Economic Value Added (EVA) analysis is a methodology used to determine the profitability of a business which can then be used to consistently quantify the real value generated by the business from one year to the next. It is important to understand the difference between the traditional views on profitability compared to the profit calculated via EVA analysis.

Traditional View of Profit

Accountants and business advisors have traditionally used a number of tools for measuring and reporting business profits. These include net profit as a percentage of sales and simple historical growth in the bottom line.

These methods of profit reporting provide no information to owners of how their business is truly performing because they have neglected to consider the amount of capital employed in the business and how effectively that capital has been utilised. In other words, the rate of return generated on the capital invested. This also requires an assessment of how the business capital has been funded (i.e. debt or equity).

Businesses can generate profits, yet the owners could be unknowingly destroying the value of their business because they have made no allowance for the cost of capital.

Real Profit Performance Measures – EVA Analysis

Increased sales or higher absolute profit reported historically can not provide a measure of business growth without reference to the overall wealth of the business owner relative from one year to the next. Wealth is created when “real value” is added to the business as the result of making “real profits”.

To determine when real value has been added to the business we must restate the traditional balance sheet equation as follows:

Traditional equation – Owners Equity = Assets – Liabilities or restated and expanded as;
Owners Equity = Working Capital + Fixed Assets – Debt

Negative gearing is a term most property investors know well but what does it really mean. Put simply it means that you have lost money ie. your rental expenses were greater than your rental income. This situation may be acceptable to an investor provided that a) the property is increasing in capital value each year and b) the losses made on the property can be offset against other assessable income. This is particularly important as it provides an investor with an immediate tax break.

80% of Investors overpay their Tax. Negative gearing reduces an investor’s assessable income resulting in a tax refund from the ATO at the end of the financial year. The tax refund can be used by an investor to help cover the negative gearing shortfall making the investment more affordable from a cash flow perspective.

It makes sense then that all investors would want to maximise their deductions. What most property investors do not realise is that some deductions do not require the outlay of cash each year in order to obtain a deduction for tax purposes. These “non cash” deductions or “free deductions” as I have called them come in the form of depreciation and capital allowances.

Most investors will claim some form of depreciation but many will not be aware of the capital works deductions that they may be entitled to claim. Depending on the age of the property the capital works deduction will be either 2.5% or 4% of the construction cost of the property. Therefore if the cost of construction of an investment unit was $160,000, an investor could claim a tax deduction of $4000 at the 2.5% rate or $6400 at the 4% rate each year without having to spend a cent. For an investor on the top marginal tax bracket this would result in an actual tax refund of $1860 or $2976 respectively.

Investment property deductions are currently under the microscope by the ATO and I therefore recommend that any deductions for capital works be supported by an estimate provided by an appropriately qualified person such as a quantity surveyor.

Taggart & Partners have over twenty years experience in all areas of accounting and taxation related investment and business matters. The firm’s philosophy is to “think outside the box” whilst being proactive in providing timely solutions to their client’s business and personal needs. To unlock all of your investment and business deductions call the experienced team at Taggart & Partners on 07 3391 1188.

Saving or reducing tax is an important consideration for employers and employees alike. As an employee the opportunities to achieve this goal are somewhat limited and generally extend to claiming a few deductions against income earned or investment deductions such as interest expense on a rental property.

Often overlooked as an option SSA’s can be a very effective way for employees to avoid a taxable receipt. SSA’s work best where an employee is paying tax at the top marginal tax rate plus medicare levy i.e. 46.5% for income above $150000. Employees on lower income levels can still salary sacrifice but the tax saving will be based on the employees personal marginal tax rate.

So how do SSA’s work? In return for sacrificing salary employees receive benefits which may be subject to Fringe Benefits Tax (FBT). A tax benefit will arise where the benefit provided to an employee is exempt or concessionally taxed. The most effective SSA’s involve benefits provided to employees which are exempt from FBT.

It is important to note that exempt benefits are NOT included as assessable income of the employee. Therefore, no tax is payable on the value of the exempt benefit received by the employee.

The most common types of exempt benefits include:

• Superannuation
• Laptop Computers and PDA’s
• Mobile Phones
• Protective Clothing
• Tools of Trade
• Airport Lounge Memberships
• Any other benefit where the employee would have been entitled to claim a tax deduction if they had

personally incurred the expense (otherwise deductible rule).

A further 10% GST saving may also be achieved where the employer is still able to claim a GST input tax credit in relation to the benefit provided i.e. only the net of GST cost of a computer needs to be salary sacrificed by the employee.

