Hi <<First Name>>, I hope you have been well!
Welcome to our November newsletter. This edition we welcome Stephen Bisgrove and Kristy Isherwood to our practice. Have a look at their profiles and smiling faces on our website here.
With Christmas on our doorstep we outline the tax consequences of christmas parties and gifts. We also cover some superannuation issues relating to properties with borrowings. If you are curious about the price or value of your business please refer to the article below.
Inside this issue:
Christmas Parties & Gifts 2011
Christmas is on the way and many employers will be planning their annual year-end 'bash'. However, an inportant issue to consider is the possible FBT and income tax implications of providing 'entetainment' to staff.
Property and SMSFs: loosening the rules
If your SMSF has borrowed money (or thinking of borrowing money) to acquire ‘bricks and mortar’ property then there are a few things you need to know.
A new ATO ruling released last month helps to clarify what you can and can’t do with property that is under a limited recourse borrowing arrangement.
What’s the difference between price and value?
If you need an opinion on price, be careful and make sure you get the information you are really after.
When you value a small business it is not unusual for the valuation to come in under the asking price. A normal reaction to this is that the business must be overpriced. While this is sometimes true it is not automatically the case. In a perfect market, price and value are the same thing - but we don’t operate in a perfect market. As a result, this causes price to trade at either a premium or a discount to value.
Do you have a website?
Most people now use Google instead of looking in the yellow pages for a phone number or for more information about your services. A simple webpage with this information can make the difference between beating your competitors and getting the sale!
Macquarie Partners can now provide you with a solution, from a basic website to a full online shopping cart system. Prices start from $399 or we can provide a monthly fee to cover even more features. To see plans and more details please click here and view them on our website.
Keep reading below for the full articles -
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Christmas Parties & Gifts 2011
One major consideration is the 'less than $300' minor benefit exemption and the fact that the tax office now accepts that different benefits provided at (or about) the same time are not added together when applying the threshold. Basically, this means that a Christmas party and gift may be exempt from FBT even if provided at the same time, as long as each costs less than $300!
Christmas parties - Electing to use the 50/50 method.
Food and drink provided (irrespective of where the part is held or who is attending) - Only 50% of the total expenditure is subject to FBT and is tax deductible. Under the 50/50 method, the following traps must be considered.
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where the function is held on the employer's premises - food and drink provided to employees is not exempt from FBT; and
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the less than $300 minor benefit exemption cannot apply; and
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the taxi travel exemption cannot apply.
Christmas parties - actual method.
The actual method applies where an employer has not made an election to value their meal entertainment expenditure for FBT purposes under either the 50/50 split method or the 12 week register method.
Calculating the taxable value
FBT is generally only payable on that portion of meal entertainment privded to employees and their associates (eg. family members). Therefore, FBT is not payable on entertainment priovded to non-employees (eg. clients).
Employees can calculate how much of their meal entertainment relates to employees and family members on the basis of either:
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the exact cost attributable to each person; or
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a 'per head' apportionment, where an exact allocation cannot be easily made.
"Recreation expenditure" at a Christmas Party
Where an employer hires a band, DJ, a comedian or any other entertainer, for a Christmas part or similar function, this expenditure is generally considered "recreation expenditure" and is generally dealth with under the actual method.
To the extent that any recreation expenditure relates to clients, suppliers, etc, there is no FBT and no tax deduction.
Exclusive use of premises or facilities.
Where an employer hires or leases premises or other facilities (eg. a reception centre, a boat) for the exclusive use of their own staff, family members and clients, this expenditure may be dealt with under the 50/50 method (instead of the actual method.)
Note(*): Such exclusive use qualifies the hiring costs as Entertainment facility leasing expenses ('EFLEs')
Where the 50/50 split method is used for EFLEs, 50% of the employer's EFLEs are:
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subject to FBT; and
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deductible,
irrespective of who is being entertained (eg. employees, clients, suppliers, or contractors.).
Christmas Gifts
Gifts which ARE NOT considered to be entertainment.
These generally include, for example:
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a Christmas hamper, a bottle of whisky, wine, etc; and
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gift vouchers, a bottle of perfume, flowers, a pen set, etc.
Briefly, the general FBT and income tax consequences of these gifts are as follows:
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gifts to employees and family members – FBT is payable (except where the minor benefit exemption applies) and a tax deduction is allowed.
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gifts to clients, suppliers,etc. - no FBT, and a tax deduction is allowed.
Gifts which ARE considered to be entertainment
these generally include, for example:
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tickets to attend a theatre, live play, sporting event, movie or the like and
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a holiday airline ticket or admission ticket to an amusement centre.
Briefly, the general FBT and income tax consequences for these gifts are as follows:
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Gifts to employees and family members - FBT is payable and a tax deduction is allowed (except where the minor benefit exemption applies); and
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gifts to clients, suppliers, etc. - no FBT and no tax deduction.
