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Audit Insurance

 

Many accounting firms offer an audit insurance policy as an optional extra for their clients.  It is just about time for Jigsaw Tax’s policy to renew and we will no doubt get many questions from our clients about the need for this policy.  Given that we have been through a year with many self-assessed benefits being provided (particularly Jobkeeper), we are strongly recommending to our clients that they consider taking out a policy.  Here is a simple explanation about what audit insurance provides.

What does audit insurance cover?

First, you need to understand what the insurance covers.  The insurance is not in place to prevent you from being audited, it is in place to cover the costs of your accountant helping you through the audit process.  It does not cover the result of the audit either.  If the auditor finds a shortfall in the tax/superannuation/workers compensation you have paid requiring you to pay the shortfall, possibly with penalties and interest, you will still need to pay that.  Effectively it covers the cost of your accountant’s time, and other professionals they may ask to assist in your audit case.

Do not expect your accountant to act for free if you are audited.  This is additional time that your accountant will need to spend on your behalf and they will charge you for it.  If you have audit insurance it is likely this time will be covered by the policy.  If you don’t have audit insurance you should expect to pay for this service.

Audit insurance typically covers audits that arise from the ATO and other government agencies.  It covers audits for wage obligations, payroll tax and workers compensation.  Make sure you read your policy to understand what is, and what is not covered by the policy.

What if I don’t take out the policy?

The policy is completely optional, and like any insurance you run the risk that if you are not insured you will need to pay for the costs yourself.  We take out car insurance even though we hope we will not have a car accident.  Similarly, you can take out audit insurance in the hope that you will not need to draw on it.  If you do get audited, it is nice to know it is there.

If you don’t have audit insurance you can either handle any audit yourself, or you will need to pay for the services of a professional to help you.  Most audits take a number of hours (probably 3-4 at a minimum) so the cost is certain to exceed the insurance policy cost.

What are the benefits of having a professional help you with an audit?

From personal experience you will get a better result if you have a professional help you with the audit.  Your accountant understands what the auditor is looking for and can help to negotiate lower penalties.  They also know how to speak in the language of the auditor, and what not to say.  I have seen clients mention things to auditors that get them into more trouble.  We know what evidence is needed to argue for the view that was taken and we know when to concede that something was wrong and ask for leniency on your behalf.

Another major benefit is that it saves time and stress.  If someone else can pull the information together that saves you valuable hours which can be better spent running your business.

Do I need to be worried?

The Government have committed to over $500 billion in 2020 providing stimulus support to all areas of our economy.   This is money that Australia does not have and it will take years to recoup through an efficient tax system and increased wealth (Gross Domestic Product) in the Australian economy.

The ATO released statistics on the Tax Gap (if you want to find out more about the Tax Gap read my article https://www.tradiewags.com.au/wagtips/2020/11/1/what-is-the-tax-gap) indicating that in 2017-18 over a third of the tax gap came from small business.  This equates to $11.1 billion.  It is clear that with better use of information the Government will be targeting small business so they can close this tax gap.  Take this as a gentle warning – audit is going to be a big issue over the next few years.

We are concerned that people have applied for Jobkeeper without going through the myriad of tests that were required.  We know that businesses are struggling and sometimes that means bending the rules a little or missing compliance obligations.  We understand that compliance it difficult and that it is easy to make mistakes or forget to lodge something.  We are also seeing an increase of businesses being reported to the ATO for not doing the right thing, which typically results in an audit.

Insurance is a method of risk mitigation.  You cannot ‘insure’ that you will not be audited, but you can insure so that your audit will be handled in a professional way without cost constraints.  At Jigsaw Tax we will be recommending that our small business clients, particularly those who received Jobkeeper, take out audit insurance this year.

Jigsaw Tax & Advisory have staff who specialise in managing ATO audits.  This team is managed by ex-ATO auditors who understand how to communicate with the ATO in an effective way.   We do this not only for our own clients but also on behalf of other firms.  If you are interested in this service, please get in contact with Jigsaw Tax & Advisory and we can discuss your needs.

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Are you paying your staff correctly?

Employing staff certainly adds a layer of complexity to your business.  For many small businesses hiring staff is an essential way to meet growth goals and manage your client’s expectations.  Understanding how to pay staff is not something we naturally know, and we often see that staff are not being paid correctly.  It would seem that almost every week one major company is called out for not paying their staff correctly (and these include some of the biggest employers in Australia), so it understandable that the small business owner struggles to get it right.

There are so many rules around paying staff that your mind boggles.  The Government want small businesses to employ yet the red tape involved and the penalties for getting it wrong can be a deterrent for many.  We understand that rules are needed so as not to exploit our staff, but most employers are not trying to exploit anyone.  They unfortunately just haven’t kept up to date with the rules, or made assumptions about pay rates without doing the research.

The way we employ and pay staff in Australia is governed by the Fair Work Act 2009, and monitored by the Fair Work Ombudsmen.  The best source of information for any of this is the Fairwork website.

Let’s take a few minutes to review some basic elements about employing and paying staff.

 

National Employment Standards (NES)

Do you know what the NES are?  They are a set of 10 minimum standards of employment that apply to pretty much all employees in Australia.  The 10th rule is that you provide all new employees with a copy of the Fair Work Information Statement…does this mean you are breaking the rules already? Have you been giving all your staff this when they commence work?

To download a copy use the following link, and I suggest you take a read of this and make sure you are complying with these basic standards.

https://www.fairwork.gov.au/employee-entitlements/national-employment-standards/fair-work-information-statement 

Of note, the maximum work week is 38 hours per week.  Not 40 hours, 38 hours.

 

Find your Award

Speaking with a client a few weeks ago, I asked what award he paid his staff under.  The award he quoted doesn’t even exist anymore.  Most awards have now been replaced with Modern Awards and the best place to find your Modern Award is the Fairwork website. I know, reading awards can be incredibly boring, but please take the time to read the award that is applicable to your business.  Pay particular attention to the minimum rate and the casual loading that applies to the minimum rate (if you are employing casuals). Make sure you at least paying this minimum rate.

It is also important to read the Classifications that apply to each rate, and make sure your staff are correctly classified.

