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Tax-time warning for SMEs: How always focusing on June 30 can blur your long-term vision

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*The information in this article is general information only. It is not professional tax advice and should not be taken as constituting professional advice from the author. You should seek professional tax advice from your accountant that is specific to your circumstances. 

Every year coming up to June 30, the tax man looms large in the back of all SME owners’s  minds.  

In the lead up many will be looking to minimise how much tax they need to pay, and particularly this year, to take advantage of Government rebates and assistance. In fact, it’s one question we often get asked by the businesses we work with. 

But no business should be acting solely in the interest of minimising tax.  

The reason for this is simple. Tax incentives should not be the starting point for making smart business decisions. It is something to consider, but the business / investment decision should be considered first. 

For most of us our business goals will include growing and increasing profits, which means we’ll likely need to accept that additional tax or legal responsibilities come with this.  

To minimise tax, you’re likely to be minimising the profit that your business is making.  

Don’t be sucked in by incentives 

Right now, the Government is offering highly publicised additional instant asset write-offs as part of its Coronavirus pandemic measures to boost the economy. 

However, if you are not already planning to spend that money, and it does not make sense to do so outside of a tax incentive, this incentive isn’t worth taking up. 

But this is an uncertain time, soon JobKeeper will stop, and the long-term effects on our economy are still unknown. With that in mind, spending incentives are best approached with skeptism and careful planning. 

One common lure is that it can be really appealing for a business owner, knowing that tax incentive is there, to take an additional loan or novated lease for a new car.  

However, unless you need the car (eg you might be a tradesperson in need of a new van or ute) it isn’t beneficial for company purposes. You shouldn’t buy a car for a tax write-off.  

Look beyond June 30 

There is a controversial business adage that any company will need three books: 

  1. For tax (so you pay less) 
  1. For the bank (to get better terms/loans) 
  1. For yourself (reality) 

When you balance your books to make the most of all tax offsets, you often have a focus on a singular point in time: June 30. 

But a business doesn’t operate like this, and continues on July 1 and beyond. People are looking at the tax before looking at what they really want to do. 

Beyond tax, there will be competing interests where it is likely you’ll need to show that your business has strong performance, growth and profits.  

This could be if you’re looking to approach the bank for a loan, or even if you’re presenting your company to a potential investor.  

A great example occurs in Research and Development tax. 

A lot of companies structure the books so they can claim losses for R&D tax rebates. Keep in mind it’ll mean your company looks bad, and you’re stuck with an entity that isn’t going to be appealing if you’re trying to borrow or raise capital in the future. 

Prioritise your business goals 

Instead, business owners should prioritise what they are trying to achieve.  

What’s your plan in the short-long term? Will you need to approach the bank for a loan, do you need to raise capital, do you want to aim for high growth? 

You need a strong business plan and understanding of your fundamentals first. Then manage the tax to support this plan.  

Navigate growth 

When businesses are growing it can be daunting to step up to the next level in terms of legal responsibilities, particularly in payroll tax.  

It’s a common misstep for a business in early growth stages to avoid hiring, because they’ll have to pay over the threshold. But this can cost your business big-time in lost productivity.  

If you are trying to grow your business these are situations you will need to proactively navigate and potentially invest back into your company so it can grow.  

Understanding business fundamentals, growth projections and your responsibilities are part of this, and unfortunately leading a strategy by tax minimisation will likely cost you more in the long-term. 

It’s always important to remember if you’re paying more in tax, it means you’re making more money. 

So as the end of this financial year approaches, approach your tax with your business goals in mind, not just avoiding the tax man.  

This post was first featured on Smart Company.

Beyond Government subsidy: How to keep your staff employed

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As a business owner, being in charge of your staff’s livelihoods is a responsibility that can lose you sleep, even in boom times.

In the current climate, with many businesses reeling from revenue or business model hits due to the Covid-19 pandemic, keeping people in jobs is a genuine crisis.

