Financial reporting has been a costly and messy business for many business owners in the past. Times are changing in NZ from #1April2014 . If your turnover is less than #30million dollars per year and the assets you own cost you less than #60million dollars (and don’t ask us how they came up with those figures!!) you are in to #Win Find out more from Accounts Online Limited Plus there might be other ways we can help you. www.accountsonline.co.nz.
If you sell a personal item on Trade-me there are no tax implications for you. But if you have got into the habit of buying items with the intent of selling them for a profit, then you must declare the income and the costs associated with those deals and pay tax on the gain (profit). Example: If you buy an item for $40 and on-sell it for $100, then you must pay tax on the $60. If you also paid for the postage (say $10), then you can deduct that from the $60. The simple arithmetic looks like this: $100-$40-$10=$50
The $50 you must share with the tax man in your annual tax return. Don’t get caught out as the IRD will eventually catch you and then you will have find tax plus the penalties for not declaring it earlier.
Apart from a few exceptions any costs you incur to run the business will be tax deductible. For example if you decide a BMW is the type of car you need to run your business, the IR (Inland Revenue) cannot insist you buy a 2nd hand ute. Some costs like insurance can be a little tricky because depending on when you pay them, the cover may extend into the next year, so in that case part of the cost will have to be spread. A tip is to get your policies in line with your financial year. However, if the cost is of a personal nature or getting a business going this is where you could come unstuck. Here are some examples:
- Travel from to work from home and back
- Normal dress wear is not deductible unless it is for protective purposes, like safety boots or overalls.
- Going out to the pub with your mates after work
- Optician glasses, unless they are for protection purposes
- The cost of taking your partner on an overseas business trip unless they are actively involved in the business.
- These types of expenses should be charged to ‘Drawings’.
- The cost related to setting up a business including forming a company, these are all classified as formation costs.
- Money you pay to repay a hire purchase, finance lease or other loans should be charged to the liability accounts.
- The costs relating to buying new equipment or machines including the travel to inspect and install it. These should go to fixed asset codes
There is a slight twist with the last one above because you can claim that cost as an expense, but it happens on the drip feed and that drip feed process is called in accounting terms “Depreciation”. In other words it is simply spreading the cost over a number of years. Realise this is not for your benefit, it’s just the way you have to play the game.
When Using Your Home for Business
If you run your business from home the tax law allows you to claim a certain percentage of your home expenses as a business expense. These will include:
- Rates (Rent if you don’t own)
- Interest on Mortgage
- Repairs and Maintenance
- Depreciation on carpets, furnishings in the rooms used for business
- Business uses the garage can also be included as part of the area used for business.
It is a good idea to keep a permanent record of the calculation you perform to work out the use you are making of your own home. Do this by measuring the total house and then measure the area occupied and used regularly by the business. This might include hallways, toilet, meeting areas and part of the kitchen.
Unless you keep records to show the contrary, IRD allows you to claim 50% of the phone rental for business if used part for private and business, so long as the business element is reasonably significant.
Farmers who live and work on the farm can claim 100% of telephone as business.
This is quite a difficult one and you might want to go to the IR web site and download the IR268 guide. http://www.ird.govt.nz/forms-guides/number/forms-200-299/ir268-guide-entertainment-expenses.html As a simple rule of thumb if you provide food and drink in the town where you live then only 50% of the cost is deductible. Which simply means your share is considered a personal expense.
Interest paid in running a business is generally tax deductible. However, be careful. However, if it relates to money borrowed for real estate transactions get expert tax advice.
Don’t try paying yourself an expense allowance to cover incidental business expenses. That sort of expense does not wash well with the IR, they much prefer actual expenses. And because we live in a self-assessed tax environment at the end of the day you are personally liable for your deductions, not your accountant. So it is prudent to err on the side of conservatism.
If you need cash for parking meters, try and keep some change in your car or use your credit card or telephone.
As must as possible pay your expenses out of the business bank account, not from personal savings as that will only create extra work.
Chapter 1: So, why are you in business?
By Mal Warwick and Ben Cohen
Excerpted from Values‐Driven Business: How to Change the World, Make Money, and Have Fun. Berrett‐ Koehler Publishers, 2006. Copyright © 2006 by Mal Warwick and Ben Cohen. All rights reserved.
Living a life of purpose and fulfillment
Perhaps you run a business of your own. For years, you’ve been working impossible hours, neglecting family, friends, and the activities you really enjoy.
Maybe you’re convinced that a business shouldn’t have to treat customers and employees as expendable, ignore the needs of the community where it’s located, or pollute the air and water.
Or maybe you’ve been working for a company that’s making use of few if any of your talents. You’re a cog in someone else’s machine, and you don’t get the respect you deserve. Yet you’ve plugged away, year after year.
Questions about the purpose of life and the meaning of work are certainly not unique to people in business. But they take special shape in the business world. The circumstances that so often lead people in business to wonder about life’s meaning are themselves special.
For one thing, business is commonly regarded in our time as a way to pursue the accumulation of money, pure and simple. Loud voices in the business establishment, in academia, and in government insist that’s so. Sometimes they go much further, asserting that making profits is the only legitimate purpose of business.
This view gained prominence in the 20th Century. In a typical business, it’s now often felt that life is life, and business is business. Whether you’re an employee, a manager, or an owner, you’re expected to draw a sharp line between the two. And if you exercise authority over others—as a supervisor, manager, executive, or owner—the prevailing logic of business implies that you must reinforce this schizophrenic mindset by requiring it of those who work for you.
Why does business have to be exclusively about making money? Who says so, anyway?
