MGI South Queensland, Author at MGI South Qld | Business Accountants | Audit and Accounting Firm

A successful exit strategy is dependent on numerous elements, from what industry you work in to the nature of your business and of course, the scale. The way you choose to exit your business is a very important and personal decision and one that shouldn’t be taken lightly. The type of exit will depend on your personal goals, financial needs and industry conditions.

Below we have detailed five different types of exit strategies to identify which best fits your organisation.

1 – Sale to Market (third party)

Let’s start with the most common exit strategy – selling to market. The sky is the limit on your perceived value but you still need to find a willing buyer on the open market. Typically you will require services from a team of consultants, including business brokers, lawyers and accountants; this can be costly depending on the complexity of the transaction.

The up sides of selling to market are that you can set a higher price than you would for say, a family member or friend. You could also potentially have multiple buyers which would result in a bidding war and increased sale value. Furthermore, by not passing on the business to family means your loved ones benefit from the money without the pressure of the business operation.

There are downsides of selling to market however. Depending on your business it may not be able to cope with the handover. The acquisition has the possibility to get messy and difficult and if the buyer doesn’t hold your values which could seriously alter the culture of your business. There’s also a chance that you could find it hard to let go.

2 – Internal Sale

When it comes to an internal sale, the owner is usually very emotionally attached to the business and wants to see it go into good hands so will choose someone they know. This person tends to be an employee or business partner, or a family member to ensure the legacy that has built up over the years continues to grow as the owner wanted.

The pros of this type of sale include that the owner has confidence that the business will be ran by someone who has an existing knowledge of the business, improving chances of future growth and longevity. The buyer already has the commitment to making it work as they have an emotional attachment to it. Selling internally also means that the owner could stage their exit over a longer period of time.

However, as the buyer has more power because of the knowledge of the business, the price tends to be sacrificed. In most instances, the buyer has to finance the sale to allow the buyer to pay the purchase amount off. If there are several family members interested in the business, this can cause conflict over who gets what share. In addition, if there are any liabilities in the business such as unpaid taxes that are then handed over to the new buyer, it may damage that relationship post-sale.

3 – Merger / Acquisition

It could be necessary to exercise the option to merge with another company should cash flow or liquidity become an issue. By ensuring your company stays afloat will provide a level of security to investors .

The difficulties that can occur with a merger include: it’s often complicated to set up and execute seamlessly, it can be difficult to sustain long-term, there could be a damage of culture as you’re mixing two separate businesses, and depending on the nature of the company, it just may not be suited to merging.

If the merger goes ahead then it could provide a lot more access to new markets and expand your product options as well as opening the business up to new technologies, people, supply and capacity.

4 – IPO

Summary: An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded. Of the two million plus companies registered in Australia, around 2,000 are listed on the ASX.

IPOs are very rare and take a lot of time and money to carry out. In fact, the financial and accounting requirements need to be in place from day one and they will be well above the normal required by SMEs. The other downside of an IPO is you will lose the ability to operate confidentially.

The upside to an IPO is the instant recognition and fame within your industry; if your company is listed it brings a certain amount of prestige and public awareness. Once it’s listed, the business will have high stock worth potential and it improves the financial position.

5 – Liquidation

Going into liquidation is a normal exit plan for companies that will not go on and survive without the owner. Assets are disposed to pay off creditors and any minor profits are divided among shareholders . This is usually a considered option if the business owner is stressed and just wants to exit; an attitude of enough is enough.

Liquidation is not normally a planned exit strategy but unfortunately, it happens regularly. This method of exit strategy is more common in the situation of microbusinesses and when the owner is so closely associated with the brand, image and running of the business, making.

Although going into liquidation is seen as a final resort there are some pros such as the simplicity of it and how quick it can happen as well as you don’t have to worry about the selling price or the time it could take to sell and there’s no stress about transferring control to a third party – be it a relative, close friend or stranger.

Of course, having to go into liquidation can be a terrible feeling – the reputation that you have built up, your clients, contacts, time and effort effectively disappears. This option will also not impress your shareholders and you’re not likely to get your highest sale value.

Our succession planning services will help you make calm and considered decisions about the long term future of your business.

¹ HuffPost article Startup Exit Strategies for Investors http://www.huffingtonpost.com/david-drake/six-startup-exit-strategies_b_8254780.html
² Small Business United, Pros & Cons of 5 Different Exit Strategies http://www.sbua.org/articlesJune/june_article04.html

We hear a lot about corporate governance, particularly in the press when things go wrong at some of the country’s biggest companies. But what does corporate governance for SMEs mean in reality and how is it relevant to the vast majority of companies that class themselves as small or medium sized businesses?

When I talk to many people through my role as Audit Director at MGI, I often hear that “corporate governance is only for larger companies and besides, I’m too busy running the business.” There appears to be a high level of scepticism towards corporate governance as the view is that is another level of unnecessary compliance for no benefit.

However, corporate governance is not about compliance and hindering a business, it is about establishing a framework of processes and attitudes with a view to adding value to the business, helping build its reputation and ensuring its long term continuity and success. Good corporate governance generally delivers major advantages in circumstances such as when a business is looking to sell, raise funds or just improve its overall financial performance.

