Business Government News

SME Recovery Loan Scheme

From retailers to gyms, hairdressers to cafes, even construction and tradies, many Australian businesses had to cease trading for months while others felt the ripple effect as the economy slowed and the global pandemic raged on. 

The Australian Government’s SME Guarantee Schemes have helped many of them survive the closure and endure through an extremely challenging time. As of 1st Jan 2022, the expansion scheme, known as the Government SME Recovery Loan Scheme, has become available for SME’s impacted by the pandemic, and is designed to support businesses helping them to recover and grow.

The Government will be working to enhance lenders abilities so they can provide cheaper credit to eligible SME’s for the finances required to recover from the financial impact of the global pandemic, maintain their business and invest for future growth. 

Under the scheme expansion for 2022, loans will be available from 1st January 2022 until 30th June 2022, and will come with a Government guarantee of 50 percent.

Are you eligible?

The scheme is available to SME’s with up to $250 million turnover, including self-employed and not-for-profit organisations and SME’s that were adversely economically affected by COVID-19 from 1 October 2021. Eligible loan purposes include refinancing existing loans and a broad range of business purposes including to support investment. Loans can also be used to purchase non-residential real property (such a commercial property) or for the acquisition of another business.

Loans have no minimum amount but are capped at $5 million and include:

  • term loans, 
  • overdrafts, 
  • working capital and revolving facilities, 
  • leases and hire purchase agreements. 

The loan cannot be used to:

  • purchase residential property, 
  • financial products, 
  • lend to an associated entity or 
  • to lease, rent, hire, or hire purchase existing assets. 

Loans are 50 percent Government backed for a loan term of up to 10 years. Loan interest rates will be determined by the lender and capped at around 7.5 percent. Loans backed by the scheme will be available through approved participating lenders and decisions to extend credit and manage the loan, remain with the lender.

To see full information on the scheme, including a list of approved participating lenders, please visit SME Recovery Loan Scheme.

Blog Business Education Financial Reporting Frequently Asked Questions

Setting Up a Business or Side Hustle

side hustle

“Tomorrow is the first blank page of a 365-page book. Let’s write a good one.”

Brad Paisley

This quote seems to sum up what I have been experiencing from my clients at the moment. The current challenges we have faced these last few years have made many reflect on what is important and what we want to do about it. For some, it is changing how they do what they do, and for others, it is making a change in what they do.  

There has been an increase in people asking about setting up a new business or a side hustle and asking for advice on what to do. So my first bit of advice to a starting entrepreneur is to surround yourself with people that will inspire you and challenge you while supporting you with options, not just problems.

I am a Chartered Accountant and an Entrepreneur, so I like lists, and I also like to consider many aspects of a business. So let’s start in order of priority and timing.

What is your reason or purpose? 

Starting a business takes a great deal of effort, responsibility, and commitment. If it is not thought through carefully, there are not only financial losses that can occur but also personal losses in terms of time, reputation and sense of achievement.

Discussing the reason for starting a business sets the scene for all the elements and decisions that have to follow. If a clients reason for setting up a business is not strong, I would suggest that they do more research and consider a broader range of options such as improving what they do now. 

Making sure you have enough capital; enough energy, commitment, and demand for your offering are essential elements.

Is there demand?

It is essential to make sure you have researched the products or services your business provides and that there is proven demand in the market for your product or service. However, suppose there is no demand because it is a new product, service, or idea. In that case, there are some other critical issues to discuss, such as funding and Intellectual Property IP protection and those are not covered in this article.

Complete a business plan with your advisor

A business advisor can be a family member, a friend or a paid advisor or a combination of all these. Even our mate Google has some great resources to help you.

It is probably one of the most annoying things for an entrepreneur to be told when all they want is to just get on with it and start making money. I have placed it second as, in my view, it is critical.

It is not important to figure everything out, have an answer for every aspect of the Business plan and have it completed bound and looking fantastic on the bookshelf. Instead, it is essential to make sure many aspects of the business are considered before making decisions that will affect your business. A business plan is never completed and continually adapts and changes as your business evolves.

A good business plan is simple but effective and should cover the following:

  • The Business – 
    • Structure
    • Management and Personnel
    • Products and service
    • Insurance, Risk and Legal
    • Operations
    • Strengths Weaknesses Opportunities and Threats SWOT– Analysis
  • The Market
    • Market research – Demand for your product or service and your demand location, whether local, regional, national or international.
    • Competitor Analysis
    • Advertising and Marketing strategy – How will you let your customers know about your products and services
  • The Future
    • Goals and objective setting
    • Action plan – Who will do what and when
  • The Finances
    • Revenue projections and targets
    • Cost estimates
    • Cashflow – When will the business make a profit, and when will it start to have excess cash 
    • Funding – How much is needed, and how will you get it.

Structure, Structure, Structure

The reason why the first thing I ask is, “what is the purpose of setting up a business” is not only to understand the clients’ goals and motives but also to understand which structure they should operate their new venture under.

Is it a Not for profit, a Company (Private, Public Listed or Public Limited by Guarantee) or a Trust, or as an Individual Sole Trader or a Partnership. This can be decided on after discussing the purpose and then centres around three areas: risk management, operation requirements and minimising any tax burden.

Let’s look at some examples.

Example 1 – John single has no children and wishes to run his own domestic Cleaning business without any employees. He is not expecting to make more than $70,000 in revenue in a year. This would generally lead me to suggest he should operate as a Sole Trader to keep set up and ongoing costs down. Risk is low and can be managed with insurance. 