Use the calculators on the Fairwork Site

The Fairwork website has a pay calculator that steps you through the questions you need to answer to determine the correct rate of pay.  The link to this calculator is below.

https://calculate.fairwork.gov.au/findyouraward 

Take the time to work though this and keep a copy on record for each staff member.  If questioned, you can show Fair Work how you came up with the payrate for your staff. Remember that if a junior rate applies to a staff member, that rate is going to change when they have a birthday.  You should run this pay calculator at least one a year for all staff to ensure things have not changed. Maybe link that to their birthday as a way to remember to do this.

 

Stay aware

If you are member of an industry body you should get updates if awards change, but as a general rule, most award rates are updated on 1 July each year.  Put it in your diary or set a phone reminder to check this each year.  Include it as part of your year end process.  Be interested in media stories about employment so you can be alerted to wage rises.

Temporary changes are in place due to COVID-19, including the delay to some award rate increases this year.  If COVID-19 is impacting your ability to pay or retain staff, it may be worth reading the information on the Fair Work website. There are plenty of rules about what you can and cannot do due to COVID-19.

 

Pay your super

I feeling like a broken record, but just a reminder that superannuation is not an optional extra for staff.  It is mandatory.  It must be paid and it should be paid on time.

 

What if I have got it wrong?

Seek help from a professional.  You will need to rectify the situation and may need help to calculate the back pay or the missing entitlements.  Your accountant is a great starting point if you are having difficulties.  This is an issue you really cannot ignore so take time to add a HR check up to your to-do list today.

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The Partner conversation

Going into business with another person is a major commitment, one which I would consider equivalent to entering into a marriage.  While a business partnership may not be “until death do us part”, like a marriage, a business partnership requires a sharing of finances, commitment, decision making and compromise.

Like a marriage, business partnerships have their ups and downs.  Sometimes one partner may take on a little more of the burden which can lead to resentment.  Sometimes there is interference from an outside party (often the person your partner is married to), and sometimes business partnerships, like marriages fail.  Sometimes, but not all the time.  Like a good marriage, a good business partnership takes patience, commitment and planning from all partners.  It requires all partners to communicate regularly, vent their frustrations, listen to the other person, compromise, assist, empathise and not hold grudges.

This is my business partner Michael. We have been working together for a number of years now. We trust each other implicitely, talk all the time, and while we each get frustrated we can always find a way through. I couldn’t run Jigsaw Tax without him.

I regularly see new business partners who want advice on how to structure their business and other tax and accounting issues.  The one piece of advice I always give them is that they need to have the Partner Conversation as soon as possible.  Ideally this is done while things are good and there are no frustrations.  If you are in partnership it is not too late to have the Partner Conversation.

What is the Partner Conversation?

Ideally this is done over a bottle of wine, some beers, or if you are not a drinker maybe a cup of tea or a nice meal.  It requires all partners to speak frankly and uninhibited and look at all the scenarios that could happen to the business.  No idea is stupid.  No one should be offensive to the other partners, but you will need to think of circumstances that may be difficult to consider.  Importantly, you need to come to the decision of what you will do in each case.  Write it down, sign it and give a copy to whoever you think should hold onto it.  I suggest all partners have a copy, and maybe give a copy to your accountant or another trusted advisor.

This is not a legal document (although you can pay a lawyer for a shareholder, unit holder, or partnership agreement), but the spirit and intention is there.  When things go to crap (which may happen), or one of these trigger events happens, there is some comfort in being able to remove yourself from the situation and make decisions based on happier times.

Here are some of the questions I believe you should discuss.  This is not a comprehensive list, so feel free to add more.

  • If the relationship falls apart, what will you do.  Will one of the partnership step away from the business?  Will you break the business up and take different parts?  How will you value the business at that time?  Would there be a trading restriction on any exiting partners?
  • What will you do if one of the partnership dies?
  • What will you do if one of the partnership has a serious illness and cannot work for a period of time?  How long will you carry that partner (is it 3 month, 6 months…)?
  • What will you do if one of the partners goes through a relationship breakdown and how could this impact the business?
  • What will you do it a partner just wants to leave the business?
  • What will you do it things go exceedingly well?  Is there a timeframe when you want to assess the future of the venture, and consider selling the business?
  • Will you formalise “Board Meetings” with the partners, and if so, what are you going to discuss, how often, in what format.
  • What is the procedure for internal dispute resolution between partners?  Is there a safe word, a talking stick, or a mediator that you can call on to have an honest, frank discuss limiting the emotional attachment?
  • How will you manage individual expenses such as cars, phones and travel?  Do you each get an equal allowance for expenses or do you just run the expenses through the business?
  • Does each partner get compensated the same, or is there a compensation component based on some KPI?
  • How are responsibilities divided?
  • Is there a Managing Partner?  Does this partner have the deciding vote in a deadlock decision, or do you have a different process for breaking deadlock decisions?
  • What level of expenditure is acceptable without approval from the other partner?  Is it $300, $1000 or something else?

I am sure you can come up with more questions, but this is a start. It is not a perfect science, and there is no guarantee that all partners will respond in the way you had agreed, but getting these difficult conversations out in the open at the outset can save serious problems down the track.

My business partner and I have these conversations regularly. While we definitely have moments where we frustrate each other (it really is like a marriage), we have something to come back to which grounds our thoughts.  Acknowledging that each partner brings something different to the table, that we are both trying our best, we each have other things going on in our life, and being supportive of each other has made our partnership thrive. Communication is key, we talk all the time.  Maybe we are lucky, or maybe we just work hard at it, or perhaps it is a bit of both.  How seriously do you treat your relationship with your business partner?  It is critical to your overall business success.  If you haven’t had the Partner Conversation yet, just do it.

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Federal Budget 2020-21

Federal Budget 2020-21

The Budget is usually presented in May and as accountants, we get a nerdy excitement at the prospect of the tax planning that results.  Of course, this year is different.  Tax planning went out the window in April and was replaced with Stimulus planning.  The delay of the Budget until October seemed a lifetime away yet here we are, seven months into a global pandemic, sifting through a document full of unprecedented spending to kickstart our economy.

