Passing The Business To Family? Here Are Three Things You Probably Hadn’t Considered

Succession planning for the family businesses has a number of factors that could impact the decision to pass the business onto the next generation. Namely, you’ll be looking for someone in the family who is willing to assume the responsibility.
But if you intend to pass your business down the family tree there are a number of taxation, financial and managerial considerations that need to be taken into account for a successful succession.

Taxation Implications
When transferring your family business and placing it in the name of another family member you may trigger a myriad of taxable consequences, including Capital Gains Tax (CGT), wine equalisation tax, fuel tax credits and excise duty. You need to consider, when preparing the business for succession include:

●      Consulting the ATO to check if you are eligible for tax concessions

●      Document all business restructuring operations and the tax impact in the succession plan


Consider A Family Trust
It is often suggested before a younger family member gains ownership of the business they should first assume managing responsibilities to prove themselves. If you want to relinquish control gradually rather than permanently, re-structuring the business as a family trust is an option.
Although this may be complicated and incur costs, as a trustee you will be able to have control of the assets from a distance and be able to step in should the need arise in the early phases of new leadership. Family trusts also carry increased tax benefits and concessions that can be taken advantage of.
This is a great solution for those looking to go into semi-retirement or looking to step back from the business but still want some involvement with the process.

Create A Family Constitution
To make the hand-off occur as smoothly as possible a family constitution should be drawn up collaboratively by all, directly and indirectly, involved in the business. The following should be included:

●      A detailed business plan, stipulating goals, outcomes 

●      Hierarchy of the business, both present and future

●      Will of the business

●      Code of conduct for interactions between family members in business 

Develop A Succession Plan To Successfully Succeed

A succession plan is designed to assist you in transferring your business to a successor. To do so, it should include the following to further guide the process.

  1. Choose A Successor


Identify who you would like to take over your business. If you wish to keep it in the family, you need to be certain that the person who will be taking over is skilled and prepared for the responsibilities to come. Make sure that you consider what is the best path for the business.

  1. Value Your Business


Understand how much your business is currently worth by getting your business valued. By doing so consistently, you can mark out how much your business is worth during events, the general day-to-day and more. This valuation may change substantially before you plan to leave, but having a valuation may assist you with planning for your succession.  

  1. Keep The Plan Current


Review your plan regularly, as your circumstances and the business’s circumstances may change over time. Having an up-to-date succession plan will ensure you’re always ready in the event that you need to pass the business on earlier than expected.

  1. Make The Final Handover


If the final preparations have been properly made, and you’re ready to go, you should simply be able to hand over the business and step aside. A clear and current succession plan should facilitate a smoother transition with far less chance of disruption to the business’s everyday operations.

Cash in Hand Compliance Concerns For Businesses & Individuals Alike

If your business earns a part of its income in cold, hard cash, be prepared to have the Australian Taxation Office’s eyes on you this tax time.

To protect honest, compliant Australian businesses, the Australian Taxation Office (ATO) has placed a strong emphasis on targeting the cash and hidden economy (known to be a part of the shadow economy).

For example, they may be keeping a close eye on a sole trader electrician, whose reported earnings over the financial year versus their actual spending isn’t adding up.

Or perhaps you have a side hustle (such as freelancing or selling plants at the market), and earn some cash-in-hand alongside your full-time job’s income.

The ATO will be watching these businesses and individual traders that deal predominantly in cash, with a focus on those that:

  • Fail to meet super or employer obligations, and fail to register for GST or lodge activity statements.
  • Operate outside regular small business benchmarks specific to their industry.
  • Show discrepancies between what they have reported and ATO collected data relating to electronic payments.
  • Operate and advertise as cash-only.
  • Income does not correlate with the lifestyle of the business owner, i.e., assets and spending habits exceed what is expected of someone with their reported income.
  • Pay their employees cash-in-hand.
  • Estimate their sales and income.
  • Use the ‘no sale’ and ‘void’ buttons on cash registers when taking cash payments.
  • Do not reconcile at the end of the day and do not keep cash register tapes.
  • Are reported to the ATO by members of the community or any third party regarding potential tax evasion.
  • Are part of an industry that is known for dealing primarily in cash-only.

