There are ways to insulate yourself from ATO benchmark attack!

© Peter Mulcahy 2011 Posted on December 22nd 2011 by Peter Mulcahy FIPA

1. Develop a strong working relationship with your accountant, and advisers, who are there to make your life easier.

2. If you insist on being paid by cheque, EFT or credit card and avoid cash sales you have removed the main area of ATO attack.

   As all your sales will now be passing through your bank account/s there is little room for the ATO to dispute your business income, even if you still fall outside the ATO benchmarks. It is then up to the ATO to prove that you have made sales which you are not declaring.

3. By refusing to accept cash you also remove the pressure from customers to give a discount because the sale "is off the books", and you preserve your profit margin from customer attack.

4. Keep excellent records, with all invoices for purchases and sales, credit notes etc., and keep your book keeping up to date.

5. Also keep records of your holidays, time off etc., as the benchmarks ignore that you may have had an extended holiday.

The benchmark system is flawed, and if you have excellent records you will be able to prove that the ATO are wrong, but doing this is not a cheap process.

Your tax accountant should be able to offer you audit insurance, which is fully tax deductible. For a nominal cost you can protect yourself for up to $10,000 of audit expense. Unfortunately tax audits are an expensive process, particularly if you have to employ a tax lawyer to appear at a Tax Tribunal hearing to argue and defend your case.

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High quality record keeping for a small business is now crucial.

© Peter Mulcahy 2011 Posted on November 23rd 2011 by Peter Mulcahy FIPA

The ATO are now focusing heavily on bench marking of financial performance, and increasing GST audit activity. It is clear that the ATO's focus on benchmarking and GST is really an analysis of business record keeping.

I think it timely to review the legal requirements for business record keeping.

By law businesses must keep records:

• for five years after they are prepared, obtained or the transactions completed, whichever occurs latest, and
• in English or in a form that we can access and understand in order to work out the amount of tax you are liable to pay.

The ATO expect a business owner to:

• Record every sales transaction through their cash register or point of sales system
• conduct a daily sales reconciliation between the ‘z' total (or end of day report if using an electronic system) and cash in the register till, taking into account cash taken for business expenses and personal use.
• regularly transfer daily sales figures into a cash receipts book.
• perform a bank reconciliation between the bank statement/s and the cash receipts book at least monthly.

Retain these records for five years:

• the ‘z' totals or point of sale system end of day reports
• daily reconciliations
• bank records and cash receipt book
• till rolls or end of day reports that record details of each individual transaction. Note: If the ‘z' totals have been reconciled with actual cash sales and bank statements, the detailed till roll can be discarded after one month, plus
• maintain a filing system to keep track of paid and unpaid accounts.

Further information can be sourced from the ATO

Want to know more?

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ATO continues to ramp up Business Bench marking.

© Peter Mulcahy 2011 Posted on November 11th 2011 by Peter Mulcahy FIPA

• Landscape construction
• Motor vehicle retail - new and used
• Panel beating and smash repairers
• Lawn mowing and garden services
• Tattooing services
• Pharmacy.

So far the ATO has identified 46,000 businesses which are operating outside benchmarks and 50% of these businesses are represented by just 1,900 tax agents. The ATO has written to 107,000 taxpayers regarding their performance against industry benchmarks.

The ATO has noted that many businesses it contacted responded by :

• reporting more GST revenue in following BAS's after receiving the letter
• explaining why they were operating outside the benchmark concerned,
• 1,400 taxpayers voluntarily disclosed income not declared in prior years.

Good quality record keeping is crucial.

Bench marking is really all about record keeping, and the quality of business records. The ATO has repeatedly stated that taxpayers with poor records are at risk if prosecuted, because without adequate records a taxpayer has no way to prove that what they are saying is correct. Taxpayers are at risk because it is up to them to prove that the ATO position is incorrect. The ATO do take into account the individual circumstances of each business that it reviews, based upon records maintained by that business. Where records are complete and reliable the ATO will not use benchmarks to estimate sales, even where the business is outside the industry benchmark.

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Understanding Derivatives

Posted on November 11th 2011 by Peter Mulcahy FIPA

Helga is the proprietor of a bar in Your City. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later. Helga keeps track of the drinks consumed on a ledger (thereby granting the customers' loans).

Word gets around about Helga's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Helga's bar. Soon she has the largest sales volume for any bar in Detroit. By providing her customers freedom from immediate payment demands, Helga gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Helga's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Helga's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral!!! At the bank's corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS. These "securities" then are bundled and traded on international securities markets.