Unfortunately the vast majority of information available on corporate governance tends to be only relevant to large listed entities, which makes it very difficult for SME’s to understand what it all means and what the benefits are. However, I have assisted many clients to establish practical ways to adopt certain aspects of corporate governance for the overall improvement of their businesses. Some of these include:

Family owned businesses should establish and document a clear definition of the role that each family member plays. If non-family members are part of management it becomes even more critical that the staff member is fully able to undertake the role without have conflicting views from a range of different family members.
It is important to establish an effective board which meets regularly to discuss the operations and future strategic direction of the company.
There should be a clear division of responsibilities at the head of the company between the running of the board and running of the company’s business. This allows accountability for the operations of the company which the board can critically review.
The board should have mix of skills and experience which allows for more robust debate about the issues facing the business. Obviously the size of the board will be dependent upon the complexity and size of the company and may need to change over time as the business grows and expands.
The board is responsible for managing risk and should maintain a sound system of internal control to ensure safeguarding of the company’s assets and the shareholders’ investment.
The board should be supplied with appropriate information within a timely manner. The more timely the information, the higher chance the board can discuss and if need be, change the direction of the business to address the conditions that the business is facing.
All directors should receive adequate and ongoing training to allow them to keep abreast of key issues of the day.
The board should review its strategic direction on a regular basis.
The board should undertake a regular appraisal of its own performance and that of each individual director.
Levels of remuneration should be appropriate to attract, retain and motivate executives and non-executives of the quality required to run the company successfully.
Establishing guidelines to ensure that private and non-business activities are not pushed through the business.

Many of the above points relate to the operation, size and structure of the board. This is relevant to almost every company in the country regardless of its size or complexity. However, once the company grows, particularly if it grows quickly or expands into different areas, there are additional considerations that directors should give consideration to, including:

Appointing an independent chair or director to the Board – this provides the board with an outsiders view of its operations and direction, allowing them to objectively analyse the business without being involved in its day-to-day running.
Establish sub-committees including an audit committee and a remuneration committee.
Consideration of remuneration should include key people within the business and cover incentive schemes and appropriate remuneration for board members.
Consider appointing an external auditor to obtain comfort around the financial results of the company, the effectiveness of the internal control environment and whether the company has established appropriate policies and procedures.
Be in regular communication with non-active shareholders of the business, by way of timely and regular updates on business operations.

Good corporate governance really is for everyone and not just for large listed companies. All businesses, regardless of their size or complexity, can benefit from improved corporate governance arrangements. The benefits can include increased accountability of performance, improving both the quality and timeliness of the company’s financial reporting and enabling a board to be united in focusing on the company’s overall strategic direction. The tone of good corporate governance is set from the top and should be filtered all the way down to the bottom ensuring that all staff members live and breathe the corporate culture.

If you feel like your small business would benefit from improved corporate governance processes, feel free to reach out to the Audit and Assurance team at MGI for an informal chat.

Given the importance of food and drink sales in the overall success of a club, it is little wonder that management and staff need to continually be focused on inventory management. Successfully managing your inventory can dramatically improve the financial performance of your club.

As an external auditor to clubs, I’d like to share those practical things that are done in successful clubs that may help improve your own club’s financial performance.

Get your purchasing right

Large amounts of critical working capital can be unnecessarily tied up in stock balances. While buying in bulk can be great for securing a better price on a stocked item, it could also be hurting your cash flows. There is nothing worse than having stock sitting on the shelf collecting dust that no one is likely to use. Think of some wines in your stock holdings – every club has at least a few old bottles lying around.

There is a fine line between having too much stock tying up critical cash flows and not having enough stock resulting in shortages and potentially missing out on sales

So how do you determine what is the right level of stock? For clubs that have a real time inventory system, it is generally easy to find a report which identifies stock items that have not been sold for quite some time. Such a report, often called an inventory turnover report, can highlight those stock items that have been sitting around too long and need to be moved on. This allows for staff to discount the item in an attempt to sell the stock.

Another way of monitoring stock purchases is to review the level of sales of particular items in order to minimise any future purchases. This can also involve setting a minimum purchase function within the accounting software that alerts staff when stock is almost out, limiting the potential of excess purchasing when stock is already held by the club.

In smaller clubs where the accounting system is not as sophisticated, stock levels tend to only be updated once a stock count has occurred.

If this is a situation which is all too familiar, managing your stock becomes even more critical, as information regarding sales and purchasing trends are not readily available. In such situations, practical approaches to monitoring stock include:

Conducting regular stocktakes

Reviewing holdings of your largest stock balances – the 80:20 rule applies here. Generally 80% of a clubs income will come from 20% of the stock lines. Ensure that unnecessary stock lines being held are either eliminated or held to a very minimum.

Comparing stock items to monthly sales: is the club holding more than a months’ worth of sales at any one time. Ensure that purchases are kept to a minimum.

Minimise Waste

Waste unfortunately occurs within most clubs. However, the key to minimising it is to monitor waste as much as possible.

