MIS & KISS – A Sign Of The Times
Time to read this article: 2.5 mins)
Two of Australia’s multi-million dollar Managed Investment Schemes (MISs) are in liquidation, partly because of a mistake by the Tax Office who wrongly* withdrew a key tax concession, there were two other factors that would have eventually lead to their demise anyway.
What Do Steroids and Tax Breaks Have in Common? (Answer: They’ll both kill you in the end!) The first of those two doom factors was the fact that MISs were expected to be profitable primarily because of a tax break – they didn’t have quite as good an inside run as a religion would enjoy in this country, but they certainly weren’t playing on a level playing field with others in the primary industry sector.
If you take steroids in sport, you enjoy an early and unfair advantage over your honest competition, but your subsequent organ failure tends to square the books with finality. So it was for the MISs. When their tax steroids were withdrawn, their poor underlying management and business model spelt doom. Abusing tax structures in business is never a long term success strategy.
Anyone who drives their business distracted by a focus on avoiding tax is destined for poverty or worse. We see too many small business operators who are so focused on paying little or no tax, that they succeed year in and year out – legitimately – by making no money!
Make a profit, pay taxes, invest the rest! It’s the only formula for wealth that works consistently!
Obfuscation: The second reason that the MISs failed, is one that appears time and time again as the press peel back the lid on the dealings of those who’ve failed in a spectacular enough fashion to make their pages: Complexity.
One MIS administrator described the “extremely complex structure” that he would need to unravel to determine the true state of affairs of the company. Another Administrator dealing with the $100m collapse of a whitegoods specialist revised his initial fee estimate from $600,000 to $1.2m citing the “incredible complexity of the companies’ accounts and their intercompany dealings”.
If a trained accounting specialist needs $1.2m worth of time to work out what was going on in that business, could the people running it have had any clue at all as to where they were and how they were doing at any point in time?
Warning Signs. If a business becomes so complicated that you can’t explain it to an intelligent 12 year old there is a fair chance that you don’t understand it yourself- and you can’t control what you don’t understand.
So here are a few simple rules:
- Keep your structures simple – draw a diagram if you have more than a simple company or trust & company arrangement and make sure they pass the “12 year old test”.
- Keep your reports (your dashboard) simple, and check them at least monthly against your Profit & Loss and your Balance Sheet. If there is any variance find and understand the cause immediately.
- Keep your focus on your cash. If it keeps going up, you’re probably OK; if it’s going down make sure you know why.
- Focus on attaining your target or ideal net profit before tax.
- Use the PAYG system of company tax as a motivational tool and scoreboard (this is a major point and if you’d like to know more about why, please email me.
*(“wrongfully” because the ATO retrospectively withdrew a key tax concession that made MISs attractive in the first place, then the courts reinstated it 3 years later – too late to save the MISs.)