When out visiting cash-only businesses, the ATO will be working in unison with local authorities and industry associations to ask questions and discuss:

  • Why the business operates primarily or only in cash.
    The need to lodge tax returns and activity statements.
    How to be compliant in relation to tax and super obligations.
    Different claims and ta
  • The need to lodge tax returns and activity statements.
  • How to be compliant in relation to tax and super obligations.
  • Different claims and tax deductions businesses can make.
  • The general community’s preference for having EFTPOS or electronic payment options available to them.
  • Benefits of electronic payment and record-keeping facilities.
  • Relaying tools and services businesses can use if they are struggling to ensure they are compliant with Australian tax laws.

If the ATO comes across a business that is doing the wrong thing or failing to meet its obligations, they have a duty to take action. This may result in the business facing an audit and possible prosecution.

Its imperative that you are fulfilling your obligations and know where you stand, particularly with;

  • Bookkeeping and record-keeping requirements
    Reconciliations between till takings (z-totals) and banking
    Consequences of failure to report all income (penalties, fines, interest, additional tax, additional GST)
    Consistency of business income between prior and current years, and with reference to lifestyle
  • Reconciliations between till takings (z-totals) and banking
  • Consequences of failure to report all income (penalties, fines, interest, additional tax, additional GST)
  • Consistency of business income between prior and current years, and with reference to lifestyle

If you do make a mistake upon completing your tax return but make a voluntary disclosure detailing your errors, the ATO will work with you to rectify this and create a solution.

COVID Deductions Rely On Work-Related Purposes (So Here’s What You Might Be Able To Claim)

People across different industries may have different items for work that they can claim a deduction on their tax returns for, but this season may see a few common occurrences across individual tax returns for 2022.

On your individual tax return this year, you may notice a few expenses pertaining to COVID-19-related purchases, such as masks, hand sanitisers and RATs tests that you may be able to claim (depending on your circumstances). These deductions may have specific conditions and requirements that must be met, and failure to comply may result in the Australian Taxation Office disallowing these claims.

Masks and hand sanitiser are claimable deductions for those who have required them to work in their industry (e.g. retail, hospitality, education). This is because they can be claimed as PPE (Personal Protective Equipment), but they must be directly connected to how you earn your income (for example, many State governments mandated at various points last year that hospitality workers were required to wear masks while working). If your place of employment did not provide this PPE to you, and you had to purchase it yourself, it may be claimable.

Rapid Antigen Tests (RATs) however, must be purchased for a work-related purpose. There have been plans to specifically allow deductions for Covid-19 tests such as RATs by the Government to be claimed on individual tax returns.

This legislation is scheduled to be introduced on 1st July to specifically address this, but a COVID-19 RAT test can still be claimable if it is for a work-related purpose. This is the critical point to understand. It is a claimable deduction in this instance because it has been purchased for a work-related reason, or to be able to attend your place of work.

When claiming a deduction, it is important that you keep accurate records (such as receipts) to provide evidence of your purchase, and that these purchases weren’t reimbursed by your employer. If they were reimbursed, you will not be able to claim it back.

If you were working from home during 2021, you may be able to claim back some of the expenses related to this. One of the ways that you may be able to do so is through the ‘shortcut method’. This method allows you to claim 80 cents per hour for each hour worked from home (from 01 March 2020 to 30 June 2022). Importantly though, this includes everything – you don’t need to make other claims for work from home items such as phone, internet, stationery or furniture/equipment depreciation separately.

Depending on your circumstances, choosing the wrong method means you could cheat yourself out of big dollars on your tax return. Discuss your situation with your trusted tax agent so that you can understand what exactly is required from you in the lead up to tax return time.