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April Business Quotes:
This month we actually have two quotes for you as they both make a similar but relevant point:
“Never mistake activity for achievement” and
“There is nothing so useless as doing efficiently that which should not be done at all”.
Against the background of these two quotes this months newsletter has as its main story some comments regarding driving business value so that your business can successfully change hands to either the next generation or a new owner.
At a more mundane level, your attention is drawn to the land tax changes discussed in the last article in the newsletter.
As always, if any of the items are of interest to you, please do not hesitate to get in touch with your usual contact at the firm.
Driving Business Value
The ultimate test of success for a business owner is how well the business thrives when the owner is no longer there. Establishing the strategic direction, intellectual property, culture, people, systems and relationships so that a business can succeed in your absence will greatly increase its saleability and its value. It also frees you from the significant time commitment typical of many business owners, to do things that are more rewarding or enjoyable. Furthermore, it significantly enhances the value of what is usually a major asset and provides the owner with real options as to how it can be dealt with.
A significant number of businesses will change hands in the next decade. When businesses do change hands, the premium paid for a business over and above the actual net assets acquired is typically referred to as ‘goodwill’. In reality, goodwill is simply the sum total of all of these factors and more.
Ensuring that what goodwill exists is
business goodwill
and not
personal goodwill
is the key. If the goodwill attaches to individuals it is only there as long as the individual is there and actively working to maintain that goodwill. Business goodwill however survives the individual and is an asset in its own right.
A principal challenge facing many small and medium sized businesses over the next decade is how to manage the evolution of their business. Approximately 83% of Australian businesses are family owned and it is estimated that 70% of those businesses will face a generational change in the next decade. Irrespective of whether your business is one of the seventy percent, the likelihood is that the competitive landscape of the industry in which you operate will undergo substantial change.
A technique that may be helpful to clients is to have us look at your business from an investor’s viewpoint. By commissioning a ‘reverse due diligence’, clients can get a critical analysis of their business, which assists in identifying its vulnerabilities and risk factors to enable them to put in place positive action plans to address those issues.
This methodology, which is similar in approach to a due diligence undertaken by an investor, identifies not only the issues but also the opportunities to both protect and enhance the value of a business.
Matters typically addressed in this process include:
•
Value drivers:
understanding what drives value in the business and recognising its key performance indicators;
•
Key risk areas:
understanding weaknesses and threats facing the business including dependency on customers, suppliers or key personnel, integrity of supply chains, impact of technology (product or process obsolescence), capacity issues (human, space, and infrastructure), industrial relations, quality of systems working capital management, balance sheet strength, gearing, gross margin performance, and contingencies:
•
Earnings sensitivity:
to industry, political or economic factors including interest rates and exchange rates;
•
Management structures:
ensuring alignment of management and organisational goals;
•
Intellectual property:
identification and analysis of intangible assets including brands, patents, rights, processes and know-how;
•
Competition:
reviewing the competitive landscape and understanding the barriers to entry, and
•
Identification and evaluation:
growth opportunities and exit strategies including consideration of business and tax structuring implications, valuation bases and linking with business value drivers.
Important changes increasing land tax in some trusts
Following the High Court decision in
CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53
, a Victorian land tax decision a number of potential taxation issues have arisen:
• the meaning of present entitlement for unit trusts;
• the meaning of the words "vested and indefeasible interests" (which are relevant, for example, to determining whether a trust is a "fixed trust" under the trust loss rules or whether a beneficiary is absolutely entitled to an asset against a trustee for CGT purposes);
• The impact on land owned by trustees of unit trusts;
• the CGT consequences arising from resettlements of unit trusts.
The ATO is currently giving priority consideration to these and other related issues.
From a land tax perspective, the NSW Office of State Revenue has stated its position in respect of the High Court decision. It has advised that unit trusts in NSW will generally be assessed in respect of the 2006 tax year as 'special trusts' under section 3A of the NSW Land Tax Management Act, 1956. That is, affected unit trusts will be taxed at the rate of 1.7% applying to special trusts without the application of the tax-free threshold. This change will apparently not be retrospectively applied but impacts the land tax returns and assessments for the current year. As this will typically increase the land tax burden of a unit trust, you may wish to discuss the merits of continuing with the ownership of property in such a structure with your usual contact in the firm.
30% child care tax rebate
This rebate covers 30% of out-of-pocket child care expenses for approved child care, up to a maximum of $4,000 per child. All approved child care providers were sent details by the ATO in March 2006. Full details can be accessed by clicking
here
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Super Relief
Effective from 1 January 2006, the Australian Tax Office (ATO) has provided some relief for employers facing penalties for late payment of superannuation guarantee contributions.
Previously, if superannuation contributions were paid late, employers needed to lodge a Superannuation Guarantee Charge Statement – Quarterly Form and pay the full superannuation guarantee charge to the ATO.
The charge included the total of the employer’s superannuation guarantee shortfalls and choice liabilities for their employees for the quarter, plus an interest component and an administration component. Any superannuation contribution that was paid late to the fund could not be used to offset or reduce the superannuation guarantee charge payable.
Under the new law, if employers make a contribution to a superannuation fund for an employee which is less than 28 days late, the employer can elect to have this contribution used to reduce the amount of superannuation guarantee charge they otherwise pay that relates to that employee.
Example: Superannuation due 28 July. If paid by 25 August the employer can elect to treat the contributions as made on time.
Personal services income - Business premises test satisfied
In the recent case of Dixon, the AAT was concerned with the refusal by the Commissioner to grant the applicant a personal services business determination on the basis that the applicant "did not satisfy the Business Premises Test, namely that the business premises of the Applicant were physically separate from the premises that Mr Dixon, a director and shareholder of the Applicant, and his family used for private purposes". The AAT ordered that the Commissioner's decision be set aside, as based on the evidence presented, the Applicant did satisfy the business premises test. In particular, the Tribunal stated that, "the Applicant has "exclusive use" of the premises to the exclusion of relevant use by the Dixon family" and "the business premises are physically separate from the premises that are used by the Dixon family for private purposes".
The matter before the Tribunal concerned the refusal by the Commissioner to grant the applicant a personal services business determination pursuant to Division 87 of the Income Tax Assessment Act 1997 for the year ended 30 June 2002 on the basis that the applicant "did not satisfy the Business Premises Test in section 87-30(1) of the Act, namely that the business premises of the Applicant were physically separate from the premises that Mr Dixon, a director and shareholder of the Applicant, and his family used for private purposes".
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