Areas where waste occurs that you may not recognise include:

Giving away free drinks: do you record how many of these are given away through promotions? Does your club know exactly the cost of such an offer, and factor these into your selling prices?
Purchasing perishable foods before they’re needed. There is nothing worse than ordering in new stock only to realise that you already had some in the fridge/ freezer which was about to expire.
Having old or inefficient bar taps/lines. Do you know the impact having inefficient bar taps/lines is having on your club? Are they being cleaned regularly to ensure optimal performance, minimise waste and ensure maximum taste for the beer?

Counting Stock Regularly

As we draw ever so close to the end of the financial year for many organisations, it is a timely reminder of the importance of having a regular stocktake. While conducting a stocktake can be a time-consuming process, there are many benefits to undertaking one regularly and not just due to it being the end of the financial year. These include:

Highlighting any problems with stock shrinkages or obsolescence. This allows staff to address these concerns on a timely basis, minimising the potential impact to the club.
Helping determine how well the club has performed and assisting with the calculation of your gross profit (which will determine whether or not you are charging enough for your food/bar stock items).
Providing an accurate picture of your stock holdings and helping easily determine whether you are carrying too much of any particular items.
Highlighting sales performance on products allowing staff to change sales strategies.
Helping reduce the amount of stock levels held by your club, reducing stock purchases and freeing up valuable cash.
Helping with your stock purchasing process. Ensuring that you only purchase those stock items that you actually need.
Allowing accurate monthly financial information to be given to the Secretary/ Manager and the Board.

While undertaking regular stocktakes can be a somewhat time consuming process, the benefits associated with doing it regularly mean that all clubs, no matter what their size should undertake one regularly.

Safety of Stock

How safe is your stock? At any one time your club is likely to have large amounts of money tied up in stock, which can be located in multiple places, be it in the kitchen, multiple different bars, function rooms and bulk storage. Do you know who has access to your stock at any point in time? Can stock be accessed after hours? Do you have adequate controls around this process?

Amongst the most practical ways I have seen clubs secure their stock include:

Locking high dollar stock items away with keys only given to managers or senior staff.
Maintaining a log of those staff who have keys and access to stock after trading hours.
Restricting access to stock items to only those employees that actually need access e.g. bar and kitchen staff.
Having regular training sessions with staff regarding the importance of stock security.
Having CCTV’s in areas where stock is stored.
Conducting regular stocktakes
Regularly reviewing the gross profit margins and any variations in stock balances and seeking explanations from staff if regular variations occur.

By undertaking some of the above practical procedures, you can ensure that your club achieves the maximum financial performance out of its food and beverage operations.

Are we using the wrong metrics to assess business success?

So often we hear or see something in the media about a particular business that has “made it”. Usually, it’s a fast growing start up business that has grown out of someone’s garage into a “multi-million dollar business”.

Sorry to be the bearer of bad news – but it is usually NOT a “multi-million dollar business”.

As a society, we seem to have this obsession that the business value is somehow the same as its sales volume. In other words, a business turning over $3m is somehow a $3m business, implying that it is worth $3m. This is rarely, if ever, the case.

In my opinion, this focus on sales (and not true business value) is one of the factors influencing many business owners to chase volume (or sales) at the expense of building a sound, sustainable business over time and why we continue to see business failures reported on an almost daily basis.

It will therefore come as no surprise that my key measure of business success is business value, not sales volume. It therefore follows that every decision a business owner makes should be predicated on building long term business value. Sometimes this may be contrary to sales growth. For example, it is easier to build sales if you simply discount your prices. You’ll have higher and higher sales, but less and less profit. In my experience, this is a downward spiral to the bottom.

On the other hand, adopting a premium pricing strategy and differentiating your product may actually result in slower sales growth. This is not a bad thing. Your sales growth needs to be sustainable. However, if your cost of product remains unchanged then clearly you will make more profit under a premium pricing strategy than a price discounting strategy.

This raises an interesting point. How many business owners actually measure and manage their business value on a regular basis – say yearly? How many actually develop strategy based on whether those strategies will increase the business’ value? How many know whether a particular strategy will increase or decrease its value?

From my 30-odd years of experience, the answer is very, very few. Everyone measures sales and everything else in the financial statements but very few measure their business value and whether they have added or destroyed value in their business.

How to determine my business value?

In its simplest form, business value is added when the business makes a return (on capital employed) greater than the cost of the capital invested in that business.

The capital invested in any business has an opportunity cost. If that capital wasn’t invested in that business it could be invested in another business, in publicly listed shares or in interest bearing deposits in the bank. Either way, that capital would get a return relative to the risk taken with the various investment classes. When you choose to invest your capital into a business you need to ensure that you’re getting an appropriate rate of return reflecting the risk taken. If your rate of return is less than the rate you need to compensate you for the risk on investing in that business, then you’re destroying value, not building value.

So why the predisposition with sales turnover?

In my view, it’s simple – sales feed the ego of the owner or CEO and it’s an easy metric to pick. It is also implicit that if sales are growing, the business must be doing well. Wrong! Look at the corporate collapses in recent months and you’ll see quite a number that have been “fast growing”. I would say, growing too fast.