For an SSA’s to be valid for tax purposes the SSA must be prospective rather than retrospective i.e. benefits must be received in lieu of future earnings.

To unlock all of your investment and business deductions call the experienced team at Taggart & Partners on 07 3391 1188.

There is continued discussion in the media concerning the advantages and disadvantages of having a Self Managed Superannuation Fund (SMSF) largely due to significant legislative changes to the super system over recent years.

The introduction of employee choice has opened up the super system to many who were previously confined to accumulating their superannuation in a master trust. Most recently the ability in certain circumstances for a SMSF to borrow money for investment in direct property has created much interest in the SMSF arena. Establishing a SMSF may provide a flexible means of controlling your retirement savings in a cost and tax effective manner.

The main benefits of having a SMSF are summarised as follows;

• Investment control and flexibility
• Ability to have multiple members
• Fixed costs with respect to the management of the fund
• Tax effectiveness – 15% in accumulation phase and 0% in retirement
• Asset protection and wealth creation
• Retirement planning and succession planning
• Life Insurance benefits

The main disadvantage of having a SMSF is the burden placed upon the trustees (note that all members must be trustees) to administer the fund in accordance with the many rules and regulations contained in the Superannuation Industry Supervision Act (SIS) that govern a SMSF.

The role of the trustee is an important one as the trustee may be held liable for breaches of the SIS Act. It is therefore essential to have an advisor who can assist the trustees in the day to day administration of the fund’s activities and investment decisions.

Whether or not a SMSF is appropriate for your circumstances will depend on many factors. In most cases member’s funds would need to be between $150000 and $200000 before considering the establishment of a SMSF.

The experienced team at Taggart & Partners can evaluate your needs and if appropriate attend to the establishment, administration, taxation and audit compliance requirements of your SMSF.

For further information on SMSF’s call Raymond Taggart on 07 3391 1188.

Every year the Australian Taxation Office (ATO) publishes their audit hit list. The cash economy regularly makes the list targeting industries such as restaurants, take away stores and taxi drivers. Also high on the ATO audit priority are business activities connected with the property industry such as property developers, real estate agents and rental property owners.

Rental property owners are of particular concern to the ATO due to the significant increase in the number of Australians investing in the residential property sector over the last five years. The potential to over claim deductions resulting in negative gearing losses to be offset against other employment income is a serious threat to government revenues as is the correct declaration of capital gains made on the sale of such rental properties.

As part of the ATO education process to assist investors brochures and fact sheets have been published on the ATO website www.ato.gov.au titled Rental Properties: avoiding common mistakes and Tax-smart investing: property investors, home buyers and sellers. From a record keeping perspective it is important that relevant receipts are held. Generally tax claims will be denied if you can not produce the necessary documentation to support your claim even if you have actually made a payment.

Income and expenses for most rental property owners will need to be declared on a cash basis i.e. income is assessable only when received, by you directly or indirectly by your agent, and expenses are deductible only when paid. Even though your property agent may not pay the rent to you until after the end of the financial year it will still be assessable if the agent received the rent prior to the end of the year.

Some expenses may also not be deductible outright when incurred e.g. borrowing expenses including lender’s mortgage insurance must be written off over five years and assets costing more than $300 must be depreciated. Other expenses such as acquisition costs including stamp duty and legal expenses can only be claimed when the property is sold and are used to calculate your net capital gain or loss. There may also be some expenses that can never be claimed such as water charges paid by tenants or expenses that need to be apportioned. An example of where expenses need to be apportioned into deductible and non deductible components is where there is private use of a holiday unit.

Taggart & Partners can assist with the tax implications of buying and selling residential, commercial and industrial property and the correct claiming of all expenses you may be entitled to at tax time.

To ensure you are not caught out by an ATO audit contact the experienced team at Taggart & Partners on 07 3391 1188.

$220k of business over breakfast – the power of breakfast networking You don’t have to be a city fat cat to do $200k of business over breakfast (just ask Brisbane accounting practice owner Raymond Taggart).

Raymond Taggart, of the Stones Corner accounting practice Taggart & Partners, was very pleased (but not necessarily surprised) to note that, when he looked at his practice accounts for the last financial year, he could attribute over $220,000 of business to referrals from his BNI (Business Network International) group. And this, despite that fact that when he joined the group five years ago he didn’t get any referral business from it in his first year at all.

Business referral organisation BNI (Midas chapter) meets every Wednesday morning over breakfast in Bulimba, and is different to many other business breakfast groups that meet around the country. Like all chapters in the network, BNI Midas records the value of business that has been referred between members, so that members can know the system is working for them.