Why can’t work be pleasant and rewarding? Why can’t it be fun? Indeed, why can’t we be passionate about our work, not just every once in a rare while, but most of the time?
Why can’t business seek to make positive contributions to society—even if a particular decision isn’t based on the least‐cost solution?
Why can’t employees be treated with genuine fairness and respect?
Why can’t companies contribute to the health of the communities where they do business? In fact, why can’t business help narrow the inequities in our economy rather than increase them?
Why can’t business recognize that the resources of our planet are limited, and that unending growth will lead only to catastrophe for the entire human race?
In fact, there are hundreds of businesses that are based on the belief that a company can answer some or all of these questions in the affirmative.
Most Americans believe there is a spiritual dimension to their lives as individuals. When a group of people get together as a business, does that spiritual dimension simply disappear? We think not. The spiritual law of “as you give, you shall receive . . . as you sow, so shall you reap” can work just as well in business as in a person’s life. Take ShoreBank, for example.
ShoreBank: The little bank that could
Founded in 1973, ShoreBank (www.shorebankcorp.com) is the nationʹs first and leading community development and environmental bank. With headquarters in Chicago, it has banking operations in Detroit, MI; Cleveland, OH; Ilawaco, WA; and Portland, OR. ShoreBank invests in people and communities to create economic equity and a healthy environment. The firm considers itself a triple bottom line company that equally values profitability, community development, and conservation.
ʺOur job is to free the energies and resources of our customers,ʺ says Jean Pogge, senior vice president of mission‐based deposits. Most of those customers are low‐wealth members of African‐American communities. The bankʹs home base is 20 minutes south of Chicago, in a community that experienced rapid racial change in the late 1960s and
early 1970s. ʺThe area was red‐lined. There werenʹt any loans being made here at all,ʺ says Pogge. ShoreBank purchased the failing local bank and turned it around in 18 months.
ʺWeʹve proven that when you understand particular areas and needs, you become the bank of choice,ʺ says Joel Freehling, manager of triple bottom line innovations at ShoreBank. ʺBy focusing on places that are often ignored by corporate America, we’re in a position to really help people and be seen as a boon to the community. They support us as we support them.ʺ
ShoreBank provides loans to those who wish to revitalize neglected houses or multi‐family buildings, or build on abandoned lots. It also lends to nonprofits with capital needs, including churches, civic‐oriented organizations, and neighborhood groups. ʺDue to the destructive nature of the racial change process in the late 1960s, the South Shore community of Chicago would probably have ended up as just another blighted neighborhood with abandoned lots if ShoreBank had not shown confidence in the future of the community by making loans,ʺ says Pogge. ʺNow, itʹs a vibrant community thatʹs very mixed‐income, with people ranging from Section 8 renters to very wealthy people.ʺ
Promoting conservation and environmental improvement is an integral part of ShoreBank’s work, accomplished both through its intrinsic efforts to support local people in restoring neighborhoods, and through the incentives it provides residents to incorporate energy‐saving elements into their renovations. ShoreBank provides free energy‐efficiency evaluations to help loan recipients understand how to reduce utility expenses and improve the comfort of their homes and offers an ENERGY STAR®‐ qualified refrigerator for those who invest in more than $2,000 worth of energy‐ efficiency work. ʺWeʹre hoping to create converts to the energy conservation movement,” says Pogge.
ʺFor us, there is no tension between community development and profitability,ʺ she adds. ʺWe believe that trying to do both makes us better at both. As we increase community development or conservation output, we make more money.ʺ
ShoreBank’s Chicago branch, for example, which accounts for 95 percent of the companyʹs assets, is a $1.8 billion institution. In the last three years, its return on equity has been over 15 percent, which puts ShoreBank in the top tier of all banks with assets between $1 billion and $10 billion – in terms of return on equity. In 2004, the bank did $311 million in new community development loans and $150 million in new conservation loans. That same year, the bank’s losses were one‐half of 1 percent. Those are exceptional figures.
The company also requires every employee to understand and implement the ʺtriple bottom lineʺ concept. Each person has performance goals relating to financial performance, community development, conservation, customer satisfaction, and employee satisfaction.
For example, folks who run the bankʹs statement processing division met their conservation goals by sending an e‐mail out to colleagues soliciting used cell phones and donating them to womenʹs shelters. A customer service representative started a printer‐cartridge recycling program for the entire bank. This year, with the squeeze on margins in the banking industry, employees were asked to come up with cost‐saving ideas. Employees responded with an idea to cut back on paper usage.
ʺAnybody interested in combining its financial and social bottom line has a long‐ term perspective and stay the course,ʺ says Freehling. ʺIt requires patience and diligence, and it takes more work. People have to be committed. Itʹs harder to do business like this because markets are not set up to make it easy. For example, we were trying to decide what kind of de‐icer to put out in front of our building. We knew we could go to the local hardware store and buy it off the shelf, but if you are really concerned about the environment and the community, then you have to take more steps and do more research on what the most appropriate product is.
ʺItʹs important to create networks,ʺ he continues, ʺbecause a lot of these types of solutions come from trying different products. There are not a lot of places where you can go and ask ʹWhat did you find that worked well, was cost‐effective, and socially and environmentally friendly?ʹʺ
Pogge adds, ʺTo be a triple bottom line company, you really have to make all three bottom lines equal. Itʹs not an add‐on. Corporate giving is not business. The social values have to be core to your operations. We do community development and conservation loans, and we make money doing it.ʺ
For ShoreBank, then, values came first. They still do. Wild Planet Toys exhibits the same emphasis on values in a completely different industry.