So, before you get excited (and envious) about some fast growing business you may see reported in the media, ask a simple question – what was their return on capital employed? This is the true measure of business success.

Business owners need to constantly ask themselves the question: “Is my business decision adding value or am I destroying value?”

MGI works with our clients to help them regularly measure the value of their business and strategies to improve this.

The information contained in this article is general in nature and readers should seek their own professional advice in relation to these areas. MGI refers to one or more of the independent member firms of the MGI international alliance of independent auditing, accounting and consulting firms. Each MGI firm in Australasia is a separate legal entity and has no liability for another Australasian or international member’s acts or omissions. MGI is a brand name for the MGI Australasian network and for each of the MGI member firms worldwide. Liability limited by a scheme approved under Professional Standards Legislation.

As we approach the end of financial year SMSF holders should use this time for some important housekeeping. Below are 13 things you need to do to maximise the benefits of having a self managed super fund.

1) Get a market value of your assets

SMSFs are required to undertake annual valuations of all their assets for their financial statements and annual audit. See the ATO publication ‘Valuation guidelines for SMSFs’ for more detail.

2) Minimising capital gains tax

If you have made considerable gains this financial year it might be worth taking some losses to offset the gains to minimise tax on capital gains (10% for super funds).

3) Maximise contributions

Your concessional contribution limit, if you’re under the age of 50 during the financial year, is $30,000 or $35,000 if you are 50 years or older. The non-concessional (after tax) contribution limit is $180,000. If you are under 65 you can bring forward up to two years’ worth of non-concessional contributions, which means you can make $540,000 in one year. Make sure your contributions are received on or before June 30.

4) Ensure your employer contributions have been received

Ensure that your Superannuation Guarantee contributions for the June 2015 quarter have been received and that you have accounted for these in your concessional contribution gap.

5) Ensure your salary sacrifice contributions have been received

Salary sacrifice contributions are treated as concessional contributions. Make sure any salary sacrifice contributions have been received by your employer as per your salary sacrifice agreement before contributing additional concessional contributions.

6) Consider contribution splitting in your SMSF

If your partner hasn’t reached their preservation age or is under 65 and has not retired from the workforce you can choose to split up to 85% of your concessional contributions between you and your spouse. You cannot split non-concessional contributions. Splits must be made in the financial year immediately after the one in which your contribution was made. So you can split contributions made in the 2013/14 financial year in the 2014/15 tax return.

7) Have you just turned 65 or are about to?

If you are under 65 at any time during the 2014/15 year you can access the ‘bring it forward’ rule. So if you have just turned 65 in FY 2014/15 this is your last chance to contribute three times your non-concessional cap in one year.

8) Does your spouse earn less than $13,800?

If so you may be eligible for a full or partial tax offset for spouse contributions up to $3000. The maximum offset available is 18% ($3000 x 18% =$540) but decreases if your partner’s income exceeds $10,800.

9) Can you access the government co-contribution of $500?

If you have a low-income spouse or partner who is engaged in employment, or an adult child who is working part time, you are most likely eligible to access the government co-contribution.

The maximum co-contribution is $500, which is paid when a taxpayer earns less than $34,488 and makes a personal super contribution of $1000. If the tax payer earns between $34,488 and $49,488 the maximum co-contribution is reduced by 3.333 cents for every $1 in excess.

Other conditions to access the co-contribution include that at least 10% of the tax payer’s income must come from employment related activities or carrying on a business (i.e. self-employed), the taxpayer must be under 71 years of age at the end of the financial year and that the person making the super contribution has not claimed it as an income tax deduction.

10) Make sure you have taken the minimum pension payment

If you are taking an account-based pension (including a transition to retirement pension) you need to ensure that your SMSF has paid the minimum pension amount by June 30 in order to receive the tax exemption. If you are accessing a pension under a ‘Transition to Retirement” income stream also make sure you do not exceed the maximum limit.

11) Get on Top of SMSF Administration and Audit

Your SMSF financial statements and audit need to be complete to lodge your tax return. Make sure that you get your records and information ready to send to your accountant. At MGI we will provide you with a list of what information is required by what date.

12) Take advantage of tax deductions

An SMSF is able to claim tax deductions for a number of expenses including:

Actuarial costs
Accountancy fees
Audit fees
Updating a trust deed to comply with the SIS Act
Ongoing (not initial) investment adviser fees
Subscriptions to reports
Other administrative costs incurred in managing the fund
Member life insurance premiums (conditions apply)
Tax agent fees
Interests on loans borrowed to acquire an asset under a Limited Recourse Borrowing arrangement.
Investment property deductions related to a SMSF

13) Get cracking

While it’s tempting to leave sorting out your SMSF until the last minute it’s best to get started early to make sure that any contributions are received well before the deadline for this tax year (otherwise you risk having the contributions treated as received in the following tax year). Contributions are only recognised when they are received by the superannuation fund’s bank account so make sure you allow plenty of time.

If you have any questions getting your SMSF ready for June 30 speak to your MGI tax adviser today on 3002 4800.

