The Rise of Part-Time Executive Solutions
The way in which we work is fundamentally changing. Have you noticed?
Roles are changing, reporting lines are changing, technology is driving efficiencies; everywhere you look in business today things are changing. In this article Chris Baring-Gould explains the trend towards outsourcing C-Suite [Executive] functions and what that means to businesses and their future.
- Why do you think we’ve seen a rise in outsourced part-time resource solutions?
This is a great question. The answer, I believe, is driven by society’s constant progress towards sophistication in the way we live and work. The two key drivers are the increasing use of technology and the specialisation of labour. Technological progress increases productivity, which in simple term means it replaces the mundane, repetitive work that we humans once performed. As society and work become more sophisticated, we become specialised provider of skills.
As a result, we find businesses can now acquire specialised human skills for a particular time frame. Skills and specialised labour then, become resources in a “just-in-time” economy that operates continuously, hence giving rise to the trend of outsourcing what is “not core to a business”. The trend in accounting now is towards “continuous accounting”, not a fast end-of-month close in 1 day, but a financial close every day, so that a business can access its financials in real time and instantaneously.
- If a business is interested in offering a part-time resource solution what is the best way to work out the pricing?
There is no such thing as a “right price”, as price settles on the demand and supply of a product or service. However, there are some common-sense guidelines. Businesses are also prepared to pay a premium for on-demand quality services. When you combine an on-demand service with something that is of value to your clients, i.e. your point of difference to others, you can price your service at a premium to market.
- What is your advice about managing conflicts of interest between clients, for example, working for 2 clients who are competing with one other?
Be upfront and honest with both your clients and tell them that you cannot advise them in certain areas where conflicts of interest arise. You may even have to consider declining an engagement with one client in order to protect your integrity and avoid all doubt of conflicts of interest.
- What are the benefits to businesses of having access to an external business resource, for example, a CFO?
SMEs, in general, cannot afford full-time CFOs until they become large enough and have the activity and complexity to need one. Our experience at the CFO Centre is that SMEs up to $50 million in revenue turnover do not need a full-time CFO. A part-time CFO makes financial and business sense to SMEs, as they are getting the experience and skills of a finance executive for a fraction of a full-time CFO. All SMEs have growth ambitions, and at some stage of their journey, business owners want to exit their businesses at valuations that are many multiples of their investments. Part-time CFOs can help business owners plan and achieve their business and wealth creation ambitions during this time, provided there is sufficient time to implement these plans.
- Can a business outgrow their need for an external resource, for example, a CFO?
Yes, it can. When a business becomes large and complex and requires an executive to exercise a finance leadership role regularly, this is when you know you’ll need a full-time CFO.
- What other functions are suitable for a business to outsource?
In professional services, just about anything, from HR, IT, marketing, legal, and yes, even C-suite executives. The professional outsourcing trend in America is moving towards the 60% of the C-suite workforce. Work then becomes portfolio and project-based, that is, you service many clients as a portfolio rather than work for one employer. This gives the business the flexibility to expand and contract its workforce in line with market conditions.
- We’ve seen some fundamental changes recently so what's next?
This is a hot topic that is currently unfolding. I believe as professional services providers, we’ll need to become more flexible and sensitive to fulfilling the needs of our clients. I also believe we’ll need to collaborate with other outsourced professions working on the same client project, which can be challenging for project leaders! Working from home, or really anywhere, will become the norm.
I believe business will evolve to a “hub” and spoke model – core business at the hub, and spokes for non-core support infrastructure. Think about your smartphone. If you have an Apple or Samsung, the apps on your phone are created by independent app providers to both Apple and Samsung. This is specialisation at its best. Apple and Samsung provide the technological platform (their core business) for the apps to work on their phones. They don’t have to own the apps or the app providers.
- What is your advice to a business that is considering looking at an outsourced solution for their needs? What do they need to look for?
Be clear about what your needs are, and what your “pain points are”. I have experienced many occasions where business owners struggle to articulate their problems, which is not surprising as they are very close to their day-to-day operations. As a part-time CFO learning about their business, I learn to be a good listener first, before diagnosing their financial or business problems. I use a diagnostic framework to help me do this so that when a potential client is describing problems, I have a mental picture of what the issues are and where they reside. Then, we can have a conversation about how to solve the problems, which is often what the clients want to hear!
Thank you to Chris Baring-Gould, Principal, The CFO Centre
Tax news, views and clues February 2018
ATO guidelines:
Profit allocation within professional firms
The ATO has become aware that its guidelines on Everett assignments and the allocation of profits within professional firms are being misinterpreted for some higher-risk arrangements, including the use of related-party financing and self managed superannuation funds (SMSFs).
The guidelines have been suspended from 14 December 2017 to allow the ATO to consult with stakeholders on replacement guidelines.
Anyone considering new arrangements beginning after the cut-off date should contact the ATO to discuss the arrangement risk profile and the possibility of a private ruling.
Arrangements beginning before the cut-off date that comply with the guidelines and do not exhibit high risk factors shouldn’t require action, but arrangements with high risk factors may be subject to ATO review.
TIP: The ATO encourages anyone who is uncertain about how the law applies to their existing circumstances “to engage with us as soon as possible”.