Example 2 – John now wants to work with his brother, and the amount they will earn will not be more than $140,000 in revenue. No other employees. We would then recommend a partnership or a company depending on Johns brothers personal situation. 

Example 3 – Now consider John is married, has three children and has a full-time job that he will not be leaving as it makes him $250,000. He has researched the demand and wants to employ 5-8 people on a full-time basis doing domestic and commercial services. He expects to be making over $2Million in revenue in the first year and $250,000 in profit in the first year. He wants to do it with his daughter, who is 19 years old and his brother. The complexity and the level of risk have now just escalated, and the structure needs to adapt and evolve. We would then recommend that a company operate the business and that the company’s shareholders be Discretionary / Family trusts for John and his brother depending on the brothers personal family structure and goals.

The tax rate applied to taxable income amongst each entity must be considered in deciding on the structure. The individual and the partnership is from 0% to 47%; the company rate is between 26% and 30%. The Trust rate is from 0% to 47%. There would be wide variations on the possible tax effects and the potential Capital Gains Tax if the business were sold at a substantial profit. Getting the structure correct can result in significant savings.

This stage requires a professional advisor who can advise you and set up the correct entity with the proper legal documents such as the Company constitution or Trust Deed that will allow flexibility, risk management, and tax minimisation.

Registrations, Insurances and Banking

Registrations

You may need to register your business for a number of tax obligations. The above points will direct you to what you need to register for. The most common tax registrations businesses need a tax file number or TFN, an Australian business number or ABN, goods and services tax or GST, pay as you go withholding (PAYG), and fringe benefits tax or FBT. If you’re registered for GST, you can also register for fuel tax credits. Applications for most tax obligations can be completed and lodged online.

To highlight some of the business registrations you may need when starting your business, we have created a couple of examples for you to refer to.

Jason’s Landscaping Business

Jason started his own business as a landscape gardener. He does most of his work on-site and in his workshop.

Jason doesn’t need a separate TFN because, as a sole trader, he uses his individual TFN.

He needs an ABN as he will register for GST and needs to quote an ABN when dealing with other businesses.

He plans to work alone initially and hire employees later in the year.

To do his job, Jason sometimes uses machinery such as a whipper snipper, ride-on lawnmower, and a generator which requires fuel. As a result, Jason may be able to claim fuel tax credits and is required to be registered for both GST and fuel tax credits.

Mary’s Sunny Café

Mary started her own business, The Sunny Café.

At the same time, she created a company, Sunny Cafe Pty Ltd, through which she runs the business.

The company needs a separate TFN.

It also needs an Australian Company Number or ACN.

And the company needs to apply for an ABN as it must register for GST.

As Mary will be employing staff, Sunny Café Pty Ltd must register for PAYG withholding.

Mary plans to have private use of a company car, which is a fringe benefit. If FBT is payable on this benefit, the company must register for FBT.

There are a lot of things to consider when starting a new business. Business registrations are just one aspect to consider when setting up.

Insurances to consider

When considering insurance, the most common types of insurance to consider are the following:

  • Public Liability – Public Liability covers your legal liability to pay compensation for injury or damage to property caused to a third party in connection to your business. For example, if a customer slips and trips while on your business premises.
  • Indemnity Insurance – Indemnity, on the other hand, protects against the risks associated with providing advice or recommendations to clients or for any actions performed by your services. For example, a customer could sue you for damages if it’s alleged that your advice has caused a loss.
  • Products Liability – Product Liability insurance protects your businesses against claims by third parties relating to property damage or personal injury caused by your products.
  • Workers Compensation – A Workmen/Workers Compensation policy covers the statutory liability of an employer for the death, disability and bodily injuries of his employees caused by accidents. So if you’re business employs people in NSW, you need workers compensation insurance.
  • Other types of insurance to consider are Keyperson Insurance / Life Insurance in the event that a key person death or removal from the business due to ill health would cause considerable cost.

There are many other forms of insurance; however, it is best to speak to an insurance broker to understand all the areas of cover you can get and if they are necessary.

Banking

It may seem obvious, but once you have all your registration documents for the entity you will run your business through, you can open a bank account. Talk to your bank about which product you may need to help you manage your cash flow. Having a separate bank account to hold your Tax obligations such as GST, PAYG for employers, and superannuation is a wise step, so you don’t fall into the trap of accumulating a large Tax debt.

Choose a cloud-based accounting platform. 

This is one of the final and most important steps. An excellent Cloud-based accounting program allows you to manage and keep track of your cash and tax obligations. They can help control who owes you money and who and when people need to be paid. In addition, they can manage your payroll responsibilities and make sure you keep up to date with tax changes. 

As a cloud-based service, it also means that you can access your accounting program anywhere there is internet access. This is important in providing flexibility and functionality in today’s demanding and changing world.

Many of these programs connect with other management tools and apps, such as 

  • booking systems.  
  • timesheet management. 
  • Apps that help to provide on the spot quotes for jobs with costings of all materials and labour at your fingertips, allowing you to win work by providing quick quotes and 
  • Apps that allow you to go almost entirely paperless.

Make sure you speak with your Chartered Accountant to help you choose an accounting package that suits your needs. 

Have fun and get that revenue flowing!

Always remember and connect back with why you wanted to start a business. It is not an easy path to take, but it can and often is a very rewarding journey, even if it may not bring you the millions you hoped for.

