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Debt financing vs equity financing

Gathering funding is a challenge that almost all business owners face at some point. Financing can come in two forms – debt financing and equity financing.

Debt financing is money that you borrow and plan to pay back within an agreed time frame and interest rate. Common forms of debt financing include bank loans, mortgages and credit cards. This may appeal to business owners that wish to maintain complete control and ownership over their business, without having to manage the expectations of investors. Debt financing also means that business owners do not have to share any profits made by the business, as their only obligation to their lender is making payments on time. As well as this, debt financing methods are usually tax-deductible, unlike private loans.

However, debt financing also has its downsides as the cost of capital is higher. Loans from official lenders such as banks typically come with interest rates that also need to be paid in addition to regular repayments. This means that your business must generate enough income to meet the requirements of the debt, which can affect cash flow and could even result in bankruptcy if the business fails and is not able to repay the debt. As well as this, new businesses may struggle to secure a bank loan, as banks often have a strict protocol regarding who can receive a loan.

Equity financing, on the other hand, is when you invest your own money or someone else’s money (usually family and friends, venture capitalists, business angels, or public floats) in your business. As a result of this, the investor of your business partially owns your business and shares the profits you make. This method of financing may be more suitable for business owners who can accept sharing their profits and not having complete ownership and control over their business.

One advantage of equity financing is having freedom of debt as repayments do not have to be made on investments. As well as this, equity financing methods can potentially expose business owners to additional funding opportunities if investors decide to provide more support for the business as it develops. However, business owners considering equity funding should also keep in mind that these methods can often put a strain on personal relationships if the financing was sourced from family and friends, depending on if the business succeeds or fails.

Posted on 9 July '20, under business. No Comments.

Tax on super death benefits for dependants vs non-dependants

A super death benefit is the super paid after a person’s death, usually to a nominated beneficiary. These benefits are subject to different tax treatments, depending on whether the beneficiaries are dependant or non-dependant.

Superannuation death benefits will generally be received tax-free by tax dependants, who are considered to be:

Dependants will not have to pay tax on the tax-free component of their super in the event that they:

However, they will be taxed at their marginal rate if they receive a capped benefit income stream and:

Not all super death benefits are subject to tax; for non-dependants, there is a taxable portion. This component is largely made up of after-tax super contributions that the deceased member has made.

Super death benefit payments are subject to tax when:

Non-dependants must calculate how much money in the super account is a:

The amount of tax non-dependants pay will be based on their marginal tax rate, however, this amount may be reduced by tax offsets. For the taxed element of the taxable component, the effective tax rate is your marginal tax rate of 17% (whichever is lower). For the untaxed element of the taxable component, the effective tax rate is 32% or your marginal tax rate (whichever is lower).

Posted on 9 July '20, under super. No Comments.

Are you eligible for the small business income tax offset?

The small business income tax offset can be used to reduce the tax you pay by up to $1,000 a year. Also known as the unincorporated small business tax discount, the offset is worked out on the proportion of tax payable on your business income.

The rate of offset is 13% for the 2020-21 financial year and 16% for the 2021-22 financial year and onwards. The offset is only available to entities with an aggregated turnover of less than $5 million (from 2016-17 financial year onwards) and is capped at $1,000.

The ATO will work out your offset based on your income tax return and uses your:

Conditions for sole traders

The offset is calculated based on net small business income for sole traders (which is the sum of your assessable income from carrying on your business, minus any deductions). Sole traders are not entitled to the offset in the event that their net small business income is a loss.

Income and deductions that you need to include in your net small business income include:

Conditions for partnership and trust distributions

You may be eligible for the tax offset if:

Keep in mind that there are income and deductions that you cannot include when working out your net small business income for the small business income tax offset. Such income amounts include wages, government allowances and net capital gains you made from carrying on your business. Discuss with a financial advisor or accountant for more information on the offset conditions for your business.

Posted on 9 July '20, under tax. No Comments.

What are the different types of cashless payment methods?

In an effort to minimise physical contact during the global pandemic, most businesses are making the switch to cashless payments. While contactless credit cards and mobile wallet applications remain the most common type of cashless payments, many other methods have emerged in recent times. In the event that your business is also looking to make the switch, here are a few cashless payment types to be aware of.

Radio-frequency identification (RFID):

RFID uses radio technology to track tags containing electronic payment and banking information. RFID tags are most commonly attached to wristbands, watches or badges and can be scanned using mobile phones and RFID system technologies.

RFID tags can also be used at business events or service-providing organisations to keep track of clients while also acting as their digital wallet.

