Posts by Sanjib inkiit

Cash is King, but beware of the ATO

Historically, cash has been the preference for many Australian businesses. Unfortunately, this also made it very attractive for businesses to “forget” to disclose some of their cash-in-hand earnings. When cash is not banked, it’s very hard to trace. This meant that a lot of the participants of the cash economy were able to get away with tax avoidance and even getting around employment laws.

undeclared income costs the Australian economy an estimated $15 billion in lost taxes and welfare payments each year.

There are many businesses in the cash economy that do the right thing, but unfortunately because of the “bad apples,” all businesses in the cash economy have come under the microscope of the Tax Office and other government departments.

Now how does this affect you? What are some of the industries being focused on? And what are some of the ways you can safeguard yourself against this crack down on the cash economy?

Who is the ATO targeting?

Some of the industries the ATO is focusing on are cafes and restaurants, carpentry and electrical services, hair, beauty and nail specialists, building tradespeople, road freight businesses, waste skip operators and house cleaners.

Typically there are three types of problem businesses and individuals in the cash economy:

  • businesses and people who don’t understand the law;
  • businesses and individuals who deliberately avoid their tax obligations; and
  • people who use cash payments to hide income, to avoid losing Centrelink payments, or who are breaching visa restrictions.

A key tool the ATO will be using to catch avoidance in the cash economy is data-matching programs. The ATO has created profiles of businesses based on their various characteristics. This allows them to benchmark and compares its income, profit margins and level of profitability with similar others. If a business falls outside these benchmarks they are more likely to get audited. Audits can be expensive and time-consuming even if you haven’t done anything wrong and have a legitimate reason for falling outside the ATO benchmarks. It is important to ensure your accountant has checked that you are within the benchmarks for your industry, sometimes choosing the correct industry code may be the difference between being audited or keeping clear of the ATO’s radar. For example, Let’s say a business earns income predominantly from selling goods (but also earns income from rendering services). When the tax return is done for this business, the business code that is chosen for the service industry (in which the business does not earn the majority of its income). The ATO will end up comparing this business against other businesses in a completely different industry which is likely to lead the ATO to the deem it to have fallen outside the industry benchmarks.

Incentives to move away from cash are on the horizon. As part of its terms of reference, the Federal Government’s Black Economy Taskforce will look into possible tax and other incentives for small businesses that adopt a non-cash business model.

How can you safeguard your business?

The first place to look in terms of safeguarding your business is your bookkeeping. Make sure sales and purchases are recorded accurately (ideally in an accounting software). Make sure you issue invoices when a sale is made and that you keep purchase invoices on file. This will give you a clear audit trail to prove that you are declaring all income. Most importantly make sure you have an open line of communication with your accountant and ask them questions about how you can keep your business out of the ATO firing line.

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investment property return

Are You Getting the Most from Your Investment Property?

Every thought if you are getting the best returns from your investment property? This guide will help you evaluate the returns. Let’s find it out.

investment property return

Property depreciation claims

Depreciation works to lower your taxable income, meaning that you pay less tax, which can help boost your return. To make it less cumbersome, the ATO allows you to claim depreciation using low-value asset pooling. This means you do not have to account for the depreciation for each asset separately, but rather pool all the assets together and claim depreciation on the pooled asset value.

What are depreciable assets?

Depreciable assets for an investment property include both items within the building, classed as “plant and equipment”, and the “building” itself. Plant and equipment covers items such as ovens, air-conditioners and carpets, and building includes construction costs for items such as brickwork and concrete. Common property, for example stairways and gardens, can also be included as part of the building.

How to determine asset values

Before we can help you assess your claim, you will need to have your property valued by a qualified quantity surveyor. As construction and property depreciation is a specialised field, accountants are unable to make estimates on construction costs.

As part of the valuation, the surveyor will need to conduct a site inspection and photograph and log all items in a report. The optimum time to do this inspection is after settlement, and before your tenant moves in. Note, too, that it may take a couple of weeks for the surveyor to prepare the report.

The surveyor’s report will allow us to work out the depreciation type and schedule. The good news is that surveyor fees are tax deductible too!