Wild Planet Toys: “The line you won’t cross”
Wild Planet (www.wildplanet.com) makes innovative toys that appeal to both parents and kids. The companyʹs products are designed to spark childrenʹs imaginations and provide positive play experiences. Wild Planet’s most popular brand, Spy Gear™, offers all sorts of accoutrements necessary for the budding young espionage professional, including Night Vision Goggles that feature small flashlights on the sides of an edge‐lit lens (perfect for investigating the backyard after dark), and a Laser Tripwire that sounds an alarm in oneʹs room when its invisible beams are broken by intruding younger siblings or the pesky family dog.
ʺWhat makes Wild Planet a social enterprise is how we started and the values to which we adhere,” says Jennifer Chapman, chief operating officer. “Most toy companies get started when someone has an idea for a product and needs a means to bring it to market. Wild Planet did not start with a product; we instead began as a group of people with similar values, a shared vision, and the desire to develop a unique corporate culture.”
The company was founded in 1993 on the principles of integrity, imagination, openness, and respect. “We had a set of ideas about how we wanted to help kids experience the world,” says Chapman. “We wanted to give them toys that fostered play and imagination, respected their intelligence and creativity, and met them where they were.” The company was also committed to treating workers with dignity, encouraging open and effective communication, and being involved in the community, particularly through partnerships with children.
Wild Planet reaches out to kids not only from the toy aisle, but also more directly through efforts such as the companyʹs Kid Inventor Challenge™ and Inventor Invasion™ programs. Kid Inventor Challenge is Wild Planet’s way of championing children and showing that kids’ opinions are important. The annual contest invites children from across the country to submit their ideas for new toys. From the thousands of entries received each year, Wild Planet chooses 100 kids to serve as toy experts for 12 months, and makes one of the top ideas into a real toy, which is then sold in stores worldwide.
The company has selected several of the resulting toys for full‐scale production, such as a whimsical talking alarm clock and a playful hand strap that makes colored light beams emanate from the fingertips. ʺThe kids receive royalties for every unit of their product sold,ʺ notes Chapman.
The Inventor Invasion project is a smaller‐scale program, designed specifically for low‐income and at‐risk kids in Wild Planet’s local community in San Francisco. Wild Planet employees host weekly invention sessions through a partnership with a local after‐school center for the period of a semester. The initiative has proven successful in encouraging creativity, exercising critical thinking skills and boosting the self‐esteem of its young participants. “Our contribution of time and teaching has a lasting positive impact on the children,” says Chapman.
For employees, the company encourages above all a fun workplace in which people have the opportunity to get to know one another through group activities. Workers enjoy flexible hours, generous vacations, early quitting time on Fridays, and four paid hours each month to volunteer at a local charity of their choice. ʺBecause of the positive way we treat people, weʹre a sought‐after employer in the toy industry,ʺ comments Chapman.
And that reputation goes around the globe. With 30 of his 90 employees in Hong Kong, company founder Danny Grossman is particularly committed to helping promote, both in‐house and in the industry more broadly, the International Council of Toy Industryʹs code of conduct, which rallies for fair labor treatment and healthy work
conditions in manufacturing facilities. ʺGiven that all of our toys are produced in China, this is an issue about which the company is particularly passionate,ʺ says Chapman.
Wild Planet sells its toys in mass and specialty markets in more than 50 countries, which, in the United States, means its toys can be found in places such as Target and Wal‐Mart. ʺWe made a decision that we wanted our toys to be available to a broad group of kids. We didnʹt want to make products just for the elite,ʺ Chapman says. ʺMy advice to any social ventures is that you clarify your priorities early on, and determine where the line is that you wonʹt cross. You donʹt have to be perfect. Just be bold – embrace change and take chances.ʺ
Both ShoreBank and Wild Planet started small, of course. By the standards of most people in business, neither one is small any longer. So you might well be wondering whether your company could adopt similar policies and practices and still make money.
Can you make money in a values‐driven business?
If you run your business in accord with your personal values, will you make money? Or will you simply drive yourself into bankruptcy in a self‐indulgent attempt to do right by everyone in sight?
After all, everyone you turn to—your lawyer, your accountant, your Uncle Fred who owns a dry‐cleaning shop—is probably telling you that the secrets to running a successful small business are to keep costs as low as possible and never take your eyes off the cash. They’re right, of course—up to a point. And that’s the point at which the
principles of values‐driven business depart from the conventional wisdom.
Values‐driven business is based on five fundamental premises:
- Employees work more productively and pay more attention to a company’s profitability when they’re working for something they believe in, are treated with respect, well‐paid, and receive a share of the profits. They also tend to feel better if the owner or top managers aren’t making out like bandits by comparison.
- Customers are more loyal and willing to forgive errors when a company’s dedication to quality products and services is obvious and when they deal with highly motivated employees – especially when employees are allowed to take the initiative to apologize and make things right.
- Consumers often show a strong preference to do business with companies that demonstrate a commitment to their community and to the environment—and are sometimes disinclined to patronize those who don’t. Values alignment between a company and its customers builds loyalty. Customers are more forgiving of mistakes and less apt to buy from a competitor when its goods are on sale.
- Your business will be better prepared for the future and more likely to survive its inevitable disruptions if you build stronger relationships today with your employees, your customers, your suppliers, and your community. And the planet we share will be more likely to survive the ravages of the human race if you do everything in your power to lighten your footprint on the environment. In other words, to use the contemporary jargon, your business will be more sustainable.
- You—as the company’s owner or manager—will live a less stressful and more fulfilling life if you look on your employees, customers, suppliers, and the community as partners rather than adversaries.
