Audit Insurance - why it matters

If you're a Dewings client you'll know that we pride ourselves on making sure our advice is sound and our work is as accurate as possible.

Unfortunately, even in cases where everything is perfect, the cost in accounting fees of responding to an audit query and providing substantiation can be significant. If there are matters that require further investigation and discussion, the costs can escalate even further.

This has always been the case in the event of an audit. In recent years, however, the risk of being audited has increased significantly as the Tax Office continues to increases audit activity. This makes audit insurance more important than ever before. The Tax Office continues to develop and deploy more and more sophisticated data matching technologies which enable detailed cross-referencing of information from government departments. This in turn increases the frequency and scope of audits, reviews and investigations.

In addition, the Tax Office continues to increase audit activity simply to ensure better compliance and, we suspect, increase Government revenue. For example, the Tax Office recently signalled its intention to increase audit activity for Self-Managed Superannuation Funds by 78%. This alone means that the chances of being the subject of a review have increased substantially, even if you're not doing anything that might attract attention.

Audit insurance won't cover any additional tax or interest that may need to be paid in the event that an audit finds discrepancies. However it does cover any accounting fees incurred for all enquiries, reviews and investigations - from the very first dollar (up to a prescribed limit). There is no excess, and it covers the activity of most State and Federal bodies, including WorkCover, Payroll Tax, ASIC and the Tax Office (which covers Income Tax as well as Fringe Benefits Tax and BAS/GST). In addition, it covers the costs of engaging additional legal opinion in the case of preparing a defence.

The cost is tax deductible and covers the taxpayer and his or her spouse (where applicable), as well as entities in which they have a significant interest (e.g. companies, trusts etc. - self-managed superannuation funds need to be insured separately, however, due to their more complicated nature).

We encourage you to consider the offer of audit insurance carefully, and please contact us if you would like any further information.

 

Posted: May 19, 2014 | 0 comments


2014 Federal Budget

The Federal Treasurer Joe Hockey handed down his first Federal Budget on Tuesday night. Read out take on the tax and business highlights. In accordance with standard practice over recent years, there were very few surprises when the Budget was actually delivered - particularly from a tax and business point of view. But we would like to have have seen a lot more attention given to addressing desperately needed tax reform in Australia.

Read our full summary of the tax and business highlights here.

Posted: May 15, 2014 | 0 comments


Exit Strategy: Selling your ophthalmic practice

We published this article in the April 2014 edition of Insight, Australia's leading ophthalmic newsletter. You can see the original here (it's on page 29).

You may have spent years working long hours, developing relationships and building your practice. But what happens when you want to sell?

Planning your way out can be one of the most critical things you will do in the life your practice. The reason is simple - when the time comes to sell or retire, your practice will only be worth as much as someone is willing to pay for it. It doesn’t matter how much hard work and money goes into setting up and operating a business. If you can’t find common ground with a willing buyer, your business will be worthless. What you do therefore to plan your exit will go a long way towards helping you achieve the outcome you want, on your terms.

We see many cases where business owners have no exit strategy at all. The general plan seems to be that bridges will be crossed when the time comes, at which point the business will be sold at a healthy EBIT multiple and everyone will walk away happy. In reality, what they often find is that at this point there is no bridge to cross and it’s too late to do anything about it.

Incidentally, EBIT stands for Earnings Before Interest and Taxes. A multiple of EBIT (e.g. 2x, 3x, 4x etc.) is often used to measure the value of a business. Unfortunately, many business owners expect there to be certain EBIT multiple ‘standards’ within their particular industry, and that when the time to get out finally is at hand it’s a simple case of applying that multiple and making a clean break through a sale of the business.

The optometric industry is no exception. Many practitioners expect that an EBIT multiple of 4-5 times is more than reasonable for the amount of work that has been put in. This view may be further enhanced when looking at the value of the net assets of the practice. In reality, a straight sale of a practice often results in a multiple closer to 2 or 2.5 times, and sometimes even less. In addition, some practitioners are finding that there are very limited buyers out there to begin with.

The value of a practice can however, be significantly improved by putting a little work into developing an effective succession plan. There are a number of barriers that can get in the way of finding willing and attractive buyers. Within the practice, things like poor internal systems, a lack of documentation, having the wrong staff and other obvious weaknesses can put prospective purchasers off or reduce the price they are willing to pay. Just like selling your house or car, an important component of any succession plan is detailing – making your business look its best so that it makes a great first impression.

But that still doesn’t bring buyers to your door. One of the realities of the optometric industry is that often your largest pool of potential buyers is the next generation of optometrists, and that means negotiating with the dreaded ‘Generation Y’!

We’ve all heard the clich├ęs about Gen Y. They’re lazy, they don’t want to commit to anything, they won’t listen and demand too much in return. In our experience, we’ve found most of these stereotypes to be untrue for young optometrists. Instead, many young practitioners are hard workers eager for an opportunity to step out into private practice. However they are often averse to long term debt and may want more immediate returns if they are to make an investment.

Ironically, despite their enthusiasm, many young optometrists are already working in practices that have no plan for succession. They are wary though of discussing a possible transition because they perceive that the current owner will want too much for the practice. In many cases, they’re right. So how can buyer and seller find common ground?

This is where the science of succession planning becomes an art form. There is no one-size-fits-all approach, but there are many different options that can reduce the gradient between buyer and seller and achieve an outstanding result for both. A gradual transition is one method.  This can be vendor financed, so neither side needs necessarily to go out and borrow any money. Rather than looking for a buyer who is willing to pay a lump sum sale price, which presents a much steeper gradient to a potential purchaser, a plan is put in place for the practice to be gradually passed on, over a period of years. Payment is made through future dividends (or other share of profit). The senior optometrist is able to wind back slowly, achieving a greater work/life balance by working less hours while still maintaining an interest in the practice. At the same time, the reputation of the business is better protected by having a familiar face around to preserve relationships, educating regular customers about the changes that are coming and ensuring that everything transitions smoothly. In the eyes of a prospective buyer, this can greatly enhance the perceived value of the practice. In the meantime, the owner continues to draw both a salary and dividends which amount to far more than the original sale price would have been. There are many other benefits for both sides too.

But perhaps the best part about a plan like this is that potential buyers may be working in the practice right now. No advertising is required, no long and painful searching is necessary, and both buyer and seller are spared the awkwardness of dealing with people with whom they otherwise have no relationship.

A deliberate and creative succession plan can maximise your chances of finding willing buyers. It can also enhance the probability that buyer and seller achieve an outcome that is mutually satisfactory. Sadly the alternative is often that practice owners must work for much longer (and/or at longer hours) than they would like. In some cases they even end up closing their doors and walking away, abandoning decades of investment for lack of a willing buyer. It doesn’t have to be that way.

Posted: May 05, 2014 | 0 comments


Latest News from Dewings

In our most recent issue, we look at how you can take best advantage of your business structures to grow your wealth, we highlight changes to the superannuation contribution caps coming in the next financial year, and also congratulate Emma on her big walk for Coastrek in NSW.

Click here to read it.

Posted: May 01, 2014 | 0 comments