The Federal Government has released a wage subsidy of $1500 a fortnight per employee with the aim to keep thousands in work during a time where we are in “social hibernation”.

Through our financial modelling, we help businesses understand what will happen in varying situations.

For many industries, hospitality, fitness and retail, dealing with such a sharp decline in revenue is almost unprecedented.

To keep businesses operational or even viable in “hibernation”  there are a few solid strategies that can help and hopefully keep staff on board through the hard months.

Can your business access the JobKeeper subsidy?

Businesses and sole traders with revenue under $1 billion will be able to access the JobKeeper subsidy of $1500 a fortnight to support employees if their revenue has fallen by more than 30 per cent (of at least a month).

The Government has also introduced discretionary measures to allow for pre-revenue, high-growth and businesses that have not been in operation for a year.

The best resource to keep up with changing information for these and other measures is direct through Government websites. We also recommend contacting your accountant for more information specific to your business.

Cut costs

Depending on how the current economy has affected your business there are probably areas that ordinarily would be considered essential that must be cut at least temporarily.

Redeploy: If you are a larger business, you might be able to move staff into different roles where more help is needed.

Leave: Other businesses are reacting by asking staff to take periods of leave, both paid and unpaid, through the pandemic period to balance their cash.

Re-negotiate terms

It is essential during these months of uncertainty to assess whether your business has a cash flow, revenue or other problem.

If it is cash flow related, speak to suppliers and other stakeholders about different terms to cope through the pandemic.

One area under focus is commercial rent with landlords moving to defer rental payments. Some co-working spaces, including the one we are based in Stone&Chalk, have offered three months rent reprieve to assist businesses through the crisis.

Flip your business

If we told you a month ago, that Attica, one of the world’s 100 best restaurants, would pivot into a bakery to survive, you’d have laughed at us.

But it has, and many other strong brands in the restaurant business have likewise flipped their models to survive through an uncertain period.

Many of us can look to these savvy business owners for inspiration on how we can change and adapt to the rapidly evolving situation.

But keep your eye on the future, a crisis can push a business to change in positive ways and ensuring you think long-term will help ensure you make the right choices now.

Charles Darwin said it best: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.”

Keep communicating with your team

In this period of social distancing, keeping connected to your team is important. You don’t want to lose good staff through lack of support as they’ll be essential to your recovery when things begin to pick-up again.

Although a time of uncertainty, giving your team updates to keep business progressing, and the team informed about their potential job security will help not only producitvity, but their personal wellbeing.

There is no doubt that no matter what your business is, it will be a time of evolution and change. Before making major decisions it will pay off in the long-term to return to your key business drivers and fundamentals.

We also have responsibility, and now incentives, to keep our teams together and staff employed where we can through the Covid19 crisis.

Understanding where your cash flow and growth has come from in the past, and where it is likely to pick up when the economy begins to recover will help guide your choices so they are beneficial to your business now, and when the good times come again.

Why the federal government’s coronavirus stimulus package won’t save your business

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The federal government’s stimulus package won’t save your business. 

Increasing the instant asset write-off threshold, as well as some money to help keep staff on board, will be helpful, but as we see a panic-driven economy reeling from uncertainty around COVID-19, these are not measures that will prevent closures.

As a tax incentive, they also rely on businesses having the cashflow upfront to spend money regardless. 

In fact, while these measures are designed to encourage spending and growth to stimulate the economy, this is may not the best time for most SMEs to do so. 

Before considering even trying to take advantage of this package, business owners must rely on their fundamental systems and practices, and crucially, understand how this market will affect their revenue. 

However, first, don’t panic. 

SME owners can’t afford the panicked equivalent of a run on toilet paper. 

To survive you must avoid making panic-based decisions, and at the same time, keep your head out of the sand. 

So take a moment to step back calmly as there will likely be impacts on most businesses, and there are things everyone can do to protect themselves.

Understand your business

All business owners should understand the levers and drivers that keep their companies going. 

