By David Rose
Welcome to the November edition of VIN-sight – delivering small business advice to our clients on a regular basis that moves beyond the accounting foundations we already provide and focuses on business strategies that help automate, simplify and advance systems, procedures and profits.
In this issue we will:
- Share 5 simple steps to reduce the possibility of fraud in your business;
- Remind employers of the importance of complying with superannuation salary sacrifice obligations in light of a recent court decision;
- Consider what Christmas tax deductions your business can benefit from; and
- Provide an example of how business health checks can make a real difference to the bottom line.
This will be our last edition of VIN-sight for 2015 and from all of us at Vincents we wish you and your families a safe and happy festive season and a prosperous new year!
Five Ways to Fight Fraud
Businesses of all sizes experience varying levels of fraud at some point in time. It can be costly for the business and not just financially speaking. Fraud can also impact the company’s reputation, particularly when customers or clients are involved.
Case Study: Major Financial Services Firm
As a result of “whistle-blower” information, it was alleged that a mid-level Procurement Manager at a major Australian financial services organisation was colluding with contractors in relation to two major office maintenance tenders (with a potential value of AUD$2m).
The ensuing investigation included whistle-blower/informant handling, forensic accounting, background reputational due diligence, data analytics and formal interviewing.
As a result it was established that the Procurement Manager had:
- Engaged in a non-arm’s length relationship with one of the contractor’s account managers, bypassing organisation procurement processes, and passing on (without authority) competitor tender information;
- Accepted gifts and hospitality, in breach of organisation regulations;
- Played an active role in the development of the contractor’s future business plans;
- Cancelled contracts for both incumbent contractor’s without authority or good reason; and
- Misused their own organisation credit card to the value of AUD$25k.
The Procurement Manager was summarily dismissed and both existing contracts were reinstated.
There is no single set technique employed by fraudsters, just as there is no overarching test or method for its simple detection, however by implementing some simple measures you can take steps to protect your business and limit the opportunity for individuals to commit fraudulent acts like in the example above.
1. Abuse of policies and procedures
The central theme of fraud prevention lies in the business’ policies and procedures. Internal controls are the key to proactive fraud prevention and they should include:
- Separation of duties – no employee should be responsible for both recording and processing a transaction;
- Access controls – access to physical and financial assets and information, as well as accounting systems, should be restricted to authorised employees with appropriate oversight; and
- Authorisation controls – develop and implement policies to determine how financial transactions are initiated, authorised, recorded and reviewed.
2. Payments fraud / personal expenses
The most common and yet preventable fraud risk usually occurs when the three points noted above are either breached, not enforced, or simply do not exist.
Key fraud indicators can be any one or combination of methods, such as:
- Regular payments of same amount (one goes to supplier and one to fraudster) ;
- Round (i.e. whole dollar) payment amounts;
- Check supplier invoice numbers for conformity, also for duplicates or consecutive invoice numbers;
- Check for suppliers being paid before invoices are due or within usual payment days;
- Suppliers paid several times in one month;
- Journals entered or altered in the ledger well after the transaction occurred;
- Check for ‘friendly’ supplier relationships with staff (side-agreements);
- Review for a change in purchasing patterns generally;
- Use of complex, unreconciled ‘clearing accounts’, especially for electronic payments
- Use of external systems, such as spreadsheets, to reconcile or report on the ledger accounting system;
- Changes in business patterns, such as entry into new and/or remote markets;
- Shipments to new or unusual customers towards the period end; and
- Unusual numbers of credit notes around period end.
3. Fraud via internet banking
Major banks now have online products that are able to implement security measures which provide a high level of assurance to customers, including;
- Electronic tokens to identify each user Multi-tiered authorisation such that the person who enters the payment cannot approve the transfer and vice versa ;
- Double Authentication (for example, login plus SMS code authorisation);
- Account Lockout functions and so forth;
- Limit access to your online “approved suppliers” information, such as bank accounts and addresses; and
- Maintain records of online payments – who (supplier), what (target account), when (actual payment date) and how much. Also ensure that these records match the accounting system.
