Taxation and Financial Matters for Lawyers

Transcription

1

2 Taxation and Financial Matters for Lawyers Professional Practice Advisory CROWE HORWATH Chartered Accountants May 2017 Purpose of this Session To cover the taxation issues applicable when establishing a professional practice. To cover the taxation issues that will affect you as an individual. 2 1

3 Part 1 Registration requirements Accounting for income The various business taxes and obligations GST PAYG Superannuation FBT Disbursements 3 Part 2 Choosing a structure Personal services income Work in progress - buying and selling PAYG and superannuation Personal tax planning 4 2

4 Registration Requirements If you use a new entity for your business, you will need to apply for a Tax File Number ( TFN ) Any business will require an Australian Business Number ( ABN ) This includes Sole Practitioners If your turnover >$75,000 you must register for GST 5 Accounting for Income Accruals (or earnings) Income assessable when it becomes recoverable (ie when billed) Deductions allowable when expense is incurred (ie definitively committed) Cash (or receipts) Income is assessable when received Deductions allowed when incurred 6 3

5 Goods & Services Tax 10% of value of goods and services made as a taxable supply Taxable supplies are made by registered businesses - provide Tax Invoice Registered businesses get an input tax credit for the GST paid on their inputs Sole Practitioners - need to apportion business/private 7 Goods & Services Tax (continued) Monthly if annual turnover exceeds $20 million or by choice (else quarterly) Cash basis by choice if turnover < $2 million (else accruals) Account for GST on the Business Activity Statement ( BAS ) 8 4

6 GST - Issues GST is not an expense for businesses It goes to the balance sheet not P & L Accruals method for GST - pay GST on bills not collected (watch debtors!) 9 Disbursements GST Impact depends on contractual arrangements 1. Paid as agent for client 2. Incurred by solicitor 10 5

7 Disbursements If solicitor is the paying agent for client ie. contracting party is the client No GST payable on payment No GST credit (if GST is paid) Usually through trust account and is engaged by the client Fines, penalties, stamp duty taxes Application fees Court fees Registration fees 11 Disbursements If the contracting party is the solicitor GST is payable on reimbursement by the client to the solicitor, the solicitor may claim the GST credit eg. barristers fees when the barrister is engaged by the solicitor. Witness fees Search fees Other disbursements postage, photocopying, couriers, travel attract GST on payment by the client. 12 6

8 PAYG (Pay As You Go) Two Branches PAYG withholding (someone else s) Tax deduction from payments you make Salary/wages paid to employees PAYG instalments (your own) Both recorded on the BAS Applies to companies and sole practitioners 13 Superannuation Employer s obligations - 100% deduction Superannuation Guarantee 9.50% (2016/2017) Payable by 30 June to obtain tax deduction 14 7

9 Superannuation June 2017 Employer and self-employed contributions - Annual contribution cap per person $30,000 - Annual contribution cap per person aged 50 or more $35,000 (1 July 2016) - Non-concessional personal contribution $180,000 - From 1 July concessional contribution cap $25,000 - non-concessional $100,000 (*conditions apply) 15 Fringe Benefit Tax Payable on benefits provided to employees Common benefits cars, expense payments, entertainment Exempt benefits and tools of trade Payment forms part of the BAS 16 8

10 Typical Structure Professional Practice (provider of professional services) Service Trust (provides support to professional practices) Family Trust (can make discretionary distributions) Spouse Children Company (accumulates at lower tax rate) 17 Service Trusts Charges mark-up on wages and other costs Commercially realistic rates FCT v Phillips Administrative convenience for superannuation Ability to split income Beware Part IVA (if dominant purpose tax benefit) 18 9

11 Service Trust To avoid problems Commercially operated entity itself responsible for own functions and risks Written agreement setting out nature of services provided Fees to be charged (at a commercial rate) Service Trust should regularly invoice the practice (and be paid) Fees not grossly excessive Be in accordance with TR 2006/2 and guide 19 Service Trusts - Update Significant ATO activity IT 276, TR 2006/2 and ATO Guide Service Entity Arrangements Indicative mark-up rates low risk of audit Consult tax professional 20 10

12 Incorporated Legal Practices (ILP) Legal Profession Uniform Act (NSW) 1 Director lawyer required External funding Creditor protection Income distributed by as salary or dividends Need to advise Law Society Taxed at company tax rate 30% (small business 28.5%) 21 ATO Guidelines Assessing the Tax Risk of Firm Structure October 2015 Equivalent employee services test 50% or more income test 30% or more effective tax rate test Rated low risk not subject to compliance action if they meet one of the above guidelines regarding income from the firm. Otherwise considered high risk

