With the financial world in a state of turmoil, business owners are hard pressed just keeping the wheels turning. What they need right now from regulators is patience, understanding and support. And yet we have seen over the last 12 months or so a significant increase in tax audits of SMEs, fuelled by the additional budget allocation a couple of years ago. While there is no doubt that the Government needs to ensure revenue is properly collected, surely now is not the time to heap the cost and anxiety of a tax audit on top of the other concerns business owners are having to deal with.
The cost of a tax audit can add up to tens of thousands of dollars – even the cost of a preliminary risk review is significant. There is also the distraction that a tax audit causes business owners and their staff who need now, more than ever, to be focused on sales, efficiencies and cash flow. And even if a tax audit does uncover some underpaid liability, few businesses are currently in a position to be able to extract an additional lump sum payment from their cash flow without causing considerable damage to the business – even business failure.
We need the Government and the ATO to release some of the pressure, not just on the audit side but also on general collections, as cash flow for many businesses has become a trickle with slower paying debtors, slower realisation of inventory, or inventory that now costs 30% more to import than it did twelve months ago Recently the Tax Office announced a program of visits to small businesses that show early signs of difficulty ‘in order to assist viable small businesses to stay on their feet during the economic downturn to discuss their plans for meeting various tax obligations’.
While this program was launched under the headline of ‘Tax Office support for small business’, ther is no doubt that these visits will create considerable angst among business owners who are unlikely to see them as part of a support program. The ATO’s use of the work ‘viable’ to describe the businesses that will receive assistance also raises concerns about how the viability of a business will be determined and what the treatment will be for businesses the ATO does not consider viable. Of additional concern is the fact that the ATO will contact business owners directly, and not their tax agents, in relation to these visits. While this may well be intended to reduce costs for the business, the prospect of dealing directly with the ATO is likely to be intimidatory to business owners.
Those that are anxious, or simply prudent, will want to have their tax agents present, which will, of course, further drain their limited resources. Another issue that many SMEs will have to deal with this year is in relation to their associated selfmanaged superannuation funds. Many private business owners have self-managed superannuation funds and many of these have traditionally invested in property unit trusts which own real estate – often the property from which the business owner operates the business. From 30 June 2009 related property trusts of self managed superannuation funds will no longer be able to repay debt from capitalised profits. This is the end of the 10 year transitional period for these geared unit trusts during which time superannuation funds were permitted to capitalise their profit distributions into additional units enabling the property trust to repay debt.
For those that still have debt, the end of the transitional period couldn’t come at a worse time. Trying to refinance debt to an interest-only facility is going to be difficult when banks are nervous, and loan to value ratios have fallen. Trying to sell the property to allow the debt to be repaid, at a time when property values have fallen and potential buyers are thin on the ground, could result in superannuation funds making unnecessary losses. This is not in the best interests of the members of the superannuation fund.
The general prohibition on self managed superannuation funds investing in related unit trusts makes little sense in the first place. What is the mischief as long as the investment is part of a prudent investment plan that the SMSF is required to prepare under superannuation law? Indeed, superannuation funds are now permitted to gear using instalment warranties. It doesn’t seem too much to ask for a two-year extension to the transitional period so that new arrangements can be made, hopefully, at a time when funding and property markets are more relaxed.
Surely we must now be focussed on business survival. Applying extra pressure to businesses now, forcing them to sell assets, close or significantly downsize can only result in higher business bad debts and higher unemployment. It is vital that Governments and regulators don’t lose sight of the big picture.