Even with talk of bubbles bursting and budget-time reforms, property remains a popular choice for investors. An investment property can bring more savings at tax time through property depreciation deductions than many people – particularly new investors – realise.

Factors to consider for the depreciation schedule

Age of building

How old is the building? This will determine which costs can be included in your depreciation schedule. If it was built post-1985, then plant and equipment and building costs can be depreciated. If it was built before 1985, then you can only claim for plant and equipment.

Property purchase date

Did you buy the property a few years ago? This doesn’t mean you have to miss out on the depreciation savings – if deductions are available, we can go back and amend your previous tax returns.

Renovations and repairs

Renovation expenses can be included, but we’ll need to know the amount of these costs. You’re also entitled to claim depreciation even if the renovations were completed by the previous owner. But as with the primary valuation, if you don’t know the cost of the renovations, then a quantity surveyor will need to make that estimation.

Keep in mind that repairs and improvements made to the property before it is leased can’t be claimed in the depreciation schedule, because the costs are incurred before the property is generating income.

Also, some items which you might think are fixtures, such as cupboards, are actually classified as part of the building, and so the expense of replacing them can’t be claimed as a depreciable asset under Div 40 of the Income Tax Assessment Act 1997. However, a percentage of the cost of installation by a tradesperson can be claimed as capital expenditure. The claimable amount will be influenced by the tradeperson’s profit margin.

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Talk to us to find out more about your obligations, entitlements and other considerations when working in the gig economy.

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Gig economy explained

Playing to Win in the Gig Economy

This is the first article in our series on the gig economy, where we explore the changes in the employment market, and the related tax and financial issues that workers and employers face.

What is the gig economy?

The gig economy is characterised by freelance and project-based work. Its players inhabit a constantly changing workscape and juggle a pastiche of jobs.

In some circumstances, gig economy workers have very little connection with their “employers”. This is typical for the “share economy” workers of Uber, Airtasker and similar companies, where the platform owner facilitates jobs through a technological medium like a website or an app, and the workers pay a percentage of their earnings for access.

Gig economy explained

But many gig workers make their living through a combination of employee and freelancer jobs. Sometimes known as “slashies” (for the slashes in their multifaceted career descriptions), these people often work across multiple industries and offer a diversity of skills and experience. A slashie might be, for example, a university tutor/web designer/bartender.

If you are a solopreneur, a casual employee, a contractor or a slashie, the chances are that you are part of the gig economy.

Got a gig?

While recent changes in the labour market have brought flexibility for both employers and workers, they have also brought risk and uncertainty. For many, too, there is an increase in the amount of administration they must do for contracts, recordkeeping and their income stream, as well as greater complexity in planning a financial future.

Each employment type, task and industry has unique characteristics and implications for tax and financial planning. But regardless of the category, similar tax, superannuation and income contingency planning considerations apply. We can help you manage these.

The impact of the gig economy on the employment market and the economy as a whole is yet to be realised, as are the social effects, yet it is touted as the future of work. Many more of us are likely to find ourselves as players. So why not have an advantage? Understanding your obligations and entitlements and having a plan for stability in this dynamic market is critical for success.

Employment status

Are you an employee, a contractor, self-employed – or is your work a combination?

If you are part of the gig economy, then it is essential to establish your status for each job. Fair Work Australia provides a clear summary based on the level of control you have in carrying out the work and responsibility for statutory obligations such as taxes and benefits.

As an employee, you will have pay-as-you-go (PAYG) tax deducted from your wages, and superannuation and other benefits will be paid by your employer. Your contract will specify if you are a casual, fixed-term, or permanent employee. Employees also have the benefit of workers compensation if they are injured on the job.

For any work you undertake as a contractor, you have responsibility for managing your own obligations, including your tax, superannuation and insurance.

Tax

Determining your tax status will be more complex if you have multiple gigs.

If you are a PAYG employee but also use an Australian Business Number (ABN) to invoice for other work, you will need to lodge an annual personal tax return and may also have to lodge a regular Business Activity Statement (BAS) and pay tax instalments. You will need to set aside funds out of the income from your invoiced work to make your BAS payments. These tax instalments are usually required quarterly, and it’s a good idea to set aside around 35% of each income payment you receive.