13 Personal Services Income Prevents alienation of PSI Rules do not apply to Personal Services Businesses If more than 80% of PSI from one particular client, then PSI rules apply Unless you satisfy 1 of 3 tests: unrelated clients; employment; or business premises 23 WIP Buying & Selling Assessable Income Sale of WIP Payout to outgoing partners if it is calculated with reference to WIP Deduction allowed Purchase of WIP Previously, no relief for purchase, it was part of capital costs 24 12

14 PAYG Instalments Can pay a calculated instalment or amount advised by ATO Calculated instalment is *instalment income x *instalment rate Will vary depending on turnover for the quarter Payments are credited against tax liability on Tax Return 25 PAYG Instalments Timing of payments No tax paid until March or May 2018 (June 2017 year) Partner 1 July 2016 Planning for cash flow Financial planning 26 13

15 Tax Planning Products Many products are marketed that provide tax benefits Avoid if tax is the driving force ATO getting more aggressive Usually only a timing difference and costs of interest (and accountant s fees) offset the savings 27 Financial Planning Consider superannuation Debt planning Lifestyle decisions Need a PLAN 28 14

16 Wrap Up Tax imposes a lot of compliance obligations Requires a disciplined approach to preparing quarterly accounts, tax matters and cashflow 29 Andrew Chen Partner, Professional Practice Advisory Sydney Tel Mobile andrew.chen@crowehorwath.com.au We don t just improve financial outcomes for our clients we advise on different aspects of their business, whether it s a large professional services firm or a small company. Andrew Chen is a Partner of Crowe Horwath s Business Advisory team and has provided business advisory, taxation and accounting services to a broad range of clients for 25 years. Andrew helps business owners identify key financial issues affecting their businesses and then develops tailored solutions to make their businesses more profitable and sustainable. Clients and expertise Being an advisor is all about understanding a client s needs and working closely with them to provide practical solutions, says Andrew. There is nothing more satisfying than achieving a positive result for a client and building an enduring professional relationship with them. Andrew s significant experience in advisory and tax accounting services comes from working with businesses of all sizes. He specialises in advising legal and professional service firms on establishing business structures; financial management in areas of internal accounting functions and tax administration; financial reporting and KPI performance measurement; budget and cash flow forecasting; tax planning; salary packaging; and tax return preparation. Andrew is a regular speaker on financial management and taxation issues at industry events. He was a key speaker for Macquarie Bank s National Legal Firm roundtables. Andrew lectures at the College of Law and also contributes to industry publications including those for the Australian Legal Practice Management Association and Australian Dental Association

17 Our Service Offering Audit Tax Advisory Financial Advice Audit and Assurance Corporate Governance Internal Audit and Risk Consulting Specialist Tax Advice Business Structuring GST, State and Indirect Taxation International Tax and Expats Research & Development Customs and Excise Accounting Business Advisory Corporate Finance Forensic Accounting Business Recovery Performance Consulting Mergers and Acquisitions Estate and Succession Planning Financial Advisory and Wealth Management Lending and Finance Risk and General Insurance Superannuation and SMSF Tel The relationship you can count on Disclaimer Crowe Horwath (Aust) Pty Ltd is a member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath is a separate and independent legal entity. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania. ABN Disclaimer While all reasonable care is taken in the preparation of this presentation, to the extent allowed by legislation Crowe Horwath (Aust) Pty Ltd accept no liability whatsoever for reliance on it. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice by Crowe Horwath (Aust) Pty Ltd. Crowe Horwath (Aust) Pty Ltd assumes no obligation to update this presentation after it has been issued. You should seek professional advice before acting on any material. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania. The title 'partner' within Crowe Horwath conveys that the person is a senior member within their respective division, and is among the group of persons who have the day-to-day and strategic responsibility for the services it provides to clients and client relationships. However, the only part of the Crowe Horwath organisation which is conducted by a partnership is the auditing business. The other professional services offered by Crowe Horwath business are conducted by a publicly-listed organisation and/or its subsidiaries. If a person has the title of 'partner' in any of those other professional services of the business, he or she is not in fact an owner or part owner of the Crowe Horwath business via a partnership structure (but may be a shareholder in the publicly-listed organisation), and is not personally liable for the provision of services. Crowe Horwath (Aust) Pty Ltd ABN