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ACC - First Weeks Compensation

If an employee suffers a work-related personal injury, ACC’s liability to pay weekly compensation begins only after their first week of incapacity. During that first week, you must pay your employees compensation for their loss of earnings if they suffer a work-related personal injury under your employment.

When am I Liable to Pay First Week Compensation?
You must pay all the first week compensation an incapacitated employee is entitled to if, while under your employment, they suffer a:

  • Work-related personal injury
  • Work-related personal injury that is a motor vehicle injury

This means that if your employee has more than one job, and suffered a loss of earnings in all their jobs in their first week of incapacity, you as the employer in whose employment they suffered the injury, will be responsible to pay all of their first week compensation.

Before paying their first week compensation, you may require the employee to meet reasonable requirements.

For example, you can require them to produce a medical certificate from a registered health professional stating that they’re unfit to work.

What is a Work-Related Injury?
Work-related injury includes:

  • Injury suffered while the employee is at any place for the purposes of their employment.

This means an injury suffered by an employee at a place outside their usual place of employment will be considered a work-related injury, as long as they were at that particular place for the purposes of their employment.

For example, it has been held that the injury an employee suffered in his employer’s car park after finishing his work was a work-related injury.

  • Injury suffered during a break for a meal, rest, or refreshment at the employee’s place of employment
  • Injury suffered while travelling to or from the place of employment at the start or finish of the day’s work, but only if it’s in transport provided by the employer and driven by the employer or by a nominated employee
  • Injury suffered while travelling on the most direct route to get treatment for a work-related injury
  • Heart attack or stroke suffered as a result of excessive physical strain in performing employment tasks
  • Personal injury caused by a work-related gradual process, disease, or infection
  • Injury suffered as a result of treatment for a work-related injury

What if the Injury is not a Work-Related Injury?
If the employee’s injury is not a work-related injury, you are not liable to pay their first week compensation.

They can use their sick leave entitlement under the Holidays Act 2003.

If they aren’t entitled to paid sick leave, you can (but are not compelled to) allow them to use their annual leave entitlement, if they have any.

Checklist:  Do I Have to Pay First Week Compensation?
Answer the follow questions to guide you in determining whether you must pay an employee’s first week compensation: 

  • Did the injury arise out of, and in the course of, your employment? Make sure that the injury happened at work and that it was not a non-work injury. If the injury occurred while the employee was working for a different employer, you are not liable to pay
  • Did the injury prevent the employee from working? 
  • Has a medical certificate been produced showing that the employee is unfit to work and for how long? 
  • Does the doctor who issued the certificate know enough about the job requirements to be able to judge correctly whether the employee is unfit to do their job?

Note: If you are not satisfied with the medical certificate provided by the employee, you may (at your expense) have the employee examined by your nominated doctor who can provide you with another medical certificate.

How Much do I Have to Pay?
Once you are satisfied that you have to pay the injured employee first week compensation, you must pay them 80% of the amount of earnings they lost during their first week of incapacity.

In order to calculate the amount owed, check what the employee earned during the 7 days immediately before the day on which the incapacity commenced (this may not be the day of the accident). Earnings include:

  • Ordinary time
  • Overtime
  • Allowances
  • Bonuses
  • Income from other employment

Subtract the amount they earned (if anything) in their first week of incapacity. The remainder is their lost earnings. Pay 80% of this amount.

For example, an employee earned $600 in the week before she hurt her back at work. She was off work for 3 days due to this injury, then returned to work.

In the 2 days that she worked that week, she earned $240, so her lost earnings were $360. Her first week compensation for the 3 days that she had off work will be 80% of this amount, ie $288.

When Does ACC Start Paying?
ACC starts paying weekly compensation after the first week of incapacity. You need to send an Employee Earnings Certificate (ACC3).

For example, an employee is injured at work on Thursday afternoon and continues working to the end of the shift. The next day the injury is worse, so he visits his doctor, who gives him a medical certificate stating he is unfit for work for 14 days, starting immediately.

The following table shows who has to pay the employee's compensation:

 Friday  Employer pays  Day 1
 Saturday  Not a working day  Day 2
 Sunday  Not a working day  Day 3
 Monday  Employer pays  Day 4
 Tuesday  Employer pays  Day 5
 Wednesday  Employer pays  Day 6
 Thursday  Employer pays  Day 7
 Friday  ACC starts payments  Day 8

Note that the law can and does change quickly. The latest on accident compensation can be found on www.acc.co.nz.