Naive investors don't really understand that the securities being sold to them as "AA" "Secured Bonds" really are debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb!!!, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

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What is Incorporation (.Inc)?

© Peter Mulcahy 2011 Posted on August 6th 2011 by Peter Mulcahy FIPA

Incorporation, within Australia is a legal process conducted under State or Territory legislation, and registration provides associations or community groups with certain legal advantages in return for accepting certain legal responsibilities. Incorporation of a body gives that body legal status separate from that of its members, and offers some protection to both office holders and members, from debts and liabilities incurred by the group, provided that the group is not run as a profit making body; that is you are genuinely "not for profit".

Incorporation allows you to have a bank account in the name of your body, to insure in the bodies name, to rent and lease in the name of your body, rather that your own natural name. If something goes wrong and someone sues, they sue the incorporated body, not the office holders or members. Therefore, the office holders and members have a "firewall" between the incorporated body and the office holders and members own assets. This is a huge advantage.

So incorporation is a legal status granted to not for profit community and service bodies who meet specific requirements, and are registered with a government authority. In Victoria, you will register with Consumer Affairs Victoria (CAV) and will operate under the Victorian Associations Incorporation Act 1981 as amended in April 2009. The legislation is 163 pages long, and details the rules and processes that an incorporated body must follow, including how you are to conduct your meetings, and these rules and processes must be complied with if you wish to remain incorporated.

Why would an Accountant in Public Practice tell you about this?

Incorporated (.Inc) bodies are required to have their financial accounts audited after the close of every financial year.

To do this your body must document:

• the receipts and expenditure of the organisation
• the assets and liabilities of the organisation
• the mortgages, charges and securities affecting any of the bodies property
• details of any trust for which the body was trustee
• details of any trusts held on behalf of the body, in which funds and assets have been placed.

Bodies must hold an annual general meeting and present the audited accounts to members, and must file an annual return with CAV.

Challenges with the new MYOB AO; a new users perspective

© Peter Mulcahy 2011 Posted on July 22nd 2011 (updated August 01 2011) by Peter Mulcahy FIPA

This is my fourth year using MYOB Accountants Office (AO) to prepare tax returns.

I have had the misfortune this week to be trying to prepare small business tax returns with the new version of MYOB AO Tax v5.1.0.169 Plus with tax v2.50.3.63.

There is a steep learning curve involved in using this version. The version I have installed on my PC does not have all of the options shown in the training video, so that it seems to be impossible to get generated dollar information depositing into the correct cells within the tax return. For example business car costs are deposited by default to cell D1 in the "I' return, rather than motor vehicle costs in the business return.

Depreciation immediate write off (DIWO) also termed "simplified depreciation" by the ATO

Another area of angst is the lack of depreciation immediate write off DIWO. The tax rates within the new AO are greyed out and therefore cannot be altered. MYOB in their wisdom give three ordinary depreciation rates, 37.5% ( low value pool), 30% (general pool), and 5% (long life pool, plus a software development rate, but for some reason they have not provided a 100% rate to cater for small business entities who use the depreciation immediate write off method. This appears an enormous oversight as the recent predecessors of Accountants Office have all catered in full for depreciation immediate write off.

For some reason MYOB choose to make it impossible for users to provide feedback about their AO Tax product, hence this blog.

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It is tax time and the scammers are back

© Peter Mulcahy 2011 Posted on July 12th 2011 by Peter Mulcahy FIPA

It is now tax time, and a very busy time it is.:-)

I am reproducing this message from the Tax Office as it has much value, and relevance.

The Australian Taxation Office have issued a very timely warning to all tax payers too beware of scammers who masquerade as, or claim to be from the Australian Taxation Office (ATO) in order to steal your identity, or to steal your banking and credit card details.

The ATO advise that "you may receive an SMS or email from us or notice our presence on social media sites such as Facebook, Twitter and YouTube. Our presence in this space is legitimate and can be accessed through www.ato.gov.au"

The ATO also advise that "we will never use these channels to request that you confirm, update or disclose confidential details like the following:

1. your name
2. date of birth
3. address
4. passwords
5. credit card details."

The ATO knows most of this information about you already. In my experience the only time the ATO ask for information of this kind is when you contact them, and they want to confirm your identity.

What assistance do First Home buyers receive?

This article is relevant to Victoria only.