Blog Business Education Financial Reporting Frequently Asked Questions Tax Tips Taxation

Tax Tips for Social Media Influencers

Tax Tips for Social Media Influencers - blog image

The number of social media influencers in Australia is increasing, and so is the level of revenue generated by those “influencers”. As an influencer, there are several things you need to consider to comply with tax obligations required by the ATO.

Musicians, bloggers, vloggers and other social media “influencers” in Australia must pay tax on any income made through sponsorships and endorsements, including non-cash benefits. This information may be surprising to most Insta-famous celebs who started out thinking that their freebies or money made from spruiking products and brands weren’t counted as part of their income tax. However, under existing tax rules, influencers, bloggers, or any Social Media celebrities running a business and receiving cash and/or non-cash revenue/benefits must include this as assessable income.

Some Influencers and Celebrities have been creating licensing structures to effectively pass income over to another entity to access favourable tax treatment. In the 2018-19 budget, the Tax integrity – Taxation of income for an individual face or image was announced. It aims to ensure that from 1 July 2019, all remuneration, both cash and non-cash benefits provided for the commercial exploitation of a persons face or image, will be included in the assessable income of that individual, thereby removing these advantageous tax treatments created by licensing structures. This has been referred to as the Instax or Instagram Tax. Please note that at the date of this article, this is still under review and has not been passed into law. However, this does not mean that revenue or benefits from running a business as an Influencer, Blogger, Vlogger or Celebrity are not assessable, as they are.

Are you running a business?

No single factor will determine whether you’re running a business. However, it would be best if you considered the following questions:

  • Are the undertaken activities done for commercial reasons?
  • Do you intend to make a profit, or do you believe you will profit from the activities?
  • Do you regularly undertake the activities?
  •  Are your activities organised, planned, and carried out in a businesslike manner?

If you are running a business, you will need to report and pay taxes on your profits.

What are Non-Cash Benefits?

As mentioned previously, there are tax implications for non-cash benefits you receive. Non-cash benefits can include any goods or services you receive for your business activities such as free accommodation, free event entry, free products such as clothing, makeup or jewellery, use of a car or free travel.

In Australia, influencers must pay income tax on all non-cash benefits received in return for their services, including endorsements or physical appearances.

While small irregular gifts are not considered income, if you receive non-cash items of value, the Australian Taxation Office will expect you to declare and pay tax on the market value of the item or benefit received.

The lesson is to be careful what you get paid with and make sure you set aside the potential Tax on these benefits; otherwise, you may get a nasty surprise come tax time.

The Good news is you can claim tax deductions!

If you have expenses that are incurred for business purposes, you may claim tax deductions for those expenses. This will depend on the area you influence and could include:

Internet Costs – internet-related expenses, including hosting fees for your blogs, domain name registration fees and business software fees. You can claim a portion of your home internet costs if you work from home or your total internet costs if you work from a dedicated office away from home.

Equipment – Various tax concessions are available to claim an immediate tax deduction. Make sure you look for some of our previous articles on this as there are many factors to consider. Capital equipment includes a webcam, digital camera, monitor, wireless router, computer or laptop, keyboard, and mouse.

Advertising, Promotion and Design – A key to getting your brand out there is to invest in design and promotion. That’s why you can claim on branding-related costs, including design, advertising, brand logo design, and promotional giveaways.

Other Expenses – There’s an extensive array of additional costs you might be able to claim; this includes the cost of employing a professional photographer or the cost of hiring an accountant to prepare your tax return or give you business advice.

If you’re already an influencer or considering becoming one, make sure you speak with one of our team and get the appropriate advice needed to avoid any problems or surprises that may arise. Please fill out the form below, we will get back to you, and one of our professional accountants can assist you in ensuring you start out the right way.

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Business Process Analysis AKA Audit

business audit

If I told you I could visit your business and in one day I could look at your financials, oversee your management processes, highlight areas in your business you could do better in, offer solutions to running more efficiently and identify not only any threats that could cost your business big money in the future, but also uncover any employees that might be swindling you and your business, would you be excited? 

Sounds too good to be true, but I promise it’s a service I can deliver. Would you book me if I could help your business in this way? 

What if I told you I was an auditor and your company needs a business audit? 

Would you still book me?

I am guessing, like most people, you probably said yes to the first option and freaked out slightly at the second one. However, the reality is a business audit often has many positive outcomes that you can apply to improve your business.

To most business owners, just the thought of a business audit places them in a state of panic. Questions such as: “Are we paying the right amount of tax?”, “Did we declare any deductions we shouldn’t have?”, “How much super did we pay our employees?”, “Did we lodge our last tax return on time?” run wild in your head, and often we feel that the outcome will be more harmful than positive.

An audit is not only about making sure you have followed your legal obligations as a business owner correctly. It would help if you thought of an audit as a “Business Processes Analysis”. Effectively this is a process performed, by experts, to analyse the systems you have in place to run your business more EFFECTIVELY, EFFICIENTLY and SYSTEMATICALLY.

HOW DOES THE AUDIT PROCESS WORK?

There are most commonly 2 types of company audits: 

  • A Statutory/ External audit and 
  • An Internal audit

The External Audit: Generally, this audit applies to public and large proprietary companies. These companies are required by law to have their financial statements audited.

