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Tax Minimisation – Not Tax Avoidance

John and Bev worked hard all of their lives. They started their business in the 1950s when they took out a hire-purchase agreement on a dump truck and began providing contract earthmoving services. John drove the truck seven days a week when required and Bev supported him with the bookwork and looked after their four children.

Over the years, John and Bev, through hard work and good service, built a substantial business. They had a fleet of dump trucks, semi- trailers, and earthmoving machinery and equipment. Their business had a big turnover and a large profit.

As John and Bev hit their late 60s they decided it was time to ease back and let their children run the business.

Over the years they liaised closely with their accountant, ‘Bill’ who had advised them on taxation minimisation. Although they planned their tax with him, and entered into many ‘creative’ tax minimisation schemes, they still paid hundreds of thousands of dollars in tax each year.

After easing back from the business, they again met with Bill at the end of June. Bill advised them that their taxation for the year would be around $800,000. This was unusually high, and did not equate with the same turnover as the previous year.

During an examination of the profit and loss and potential tax liability, Bill suggested to John and Bev that he could set them up in an offshore tax minimisation loan scheme, which would reduce their tax to about $250,000. The cost for this, to the entities providing the service, would be about $100,000. This had to be completed within one week, and prior to the end of the tax year.

John and Bev were suspicious of this scheme and questioned Bill about it. They wanted to ensure that after years of compliance and taxation payments, they were not going to break the law. Bill assured them the scheme was compliant and had been approved by the Australian Taxation Office.

Believing they could save $400,000, John and Bev accepted Bill’s advice. They transferred $100,000 to Bill and he attended the following day with a revised profit and loss and balance sheet. He also had other documents relating to the scheme, which they executed.

John and Bev, then relaxed and set about retiring, leaving the troubles of the business to their children. They paid $250,000 in tax and never gave it further thought.

Two years later, the Taxation Department advised them of an audit of their books. The audit identified the scheme Bill had recommended. The Department advised John and Bev that this scheme was not approved and was illegal. They were hit with $550,000 in unpaid tax, a serious fine and unpaid interest. Further examination revealed other problems relating to Bill’s previous advice.

Two previous schemes they had entered into were also deemed unlawful and not approved. The audit resulted in an assessment of $1.25 million. Luckily, John and Bev were able to pay.

During our investigations, we revealed that:

• Bill was incompetent and had a poor record with many clients;
• His business was unsuccessful, despite him being a accountant for some 35 years;
• Bill was known to the Taxation Department and had been investigated on many occasions for unlawful tax minimisation schemes;
• John and Bev had never been placed in any taxation minimisation scheme;
• Bill had pocketed all fees charged, including the last $100,000 to place them in schemes;

• Bill was later prosecuted for four counts of fraud. He received a four-year jail term.

• At the time of the investigation, John and Bev lawyers institute civil proceedings against Bill for fraud and damages. They also froze his assets, by way of Supreme Court Injunction, and John and Bev later recovered $885,000 from the sale of these assets, after receiving a judgment against Bill.

Financial adviser:

Many people are confused about the role of a financial adviser. Quite simply, financial advisers identify your monetary needs and goals, and prepare a financial plan for you to work from so that you can meet those needs and achieve those goals. They also recommend investment products that may help you in your endeavours.

They can give you advice on managed investments, investment portfolio planning, superannuation, allocated pensions and rollovers and life insurance, income protection insurance, retirement planning and many other investment products and services.

Ensure that the financial adviser is independent of the investment products they are recommending, otherwise their advice may be tainted by the commission those investment companies offer.

Many businesses choose professionals to act for them on the recommendation of another person. Financial planning can be complex and you will need to trust your adviser. Referrals from people you trust can be a good way of choosing your adviser.

Other professionals who work for you may be able to recommend a financial adviser who will suit your needs.

Other financial advisers who do not handle your type of work may be able to assist with the decision-making process and refer you to someone who would suit your business.

There are many financial adviser referral services that you can contact for a recommendation. The only problem with this kind of service is that the financial advisers often pay a fee to be on the list of referrals and may not be ideal for your circumstances. These services can also be found in the telephone directory or on the Internet.

Questions to ask your potential financial adviser

Experience

• How long have you been in practice?
• How many similar businesses and people have you worked for?
• Ask for a description of typical clients to see whether their assets, income and financial circumstances resemble your own.
• What kind of work did you do for these businesses and people?
• What kind of work do you do the best?
• Do you specialise in any areas of the planning?
• Are you self-employed or do you work for a firm?
• What is your role within the firm and who owns it? Is it owned by a bank or an institution, and if so do you only recommend their products?
• What are your qualifications?
• What practical and professional experience have you had in giving investment advice?
• How do you select the investments you recommend and how do you determine what is suitable for me?
• Do you or the firm specialise in a particular type of investment product or a particular clientele?
• Do you or the firm have any special expertise in the types of investments that might be of interest to me?