We knew the headline figure would be large, and the $213.7 billion deficit was not a big surprise.  In fact, there were few surprises in this budget as most of the measures had been announced prior to the budget being presented.  It has been clear that the Government sees the construction industry as a key driver to recovery.  As a business owner (particularly if you are in a Trade business) there is a lot in this for you, so let’s explore how this budget can help you to kickstart the Australian economy.

Personal tax cuts

The tax cuts that were expected in 2022-23 have been bought forward to this financial year.  The 19 percent tax bracket will increase from $37,000 to $45,000 and the 32.5 percent bracket will increase from $90,000 to $120,000.  The Low Income Tax Offset will increase from $445 to $700 and the LMITO (low and middle-income offset) of $1,080 will remain for an additional year, ending after 2020-21.  Ultimately this means more money in the pay packets of 11.6 million workers.  This money will be available almost immediately once the tax cuts are legislated.

I find it a little amusing that the tax cuts have been backdated to 1 July 2020.  I have no idea how the ATO would administer a mid-financial year tax cut so this a logical move in my opinion.

As a nation with one of the highest personal tax rates in the world, this is welcome news.  Bring on the Stage 3 tax cuts from 1 July 2024 which will flatten the tax rates resulting in 95% of taxpayers having a maximum rate of 30%.

Temporary Full Depreciation

We have become accustomed to budget changes to tax-deductible depreciation since 2012.  The government has been moving the deductible amount and the eligibility thresholds which has increased business investment in capital items by bringing forward the resulting tax deduction.  The latest measure is going to benefit almost every business who can invest in depreciable assets.

The temporary full depreciation measure takes away all the thresholds and eligibility (with the exception of those with turnovers exceeding $5 billion).  This means you can fully expense any ‘eligible’ assets purchased between 7.30 pm on 6 October 2020 that are installed and ready to use prior to 1 July 2022.  You can also fully expense the costs to improve existing eligible assets.

The key facts here, the asset must be an eligible asset which means it is a business asset subject to Division 40 depreciation.  Buildings and structure improvements to buildings are subject to a different type of depreciation (Division 43) which means the full depreciation is not going to apply to a property purchase or structure renovations.  You cannot use it for personal assets such as a new boat or investment purchases such as your rental property renovations.  The depreciation limit on luxury vehicles of $59,136 will apply, however many utes are not subject to this limit.  There are many assets that this will apply to and if you are intending to invest in capital in the next few years, this is your opportunity to maximise the tax deduction.

Temporary tax loss carry back

Our accountant minds are ticking away at how we can use this budget measure in combinations with the Full Depreciation to get you some of your previously paid tax back.  This measure applies to businesses with a turnover of less than $5 billion (so most businesses).  Without too many details available I imagine this is limited to those trading out of a company structure.

Essentially, if you have a tax loss in a business it will normally carry forward to future years to be offset against future profits.  However, it is expected that many businesses will have losses in 2020-21 and may not be able to use these for a few years.  As such the budget allows you to offset that loss against past taxes paid rather than carry the loss forward.

If you have tax losses in 2019-20, 2020-21 or 2021-22 you can offset these with tax paid in 2018-19 or later.  You will not be able to do this until the 2020-21 or 2021-22 tax return, so you don’t need to amend your 2020 return if you have already lodged this and it is applicable.

There are many questions that come out of this but no doubt it will be an excellent tax planning tool.  There was a loss carry back provision around 2012 -2014 so presumably, the rules will be similar.  We will be keenly waiting to find out how this will work.

It’s all about jobs

The government inspired catchphrases including the word “Job” just keep coming and the latest instalment is the JobMaker.  The JobMaker Plan involves $74 billion of spending to skill up our workforce.   If we are going to be creating new jobs, we need someone to do those jobs.  With high rates of unemployment, we need to find a way to direct people to areas that will need workers, at the same time creating sustainable careers.

Much of this money is directed at young people with the following key initiatives:

Boosting Apprenticeship Wage Subsidy.  The first lot of stimulus support for retaining apprentices was retrospective.  The apprentices needed to be in your employment before the key dates for you to be eligible for the wage subsidy.  This new initiative will help you to hire a new apprentice after 5thOctober 2020.  There are no restrictions on business size or employee numbers like the first and second round of apprentice wage subsidy.  The subsidy will be a quarterly payment of 50% of the apprentice’s wage up to $7000 per quarter until 30 September 2021.  This is expected to support up to 100,000 new apprentices and trainees.

JobMaker Hiring Credit.  Aimed directly at youth unemployment, payment will be made to businesses who create a job for an eligible employee from 7 October 2020.  An eligible employee is aged between 16-35 and is on Jobseeker, Youth Allowance (other) or Parenting Payment for at least one month of the 3 months prior to their hire.  The subsidy will be $200 per week for those aged 16-29 and $100 per week for those aged 30-35.  The program will be available for 12 months and subsidy is intended to run for the employee’s first year of employment.

JobTrainer Fund.  A fund of $1 billion will be established to support free or low fee training places, expected to benefit up to 340,700 people.  This money is meant to be directed to courses with areas of genuine skills needs, and presumably, some trades would be classified in this area.

Infrastructure spend

An effective way to create jobs is to initiate big infrastructure spending.  The budget added an additional $10 billion to project funding increasing the spending to $110 billion over the next 10 years.  The additional $10 billion announced in the budget is expected to be spent in the next 4 years, indicating an urgency to get these projects underway.

Much of this spend involves road, rail and water projects.  Money has been directed to State and Local governments for road upgrades, and presumably, some of these projects can be rolled out reasonably quickly.  Tradies, the demand for your services will be high over the next few years.

Housing Construction

For those not geared up for a large infrastructure project, the government has extended the First Home Loan Deposit Scheme by adding an additional 10,000 places. This allows first home buyers to enter the housing market to build or buy a newly constructed property with only a 5% deposit.

In conjunction with this, the Government is providing an addition $1 billion to enable the National Housing Finance and Investment Corporation to guarantee low-cost finance for eligible applicate to build affordable housing.

These initiatives are expected to generate $1.5 billion in additional economic activity.