The purpose of this is to examine a company’s business records, policies and procedures to determine whether the company’s financial statements fairly state its financial position, in all material respects, in accordance with Generally Accepted Accounting Principles (GAAP). 

The Internal Audit: An internal audit is elective. Yes, that’s right, businesses choose to have this audit process on their company.

The purpose of the internal audit is to examine the business’s overall performance and address and identify any areas of risk, inefficient processes, the potential to run the business more effectively, and how to safeguard your business assets.

business audit process

The Hero and the Villain Analogy

Although it may sound menial and somewhat dull on paper, the benefits of a “business processes analysis” (formally known as a business audit) are HUGE! To make it more exciting, I compare our work to that of an undercover detective, where the auditor (me) is the hero and bankruptcy or insolvency is the villain. I look for the crucial evidence that saves your business from disaster.  

  1. A detective like analysis uncovering potential fraud and improving your fraud prevention methods:  Our expertise can find discrepancies caused by human involvement before it’s too late and work with you to create a solution to improve your fraud prevention methods.
  2. Staking out poor accounting protocols: You may not know it, but the methods your staff use to complete tasks may not be the most efficient process. Simple changes in delegations of duty and tasks through education and management from the auditor can save you time and, more importantly, money.
  3. Up to Date Accounting Systems: Do you know if the accounting system you use is the most effective for your business? Do you even use accounting software in your business? Are you maximising your performance by using the most up to date platforms? We know the answer. We can uncover what’s best for your business.
  4. Benchmarking of financial reporting information: We can determine the performance of the business and how well it has performed during the financial year by testing, questioning and evidence acquisition.
  5. Protect your business assets: protection from the evilest villain of all businesses, bankruptcy, is essential. We can make sure all your business assets are safeguarded in the event of misfortune.
  6. Uncovering and managing risks to your business: We will look for potential threats to the wellbeing and future success of your business growth. 

Finding the issues in your business or company that may be holding you back can assist you in growing your business more efficiently and keep you on track for greater success and compliance with the law.

If you think your business could benefit from a business audit, don’t hesitate to contact Bishop Collins Accountants. Our audit team is passionate about assisting you in identifying risks to your business and creating strategies to avoid these risks in the future. Through intelligent insights and innovative solutions, they aim to deliver even greater trust and confidence, helping you unlock opportunities in your business.

Blog Education Frequently Asked Questions News Taxation

Cryptocurrency Part Two: Crypto Transactions & Environmental Impacts

cryptocurrency part two

I’ve explained the basics of Cryptocurrency in the last article and the tax implications for Australian residents and businesses. Now I will go in-depth about Crypto transactions and the types of taxes you may face when transacting with Crypto, crypto mining basics, and the impacts crypto mining has on the environment.

Transacting with Cryptocurrency

When a transaction is a Capital Gain

If you invest in Cryptocurrency simply hoping that it increases in value, any gain you make from the disposal is treated as a capital gain.

Capital Gains Tax (CGT) occurs when you dispose of your Cryptocurrency. The disposal can 

happen when:

  • you sell or gift Cryptocurrency
  • you trade or exchange Cryptocurrency (including the disposal of one Cryptocurrency for another Cryptocurrency)
  • you convert Cryptocurrency to traditional currency, such as Australian dollars, or
  • you obtain goods or services using Cryptocurrency.

Some or all the gain may be taxed if you make a capital gain on the disposal of Cryptocurrency. 

Some capital gains or losses may be disregarded if they come from the disposal of a Cryptocurrency that is a personal use asset.

Crypto is a personal use asset if you hold it or use it mainly to purchase items for personal use or consumption.

If Cryptocurrency is acquired and used within a short period to purchase items for personal use or consumption, the Crypto is more likely to be a personal use asset.

The appropriate time for working out if an asset is a personal use asset is at the time of its disposal.

Except in rare situations, the Crypto will not be a personal use asset.

When a transaction is an ordinary income 

There are situations where a Cryptocurrency transaction or series of transactions can give rise to ordinary income if:

  • you went into the transaction intending to make a profit, and
  • the transaction is part of a business operation or commercial in character.

Relevant considerations for working out whether a transaction has such a character include:

  • the nature of the entity undertaking the transaction
  • the nature and scale of any other activities conducted by the entity
  • the amount of money involved in the trade and the scale of the profit sought or obtained
  • the nature, scale and complexity of the transaction
  • the amount of time which the transaction occurs
  • whether the Cryptocurrency has had any other use, other than as an object of trade, for example, is it used to exchange or buy services only available on the blockchain?
  • whether there is the necessary profit-making intention and business or commercial character of the transaction will depend on each case’s particular facts and circumstances.

If the disposal is part of a business you carry on, the profits you make on disposal will be assessable as ordinary income and not as a capital gain. This includes if you carry on a business of Cryptocurrency Miner or Trader making multiple disposals frequently.

Using Cryptocurrency for business transactions

Suppose you are carrying on a business that is not a Cryptocurrency business but uses Cryptocurrency in your activities. In that case, you need to account for Cryptocurrency as you would for other assets or items used in your business.

Suppose you receive Cryptocurrency for goods or services you provide as part of your business. In that case, part of your ordinary income must include the value of the Cryptocurrency in Australian dollars. This is the same process if you receive other non-cash considerations under a barter transaction.

One way to determine the value in Australian dollars is to obtain the fair market value from a reputable Cryptocurrency exchange.

If you purchase business items using Cryptocurrency (including trading stock), you are entitled to a deduction based on the market value of the item acquired.

