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What Does an Auditor and Reviewer Do?

What Does an Auditor and Reviewer Do?

Australian law requires some types of entity to undertake a comprehensive process of financial reporting, review, and auditing to ensure that financial statements comply with standards and legislation. As part of this process, entity’s such as listed companies and non-listed companies over a certain size are required to have their mid-year financial statements reviewed by a financial professional qualified to undertake reviews and audits of financial statements.

These entities are required to submit their full-year financial statements for a more thorough examination, known as an audit of financial statements, which is also conducted by an audit and review practitioner.

These requirements are set out in legislation known as the Auditing and Assurance Standards, which lay the framework for financial reporting of financial statements as well as a set of minimum requirements for the regular audit and review of financial statements. The audits discussed here are external audits, which are required by law and involve the engagement of an independent auditor who meets the ethical requirements set by the minimum standards.

Auditors and Reviewers – Are They Independent?
Comprehensive professional and ethical standards ensure that audit and review practitioners are able to operate with bias or external influence. This is ensures that financial statements are reviewed and audited by practitioners capable of forming an independent judgement or conclusion with regard to the financial statements, and can inform stakeholders whether or not these statements provide a fair and truthful depiction of the entity’s financial position.
These standards ensure that auditors and reviewers in independent from the relevant entity’s both in terms of professional practice and in appearance. The assurance process is vital in the function of our capital markets and the economy more broadly, so stakeholders need to be sure that they can trust the advice of an auditor or reviewer and take it at face value when making important decisions.

Different legislation dictates the different auditing and reviewing requirements for different entities. As an example, the Corporations Act 2001 sets out the following requirements for auditors and reviewers of listed company financial statements:
• That the position of lead auditor be rotated every five years
• That auditors are restricted from holding positions on the board of companies whose financial statements they review or audit.
• That the auditor produce a declaration of independence to be issued to the company’s board of directors, and that this declaration of independence be published in the company’s annual report.

The Audit and Review Processes for Listed Companies
The task of assurance practitioners carrying out the auditing and review of listed company financial statements is to identify instances where material has been misstated or is unverifiable. As stated previously, the process is governed by a set of minimum requirements and standard framework for financial reporting and the review or audit of financial statements.

For listed companies, financial statements are released twice-yearly in the form of half-year and full-year financial statements. Mid-year financial statements are required by the legislation to undergo review by a qualified auditing and review practitioner, and it is often the same practitioner who conducts the complete audit required for full-year financial statements.

The auditor/reviewer is engaged prior to the end of the reporting period, and spends much time performing an initial assessment of the listen company’s financial reportage. The practitioner is then required to conduct an assessment on whether they meet the requirements for independence and professional ethics, only after these requirements have been met are they able to agree on the company’s terms of engagement and begin the task of review.

Once the terms of engagement have been agreed upon, the practitioner must take the time to understand the company whose financial statements they are reviewing. This involves a comprehensive analysis of micro and macro factors involved in determining the company’s financial position, so that they are able to later apply this data to their review and audit of the financial statements. It is during this stage that the reviewed will identify and examine any substantial risks for material misstatement that they come across during their examination of the company’s financial position.

Once the reporting period is reaching a close, the practitioner will work closely with company management to reduce the risk of any material misstatements appearing in their financial statements. The work carried out during this stage depends heavily on the nature of the company involved, and whether the work is part of a review or an audit.
Within three months of the reporting period’s close, the practitioner is required to finalize and sign their report, which may then be issued to the relevant stakeholders.

What Constitutes a Material Misstatement?
The purpose of assurance is to reduce the risk of an entity’s financial statements containing information that does not present a fair and truthful depiction of the entity’s financial position. For the purposes of auditing and reviewing, a material misstatement constitutes more than a mere oversight or mistake, it is a significant error or misstatement that may reasonable impact the decision-making process of those using the entity’s financial statements. Misstatements may be identified using qualitative or quantitative methods, as both are capable of identifying significant misstatements.

Qualitative misstatements
– Relate to the nature of individual elements of the financial statements, such as a failure to disclose certain transactions or remuneration payments to management. These misstatements are important for stakeholders to be aware of, because they provide important information about how the entity is being managed.
Quantitative misstatements – Relate to dollar amounts or quantities included in the financial statements, such as revenue amounts (overstated), expenses (understated), and liabilities (missing or not recorded). Such misstatements seriously impact the ability of stakeholders to make informed decisions about an entity.

Fraud Detection

Assurance professionals conducting the audit or review of an entity’s financial statements are required to consider the possibility that fraudulent activity may affect the financial statements, such as by resulting in material misstatements. Therefore, auditors and reviewers must take fraud into account when planning their work and carrying out their review/audit.

It is important to remember, however, that an audit of financial statements is by definition not intended to serve as an investigation into any and all instances of fraud that may have occurred within an entity. It is not unreasonable to expect that an audit would uncover fraudulent activities, though, due to the fact that such activities are likely to result in material misstatements being included on financial statements.

Going Concern Assumption

The assumption that a listed company will continue to engage in business operations for the foreseeable future is known as the going concern assumption. Unless evidence indicates otherwise, it is standard for this assumption to be adopted by assurance practitioners.

Assumption of going concern has a very significant impact on the presentation of a company’s financial statements, and the assumption is outlined in the financial statements presented by management. When conducting the audit, the practitioner will assess the going concern assumption adopted by company management as part of their work.
Going concern assumption does not always apply, as some entities are not a going concern and are subject to different reporting requirements than those that are assumed to be a going concern.

Where the assumption of going concern is adopted, the auditor will gather evidence and perform an assessment of this assumption. Once the assessment is complete, the auditor will produce a conclusion and include it in their final report. Auditors are required to determine whether or not a company that assumes going concern can in fact continue as such for the 12 months from the date on which the auditor’s report is signed.

Events that take place in the future are inherently uncertain, but where concerns over forecast going concern assumption exist, the auditor will include notes in their report that direct users to the relevant elements of the financial statements that have lead them to form this conclusion. It is standard practice for such content to be included in the emphasis of matter paragraph, if one exists, or in the modified opinion section should the auditor reject management’s assumption of going concern.

