Posted on November 1, 2016 by GSCPA Admin
When considering the acquisition of a business, a thorough due diligence should be undertaken to ensure you know exactly what you are buying and any potential risks associated with the acquisition. The due diligence process allows you to ascertain the true value of the business.
The Due Diligence process is undertaken after you have expressed interest in the purchase but before a binding contract is negotiated. However some vendors may allow you to make a conditional offer on the business subject to the business passing the due diligence. The vendor may insist you sign a non-disclosure agreement due to the confidentiality of information you will have access to.
A thorough due diligence will investigate all aspects of the business, including, but not limited to:
- Financial performance
- Business operations
- Tax compliance
- Legal compliance – Contracts, Leases, Licences
- Key stakeholders
- Customer contracts
- Cash flow assessment
- Equipment valuation and inspection
When reviewing a potential business purchase, the past financial performance needs to be reviewed in detail. We usually expect to see the last 3-5 years of financial data to ensure the reported profits are stable if not rising, and margins are consistent. The information contained in the financial reports of a business should be compared to the information reported to the Australian Taxation Office (ATO). Business Activity Statements and Income Tax Returns lodged with the ATO should contain the same reportable figures as those declared in the business’ financial statements.
Although a thorough review of the businesses financials is a critical aspect of the due diligence process, there are other factors within the business that need to be considered in conjunction. As part of the due diligence, the industry the business operates in, the main competitors and their market share need to be analysed. You also need to consider who the target customers are and the mix of current customers; for example if one customer makes up 50% of the customer base this may leave the business exposed to significant risk.
Our office specialises in the due diligence process ensuring you can comfortably ascertain the viability of a purchase and rest easy knowing you are getting what you are paying for!
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Posted on October 24, 2016 by GSCPA Admin
Am I a Share Trader?
To be classed as a share trader, you may be asked to provide evidence that demonstrates you are carrying on a business of share trading. A ‘business’ for tax purposes includes ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’.
The question of whether a person is a share trader or a share investor is determined in each individual case. This is done by considering the following factors, which in the past have been used in court cases:
- Nature of activity and purpose of profit making
- Repetition
- Organisation in a business like manner
- Volume of trading
Nature of activity and purpose of profit making relates to the fact that Share Traders carry out their business activities for the purpose of earning income from buying and selling shares. A share investor on the other hand invests to earn income from dividends and receipts, but is not carrying on a business activity.
Repetition is a significant characteristic of business activities. To be classified as carrying on a business in this kind of scenario, there needs to be frequency of transactions and/or repetition of similar transactions.
If there are one off transactions then it is most likely they aren’t carrying on a business and therefore cannot be classified as a share trader.
It would be reasonable to expect a share-trading business to involve the study of daily and longer-term trends, analysis of a company’s prospectus and annual reports, and the seeking of advice from experts. Any qualifications, expertise, training, or skills you may have in this area would be relevant to determining whether your activities constituted a business.
To be classified as carrying on a business of share trading, the ATO will also look at the volume of trading. The higher the volume of your purchases and sales of shares, the more likely it is that you will be carrying on a business.
What are the Tax Consequences relating to Share Trading?
If you can demonstrate you are carrying on a share trading business, all share trading profits are subject to tax at your marginal tax rate. Any losses you incur can be offset against your salary and wages, investment income and any other business profits you derive, subject to non commercial loss measures.
The fact that you may be a salary or wage earner, investor or someone carrying on business as a plumber, accountant, dentist etc, does not alter the fact that you may be treated as carrying on a share trading business. The classification is merely for the purposes of determining how your gains and losses will be taxed. You can’t however, take advantage of the 50% capital gains discount on shares held for more than 12 months. But as a share trader, you probably wouldn’t hold shares for this long anyway.
What if the factors of being a Share Trader don’t fit me?
If the factors of being a share trader don’t fit, you are a share investor. Investors report their activity different to share traders. A share investor invests in shares with the intention of earning income from dividends and capital growth, but does not carry on business activities. If you have been classified as a share investor then there are a few perks to take advantage of. Profits made on shares are not classed as assessable income, but as a capital gain and are subject to capital gains tax. If the shares have been held for more than 12 months then they are eligible to receive the 50% capital gains discount.
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