To further complicate things, if you derive income from your individual skills or personal efforts – for example, if you are an entertainer, engineer or IT consultant – you’ll need to work out if you are classified as a personal services business (PSB) and/or you earn personal services income (PSI). This is significant, as there are substantial differences between the corporate and personal tax rates and the deductions claimable for the different income types. Accurately identifying your PSI/PSB status can be tricky, depending on your profession, how you are contracted and the scope of your work, especially where you have multiple contracts.

GST registration

If you earn more than the $75,000 threshold through your ABN, you need to register for Australian GST. And if you earn income as an Uber driver, you are now required to register for GST no matter how much (or little) you earn from that work. If this applies to you, talk to us about whether you can use your existing GST registration.

For everyone else who works in the platform economy – watch this space! The Federal Government is setting its sights on better ways of capturing GST on consumption, as we’ve seen with the introduction of the “Netflix tax” on digital products and services and the proposed low-value imported goods tax.

Superannuation

You’ll also need to manage your own superannuation for your gig-economy income, whether you divert money into an existing fund or set up a self managed super fund (SMSF). An SMSF may be worth considering if you’re looking for greater portability and diversity in investments.

Insurance

PAYG employees are covered for workers compensation by their employer. If you are a contractor or run a small business you will have to take out you own insurance to cover loss of income, illness, disability and death, and possibly other insurance types if you also employ people (workers compensation), sell products or provide certain services (professional indemnity).

Deductions

Negotiating entitlements for cross-industry work and a variety of tasks can be bamboozling. We can help make sure that you’re claiming appropriately for your types of work and business.

Some common issues faced by gig economy workers include distiguishing between revenue and capital expenses, and apportioning claims where assets are for both personal and professional use. Don’t forget that if you’re undertaking project work, you might be entitled to claim for coworking space hire, software that allows for collaboration across a team, travel expenses and equipment depreciation.

As always, good recordkeeping is essential – hold onto all of your receipts!

Charging clients and low season contingency plans

If you’re a sole trader or casual employee, the level of control you have over the rates you charge will vary according to your profession and from gig to gig. Nonetheless, it is essential to build into your fee structure the amounts you need to cover your tax, superannuation, insurance, purchasing new equipment, training, any certification fees, repairs.

Balancing current work while chasing future work and keeping up with tax and other obligations can be extremely challenging. You should also plan how you’ll deal with periods when you’ll have less work and income, and think about how to fund some holiday time. Talk to us if you’d like help developing a contingency plan.

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CGT rollovers

CGT Rollovers on Restructures

Every business runs using a particular legal structure – as a sole trader, a partnership, through a company or trust arrangement or even using a combination of these structures. Each structure offers different advantages and disadvantages. These advantages range from ease of regulatory compliance to matters of personal liability to asset protection considerations and, of course, tax advantages and requirements. The “mere” choice to operate a business using a particular structure for its beneficial tax outcomes does not generally amount to tax avoidance.

CGT rollovers

In this increasingly complex and fast-changing commercial and trading world, you may find it necessary to change your business’s form from one structure to another as business (or personal) needs shift. There are a range of tax concessions that allow for a change in business structure without triggering tax liabilities that may otherwise arise on the transfer of business assets from one structure to another – particularly in relation to capital gains tax (CGT).

For example, from its inception, the CGT regime has provided for “CGT rollover” relief when a business’s assets are transferred from a sole trader or partnership structure to a wholly owned company structure (with all the tax and other benefits that could arise from running a business as a company).

Likewise, rollover relief is available when interposing a company or a trust between a business’s owners and the existing entity through which the business is run, if this considered to be a viable thing to do for the business.

A CGT rollover allows you to "roll over" a capital gain connected to a CGT event,
such as the transfer of assets from a sole trader business to a company business
in a restructure.This means you can put off paying tax on the gain until another
CGT event happens to the assets – for example, when the company sells them.

The small business restructure rollover (which applies to transfer of assets occurring from 1 July 2016) was introduced to provide greater flexibility for businesses with a small aggregated turnover of (at the time of writing this article this amount was $2 Million). This rollover is somewhat revolutionary, because for the first time it allows business assets to be transferred to a discretionary trust, subject to the underlying principle of any business CGT rollover, which is that the ultimate ownership of the assets does not change. In effect, the rollover rules themselves are designed to maintain the economic ownership of the transferred business assets in various ways, including through the use of “safe harbour” rules.