Where Will I Find an Auditor’s Signature in a Company’s Annual Report?
The Auditor’s report is included in the annual report, and relates specifically to the company’s financial statements in order to provide assurance. For Australian listed companies, the auditor also signs off on the remuneration report which lists payments to management staff.

The auditor is required to ensure that information presented to stakeholders is consisted with the information contained in the financial statements, and that these statements do not contain material misstatements.

Audit Quality
It is difficult to measure or define the ‘quality’ of an audit or the associated report, which is why the auditing, reviewing, and assurance processes are governed by a set of minimum standards and regulated by legislation. This ensures that all audits conducted for Australian entities meet certain standards, and that a certain degree of quality is assumed.

Much of the hard work performed by auditing and assurance practitioners is carried out before an entity’s financial statements are released, so this is perhaps the most important period for quality with regard to the audit. It is during this time that the practitioner works to ensure the finalized financial statements are free of misstatements and provide a true and fair view of the entity’s financial position.

It is the practitioner and their firm who are ultimately responsible for the final quality of an audit, ensuring that they accept liability for mistakes or oversights that make it onto a final report. Seeing as the auditing and assurance process are such an integral part of the healthy functioning of our capital markets, regulators and industry bodies also work to ensure that minimum standards for audits of financial statements deliver a high degree of quality for stakeholders.

Internal and External Audits
External audits are largely what we have been discussing in this article, as they are the core component of the assurance system that we use to deliver confidence to stakeholders. An external audit is conducted by an assurance practitioner who meets the criteria or ethical and actual independence from the entity which they are auditing. Practitioners are engaged by the entity to conduct external audits, in line with regulatory requirements and accounting standards.

Internal auditing is a tool available to an entity’s management which enables them to achieve a comprehensive overview of their financial position, making internal audits an important part of the entity’s internal control system. Internal audits are conducted by a practitioner who is either working directly for the entity, under the supervision and direction of management, or who has been contracted with the task of conducting an internal audit. Internal audits are largely intended to evaluate the effectiveness and adequacy of the entity’s internal control measures and management system.

Other Forms of Assurance
The process of giving stakeholders the opportunity to make a fair and informed decision, or to act with an appropriate degree of confidence in their dealings with an entity, is not limited to auditing and review of financial statements.
Assurance practitioners may perform a range of other activities that are not focused on financial statements, as these are understandably not the sole source of concern and interest for stakeholders. Examples of other assurance practices include:
• Audits of Performance
• Prospectuses
• Compliance with Regulations
• Greenhouse Gas and Emissions Statements
• Sustainability Reports

It is increasingly important for a range of stakeholders to have access to credible and reliable information with which they can judge the impact and performance of the entity in relation to these key areas. For example, the financial statements of a listed company may be in-line with regulatory requirements and accounting standards, and be free of material misstatements, but it would be unwise to form a high-level of confidence on this basis if the company was in breach of other regulatory requirements. All these functions aim to increase the level of assurance available to stakeholders, allowing them to make an informed and confidence decision when they are required to do so.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting and auditing services, or email us at admin@kingstonknight.com.au.

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Auditing and Assurance for Listed Companies

Auditing and Assurance for Listed Companies

Listed companies and their shareholders play an enormous role in the Australian and world economy, along with the global economy more broadly. The information that listed companies provide to their shareholders, both current and prospective, is a key driver of capital markets and the broader economy. Without assurance as to the validity of this information, capital markets would not operate as efficiently and predictably as they do.

Auditing and assurance services provided by financial service providers such as Kingston and Knight allow current and prospective shareholders in listed companies to feel secure in the information they are given, and manage their investments accordingly.

In Australia, the auditing and assurance process is set out in best-practice guides issued by CPA Australia. This ensures a standard of practice across the 150,000 strong membership of the nation’s chief financial services body, allowing shareholders in Australian listed companies to feel secure in the knowledge gained from their company’s auditor.

What Does Assurance Mean and Why Does It Matter?

Assurance is a term used to express a conclusive statement that functions to increase the confidence of those receiving information as to the validity of that information. For example, an audience seeking confirmation about the statements issued to them by the company they have invested in may find assurance in the detailed financial audit report issued to them by an independent financial auditor. The information contained in such a report clearly demonstrates the facts relating to the subject matter, and provides a firm basis for opinion be it positive or negative.

The gist of the term assurance is this; assurance allows stakeholders to make an informed decision on some particular subject or in relation to particular matters, sound in the knowledge that all relevant information is accounted for and presented in a verified format.

Assurance matters, because without assurance there can be no confidence. In capital markets and financial systems more broadly, confidence is a key driver of growth and positive outcomes. The work of qualified financial auditors and assurance practitioners allows those taking part in these financial systems to express confidence in the information given to them by listed companies, ensuring that they are in fact making a sound investment based on verified financial evidence.

It is important to note that there are different levels of assurance available to stakeholders, and these levels of assurance depend on the nature of the work performed by their assurance practitioner. Different levels of assurance may result in different conclusions and have a differing effect on the level of confidence available to stakeholders.
The framework for these levels or types of assurance is set out by the peak body for financial auditors and assurance practitioners, ensuring that these professionals always have an answer for stakeholders, even if the answer can differ in the level of assurance it provides.

Levels of Assurance

No Assurance – This is the level of assurance stated by assurance practitioners who are still in the process of compiling or preparing financial statements, and therefore are unable to provide a conclusion for use by stakeholders. If auditing and analysis have not yet been conducted as the relevant financial information is still being compiled, the assurance practitioner is unable to offer assurance. The level of assurance offered at this stage is therefore no assurance.

Limited Assurance – When assurance practitioners reach the stage of conducting their preliminary review, analysis, and inquiries into the financial statements of the listed company, they may be able to provide limited assurance to stakeholders. This means that the assurance practitioner has begun their analysis of the financial statements and other data, and has not yet found evidence for the belief that these statements and data are not truthful and fair. At this stage of the assurance process, the practitioner has only completed the less detailed procedures involved in the overall process and therefore is unable to draw a firm conclusion with which to offer assurance to stakeholders.