© Peter Mulcahy 2010 Posted on April 4th 2011 by Peter Mulcahy FIPA

Possibly you are thinking of buying your first home, and are wondering what assistance is available.

The State government, have for many years provided, through the State Revenue Office (SRO) up to three grants for first home buyers. For many people these grants amount to you getting back the stamp duty that you will have paid to purchase your home. Such grants are gratefully received by the grant beneficiaries.

Firstly you have to be eligible in order to qualify.

Eligibility criteria:

• Applicant and partner must not have ever received a grant from any State or Territory within Australia.
• Applicants must never have owned a residential property, either jointly, separately, or with another person before 1 July 2000.
• Applicants must never have occupied a residential property,for more than six months in which they acquired a relevant interest 1 July 2000 in any State or Territory within Australia.
• Each applicant must be at least 18 years of age.
• At least one applicant must be a permanent resident of Australia, or a NZ citizen with a special category of Visa.
• At least one applicant must occupy the home as their principle place of residence for a continuous period of at least 6 months, commencing within 12 months of completion of the eligible transaction.
• Each applicant on or after 1 July 2000 must:
  * enter a contract to purchase a home,OR
  * enter a contract to build a home, OR
  * commence construction of a home as an owner builder.

Eligible Transactions

• A contract to purchase a home.
• A comprehensive building contract entered into by a person who has a "relevant interest" in land on which the home will be built.
• A comprehensive building contract entered into by a person who, at the completion of the contract, will have a "relevant interest" in the land on which the home is built.
• House and land packages.

Application is by approved form. Grants to successful applicants are paid within 14 days of receipt of your "Certificate of Occupancy".

For established homes grants are paid within 14 days of application, after settlement.

There are up to three grants available.

Everyone loses through price discounting.

© Peter Mulcahy 2011 Posted on March 24th 2011 by Peter Mulcahy FIPA

Price discounting does no one any good as suppliers lose, processors lose, retailers lose, and ultimately governments and taxpayers lose, as the taxpayer ends up carrying the unemployed and displaced. In the very short term consumers reap a benefit, but in the longer term they are much worse off, due to a lack of competition, and possibly limited supply. One of the excuses offered to the Senate inquiry into milk pricing by supermarkets was “we supermarkets have very low profit margins (because they are grossly inefficient) and therefore we have to discount the prices that we pay to producers.” Clearly, if you are selling a product at cost price, or below cost price, you cannot and never ever will be able to make a profit. You do not need to be very intelligent to work this fact out. Yet supermarkets need to make good profits, if for no other reason than they need to pay dividends to their shareholders, who in part are funding the growth of these monoliths.

Australian farmers, like all farmers throughout the world, have never been in a a strong position when it comes to selling their product. Generally the produce is perishable and they have to be price takers in order to sell their product quickly. So it is at present for milk and egg producers, and processors, who are being screwed by the big supermarket chains, Coles and Woolworths.

Fosters Brewing have demonstrated the advantage of being in a duopoly, where there are a limited number of suppliers for a product. Fosters are reported by 'The Age', Melbourne 23/03/2011, as quite rightly refusing to sell to Coles and Woolworths because they were going to sell Fosters various beer brands at below the cost of production. Full marks to Fosters management for having the courage to withhold supply.

Penfolds profits while discounters lose lots This is a very interesting case study. Clearly discounting is an unsustainable situation for any producer or retailer, as they quickly become financially weakened and will eventually become insolvent, and then bankrupt, as their cash supply dwindles and they cannot pay their suppliers and employees as and when the various debts falls due.

If farmer producers as an industry and the middle men or co-operatives who process their product were to adopt a similar approach to that adopted by Fosters, and value add their products by perhaps drying the milk, producing rare minerals, or cheese, butter, etc., or pulping the eggs and drying them, for sale on the world market, particularly at this time of the year they will reduce the available local supply. It wouldn't matter how low a price Coles or Woolworths offer, and advertise milk or eggs at, if they cannot get stock into their stores consumers will very quickly become very annoyed, and this ridiculous price discounting cycle will very rapidly come to an end.

Are you paying back too much interest on your Mortgage or Loan?

© Peter Mulcahy 2010 Posted on February 11th 2011 by Peter Mulcahy FIPA

Our banking system is run by humans who, like you and me, from time to time make mistakes. Sometimes the humans making the mistakes are the ones writing the programs that calculate your mortgage repayments, and you end up losing in two ways:

1. You can end up paying far too much interest and end up being ripped off
2. You loan takes far longer to repay because you are incorrectly paying back insufficient of the loan principal.