Cutting red tape

The Government has relaxed a few things to make it easier for us to do business.  Of note are the following changes.

Insolvency Changes. The rules around trading while insolvent relaxed during COVID-19 but more permanent changes will be introduced from 1 January 2021.  The changes are aimed at small businesses allowing a lower cost process to restructure debts while they stay in control of their company.  There will also be a quicker, lower cost liquidation process available for those businesses that cannot survive.  These measures will be available to those companies that have liabilities of less than $1 million.

Relaxed credit rules.  If you have tried to borrow money from a financial institution in recent times you will understand that the processes are extremely restrictive.  The Government is relaxing the tight constraints that have been applied, hopefully allowing more people to access the funds required to spark investment.

While there has been a lot of criticism over this change in the regulatory framework of our credit laws, it will not be relaxed for the small loans and leases that are targeted at the more vulnerable (such as pay-day loans).  I personally think the relaxation of the laws will be a good thing.  The red tape we have to go through to get our clients even a basic loan has been incredibly restrictive and I cannot see how increased investment spending would be able to occur without this change.

Other spending and changes

Of course, there are plenty of other items in this budget, including investment in the Women’s Economic Security Statement 2020, changes to R&D concessions, spending on our security, the environment and health, but I have tried to highlight the items that are of interest to business owners.

One item that may be of interest to those who have young adult children is the increase of the age of dependents under private health policies from 24 to 31.  It was not highlighted in the speech, but I found it buried in the budget papers.

What next

Like all budgets, the bill will be debated and passed through parliament and then the various departments will work on how to enact the new rules.  The budget gives us a taste of what is to come, but the details are what we need so we can start to take advantage of these new initiatives.  As a business owner, it is time to consider how you will use these initiatives to your advantage.  It is your responsibility to take advantage of this unprecedented spending to create jobs, invest in capital and build your business.  That, along with a vaccine and the opening of borders, is the key to our nation’s recovery.

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Jobkeeper 2.0 – What you need to know

This week is the crucial week for action for those on Jobkeeper 1.0 and those intending to continue to claim support via Jobkeeper 2.0.  The long awaited alternative tests were released by the Commissioner of Taxation on 22 September giving us more clarity and some tools to assist our clients in determining their eligibility for Jobkeeper 2.0.  Once again our mind is swimming as we seek to get the best support for our clients in this crazy time.

If you are one of the businesses who were not impacted sufficiently by COVID-19 to be eligible for Jobkeeper you must be very bored by these conversations by now.  However, there are around 960,000 employers who have accessed Jobkeeper 1.0, and many are uncertain if they qualify for Jobkeeper 2.0. This make planning for the next 3 months very difficult if you are not sure of your eligibility.  This week will hopefully bring the clarity you are waiting for as to your continued eligibility.

The announcement of the Jobkeeper extension was made on 21 July.  Changes to the tests were quickly announced on 7 August as a result of the lockdown in Victoria.  The alternative tests were released on 22 September demonstrating that the government is taking a more measured approach than the rush to bring support to businesses in April.  Yet despite the delay in their release, the alternative tests are in line with the predictions of accountants trying to assess client eligibility.

Here is what you need to know:

 

The End of Jobkeeper 1.0

·       If your business is currently receiving Jobkeeper 1.0, this finished on 27th September.  You need to ensure that you have paid your staff at least the minimum of $1,500 for the fortnight 14th September – 27th September.

·       Report your turnover for September using the regular monthly business declaration  between 1 October – 14 October to receive the last of your payments for Jobkeeper 1.0 (being the payments for the two fortnights in September).

 

The start of Jobkeeper 2.0

·       Assess if you are eligible to receive Jobkeeper 2.0.  I will discuss how to assess this below.

·       If you are eligible you need to assess which Tier of payment your staff fall into.  This is determined by looking at the average number of hours the employee or business participant were actively engaged in the business in the four week period before either 1 March 2020 or 1 July 2020.  If the average hours are more than 20 hours per week the employee or business participant receives a Tier 1 payment.  If less than 20 hours, the employee receives a Tier 2 payment.

·       Advise via Singe Touch Payroll which Tier of payment is applicable for each employee.  If you don’t use Single Touch Payroll you will need to identify your employees when you make you submit your details on the Business Portal or MyGov.

·       Make sure you pay the employee the minimum amount for each fortnight based on their Tier.  The minimum amount is $1,200 per fortnight for Tier 1 and $750 per fortnight for Tier 2.  You have until 31 October to get this minimum payment made for the first 2 fortnights of Jobkeeper 2.0, allowing you time to properly assess your eligibility.

·       You will need to submit details of your businesses actual decline in turnover to the ATO between 1 – 31 October 2020.

·       In November you will need to continue with the monthly business declaration, not only declaring your turnover but which Tier your employees were paid for over the course of the month.

·       You will continue to be eligibly for Jobkeeper 2.0 until the next retest point at the end of December 2020.

 

Keep your employees informed

While there is no requirement to get new declarations from your employees for Jobkeeper 2.0, make sure you inform them of your eligibility, or not, so they can be aware of the circumstances.

Note, the eligibility tests for employees has not changed.  If you had assessed the employee eligible for Jobkeeper 1.0, the employee will continue to be eligible for Jobkeeper 2.0.  The start date of 1 July is the testing date for permanent employees and long term casuals and it is still the ”one in, all in” situation, meaning you cannot pick and choose which employees receive Jobkeeper.

 

The business eligibility test

When considering your eligibility for Jobkeeper 2.0, remember that this extension is really designed for the businesses who have been severely impacted by COVID-19.  In many cases businesses have returned to normal trading (although maybe slightly reduced) in recent times.  Jobkeeper 2.0 is largely designed to assist those in Victoria, and those in industries such as entertainment and tourism that simply cannot operate in a normal way at this stage.  Of course, there will be a wider net of businesses that will pass the eligibility test because it is not exactly business as usual right now, but this test will be a lot more difficult to pass than the Jobkeeper 1.0 test.