Reasonable Assurance – Reasonable assurance is delivered by the practitioner only when they have completed gathering evidence and subjecting the financial information of the listed company to detailed testing and substantiation. This means that an audit of financial statements is complete, and the assurance practitioner has substantial evidence with which to support their statement of assurance. When reasonable assurance is provided, the practitioner is stating their genuine belief that the information contained in the relevant financial statements is a true and fair indicator of the level of confidence stakeholders may take.

Absolute Assurance – This is essentially a guarantee of authenticity issued by the assurance practitioner, stating that their detailed analysis has enabled them to conclude that the information contained in a company’s financial statements is in fact a fair and truthful depiction of that company’s financial position. Once shareholders have received a guarantee of absolute assurance, they may express the appropriate level of confidence and use this to inform their decisions relating to the company.

Why Are Reviews and Audits Required?

Shareholders are usually not intimately involved in the management and operation of the company in which they have invested, meaning that they may not be aware of the true nature of that company’s financial position. This has obvious implications for the stakeholder, meaning that they require an independent, reliable source of financial assurance so that they can assess their investment based on the facts.

For example, shareholders are tasked with the appointment of senior management, so they need a reliable and independent means of analyzing the performance of senior management. This enables them to make an informed decision when appointing management and making other important decisions relating to the company’s operations.
Financial statements are issued by the company, but these need to be subject to audit and assurance processes before shareholders can express confidence (or a lack thereof) in the contents of these statements.

Review of Financial Statements
Conducting a review of the listed company’s financial statements allows the assurance practitioner to offer limited assurance, as the level of analysis and engagement with financial data is not as comprehensive as that of the auditing process.

It is standard practice in Australia for listed companies to release half-yearly financial reports, and for these reports to be reviewed by an assurance practitioner who will later audit the end of year financial statements of that company. A review of these reports enables the reviewed to issue shareholders a conclusion about whether or not the reports offer a fair and truthful view of the company’s financial position.

In essence, the review process is limited to providing limited assurance, as the level of scrutiny placed on the relevant financial data is not as comprehensive as required for a statement of reasonable or absolute assurance.
Audit of Financial Statements

The auditing process involves a highly-detailed and comprehensive level of analysis and evidence gathering designed to substantiate or disconfirm the information contained within a company’s financial statements. This constitutes a process of reasonable assurance, and upon the conclusion of an audit, shareholders will have a reasonable view of the facts relating to their company’s financial position.

Auditors are engaged to deliver their professional opinion on the fairness and truthfulness of the company’s financial statements, and to offer shareholders reasonable assurance if the appropriate conditions are met.

In Australia, auditing of financial statements is conducted in line with the appropriate legislation, as well as the accounting standards set by the industry peak body. This ensures that the audit process is consistent, independent, and constitutes a reflection of best practice as determined by the peak body. These requirements enable the assurance process to continue by providing transparency and consistency that shareholders can rely on form judgements about their company.

Australian laws require listed companies to have their full-year financial statements audited by an approved, independent auditor. This requirement is not limited to listed companies, and other entities and organizations are also subject to regular auditing by law to provide assurance for relevant stakeholders.

Bear in mind that the level of assurance obtained from the auditing of financial statements is reasonable assurance, because an audit is a standardized procedure and therefore cannot apply to each and every transaction and action of each company. There are operational and functional differences between companies that result in the standardized audit procedure being unable to test each and every component of an individual entity’s financial position. Additionally, estimates and judgements are made in financial statements. That is, there are estimates present which cannot be verified discretely or exactly, and may be dependent on future events.

For listed companies, the auditor is usually appointed by an audit committee. The audit committee may consult the auditor at various points throughout the year to obtain their professional advice on matters such as risk, scheduling, and financial reporting. Auditors findings from previous years may be subject to ongoing examination, for example, in light of an event forecast by the auditor coming to fruition.

Once a audit of financial statements has been completed, the auditor usually produces a comprehensive and confidential report that is given to the audit committee. This enables them to form their own conclusions on the level of assurance provided by the audit, and any implications this may have for the board of directors and other shareholders.
It is standard practice in Australia for the appointed auditor to attend the Annual General Meeting of the listed company whose financial statements they have audited. This allows interested stakeholders to obtain any details they may require from the auditor, providing a useful means of clarifying specific elements of the audit and implications thereof.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting and auditing services, or email us at admin@kingstonknight.com.au.

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PAYG System Advice for Employers

PAYG System Advice for Employers

In Australia, employers are required to assist their employees in meeting their taxation and superannuation obligations. The ATO has implemented a system which employers can use to make this task easier, known as PAYG, or Pay As You Go tax withholding. The PAYG system enables employers to use their existing payroll system to automatically deduct amounts from payments made to the following:
• Employees and staff
• Contractors or other temporary workers
• Businesses which do not quote an ABN on their invoices or receipts.

Bear in mind that the PAYG system is not the same as payroll tax, which is a separate state-level tax. PAYG is used to enable easier and more efficient withholding and reporting of income so that it can be used to meet an employee’s end of period tax liability. They may then claim deductions or discounts for which they are eligible, and this amount is deducted from the PAYG withheld amount and returned to them.

PAYG Registration
Employers, or others who may need to withhold tax from payments, are able to register for the system online through the ATO’s business portal, or by phone. Your registered BAS or tax agent can also assist you in setting up the PAYG system for your business, ensuring that you meet your obligations and that the system is appropriately geared to your business structure.

Employers or businesses required to withhold tax are required to establish their PAYG registration before they make any payments on which tax needs to be withheld. This means that if you are in the opening stages of starting a businesses, you will need to set up your PAYG account before you are able to pay any employees or businesses which do not quote an ABN.

What Sort of Payments Require Me To Withhold Tax?
Payments made to workers, one-off payees, and some other businesses are the most common types of payments which require tax to be withheld via the PAYG system. These requirements differ depending on the nature of the employment relationship or business structure that you use to employ workers; for example, if you run a small business and hire workers as independent contractors, you generally do not need to use the PAYG system to withhold tax on their payments, unless they actually request that you do so as part of their contract.

For tax purposes, contractors are seen as independent and to be running an enterprise of their own. This means that they are required to report their own income and pay the required amount of tax for that income, minus any relevant deductions or discounts.