This small business restructure rollover provides tremendous scope for business owners to restructure their business in a variety of ways without triggering CGT (or other) tax liabilities.

However, as with the other business rollovers available, a restructure must meet a range of conditions for the new rollover to apply. The key conditions are as follows:

  • the transfer of the assets must be part of a “genuine restructure” of an ongoing business;
  • the entities involved in the restructure must, in effect, be “small business entities” in terms of the $2 million annual turnover test (this threshold is proposed to change to $10 million);
  • the transfer of the assets must not materially change the “ultimate economic ownership” of the assets transferred;
  • the asset transferred must be an active asset (ie one used or held ready for use in carrying on a business);
  • the transferor and transferee parties must be Australian residents for tax purposes (at the time of the transfer); and
  • the transferor and each transferee must choose to apply the rollover.

Each of these requirements have their own particular intricacies that must be considered carefully in light of the particular business’s and taxpayer’s circumstances. For example, the requirement that the restructure be “genuine” means that it cannot be undertaken as or be part of an “inappropriately tax-driven scheme” – for instance, one that allows the transferred assets to later be sold with minimal tax consequences. This requirement is so significant that the ATO has issued a lengthy guide, Law Companion Guide LCG 2016/3, to illustrate what would and would not be regarded as a “genuine restructure”.

In spite of the need to meet these varied and precise conditions, this rollover will prove invaluable for business taxpayers who find it necessary to change the legal structure of their business to fit in with their changing business and the shifting domestic and global business environment.

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Are you considering changing the structure of your business, or wondering about other CGT-related matters? Contact us to talk about your situation.

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Accounting firm sydney

8 Reasons why Accountants are important for small business

Sydney accountant

Infographic on why accountants are necessary for your small business. Brought to you by IdealBC Accounting Firm Sydney.

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forgiving debt

The creditor’s position: Forgiving a debt

In a commercial context, where a creditor has made a loan that the debtor uses in the course of a business or to produce their assessable income, there will be clear capital gains tax (CGT) consequences when the creditor agrees to forgive the debt. This is because the creditor’s legal or equitable right to repayment of a debt is a CGT asset in the creditor’s hands.

forgiving debt

However, this does not necessarily mean that the creditor will make an outright capital loss on the forgiveness of a debt equal to the amount of the debt owed. There will be other factors to consider, including whether the debt is entirely forgiven and the circumstances under which it is forgiven. The debtor’s capacity to repay the debt (that is, the extent to which the debt is “truly bad”) will have a significant bearing on the amount of any capital loss arising to the creditor – and could even mean that the creditor makes no capital loss. The “truly bad” status of a debt can be complicated to determine, depending on the particular circumstances of the creditor, the debtor, the debt and the forgiveness arrangement.

Whether the parties are dealing with each other at “arm’s length” under the forgiveness arrangement (and not just in terms of whether they are related parties) will likewise have a significant bearing on the amount of any capital loss arising to the creditor. This consideration is typically important where the parties are a shareholder and a wholly owned company.

Where a debt exists as part of a private (non-commercial) arrangement – such as a loan between family members – and is forgiven, there are a range of other CGT-related matters to consider. In particular, the tax consequences will depend on whether the loan was made at a commercial rate of interest or is interest free. As a basic rule, however, where a loan was not used to produce assessable income, the lender’s forgiveness of the debt does not give rise to a capital loss.

The debtor’s capacity to repay the debt will have a significant bearing on the amount of any capital loss arising to the creditor – and could even mean that the creditor makes no capital loss.

The debtor’s position: having a debt forgiven

In a commercial arrangement where a debt is forgiven – that is, one where interest was payable on the loan – the forgiven debtor’s position involves a range of entirely different CGT considerations.

This is because, unlike the creditor, the debtor does not own a CGT asset as part of the debt arrangement. The debtor’s repayment obligations are merely that: obligations or liabilities, but not assets.

