Financial Statements represent a formal record of the financial activities of an entity. These are written reports that quantify the financial strength, performance, and liquidity of a company.
Financial Statements reflect the financial effects of business transactions and events on the entity. They include a balance sheet, a profit & loss statement, a statement of cash flows, as well as a statement of changes in equity. These are typically prepared by the accountant alongside the annual tax return for a company, trust, or partnership.
It is our protocol to prepare financial statements for companies, trusts, and partnerships along with the annual tax return unless very limited circumstances apply.
Here’s why:
- We have a duty of care to our clients, professional bodies, and the tax agent board to ensure that the tax returns we prepare are correct and of the highest possible standard. Financial Statements guarantee that the information contained in the tax return is correct and that balances are properly reconciled.
- The Corporations Act 2001 (Sect 1.5.10.3) suggests that “good business practice may make it advisable for the company to prepare financial reports so that it can monitor and better manage its financial position.” Ultimately, the ability to view your business position at a given point in time ensures you have the information that you require in order to make sound business decisions. Furthermore, almost all trust deeds require the preparation of formal financial statements.
- If the balance of the GST account is not properly reconciled, there could potentially be hundreds or even thousands of dollars of undiscovered, unclaimed GST owing by the ATO to your business as a result of an incorrect BAS lodgement that was never picked up. Conversely, GST owing to the ATO could go unnoticed which could potentially result in audits, fines, and hefty interest charges. (We have come across both scenarios many times!).
- A company director has a legal obligation to track and disclose the balance of any monies deposited into the company less any monies taken from the company and deposited into a personal bank account. The net result of these transactions is called the “director loan balance”. By law, this must be recorded and tracked each financial year. If director loan balances are not properly tracked there is a risk of an audit. This could lead to untaxed dividends and high personal tax that could have easily been avoided had the balances been properly managed through the preparation of financial statements.
- If you are going for any kind of personal or business loan and you run your business as a company, trust, or partnership structure, you will be asked to produce current and prior year financial statements. If you have not had these prepared each year along with your tax return, you could be up for a very expensive accounting invoice. This is because it is a great deal of work to prepare these retrospectively and because you cannot produce a current-year financial report without first preparing the reports for the prior financial years.
- If you ever want to sell your business or bring in partners/change structure, financial statements will be required to be produced for review. Potential investors will want comfort that the business has a high asset position and is therefore an attractive purchase.
- Fringe Benefits Tax can apply to both companies and trusts where employees or associates are obtaining benefits from companies or trusts without paying tax. Some common examples are: paying personal expenditures, taking loans without paying interest, using motor vehicles for private purposes, etc. Freshwater Taxation assesses your FBT exposure and mitigates the risk of paying the FBT tax rate of 47% (the highest tax rate!) when preparing your financial statements.
- There are also asset protection and estate planning considerations which we address when preparing your financial statements. By way of an example, if you are a high-risk director then you may not want assets in your own name. It is commonly overlooked that a loan from a director is a personal asset of the director and can be called upon if either of the following occurs:
- A director penalty notice is issued by the ATO to recover the superannuation guarantee.
- PAYG tax withholding or GST is owed to the ATO.
More information
Should you have any queries, or wish to discuss this further, don’t hesitate to send us an email or book a chat.