Regular employees, those whose employment is governed by an employment contract and are not independent from your business, generally need to have tax withheld on their pay using the PAYG system. Employees are not seen as independent from your business, and are not carrying on an enterprise of their own or capable of delegating their work to others as part of their employment contract.

Other Payments Which May Require PAYG Withholding

If you operate your own business as a partnership, or by yourself as a sole trader, and you draw payments from the business to contribute to your income, this is not assessed as a wage, and therefore you do not need to withhold tax on these payments. These payments will need to be reported as income, however, and you pay tax on drawings through your income tax return.

Some other forms of payment, besides wages payed to employees and some other workers, require you to use PAYG to withhold tax on the payments. These additional payments that require your use of the PAYG system include the following:
• Interest, dividends, and royalties which you pay to someone who not a resident of Australia
• Income from an investment, paid to someone who has not provided a Tax File Number (TFN)
• Payments to annuities and superannuation income streams
• Payments or wages for Australian residents who are currently working outside Australia
• Payments made to the beneficiaries of certain trusts
• Payments made to residents of foreign nations for the purpose of entertainment, gaming, sports, and construction.

PAYG and Employee Wages
If you have set up a business and would like to hire employees or workers, you will first need to register for the PAYG system. If you are registered, you then need to ensure that those you hire have a tax file number. If your new employees do not yet have a TFN, you can provide them with a Tax File Number declaration which they then deliver to the ATO.

For some employees, you may need to ask them to complete a withholding declaration. This declaration is used to organize the withholding amounts for some employees with special conditions, such as:
• Those who have a Higher Education Loan Program debt, i.e. a university or education debt, or Trade Support Loan as well as Financial Supplement Debt.
• Those who wish to claim certain tax offsets for which they are eligible.

PAYG Summary

The PAYG system is used to assist employers and others who hire workers that pay tax in meeting their obligations. This system can be set up online, or you can have your accountant set up the system for you. Your accountant can also assist you in arranging the other details, such as employee TFN information and any relevant withholding declarations.
As always with regard to tax, it is very important that you keep detailed records of your payments and the details of your PAYG registration. If your business ceases to employ workers, you should withdraw from the PAYG system. If you are unsure of whether or not you need to withhold tax on some payments and not others, then you should speak to your accountant or tax professional today to obtain clarification and ensure that you meet your obligations. Meeting your tax obligations to employees or workers is an important part of taxation compliance, and is monitored closely by the relevant regulators. Ensure that your business does not encounter unnecessary disputes or difficulties by arranging your PAYG and other employment obligations at the earliest opportunity.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting services, or email us at admin@kingstonknight.com.au.

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Tax Compliance – Selling Commercial Property

Tax Compliance – Selling Commercial Property

Tax compliance must be considered when selling commercial property in order to ensure that the transaction is as beneficial and efficient as possible.

A primary taxation consideration for those seeking to sell or dispose of commercial premises is capital gains tax, depending on whether you have incurred a capital gain or a capital loss. You are likely to experience one of the two, as it is very unlikely that a commercial property will sell for the exact value at which it was previously purchased by the vendor. If the property is sold for an amount that is greater than the amount the vendor payed for it, a capital gain is incurred by the vendor.

A capital gain, that is, the amount of profit derived from the disposal of certain assets, is subject to the capital gains tax (CGT). CGT discounts are available to trusts, small businesses, and individuals.

It is likely that a GST liability will also be incurred during the sale, as sale prices generally attract GST. If you are registered for the GST or required to be registered for it, you may be able to claim GST credits in relation to the sale amount. If you have a GST liability, you may be able to calculate it using the margin scheme; this scheme allows you to calculate the GST you owe as one-eleventh of the marginal value derived from the sale. That is, not one-eleventh of the overall sale price, but one-eleventh of the difference in value between what you paid for the property and the amount you sold it for.

Commercial property sold as part of the sale of a going concern, that is an operational business enterprise, generally does not attract a GST liability on the sale price.

Capital Gains Tax (CGT)
For taxation purposes, the marginal difference the value at which an asset was purchased and the value at which it was later sold, is known as either a capital gain or capital loss. A capital gain is incurred when the asset is sold for an amount greater in value than the seller paid for it, that is, they made a profit on the sale. For our purposes, a capital gain is a profit made on the sale of a capital asset.

A capital loss is incurred when an asset is sold for an amount which is less than the seller paid for it, that is, they made a capital loss on the sale.

When a property is sold, it is likely that the seller has incurred either a capital gain or a capital loss on the sale. If a net capital gain is made for the income year, this attracts capital gains tax (CGT), which you pay as part of your tax return. If a net capital loss is incurred for the income year, you are able to have the capital loss carried forward into future income years where it can be used to decrease your capital gains liability.

An important concept in the calculation of capital gains and losses and the subsequent tax requirements is the cost base. In this context, the cost base refers to the difference between what it cost to acquire and improve a property, and the amount obtained following its disposal. The value of claimed or eligible tax deductions are not included in calculations of a property’s cost base. This means that if you perform capital works such as the construction of additional features or improvements, and these works are eligible for deduction from your tax bill, that the value of these works is not included as part of the cost base used to determine capital gains and losses.

Premises Acquired Before 20 September 1985 – This is the date on which capital gains tax came into effect, so if a property was acquired before this date there is no requirement to calculate or report any capital gain or loss incurred following the sale of the property. Somewhat confusingly, however, any additional improvements that count as capital improvements made to the property after that date still attract capital gains tax if a gain or loss is made on their value during the property’s sale.

Capital Gains Tax: Discounts and Concessions
Existing legislation allows individuals who own a property (including as partners in a couple) to claim a fifty percent discount on any capital gain incurred during its sale. This discount also applies to capital gains incurred by trusts, but not those incurred by companies.