MGI refers to one or more of the independent member firms of the MGI international alliance of independent auditing, accounting and consulting firms. Each MGI firm in Australasia is a separate legal entity and has no liability for another Australasian or international member’s acts or omissions. MGI is a brand name for the MGI Australasian network and for each of the MGI member firms worldwide. Liability limited by a scheme approved under Professional Standards Legislation.

Over 60% of Australians are dying without a will. That number includes people who have incorrect wills and those who don’t have a will at all. How can this be the case in a supposedly highly educated and intelligent country like Australia?

It begs the question – is the traditional Aussie culture of “she’ll be right mate” getting in the way of practical common sense and will it mean that our families will be short changed?

There are a lot of common myths out there in relation to estate planning. And if we don’t know what we don’t know, how can we fix the problem?

Here are seven myths busted to help small business owners get a better understanding so they can better plan their estate, manage their wealth and protect their family by ensuring their assets end up with the people they intended.

Myth 1: All “my assets” will be treated in accordance with my will

This myth is founded on the premise that you “own” all of your assets. This could, in reality, be a fallacy.

For most people, including small business owners, their large value assets include their home and super, which may include life insurance. Whether your family home forms part of your estate will depend on how you hold (or own) the property. Most couples would own their home “as joint tenants”. This means in the event of the death of one of the parties (i.e. tenants), the property automatically reverts to the surviving party (tenant). Your share of the property does not form part of your estate.

Some people (generally unrelated owners of properties) will hold the property as “tenants in common” in agreed-upon proportions (e.g. equal shares). In this case, the death of one “tenant in common” will mean their share of the property will be dealt with in terms of their will and will not go to the survivor co-owner.

It is absolutely crucial you understand how your property is held and therefore whether or not your share of the property will form part of your estate (and dealt with in terms of your will) or not.

Myth 2: My superannuation will be treated in accordance with my will

The reality is your super is held in a trust, being the super fund, so you don’t actually “own” it. You are therefore reliant on the trustee of your super fund to distribute your super, including any life insurance you have in your super fund, to those you intended it to be distributed to.

Your perception that you “own” your super is entirely that – a perception – unless you have specifically instructed your super fund trustee to distribute it in a certain way. However, you can’t just instruct your super fund trustee in any old way. You have to give them a binding death benefit nomination, or more specifically, a non-lapsing, binding death benefit nomination.

As the description suggests, this nomination is in writing, it doesn’t lapse and therefore remains in place until you revoke it, it is binding on the parties and it nominates who you want your death benefits to go to.

Importantly, every super fund trust deed is different and may contain specific provisions about the form and content of the nomination. It is critical that you specifically follow the requirements of your trust deed to ensure your nomination is binding on the trustee. This is particularly the case where you don’t have a self-managed super fund. In this case, you are reliant on a trustee who you don’t know and have never met, to distribute your super in the manner you had intended. Blind trust – perhaps.

Myth 3: If I die without a will, things will all work out

Wrong!

If you die without a will, your state government decides how your estate will be distributed. There are particular rules regarding intestacy (dying without a will). Specifically, the government has a predetermined methodology of determining how to distribute your assets if you die without a will. This may, or may not be, how you had intended them to be distributed.

To illustrate how things can go very wrong, I want to give you a real life example. Recently, a young lady tragically passed away in an accident. She was over 18 years of age and died without a will. As she had no dependents, the intestacy laws in her state prescribed that her substantial death benefit (i.e. life insurance) in her super fund was to be paid equally to her mother and father. Sounds fair enough doesn’t it? The only problem was that the young woman and her mother had been estranged from her father since she was a young child and they had nothing to do with him since then.

Unfortunately, the rules of intestacy meant he ended up with half of her death benefit. Sad, but true.

Myth 4: I want all of “my assets” to form part of my estate

In most cases, this may well be the case. But what if you are recently divorced from an ex-spouse with children? What if you are in a de facto relationship with someone other than your spouse? What if you are leaving your estate to some children and not to others? What if you are in a “blended” relationship with current and recent ex-spouses, children from prior relationships, step-children? And the list goes on. Do you really want all of your wealth forming part of your estate where it can potentially be challenged?

To the lay person it may seem logical and almost automatic that your assets must form part of your estate. However, for the reasons previously mentioned, there may be valid reasons why you want your estate to contain little, if any, assets. For example, if your will is likely to be challenged.

As discussed, it is possible, in fact probable, that your jointly owned home together with your superannuation will not form part of your estate and therefore beyond challenge. The same goes for interests you may own in a business or other structure, particularly in a trust.

Myth 5: I don’t have a lot of assets so I don’t really care how my estate is distributed

As illustrated by the example in myth 3, even relatively young people can have a sizeable estate due to life insurance held in their super fund. Anyone without a valid will needs to think long and hard about where they want their wealth to end up and where it might end up if they die without a will.

Myth 6: It’s my money and I’ll leave it to whom I see fit

Yes, but . . .

Generally the courts will look at whether the deceased has made “adequate provision” for potential beneficiaries. This might include situations where the deceased leaves a disproportionate share of their wealth to certain children in preference to other children. This could potentially also apply to step children and illegitimate children.