No doubt you can point to many exceptions to each of these statements. Highly profitable sweatshops where employees are coerced into working hard. Companies that manage to sell defective products year after year. Customers who return again and again to businesses with a well‐known history of exploiting their employees, destroying communities, or polluting the air and water. There’s no denying that today’s business climate, with its single‐minded focus on profits, encourages bad behavior of all sorts. Increasingly, though, companies that rush after short‐term gains to the exclusion of all other considerations are having a hard time. From the biggest businesses to the smallest, they’re learning that the expectations of employees, consumers, and communities alike are evolving. Business as usual doesn’t work so well anymore. Of course, it’s still possible to make lots of money without adopting socially responsible policies and practices. But that’s becoming tougher as time goes on.
You might be wondering about those nasty articles that seem to crop up in the business press from time to time. They make the case that socially responsible business practices are misguided because they increase costs and reduce profits. The implication of many of these articles, and of their counterparts in the academic business literature, is that socially responsible businesses are uncompetitive.
Fortunately, the critics of socially responsible business, loud and well‐connected though they may well be, have many counterparts on the other side of the argument. In fact, a prize‐winning 2004 “meta‐study” of 52 inquiries into the relationship between corporate financial performance and corporate social performance across industries found a statistically significant correlation between the two. Investment advisory firms such as Innovest, a company that evaluates securities for mutual funds, pension funds, and other big investors, have reached similar conclusions in recent years. Socially responsible policies and practices are good for business—and well‐informed investors are waking up to this reality.
Our own experience confirms these findings. In the early days of Ben and Jerryʹs, Ben spent a lot of time trying to convince his board that engaging in activities that were of benefit to the community didnʹt detract from the company’s for‐profit business mission. Later, he spent a great deal of time trying to make the media understand that the socially beneficial things the company was doing weren’t just marketing activities designed to increase business. Much later, when Ben and Jerryʹs had become a $270 million business, there was no doubt in anybodyʹs mind that the company’s social activities drove the business and generated sales and profits. At Mal Warwick & Associates, the experience was similar. It took years for the company’s stakeholders to understand that the firm’s socially responsible policies and practices weren’t just products of Mal’s whims but integral to the success of the business.
Still, you might well be asking yourself whether any of this is really relevant to your own challenges in starting or running a small or mid‐sized business. Theory aside, does it really make sense for you to build your business around your values?
The pros and cons of bringing your values to work
So, is values‐driven business the answer to all your prayers? Are you guaranteed of success if you listen to your customers, share profits with your employees, supportPage 8 your community, respect the environment, and are nice to little children and small, furry animals?
Well, obviously, it’s not so simple as that.
After all, embedding your values in your business does sometimes require additional investment. It may mean that you’ll forego short‐term profits for the sake of greater prosperity over the long haul. That’s called an investment. It requires patience. It means that you have to be prepared to listen to employees you might prefer to ignore. Not to mention unreasonable customers! Sometimes life may seem a whole lot easier if you close your mind, stop up your ears, throttle your conscience, and just go ahead and do whatever you damn well please! (Of course, if you’re like us, socially responsible business may be what you damn well please!)
But before you pick a fight with a customer, dump toxic waste in the river, or fire an employee for mouthing off, ask yourself why you’re in business in the first place. This may require that you take a deep breath and grit your teeth. But getting back to basics should do the trick. After all, you’re running a values‐based business for some combination of the following ten reasons:
- You’re passionately committed to your work, your customers, or both.
- You want to live a balanced life.
- You want to make your company sustainable for the long run, so that it outlives you.
- You want to treat your employees as equals in a community or even a family.
- You want to build your business on a solid foundation, fostering loyalty among your customers and your employees alike.
- You believe it’s wrong for business to enrich the few when so many have so little.
- You want people to enjoy their work.
- You want to share your good fortune with others.
- You want to contribute to your community in meaningful ways.
- You believe that every business must do its part to heal the environment.
Realistically speaking, every one of these nine ideals can cause trouble for you. Big trouble. Check out the table entitled “No Good Deed Goes Unpunished.”
No Good Deed Goes Unpunished
|Your Ideal||What Can Happen|
|You’re passionately committed to your work, your customers, or both.||Your customers may not give a hoot for your passion. Maybe they just want to get what you’re selling at the lowest possible price.|
|You want to live a balanced life.||You know what happens! Reality just doesn’t cooperate. To succeed in business, you’ve got to work your tail off. And, despite your best efforts to minimize stress, everything from impossible deadlines to uncooperative employees to financial pressures gets in the way.|
|You want to make your company sustainable for the long run, so that it outlives you.||The bills pile up, but your customers are slow to pay. Before you know it, you’re worrying about surviving today—never mind tomorrow.|
|You want to treat your employees as equals in a community or even a family.||Guess what? Many of your employees just want you to pay them well, tell them what to do, and stop blathering about how you’re all one big family. They’d never marry your sister, anyway!|
|You want to build your business on a solid foundation, fostering loyalty among your customers and your employees alike.||The young people you hire to ensure your future don’t share your views about loyalty and staff turnover. Their jobs with you are just a steppingstone to something better. Meanwhile, your competitors are hustling your customers. You can be sure they’ll be able to sweet‐talk some of them into leaving you!|
|You believe it’s wrong for business to enrich the few when so many have so little.||The time comes when you want to hire a new senior staff person. But your policy of keeping a lid on top salaries backfires, because that prospective new hire won’t work for what you want to pay.|
|You want people to enjoy their work.||It starts with the basketball net and the Quiet Room. Before you know it, people are having lots of fun. But they’re not getting their work done.|
|You want to share your good fortune with others.||5%, 10%, or even 100% of zero profits—it’s all the same. It’s zero. You can’t spread the wealth around if there’s nothing to spread.|
|You want to contribute to your community in meaningful ways.||It starts as a way to boost employee morale as well as to help the community. But it starts getting out of hand when your top managers are spending more time in voluntary service on nonprofit boards, and the rest of your staff is racking up hundreds of person‐hours as volunteers— and far too little on the job.|
|You believe that every business must do its part to heal the environment.||At first, it was great. You actually saved money by reusing and recycling materials and turning to energy‐saving lighting and equipment. The trouble came when the staff insisted on making your workplace an environmental showcase, which you clearly can’t afford.|
After a few years in any business, values‐driven or not, you inevitably reach the conclusion that every ideal represents a tradeoff between what you want to do and what reality will permit. Idealism is a wonderful thing. We recommend it highly. But we know that ideals frequently have to be tempered by pragmatic considerations.
