It is extremely important that a purchaser of a business involved in the hospitality industry should seek taxation advice as to the best way in which the business should be acquired.


Before Signing

Prior to signing your contract, you need to give consideration in regard to using the right business structure.

This will often mean establishing either a family trust, company or partnership. Which business structure is adopted is very much dependent upon the purchasers own circumstances. Each of these business structures has it’s own advantages and disadvantages.

Before deciding on which structure is the most appropriate, the taxation consequences of both running the business and the capital gains tax implications when the business is sold have to be considered.

Where a business is acquired in individual names and a contract signed in individual names, for example a husband and wife partnership – if it is then concluded that a company or a family trust would have been a better business structure, additional costs will be incurred to change the structure with the possibility of having to pay stamp duty a second time.

The business structure is also significantly influenced by the fact that current legislation provides for various exemptions of the taxable capital gain in regard to the sale of the business.

This exemption would apply to the vast majority of small businesses in the hospitality industry. The amount of capital gains tax which is actually paid upon the sale of a business can vary widely depending on the individual circumstances of the selling entity.

Purchasers eventually become sellers, and as such, the impact of capital gains tax, the repayment of debt to the bank or other lending institutions can erode away large amounts of profit.

To structure a business incorrectly can be an infinitely more expensive exercise than structuring it correctly. For this reason purchasers should obtain professional advice prior to establishing or acquiring their business enterprises.

At DFK Crosbie, we recommend that this is done at the very first stage of contemplating the possibility of purchasing.

Verification of Profitability

The contract you sign will contain two clauses which set out Body Corporate remuneration and the stated net profit of the business. It is your choice to have the amounts verified by an accountant conducting a “profit verification”.

However, where you are borrowing to finance the business it will be a requirement of the bank that the profit verification be conducted by an industry recognised accountant.

It is important that you understand how the net profit is calculated, what is included or excluded in regard to income and expense items. These matters can be discussed at the same time as you discuss the business structure you are going to choose. It would also be appropriate at that time to discuss the other items the profit verification covers.

If for some reason the represented net profit is not yet verified, your contract becomes null and void and proceeds no further or you obtain the opportunity to re-negotiate the price.

For your security, DFK Crosbie conducts this work every week and our data base of verified management rights complexes dates back to 1992.

Bookkeeping

General Accounting

As you hold and handle money on behalf of unit owners, these transactions are conducted through a “trust account” and you must be licensed to operate one. Only transactions on behalf of unit owners can be made through the trust account, your own business transactions are conducted through a “general account”. By law the trust account you operate must be audited three times a year with an annual report being forwarded to the State Government Office of Fair Trading.

Trust Accounting

The accounting work involved in operating such a business is not difficult to perform and computer programs to assist you with these tasks are available at reasonable costs. The firm, DFK Crosbie, can assist you to obtain the software best suited to your needs and the correct training in how to operate these programs. We also recommend a web-based program called Banklink which offers an internet friendly link between our clients, their banks and ourselves.

Taxation Matters

The Management Rights industry does not attract any special income tax concessions – the normal rules as to what constitutes taxable income, tax deductible expenditure and record keeping requirements apply. Similarly the taxation legislation in regard to Capital Gains Tax does not hold any special concessions for the industry. As discussed under the heading “Prior to Contract Signing”, these general taxation matters must be considered prior to contract signing.

You will need to understand the obligations and timing of deadlines for Income Tax Returns and payment installments.

G.S.T. Implications

The GOODS & SERVICES TAX does have special implications for the industry and these are discussed hereunder.

  • The G.S.T. Legislation states that residential rents are “input taxed”. This means that the rents do not attract G.S.T. however the unit owner cannot claim back any G.S.T. paid on any outlays made in regard to owning and renting a property.

  • As the Resident Manager, you will have to be aware of your G.S.T. obligations in regard to your position in relation to the Body Corporate as well as the unit owner. In general, G.S.T. will apply to the services you offer and you need to receive specific advice in regard to these matters.

  • The Australian Taxation office has issued a ruling confirming that for units that are let through an on site manager or local agent, even if they are let on a holiday basis, are not let on a “commercial” basis and are also “input taxed’.

Management Rights Articles

  • Will The Vacancy Fee For Foreign Owners Have An Impact On Short Term Management Rights?

    Following a series of amendments in November 2017, foreign owners who have applied for FIRB approval after the 9th May 2017 may be liable for a “vacancy fee” where their residential properties are not occupied for at least half a year.

    The vacancy fee was introduced by the Federal Government to address domestic housing affordability by encouraging foreign owners to put their properties on the rental market.

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