In determining whether adequate provision has been made to a particular party, the courts will look to things such as the size of the estate, the nature of the relationship of the parties, how the estate has been distributed and a number of other factors.

The bottom line is unless “adequate provision” has been made for the respective parties, there is the risk the courts will overrule the will of the deceased and distribute the assets in a different proportion. This shows why, with adequate planning (as discussed in myth 4 above) it may be possible to minimise the size of an estate.

Myth 7: I’ll just leave my estate to my spouse and they’ll leave their estate to me and it will all work out

Maybe, and maybe not.

This will depend on a number of factors including the age at which you or your spouse die, the age and marital position of your children and a raft of other issues.

The reality is, fortunately, we’re all living longer. This means if you or your spouse dies relatively young (and to some 60 could be relatively young) there is a fair chance your spouse may remarry or enter into a de-facto relationship. If you leave all your wealth to your spouse (at the expense of your children) there is the possibility they may subsequently break-up with their new partner or spouse and that part of your estate will end up in the hands of their estranged spouse. This won’t make your children happy.

Similarly, even if you spouse doesn’t remarry they may leave the balance of your combined estate to your children. What happens if your children subsequently divorce? Deja vu.

For these reasons, many people’s wills contain a testamentary discretionary trust. In other words, a trust is created on your death and all or part of your wealth is settled on this trust. The beneficiaries of this trust are your blood relatives. Whilst these are not always effective in the Family Court if your spouse and/or children end up there, they probably represent the best protection going around.

In summary

A myth is just a widely held, but mistaken, belief. Don’t be hoodwinked by estate planning myths. Everyone’s situation is different, so also don’t do something just because friends have done it. Get professional advice about your specific situation. The cost of doing things right now will pale into insignificance compared to the cost to your estate (and your loved ones) in getting it wrong, particularly dying without a will.

MGI South Queensland offers a range of estate planning and wealth management services including asset protection strategies to preserve wealth within families. Talk to your MGI Gold Coast or Brisbane Accountants today and make sure your assets end up with the people you intend. Call 3002 4800.

Below is an overview of the eight biggest myths we have read or heard in relation to setting up a self managed super fund.

The rules keep changing
Verdict: Myth

You read every day that one of the down sides of having a SMSF is that you have to spend time keeping on top of the ever changing landscape of rules and regulations. It is, in truth, more complicated than a retail fund (which you can literally set up and forget about) however changes to the rules are limited and if you are engaging the support of a financial advisor or accountant they will help you to stay on top of the latest requirements.

It’s too complex
Verdict: Myth

Again if you want to take advantage of a SMSF but don’t want to invest time in managing your super you can outsource this function to your accountant or financial advisor.

Superannuation isn’t performing well as an investment
Verdict: Myth

Superannuation is not an investment it’s a structure for undertaking an investment. If your superannuation hasn’t performed well it’s because your chosen investments haven’t performed well. It does not matter if these investments were set up as superannuation or through another structure. They wouldn’t have performed any differently.

It costs more to have a SMSF
Verdict: It depends

This depends on a number of variables including the investment structure you choose, the number and type of assets you hold and your fund balance. To find out more about whether a SMSF is an effective option for you, speak to your MGI advisor.

You don’t have control over your superannuation
Verdict: Myth

You do have control over your super. If it’s invested in a SMSF you have the most control, however even a retail super fund will give you a degree of control with different investment options.

I don’t need to worry about my superannuation until I am older
Verdict: It depends

As with any investment, the longer you invest the better chance you have of achieving your end goal. If you start planning early you also have the flexibility to pursue more high risk strategies, with time to recoup any potential losses.

SMSF is DIY super
Verdict: Myth

You may not be part of an industry fund but when you set up an SMSF you are wise not to go at it alone. You will most likely need the expert support of a financial advisor to help develop your investment strategy and your accountant to ensure you meet the rules and regulations and that you are achieving the best tax outcome.

Managed super funds better allow you to spread your risk and diversify your investments
Verdict: It depends

Most managed super funds have a large proportion of the fund invested in the share market. With a SMSF you can sell your shares if stock market falls are expected. However, with a retail super fund someone else (eg the trustee) is in control of this decision.

Help establishing a SMSF

MGI works with our clients to set up and manage a SMSF. If you would like one of our consultants to review your retirement goals and to evaluate whether a SMSF is the best option for you please book a free SMSF consultation today.

News that a Seven Network senior manager has admitted to falsifying invoices is a timely reminder for all businesses of the prevalence of business fraud.

While the amount of the alleged fraud hasn’t been quantified the Seven Network has revealed that the uncovered payments go back over a number of years.

MGI Audit Manager Stephen Greene said fraud is a real risk for any business from large corporations like Seven Network to SME businesses.

“Every year in Australia instances of fraud cost businesses hundreds of thousands of dollars and these are only the ones we know about,” Stephen said.

“47% of Australian organisations experienced in excess of 10 fraud incidents in the last 24 months according to the latest reports,” he said.