Purists may do well in some fields. The arts, for example. The sciences, too. Business is another matter. And on that practical note, let’s address some of those down‐to‐earth questions that may be crowding into your mind. What does it take to integrate your values into your business? How much will it cost? Can you go it alone? Are you ready for values‐driven business? Those are the questions we’ll grapple with in the following chapter.
A senior citizen lived all alone.
He wanted to plant his annual tomato garden, but it was very difficult for him, as the ground was hard from a very dry season. His only son, Jack, who used to help him, was in prison.
The elderly gentleman wrote a letter to his son and described his predicament:
Dear Jack, I am feeling pretty sad because it looks like I won’t be able to plant my tomato garden this year. I’m just getting too old to be digging up a garden plot. I know if you were here my troubles would be over. I know you would be happy to dig the plot for me, like in the old days. Love, Dad.’ A few days later he received a letter from his son.
‘Dear Dad, don’t dig up that garden. That’s where the bodies are buried! Love, Jack.’
At 4am the next morning, the police arrived and dug up the entire area…without finding any bodies.
They apologised to the old man and left. That same day the old man received another letter from his son.
Dear Dad, go ahead and plant the tomatoes now. That’s the best I could do under the circumstances. Love you, Jack.’
Lesson – Sometimes, and particularly in a market like this, we need to think outside of the box
All business owners know time is money. Saving time means not giving away hard earned profits. The following three strategies have been successfully deployed by a number of business owners to save time (money) and it is a privilege to share them with you.
Make sure your Accountant is more than a Bookkeeper:
Your accountant needs to know your business well to be able to provide you with sound financial advice. Their advice should provide you with a meaningful contribution to your bottom line.
Before calling on the services of your accountant you need to be well prepared. Because one of the biggest and most time consuming parts of preparing accounts is ensuring the accuracy of them. This means checking and validating balances and ensuring there are no unaccounted for transactions. Without this assurance your accountant is unable to provide the service you expect of them.
So whatever system you are using the minimum requirement is to be able to quickly and accurately confirm your accounting records to your external bank accounts.
Ideally, you need to be able to run over your accounting records with what accountants call a “reasonable test”. This simply means taking a helicopter view of your reporting and trying to spot anything that, based on your knowledge of your business, looks out of the ordinary or “unreasonable”. This is particularly helpful in spotting things that may either require further investigation or having an explanation ready before your accountant asks the question.
Your strategy, along with your accountants should be to minimise the time, effort and cost needed to prepare appropriate and accurate accounts. This means adopting the “less is more principle” rather than the “analysis to paralysis” approach. Often we are presented with copies of accounts that go way beyond standard compliance requirements and the additional information has not been requested or even being used by the client.
Also, if your accountant identifies issues with your accounting records do not just let them fix them without your knowledge. You need to know what errors are being made so that you can avoid making them again in the future. If you do not, guess what will happen? You will likely keep making the same mistakes time and again and your accountant will have to keep finding and correcting them. Costing them valuable time and you money.
It is a very smart strategy to meet with your accountant as soon as possible after year end and before they start your books, rather than after they are finished. This does put pressure on you to perform but sometimes that is a good thing, because:
- It removes a major distraction from managing your core business
- You will beat the rush and likely get better service from your accountant
- You will be able to find out what your accountant plans to do to help you in the coming year instead of just telling you what
you did which can no longer be changed (if not convinced at that meeting that your accountant is there to help you, then maybe it is time to consider a change – times are tough, no passengers allowed).
- You want to find out at that meeting who will be preparing your accounts this year. You need to confirm you are not ending up with the new junior every year.
- Once you have had that meeting, what a relief. It lifts a big weight off your shoulders and you are then free to take on the world once again.
Always remember if your accountant is a member of the Institute of Chartered Accountants of New Zealand this gives you extra protection and forms of recourse not available to you if you use someone who is not bound by their strict code of conduct.
For example if you want to you can request a fully detailed account and this can be quite enlightening as you can then see where the time is going to in the preparation of your accounts. Access to this information can often highlight areas where, together with your accountant’s assistance, changes can be made to reduce that time in the future.
If the cost of your fees becomes an issue for you, or more importantly where your fee is or is likely to be significantly greater than you might expect, your accountant is required to discuss it with you before the bill is prepared. Failure to comply with these requirements allows you to file a complaint to the Institute.
Appendix 1 provides additional details for what you need to provide your accountant at year end to help them assist you.
Grooming your Business for Sale:
Be well prepared in advance to sell your business, as you never know exactly when the time will come that you will have to sell. When that time does arrive and sometimes this is unexpected, many owners will rely on their annual accounts to try and help them sell their business. Many of these owners will also naïvely think that that is the only honest and genuine way to present the results of their business.