If you work in travel, or have a restaurant catering to the Asian tourist market, you would be right to be concerned about the impact the coronavirus will have on your revenue. 

Flight Centre has had to continuously reduce its full-year profit guidance (the amount it tells the stock market it is expected to profit) and managing director Graham Turner has said reducing costs is a priority along with a return to business as usual as soon as possible.

“Within this uncertain environment, our priorities are to reduce costs, while also ensuring that we and our people are ready to capitalise when the steep discounting that is underway across most travel categories starts to gain traction and as the trading cycle rebounds,” Turner said.

However, other industries may be affected differently. If you work in IT services or cyber security, there may be increasing demand for your services as many professionals opt for increased remote working. 

The key is to be aware and try to understand how and why your business may be affected.

If you are affected

In a perfect world, all businesses would hold 12 months of cash to underpin operations, but there are many different arguments and realities. 

I recommend that you understand your business’ cash cycle and have a contingency plan so you can last for at least a quarter (three months) with no revenue. 

Many small business owners take money out of their business straight away, not leaving enough of a buffer on the balance sheet to ride out a downturn in circumstances.

The essential thing to do is to focus on your business fundamentals.

Make sure you keep doing business

This sounds basic, but whatever your business does, keep doing it. Don’t get stuck in the hype and act irrationally. 

Don’t scapegoat coronavirus

It is important to budget correctly, analyse variance and understand if any issues are actually being caused directly or indirectly by the coronavirus.

It is sometimes easy to find a scapegoat when things are going wrong, but what you might find is that there could be underlying problems within your business. 

Strong businesses will be able to withstand down periods in a market.

Focus on pipeline and growth

If the current state of the economy could affect your pipeline, then you will need to pay more attention to it. If you’re likely to win less business, you might need to work even harder on attracting it. 

If there’s a dramatic impact on business, do you have a balance sheet strong enough to withstand it? And how long can you withstand it for?

Communicate with staff

Uncertainty is what’s caused the great toilet paper panic. 

Don’t let that happen in your business. Be open, clear and communicate with your team about any extraordinary measure you’ll need to take. 

You want to give confidence that any measures are short term. It is unlikely this pandemic and associated uncertainty will go on forever. We need to be patient in the interim, and still be ready to ramp up back to business as usual. 

If your revenue will be hit

In a downturn, your revenue might take a hit. If that is likely to happen to you, be realistic. 

Be aware of what is happening, and pay attention to who is impacted by the coronavirus, what the World Health Organisation’s advice is and even what broader public officials are saying. 

As an example, with public events such as the Melbourne Grand Prix being cancelled, more are likely to follow. That means if your business is in hospitality, travel and even retail, you will see an impact. 

The Grand Prix was cancelled last minute, but business owners should begin planning contingencies for other major events in the coming months. 

Emergency measures

If you really run into cashflow trouble, you may need to take some action. 

Leading from the front, Qantas’s CEO Alan Joyce is taking a $3.3 million pay cut as the airline has slashed international flights by 90% for the rest of the financial year. 

Flight Centre has taken action to close stores and where possible put staff on leave without pay to avoid having to cut jobs. 

If you are across the fundamentals, have taken appropriate measures to cut costs, and understand your budget variances, all this leads to a better conversation with financiers if it comes down to the crunch. 

3 years on…

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Happy new year and welcome to 2020!

Before I start, I’d like to draw attention to the fact that while most of us are celebrating the new year, the country’s serious bush fire crisis is ongoing. I wish all the firefighters and other emergency services well and thank you all for your service. We encourage everyone to join us in a show of support by donating, no matter how big or small, to help support and provide some relief to these brave volunteers.

Click here to make a donation to the CFA for all their hard work and bravery

2019 in review…

When I started this venture back in 2017, I set out on a new challenge, and it was an exciting time.

Three years on, the excitement remains, but for vastly different reasons. In the three years since, there has been significant changes to the business with lots of learning and experiences – both highs and lows.

Read More

Contact us today at info@ravitinsights.com.au