Small businesses that own the property they use as a business premises have access to four small business CGT concessions. If the sale of such a business premises results in a capital gain, small businesses are able to use one of these concessions to reduce their capital gain:
Capital gain rollover: A capital gain made on the sale of the business premises may be deferred until the gain is crystallized. This means that, if you were to purchase a new business premises with the amount obtained from the sale of your previous business premises, you are able to defer any capital gain until you sell the new business premises.
Retirement exemption: For those over the age of 55, capital gains from the sale of property are exempt from CGT to a lifetime maximum of $500,000. For those under the age of 55, this concession may be obtained and the conceded amount must be paid into a retirement savings account or superannuation fund that meets the ATO requirements.
15-year exemption: For small businesses that have owned the business premises for 15 years or more, capital gains will not be assessed if the small business owner is either permanently incapacitated, or over the age of 55 and planning to retire.
50 percent active asset reduction: If your small business premises qualifies for an active asset reduction, any capital gain incurred during its sale may be reduced by 50 percent.

GST Liability Incurred Following the Sale of Commercial Premises
As stated at the beginning of the page, the sale of any commercial property generally results in a GST liability. Commercial premises include property that is used to operate a business or enterprise.
In the event that a commercial property is leased to a commercial tenant at the time of sale, the sale may be treated as a GST-free supply of going concern.

Using the Margin Scheme to Calculate GST Liability

If the sale of a commercial property results in a GST liability, you may be able to use what the ATO calls the margin scheme to calculate the amount of GST owed on the sale price. In this context, the margin is the difference between the amount received for the sale of a property, and either the amount that was paid for the property by the seller or a suitably appropriate property valuation.

Under the margin scheme, GST liability is generally calculated as one-eleventh of the sale margin. Being able to use the margin scheme depends on when the property was purchased, and how it was acquired.

GST Registration
For tax purposes, you might be assessed as conducting an enterprise if you buy, sell, develop, or lease property, even as a one-off. If you are assessed as conducting an enterprise, you are likely to attract a GST liability and therefore might be required to register for the GST.

Whether or not you will attract a GST liability depends on whether you exceed the GST registration turnover threshold.
Sale of Businesses as Going Concerns

When a property is sold and it includes a commercial tenant operating a going concern, it is generally assessed as being GST-free, and the parties to the transaction are able to claim GST credits on transactions involved in buying and selling the property (conveyancing fees, etc.)
In order for the sale to be GST-free, all of the following must be satisfied:
• The purchaser is either registered, or required to be registered, for the GST;
• Payment is made for the supply of the property;
• The supplier continues operating the business until the day of supply;
• The supplier provides the purchaser or a chosen successor with everything required for the continued operation of the supplier’s business;
• Both the supplier and the purchaser have entered into a written agreement which states that the sale is for a going concern.
The following may be included as property in the sale of a going concern:
• A building which has all its space occupied by commercial tenants, and that all of the covenants, agreements, and leases between the supplier and these tenants are included as part of the sale
• A commercial premises which contains the operating framework and assets used in the operation of the business, and
• A building which is occupied by one or more commercial tenants but is partially vacant, so long as the vacant part is actively available and being marketed for lease and all leases are included as part of the sale. If the vacant part of the building is currently being repaired or refurbished, then it may be counted as property in the sale of a going concern so long as other parts of the building are leased to commercial tenants.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our Melbourne accounting services, or email us at admin@kingstonknight.com.au.

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Trust Accountant Melbourne

Trust Accountant Melbourne

The process of establishing and effectively managing a trust account is complex, requiring the skills of a qualified professional accountant. Trustees are responsible for managing the tax obligations associated with trust accounts. This includes lodging a specialized trust tax return, which can be almost impossible with knowledge of trust processes and the relevant tax laws. Kingston Knight Accountants deliver a range of cost effective and efficient trust accountant services to the Melbourne community.

Trust Accountant Services Melbourne

There is a lot of complicated work involved in setting up a viable trust account, but Kingston Knight is prepared to do the hard work for you, ensuring that your trust account is established to professional standards and in line with compliance requirements.

For trusts that are new or established, we can assist you with the following trust accountant services in Melbourne:
• Preparing and lodging your Trust Tax Return
• Applying for your Australian Business Number (ABN) and Tax File Number (TFN)
• Preparing and lodging your GST registration
• Calculating your GST and other tax liability
• Preparing and maintaining detailed, complete accounting records and completed schedules for your trust account
• Advising you on tax deductions that you are eligible to claim, reducing tax burden whilst ensuring compliance with your tax obligations
• Corresponding with the Australian Tax Office (ATO) and other regulators, agencies, and compliance bodies on your behalf and ensuring the relevant records can be produced when requested

Kingston Knight trust accountants can handle all the work involved in establishing, managing, and reporting for your trust account here in Melbourne. As registered tax agents and experienced business accountants, we understand the relevant laws and accounting methods that are used to deliver a viable trust and efficiency for trustees.
It is vital for those seeking the services of a Melbourne trust accountant that you are aware of who are you dealing with. As the number of trusts in Melbourne continues to grow, regulators and compliance agencies are clamping down on poorly managed trusts, trusts that do not use the appropriate accounting methods, and other trusts established without the assistance of experienced trust accountants.

Trust Arrangements Are Subject to Growing Scrutiny from Regulators
As Melbourne property prices continue to grow and the number of new Melbourne property developments keeps on rising, the amount of money contained in trust accounts has attracted the interest of the ATO and other regulators who suspect that some property developers may attempt to use trust accounts to reduce their income tax obligations.
Government agencies and regulators are increasingly observant of the way trust accounts are established and managed, including the accounting methods used in calculating revenue, proceeds, payments etc.
In order to avoid a costly and time-consuming dispute with regulators or agencies, ensure that you use a qualified and reputable trust accountant such as Kingston Knight to establish and manage your trust. Our in depth knowledge of the relevant laws and accounting methods ensure that your trust account is compliant, allowing you to make the best use of it.

Contact Kingston & Knight Accountants today on 1800 283 481 to learn more about our trust accountant Melbourne services, or email us at admin@kingstonknight.com.au.

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SMSF Auditor Melbourne

SMSF Auditor Melbourne FAQ’s

Acceptance and continuance

Who can audit an SMSF?

Before 1 July 2013
SMSF audits must be carried out by approved auditors. An auditor is an individual who is currently:
• Registered as a company auditor; or
• A CPA Australia member; or
• An Institute of Chartered Accountants in Australia member; or
• An Institute of Public Accountants member; or
• An Association of Taxation and Management Accountants member or fellow; or
• A fellow of the National Tax and Accountants Association Ltd; or
• An SMSF specialist auditor from the SMSF Professionals Association of Australia Ltd; or
• The Commonwealth Auditor-General, or that of a state or territory.