Licensing and insurance

• Do you, or your company, hold appropriate licensing?
• Are you insured for any claims brought against you for loss caused by your advice?

Fees

• Determine how the adviser is paid and whether this suits your budget. Some advisers have a minimum fee.
• Do you charge for the initial consultation?
• What do you charge for a financial plan?
• What do you charge for annual or regular reviews?
• What do you charge for purchasing or amending a portfolio?

Past performance

• Have you had complaints about your past performance?

Service

• What types of services am I entitled to receive if I become a client of your firm? (This may include regular reviews on the performance of your portfolio, client newsletters, seminars and networking evenings. In addition, planners may offer insurance, tax and stock broking services.)
• How, and how often, will you keep me informed about the progress of my work?
• Will you consult with me about what I want done?
• Do you regularly review investments, goals and circumstances of your clients and if so how often?
• Do you provide a written financial report and what information is contained in that report?
• How often will we meet?

Managing financial advisers

• Ensure that your financial adviser regularly reviews your investments and changes any investments when your circumstances or goals change.
• You should ask your financial adviser to diarise reviews for you.

Other benefits

• Your financial adviser may hold seminars that provide useful information and also act as a networking event where you can meet other business owners or potential clients.

Billing

After you have chosen a financial adviser you should expect to pay for their expertise and service just as you would any other professional.

• Fees can be charged in various ways:
• The adviser accepts the commission from the investment as their fee;
• The adviser rebates the commission and accepts a fee as their payment; or
• A combination of both;
• Most fund managers pay commission to advisers and this should be disclosed to you at the time of appointing your adviser;
• You need to make sure that there will not be any over-the-top, hidden costs;

How can I tell if a financial adviser will suit my business?

• Most clients find that they deal with and rely heavily on a single individual in the firm. For that reason, it is important that you know as much as you can about that person’s skills, knowledge and expertise, their approach to investing and their ability to provide the personal service you expect. You want to find someone who deserves your confidence and your trust.
• You need to be comfortable with the adviser and their firm. It is important to find out if the firm focuses on certain sectors of the market or on certain types of securities, or deals with a particular type of client, which is usually based on how much money they have to invest.

Other considerations include:

• Your level of experience using financial advisers. If you already have experience you may only need a discount broker that will execute the investments you instruct at a low cost.
• If you are not experienced in making investments you will need to appoint a firm that provides you with advice and explains everything you need to know.
• Advisers can vary in size from small to multi-national firms; some firms will promote only one kind of product; others will provide a full range of securities.
• Look into the adviser’s educational qualifications, experience, investment philosophy, and specialties.
• If unsure, ask for references, the size of their client list and the amount of an average client portfolio, as well as any disciplinary history.
• Small firms normally provide more individualised attention but they may not have the resources to rely upon when giving you advice.
• Financial planning is a vast and complex topic, and it is unlikely that any one person will be able to help in all aspects.

Accountants

The services of a good accountant can be invaluable. They will help you navigate the maze of tax laws and provide the financial advice you need to manage and grow your business.

Before creating your business entity you should speak with your accountant. They should be able to give you tax advice on different kinds of business entities, and which would be best for your circumstances. A good accountant will also take into account where your business is going and what entity would best grow with your needs. An accountant can help you decide whether to buy or lease your premises or vehicle, how to best provide stock options and other incentives for your employees, and a plethora of other issues that can affect your business.

Many people choose professionals to act for them on the recommendation of another person. Talk to your friends and business associates. If their accountant contacts them throughout the year, not just at tax time, with proactive advice and recommendations they may be a good choice. Find out if your friends or associates get real value from their accounting firm, and a forward-thinking attitude and a relationship that you can rely on.

Other professionals who work for you may be able to recommend an accountant who will be appropriate for your needs. Other accountants who do not handle your type of work may also be able to help with the decision-making process and refer you to someone who would suit your business.

Questions to ask your potential accountant

Experience

• How long have you been in practice?
• How many businesses like mine have you worked for?
• What kind of work did you do for these businesses?
• What kind of work do you do the best?
• Do you specialise in any areas of accountancy?

Fees

• Do you charge for the initial consultation?
• How do you charge for your work?
• When do I have to pay?
• What is your hourly rate?
• What is the likely cost?
• Do you charge for every telephone consultation?
• How do you charge?
• What is your past performance?
• Have you had complaints about your past performance?