The BNI Midas group is throwing open its doors at a special breakfast meeting on Wed 3rd September in Bulimba and all businesses that would like to find out if the BNI business referral network would help their business are welcome to attend. Businesses can attend two meetings as a non-member before deciding whether or not to submit a membership application to determine their eligibility to join.

Raymond explains, “There are many reasons why the BNI business referral model works, but the most important reasons to me are that the group meets without fail every week and that we are focused on, and measure, business referrals. Like anything it may take a while for the system to start working for a member, as it takes time to build trusting relationships, but it definitely works for my business.”
20th August 2008

About BNI

BNI is a professional business networking organization that allows only one representative from each business or profession to join any of its chapters. The sole purpose of the BNI chapter is to generate more business for its members. BNI is the largest, most successful Business referral organization in the world.
It currently has over 100,000 members in 40 different countries and in 2007 BNI members passed over 4,900,000 referrals which translated into over $A2.25 billion in business being done. Check out the BNI website www.bni.com.au.

For more information on the BNI Midas Big Breakfast or on BNI in general please contact Midas member David Bateson on 07 3391 1188. 

Random audits, reviews and investigations are conducted by various Australian Government departments as a means of protecting the country’s revenue base. The Australian Taxation Office (ATO) is one such department which has a high commitment to monitoring taxpayer compliance to various tax and legislative requirements.

Business owners are faced with an array of compliance issues including income tax, land tax, GST, payroll tax, fringe benefits tax, capital gains tax, superannuation guarantee, stamp duty, workers compensation and the list goes on.

The chances of being selected for an audit have increased dramatically to the point that it has become a virtual certainty. It is a stated objective of the ATO to increase its audit activity across the board and taxpayers could now expect to be audited at least once every four years.

If selected for an audit the costs in terms of both time and money can be considerable even if no errors or problems are detected during the audit. These costs are invariably borne by the taxpayer.

At last there is a solution – Audit Protection Services. Taggart & Partners have negotiated directly with a scheme administrator, Accountancy Insurance Brokers, to provide audit protection to our clients as a valued added service which is underwritten by Vero Insurance.

Whilst we cannot prevent your business from being selected for an audit the Audit Protection Service can provide you with comprehensive relief from the professional costs associated with responding
to or defending an audit, review or investigation undertaken by the ATO or any Local, State, Territory, Commonwealth Body or Agency.

The major benefits of the service can be summarised as follows;

100% tax deductible
No excess.
Retrospective cover for all past year returns prepared by an accountant Superannuation funds can participate
Grouping for related entities and individuals

If you would like more information about the benefits of this service or would like to obtain immediate cover please contact Taggart & Partners on 07 3391 1188.

Business networking booms during downturn for local networking group.

Business referral organisation BNI (Business Network International) Midas chapter, which meets weekly over breakfast in Bulimba, is in growth mode. Chapter President Gavin Watts says “We’ve grown from 16 to 21 members in the last month or so. At this rate we’ll have 25-30 members soon, which will substantially increase referral business within the group. Businesses not using networking as part of their marketing are welcome to come along to our big breakfast on Wednesday 19th November to see how it works.

”And business networking does work – $1.7M of business has been generated for BNI members in the Brisbane South region so far this year (around $15,000 income per member). Midas member Raymond Taggart, of Stones Corner accounting practice Taggart & Partners can vouch for this – his practice accounts for 2007/2008 showed over $220,000 of business had come from referrals from his group.

BNI was originally founded in the USA in 1985 by Dr Ivan Misner, who had this to say recently about the power of business networks in a downturn: “Now, more than ever, a powerful personal network can carry you through difficult times. Business will go on. In times like this, people want to do business with people they trust more than ever. The relationships you have with the people in your network can make the difference in your business.

”The BNI Midas group is throwing open its doors at a special ‘big breakfast’ meeting at 7am on Wednesday 19th November at Cafe Citrus in Bulimba and all businesses that would like to find out more are welcome to attend.
10th November 2008

About BNI

BNI is a professional business networking organization that allows only one representative from each business or profession to join any of its chapters. The sole purpose of the BNI chapter is to generate more business for its members. BNI is the largest, most successful business referral organisation in the world.
It currently has over 100,000 members in 40 different countries and in 2007 BNI members passed over 4,900,000 referrals which translated into over $A2.25 billion in business being done. For more information go to the BNI website www.bni.com.au.

For more information on the BNI Midas Big Breakfast or on BNI in general please contact Midas member David Bateson on 07 3391 1188.