Disclaimer

Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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ACC Levies

What are ACC Levies?
New Zealand has a scheme which provides compensation for people who have suffered a personal injury. This scheme is administered by the Accident Compensation Corporation (ACC).

ACC spends around $1.4 billion per year on rehabilitation, treatment and weekly compensation. This is largely funded by the collection of levies from employers, earners, self-employed people, the Government (for non-earners), and people who own or use motor vehicles.

What Levies do I Have to Pay?
If you are an employer, you have to pay an employer levy and a residual claims levy.

The employer levy pays for the cost of work-related injuries.

The residual claims levy pays for the ongoing costs of injuries that occurred before 1999, because not enough money was collected at the time.

Employers also have to deduct an earners’ levy from their employees’ pay. This is built into the PAYE deduction tables.

The earners’ levy pays the cost of non-work-related injuries, such as those suffered at home or while playing sport.

If you are self-employed, you pay a levy that covers both work-related and non-work-related injuries.

CoverPlus (the standard product for the self-employed) makes you eligible to receive compensation of 80% of your previous year’s earnings.

Self-employed people can choose CoverPlus Extra instead, which makes you eligible for a pre-determined amount of compensation – this is particularly aimed at people who are newly self-employed or those whose income varies from year to year.

Injuries from motor vehicle accidents are funded by:

  • A levy added to the vehicle registration fee (collected by the Land Transport Safety Authority)
  • A levy added to the price of petrol

How Much do I Have to Pay?
The amount that you have to pay for the employer or self-employed levies varies depending on:

  • Your liable earnings
  • Your classification unit

ACC provides a levy calculation tool online at http://acccalc.akl.adv.net.nz.

What is my Classification Unit?
Depending on the type of activity the business carries out, it is put into a ‘classification unit’ for ACC purposes. The classification unit is chosen based on the ‘business industry description code’ used to register for GST.

The classification unit is a big factor in how high your ACC levies will be (both for employers and the self-employed). This is because the levy rate varies widely, with the highest rates being for activities with the highest injury costs.

For example, forestry has a very high employer levy rate, at over 6% of liable earnings (in 2004). Activities like accounting services, on the other hand, have much lower rates, such as 0.09% of liable earnings.

Using the wrong classification unit can affect how much your invoice from ACC will be, especially where the difference accumulates over several years.

If you’re paying too much, you could be due a refund. If you’re paying too little, you could have a big bill to pay when the right classification unit is discovered.

Take a bathroom renovation company, for example, that sub-contracts all the trades. The owner registers the business activity as ‘Repair or renovation of residential buildings’.

In the year 2003-04, the employer levy rate for ‘Construction services’ was 2.74%. If the liable earnings were $100,000, this equates to $2740. However, because all the trades are sub-contracted, the classification unit ‘Residential property operators and developers (excluding construction)’ may be more accurate. The rate for this unit was 0.33%, and so with the same liable earnings, the employer levy would be $330.

How and When do I Have to Pay?
The employer levy is payable in advance and ACC invoices employers directly. The amount is based on the previous year’s payroll as an estimate, adjusted by the labour cost index.

Employers can provide ACC with an amount that is considered to be a more accurate estimate of the current year’s earnings for provisional payment. If you want to make an estimate, contact us.

The employer levy will be recalculated the following year when the actual payroll details are available. A levy adjustment is then issued to the employer.

For self-employed people, ACC calculates the levy using their last IR3. ACC invoices them directly. Self-employed people must pay their ACC invoice within 30 days. However, they can opt for a 3-monthly payment plan, or an instalment plan.

What do I Get for my Money?
The benefit for employers is that employees who are injured at work will be paid compensation (after the first week) by ACC, as well as their treatment and rehabilitation costs. They are much less likely to be able to sue their employer for an injury, and everyone concerned will hopefully be saved the expense and stress of a court case.

In return for the earner’s levy, employees are also covered for the cost of treatment, and rehabilitation, and get weekly compensation for non-work-related injuries. Self-employed people who are injured are also covered for the cost of treatment and rehabilitation, and get weekly compensation if they are injured.

Weekly compensation from ACC is generally 80% of your prior earnings.