Service

• How often will you keep me informed about the progress of my work?
• Will you consult with me about what I want done?
• What is your policy on returning phone calls? How soon?

Support system

• Do you have other office locations?
• How much of the work do you do yourself?
• How much will you delegate, and to whom?

When should I engage my accountant?

• Accountants help you set up your business in such a way that if you make money, you can minimise taxes. Their initial job should be to select a business entity that will legally reduce the tax you have to pay, and limit your exposure to litigation.
• It is essential that you engage an accountant before you start your business. Do not try to save on outlays here even if you are short of money. A good accountant is well worth the fees.

Managing your accountant

There are many deadlines that accountants must comply with. Keep in mind that you should try to give your accountant information as early as possible.

Giving information to your accountant at the last minute can mean that you are fined because tax deadlines could not be complied with. Or you might receive a hefty invoice from your accountant because of the late nights they had to put in to ensure you were compliant.

Develop a picture of your needs to ensure that your accountant cannot only meet those needs, but also expected, and unexpected, future needs. Accountants with only one piece of your financial picture will not be able to give you the best advice.

As a business grows, accounting work such as routine book-keeping can be done in-house by employees to save money. This means your accountant will eventually just do the accounting work and you will have a book-keeper doing the day-to-day work. This is much cheaper.

Other benefits

Accountants can also be a source of referrals. An accountant may have one client who is seeking financing and another who is looking for a good investment. A good accountant can put the two together, and may also refer customers to their clients.

Billing

Fees for accounting services vary greatly and depend upon the size of the firm, the experience of the accountant and where the firm is located.

It is important to shop around and find out if any of their services will be provided on a fixed-fee basis or if it will all be billed hourly.

You should also ensure that there will not be any hidden costs.

How can I tell if an accountant will suit my business?

Be sure that you feel comfortable with the accountant, because this is a long-term relationship. The accountant should be able to understand you and your problems. Most importantly, your accountant needs to understand your business and where you want to take it.

Accountants provide many varied services and you need to decide what services you require before appointing them. If you just want a firm to prepare a tax return and year-end financial statements then you probably do not need a large firm, and you certainly do not need a tax specialist. But if you need tax and financial planning advice, look for somebody who is a specialist in their field.

Think about whether you need an employee benefit plan designed, computer system installation and support, and advice on changing your operations for maximum efficiency and tax advantage. All of these factors should be considered when appointing your accountant.

Once a business is operational, an accountant is still needed to prepare annual information returns, do quarterly reviews and offer advice. A good accountant can also take on the role of a general business consultant, help with cash flow problems, internal controls and finance.

Your personal tax issues can be closely related to and affected by business tax issues. Other considerations for appointing an accountant are:

• Choose an accountant who specialises in small-business issues and has experience representing other businesses in your industry.
• It is not necessary to appoint the largest firm, especially if your business is small. Larger firms are typically more expensive and may not be money well spent for a small business.
• If you decide to go with a small firm, ensure it specialises in the areas you need.
• Ensure your accountant is available at short notice or responds to your call quickly as there may be occasions when you need urgent advice.

Legal advisers

A good legal adviser can mean the difference between a highly successful business and bankruptcy. All businesses have legal needs and good legal advisers can identify and find solutions for potential legal problems before they happen.

You need to nurture a strong relationship with your legal adviser, so that you can increase the nature and quality of service, and advice you receive. When selecting a legal adviser consider recommendations from some or all of the following sources.

Ascertain whether friends, family and acquaintances have had similar legal issues or circumstances to you. If they are similar and they were happy with their legal adviser then ask for the recommendation. People often choose their legal adviser by contacting the firm of legal advisers that their parents used and trusted, and who already have family knowledge and commitment.

Other professionals who do work for you

Other trusted professionals may recommend a legal adviser who would be ideal for your needs. For example, your accountant may work with a legal adviser who they are impressed by and believe will benefit you and your business.

Referral services

There are many legal adviser referral services that you can contact for a recommendation. The only problem with this kind of service is that the legal advisers often pay a fee to be on the list of referrals and may not be ideal for your circumstances. These services can be found in the telephone directory or on the Internet.

Local law society

You may also get in contact with the law society in your area. They usually maintain a list of the expertise of each registered legal adviser in the area and will be able to provide you with legal advisers practising in the required area of the law.

Advertising

A legal adviser or firm of legal advisers you are considering may have a website and advertising material which gives you information about the firm and the kind of law they practise. You will also be able to ascertain the kind of clients they work for and if they will be a suitable firm to act for you.