MGI has released a report that analyses specific cases of fraud in 2015 and provides key strategies that can implemented by businesses to deter and detect similar fraud situations.

To download the full MGI report click here.

As the end of the financial year approaches, it’s a good time to take a look at your profitability and potential tax liability for the year. There are a number of strategies which if implemented by June 30, may reduce the liability to the Australian Taxation Office (ATO).

1. Get a double tax deduction for super contributions made in June

Some individuals may be able to get a double tax deduction for contributions to their SMSF during the month of June if they adopt what’s called a ‘reserving strategy’. Once a contribution is made to the SMSF, you’ve got 28 days to allocate it to a member; in the interim you’re ‘reserving’ it until the allocation.

Basically, you can get a double deduction for your super contribution limit. That is, even though the limit is $35k, you could put in $70k (provided it is made in June) and get a tax deduction for the full $70k. The ATO has recognised this as a legitimate strategy, however you really need to dot the I’s and cross the T’s and ensure you comply by getting appropriate advice prior to doing this.

2. Research and development (R&D)

More and more SME’s are conducting research and development as a matter of course. Unfortunately, very few realise what they are doing qualifies as R&D and aren’t claiming the respective tax offset. Basically, you may be entitled to claim the offset if you are undertaking experimental activities conducted for the purpose of generating new knowledge in relation to products or processes whose outcome is unknown. If your activity is eligible you can get an extra 50% on the 30% company tax rate you currently get, meaning you get a 45% tax offset. Importantly, you can obtain the offset (or tax refund) even if you are making losses. The offset can then be used to fund your business R & D.

3. Immediate tax deduction for assets costing less than $20,000

If you need to buy capital assets, and your business has a turnover of less than $2m, you may qualify for an immediate write off where the asset costs less than $20,000. If it costs $20,000 or more, although you won’t get the immediate deduction, depending on how much it is and what other assets the business has, you may still be able to claim accelerated depreciation on it. .

However, if you don’t need the item, don’t waste your money. Whilst you’re getting a full tax deduction, you still have to pay the after tax portion (this could be more than half, depending on what tax bracket you’re in). It also only applies if you’re a small business entity, so make sure you meet the tests for this. You don’t get the deduction if you simply own a rental property. Also, don’t forget to consider your business cash flow. If you buy 2-3 items for close to $20k each, this can add up and can affect your business cash flow. Also remember, the item must be installed and ready to use by June 30.

4. Maximise deductible super contributions

Business owners may be able to reduce the overall taxable income of their business by making additional contributions to superannuation prior to June 30, 2016. The maximum amount that may be contributed and claimed as a tax deduction is $30,000, or $35,000 for those who were 49 years of age or more on June 30 2015. If you are over 65 years of age, you also need to meet the work test (40 hours in 30 consecutive days).

Super contributions are only deductible if made during the year, so make sure your super fund receives the contributions well before June 30 to allow for potential bank processing delays.

5. Get your super fund pension right

If you’re currently drawing a pension from your self-managed super fund (SMSF) make sure you’ve paid yourself the minimum pension required by law. Where there is also a maximum limit (e.g. those on transition to retirement pensions),make sure you also haven’t exceeded that maximum limit.

If you don’t meet these limits, the ATO view requires that the fund must pay 15% on its earnings rather than zero. According to ATO statistics, the average size of a SMSF is about $1m. So getting this wrong could work out to be a very expensive mistake.

6. Take advantage of capital losses

Taxpayers with capital gains in the current financial year should also consider if there are ways to minimise the tax on those gains.

If you’ve had a capital gain, the aim is to put yourself in the lowest possible tax bracket in order to pay the lowest possible CGT. Useful strategies can include deferring income to next year, accelerating deductions or selling assets that may have unrealised capital losses. Remember, the date of disposal of an asset is the date of the contract, not necessarily the date you settle. You may be able to sell these to a related entity if you still want to keep the asset but make sure you get advice first.

7. Bad debts

It is important for businesses to review and write off any bad debts before June 30 to ensure that you can get a deduction. Otherwise, you could be paying tax on income you are not going to receive. It is important that these bad debts must physically be written off before June 30. It is not sufficient to do this when doing your tax return several months later. As always, some form of documentary evidence of the write off (prior to June 30) is good practice. This could be by way of accounting entries processed before year end or some other form of written record such as a minute. Another requirement is that the debt must have previously been included in your assessable income. If you’re a small business and only recognise income when you’re paid (i.e. cash basis), then you won’t previously have included the debt as assessable income and therefore won’t be eligible to write it off as a bad debt.

8. Trading stock

It is worth reviewing your stock for any old, damaged or obsolete items – you can write these items off in full and get an immediate tax deduction.

Furthermore, the value of trading stock at the end of the year can have a big impact on the overall profit & tax position of a business. There are a number of options available for valuing trading stock, including valuing it at cost price, market selling value or replacement value. You can choose between these options from year to year and item to item. Depending on your circumstances, this choice can significantly increase or decrease your taxable income.