4. Breakdown in staff relations and procedures
- Hire the right employees: Recruitment of employees should be done to ensure not only the right skills and qualifications, but also with the right ethical history. Dishonest employees will ignore your attempts to provide a positive work environment and will search for ways to defeat the internal controls structure. Background checks are easy and inexpensive.
- Create a positive work environment: Studies have found that employees can be the business’s best watchdogs. Most are honest and don’t like to see others stealing. Encourage employees to follow established policies and to act in the best interest of the entity. Open lines of communication between management and employees.
5. Be proactive
- Establish a system: Businesses that are serious about prevention of fraud should provide a confidential “ whistle blower” reporting system for employees, vendors and customers to anonymously report any violations of policies and procedures.
- Maintain professional scepticism and assess your fraud risks: A simple SWOT analysis can be a revealing source of information on where fraud may occur (or be occurring). Strengths and weaknesses should focus on internal aspects to the firm, whereas opportunities and threats related to external factors.
- Perform regular and irregular audits: Aside from the obvious benefits of performing regular and random assessments of vulnerabilities, these also let employees know that fraud prevention is a high priority for the organisation.
Vincents can assist with any Forensic matter including investigations, fraud prevention plans and risk assessments. Contact your Vincents advisor for more information.
Company Director Chased Over Non Payment of Superannuation
Superannuation salary sacrifice has taken on a more concerning aspect and employers need to beware.
In a recent case in Victoria, a company director was charged with theft in regards to an employee who had been salary sacrificing superannuation for 3 years and the company had not put any of these funds into the relevant superannuation fund.
Upon the discovery of this, the employee contacted the police who then laid charges.
The company director was convicted and now has a criminal conviction even after personally paying the employee’s unpaid salary sacrifice superannuation contributions.
Christmas Party Tax Deductions Explained
Are you a business owner and will you be hosting a Christmas party for your staff or giving gifts to clients?
If you’ve answered yes, then it’s important to understand your FBT and Income Tax issues in the lead up to the festive season. Find out what your business should consider when hosting your annual Christmas party, entertaining and gift-giving to clients and your staff.
Christmas time entertainment up to the value of $300 for each employee is generally exempt from FBT. So throwing a party where the cost per head is less than $300 should escape the tax. This should also be the case where an employee’s spouse attends the function. So if, as a generous employer, you also give a gift to everyone, the party and the gift are considered separately for FBT. If each is less than $300, they are both generally FBT free.
1) Off-Site Christmas Party
If you hold your Christmas party off site from the business premises, they are exempt from FBT where the cost for the employee and their associate is each less than $300 inclusive of GST but no tax deduction or GST credit can be claimed. The cost of clients attending the party are not subject to FBT, and no tax deduction or GST credit can be claimed on their portion of the cost.
As mentioned above, benefits provided to employees at the Christmas function are considered separately when applying the $300 minor benefits exemption. For example, a Christmas party is held at a restaurant costing $220 per head, and at the same time employees are provided with a Christmas hamper (considered a non-entertainment gift), costing $150. Although the total cost is more than $300, the provision of both benefits will usually be exempt from FBT under the minor benefits exemption.
For the Christmas party expenses, the business will not be entitled to claim either a tax deduction or a GST credit. However, a tax deduction and GST credit claim should be available on the cost of the hamper as this is not considered to be “entertainment”.
(2) On-Site Christmas Party
Holding the Christmas party on the business premises on a working day is usually the most tax effective. Expenses such as food and drink (including alcohol), are exempt from FBT for employees with no dollar limit, but no tax deduction or GST credit can be claimed. However, where employees’ families (i.e. associates) also attend and the cost attributable to each associate is $300 or more inclusive of GST, there is FBT on the associates’ portion of food and drink, and a tax deduction and GST credit can be claimed on that portion. The cost of clients attending the party are not subject to FBT, but no income tax deduction or GST credit can be claimed on their portion of the cost.