When it came to testing for Jobkeeper 1.0 we had a few options.  We could test on any month between March and August, or we could predict that the March- June quarter would show the required decline.  The ATO accepted those predictions so long as there was a reasonable basis for them.  We could choose between turnover on a Cash or on an Accrual basis.  With many businesses trading in a very different capacity in April and May, it was relatively easy for an effected business to pass the test.

There are no predications in Jobkeeper 2.0.  The test is based on actual figures and rather than looking at a month, it considers an entire quarter.  We need to look at the actual GST turnover from July- September for our comparatives.  The ATO prefer you to compare on the same basis as your Business Activity Statement (you either report on a cash or accrual basis) although they have said you can use the other basis this may be questioned by the ATO when your BAS comparisons don’t stack up.

The comparatives will be based on what your reported as your GST Turnover in your July- September 2020 BAS, and your July – September 2019 BAS.  To be eligible you need to show the 30% decline in turnover this year compared to last year, unless your business has a turnover of more than $1 billion per annum, in which case you need to show a 50% decline. The decline in turnover test for charities and not for profits is still 15%.

For most businesses it should be very simple to compare and determine eligibility.  If you qualify you will get Jobkeeper 2.0 from October – December.  You do not need to retest again until the end of December when a further extension is available at a further reduced rate until 28 March 2021.

Do not by surprised if you have dropped out for Jobkeeper 2.0.  If things go particularly bad in the October- December quarter the Government have left the door open for you to retest for the January- March quarter and jump back into the scheme.  Fingers crossed that will not be necessary.

 

The Alternative Tests

Aware that circumstances may prevent the traditional test to be appropriate for some businesses, the ATO has issued alternative tests that may be used.  These tests are very similar the initial alternative tests that were advised for Jobkeeper 1.0.  Remember, these are designed for businesses that have unusual circumstances and to be eligible to use an alternative test you must satisfy a condition to use the test, as well as pass the alternative test itself.

Below is a table explaining the alternative tests.  Note, if your business qualified for the ATO Bushfire’s 2019-2020 lodgement and payment deferrals, or received Drought Help concessions, you can exclude the months that these concessions or deferrals covered from the calculations, unless they are the only months that the business operated.  If this is applicable to you, I suggest you read the legislation at this link for more details on how the bushfire or drought figures impacts your test.

https://www.legislation.gov.au/Details/F2020L01200

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I know this seems extremely complicated and if you think one of these tests may apply to you, I strongly suggest you seek the advice of a professional.

It is going to be a busy month ahead with all these things to consider, along with Business Activity Statements to be lodged and our first of our lodgement deadlines coming up on 31 October 2020 (typically for those with overdue returns).  Have patience with your accountant.  They are doing their very best to get you through this challenging time.

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The Value of Time

When I think about time I feel a mixture of emotions.  It is something that is often on my mind or in my conversations.  Do you have time, how long will this take, I’m running late, I’m running out of time!  So much of what we do is based on time and I believe it is our most precious resource, yet others do not value our time in the way they should.

Tradies, like accountants primarily sell one thing – time.  It has taken them time to develop their specialised skills.   If they choose to spend a moment of their precious time solving a problem for a client, they deserve to be compensated for it.   It is the same for any skills-based profession, however I feel that tradies, like accountants often get a bad rap for the time it takes them to do a job.

Why is this?  Like tradies, accountants provide a service that is typically not a choice, nor is it exciting.  Accountants fill out forms to advise the authorities of the position your business is in and calculate the amount of tax needed to be paid.  No one wants to pay tax so often we are the bearers of bad news.  Your company has done really well this year, you have made a really good profit and now you have some tax to pay!  How often do I have to explain to clients that this is a good thing.  You have made a profit.  I am sure you did not get out of bed each day to run your business at a loss.  Yet the words profit and tax often provoke fear and sadness in business owners.  The fear and sadness is amplified when we dare to send an invoice for the time it took for us to prepare the accounts, analyse, minimise and calculate that tax position.

Tradies often face the same challenges, particularly if they are working for the public.  Clients do not choose to have a blocked drain, a broken car or an electrical fault.  The fact that you are solving a problem for your client can be forgotten when the invoice is raised.  But you just did this?  How hard can it be?  How can it be so expensive?  Hey there, you asked me to use my skills to solve your problem, skills I have trained in and developed yet my value should not count?

Tradies (like accountants) also have to contend with those who look for the cheapest option or think they can do the job themselves.  We are then called in to fix the problems that these cheap or DIY alternatives cause.  The old saying you pay peanuts, you get monkeys is very true when it comes to skilled professions.  Solving this problem and explaining the value of your work can be difficult.

Another parallel between tradies and accountants is the “head in the sand” customer.  For tradies, it is the client who knows there is a problem but leaves it so long to get it fixed that the problem becomes critical and much more expensive to resolve.  In the accounting world this is the client who has not lodged tax returns or BAS’s for a long period of time.  We try to help them, and they sometimes expect a discount because they are providing us with a “bulk” job to do.  We rarely discount these types of jobs.  We do not want to encourage this sort of behaviour.

So why does this lack of value of our time frustrate us?  It is because time is a limited resource.  As I write this I am currently 50 years old and I have a life expectancy according to the OECD 2017 (Table S6.2) of 84.5.  Based on this, I am due to die on 19 September 2053.  Let’s see how accurate that is!  What is important to me is based on this information I have 300,852 hours available to me and every single second this clock is ticking down.  I could die tomorrow, or I could live well beyond my expected date of death.   The clock keeps ticking down and those finite hours are precious.  If I chose to spend my precious hours helping a client I need to be compensated for it.

How do we value our time?  There are a few concepts you can use.  The first is what I call the thirds model (I am sure there is a more sophisticated name for it).  This model takes the base salary of an employee and effectively times it by 3.  1/3 is for the salary, 1/3 is for overheads and 1/3 is for profit.  This works perfectly if the employee is 100% productive however that is the seldom the case.  In accounting we adjust the salary to their productive salary (eg they are productive 65% of the day so we gross up their base salary to reflect this) and then use the 1/3 model.

Business owners typically work more than the standard 38 hour week and as such, their charge rate needs to reflect more than this.  There are two other concepts I want to raise, both are economic  concepts; opportunity cost and supply and demand.

