Uncharted

Welcome to the latest edition of Uncharted.

Here we deliver the latest news, updates and insights to help you capitalise on opportunities and make effective business decisions.

This edition includes:

• Selling a business? The pros and cons of earn-out clauses
• Protecting against risk: Is it a business expense? Really?
• Team Spotlight – Robby Cangco
• Budget 2023 – Now that the dust has settled
• R&D Unwound

Selling a Business? The Pros and Cons of Earn-out Clauses

Earn-out clauses for the sale of a business are increasingly common. We look at the positives and negatives that every business owner should consider.

Business transactions often include earn-out clauses where the vendors ‘earn’ part of the purchase price based on the performance of the business post the transaction. Typically, an earn-out will run for a period of one to three years post transaction date.

There are two main reasons to include an earn-out in a sale:

1. To bridge a gap in the sale price expectations between the vendor and the purchaser. The earn out represents an ‘at risk’ form of consideration. If the business produces the result, the vendors are rewarded through a higher sale price.
2. To incentivise the vendors who are continuing to work in the business and maintain the growth momentum of the business post sale.

Advantages of earn-outs include:

• The ultimate sale price has a performance component to it – both buyer and seller benefit.
• May assist in achieving a sale where a price impasse would otherwise prevent the sale.
• If the calculation of the earn-out is transparent and easily measurable, there should be no dispute between the parties.
• Creates equity where the business has lagging income, new business initiatives in play at the time of sale or a high growth rate.
• The incremental sale price can be effectively funded by the business out of realised growth.

The key to an effective earn-out is in their construction, both from a commercial and a legal perspective. Get them right and they can enhance the continuity and succession of a business.

Protecting Against Risk: Is it a Business Expense? Really?

For a few years now, very generous provisions have been in place that allow business to claim the cost of assets used in the business in the year of purchase instead of having to deduct them over time. But, this has led to some serious problems where some products have been promoted as being tax deductible without proper consideration being given to the way the tax rules operate.

Artwork is one example.

If your business buys an artwork to display in areas of your office where it would be viewed by clients, then assuming it is used in connection with your business and is likely to decline in value, the business can generally claim depreciation deductions for tax purposes. Depending on the situation, it might be possible to claim an immediate deduction. If, however, the artwork is displayed in a home office then the risk of the ATO querying this is much higher.

If the artwork is an investment piece and you expect it to appreciate in value, then it’s unlikely to be a depreciating asset and would not normally qualify for an immediate deduction.

Another scenario is a boat used for “marketing purposes”. If your business buys a boat, claims the cost of the boat and the expenses, the ATO will expect to see the benefit to your business of this and will be checking to see if the boat has been used privately by employees or shareholders (yes, they do look at your social media). If there is private usage of the boat then this can give rise to a range of complex tax issues. For example, this could trigger an FBT liability or a deemed unfranked dividend under the rules in Division 7A. It gets very messy.

In general, the ATO is likely to review any expense where the cost outweighs the likely value to the business of acquiring it, particularly for assets that people are likely to want for their own pleasure.

Team Spotlight – Robby Cangco

Welcome to our Team Spotlight Series, where we showcase the individuals behind CharterNet Rothsay. Today, we are pleased to introduce Robby Cangco, Accountant.

Here’s an excerpt from his interview: 

If you weren’t an accountant, what would you be doing?
My first career choice was actually to become a teacher. I was particularly interested in majoring in history, specifically Philippines history. Accounting was my second degree, and before that, I had studied IT.

What are your personal goals for this year?
I want to finish the CA program, which will take me two more years. It’s important to me because it broadens my understanding of how businesses work and helps me develop and fully utilise my skills. I think it’s crucial to have a grasp of ethics in business, risk mitigation in technology, and using data to produce reports that tell the client a story. My faith also plays a big role in how I work and my career goals, so I want everything I do to align with my morality and values.

Click through to learn more about Robby. 

Budget 2023 – Now That The Dust Has Settled

Core Highlights

1. Temporary Full Expensing measures to finish on 30 June 2023. The current measures allow businesses with an aggregated turnover of less than $5 billion to claim the purchase of eligible new or second hand assets as an immediate deduction, rather than depreciating those assets over the course of multiple years. After the Temporary Full Expensing measures cease, small businesses will have access to the instant asset write-off regime for eligible asset purchases of up to $20,000 for the following year.
    
2. Individual tax cuts from prior Government budgets, whilst not affecting the 2023 financial year, will continue to be rolled out in the 2024 financial year and beyond (see table below for more detail on legislated tax cuts for the 2025 financial year). Individual tax cuts were last introduced in the 2021 financial year, however there was a temporary Low and Middle Income Tax Offset (LMITO) available for taxpayers earning less than $126,000 in the 2022 financial year.
    
3. “Payday Super” to apply from 1 July 2026, requiring employers to pay superannuation at the same time they remit wages to employees, rather than 28 days after quarter end.
    
4. Targeted reduction of superannuation concessions for individuals with total superannuation balances exceeding $3 million from 1 July 2025. The proposal will see individuals taxed an additional 15% on (both realised and unrealised) net earnings attributable to superannuation balances in excess of $3 million. The tax resulting from this measure may be paid personally or from the individual’s superannuation funds. There are no proposed changes to existing superannuation tax rates as part of this measure.
    
5. Support for small and medium businesses on “electrification” and energy efficiency projects. A total of up to $100,000 of eligible expenditure can be claimed between 1 July 2023 and 30 June 2024, yielding a total additional tax deduction of up to $20,000 per eligible entity. Eligible expenditure includes acquisitions of depreciating assets and upgrades to existing assets, and eligible asset categories including, but not limited to energy-efficient equipment, electric heating or cooling systems and energy storage batteries. Note that electric vehicles will be excluded from this measure.
    
6. No changes to the Research & Development Tax Incentive regime, however the patent box regime from the previous Government’s 2022 budget will not proceed.

R&D Unwound – Q4 FY23

The R&D Tax Incentive (R&DTI) landscape has been particularly fluid over the last few years. As such, CharterNet Rothsay aims to provide a quarterly update covering key topics relating to the R&DTI to ensure claimants have the most up-to-date information. This covers areas such as changes to legislation, R&DTI-related news, case studies, and more.

This edition includes: 

• June Year-End Companies – Associate Payments
• Temporary Full Expensing Provision Ending
• ATO Focus Area – Apportionment Methodologies
• Clinical Trial Determinations
• Important Reminder – June Year-End Companies – R&D Overseas Findings

We’re here to help

Get in touch for more insights or direct support – we are here to help. You can also find news and resources online, and contact us on (02) 8999 1199 for all your tax, accounting and advisory needs.