GST on Cryptocurrency transactions is a more complex topic, and we will discuss that in more detail in a future article.
Crypto Mining

What Is Crypto Mining?

Cryptocurrency mining is how new Cryptocurrency is entered into circulation and how the network confirms new transactions. It’s a critical aspect of the integrity of the blockchain ledger. Unfortunately, it is incredibly expensive and only sporadically rewarding. Nevertheless, mining has a magnetic appeal for many investors interested in Cryptocurrency because miners are rewarded for their work with crypto tokens. 

“Mining” is performed using sophisticated hardware to solve a complex computational math problem. The first computer to find the solution to the problem is awarded the next block of Bitcoins, and the process begins again.

After all that work spent mining, miners still may not get any Bitcoin for the time and energy.

Only the first miner to get the correct answer, or closest answer, to a numeric problem receives the prize. This process is also known as PoW or Proof of Work.

How Much a Miner Earns

The rewards for mining Bitcoin are reduced by half roughly every four years.

In 2009, when Bitcoin was first mined, one block would earn you 50 BTC. In 2012, this was halved to 25 BTC. By 2016, this was halved again to 12.5 BTC. Most recently, on May 11, 2020, the reward halved again to 6.25 BTC.

Today 8 December 2021, the price of Bitcoin was about $50,378USD per Bitcoin, which means you’d earn $314,862USD (6.25 x 50,378) for completing a block. 

That is the incentive to solve that complex computational problem and the costs of mining.

What about the Climate?

I find this part of the discussion the most interesting and the biggest surprise to most Cryptocurrency users. 

Crypto investors are younger than stock market investors — the average age of a crypto investor is 38 years, compared to 47 years for stock market investors. Generally, the younger generation is more concerned about climate change than the older generations. Here is the surprise…

Bitcoin has a massive climate dilemma

The Cryptocurrency uses enormous amounts of electricity. As a result, Bitcoin miners are now producing as much carbon pollution as a medium-sized nation uses in a year! That’s just amazing! Fossil fuels power most of the electricity consumed by Bitcoin, and there lies the dilemma.

Even if the electricity that powers Bitcoin and other Cryptocurrency uses Green electricity, it is still taking that Green electricity away from other electricity needs.

Bill Gates said, “Bitcoin uses more electricity per transaction than any other method known to mankind

” when he recently spoke on Clubhouse.

A new study in the journal Joule by data scientist Alex de Vries predicts that Bitcoin may soon be consuming over 200 terawatt-hours (TWh) of electricity.

A large majority of the energy used is in the “proof of work” process that creates new Bitcoins. Energy consumption is a key feature of the Bitcoin process, and without it, you lose what’s attractive about digital currency.

Bitcoin, currently @ over $50,000/BTC, is estimated to be using more energy than all of Australia used in 2020.

Feel free to read the full article here:

https://www.abc.net.au/news/2021-03-18/bitcoin-has-a-climate-problem/13210376

It’s important to note that not all Cryptocurrencies use as much energy as Bitcoin and have more energy-efficient features. Read this article if you want to know the most energy-efficient Cryptocurrencies around:

https://www.leafscore.com/blog/the-9-most-sustainable-cryptocurrencies-for-2021/

So regardless of your inclination to be a Cryptocurrency Miner or investor or just ignore it and hope it goes away, the future reality lies somewhere in the middle, with some countries like El Salvador making Bitcoin legal tender. 

I think change is good!

We would love to hear your thoughts on this article and what other topics you’d love to read about from us, so follow our social pages and let us know what you think.

If you’d like any further information on how you can start trading in Cryptocurrencies, the tax implications involved or investment opportunities available to you, feel free to contact us on the form below.

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Cryptocurrency Part One: What is it & how does it affect my taxes?

cryptocurrency part one

“The future of money is digital currency” – Bill Gates.

“Probably Rat poison squared. The idea that it has some huge intrinsic value is just a joke in my view” – Warren Buffet.

Two brilliant minds and two very different views on Bitcoin and Cryptocurrency. How could they be so far apart, you say. Well, in my humble opinion, it shows that there is more to play out in the Cryptocurrency market and that anyone who says they are an expert in Crypto or say, “Crypto is how you can make lots of money”, are exaggerating. It’s like saying an economist can predict the future!

So let’s do what I love best; let’s get the basics covered and then elaborate on the detail for those that want to go further.

What is Cryptocurrency or Crypto?

Oxford defines Cryptocurrency as a digital currency in which transactions are verified and records are maintained by a decentralized system using cryptography (The art of writing or solving codes) rather than a centralized authority like a country’s Central Bank. In other words, the records and verification of who owns Crypto and how much they own are verified and determined by a system that does not involve a bank or Government or regulatory authority.

The first of this Cryptocurrency is Bitcoin. At its conception, bitcoins are mined by sophisticated hardware that solves extremely complex computational math problems. The first to find the solution to the problem is awarded the next block of bitcoins, and the process begins again. This computational system is called Blockchain technology. Bitcoins are created out of thin air or “Mined”, and anyone can do it. That’s it.

Ridiculous, you may say, but that is how all currency initially started. When we print notes, the paper itself has no value, but we determined it to have a set amount of value. 

Today quantitative easing does the same thing as Crypto-mining (which we will discuss further in part two of this article). A country’s Central Bank creates more of its currency electronically and circulates it into the economy via its banks. It’s also known as “printing money” even though it is not physically printing the money!