Housing affordability measures
now law
Legislation has been passed to implement the 2017–2018 Federal Budget housing affordability measures. The following will start on 1 July 2018:
- the First Home Super Saver (FHSS) Scheme, which allows individuals to use specific amounts from their super to buy or construct a first home; and
- the option for individuals aged 65+ to make “downsizing” contributions of up to $300,000 to their super from selling a home they have owned for at least 10 years.
TIP: An exemption from meeting the FHSS Scheme “first home” requirement will be available for people suffering financial hardship. “Financial hardship” criteria are likely to include circumstances where someone has limited savings, is currently renting and had a past interest in a home that was in a cheaper real estate market or when the person was in a relationship that has since broken down.
Fringe benefits tax: employees’ private use of vehicles
The ATO has issued guidance for employers on determining an employee’s private use of a vehicle.
Draft Practical Compliance Guideline PCG 2017/D14 should provide more certainty and transparency about the circumstances where the ATO won’t apply compliance resources to investigating whether private vehicle use meets the car-related FBT exemptions.
Eligible employers who rely on this guideline won’t need to keep records to prove that an employee’s private use of a vehicle is minor, infrequent and irregular.
TIP: The guideline includes specific eligibility conditions for employers and their employees’ vehicle use. Talk to us about whether the new guidance applies to your FBT circumstances.
Tax consequences of trust vesting
The ATO has issued a long-awaited ruling on trust vesting, including changing a trust’s vesting date and the CGT and income tax consequences of vesting.
TIP: A trust’s “vesting date” is the day when the beneficiaries’ interests in the trust property become fixed. The trust deed will specify the vesting date and the consequences of that date being reached. Vesting does not, of itself, ordinarily cause the trust to come to an end or cause a new trust to arise. In particular, the underlying trust relationship continues after vesting while the trustee still holds property for the takers.
The key points in the draft ruling are that:
- before vesting, it may be possible to extend the vesting date (by applying to a court or by the trustee exercising a power to nominate a new vesting date);
- it is too late to change the vesting date once it has passed (and the ATO says it is unlikely that a court would agree to do so); and
- continuing to administer a trust in a way that is inconsistent with the vesting terms can have significant CGT and income tax consequences.
Disclosing business tax debt information to credit agencies
The Federal Government has released draft legislation and a draft legislative instrument that, when passed, will authorise the ATO to disclose a business’s tax debt to registered credit reporting bureaus where the business has not effectively engaged with the ATO to manage the debt.
The draft legislation intends to place tax debts on a similar footing as other debts, to encourage timely payment or engagement with the ATO for businesses that want to avoid having their debt information affect their creditworthiness. Disclosure to credit reporting bureaus will only be permitted if the ATO has given the taxpayer at least 21 days’ notice beforehand.
Taxing employee share scheme dividend equivalent payments
The ATO has made a new determination that dividend equivalent payments made under an employee share scheme (ESS) are assessable to an employee as income when they receive the payment for or in connection with services they provide as an employee.
A “dividend equivalent payment” is a cash payment to an employee participant and beneficiary an ESS funded from dividends on which the trustee has been assessed in previous income years because no beneficiary of the trust was entitled to the income at the time.
A trustee that makes a dividend equivalent payment under an ESS must withhold an amount from the payment, even though the trustee is not the employee’s employer.
TIP: The ATO offers a safe harbour from such payments being treated as income under specific circumstances. Get in touch with us to talk about whether your situation makes you eligible.
The new determination applies to dividend equivalent payments paid under the terms and conditions attached to ESS interests granted on or after 1 January 2018.
Superannuation integrity changes
The Government has released a consultation paper and exposure draft legislation to give effect to the following superannuation taxation integrity measures it announced in the 2017–2018 Federal Budget:
- the non-arm’s length income (NALI) rules in s 295-550 of the Income Tax Assessment Act 1997 for related-party superannuation fund transactions will be expanded from 1 July 2018 to also include expenses not incurred that would normally be expected to apply in a commercial arm’s length transaction (eg reduced interest expenses, brokerage, accountancy fees or legal costs); and
- a member’s share of the outstanding balance of a limited recourse borrowing arrangement (LRBA) will be included in the member’s “total superannuation balance” for new LRBAs entered into on or after 1 July 2018.
The measures are designed to ensure that related-party transactions with super funds and LRBAs can’t be used to circumvent the reduced contribution caps that apply from 1 July 2017. The changes should generally not affect LRBAs entered into with unrelated third parties for commercial rates of interest (and other expenses).
Guidance for SMSFs on transfer balance reporting
The ATO has released further guidance on when SMSFs need to report events affecting their members’ transfer balance accounts (by making a transfer balance account report, or TBAR) for the purposes of the $1.6 million pension cap.
From 1 July 2018, SMSFs that have any members with a total superannuation balance of $1 million or more must report events impacting that member’s transfer balance account within 28 days after the end of the quarter in which the event occurs.
SMSFs where all members have total super balances of less than $1 million can choose to report events which impact their members’ transfer balances at the same time that the fund lodges its annual return.
The guidance also covers reporting requirements for retirement phase income streams and commutations (including commutation authorities).
Clients should not act solely on the basis of the material contained in this article. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. This article is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.