Opportunity cost is the value of what you could otherwise be doing with your time.  If you are working on weekends or getting called out at night you should be applying a factor to your charge rate for the opportunity cost of not getting to spend time with your family.  If you must stop one job to attend to an urgent job, you should be factoring in the opportunity cost of potentially losing that first client because you were not able to serve them in the way you wanted to.   The opportunity cost of our life clock clicking down is that we probably have things we would prefer to do with our hour than work and there should be value placed on the choice we have made to work rather than enjoy time with our family or friends.

Supply and demand is an interesting and relevant concept.  This is the first economic theory we learn in high school and is fundamentally basic, yet we challenge it all the time.  The price point of a good or service is determined by the supply available on the market, and the demand for the good or service.

Media will tell you that plumbers charge more than doctors for their time.  I don’t believe this to be the case, doctors still earn very good money, but this notion is based on supply and demand.  Society in the more recent years has valued a university education above that of a trade.  Kids are leaving school and without any idea of what they want to do in life, head to uni to study something that may lead them in the direction of a career in the future.  I believe the smart ones are those like my son, who really does not have a head for study, and has decided to be an apprentice.  Not only do they start to earn money from day 1, they are gaining skills in an industry that has high demand and low supply.  This equates to a higher price point.

Even within the industry, there is a difference in skill levels.  If you are providing an excellent service and the phone keeps ringing, you are in high demand.  You are only human, you can only spread yourself so thin and you may well be covering that increased demand by forgoing the opportunity to spend time with your family.  You deserve to charge a higher price and you should proudly say how much you are worth.

We all have one life to live, one clock that is ticking down.  Let’s value our most precious resource and be brave in confronting those who challenge our value.

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Its time to break some bad habits

Have you taken a good hard look at yourself over the past few months when your normal routine changed?  I certainly have.  There are things I liked and things I definitely didn’t like about the way I adjusted to the temporary new normal.  I really liked my commitment to exercising (there are no excuses when the most exciting part of your day is going for a walk).  I very much enjoyed connecting with my husband as my busy travel schedule came to an abrupt halt and I was required to stay at home.  I was not so fond of the frequent trips to the fridge or the increased consumption of alcohol.  I became accustomed to wearing gym pants and found comfort working in my home office.

It is common thought that is takes 21 days to make a habit and 90 days to make it into a lifestyle.  We have certainly cracked the 21 days with the lockdown measures, but will your lifestyle be permanently changed in some way as a result of COVID-19?  Personally, I really hope to reduce the amount of travel I do now that I can so easily conduct a meeting over Zoom.  That will impact my lifestyle allowing me to explore new ways to use my time.

Perhaps now is an opportunity to work on some new business habits as we start to move out of the severe restrictions and back to something closer to normal.  I feel it is almost like the start of new year, we have that line in the sand when we can look at what we did BC (before Covid) and see what we can adapt to our advantage going forward.

I have no idea how we would have coped this past few months without technology.  Not only has it benefited our business, it has benefited our clients.  Now is the time to consolidate on this and encourage the use of more technology.  I feel that the fear of technology has been partially eased as we all had to embrace technology to remain connected.

If I can get my parents to partake in a weekly family Zoom catch up, there is hope for those who have neglected to take up technology options because it all seemed a little too difficult.  It really wasn’t that hard to find and use an online product that has helped over the past few months, and it is not just the millennials jumping online to conduct business.  Baby boomers and GenX are moving online and getting pretty good at it.

Even our business which I consider as an early adopter of technology has made changes.  We had to close our offices very early in the pandemic as we had a scare that effectively required all of our staff to self-isolate. The one problem we had was our phone system which required someone to be at an office location to answer the phone.

Always up for the challenge my business partner Michael sought a solution.  We now have a phone system that works over the internet and allows us to take, make and transfer phone calls using the Microsoft Teams product.  This means our work locations are no longer limited.  Our staff working from home can communicate with clients using their mobiles of through their computers via our work number.  After a few small hiccups we are now excited to be using our new phone system up and running.

Another app we have been promoting as a great benefit to those who have the bad habit of losing receipts, is Hubdoc.  Hubdoc is an app you can download on your phone and take photos of your receipts, feeding them directly into your accounting software.  Hubdoc is not the only product out there so speak with your accountant for the most appropriate solution for your business, but if you are using Xero, you will have Hubdoc as part of your subscription.

It is simple to use, particularly for your Tradie.  It is great way to break that habit of throwing receipts into the centre console of the car, or on the floor where they fade and are lost forever.  Now is a great time to start a new habit of taking those photos.  So how do you remember to do that?

Most habits are motivated by some sort of trigger.  Here is my suggestion on how to get into the habit of taking a photo of your receipts.  When you are at the shop, or the service station and the cashier asks if you would like a copy of your receipt, ask if you can take a photo instead. Use the question as your trigger.  Before long it will become second nature to opt in for a photo.  You will have a permanent copy of your receipt attached to the associated expense without the need to keep paper files.

As an alternative to taking a photo at the checkout, dedicate a time each day to take a snap of your receipts, but link it to something else you do everyday.  It may be when you watch the news, or as you crack open that first beer in the evening. Grab your phone and take a few pictures while you are watching the advertisements. Why not also take that time to reconcile your transactions in your accounting product?  A few minutes each day and everything will be done. The wonders of technology.

Associating a task with something that is already a habit makes it so much easier to introduce that as a new habit.  We all have habits that are good and bad, but lets take advantage of this fresh start to bring new technology and new good habits into our business lives.

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Unpredictable

Every Monday I start my week with an early morning Reformer Pilates class.  It is a lesson in vulnerability and personal strength as I manipulate my body in challenging new positions that I thought I would never have been capable of.  This morning the only thing preventing a spectacular fall from the machine was a fluffy band and my will and strength not to embarrass myself. I saw this as a metaphor for life right now, particularly business life.  I don’t know if my body can do the exercise that I attempt because I have never done it before.  The outcome is unpredictable, but I try it anyway.  We are running our businesses in this strange time with a level of vulnerability we have not seen before.  To succeed we must trust in our own strength and instinct.