How can I Reduce my Levies?
One of the main principles of the accident compensation system is to prevent injuries happening in the first place. In order to encourage injury prevention, ACC runs a Workplace Safety Management Practices Programme.

This gives levy discounts (of 10%, 15%, or 20%) to employers who demonstrate a high standard of workplace health and safety.

Note that the law can and does change quickly. The latest on accident compensation can be found on www.acc.co.nz.

See us First
Please contact us for tax implications that may arise from ACC payments.

Disclaimer

Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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Accounting Software Considerations

Business computing has undergone exponential growth in the past few years with computers now forming an important part of most businesses, and most workplaces using them to serve accounting needs, amongst other things.

Accounting Software
The right accounting software can help improve operating efficiencies and obtain some competitive advantages. Spending some time on selecting the most appropriate accounting software for your business will ultimately free up your time and save you money, provide you with useful information to manage your business better, and can reduce your accounting fees.

The use of a 'leading edge' accounting solution can carry a high degree of risk and cost. Many, if not all, accounting processes can be automated to some degree with an accounting software solution. Such solutions are  increasingly becoming an essential element of day-to-day business operations.

However, many business owners are unaware of, or are confused by, accounting terminology and the breadth of system and software choices available.

While accounting software decisions can sometimes be small in dollar terms, the choice of software you make is best driven by how it meets your overall business.

Things to Consider
Before selecting an accounting computer system you need to consider:

  • Establishing your business requirements
  • Examining and evaluating options
  • Determining if user training is required
  • Setting down a list of absolute minimum features required
  • Developing processes, policies, and procedures to handle accounting needs
  • Who will install the hardware and load software
  • Testing the new system
  • How to converting from an old system
  • Ongoing support and maintenance issues
  • Cloud based or desktop.

Two Basic Requirements 

  1. Choose software that meets your needs – small businesses can get by with a simple book-keeping type system, others may require more sophisticated systems which offer advanced management reports.
  2. Choose software that is compatible with your system, can avoid major reworking of existing data, improves the services you can offer, and saves accounting fees.

Tax Considerations
The IRD has guidelines on the information and assistance required when they request information or require access to business records and supporting background materials.
 
While business records may be kept in either paper-based or electronic form, where records are held in electronic form, they must be kept in a manner that allows IRD to readily ascertain the amount of tax payable.

Internet Trading
Persons who do business via the internet are required to keep business records of all internet transactions for tax purposes.

Emails
Some emails may be classified as business records required to be kept for tax purposes. Where emails are business records, the origin, destination, and time of electronic communications must be retained and accessible so as to be usable for subsequent references.

Regardless of how business records are retained there must be sufficient detail to ensure a complete audit trail that allows the retained records to be traced to and from accounting records and to tax returns.

Electronic Record System Standards
Controls must be adequate to ensure that all business transactions executed electronically, including those executed through the internet, are completely and accurately captured.
 
Taxpayers should be able to demonstrate that their electronic records systems are secure from both unauthorised access and data alterations. This usually involves developing and documenting a security programme that: 

  • Establishes controls to ensure that only authorised personnel have access to electronic records
  • Provides for backup and recovery of records
  • Ensures that personnel are trained to safeguard sensitive or classified electronic records
  • Minimises the risk of unauthorised alteration, addition, or erasure.

Charts and codes of accounts, accounting instruction manuals, and the system and program documentation that describes the accounting system used must be retained and produced, if required, to an IRD officer.

The electronic copy must be readily accessible and capable of being retrieved and produced as legible hard copy or supplied in electronic form if required.

Those who engage in the electronic transfer of tax invoices, credit notes, or debit notes must retain electronic records that in combination with any other records (eg, the underlying contracts, price lists, price changes, and product code descriptions), have an adequate level of detail to meet the requirements of the GST Act.

Backup and recovery procedures must be sufficient to guarantee availability of electronic records for the required period. Adequate viewing and printing facilities should be made available free of charge to IRD officers. If requested, persons must locate selected records that have been stored, and print any items selected for IRD officers, free of charge.
 
Persons must be available to explain the operation of their computer system to IRD officers. This is the case whether the system is owned and operated by the person or out-sourced to a third party.

There must be sufficient detail to ensure a complete audit trail which allows the retained records to be traced to and from accounting records through to tax returns.

Storage of Records
In the event of changes to hardware or software, facilities for retrieving electronic records that have been stored on the former system must be retained, or the electronic records must be converted to a compatible system and both sets of files retained complete with documentation showing the method of transfer and controls in place to ensure the transfer was complete and accurate.