To understand Crypto better, we need to understand money. For money to have relevance, it must be valuable, and it must also have the following characteristics:

  • A critical mass of people must have it
  • Sellers of products and services must accept it as a form of payment
  • The community or economy must have TRUST in it and TRUST that it will remain valuable. 

IT’S ALL ABOUT TRUST!

In the past, products were bartered, such as food and tools, and the value of the goods was in the nature of the goods themselves and what benefits they could physically provide. If we consider something like Coins or Notes, we are talking about something physical, but you can’t gain much from the nature of the coin or the note. You cannot eat it or burn it to keep warm, so we must trust in its value and that it will remain valuable and hopefully stable. 

Something like Credit takes a step further into the realms of trust and is only valuable if we trust the rules, regulations and society’s wish to comply with the “rule of law”. Otherwise, Credit is useless. 

Now consider Cryptocurrency. It requires even more trust as a Central Bank, or the Government doesn’t back it to say that we will support it if the price goes down. So it’s used rarely to buy products or services, and not that many people own it compared to traditional money.

But all this is changing. 

What is so good about Cryptocurrency?

The following are some arguments that have some merit:

  • Sharing power and thereby reducing corruption – This is an interesting argument that has been stimulated by the increasing wealth gap we are finding in today’s societies. Instead of having one authority as the gatekeeper of money, there is a system where the network members hold the power. Cryptocurrencies aim to resolve the issue of absolute power by distributing power among many people. That’s the fundamental idea behind blockchain technology, which all Cryptocurrencies use.
  • Limiting the ability to print too much money – As discussed, Government Central Banks can simply create or “print money” when they face serious problems such as what US, EU and Japanese banks are doing now. The argument is that this doesn’t solve the root cause of the economic crisis and is just a band-aid solution. Most cryptocurrencies have a limited, set amount of coins available. When all those coins are in circulation, it is very difficult or impossible in the case of Bitcoin to create more. This ensures the problem that caused the Economic crisis is dealt with.
  • Giving owners complete control – Traditional money is controlled by Central Banks and the Government. If you trust your Government, that’s great, but at any point, the authority can freeze your bank account and deny your access to your funds. For example, look at Greece during its recent financial crisis. Some Governments can even simply abolish banknotes the way India did in 2016. With cryptocurrencies, you and only you can access your funds.
  • Cutting out the middle person – With traditional money, a middleman like your bank or a digital payment service takes a cut each time you make a transfer. With cryptocurrencies, every blockchain network member is the middleman; their compensation is minimal in comparison.
  • Serving the unbanked – Financial inequality is growing around the globe. Around 3 billion unbanked or underbanked people can’t access financial services. That’s approximately half the population on the planet! Cryptocurrencies aim to resolve this issue by spreading digital currencies and creating access to the most minute amount of a coin, depending on the Cryptocurrency you choose. For example, you can purchase 0.00001 of a Bitcoin or even buy an alt-coin valued at AU$0.000051. 

cryptocurrency bitcoin

Let’s go a little deeper.

Dispel some Myths

Cryptocurrencies are only suitable for criminals. Some cryptocurrencies have anonymity as one of their key features. In addition, most Cryptocurrencies are based on a decentralized blockchain, meaning a central government isn’t the sole power behind them. These aspects do make Cryptocurrencies attractive for criminals. However, citizens in corrupt countries can also benefit from them. For example, if a country’s Government or bank is untrustworthy because of corruption or political instability, the best way to store your money may be through Cryptocurrency.

You can make anonymous transactions using all Cryptocurrencies. Many people think Bitcoin is a secret, and nobody will know How much you have or what you have purchased with BitCoin. But Bitcoin, along with many other Cryptocurrencies, doesn’t incorporate anonymity at all. All transactions made using such Cryptocurrencies are made on the public blockchain. It’s actually the opposite and part of the TRUST element that makes Bitcoin more attractive. It is fully transparent, and anyone can view real-time Bitcoin transactions.

Risks of Cryptocurrency

There is no such thing as a sure thing. 

If it’s too good to be true, it often is!

We have all heard these sayings, and it does not stop with Cryptocurrency.  Whether you trade Crypto, invest in them, or simply hold on to them for the future (known as HODL in the Crypto space), you must assess and understand the risks beforehand. 

The most significant risk with most Crypto is their volatility and lack of regulation, which is ironically why they are also liked. However, this threatens the aspect we discussed above around Trust and may limit the ability of Cryptocurrency to replace our traditional money systems in the future.

On Saturday 4th December 2021, Bitcoin shed 20% before recovering a little, which had it losing about $10,000 an hour. Including that drop, its value has declined about 29% since its all-time high on 8 November 2021, around the same time that speculative stocks started to slide.

The AUSTRALIAN TAXATION OFFICE and Cryptocurrency

You can guarantee that if you profit from Cryptocurrency, there will be some Tax to consider. As discussed previously, transacting in Cryptocurrency is not a secret transaction that is undetectable.

The Australian Taxation Office (ATO) Cryptocurrency data-matching program has been around since April 2019. Under the program, the ATO has collected data on cryptocurrency transactions for the 2014-15 to 2019-20 financial years. This protocol will continue onto the 2022-23 financial year.

Cryptocurrencies can be bought or sold on a digital currency exchange platform using traditional currency. In addition, some popular digital currencies or “stable coins”, like Bitcoin, can be purchased or sold for cash through special ATMs.