Although your annual accounts are perfect for complying with the Inland Revenue they are often not that helpful when talking to a prospective buyer. Why is that? Well when you accountant prepares your standard financial accounts they should be determined to claim every single cost that can be legitimately claimed for tax purposes which results in the poorest possible result in order to minimise the tax you have to pay. For the Revenue that is the perfect result but it has the effect of dressing your business up like it is going out to a funeral. That is not the appearance you want to present when you have a hot prospect interested in you. You want to appear as if you are going out to an important occasion or a party. Now you don’t want to put on any false appearances but you do want to do everything possible to present an honest and genuine look that will help them make a quick and informed decision about your business.
That actually means you need to remove stuff that will get in the way of the buyer making an informed decision.
For example, no two owners given the same business to operate will ever produce the same taxable result. Why? Because they will never make the same decisions over certain discretionary costs and their circumstances will be different. Therefore, when selling your business don’t spend all the time sharing with them the great job you did in the past but rather assist them to see how business can be great for them in the future. That means legitimately removing certain costs from your current financials and allowing the prospective owner to easily insert their own.
By having this method of reporting set up well before you want to sell will give you a totally different perspective on your business on an on-going basis.
With proper guidance and training you can be prepared to help a buyer at a moment’s notice when you need to sell. The problem is if you do not plan for this early enough, you will not be able to quickly perform this process easily and efficiently. In fact we have found there is a certain mind set the seller has to adopt in order to be successful at this process.
here is also the risk that unless you can easily get your hands on reliable information you might feel forced into agreeing to guarantee the performance of the business just to sell it. Then through no fault of your own, you end up carrying future risks and costs.
You will also avoid the situation we have seen on a number of occasions where the client asks the accountant to prepare an adjusted set of accounts during the year at the request of an interested party. The client bears that cost which may involve them in fees from $500-$2,000 and the deal goes cold. Six months later someone new comes along and similar costs are incurred again. This strategy is designed to try and minimise those costs. In making these suggestions we are not suggesting you exclude your accountant, we are simply saying use their skills and expertise to verify your information, not prepare it.
Time Saving Software
The final strategy involves examining the type of tools you are using to easily achieve the above two strategies. Experience has taught us that success in these areas depends on having the right tools for the right job. What you might not be aware of is that thousands of accountants throughout NZ and Australia use a special piece of software that you cannot purchase online or from a retailer like Harvey Norman or Dick Smiths. They use this software to efficiently process their clients’ accounts and most clients have no knowledge of this best kept secret. Here are the comments of a couple of accounting firms who use it:
” BankLink delivers data to us so quickly and seamlessly, which gives us a real head start in processing GST returns for the month.” McGreevy & Associates Ltd
” Big savings despite low transaction volumes. LAQC clients are usually looking for rapid refunds, and BankLink Practice helps us turn their accounts around very quickly. We receive the data automatically so there’s no waiting around for statements.” Tony Thorne, Partner Thorne Accounting
There is simply nothing faster out there to process accounting records! If we said to you there is an opportunity for you personally to enjoy those same savings would that be of interest to you? What that would mean is that you would then be in a position to make better use of your accountant’s service but at a much higher level for the same or in some cases less money than you were paying before.
In other words you employ your accountant for their technical skills and get them to help you with more of the strategic stuff that adds real value to your business? Besides, accountants prefer that interesting work……and also never forget that your accountant works for you, not the other way around.
By accepting more control there is an added benefit. If you allow your accountant’s office to do all your bookwork, who is keeping an eye on their workmanship? The reason we ask that question is because, full accountability with Inland Revenue falls on you as the tax payer, not on your accountant.
We have in our files many instances where accounting firms, who have relied on their junior staff to do a good job, have failed. By
giving you direct access to this professional software…. means you can be trained to be in the driver’s seat of your accounts, not in the passengers. It then means your accountants are given the opportunity to perform more of a review function of your core accounting records rather than a preparing one.
After being trained to use this software if you get stuck on how to handle a certain transaction, then you consult your accountant or us. Because, it is most important to deal with any sticking points while they are fresh in your mind and when the information is readily available. Plus, you learn from the experience.
After being trained to use this software if you get stuck on how to handle a certain transaction, then you consult your accountant or us. Because, it is most important to deal with any sticking points while they are fresh in your mind and when the information is readily available. Plus, you learn from the experience. http://www.kmworld.com/articles/news/news-analysis/the-high-cost-of-interruptions-14543.aspx
If any of the above strategies appears a little challenging remember the words of Julie Woods, a great lady from Dunedin who cannot see. She wrote:
“Asking for help is not an act of dependence; it’s the key to independence”.
She wrote that in her inspirational little book entitled “How to make a Silver Lining”. If you would like a copy please request one from firstname.lastname@example.org – it’s brilliant.
One of our associates said it made her cry, laugh and made her think I don’t have much to complain about.
In conclusion these three strategies set you up for:
- Now – a better way to save time and be more in control of your business on a
- Year End – a more efficient way to get your end of year accounts processed and to
make real good use of your accountant’s skills, expertise and knowledge
- Future – a streamlined approach to selling your business when the time arrives
(and no owner knows that precise moment)
Offer to YOU:
If you want help to implement any of the above strategies please book a FREE 1 hour session valued at $150.00 plus GST. There could be hidden gold in your business. To book either email: email@example.com or call 04 4999035 If you introduce a friend(s) and they join our service you will receive a surprise valued at $120! Please pass on this valuable information and help someone you know in business or starting out.