From 1 July 2013
SMSF audits must be carried out by ASIC registered auditors, also known as approved SMSF auditors.

Competency requirements

A list of competency requirements for SMSF auditors was developed by CPA Australia as part of a joint initiative carried out with the regulator and other professional accounting bodies. These requirements were created as a result of market growth in the area of SMSFs, they require that SMSF auditors:
• Possess a practicing certificate issued by a professional accounting body such as the Institute of Chartered Accountants in Australia, CPA Australia, or the Institute of Public Accountants;
• Be covered by professional indemnity insurance;
• Meet the ongoing professional development requirements;
• If there are others undertaking work on their behalf, these individuals must have appropriate experience and knowledge and are to be supervised when conducting audits;

In addition to the above, an SMSF auditor must demonstrate competency in these areas:
• Planning the engagement;
• Acceptance and retention of clients;
• Substantive procedures;
• Evaluating controls and testing these controls;
• Forming an audit opinion.

These competency requirements can be found on the CPA Australia website. They continue to apply to members in addition to the ASIC auditor registration requirements which came into effect on 1 July 2013.
ASIC has introduced its own competency standards for approved SMSF Auditors. These standards are largely based on the CPA Australia requirements. ASIC has been monitoring compliance with these standards since 1 July 2013.

Auditor independence
As part of the new registration regime for SMSF auditors, the SISR now prescribe APES110 to all approved SMSF auditors. APES 110 is the code of ethics for professional accountants. Approved SMSF Auditors will be required to declare on the SMSF independent auditors report that they are acting in compliance with these requirements.

The Auditing and Assurance Standards Board has provided guidance in the form of Appendix 6 of Guidance Statement GS 009 which relates to threats to independence within a SMSF. This Appendix lays out a variety of safeguards and scenarios available to auditors in a variety of given situations. Safeguards found within an SMSF may be limited as SMSFs are generally small entities with limited segregation of duties.

If an audit client is assisted in the preparation of accounting records or financial reports, a self-review threat may be created should these reports and records be subsequently audited by the firm which assisted in the preparation. If the firm’s staff happen to be making management decisions for the SMSF (which may be the case if the firm is providing administrative services to the SMSF), there are no safeguards to reduce the threat of self-review to an acceptably low level. The only option would be to withdraw from administration or audit engagement.

There are safeguards which apply when accounting services of a routine or mechanical nature are provided. Such services may include the posting of transactions and entries approved by the SMSF, or the preparation of the financial report based on a trial balance which has been provided by the SMSF. These safeguards include:
• Implementing procedures and policies which stop an individual providing such services from making managerial decisions for the SMSF.
• Making arrangements so that routine accounting services are not performed by a member of the auditing team.
• Requiring the source of data for accounting entries to be originated by the SMSF .
• Requiring underlying assumptions to be approved and originated by the SMSF.
• Obtaining the approval of the SMSF for any journal entries or other changes which may affect the financial report.
• Obtaining the acknowledgement of the SMSF of their responsibility for any accounting work performed by the firm.
• Disclosing the firm’s involvement in both engagements to the trustees.

Generally, a threat to independence is not created by providing taxation services to an SMSF which is also an audit client.

Timing of auditor appointment
Trustees are required to appoint an auditor at least 30 days prior to the date on which the auditor’s report is due.

Engagement letter
Audit engagement letters should clearly set out the reporting responsibilities of the auditor for both components of the audit.

If you require an SMSF Auditor Melbourne or an SMSF Accountant Accountant Melbourne contact Kingston & Knight today on (03) 9863 9779 or email us at admin@kingstonknight.com.au.

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SMSF Auditor Compliance

SMSF Auditor Compliance

Objective

There are relevant auditing standards which apply to SMSF compliance audits. These standards are:

    • * ASAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information;

and

  • * ASAE 3100 Compliance Engagements.

Compliance audits are carried out in order to form an opinion relating to five crucial areas:

  • * That the fund meets the required definition of an SMSF and has elected to be a regulated fund as per SISA s17A.
  • * The sole purpose of the fund’s maintenance is to provide benefits to its members upon their retirement, or to their dependents should death occur before retirement.
  • * The trustees have an investment strategy which complies with the investment restrictions laid out in SISR. 4.09.
  • * The trustees comply with benefit and contribution payment standards and SISR 6.17/7.04.
  • * And that trustees are performing their required administrative obligations as according to SISR s103.

There is always the risk that a breach of the SIS Act and Requirements may not be detected by the auditor. For this reason, it is important that the audit procedures are thoroughly planned and designed to cover the entire financial period, as well as specific compliance tests relating to relevant SISA requirements.

The regulations set out in the SIS legislation represent a minimum set of audit requirements for compliance. Auditors are able to expand the scope of an audit as they see fit (perhaps based on risk and other factors), but the audit must meet these minimum requirements in order to comply. An SMSF’s trustees should be consulted when determining the scope of an audit.Reporting obligations for the financial statement and compliance audits

Under the SISA, an SMSF auditor is required to:

  • * Provide an auditor’s report to the trustees detailing the SMSF’s operations for the year. The report must be in an approved form.
  • * An auditor will be required to submit a written report to a trustee if that auditor forms the opinion that:
  • * Any contravention of the SISR or SISA may be occurring, have occurred, or be likely to occur in the course of the SMSF’s operations.
  • * The financial position of the SMSF is unsatisfactory, or is likely to become unsatisfactory.

An auditor will be required to submit a written report to the ATO if the auditor forms an opinion that:

  • * A contravention is likely to have occurred, be occurring, or occur in the future, and that this contravention is of the requirements of the SISR or SISA specified in the ACR by the ATO.
  • * The SMSF’s financial position is, or is about to become, unsatisfactory.

An audit contravention report should be used when submitting the above written report. These forms are available on the ATO website.

