Surprises in Business are rarely beneficial.
It’s usually a case of business owners having to consider an appropriate reaction without which results in a diminished financial position.
Just to demonstrate the complexity of business and the need for constant review which can only be achieved by disciplined working “On the business” and optimally with professional help, here are 3 major changes about to occur and needing reaction.
- Goods and services prices have increased and will continue to do so, significantly (add Property Prices)
- Superannuation payable to Employees increases from 9.5% to 10% from July 1st
- The cost of owners taking loans from their own business is about increase….again significantly.
The increase in Goods and services is simple economics where demand exceeds supply.
Demand has been driven by Western Australians stuck at home with time on their hands.
Supply has been diminished by COVID and one stupid cargo ship captain. The one cargo ship stuck in the Suez Canal is holding up 300 ships and is a simple illustration of a worldwide phenomenon. There are simply not enough ships or crews available on a worldwide basis due to Covid. Therefore, Australia cannot get “supplies”.
Where your products or services rely upon any overseas component, prices have increased by between 10 and 20% and could go as high as 50%, ….if you can get them.
This dictates consideration of your supply channels and your stock management.
You also need to consider how passing on the price increases will impact on your clients and ultimately – your Revenue line.
Super Guarantee Change.
Employees simply don’t include SGC in their thinking of employment remuneration even though it is an expense of employment and enjoyed by them. Yet it is about to go up by a further 0.5% to 10% and will eventually be 12%.
Plan your cash flow for the 1st Quarters SGC payable in October at 10%. We also need to educate employees that the cost is part of their package.
Of course, Superannuation is also part of the Payroll tax calculation and thus the cost is slightly higher than that mooted for employees only if you pay payroll tax.
OWNERS BORROWINGS from their business.
This is called Division 7A and due to its complexity, least understood by business owners. Business owners are in business to make profits and ‘tis upon profits we pay taxation. Then we get to use the after-tax net profit for our personal desires.
There are 2 ways a business owner can “draw” money from his business:
- Wages (taxable to the recipient and deductible to the business)
- Dividends or Trust Distributions
However, there is a 3rd way used by business owners, which is to draw funds from the business as a loan. This is usually done in anticipation of profits and a plan to repay the loan (drawings) with either of the 2 ways noted above.
Division 7A covers the borrowings that fall into these loan areas whilst the repayment has yet to be undertaken.
From July 1st the rules of ‘Div 7A’ have been changed as below and the resultant cost of having these loans has increased a lot (significantly!)
- The interest rate on the borrowings has increased from 4.52% to +7%.
- The calculation of interest used to start on the last day of the year and has been brought forward to the first – adding 1 extra year’s interest.
- Previously the borrowings had to be paid over 7 years and the term has now been extended to 10 years.
Consider your borrowings structure – maximize the business borrowings and reduce personal needs.
Ensure your remuneration is adequate to cover your living expenses. Whilst increasing owners wages increases the tax cost, it simplifies your affairs and should ensure loans from your business are only for business purposes.
Accelerate the payback of loans, preferably before June 1st and thereafter via passing Dividends whilst your tax rate remains at 37% which means your top-up tax is only 10%. If you don’t and you are forced to pay later at the highest personal tax rate of 47% the top-up tax is higher and you will pay higher interest rates on the way.
We are here to help you PLAN your way through these changes and how to work ON YOUR BUSINESS EFFECTIVELY. Give our experienced accountants a call to ensure you stay ahead of the game.