Tax treatment of Cryptocurrencies

If you are involved in purchasing or trading Cryptocurrency, you need to be aware of the tax consequences. These vary depending on the nature of your circumstances.

Everybody involved in buying, selling or trading Cryptocurrency needs to keep records of their cryptocurrency transactions.

If you’ve transacted with a foreign Cryptocurrency exchange, you may also have tax responsibilities in another country. This is an important thing to consider when you’re on the hunt for a reliable Crypto exchange. A few great ones are available in Australia, so you should research those over foreign exchanges.

Cryptocurrency Part Two: Crypto transactions & environmental impacts will expand on this topic further. This article talks about making transactions with Cryptocurrency and the types of taxes you may face when transacting with crypto, crypto mining basics, and the impacts crypto mining has on the environment. For example, do you know the amount of electricity Bitcoin miners use? The answer surprised me, and I’m sure it’ll be surprising for you too. 

If you’re interested in finding out more about how to invest in Cryptocurrency and ensure you’re paying the correct taxes, feel free to contact us below, and we’ll happily show you your options.

Blog Business Education

What is Goodwill in Business?

business goodwill

Let’s put Goodwill into simple terms, then go technical for those thirsty for the detail.

Goodwill is the value in a business created over time because of its name, reputation, brand strength, and or the grand ideas it has developed. Goodwill is intangible, and it isn’t something that you can touch. If you wanted a fizzy, refreshing sweet drink, a bottle of XYZ Cola would arguably have less recognition than a bottle of Coca Cola. That powerful recognition is an intangible asset. If you were to purchase the Coca Cola business, a very substantial amount of the purchase price would be represented by that intangible asset. This extra amount paid is Goodwill. The stronger the intangible asset, the greater its effects on the business by way of increased revenue that asset creates directly, or it can create on other assets with which it is associated.

Specifically, Goodwill is the part of the purchase price that is higher than the sum of the net market value of all assets purchased in the acquisition, less the fair market value of the liabilities included in the purchase.

The value of a business’s brand/s is not the only influence on the determination of Goodwill. The following additional areas will influence why Goodwill exists in a business and the value placed on it:

  1. The customer base – Think Facebook
  2. Customer interaction and engagement – Think Amazon
  3. Staff/employee expertise – Think Space X, a highly technical field
  4. Location, location, location. –  Think Pitt Street Mall for a high-end retailer
  5. Proprietary technology – Think Intel Chips
  6. Reputation – Think Harvard University
  7. Operating procedures/protocols – Think McDonald’s

Goodwill is essential to accountants to recognise the value assigned to the future earning capacity of the business resulting from Goodwill. This must be recognised in the accounts of the company to reflect the true value.

NOW LET’S GET TECHNICAL

How is Goodwill recorded?

We record Goodwill as an intangible asset classified as Non-Current assets on the balance sheet of the acquiring business. Under Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), it is a requirement that a company evaluates the value of Goodwill on their financial statements at least once a year and record any impairments.¹

Complexities in Calculating Goodwill

The process for calculating Goodwill is straightforward in principle but can be quite complex in practice. Remember Goodwill is the purchase price less the difference between the fair market value of assets and the fair market value of liabilities.

Fair market value for liabilities is pretty straight forward excluding Provisions or Contingent Liabilities. There are, however, competing approaches among accountants to calculate Goodwill because of the many ways to determine the fair market value of Assets. This is more so in an entity that is not a publicly-traded company. If we were to get 7 registered business valuers to perform a valuation on a business asset involved in an acquisition, we could get 7 different results. We would expect that they would not be too far from each other. That is a topic to discuss at another time. Goodwill is a workaround for accountants and is necessary because acquisitions often involve estimates of future earnings and other unknown considerations at the time of the acquisition.

The complexity comes with determining the Fair Market Value of assets not only in the company being acquired but also in any previous businesses that the company acquired and the goodwill calculations made previously. For example, is the Goodwill of that previously purchased business still worth the value reflected in the company’s balance sheet, or has the value decreased?

Impairments

When the market value of an asset drops below its historical cost, we call this an impairment. This can occur due to an adverse event such as increased competition, change in market forces or consumer habits or technology. Think of Newspaper mastheads; they are considerably less than they used to be before social media. To assess whether an impairment is needed, companies usually perform an impairment test on intangible assets.

The two methods for testing impairments are the market comparison and the income approach. Using the market comparison, the assets of similar companies operating in the same industry are analysed. With the income approach, estimated future cash flow is discounted to the present value.

If a company’s acquired net assets fall below the historical value, the company has overstated the amount of Goodwill. Therefore, it must correct the balance sheet by doing a write-down on the asset’s value to record the impairment. The impairment expense is then calculated as the difference between the current market value and the asset’s purchase price.

The impairment results in a decrease in the Goodwill account on the balance sheet. The expense is then recognised as a loss on the income statement, which reduces the net income for the year. In turn, EPS (Earnings Per Share) and the company’s stock price are also negatively affected.

The FASB (Financial Accounting Standards Board), which sets standards for GAAP rules, is considering a change to how goodwill impairment is calculated. Due to the subjectivity of Goodwill impairment and the cost of testing impairment, FASB is considering reverting to an older method called “Goodwill amortisation“. As a result, the value of Goodwill is slowly reduced annually, like the depreciation of a Car. The problem with this approach is that Goodwill can appreciate over time. Think back to Reputation and Harvard University, arguably the longer the institution continues, the stronger the goodwill asset of reputation.