Nevertheless, a debtor obtains a type of commercial or other advantage when their repayment obligations are forgiven, waived, released or extinguished. To take this into account, the tax law includes special rules that aim to indirectly recoup the debtor’s tax advantages associated with forgiveness of the debt, to the extent that the debt was a commercial arrangement.

Generally, these rules provide for the net amount forgiven to be deducted from certain current and future tax deductions the debtor claims. Specifically, the net forgiven amount of the debt reduces the following tax deduction amounts, in this order:

  1. the debtor’s prior year revenue losses;
  2. the debtor’s prior year net capital losses;
  3. undeducted balances of other expenditure that the debtor carries forward for deduction (including depreciable assets); and
  4. the CGT cost base of other assets that the debtor holds.

In short, a taxpayer does not get off tax-implication free when a creditor forgives a debt they owed under a commercial arrangement.

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The CGT and other tax consequences related to debt forgiveness can be difficult to navigate, for both the creditor and the debtor, and will depend on the specific circumstances surrounding the matter. Contact us if you would like more information about how forgiving a debt, or having a debt forgiven, may affect your tax situation.

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business travel expense sydney

Happy Trails: Business related Travel Expenses

The main areas for travel expenses that can be claimed as tax deductions are:

  • transport;
  • meals; and
  • accommodation.

Specifically, these can include:

  • public transport costs, including taxi and air travel fares;
  • bridge and road tolls, parking fees and short-term car hire costs;
  • meals and accommodation expenses while staying overnight for work;
  • incidental expenses for purchases that are linked to your work and the purpose of the work trip; and
  • petrol, oil and repair costs for a car that is owned or leased by someone else.

However, there are a number of factors to keep in mind when claiming travel-related deductions in your personal income tax return as an individual or as part of small business.

business travel expense sydney
What is “work-related”?

Defining what is work-related is an essential consideration for all travel claims. There must be a direct link between your work and the expense. Put simply, you need to ask: is the travel linked to producing the income on which you pay tax?

Transgressions by politicians aside, recent cases have highlighted the importance of correctly establishing the relationship between your work and the claimed expenses. It’s also important to ensure that your employer will support your claim, should the ATO ask them. In the case of Re Vakiloroaya and FCT [2017] AATA 95, the ATO denied the taxpayer’s claim for $60,000 of work expenses, including travel, and the Administrative Appeals Tribunal agreed, in part because the taxpayer’s travel to visit clients was not required by his employer as a core part of his work.

Thresholds for deductions

To help taxpayers successfully claim reasonable deductions, each year the ATO publishes a Taxation Determination that sets out the amounts considered reasonable to claim for various travel destinations in that income year (for example, see TD 2016/13 for the 2016–2017 income year). This provides a useful baseline for trip budgeting and claiming deductions.

Expenditure versus allowances

Another important question to ask is whether you are paying for work-related travel out of your own pocket – or has your employer paid you a travel allowance?

If you are footing the bill for work-related travel yourself, then the expenses can be claimed as deductions on your tax return. However, if your employer reimburses you for the costs, you cannot also claim them.

A slightly more complex situation comes about if your employer has paid you an allowance. You will most likely have to declare the allowance as income in your tax return, especially if the amount is over the threshold set out as reasonable in the relavent year’s tax determination. Your employer is required to withhold tax on this payment as on your salary. If you are a small business owner who pays an allowance to your employees, your accountant can provide further advice on the finer points of your tax and declaration obligations.

Substantiating your claims

If you are claiming travel expenses, you need to maintain evidence to back your claim. Keeping receipts and information such as a log of car expenses, dates, driving distances and fuel purchases is vital. To show that claimed expenses are work-related, keep a travel diary recording the details of business meetings, including dates, durations, places, times and activities. In addition, sending follow-up email to clients detailing pertinent actions arising out of your meetings offers useful support for your claims.

Distinguishing between business and pleasure

Extending a business trip to include a holiday is a very popular approach, for good reason – it’s an excellent way to get the most out of a trip. However, you need to ensure that you only claim deductions for the work components of your trip. Again, keeping a travel diary will help in keeping your claims organised and reasonable.