The ATO has also published an auditor checklist (Approved auditors and self-managed super funds – role and responsibilities as an approved auditor) which sets out the responsibilities of approved SMSF auditors according to the SIS Act and Regulations. It offers a concise guide to the way in which the ATO expects audits to be conducted.

If a fund was established on or after July 1 2008 and has committed a reportable contravention in its first 15 months of existence, the auditor must report the contravention to the ATO regardless of the amount involved. This ensures that new trustees become aware of their responsibilities and obligations at an early stage.

Management letter

Trustees are to be provided with a management letter which details the findings and implications of an audit on their fund.

A management letter should include details of any contraventions of the SISR or SISA as well as recommendations as to how these mistakes might be rectified by the trustees.

Any weaknesses in internal controls identified by the auditor should also be reported to the trustees (even if they are not necessarily breaches of the legislation or requirements) so that they are able to improve their administrative procedures and systems where required.

Contact Kingston & Knight Accountants today for an Melbourne SMSF Auditor and/or SMSF Accountant on (03) 9863 9779 or email us at admin@kingstonknight.com.au.

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SMSF Accountant Melbourne

SMSF Accountant Melbourne

Kingston & Knight offer a range of SMSF accountant Melbourne services.

What is an SMSF Accountant

In order to understand what an SMSF Accountant is, you must first understand what SMSF is. Self Managed Superannuation Fund, or more commonly known as a Self Managed Super Fund is a superannuation trust structure developed as a pension for members and their beneficiaries upon retirement.
What separates an SMSF from other super funds is that an SMSF member is also the trustee of the fund. These funds are formed with one to four members who have full control of how the fund is managed. As opposed to other super funds designed to manage large groups, and the interest of a large group, an SMSF can be managed to the specific needs of individual members.

With this type of a super fund, SMSF, there are two trustee structure options:

  • Corporate Trustee: In this structure a company will act as trustee, while each member will manage the SMSF as a director.
  • Individual Trustee: Each member of the SMSF is a trustee

Regardless if a corporate or individual trustee is used, the responsibility of the trustee will remain the same. Trustees are responsible for:

  • – Implementing, and maintaining an investment strategy for the fund;
  • – Administratively manage the fund. This will require strict adherence to requirements governing SMSF management, such as maintaining records, providing financial statements, completing tax records, and organizing an independent audit.

Trustees and Superannuation Laws

In addition to required actions of the trustee, superannuation laws require that trustees maintain a level of ethical standards commiserate with the industry, which include:

  • – Honest representation of actions and all matters concerning the fund;
  • – Acting responsibly, diligent, and in the best interest of the fund and all of the fund’s members;
  • – Ensuring fund assets are kept separate from the trustees’ personal assets;
  • – Inform and maintain full-disclosure of fund, fund activities, and changes to all members.

Due to the administrative requirements, it is common for trustees to seek advice, or consult, an SMSF specialist, often an accountant.

How Can an SMSF Accountant Melbourne Help Clients

SMSF accountants tend to be the primary source for advice on the development, implementation and management of super funds.

While an SMSF Accountant is often called upon for advice, it is important to note that, without an Australian Financial Services License (AFSL), an accountant cannot provide financial information and are significantly restricted on what advice they can provide. Advice which an SMSF accountant Melbourne can provide is:

Essentially, accounting services and advice can be provided, but the accountant cannot provide any financial advice or suggestions which may lead a trustee to act upon such information.
While the practice of offering financial advice along with accounting services has been abused in a variety of degrees since the inception of super funds, it is considered a highly unethical practice, and one in which both the SMSF accountant, and trustee or directors can face significant consequences financially, or on a personal level.

Considering the complications and requirements a trustee faces in managing a SMSF it is highly recommended to seek a SMSF accountant with accredited training and qualifications. It is also important to realize the importance on whether or not your SMSF accountant is qualified to offer financial advice in managing a super fund.

Consequences for Unlawful Trustee Actions

Consequences for a trustee not properly managing a fund are managed by the Australian Taxation Office and can result in education direction, administrative penalties required of trustees and directors, trustee disqualification, and up to civil and criminal penalties based on the degree of mismanagement.
An SMSF accountant is specially trained to assist in legally and ethically managing these funds.

Contact Kingston & Knight today for the most trusted and professional SMSF Accountant Melbourne services on (03) 9863 9779 or email us on admin@kingstonknight.com.au.

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Small business tax accountant Melbourne

Small business tax accountant Melbourne

When considering whether or not to start a new business, there are a variety of taxation obligations which need to be considered. Most of the income generated by your business would be classed as assessable income – this means that it’s subject to tax and you will need to declare it on your tax return.

There are tax deductions which you can claim for most expenses incurred whilst running your business, but exceptions exist. You are not able to claim tax deductions for domestic or private purposes. Fines, entertainment, and some other specific expenses are also excluded.

Depending on the structure of your business, the rules for income and deduction will vary. Also taken into account is whether or not you hold/trade stock, and the nature of your expenses and income.

What to include as assessable income

Assessable income is any income that is subject to tax. Generally, to calculate the assessable income for your business, you are required to include any amounts you earn or receive in the ordinary course of operating your business, such as by providing services or selling stock.

Usually, you are also required to include the following:
– Commission income
– Amounts originating in isolated transactions outside the ordinary running of your business, where you intended to make a profit
– Amounts which exceed their written value if selling depreciating assets
– Compensation, including worker’s compensation or payments for trading stock losses, contract cancellations, or business interruptions
– Excise brewery refund
– Wine equalisation tax producer rebate
– Fuel tax credits, cleaner fuels grant and product stewardship (oil) benefit
– Franking credits (credits from company tax already paid), dividends on business investments
– Incentive payments, such as cash payment for a lease
– Grants, such as an amount received under the Apprenticeship Incentives Program
– If you are an Australian tax resident, income earned outside Australia
– Payments for selling know-how
– Interest on business investments and interest on early payment or overpayment of tax
– Hire changes and lease payments
– Net capital gains made from selling capital assets such as buildings or land
– Awards or prizes for your business, such as a money prize for winning a business competition in your region
– Personal services income (PSI) if PSI rules apply to you
– Recovered bad debts which you have received a tax deduction for
– Royalties, such as payments received for authorising other entities to use your intellectual property
– Rental income from properties owned by your business
– The value of goods you take from your business’s trading stock for your own personal use
– Subsidies for running a business
– The market value of transactions not involving money, including barter transactions
– The value of stock on hand at the year’s end if its value is greater than at the start of the year.