Unstructured Supplementary Service Data (USSD):

USSD services are another real-time cashless payment method which require a mobile network. With the USSD method, clients must dial a USSD code on an interactive menu provided by the business (could be a mobile phone), which will then allow clients to make payments to chosen recipients. The USSD code is dependent on a client’s mobile network and in order to make successful payments, clients must have their bank accounts correctly linked to their mobile phone number.

Quick Response (QR) Codes:

A QR code is a two-dimensional gridded pattern of black squares and is a viable cashless payment method as long as both clients and businesses have modern image-reading and camera technologies. Payments made through QR codes require a user to scan the QR code of a merchant to complete the transaction and can be done through banking apps or third-party payment applications on mobile phones.

While it may be tempting to make an immediate switch into cashless payment methods, the technology required to support cashless transactions is a costly investment. Before jumping the gun and spending money you do not need to, take note of which cashless payment methods would best accommodate your clients’ needs and fit into your existing business operations.

Posted on 2 July '20, under money. No Comments.

How to keep employees safe as they return to the workplace

Enforcing health precautions is an essential step to creating a safe workplace and giving your employees peace of mind, especially during the current pandemic. Businesses looking to invite their employees back into the office after the easing of lockdown restrictions should implement safeguards to ensure their workplace is a safe one.

Conduct a COVID-19 risk assessment

Before opening your office to employees, conduct a COVID-19 risk assessment with Safe Work Australia. A risk assessment will include an evaluation from Safe Work Australia regarding your business’:

The progression of additional business activities will also be assessed. For example, the safety of business trips when travel restrictions are lifted.

Implement cleaning processes

Invest in frequent cleaning services and processes to lower transmission risk and give your employees peace of mind. In addition to hiring a cleaning service, you can also keep your workplace safe by providing employees with disinfectant solutions for door handles, light switches and keyboards.

Other cleaning and hygiene processes to implement include:

Support your employees’ mental health

Supporting your employees’ mental health is just as important as their physical health. To create an environment that your employees feel comfortable and safe to work in, provide aid in the form of workplace flexibility, therapy and counselling services, home-to-business transportation options and financial advice. Additional services such as child-care can also be helpful to supporting your employees’ mental health.

Posted on 2 July '20, under business. No Comments.

Do you need to lodge a transfer balance account report?

Self-managed super funds (SMSF) may be required to lodge a transfer balance account (TBA) report by 28 July 2020 in the case of a TBA event.

A TBA report will need to be lodged with the ATO in the event that both of the following apply:

SMSFs will also need to complete this report when a member needs to correct information about a TBA event that they have previously reported to the ATO or are responding to a commutation authority.

According to the ATO, an event is classified as a TBA event if they result in credit or debit in a member’s transfer balance account. Such events include:

There are a number of ways you can lodge your TBA report with the ATO:

Posted on 2 July '20, under super. No Comments.

COVID-19 factors to remember when filing your tax return

The end of the financial year has rolled around again, but this time, COVID-19 may affect the way you fill out your tax return. The ATO has released a range of methods to make tax time easier for businesses and individuals experiencing unprecedented circumstances.

How JobKeeper will affect tax returns

Sole traders receiving JobKeeper payments on behalf of their business are required to include these payments as assessable income for the business. Employees receiving JobKeeper will see that those payments have been automatically filled out in their tax return.

Individuals who have had their wages increase due to JobKeeper should identify whether they have been bumped into a higher tax bracket as a result. If an individual is working multiple jobs and receiving JobKeeper at one of these positions pushes them into a new tax bracket, they may be faced with a higher tax bill on their return if their other employers had continued deducting tax at their original lower rate.

How JobSeeker will affect tax returns

JobSeeker payments are considered taxable income. The ATO will automatically upload JobSeeker details in the ‘Government Payments and Allowances’ section of recipients’ tax returns. However, recipients are advised that there may be a delay in these JobSeeker details being updated, potentially until the end of July. The ATO recommends delaying tax return lodgements until these details are finalised. Recipients that wish to complete their returns prior to this must ensure they include these details themselves, as leaving out assessable income can slow down the return process or result in a bill later.

COVID-19 protective equipment

Occupations that require public interactions may be able to claim personal protective equipment (PPE), including:

This would typically apply to industries such as healthcare, retail and hospitality. Many workplaces now have this PPE available for employees, however, employees who must pay for their own COVID-19 PPE and are not reimbursed for it will be able to make a claim.