Claiming expenses of travelling companions

The interesting case of Re WTPG and FCT [2016] AATA 971 highlighted issues with claiming travel companions’ expenses. If you are considering doing this, it’s worth discussing with your tax adviser when planning your travel. In this particular case, a taxpayer with disabilities was denied a deduction for his wife’s travel costs when she accompanied him to conferences overseas. The taxpayer’s wife had accompanied him on the trip as a carer, as his employer did not provide one. The ATO ruled that his wife’s travel expenses were not related to income-producing activities and so could not be claimed as deductions, and the Administrative Appeals Tribunal agreed with that ruling.

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small business benchmarks

Small Business Benchmarks Explained

Small business benchmarks are financial ratios the ATO uses to compare the performance of your business against similar businesses in your industry. It calculates them from the income tax returns and business activity statements of over 1.3 million Australian small businesses. The ratios include figures such as cost of sales, labour, rent and materials, given as percentages of business turnover.

small business benchmarks

If your business falls outside the benchmarks, you may be flagged for an ATO audit. However, benchmarks can also be useful for finding out how your small business compares to others in your industry, and whether you could benefit by reviewing your business costs or prices.

Small business benchmarks can be a valuable resource for small business owners who want to optimise their pricing and overheads. They can also be the best way to ensure that your business is audit-proof.

How small business ratios are calculated

Small business benchmarks reflect the financial performance of businesses with turnovers of up to $15 million, across over 100 industries. Each benchmark ratio is published as a range to account for the variations between businesses that arise from factors such as business models, locations and regions.

Three different turnover ranges are provided for each industry. For instance, if you own a courier business with annual turnover of $250,000, the applicable business ratios are in the $150,000 to $300,000 range.

The ATO identifies a key benchmark ratio for each industry. In the catering industry, for example, this ratio is cost of sales to turnover; for courier services, it is total expenses to turnover. The ATO considers this ratio the most accurate indicator of cost of sales or expenses versus turnover.

A detailed overview of how small business ratios are calculated can be found on the ATO website.

Industry classifications

The ATO will use the business industry code and the business activity description in your tax return to determine your industry benchmark. Key words in your business activity description and trading name also tell the ATO which industry subgroup(s) your business falls into.

A business can fall into more than one industry subgroup, which allows for the fact that some businesses have diverse product lines. For instance, if you run a meat and poultry retailing business, its performance should be compared against benchmarks for both the meat retailing and fresh poultry retailing industry subgroups.

When you receive your tax information from us, it’s important to check that the industry code and description in your tax return accurately reflect your type of business. If not, you should let us know immediately to have it changed.

Types of benchmarks: performance versus input

There are two types of benchmark that the ATO monitors.

Performance benchmarks

These benchmarks use a number of different ratios to check your business’s performance against other businesses in your industry. They help the ATO identify any businesses that may not be reporting all of their income. Performance benchmarks include:

a. income tax ratios such as cost of sales to turnover, total expenses to turnover, and rent to turnover; and

b. activity statement ratios, including non-capital purchases to total sales, and GST-free sales to total sales.

Input benchmarks

Input benchmarks apply to tradespeople who purchase their own materials to perform jobs for household customers. These benchmarks show an expected range of income based on the total cost of labour and materials used.

They are calculated from information provided by trade associations and other industry participants. For example, the West Australian Solid Plastering Association helps the ATO set input benchmarks for plasterers who work with domestic customers.

Benefits of small business benchmarks

Any business owner who has experienced an audit knows it can be a stressful experience that will often stretch on for months. Looking at small business benchmarks can be an effective way to check that your tax records accurately reflect your business’s income and costs.

As well as helping the ATO monitor the cash economy, input benchmarks can help sole traders set their prices. For example, a painter can check how their current prices compare against the industry’s per-square-metre or per-hour price benchmarks, which are based on information that Master Painters Australia provides to the ATO.

Keeping track of your business

It’s important to check your benchmarks regularly throughout the year. The best way to do this is to review your financial ratio reports – talk to us if you’d like more information about how to obtain them.

It’s also a good idea to talk to us about how your business is performing against your industry’s benchmarks. This should be analysed when we prepare your tax return at the end of the income year, or at the end of every BAS quarter if you are registered for GST. If any figures are outside the benchmark ranges, we can give you guidance on how to fix the problem.

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