The minor benefit exemption.
Generally speaking, where the value of a Christmas related benefit (eg. food and drink, and a gift) provided to an employee or family member is less than $300, it may be exempt from FBT.
Surprisingly, for the purposes of the $300 minor benefit threshold, the following tips should be considered:
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The $300 threshold is applied separetely to each benefit provided to an employee, and/or each benefit provided to a family member (eg. spouse)
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All benefits provided to an employee or a family member in relation to a Christmas function are no longer grouped when applying the <$300 threshold.
However, note that, if the minor benefit exemption applies to the provision of entertainment benefits to an employee, no deduction can be claimed.
Property and SMSFs: loosening the rules
If your SMSF has borrowed money (or thinking of borrowing money) to acquire ‘bricks and mortar’ property then there are a few things you need to know.
A new ATO ruling released last month helps to clarify what you can and can’t do with property that is under a limited recourse borrowing arrangement (LRBA).
The ruling addresses three key areas:
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Under the borrowing rules in the Superannuation Industry and Supervision (SIS) Act, the borrowing must be used to acquire a “single acquirable asset.” The ruling seeks to define what constitutes a single asset.
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The borrowing rules allow an asset that is held under a borrowing arrangement to be improved, however, the trustees cannot use borrowed funds to make the improvements. There is a fine line between what is a repair or improvement and the ruling attempts to clarify how the ATO assess the difference between these terms.
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Also, if you do improve the property, any improvement must not result in the asset becoming a different asset. The ruling looks at the factors the ATO considers, and what your SMSF auditor needs to consider, when they assess whether a property has been changed to such an extent that it is no longer the same asset.
If a fund falls outside of these rules, the fund must sell the asset. Imagine having to sell a property your fund recently acquired, leaving your fund with the stamp duty, legal and agent’s fees (or perhaps making a loss because the market conditions were not as good as they were when you purchased the property).
Is the property a single asset?
Assuming the fund is able to purchase the asset, the borrowing rules require that the money is used to acquire a single asset. For example, if the fund purchased a block of units, is the block considered to be one asset or are each of the units inside the block individual assets?
In the ruling the ATO concedes that “it may be possible … that the trustee is acquiring a single object of property notwithstanding that it is comprised of two or more proprietary rights. However, this will only be so where … the separate proprietary rights is distinctly identifiable as a single asset.” The bottom line is that if the rights can be dealt with separately, then they are not a single asset regardless of how the trustee wants to treat them.
Common examples include:
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where the fund acquires a property and the car park is held on a separate title but laws do not allow separation of ownership then there is a single acquirable asset.
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where a warehouse is constructed on multiple titles, then there may be a single acquirable asset.
What’s the difference between price and value?
You are looking to buy a small business. You see something you are interested in: right industry, right location but is it the right price? In today’s market everyone is looking for a bargain. The difficulty in assessing the price of a small business is that there may not be a lot of ready comparisons available in the market. If you are looking to buy a business where there is a large and active market - like a newsagency, pharmacy or coffee lounge - then comparisons will be available. And, there are industry models that typically set the pricing for these types of business. However, if you are looking at a more unique business where there is not a lot of public information, the going can get tougher.
If you need an opinion on price, be careful and make sure you get the information you are really after.
When you value a small business it is not unusual for the valuation to come in under the asking price. A normal reaction to this is that the business must be overpriced. While this is sometimes true it is not automatically the case. In a perfect market, price and value are the same thing - but we don’t operate in a perfect market. As a result, this causes price to trade at either a premium or a discount to value. Over the past decade in Australia, price has traded at a premium of up to 30% on value for good quality businesses. To test the price of a business, you need to understand both its value and also any information on the price that businesses of the type you are looking at have traded for in the market.
When you ask for a valuation of a prospective business, the real question you might be seeking an answer to is should I buy this business? This is a very different question to one about valuation. Should I buy this business is about a range of both financial and non-financial indicators. It is as much about whether the business suits your lifestyle expectations and core capabilities as it is about the financial performance. If the business is a growth business and needs lots of marketing push, then it will not suit you unless you like the marketing aspect and have the time to dedicate to it. To assess all of this you need to understand the business and the business model in operation. You then need to compare the model to your expectations and also your business strengths. None of us are good everything. You need a business that matches your strengths.
You don’t want to pay too much for the business but equally you don’t want to miss out on the right business because the asking price is a bit more than you expected or what someone has told you it’s worth. Whether or not you are prepared to pay a premium to value will depend on how much you want the business and what growth you can see in it. Good quality businesses with good growth prospects will almost always command a premium as there are always buyers for these types of businesses. Understanding the true value of a business, is understanding what it is worth now and also what value you can add to it. Once you know both these numbers you should be ready to negotiate on price. |
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