Where the Christmas party is held on the business premises on a working day with only employees and clients attending, and only finger food or a light meal and no alcohol is provided, then the entire cost is tax deductible. There is no FBT and a GST credit can be claimed on the entire cost.
(3) Inviting the Family
You can opt to make your Christmas party a family affair. It can be a more inclusive experience and the ATO states the $300 minor benefits threshold applies per-attendee, not per-employee, which potentially means more FBT-free benefits.
Non-entertainment gifts provided to employees are usually exempt from FBT where the total value is less than $300 inclusive of GST. A tax deduction and GST credit can also be claimed. These include skincare & beauty products, flowers, wine, perfumes, gift vouchers and hampers as mentioned above.
Non-entertainment gifts given to clients and suppliers do not fall within the FBT rules as they are not provided to employees. Generally a tax deduction and GST credit can be claimed for these gifts, provided they are not excessive or overly valuable.
The provision of entertainment gifts has different tax implications (examples include theatre tickets, passes to attend a musical, live play, movie, tickets to a sporting event or providing a holiday). Where the cost for the employee and their associate is each less than $300 GST inclusive, FBT is not payable, and no tax deduction or GST credit can be claimed.
However, if the cost for the employee and their associate is each $300.00 or more GST inclusive, a tax deduction and GST credit can be claimed, but FBT is payable. The cost of any entertainment gifts provided to clients is not subject to FBT, and no tax deduction or GST credit can be claimed.
It is important that businesses maintain separate accounts in the general ledger for recording the above transactions to ensure that the correct income tax, GST and FBT treatment is applied.
We hope you enjoy the festive season and if you need some advice, don’t hesitate to contact your Vincents accountant.
Business Health Checks Help
A business health check is a valuable tool that gives you an overall view on how your business is travelling as well as identifying any strengths and weaknesses. Just as you visit your doctor and/or dentist for a check-up – it’s also important to regularly assess the health of your business.
In terms of the financial component of a business health check, it is useful to apply Key Performance Indicators (KPIs) and business ratios to be able to identify issues that exist in a business, including:
- gross profit percentages;
- average sales;
- percentage of new customers;
- wages to turnover;
- net profit to turnover; and
- sales per square metre of rented space.
On their own, these ratios and KPIs don’t mean much. When compared to other businesses via benchmark comparisons to previous performance or budgets, however – they can start to give you a good indication of what’s happening within your business. This can then lead to some insightful “what if” calculations.
Consider the following exercise:
First of all, analyse the current performance of the business:
- Annual sales – $1.8M
- Number of customers – 1,745
- Frequency of the visits – 5 times per annum
- Average sale – $206.30
Number of visits is calculated as 1,745 x 5 = 8,725
If the number of customers could be increased by 5%, the frequency of visits increased by 10% and the selling prices improve by 2%, what would be the result?
- Customers – 1,745 + 5% = 1,832
- Frequency of visits – 5 + 10% = 5.5
- Number of visits – 1,832 x 5.5 = 10,076
- Average sale – $206.30 + 2% = $210.42
- Projected annual turnover – 10,076 x $210.42 = $2,120,191
This is an improvement of $320,191 from the current annual sales of $1.8M.
There are a number of marketing strategies you could implement that may contribute to an improvement in the number of customers, customer visits and selling price, including:
- Revamping your website;
- Circulating a newsletter to customers and prospects;
- Increasing your social media presence; and
- Running customer information sessions.
Continuing on our example exercise:
Based on gross profit percentage of 35%, which would probably have increased, the business should have generated an extra gross profit from this activity of approximately $112,000 ($320,000 x 35% gross profit). There might be a few extra expenses that have been incurred in marketing activities – however the business should have increased its’ bottom line by around $100,000.
If you would like some assistance in preparing these types of calculations and implementing strategies for your business, please don’t hesitate to your Vincents advisor.
An Important Message
While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.