Tourist parks present a number of opportunities for those wishing to manage their tax bill, and in turn help grow their business. It's important tourist park owners are aware of their options at all stages of the tourist park life cycle in order to maximise after tax cash flow, keep legal and protect and grow wealth.
The top five areas ripe for improvement (also the most misunderstood) are:
- Business Structure
- Capital Gains Tax
- Fringe Benefit Tax.
Business Structure – Have I told you lately…
In an ideal world, a business would be structured right from the beginning to manage tax, provide a clean exit and maximise cash flow. Upon any changes to legislation, the structure would be re-assessed for any impact to any benefits available.
While there are a few blanket rules when it comes to structuring your tourist park, (sole traders, for example, aren't appropriate), it's important to remember that whichever structure you have should be regularly reviewed to make sure you're getting the most from it.
Trusts should be used with caution when operating businesses. Following the 2009 Bamford case, authorities focused more on targeting this type of structure. However, they certainly still have their place when used for the right purpose, that being asset protection.
Private limited companies (PLCs) are the most common business operating structure and the easiest to understand for suppliers, lenders, employees and investors (foreign and domestic). They are tax efficient and present fewer complications – and people tend to understand PLCs more than trusts.
However, you need to take care with what class of assets are owned by your trading company, especially for the purposes of asset protection and cashing out on exit.
Like the 2009 Bamford case for Trusts, corporations had a watershed moment of their own in 2001, with the introduction of the Corporations Act. Around the same time, our US counterparts introduced the Sarbanes Oxley Act. These two pieces of legislation were like a corporate governance good behaviour paper aimed at clamping down on some of the previous misdemeanours of corporations, with a particular emphasis on Director’s duties.
This may all sound scary; however, if you think of a business structure like a park vehicle that needs regular maintenance and you seek out experienced advisers to help you along the way, you should be on the right track. More importantly, if your trust is more than 8 years old and your company is more than 17 years old – having a professional adviser review the trust deed or constitution is essential.
Depreciation – Is your pool in the pool?
There are some large depreciation concessions available in the tourist park industry for all businesses – not just SMEs. There are specific rulings and case law that allow for accelerated depreciation for industry businesses regarding the acquisition of certain leisure assets (e.g. waterparks, splash-pads and pools, amongst others). Other industries either simply can't claim these assets or have to spread the deduction out over many generations (we’ll be releasing an article on family business soon – watch this space).
Depreciation concessions are especially attractive for small business owners in Australia (below $10 million turnover), who get access to even better depreciation rates (including asset pooling and immediate write off) than their larger business counterparts - on top of the special industry based concessions.
The upfront cash benefit available from accelerated depreciation allows tourist park owners to invest the savings to further grow the business and multiply value, retire debt, attract and retain the best staff or pay bigger dividends. The choice is yours.
Capital Gains Tax (CGT) – Keep calm and exit tax-free
Small business CGT concessions are among the most lucrative tax concessions tourist park owners can utilise. If you have a previous year, current year or predicted turnover of less than $2 million, or have net business assets under $6 million, you can claim Small Business Enterprise CGT concessions (subject to meeting a vast array of highly technical conditions, of course). As tourist parks tend to have high asset value but relatively low turnover, many are able to claim CGT concessions even if they don't see themselves as a small business.
Turnover and net assets are not always as simple as looking at your P&L or Balance Sheet. Careful planning and structuring is so often the difference – not the numbers. If you have a landlord - tenant style relationship (right of exclusive use) with your customers rather than a business style relationship (right to occupy), then proceed with caution.
During sale negotiations or while you are locked up in due diligence is certainly not the time to be contemplating complex tax outcomes or flying blind. When ready to exit, the ability to sell the business CGT free will affect the eventual sale price. Get early advice, in writing, and at the right time. These transactions will invariably attract the attention of the ATO and appropriately written, formal tax advice obtained at the right time is often enough for an ATO auditor to be comfortable without the need for a full-blown audit.
GST – It’s your choice
The most common use of GST concessions is through long-term tenants. However, GST legislation is inherently complicated, making these (in our experience) the least appropriately used concessions in the tourist park industry. Either the rates are applied incorrectly by staff at point of sale, or misunderstood by the person doing the GST return and filing with the tax office. Often, both are true within the same business. How many business owners out there expect their office staff to understand the intricacies of our GST system? Does anyone remember John Hewson and GST on a birthday cake? Look it up on YouTube, and then decide if expecting your office staff, or even your bookkeepers, to understand GST in all its intricacies is reasonable.
Unlike GST that is incorrectly paid or not paid on deposits, (which is a timing issue and a topic that could fill an article in itself), the saving under these concessions is permanent. It also seems to be common practice for park businesses to pass any GST savings onto the customer. Providing a GST inclusive rate was quoted to the customer, what the business does with any tax savings is completely at its discretion. However, make sure the point of sale entry is correct, because the tax invoice is key and needs to have the correct amount of GST disclosed.
These concessions aren't big ticket items like the first three, but they also aren’t trivial. For a business generating $200,000 in long-term income per year, the saving can be anywhere from $7,500 to $16,500. As with anything tax related, you need to be aware of the sting in the tail - particularly if you are spending significant sums on capital expenditure (capex) for your long-term tenants. Our experience tells us that your tourist clientele are usually the main consumers of capex budget, hence the higher tariffs. Even if this is the case, a little bit of forward planning goes a long way to getting the best outcome. Documentation, park policies and general business policies are key when justifying the claim.
Fringe Benefit Tax (FBT) – Are you remote?
Our final tip makes the top five because of the sheer number of businesses it applies to, rather than the amount of tax saving it could provide. In fact, quite often, it is the opposite and there is a FBT time bomb ticking away.
Tourist park owners tend to provide managers with free or heavily subsidised onsite accommodation and with good reason, as they need to be on call. This doesn’t necessarily make the free/subsidised accommodation tax effective. In fact, it is subject to the most outrageous tax on a pure percentage basis: Fringe Benefits Tax.
For the purposes of the FBT legislation, the Government assumes that every worker in Australia is on the top marginal tax rate. Therefore, to make sure that the national revenue office is in the same position regardless of whether the employee pays the expense from net of tax earnings or the employer pays it on their behalf, any Fringe Benefit provided to employees is taxed at the top marginal rate (which is close enough to 50%).
There are exemptions, however, and also better structuring of the employment agreement can make the concessional accommodation tax effective for both employee and employer. The main exemption is the remote area exemption. The City of Horsham, for example, is an area that you may not think of as remote. However, population measurements for these concessions are drawn from the 1981 census, when Horsham was much smaller. Therefore, it is classed as remote and qualifies for exemptions for accommodation provided by parks in Horsham.
Another option, even if you’re not in a remote area, is via negotiation with your employee. Creating a total remuneration package inclusive of accommodation, taxed at the employee’s marginal rate, will remove the need to pay FBT.
Think ahead and engage an adviser early
With any business seeking tax concessions, it's important to think ahead rather than react. That's why it's important to engage an industry-experienced adviser early. They can help you plan and minimise tax right from the beginning, preventing that last minute scramble just before the end of the financial year.
Contact one of the BDO Tourist Park team to find out more about our tax and advisory services for the tourist park industry.