselves off by not keeping accurate records. If you go to TAFE as an apprentice, log the distance travelled, this is a tax deduction. The trip from home to TAFE and return is a tax deduction. The distance will not vary so measure it once and you have that measurement for all time. Also with TAFE students, keep a record of what you spend on books, stationery etc. It all adds up.

Over the next few weeks I will give a bit of advice on how to maximize that refund without undue stress being placed on you. I believe that tax deductions are over rated and spending money just to get a refund is a silly idea. The best bet is to try and make that spending tax deductible, so please ensure that all work related receipts are kept, this is the easy way to maximize your deductions..  First off we have a couple of suggestions that apply to someone who does not have a job.

There is an easy tax refund available to a select few. If your partner, Spouse, better half, etc does not have a full time job or is a stay at home type and earns less than $10,800 then a contribution of $3,000 to their Superannuation fund may entitle you to a refund of $540.00. The Tax Act allows for a tax offset, that is a reduction in tax payable, for superannuation contributions made to a complying superannuation fund for a low income or non-working spouse. The maximum rebate is $540.00, based on 18% of maximum rebateable contributions of $3,000. So a contribution of $1,000 gets a rebate of $180.00. The maximum contribution reduces by $1.00 for every $1.00 the spouses income is above $10,800. The rebate reduces to NIL for incomes of $13,800 and above. The beauty of this contribution is that the amount paid to the Super fund is not taxed in the fund, either on the way in or on the way out. The rebate is a tax free ‘gift’ for trying to do the right thing by your spouse.  It should be noted that the spouse’s income is assessable income plus reportable fringe benefits.

 The other Superannuation benefit is the co-contribution. I have been spruiking this for years but it has not been grabbed with the vigor it should have been.  Well it is probably too late to decide on that now as this Labor Government has opted in for another tax increase and virtually abolished the co-contribution system. If you work and your income is less than $32,000 then for every after tax dollar you put into Super, the taxpayer will stump up another dollar for you to a maximum of $500.00 so get in for your share before it all ceases.

 The other good tax planning strategy for the stay at home Mum (now that may be politically incorrect but it will do for today), applies to the families that have children at school and receive Centrelink benefit part A. Please ensure that you keep a record of all you spend on exercise books, text books, pens, pencils, computer stationery, printer cartridges, internet connection costs, new computers and educational computer software and School Uniforms. The taxpayer will give you “cash back” of up to half the amount you spend. The refund can be up to $390.00 for a primary school student and $779 for a secondary school student, and you do not have to have paid any tax to get the money. So start looking for those receipts now, the cash can be in your account by the end of July if you get in early.

The best method for choosing the right package is to sit down and write out what it is that you need from your new accounting software package. This is vitally important as it is very easy to get caught up in the sales hype and a spur of the moment purchase may see you spending too much on a package that is way over the top for your business’s needs.

Once you have a ‘core’ set of functions that the software must be able to handle, e.g. the features that are needed now for the daily running of your business, it is also important to look at possible features that you may need in the future. For example if your business is a small operation with a minimum of payroll entries there may be room for expansion down the track and this may mean having to upgrade your accounting software to suit. If there is no room to upgrade the software you will have to start the process all over again and spend more hard earned dollars.

Once you have a list of functions or features that you are specifically looking for you can get down to the serious business of finding the best package. With the advent of the internet shopping for these types of things has become a lot easier and doing a simple search of available programs or packages should help you narrow it down to a few different possibilities and it is then that you can source a local reseller and discuss your needs further.

Something that can either make or break a good accounting software program is the reseller’s commitment to after sales service and support in getting your system up and running and fully functional. This needs to be kept in mind as some of these packages can be notoriously time consuming and involved to get set up and if you are basically left to fend for yourself it sours the feeling you have of what could otherwise be a really good package.

It is advisable to talk to some previous clients of the reseller of your chosen package to see if they are doing what they can to help implement the software after the sale. There are many horror stories posted around the internet from individuals that have had a very hard time coming to terms with their new software and it is vital to get all the help you can to avoid these situations. It is also advisable to talk tom your accountant to find out what software he prefers his clients to use. This gives you an important ally if you have problems with your system. The Accountant should be able to offer training and support for the software recommended and if he does not, then change Accountants.

Our Practice supports and recommends MYOB but we do have clients using Quickbooks and they are more then satisfied. It is your choice but you should ensure the support you get understands you software package.

Ps: Sometimes a 9 column workbook is the best option.

Every now and then we read in the papers about an employee taking tens or hundreds of thousands of dollars of their employer’s money, and you ask yourself “How could they get away with that for so long before being found out?” Well it still goes on and it is only the ones that get caught that you hear about.

As a small business owner, or big business owner for that matter, how can you reduce the risk associated with this type of activity? Well, by monitoring your accounts you can significantly reduce this risk. It has been proven that if you have an employee in an important role, such as the paymaster or cashier and they are reluctant to take time off, then there may be a problem. Ensure that your staff always take their full entitlement of annual leave every year end that somebody new does their job whilst they are away. This gives you a chance to audit their work. If the person looking after the banking has a messy desk, cannot seem to find certain papers etc, then maybe they are trying to hide something.

One of several ways to check up on what is happening is through account reconciliations. This is the checking of account balances against a control figure. The bank reconciliation for example checks the balance of your bank account according to the Bank with the balance of your bank account according to your records. Some people find this exercise daunting but with Accounting software such as MYOB, the task is simplified. If you can get the hang of it then understanding what is being presented to you may make more sense.

Basically the exercise is to get the balance of your ledger to equal the bank.

