Making tax less taxing

Tax management needs to be a 52 weeks-a-year commitment to be successful. 

 

Rather than being a ‘dirty word’, tax is the word least likely to cross the lips of the average Kiwi business owner – other than the week before tax is due to be paid; and often through the night before D-Day, when backup documentation appears to be playing hide-and-seek.

If a number of tax experts and the Ministry of Business, Innovation and Employment (MBIE) prove to be as successful as they are determined, then that situation is about to take a turn for the better in future years. Read on to learn how one company has a simple comparison to prove that integrating tax management into your business 52 weeks of the year, rather than one, is the way to success.

We also ask Peter Vial (CA), GM-Tax for the NZ Institute of Chartered Accountants, to demystify the latest changes to tax laws, which will apply to most companies and therefore impact on you, the owner manager.

 

“A company must prepare financial statements in accordance with the new requirements unless the company is exempt. ‘Small companies’ (having less than both $30,000 of income and $30,000 of expenditure) and inactive companies (those not required to file an income tax return) are exempt.  

“Some companies need to meet the higher standards required by the Financial Reporting Act 2013 and are not subject to Inland Revenue’s minimum requirements. These generally larger companies are required to prepare general purpose financial reports according to the standards set by the External Reporting Board (XRB).” 

To meet the minimum requirements financial statements must comply with the double-entry method and accrual accounting principles. Amounts may be disclosed using tax values, historical cost or market values.  

“So far, so good,” says Vial, referring to the April 2014 tax changes. “However, from 1 April 2015 a company will also be required to disclose the following:”

Interest expenses on loans made to the company by an associated person;

• Outbound loans and other advances made by the company to an associated person;

• Expenditure on services provided by an associated person;

• Expenditure on the rental and lease of land and other assets from an associated person, and

• Expenses for acquiring or using an associated person’s intangible property.

 

“The transactions are not required to be disclosed if the associated person is another New Zealand resident company, and the minimum requirements are available on the IRD’s website (www.ird.govt.nz),” says Vial.

“Later this year IRD is expected to consult on the minimum requirements that could apply to non-companies. As with all ‘things’ tax, the devil is in the detail and those affected by these changes should seek specialist advice.”   

 

Could there be a more specialist company than one which proclaims itself as ‘The Tax Masters – taming tax since 2003’. You might be tempted to dismiss it with a ‘yeah, right’. But once you understand its founder and director, entrepreneur and tax specialist, Ian Kuperus, is credited with coming up with the idea of the tax pooling system for the IRD in 2001 (when the IRD sought ways to reduce compliance costs for business) and won the EY Entrepreneur Award last year in the services category, you might shuffle a little closer.

Tax Management New Zealand (TMNZ) was indeed the first to offer tax pooling in 2003 and today remains a leading tax pooling intermediary. Kuperus’s tale is worth listening to. 

 

“Businesses do not have to pay provisional tax when Inland Revenue says they do. There’s a way for them to defer provisional tax payments to a more convenient time without incurring late payment penalties from IRD,” he says.

“Picture this: two rival car grooming businesses based in the Auckland suburb of Penrose. Let’s say one is called Superwash Car Services, the other Deluxe Car Cleaning. Both are small operations offering the same services at the same price. Both face the same financial pressures at the same times of the year.

“However, they are in good health overall. So good, in fact, both are on the verge of branching out to Botany. There’s a slight conundrum, though: Inland Revenue is expecting a provisional tax payment from each business. 

 

“Normally this would not be a problem, but it just so happens the due date for this payment coincides with a time of the year where business is slower than normal. Each has money available – but not enough to cover the cost of expansion and pay their provisional tax. It’s either one or the other.

“Superwash plays it safe by delaying its plans to open in Botany for three months. The fear of being charged for the use of money interest (UOMI) of 8.4 percent and late payment penalties of up to 20 percent per annum is enough to ensure it pays its provisional tax without fail.

“Deluxe, on the other hand, opts for a different course of action. It takes advantage of TMNZ’s ‘Tax Finance’, which allows it to defer its provisional tax payment to a more convenient time without incurring UOMI and late payment penalties. This means Deluxe can use the money it would have otherwise paid to the IRD for provisional tax to open up shop in Botany.