Of course, being humans, most people will blame the computer for the error. :-)

I believe that there are still errors in 54% of bank loan statements with 82% of those errors being in the bank's favour.

Our friends at Mortgage Watchdog have been helping people for years to take on the banks and recover over payments. The average error is $242.00 and 22,442 people have so far discovered errors and recovered their money.

Mortgage Watchdog provides software that checks the accuracy of bank loan figures. Too many people are overcharged on their home (and other) loans. With banks hiking their rates higher than the RBA cash rate increase, it is a good time to be checking your loan statements for errors.

Mortgage Watchdog are offering you a one month, no obligation, free trial of their software.

Don't let the banks rip you off. Improve your lifestyle. Fight back and be prepared to shop around for home finance.

© Peter Mulcahy 2011 Posted on February 4th 2011 by Peter Mulcahy FIPA. Revised and re posted February 5th 2011.

Home owners with a mortgage will be aware that rising interest rates are eating into their disposable incomes.

Our Reserve Bank conducts monetary policy, which controls our economies rate of growth. The Reserve Banks main economic tool is the setting of cash interest rates.

The big four banks have all announced record trading profits in the last six months, and many bank customers believe that the banks have the capacity to continue passing on only the Reserve interest rate increases. However, the banks have all demonstrated that they are keen to charge much more than the Reserve rate rises, and the big banks are certain too continue trying to increasing their profits at your expense.

Consumers are fortunate that there is a lot of competition for home mortgage finance, as it is a very, very safe form of investment. It is only because there is competition in the market that the big four have not tried too push their rates even higher than they presently are.

Be prepared to shop around.

Please be prepared to shop around for home loan finance. Finding a new home loan may be a daunting task to many of you. But remember that a half a percent (0.05%) reduction in interest on a three hundred thousand dollar ($300,000) mortgage represents a saving of one and a half thousand ($1,500 ) in annual interest payments.

Exit fees

Exit fees are seen by many as a deterrent to changing loan providers and you are fortunate because the Federal Government is looking to change this predatory behaviour. Some commentators in the market say that exit fees phase out after several years have passed. A telephone call to your current lender will help you to find out what is the exact cost of breaking your loan. Paperwork is not necessarily an issue for you as mortgage brokers will do most of the work for free.

We suggest you follow these simple hints:

A cheap way to dry cereal grain.

© Peter Mulcahy 2011 Posted on January 22nd 2011 by Peter Mulcahy FIPA

This is a very challenging year for Western Victorian grain growers south of the Grampians. If you can get on to your paddocks without getting bogged, you are often finding it hard to get the moisture content low enough to be able to harvest and sell your grain.

When I was young I had the privilege to attend Agriculture College in New Zealand, and I lived and worked there for nearly five years.

The cropping farms on the Canterbury Plains of N.Z. were worked much more intensively than cropping farms in Australia, and they had a very narrow time window (normally only two to three days) in which too get their main cereal harvesting completed. It was quite common too work for up to 60 hours without sleep when the North West wind was blowing, in order to bring in the harvest. An issue we often faced was getting the grain moisture content low enough to be able to harvest, and store the grain safely. We found that you could strip grain with around sixteen to seventeen percent moisture content and get it dry by augering the grain between silos, as you get enough air flow through the auger to reduce the moisture percentage by one to two percent per transfer.

Are Tax Office Business Benchmarks a necessary evil? Will dishonesty crimp your lifestyle?

© Peter Mulcahy 2011 Posted on January 14th 2011 by Peter Mulcahy FIPA

For many years the ATO has been developing industry benchmarks based upon information provided within tax returns. The ATO have become sufficiently confident in their data and since autumn 2009 have begun rolling the benchmarks out. In June 2009 the ATO had eight industry benchmarks. By June 2010 there were 58 benchmarks, and a quick check at the time of writing shows there are now 97 small business sectors covered by benchmarks. This means that if your industry isn't already covered it soon will be.

There are three categories of benchmark used:

• Performance benchmarks, e.g. cost of materials to turnover, labour to turnover etc.
• Cash sales benchmarks, e.g. your % cash sales versus industry benchmarks
• Input benchmarks, e.g. range of income versus labour and materials used.

Example:

Con, married with 2 children, is a concreter, whom the ATO happened to audit. In the tax year in question Con had declared taxable income of $18,000. Con had also taken the family back to Greece for a holiday that year. The ATO has noted that Con had been reporting a very low level of taxable income for many years.