Appendix A – Help Yourself and your accountant at year end
If you use the BankLink software you will save yourself and your accountant lots of valuable time when completing the following year end tasks:
- Provide your accountant with early access to your accounting records
- Photocopy your closing bank statement, credit card, or financial institution pages as at your year-end e.g. 31/3
- Photocopy any loan statements as at year end and ensure that it shows the interest paid for the year
- Photocopy any hire purchase statements as at year end showing the interest paid
- If you still write cheques out, it is important at year end within the software (prior to doing your final GST return) to do your unpresented cheques (UPCs). This will take you less than a minute to do in the software. No ticking or reconciling!
- Print the Bank reconciliation report off and verify and attach your closing bank statement(s) page of the year
- Ensure that if you have more than one bank account tracking or credit card tracking that your “transfer between bank accounts account
balances to Zero”
- Ensure that in the software you have typed a narration against any Assets (greater than $500 plus GST) you have purchased e.g. Ford Mondeo Regn#: BTD385. This assists your accountant because they can take ledger reports out of the software to excel and import these additions into their asset registers – saving more time
- Any donations made should have a narration e.g. Canteen, or World vision
- Any large repairs and maintenance should have a narration typed as to what work was carried out e.g. replaced guttering
- If you have multiple entities i.e. trusts, partnerships and companies that you transfer money to and from, then the intercompany accounts must balance
- Provide an outstanding debtors (people that owe you money) aged trial balance listing as at year end
- Provide an outstanding creditors (people that you owe money to) list by supplier, code and amount. If you have a lot of creditors to manage we recommend a web based creditors product called CRED-it that will save you time and dollars and your accountant can access it so they do not have to interrupt you at year end
- Ensure that your GST payments/refunds ledger report agrees to your GST returns.
- Do not send all your bank statements, cheque butts and invoices to your accountant to reprocess.
- If you are rekeying your bank statement data into a spreadsheet or other accounting systems then you are wasting valuable time, and no doubt your accountant or their staff will re-enter the information into their accounting system – and guess who pays?
Here is a quick summary of what you can claim when running a business, not a hobby. If your intention is to make a profit then the activity is a business and will get caught for tax purposes, but take expert tax advice if in doubt.
Accountancy and Other Business Advisory Services – these are 100% claimable, unless the advice is pre-incorporation when those costs would have to be capitalised as incorporation costs. These are called ‘Preliminary Costs” and are recorded as a Fixed Asset and GST can be claimed.
Bank Fees – all fees to operate a bank or credit card account are deductible, but no GST can be claimed on these expenses. Please note MSF (Merchant Service Fee) rebates do not attract GST and can be classified as a refund of Bank Fees or Credit Card Charges.
Books, e-Books, dvds – so long as they were purchased for the purpose of helping you to run your business more successfully they are deductible. Even movie theatre tickets could be claimable if you are an actor or writer, or if given as a form of promotion then they can be classified as Advertising.
Depreciation – This expense that sometimes washes over the heads of some tax payers because of its treatment for tax purposes. Most can understand the logic that when an expense is paid for then it is claimed against income earned. But when depreciation is involved that rule does not apply because rules have been prescribed that state ‘an expense greater than $575’ (GST Included, $500 excluded) for a new single asset is incurred, that cost must be spread over a number of income tax years. This spreading of the cost is called “Depreciation”. In the case where the asset is used only partially for the business then only that proportion can be claimed. A simple test for this type of expenses is to ask when an asset is over $575 “Will the item still be in use at the end of this financial year?” If so then it must be depreciated, but if purchased during the year, only the number of months in use can be claimed. To find out more about the allowable rates of depreciation you can go to https://interact1.ird.govt.nz/forms/depnrates/ .
Important– If you have a large number of assets and you would like to control them better and calculate your own depreciation we can provide an online asset program.
Entertainment – Only 50 percent is deductible if the expense is incurred within your local area of residency. If away on business the same cost could be 100% deductible. If the food is consumed on your premises then 100% is claimable.
Equipment Hire – If you need to hire equipment for your business then these costs are deductible and coded to Leasing charges.
Insurance – All insurances related to running your business including partially used private assets where used by the business (proportionately) are deductible including contents, dwelling, vehicle, professional indemnity, and public liability types of insurance. With the cost of insurance escalating some clients are reducing their premiums by either increasing their excesses or self-insuring part of the risk.
Interest Paid – If you need to borrow money to finance your business the interest portion of the repayments is deductible for tax purposes.
Legal Fees – If the cost relates to business advice or re-arranging finance, debt collection then these costs are deductible. However legal costs for the purchase of a new property or asset or personal advice are not deductible.
If you do incur legal costs for new Asset purchases then seek proper advice.
Motor Vehicles – You can claim GST back when buying a new or second hand vehicle in the proportion to which it is being used by your business. Keep a log book for three months every three years to establish your business use %. Once this calculation has been done, then the Percentage can be applied to all types of vehicle running expenses, including depreciation. As an alternative a claim can be made on an actual kilometres used for business basis, in which case no expenses for vehicles would be claimed.
Repairs and Maintenance – Any costs incurred in keeping plant, equipment and at your workspace in good repair can be claimed on a proportional basis. Care needs to be exercised when it involves general improvement to your home if you work there, so make sure you consult your accountant to stay on the right side of tax legislation.
Printing and Stationery – This covers such item as printing inks, print paper, photocopy costs and other incidentals necessary to keep your office running.
Seminars and Training – All professional development costs are deductible, however obtaining an initial degree is a personal cost and not deductible.
Subscriptions – Payment for business association and professional membership costs are deductible, including newspapers and magazine costs.
Travel and Associated Costs – These costs are deductible so long as they are incurred for business purposes. If you combine going to a conference or visiting clients with a holiday you will need to apportion costs accordingly. Also take care that if the travel is overseas that no GST is claimed.