9. Loans from your business entities

This is a potential high risk area and you need to make sure these loans are in order. Basically, where you owe money to your company (or potentially even a trust), you need to ensure that you have met the requirements of Division 7A of the Tax Act. This basically requires that you have a loan agreement in place and that you’re making the prescribed minimum principal and interest repayments. If you don’t, the ATO can deem the full amount of your loan to be a dividend, with potentially disastrous consequences. Surprisingly, this is an area that is till not that well understood by business owners.

10. Review your structures and estate planning

The end of year is a good time to review your structures to ensure they still do the job. What might have been an appropriate structure when it was set up may now be a hindrance. For example, the use of trusts for running a business now needs to be reassessed in light of (the above Divisions 7A) complications arising out of the distribution of trust income to so called “bucket companies”. This can give rise to an ever-increasing layer of complexity. There are now many “rollover” provisions in the CGT legislation which mean it is no longer as hard to change structure, although stamp duty can present issues in some states.

Year end is also a good time to review your wills and estate planning generally. Everyone’s circumstances change over time and a will that worked for you a few years ago may now not give the outcome you want.

Have you recently read through your clubs financial statements and been confused as to what it all means? If you have, don’t worry, you’re not alone.

As an external auditor to many organisations in the hospitality and not-for-profit sectors, I often hear that the financial statements now are too complex, no longer relevant to our members and why can’t we just go back to having a simple profit and loss and balance sheet like we use to?

While I’d love nothing more than to be able to tell you that financial statements will return to less complex days, unfortunately that isn’t the case. Australian Accounting Standards (which in many ways mirror the International Financial Reporting Standards) are here to stay and generally need to be applied in preparing your financial statements. However, there is good news afoot.

Recently the accounting standards settings approved the reduced disclosure regime framework, which allows your financial statements to have significantly less disclosure than before (however you still must apply those sections that are integral to the valuation or measurement of any asset or liability). As a result of these changes financial statements can now remove much of the detailed disclosure including:

Removal of most (in some instances) of the disclosure surrounding the clubs financial instruments (which the exception of information around any borrowings and credit facilities your club may utilise.
Removal of the capital management disclosure, future capital and expenditure commitments, auditor remuneration and new accounting standards for future periods
Removal of the cash flow note reconciliation of operating cash flows
Removal of the property, plant and equipment roll forward for the prior year (however, you must still have that information disclosed for the current year)
Removal of large sections of key management personal remuneration and some related party transaction disclosures
Some disclosures of impairment, particularly around goodwill, intangibles and some property, plant and equipment

From our experience, the application of reduced disclosure has removed has helped the number of pages within the financial statement to reduce by up to 20%. We still believe these can be reduced even further, however, the debate still continues with the profession and our accounting standard setters as to whether it should go further. My advice to you would be to watch this space! If in doubt, talk to your auditor or accountant as he/ she should be aware of these developments.

Key Areas

While the core of your financial statements remains much the same, there are areas that all Board members should look out for in their clubs annual report, which reveals the fundamental health of the organisation. Some of the key areas I regularly discuss with my clients include:

Gross profit margin (particularly on food and bar operations): The gross profit is calculated as the gross profit (being sales less purchases) divided by revenue. If this ratio has a trend of declining it could indicate that either costs are growing faster than revenues and it might be time to review your prices or possibly that there is an increase in spoilage of stock, due to poor inventory management, over ordering or product or slippage of stock.
Cash flow from operating activities: operating activities are the core of your club. It represents your bar, kitchen, gaming and other key operations of the club (such as sporting activities etc). Cash flows from these operations are key as they show whether your club is generating enough free cash flows to fund its operations, as well as key expansion/ refurbishment plans.
Wages to income ratios: Wages represent one of the single biggest costs to any club. A simple analysis of total wages costs divided by total income will give you a quick and easy way of assessing whether your club is over/ under staffed, or whether wages are rising at a faster pace than revenues. This can be a powerful tool in assessing the future staffing needs of your club and one that should be monitored on a regular basis.
Current Asset Ratio: The current asset ratio is calculated as current assets dividend by current liabilities. It should generally always be greater than 1, which indicates that your club has at least $1 of current assets to cover every $1 of current liabilities. This calculation helps assess the solvency of the club and the ability of it to trade comfortably into the future.
Loan Requirements: If your club does have external debt (particularly if you have financed a recent refurbishment or extension), the bank will generally impose a number of requirements on you.

Generally speaking these include a loan-to-value ratio, an interest times cover and a debt coverage ratio (earnings divided by total loan repayments). In addition the bank generally undertakes an annual review, which includes not only looking at the past year’s results of the club, but also at your forecasted budgets for the next 1-2 years. Obviously when dealing with any bank, it is critical to ensure that these covenants are monitored regularly to make sure the club has a happy and successful financial future.

By looking at the above 5 areas within your financial statements, management and yourself can get a significantly better understanding of what’s going on in your club and can form strategies to improve the financial results. Your financial statements are much more than just your profit and I’d encourage you to have open and regular communication with both your management team at the club and your external advisors such as your auditor or accountant. They can help you understand and walk you through the complexity that is your financial statements.

If you would like a free consultation or support in this area, don’t hesitate to contact me.