This is done by setting down on paper a summary which shows:

Balance as per Bank Account                                                                               $

Plus Deposits in my ledger but not on bank statement                                 $

Less: Deposits on the bank statement not in my ledger                                $  usually interest earned

Less Cheques written not received by bank (the cheque’s in the mail)   $

Plus payment made by the bank not in my ledger                                          $__Usually bank fees__                   

Equals Balance as per Bank Statement                                                             $

By doing this exercise you can see if payments have been deducted from the bank account for which no authority has been given. 

The bank reconciliation is not reserved for only bank accounts, you can utilize this function to reconcile your credit card statements, payroll accounts, superannuation liability etc, which you should do. With your credit cards, by recording all credit card payments and ticking them back to your card statement you can easily verify if there is something wrong.

It is always a worry when there are a lot of transactions being processed through a bank account

or credit card so it helps if the checking process, ie reconciliation, can be broken down into smaller components. This can be done by using clearing accounts such as payroll clearing or undeposited funds account.  The account reconciliations can then be managed more easily.

If you have any questions, please send an email.

If you incur an expense for both work and private purposes you can claim a deduction only for the work related portion of your expense.

Car expenses relating to your work as an employee?

You can claim the cost of:

Transporting bulky tools between home and work; Direct travel between two differing locations of employment; Travel from your normal workplace to an alternative workplace and back to your normal workplace and directly home; Travel from your home to an alternative workplace and then to your normal workplace or directly home; Automobile Association or club fees and car wash expenses – these may be deductible depending upon the calculation method used to value car expenses.

You cannot claim:

• Travel between home and work
• Motor vehicle costs if the vehicle is provided by your employer or any other person who pays for the running costs

What about travel expenses relating to your work as an employee?

• Most expenses are allowable however, the cost of meals incurred that do not involve overnight stay are not deductible.

• If you travel in the course of your work and take a relative with you, you can claim a deduction only for your own expenses.

What about a uniform, occupation specific clothing, protective clothing, laundry or dry cleaning expenses that relate to your work as an employee?

Clothing Expenses You Can Claim

You can claim a deduction for the cost of buying, renting or repairing and cleaning any of the following:

• Occupation specific clothing; Protective Clothing; Compulsory Uniforms – Single Items of Compulsory Clothing; Non Compulsory Uniform or Wardrobe ; laundry and Dry Cleaning Expenses; and shoes, socks and stockings under limited circumstances.

With Laundry expenses costing less than $150 – no written evidence is required. However if the expenses exceed $150 then written evidence is required for all expenses.

Clothing Expenses You Cannot Claim

• A plain uniform; Ordinary clothing; Jeans or heavy duty clothing to protect you from the natural elements such as raincoats; everyday footwear such as dress, casual, running or sports shoes; laundry expenses for a plain uniform or everyday clothing; stockings and please note, you cannot claim a deduction for maintaining or repairing any of the above items.

Self education expenses relating to your work as an employee

If your course satisfies the criteria of a self education course then such expenses will include:

• Textbooks; stationery; student union fees; course fees; certain travel expenses; and the depreciation of equipment to the extent it is used for self education expenses.

Any other expenses relating to your work as an employee.

The expense must have a direct relationship to your employment. The cost must be apportioned for any private usage with only the work related usage being deductible. This usually applies to tools of trade and as an employee if you are required to bring your own mop, then you have a tax deduction.

The words used here are extracted from Tax Office publications and if we were to substitute the occupation above for Office Worker or Labourer then the deductions would be the same provided they were job specific.

The people being targeted by the Tax Office include businesses:

• paying cash in hand wages
• skimming some or all of the cash takings
• running a part of their normal business activities off the books
• not reporting barter transactions
• operating underground and avoiding their obligations by not registering or lodging returns.

The ATO strategies to tackle the cash economy and detect these businesses doing the wrong thing include:

• the publication of benchmarks which provide a guide as to the expected profitability on over 100 business industries
• educating the broader community about the risks of not getting a receipt for cash jobs,
• reviewing the records of businesses to ensure they are reporting all business income and expenses, and
• acting on information received from the community on suspected tax evasion.

The focus of this work is on industries which have ready access to cash in their business dealings. Examples include businesses in the hospitality industry such as coffee shops as well as the building and construction industry.

Another key and expanding way of detecting businesses which cheat the community is through data matching. Data matching is a key program used by the ATO to identify those who are either not lodging returns or who are not reporting all income – with more than 500 million transactions matched in the past year.

This expanding net now includes coffee suppliers’ and hardware store trade account information, with their customers’ purchase information being available to the ATO. From this information, the ATO will be able to tell if a business is skimming cash.

As detailed in the Commonwealth Gazette on 22 February 2012, information received about coffee shops buying more than 15 kilograms of coffee a week from suppliers will be checked by the ATO to ensure they are reporting all their business income. This takes the term ‘Bean Counter’ to a new level. There has been a response from the coffee shops questioning the ability of the ATO to decide whether there really is 43 beans in a cup of Nescafe and what happens if Gloria Jeans stores actually use 40 or 50 beans?

Individuals and businesses holding a hardware store trade account with annual purchases of $10,000 or more will also attract close scrutiny from the ATO, with data on purchases and reported income being cross checked.

The ATO will also be given data on complaints and licensing information from New South Wales Fair Trading, Queensland Building Services Authority and Government of South Australia Consumer and Business Services to identify those in the building industry who use cash transactions to avoid tax or fail to report correctly.

Second Commissioner of Taxation Bruce Quigley said “the message to tax cheats is clear – with increasing sources of information coming to the ATO, if you don’t play by the rules, you are more likely to be caught and penalised.”

For more information about ATO data matching programs visit www.ato.gov.au/datamatching