In Summary, if you require assistance to setup any of the allocation splits once you have ascertained your position please contact us so we can get these setup properly.
Finally FINES – These are not deductible for tax purposes.
Mixed Income Sources – In today’s environment we are finding some clients working for wages as well as running a business. This could be when someone is starting a business or they have experienced a downturn and need to supplement their business income. In these instances the taxpayer must apportion the expenses between waged income and self-employed. For example, if your self-employment only takes up say 2 days per week then you cannot claim 100% of your vehicle expenses.
Another Professional Trustee in Court
A recent decision of the High Court has again highlighted an amazingly common misconception held by professional trustees that they are not liable for liabilities of a trust.
Or worse, a misguided belief that because they are a ‘passive’ trustee and the ‘family’ run the trust any liability should not fall on the professional. Such beliefs and understandings are not part of the concept of trusteeship.
We say it again – trustees are personally liable for the liabilities of a trust. Trustees have a right
of indemnity to pay the liabilities from the assets of the trust but if the assets are insufficient or the trustee has lost the right of
indemnity then the trustee pays from his own money.
We can’t be clearer than that!
The issue recently before the High Court involved a lawyer who was an “uninvolved” trustee of a trust.
Trust tax and GST returns were not filed and default assessments were issued. The default assessments were neither disputed nor the tax paid.
The settlor/trustee left the country and penalties and interest accrued. Inland Revenue eventually (after more than 4 years (which we find despicable)) started chasing the lawyer for more than $500,000. He eventually settled with Inland Revenue and personally paid $200,000 in full settlement of the debt.
The lawyer then sued the settlor/co-trustee for the full $200,000 on the basis that:
- He had chased him to settle the debt with IRD
- He was a “passive” trustee and should not be liable
A trustee can be held to be 100% liable for a liability of a trust but only in a circumstance where it can be shown there was a breach of trust in the form of personal benefit, fraud or where the trustee has improperly benefited
as a beneficiary and none of these applied.
As for the lawyer being a “passive” trustee, the judge simply pointed to case law going back over 200 years and said there is no such distinction as “passive” v “active”. A trustee is a trustee is a trustee and is accountable for the administration of the trust.
As a result, Katz J ruled that the lawyer would be awarded judgment for half of the amount he paid to Inland Revenue plus half of the legal costs incurred plus interest.
This could be a pyrrhic victory as the trick will be to recover the money from the absconded trustee.
The message is clear
While there has been a (surprisingly) lack of action in the Courts in relation to recovering trust debts from trustees – things are hotting up. Sadly, trustees will lose every time.
The Courts will not protect trustees from liabilities properly incurred. Insurance companies will not cover trustees for personal liabilities which (for example) is what a tax debt is.
Let the trustee beware!
Budget 2013 “Mean tax” a stupid tax!
In keeping with recent trends Budget 2013 contained little in the way of tax measures. So much so that we did not see the need for our traditional Budget News Flash clogging your Inbox.
The changes announced were:
- immediate deductibility for costs incurred in applying for patent or plant variety rights where no depreciable asset is recognised for tax purposes
- making further fixed-life resource consents granted under the Resource Management Act 1991 depreciable
- making expenditure incurred on resource consent applications that are abandoned deductible
- this one may surprise you – making the costs of paying a dividend by a company deductible
- making the annual fees for listing on the stock exchange deductible (initial listing costs remain non deductible), and
- this one may surprise also you – making the costs of company AGM’s deductible, (but the costs of special shareholder meetings non-deductible).
The Government is enjoying the fruits of Inland Revenue labours in investigating land subdivisions and so for the 4th year in a row has increased funding for Inland Revenue to do more audits.
Finally, students don’t like it but if they move overseas and don’t make student loan repayments and then return to New Zealand for a mates wedding they may be stopped leaving again until they pay!
In Budget 2012 the Government repealed the “Child” rebate (or tax credit) to be technically correct. The move was “condemned” as being mean spirited.
We condemn it as being yet another example of tax policy stupidity and complexity!
While the tax credit was repealed it was replaced with a tax exemption.
Under the exemption school children are exempt from tax on income that is not PAYE wages, interest, dividends
and foreign sourced passive income PROVIDED THAT their total income is less than $2,340.
This means that school children who are “self-employed” (the baby sitter) or receive non-passive income from a trust do not pay tax on that income provided that their total income is less than $2,340. If their total income is greater than $2,340 they pay tax on all income.
In the meantime, a child receiving wages pays tax from the first dollar of wage received.
Where you act for a trust then, some child beneficiaries will be taxable and some will not.
Did you know….
- 6% of registered individual NZ taxpayers pay 37% of the personal tax paid in NZ
- 40% of registered individual NZ taxpayers pay 6% of the personal tax paid in NZ
- 8% of registered individual NZ taxpayers pay no personal tax
- A $1 increase in National Superannuation costs $35,000,000
And what about the lawns?….
…a very good question! A house owner who gets the child next door to mow the lawns should be deducting 20% “withholding tax” (PAYE) from the $20 for mowing the lawn and paying it to IRD as the lawn mowing cost is a scheduler payment.
As the lawn mowing cost is a scheduler payment subject to PAYE it does not qualify for the exemption.
Every householder who pays the neighbours child to mow the lawns should now be registered as an employer! It didn’t matter prior to 1 April 2012 because of the Child tax credit – now it should.
Inland Revenue has not picked up on this. In fact the IRD Guide refers to child’s wages from mowing lawns as meeting the (limited) tax exemption.
Legally however, every householder who pays the neighbours child to mow the lawns is committing an offence for failing to deduct and account for PAYE! Stupid!
Below are some interesting links for
you! Enjoy your stay :)
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