 

“By the time Superwash does the same three months later, it’s too late. Deluxe has already established itself as the numero uno car grooming operation in the area, capturing the market and making more than enough money to pay the provisional tax it owes.

“Basically, TMNZ pays provisional tax to the IRD for you, and you repay us at an agreed upon date in the future. Businesses only pay the tax bill which is due at the end. There’s no need to pay back the finance, if you don’t end up needing all the tax,” says Kuperus. 

“This, we believe, is cheaper than many other financing options – rates start below six percent – and does not affect existing credit lines. Neither is any credit approval or security required.”

 

If you are concerned that it all might be a tad too rich for your blood, certainly at this stage of your company’s business life, then the MBIE’s one-stop-shop for advice (www.business.govt.nz) is the place to go.

Says Kim Truscott, acting manager: “If businesses are struggling with tax obligations and need some clarity, we encourage them to check out our Tax and Reporting section. It is one of the useful places; packaging information in one place from different government agencies like Inland Revenue, ACC and the Companies Office.

“The Tax and Reporting section is split into three areas to help businesses get where they want to go, faster – company and financial reporting; business and tax levies; and employer deductions.

“If SMEs want to keep up to speed on legislation that may affect them, they can subscribe to our Business Insider e-newsletter. The e-newsletter is published monthly by Business.govt.nz and gives a summary of any changes coming out of government and advice for SMEs on what this means for them.”

Truscott adds that in the past few years interactive tools such as business health checks, online training, templates and calculators have been added to help. Basic templates can also be accessed, to assist with creating a business plan or even adding figures into a calculator to find ways your business could save money – it’s all there to help.

 

Help, with a turbocharged V8 ‘H’ is what Margaret Holmes and her ample ‘pit crew’ of CAs at Engine Room Chartered Accountants is all about. In keeping with the themes adopted by this largely female-powered company are their service packages to match the needs of businesses at all stages of their evolution: ‘Fuel Efficient’ from $350 a month; ‘Cruise Control’ from $500; and the top-of-the-range ‘Turbo’ from $900 a month.

“We work extensively with SMEs,” explains Holmes, “providing services from GST preparation through to annual accounts and tax returns, and everything in between and beyond. 

 

“As businesses start to show post-GFC growth, one of the biggest issues we are encountering is a failure to anticipate increasing tax liabilities. At the Engine Room we see paying tax to be a good thing – it means the business is profitable, providing business owners with a return on their investment, over and above a fair wage.

“Business owners need to be careful to not overcomplicate business structuring when managing their tax affairs,” she says. “Advisers recommending multi-tiered ownership structures often result in increased professional fees for limited long-term benefits.

“And as business profits increase, many SMEs are falling into the company provisional tax net again, which needs careful management. If this is not anticipated early enough the business can be subject to penalties and interest on unpaid provisional tax, often dating back prior to the owner knowing the business is making a profit. (Profits earned at 31 March 2014 need to have tax paid on them as early as August 2013.)

“There is nothing worse for a client than getting a tax bill they haven’t anticipated,” she says.

Xero gives the Engine Room the ability to be more involved in monitoring the performance of their clients’ businesses. Clients on monthly service plans know they are regularly keeping an eye on performance, meaning they can anticipate what additional funds would be needed to meet tax liabilities.

“The Inland Revenue assumes profits are spread evenly, but often they cannot be correctly calculated until the completion of, say, a construction project,” says Holmes. “Throw in retentions and often the cash needed to pay tax is 12 to 18 months away. Having good job management systems to complement the information provided by Xero is key to these businesses.”

 

It’s not just the jeans-wearing culture, but their general approach and skills in helping SMEs “free of the clutter that often sits with professionals”, which leads to the claim the local RightWay model has revolutionised the accounting world with its unique approach. So much so, that CEO Greg Sheehan was recently asked to speak to groups of accountants here, in Australia and the US “to share their secret”. 

“RightWay was born around the mantra ‘start with what the customer wants, and work backwards’,” he says. “We have always felt we could best prove we know how to grow a client’s business, by demonstrating that we are clearly growing our own.”

Sheehan sees many business owners coming unstuck over the basics – for example, tax planning and cashflow to pay tax. 

“That shouldn’t ever need to happen. Good cashflow planning is critical to running a business and paying the tax is just one of the things that should be baked into the cashflow.”