The CIR may approve the storage of records offshore. Approval is subject to the records being readily available in New Zealand on request, in English, and at no cost to IRD in obtaining the information. Each case will be considered on individual merit, having regard to the person's compliance history and whether storage overseas is likely to impede IRD compliance activities.

See Us First
Before making any decisions regarding accounting software or if you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer

Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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Allowable Deductions Overview

Net income (or net loss) is calculated by deducting annual allowable deductions from the total amount of gross income for an income year. Annual allowable deductions are the sum of all amounts of allowable deductions incurred in an income year. Only business expenditure will be an allowable deduction.

General Overview

  • Generally, an item or service will be an allowable deduction if it has been purchased in the course of carrying out the business activity. 
  • An item or service will not be deductible if it is purchased for private use or is a substantial asset. However, where expenses are not totally for business use, the expenses can be apportioned in order to calculate the business portion of the expense. 
  • Be aware that some specific business expenses will have their own separate rules. 
  • When in doubt over the treatment of an expense, ask your advisor before you purchase it.

Employment
Expenditure incurred in deriving salary or wages is not deductible. This is because the expenditure is not incurred for business purposes.

Entertainment
Business expenditure for food, beverages, recreation, and related accommodation and transportation is 50% deductible.

The following expenses are 100% deductible:

  • Food or beverages consumed while travelling on business
  • Food or beverages consumed at a conference or educational course
  • Overtime meal allowance
  • Morning or afternoon tea provided during work hours
  • Food or beverage samples for advertising purposes

Interest

  • Generally, interest is deductible for funds borrowed to purchase assets used in the business activity.
  • However, interest is not fully deductible if part of borrowed funds is used for a private use, or a use that is incapable of producing income.
  • Only the portion of the interest relating to the income producing use is deductible.

Trading Stock

  • A reduction in the opening value of trading stock is an allowable deduction.
  • The value of trading stock is calculated by measuring the difference between the opening value of trading stock and the closing value of trading stock.
  • Trading stock includes:
    • Livestock
    • Anything manufactured, produced, or acquired for the purposes of manufacture, sale, or exchange

Donations

  • A rebate is allowed where a minimum $5 gift of money is made to certain approved organisations.
  • The amount of the rebate is the lower of either: one-third of the gift or $500.

Bad Debts

  • A bad debt that is written off is an allowable deduction.
  • A bad debt can be wholly or partly written off. A bad debt will only be accepted by IRD as written off when there is no reasonable or probable expectation of recovery.

Professional Services

  • Legal, accounting, or any other professional service expenses are deductible, provided they are incurred as part of the business activity and are not a substantial asset
  • A deduction is not available for the following activities
    • Forming, registering, liquidating, or selling the business
    • Acquiring a licence for the business
    • Altering the capital structure of the business
    • Drawing up a partnership deed or trust deed

Bursary Payments

  • Bursaries or similar payments offered by employers to attract staff, are deductible.
  • The expenditure is deductible whether paid to, or on behalf of, an employee or for a prospective employee on condition that they stay with the employer for a specified time.

Penalties

  • Penalties, bribes, use-of-money interest charges and income tax are not deductible. 
  • Lawyers expenses in defending criminal or civil penalties are not deductible.

See us First

  • Before making any financial decisions. 
  • To assist you in meeting the necessary legal or financial requirements. 
  • If you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer

Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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Business Structures
Which One Should I Choose

Deciding the most appropriate structure for your business can be difficult. Each type of business entity has its own unique advantages and disadvantages. The following outlines some of these and can help when deciding which structure best suits your needs.

Sole Trader
Advantages

  • Simple and does not involve any costs relating to establishment or administration of a separate entity
  • The income is subject to progressive rates of individual tax

Disadvantages

  • Does not easily permit equalising of income with other family members
  • Does not provide limited liability
  • Income is subject to provisional tax

Summary
This form is most satisfactory for small businesses, where other family members have other income or where there are no family members to share income with.

Partnerships
Advantages

  • Simple and not expensive to establish or administer.
  • Can provide for income to be shared in desired (fixed) proportions.
  • Tax is paid at personal rates.
  • Losses are deductible against other income, subject to certain loss offset limits

Disadvantages

  • No limited liability
  • Income distributions may be inflexible
  • Income is subject to provisional tax

Summary
Best used for husband and wife businesses where simplicity and equalising of income achieves maximum effectiveness.