Telephone directories

Many people find legal advisers by looking in their local telephone directory. Do not fall into the trap of only calling the advisers with the largest advertisements. Large ads do not necessarily mean good lawyers; they only indicate that the firm spends more on telephone directory advertising than others.

Questions to ask your potential legal adviser

Experience

• How long have you been in practice?
• How many businesses like mine have you represented and what results have you had?
• What kind of cases do you do the best?
• Do you specialise in any areas of the law?
• Have you handled any similar matters to mine?

Fees

• Do you charge for the initial consultation?
• How do you charge for the work that you do?
• When do you require me to pay?
• How much is your hourly rate?
• Do you charge for every telephone consultation?
• Do you charge an hourly rate for photocopying?
• How do you bill for travelling?

Past performance

• Have you had complaints about your past performance?

Service

• How and how often will you keep me informed about the progress of my work?
• Will you consult with me about what I want done?
• What is your policy on returning phone calls? How soon?
• Do you have any other office locations?
• How much of the work do you do yourself and how much will you delegate and to whom?
• Will you closely monitor any delegates’ work and how?
• How do I contact you? E-mail, telephone?
• When should I engage my legal adviser?
• You should hire a legal adviser before you start your business. Your legal adviser should be there to set up your business entity, after giving you advice on the best business entity for you. He or she will then be able to negotiate your lease or act in the purchase of your business premises. It is at this point that many business owners make the mistake of acting on their own behalf.
• If you instruct a legal adviser to do all of this in the first place then you could save a lot of money in fixing mistakes that you would have made, had you acted on your own behalf.

Managing legal advisers

There are certain things you can do to ensure you get the most out of your legal adviser:

• Co-operate with your adviser and remember that he or she is on your team.
• Because they must deal with anything you tell them confidentially, do not withhold any information from them. They need to be fully appraised to do the best job for you.
• Do not always expect that your adviser will be able to give you an answer off the top of his or her head. Answers given straight away to complex issues may not be right.
• Let your adviser have time to think about the issues and research anything he or she is not sure about before coming back to you.
• Make sure you communicate freely with your adviser and keep them apprised of any changes or developments.
• Have your legal adviser provide business advice on everyday matters such as contract reviews, bad debts, leasing issues and finance.

Hidden costs

You need to make sure there will not be any big hidden costs. A legal adviser’s hourly rate or fixed fee quote will generally include their secretary and any typing and messages taken, etc. But you should make sure that this is the case.

Obtain a fee agreement and ensure that this covers the costs associated with issues such as travel and photocopying. Remember there is always room to negotiate.

Billing

One of the most important issues is: how will you be billed and when will you be expected to pay?

It is important that your legal adviser discusses fees with you at the beginning of the matter, before any work is started. You should always insist on signing a written fee agreement so there can be no dispute later on. This agreement will set out the work that the legal adviser will do for you, the method of charging and an estimate of the cost for the work.

Most legal advisers are reluctant to charge a fixed fee for work that is not routine, run-of-the-mill work. These kinds of cases will generally be charged on an hourly rate.

It is usual that cottage conveyancing and even business conveyancing are charged on a fixed fee amount. However, if anything unusual or above and beyond the standard conveyance happens, you will usually be asked to pay for the extra work on an hourly rate.

When negotiating contracts for various aspects of your business, a legal adviser will generally charge on an hourly rate.

In most cases you will be requested to pay upfront a certain amount of the fee. This is usual practice and gives the legal adviser some comfort that they will not be out of pocket at the end of the matter.

How can I tell if a legal adviser will suit my business?

• You need to be able to communicate with your legal adviser, who should be able to understand you and your problems. This may be one of the most important factors. If you do not ‘click’ with the adviser you may not be getting the kind of advice that is right for you.
• There are many different kinds of legal adviser, and here are some tips to choose the right one:
• Try and select a legal adviser who practises in business law as they are able to look after all of your contracts for you and set up the right legal entity to operate your business through.
• If possible, select a legal adviser who specialises in business law and has experience representing other businesses in the same industry. They will be more aware of the issues affecting your industry, which means you get better advice and do not have to pay unnecessary fees as the adviser takes time to get up to speed on your industry.
• Large firms can have hundreds of legal advisers and offer a broad spectrum of individuals and abilities. You may speak with a partner, but your work may be carried out by an associate or legal adviser.
• Smaller firms may offer more individualised attention and, in some cases, lower rates because they have lower overheads. However, you may be referred to a larger firm if a matter is more complex.

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