One of the critical areas that small-business owners need advice on is income tax. This advice is needed when the business first starts as to what type of entity to operate the business through, continues each year so that the owner maximises their income tax benefits, and when the business is sold so they can minimise the tax payable through the small business capital gains tax concessions.
The problem is many small-business owners do not know whether the accountant or tax agent they are using is equipped to provide the advice they need. In general terms, tax agents tend to just process annual returns and do not provide any advice.
This problem is further compounded because there are many professionals who call themselves accountants, but just like tax agents they mainly focus on preparing the annual accounts and tax returns rather than providing advice.
A true accountant, as well as preparing accounts and tax returns, also looks ahead and provides advice on income tax and other matters that assists the business owner to maximise their income while at the same time minimising tax.
Other more critical problems can be caused when a business owner uses someone that does not fully understand the complexities of the small business capital gains tax concessions. I recently came across a case where an owner is now facing paying income tax on the profit they made on the sale of the business, despite having received tax planning advice.
The owner operated their business through a company that they had started from scratch. The business was sold for $700,000 during the 2017 tax year, with nearly all of the value relating to the goodwill of the business.
Because the business had been operated through a company the general 50 per cent capital gains tax discount did not apply, and there was no benefit in claiming the 50 per cent small business active asset concession.
The tax planning advice they received centred on the owner claiming the small business retirement exemption on $500,000, with the roll over concession being claimed for the remaining $200,000. The tax planning advice had been obtained from an accountant who specialised in strategic tax planning, but the owner decided to have the 2017 tax return prepared and lodged by the tax agent they had always used.
After the tax returns had been prepared and lodged for the company, the business owner contacted the accountant that had provided the tax planning advice. He wanted to know how to make the superannuation contribution to qualify for the $500,000 small business retirement exemption.
The accountant unfortunately had to advise the business owner that, as a result of the superannuation contribution not having been made before or at the time the company’s tax return was lodged, they would not be eligible for the small business CGT retirement exemption and the company would be paying tax at 27.5 per cent tax on all of the $500,000.dd to shortlist
This small-business owner’s unfortunate experience clearly illustrates the importance of not only getting advice, but also of using an accountant that fully understands the steps that must be taken to qualify for the small business tax concessions and exemptions.
Article Source: TheAge | M.Newnham