Working from home

The ATO has introduced a new ‘shortcut method,’ which applies from 1 March 2020 to 30 June 2020. Under this new method, employees working from home as a result of COVID-19 can claim expenses incurred at a rate of 80 cents for each hour worked from home. Employees must keep a record of the hours they worked from home as evidence to support their claim.

Deductible running expenses include:

Posted on 2 July '20, under tax. No Comments.

What to consider before opening another business location

Expanding your business to open in multiple locations can offer more opportunities and profitability. However, managing one location can be challenging enough, so it is crucial to examine and prepare for the implications of opening up a second store. Here are some considerations that business owners need to keep in mind before deciding to open up a new branch.

How successful is your current business?

Your current business should be stable and successful before you open up multiple stores. If your business is struggling in key areas such as cash flow, sales, employee skill sets, and customer retention, then it’s a good idea to address these needs first, otherwise, your new locations are likely to face the same issues. Assess your current store’s shortcomings and consider whether they will also put your new locations at risk.

What are the characteristics of the new locations?

Choosing the right business location plays a key role in the success of your business. Before branching out, research potential locations and consider how areas could affect your business due to factors such as popularity, business competition, demographics, transport accessibility, rent prices, and attractiveness to employees. Assess whether the differences between your current and potential new locations will require you to make any changes to your business – perhaps you will have to adjust your marketing strategy, prices, or products/services depending on your new demographic.

Do you have the resources to expand?

Expanding your business will require extra financial commitments for rent, utility bills, more inventory and equipment, employees, insurance, and extra advertising. While your income may increase with your new location, remember that it may take months to make the returns required for expansion. It is therefore important that you are already financially secure before opening up a new store to avoid overextending your funds and putting your business at risk. If you don’t have the assets required, a business loan is an option provided that you can prove your financial ability to repay the loan.

Opening up a new location also means that you will have to manage your time between the two branches. This may require delegating business responsibilities, hiring managers, or promoting current employees to management positions. To keep your new business on track and identify early risks, you may also have to initially spend more time at your new location.

Posted on 25 June '20, under business. No Comments.

Carrying on a business in an SMSF

Self-managed super funds can carry on a business providing the business is allowed under the trust deed and operated for the sole purpose of providing retirement benefits for fund members.

Carrying on a business through an SMSF does have restrictions that other businesses do not have, such as entering into credit arrangements or having overdrafts.

SMSF trustees that carry on a business through their fund must adhere to the sole purpose test. The ATO looks for cases where:

The same regulatory provisions still apply to funds that carry on a business, i.e, SMSF investments must be made on a commercial ‘arm’s length’ basis, business activities must be conducted in accordance with the SMSF’s investment strategy, collectables and personal use assets cannot be displayed at the business premises and so on.

The SMSF cannot be involved in the following business activities:

Posted on 25 June '20, under super. No Comments.

Cars and taxes for 2020-21 financial year

New car threshold amounts will be implemented from 1 July 2020. Understanding the new thresholds and how they may affect your small business operations and vehicle usage will be important in preparing you for the financial year ahead.

Income tax:

There is an upper limit on the cost you use to work out the depreciation for the business use of your car or station wagon (including four-wheel drives). The maximum value you can use for calculating your depreciation claim is the car limit (irrespective of any amount you were paid for a trade-in) in the year in which you first used or leased the car.

For the 2020-21 financial year, the upper cost limit is $59,136 including GST.

Goods and services tax (GST):

Businesses registered for GST with motor vehicles used solely for business purposes are entitled to claim a credit for the GST included in the price of the vehicle, provided they have a tax invoice.

In the event that you purchase a car and the price is more than the car threshold, the maximum amount of GST credit you can claim is one-eleventh of your car limit amount. Keep in mind that you cannot claim a GST credit for any luxury car tax you pay when you purchase a luxury car, regardless of how much you use the car in carrying on your business.

Luxury car tax (LCT):

You are required to pay LCT if you’re registered or required to be registered for GST and you sell or import a luxury car.

LCT applies to motor vehicles designed to carry a load of less than two tonnes and fewer than nine passengers. LCT also applies to a car purchased by a person with a disability even if the car is GST-free. However, disability-related modifications are not subject to LCT. The LCT value of a car includes the value of any parts, accessories or attachments supplied or imported at the same time as the car.

Cars with LCT over the LCT threshold attract an LCT rate of 33%. From 1 July 2020, the LCT threshold will increase to $68,740. Additionally, the LCT threshold for fuel efficient cars will increase to $77,565 for the 2020-21 financial year.

Posted on 25 June '20, under tax. No Comments.

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