As exemplified by this list, you usually need to declare your gross proceeds and earnings, not just profit.

Amounts you should exclude when determining your assessable income

Some amounts, including the following, are not assessable. So you don’t need to include these when declaring your assessable income:
– Prizes that are not related to your business
– Amounts earned from a hobby
– Gifts or amounts given to you
– Goods and services tax (GST) collected by your business
– Any borrowed money
– Gambling or betting wins, unless your business is a gambling or betting business
– Payouts from personal income protection insurance policies (in most cases)

Record keeping and tax

As a business owner, you are legally required to keep complete and accurate records of all assessable income and any deductions you claim. Making misleading or false statements in these records or reports can result in the ATO doing the following:
– Applying penalties
– Determining your income based on other information, such as industry benchmarks, and issuing an amended tax assessment
– Prosecuting you in court

Keeping records for your business

You are required to keep records of all your business transactions, and these records must be stored by you in full for five years after the date on which the records were prepared or the relevant transaction completed.

These records are required in order to evaluate any expense claim you may make. Failing to keep records may result in an expense claim being denied or reduced, and can even result in penalties being applied by the ATO.

Examples of records which you are required to keep include:
– Cash register tapes
– Sales and expenses invoices
– Sales and expense receipts
– Credit card statements
– Bank account statements
– Bank deposit books and cheque butts
– Employee records, such as tax file number (TFN) declarations, time sheets, superannuation records, and wages books

The ATO has created a specific Record Keeping Evaluation Tool, which is hosted on their website. You can use this tool to identify what records you need to keep, and how to assess and/or improve your record keeping.

As well as those listed above, there are some other records which may need to be kept depending on the nature of your business. These income tax records also may need to be kept each financial year:
– Stocktake records
– Debtors and creditors lists
– Records of depreciating assets
– Records of any private use of business assets or purchases
– Records of assets for the purposes of assessing capital gains tax
– Motor vehicle expenses (includes logbooks)

All your financial records can be stored either in electronic or hard-copy form. But they all must be written in plain English and readily accessible. Bookkeepers often specialise in setting up book keeping systems for business records such as those required to be kept for tax purposes.

Accounting methods

The amount you should include as your assessable income depends on whether you account for income on a cash or accruals basis.

Cash basis

This refers to payments received during the year and does not require you to know when the work was done. If you are accounting on a cash basis, your assessable income only includes income which you have actually received during the income year.

Accruals basis

Accrual refers to income which has been earned during the year, even if the payment for this has not yet been received. If you account on an accruals basis, you need to include everything you earned during the income year, even if you are yet to receive payment.

Some people confuse these two assessable income accounting methods with the cash and non-cash goods and services (GST) accounting methods. Assessable income refers solely to income and has nothing to do with GST.

Concessions for small businesses

If your business has an aggregated annual turnover of less than $2 million, you may be able to receive certain concessions which reduce your taxable income. Aggregated annual turnover refers to the total sales made by your business and associated businesses during the financial year.

Examples of small business concessions include:
– Simpler trading stock rules
– CGT concessions
– Immediate deductions for prepaid expenses
– Simpler depreciation rules

Foreign income

As an Australian tax resident, you must include any income you have earned from foreign sources as part of your assessable income. Even if your income was already taxed in its country of origin, you must report it to the ATO. If your income has already been taxed, it may be eligible for Australian tax exemptions such as the foreign income tax offset.

You are required to convert foreign deductions and income into Australian dollars at the exchange rate which was current at the time the income or deductions were earned. You may also use an average exchange rate to convert your income as long as that rate is similar to the rate which applied at the time the income was earned.

Personal services income

Businesses involved in consulting or contracting may earn a type of income called personal service income (PSI). For these businesses, PSI tax rules apply and may alter the amounts included as assessable income, as well as eligible deductions.
The purpose of the PSI rules is to ensure that people earning PSI are taxed in a way which is comparable to employees performing similar roles to them. This ensures that they do not claim excessive deductions.

What is PSI?

PSI can be described as income which is generated through the application of your personal skills or efforts. Examples where PSI may be earned include:
– By professional practitioners operating a sole practice
– By consultants who provide personal expertise
– By professional entertainers and sportspeople
– Under contracts which are principally for your services or labour.

PSI generally does not include income earned by:
– Giving permission to use legal property
– Selling or supplying goods
– Through a business structure, such as a company or firm as opposed to a sole practitioner or trader working under a contract
– Using an asset, such as a truck, to generate income (these assets are known as income-producing assets)

Sole traders

Sole traders are subject to PSI rules which limit deductions they are able to claim. Examples of expenses where deductions are limited include:
– Mortgage interest, rent, rates, land tax on personal residences
– Car expenses for a spouse
– Super payments and wages for associates

Partnerships, companies, or trusts

These types of businesses are also limited in the deductions they can claim. If you operate one of these businesses, its income (minus some reductions) will be treated as your personal income, so you must report it on your tax return. In addition, your business will be subject to pay as you go (PAYG) obligations on your personal income.

Crowdfunding

Crowdfunding is a rapidly evolving industry and is subject to changing taxation regulations due to its growing popularity and value. Crowdfunding has different tax implications for individuals involved at different stages of the crowdfunding process.

Generally, there are three parties involved in crowdfunding arrangements:
– The promoter, who initiates the venture or project for which the funds are being sought
– The intermediary, which is the organisation or platform providing the crowdfunding services. These are usually websites
– Funders, individuals and entities who contribute money to the project

Each party can potentially have tax obligations as part of a crowdfunding arrangement.
If you happen to receive or earn money through crowdfunding, it may be assessed as taxable income. This means that you need to declare any money received via crowdfunding arrangements on your tax return.

If you are a small business owner it is highly advisable you utilise a qualified business accountant Melbourne, like Kingston and Knight Accountants to monitor your accounts. Contact us today on (03) 9863 9779 or email us on admin@kingstonknight.com.au.

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