 

I am sure COVID-19 has taught us all many life lessons and it is going to teach as so many more as this pandemic lingers as a disruptive force to our life for many years to come.  One thing that it has taught me more than anything is that life is completely unpredictable and trying to learn to deal with this unpredictability is a critical new skill to learn.

I think we all find comfort in predictability, even those who like to think of themselves living an “unpredictable” life.  In business, predictable is a necessary thing.  We create budgets, make plans and decisions all based on the fact that what we know from the past will be recreated into the future.  Right now, it feels that some of that has gone out the window.  As a business owner this can cause stress and anxiety, particularly for those who are working in an industry that has been highly impacted by COVID-19.

 

One of my husband’s favourite sayings is “let’s just see what the tide does”.  While I love this reference to surf culture and a free lifestyle sitting on a beach somewhere, it is can also be rather infuriating for someone like me, an accountant.  While there are unpredictable elements of my job, overall we know that our workflow goes in cycles and we can set out targets based on these cycles.

We are fortunate in that at this stage our work has only become more intense as a result of Jobkeeper and the other stimulus measures.  Compared to so many businesses out there we have nothing to complain about, but even with a level of predictability we are having difficulty making business decisions.  We are not sure how many of our clients will survive.  We are not sure how many of our clients will be able to afford to pay our invoices.  We are not sure how long it will take for those invoices to be paid.  In the back of our minds we are also concerned about staff getting sick and the impact that will have on us meeting our client’s needs. There is definitely an element of “seeing what the tide does” in our business at the moment.

This, however, is no excuse not to plan.  If anything, it means planning is more important that ever.  Planning now needs to account for unpredictability as well as predictability.  Your “what if” analysis has a whole bunch of new factors to consider.  Now is the time to be savvy about your business, to tighten your procedures, to enhance the customer experience and introduce better technology to give you a competitive advantage.

 

As a starting point take 15 minutes to write down your concerns about your business in this unpredictable time.  This may include loss of customers, staff unable to work, your customers going into liquidation meaning higher bad debts, or the fact that you simply cannot work as the government has closed your business.  Then start to formulate a plan to tackle this if the worst does happen.  We are fortunate to have some government support at the moment but this is not going to last for ever.  We need to be making plans for a business life after the support drops off.  That business life may look different to what it has looked like in the past.

No one knows where this pandemic is going to take us and honestly, it is OK to be looking one day at a time right now.  I am sure no business plan written in 2019 factored in a global pandemic.  What is predictable is that we will survive this and one day life will return to normal, even if that normal looks different to what we have known in the past.  People will still need to eat, be entertained, be clothed and housed.  Trade businesses are still going to be in strong demand.  Taxes are still going to need to be paid and most business owners will need someone to help them prepare those taxes.  What that will all look like into the future we do not know, so we need to adapt as the new models for doing business emerge.  It will be survival of the fittest, so be the fittest.  This means you need to be nimble and have great systems so you can adapt.

 

Tomorrow is unpredictable, and so is the day after that, and the day after that.  Unpredictable is starting to be predictable itself.  Strong business owners will learn to live with this and find ways to make the most of it.

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Our New Recession

I was just finishing university when Australia had its last recession and I honestly don’t remember that much about it.  I do recall our then Treasurer Paul Keating famously declaring that this was “the recession we had to have” and getting my first job as a graduate was very difficult, but the gravity of the situation certainly didn’t sink in as I was in my early 20’s.

That recession was in 1990-1991 and we have been fortunate to escape recession ever since, even during a Global Financial Crisis.  Thirty years later due to circumstances beyond our control we are slap bang in the middle of a severe recession.   This means that most business owners, including myself as a 51 year old, are experiencing this for the first time.  It is uncharted territory in so many ways.

Technically a recession is a fall in Gross Domestic Products (GDP) for two quarters in a row.  If you are not sure what GDP is, think of it like revenue in your own business.  GDP is the collective revenue for the country.  It is better to have more revenue than less in our country, just like it is better for your business to be selling more, not less.

When I think about recessions I am taken back to high school economics.  I loved economics at high school, but hated it at university.  In fact, I sucked at university economics because it was very complicated.  When we were discussing things like monetary and fiscal policy, supply and demand at high school, it just made sense.  High school economics started my love for business.  I really think as a first step to tackling this recession we need to revisit the fundamentals we were taught in high school.

I am not suggesting that this recession is as simple to understand as high school economics.  We have a layer of complexity that we have not confronted before in COVID-19.  Economics is based on the “perfect” market, which means that resources can simply move from one place to another when an opportunity arises, and information is equally available to everyone so that decisions can be made in a timely and efficient way.  This notion is unrealistic even in normal times but with the shut down restrictions and border closures, our market is far from perfect right now.  Yet that will not prevent our leaders from resorting to basic economic principles to help dig us out of this recession.

 

Supply and Demand

If you studied economics you will recall drawing a simple graph to demonstrate that the market price of a good or service is the intersection between supply and demand.  While that makes total sense, it is something we can overlook when we are pricing the products or services we sell.  We have seen some excellent examples of Supply and Demand impacts in the past few months as the price of products like hand sanitiser and face masks has skyrocketed as they have had a shift in demand, and the supply chain cannot meet that demand.  The price is correspondingly much higher than it was at this time last year when we didn’t really need these products in the same way that we do now. On the other hand retail outlets are constantly reducing the prices of their products to get stock moving.  People are just not buying certain products at the moment.

What is the demand for your product and how has it been impacted by COVID-19?  Life has not stopped altogether but if your product is a bit of a luxury, or something that can be delayed until better times, you will be starting to see a decrease in your revenue.  Knowing your customer, what they are experiencing and how this will impact their spending is critical to understanding the demand for your product.

If the demand for your product or service is reducing you need to consider a couple of things.  Clients will be price sensitive and maybe now is not the time to be raising prices. You still need to make a living so rather than dropping prices perhaps you need to be ahead of your competition.  Word of mouth is going to important and excellent customer service will help you to beat your competition when the pool of work reduces.  There will be competitors who undercut you on price but having the confidence to quote well and inform your potential clients of the benefits of quality over quantity will be more important than ever.  How will your business sharpen the experience for the customer?  How will you adapt to a reduction in demand for your products or services?