We accountants like things Black or White in business as it gives certainty; however, sometimes we must be flexible and consider the shades of grey!!!!

Goodwill vs. Other Intangibles

Goodwill and other intangible assets are not the same. For example, Goodwill is a premium paid over fair value during a transaction and cannot be bought or sold independently. At the same time, other intangible assets include the likes of licenses and can be purchased or sold separately. In addition, Goodwill arguably has an indefinite life, while other intangibles have a finite useful life.

Are there limitations to using Goodwill?

Goodwill is difficult to put value to, and we can get a negative Goodwill when an acquirer purchases a company for less than its current market value. This usually happens when the target is under stress to sell. This transaction will result in a gain from the acquiring entity, which will be entered into the Profit & Loss for the transaction year.

There is also the risk that a previously successful company could face insolvency. When this happens, investors deduct Goodwill from their determinations of residual equity. This is because, at the point of insolvency, the Goodwill the company previously enjoyed may not have a resale value, but not always.

KEY TAKEAWAYS

  • Goodwill is an intangible asset. However, not all intangibles are Goodwill.
  • Goodwill is different from most other intangible assets, having an indefinite life, while most other intangible assets have a finite useful life such as Licences.
  • Goodwill is calculated by taking the purchase price of a company and subtracting the difference between the market value of the assets and liabilities.
  • Public Companies are required to review the value of Goodwill on their financial statements at least once a year and record any impairments.
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Government Grants and how they should be considered for GST purposes

Some government grants attract GST, and some do not. How to determine this depends partly on whether an obligation, a good or service or an expectation to do something is supplied in return for the grant or sponsorship money.

The technical word is if you “supply” something to the Government for the grant.

When you make “a supply”

If the government funding is not for a supply, you do not have any GST implications. However, if you provide something of value for the grant, it can be a supply and GST implications may arise. But not always! Yes, I know it’s just a little confusing.

A government grant is not a payment for a supply if you are only required to satisfy eligibility criteria to receive the grant – in general. Here are a few examples of eligibility criteria you may need to satisfy to receive a grant:

  • Employing people
  • Operating a business located within a state or territory. Government payments to provide income support to businesses are typically not for a supply and, therefore, will not have any GST implications.
  • Holding an Australian Business Number (ABN).

Providing something of value for the payment requires you to do something more than just meet eligibility criteria. If you are required to do any of the following, you will be making a supply to the Government in return for the payment:

  • Enter into a binding legal obligation to refrain from doing something (such as agreeing to stop grazing on your land for two years near national forests 
  • Enter into a binding legal obligation to do something. For example, agreeing to display at least 70% locally made products in your shop for 12 months
  • Providing goods and services.

If the grant is for a supply that is a taxable supply, you will be required to remit 1/11th of a grant as GST.
To make it simple, the documents that accompany a Grant will nearly always tell you if it attracts GST. 

Let’s look at some recent relevant ATO examples!

Example 1:  COVID-19 impacted business payment support

Adam operates a fitness centre that employs five full time and two casual workers. As a direct result of COVID-19, the fitness centre has been closed for over three months and operates at reduced capacity even after re-opening.

Adam received the state government cash payment of $10,000 cash, a payment to businesses that meet eligibility criteria showing that they have been impacted by COVID-19.  These funds can be used only for unavoidable business expenses. Any amount from this payment not spent will need to be repaid to the state government.

In this case, Adam does not have to pay GST on the cash payment received.

Example 2: Payment to support bushfire impacted grantee

The purpose of a government program like this is to provide financial assistance to certain grantees directly impacted by the bushfires and assist in the recovery of production. Eligible entities must meet the eligibility criteria set out by the Government for that particular program.

The financial assistance is not a payment for any supply, and in this particular example, the grantees do not have to pay GST on the payment received.

Here is a quick summary check of some current major grants:

  • Cash Flow Boost – GST Free
  • Job Keeper – GST Free
  • Job Saver – GST Free
  • State Government Voucher subsidy – Businesses receiving these, GST applies.
  • Grants to support the creative economy – GST Free
  • Concessional loans to support the creative economy – GST Free

Not sure about GST on your grant?

Both the grantor and grantee must treat grant transactions consistently for GST purposes.

Some governments and other entities provide recipient-created tax invoices (RCTI) for grants.

To ensure that the grant arrangement is treated consistently for GST purposes, if the RCTI shows that the grantee is making a taxable sale, the grantee must pay the GST. Conversely, if the grantee thinks it is not a taxable sale and an RCTI is issued showing that it is a taxable sale, they should discuss this with the grant provider.

If the grantee and grantor disagree about the GST implications for the grant arrangement, they can consider requesting a private ruling. However, we recommend that the grantee and grantor lodge a joint private ruling request to provide both with consistent advice based on accurate facts.

Sponsorship

Under a sponsorship arrangement, when an organisation undertakes a fundraising activity, it often receives support in the form of money. In return, it may provide such things as advertising, signage, naming rights, or another benefit of value.

This means that the sponsor receives something of value in return for the sponsorship, so the sponsorship payment is not a gift.

If the organisation is registered for GST, it has to pay GST on the sponsorship it receives. On the other hand, the sponsor may be able to claim a GST credit.

Overall remember,

Any grant is a good grant and if you are unsure about your GST obligations, talk to a tax professional.

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