 

Monetary and Fiscal Policy

The two main ways a government can influence the economic outcome of a country are through Monetary Policy and Fiscal Policy.  Monetary policy is all about interest rates.  Changes to interest rates will impact our decisions to invest and save, as well as impact how much foreign investment we attract.  This delicate balancing act in turn impacts our economy.

The Reserve Bank of Australia look after monetary policy and you are probably familiar with the monthly publication of the official cash rate.  Reducing the interest rate is a tool to increase the investment that businesses make in our economy which should increase our GDP. The official cash rate is currently sitting at 0.25% as a result of many years of reduced interest rates.  At the present time, monetary policy has pretty much done what it can.  We really can’t go too much lower.

Without the assistance of Monetary Policy, we need to rely on Fiscal Policy.  Fiscal Policy is money injected into the economy from the government.  We are witnessing an incredible shift in our Fiscal Policy right now as we see our Budget Deficit grow to incredible numbers.  The necessary spend by the Government injects money into an economy that cannot sustain itself.  The Fiscal Policy impacts will be both short term and long term.

Our short term fiscal stimulus cannot go on for ever.  While so many businesses have benefited from Jobkeeper, Cashflow Boosts and other stimulus measures, we know that this money is going to drop off at the end of September.  It was always intended to be a short term fix.  The way to build our economy is to create jobs.  Infrastructure projects create thousands of jobs and we can see that this where the government will be focusing their longer term attention.

The construction industry are going to be the front line workers to drive our economy forward.  Infrastructure projects require tradies, and plenty of them.  There will be plenty of work but will you be in the right place to take advantage of this work?  The demand for Tradies will be high but there is going to be a lag between now and these projects being in full swing.  You need to be planning for this.

 

Unemployment

Unemployment is expected to reach 11% or higher in the next few months.  That is an incredibly high rate, and few of us remember a time when unemployment was so high.  People who are unemployed do not have the money for discretionary spending.  This means businesses that thrive on discretionary spending will have less customers.  In the next 6 months there will be many businesses that shut their doors.  It is going to be brutal, extremely sad and stressful for everyone.

Your focus for the next twelve months will need to be the survival of your business.  You should not expect to make extraordinary profits unless you are in an industry that is benefiting from the COVID-19 crisis.  You need to buckle down and get your house in order so that you can make it through.  Now is the time to think about the fundamentals of your business and go back to the basics so that you can be one of the surviving businesses at the end of all of this.

Just like the recession in 1990 and all the other recessions and depressions before them, the economy works in cycles and we will be return to a good place one day.  Riding out the storm will be tricky but it could make you a better business owner as you face the challenges ahead.   Read, learn, plan and adapt.  Lets hope this crisis is over soon.

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How To Record Stimulus (Xero)

We’ve put together a few quick and easy to follow video guides in how to correctly record your stimulus payments in Xero

How to record JobKeeper payments
Step 1 – Create a new account for JobKeeper income
https://www.loom.com/share/7dd605b361de40f39868871397e27c63

Step 2 – Reconcile payment from ATO to the JobKeeper income account
https://www.loom.com/share/7ccb72be07274d9398f1cb881228c25a

 

How to record Cash Boost
Step 1 – Create a new account for Cash Boost income
https://www.loom.com/share/6f015079a4334ab98a67994c57bc7bf8

Step 2a – Reconcile net payment from ATO to ATO income account (Jigsaw will reconcile at EOFY)
https://www.loom.com/share/5b72fa59654f4b91949fa6a5540ffd19

Step 2b – Reconcile gross payment cash boost to ATO liability account (balance sheet) and ATO income account (P&L)
1) Check whether your ATO Creditor account can accept credit payments
https://www.loom.com/share/62edcf1b6dc14e6ba2b21c921d99d7d3

2) Create a Cash Boost income transaction from ATO, and split your payment between ATO liability AND bank account (example is for a $10,000 cash boost to be split against BAS and bank account)
https://www.loom.com/share/6a6edd33a50741788e3f1c9e57756418

How to record NSW/VIC Grants
Step 1 – Create a new account for NSW/VIC Grant income
https://www.loom.com/share/fc1aacb015704693b2ed3e1793537f91

Step 2 – Reconcile payment from ATO to the Grant income account
https://www.loom.com/share/35623245c9f54ba2af0e0f98c6056151

Don’t worry too much – as we’ll be correctly reconciling these when we complete your next BAS / EOFY. If you have any concerns about your JobKeeper, Cash Boost or grants don’t hesitate to contact the team for more information.

FAQs 
JobKeeper:

  • JobKeeper is paid monthly, as a reimbursement for the last 2 fortnights (September payment will include 3 fortnights in August)
  • Every JobKeeper participant is required to lodge a monthly declaration, which will trigger the ATO to release the reimbursement (approx. 14 days from lodgement)
  • The forward month projection is your best guess at your future income. It will NOT be held against you if you are incorrect
  • Once you reach the required reduction in turnover in a month, you can continue claiming JobKeeper for the entirety of the scheme – even if your sales increase
  • Jigsaw Tax does not get notified whether your JobKeeper has been paid. Please let us know if it hasn’t been paid

Cash Boost:

  • Every business that is eligible and reports wages at W1/W2 will have the calculated boost applied automatically
  • The boost will be initially applied to ATO Integrated Client Account debt. Only excess will be refunded
  • The bank details provided for JobKeeper are not applied to Cash Boost refunds. We may have to confirm these again from you

NSW/VIC grants:

  • All grant income must be expended on business expenses (non-JobKeeper staff / top-ups, operating expenses such as rent, maintenance etc.)
  • Do not claim the grant unless you will be able to show expenditure on operating expenses
  • For NSW, we will provide a letter of support and you will be required to lodge documentation with the state Government
  • NSW has advised that compliance and verification action will occur after COVID
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Jigsaw Tax & Advisory | ABN 25 612 763 210

Phone: 1800 JIGSAW | Email: reception@jigsawtax.com.au

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