Company
Advantages

  • It is generally well understood by financial institutions and customers.
  • Provides limited liability, although most lending institutions will require personal guarantees.
  • Permits splitting of dividend income to family members through shareholdings.
  • Dividends may have imputation credits attached which will reduce or eliminate the individual's tax liability
  • If the company is a 'qualifying company', dividends will either carry imputation credits or be tax-exempt, and tax losses can be attributed to shareholders (if the company is also a 'loss attributing qualifying company'
  • The Companies Act 1993 allows the registration of a 'one person' company

Disadvantages

  • Income is taxed at a flat rate of 28%
  • Costs of establishment and administration
  • Splitting of income by way of shareholding is inflexible and cumbersome
  • The company tax rate may be higher than that applicable to individuals with relatively low levels of income
  • Except in the case of a 'loss attributing qualifying company', losses can be utilised only in the company (or within a group of companies) and are available for carry forward only where there has been continuity of ownership

Summary
Where the company 'profit' is distributed by way of salary, the salary is deductible and taxed at the individual marginal rates. Alternatively, profits distributed by way of dividend may have imputation credits attached, eliminating the double taxing of company income. The 'qualifying company' tax regime can also permit beneficial treatments of dividends and losses.

Trusts
Advantages

  • Provides maximum flexibility and distribution of income or capital gains to family members
  • Income vested in beneficiaries (beneficiary income) during the year or within 6 months thereafter is taxed at personal tax rates
  • Income not vested in beneficiaries, ie trustee income, is taxed at a flat rate of 33%

Disadvantages

  • Not always understood by financial institutions and creates problems when borrowing
  • Is relatively expensive to administer where a corporate trustee is used
  • Losses can be recouped only against future trust income
  • Trustees are required to comply with New Zealand trust laws
  • For the 2001-02 and subsequent income years, distributions of beneficiary income from trusts to children under 16 years will generally be taxed at a flat rate of 33%

Summary
The profits may be distributed as beneficiary income and are taxed at the beneficiaries' individual marginal tax rates.

Finally
Talk to us before deciding on any business structure. There may be tax implications depending on your particular circumstances that may need to be considered.

See Us First Before Making any Financial Decisions
To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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Rental Properties

Investments in rental properties have proven to be very attractive to New Zealand taxpayers if the surging growth in this area is anything to go by. If you are considering buying an investment rental property there are a number of issues to be aware of.

A number of people are buying investment rental properties with a view to building a portfolio of property for their retirement.

It is very important that these investments are structured correctly to make them tax effective.

In some instances, interest is not claimable against the rental income because the loan and ownership have been structured incorrectly.

In a recent case, a taxpayer purchased a second property to live in, borrowing funds to finance the purchase. The first property was rented out. The taxpayer tried to claim interest on the residential house loan against the rental income. The interest deduction was disallowed because the funds were not used for the purchase of the rental property.

This transaction could have been structured differently and the interest could then have been legitimately claimed against the rent.

Deductions

  • Where you occupy a rented private dwelling-house and a portion of that house is used for business purposes (eg, musicians, doctors), a proportionate part of the rent may be claimed as a business expenses
  • Where property has been purchased for the purpose of re-selling, any profit from rental income is taxable
  • Expenses such as rates, insurance, and repairs (less any casual rents) pending sale are deductible from the gross rentals
  • Expenses applicable to the property are deductible even though the property may be temporarily vacant
  • Where the property is held for realisation and the property returns casual rents, the expenses are deductible only to the extent of the casual receipts
  • Where property of an estate is held for letting at an adequate rental with a view to subsequent realisation, the expenses are allowable up to the rents received
  • Whether or not the excess expenditure is allowable depends on whether such expenditure is incurred primarily for the purpose of securing rents during the period or is incurred primarily for the improvement of the property

Repairs and Maintenance
Repairs and maintenance expenses are only claimable if the repairs were carried out while the tenant was still living in the house or the house was still available for renting.

Often overseas owners returning home realise the damage done to the property after the tenants have moved out – and because of the change to private use, Inland Revenue may not allow a claim for repairs of such damages. There have been instances in the past where such claims have not been allowed.

Rental Expenses from 'own-your-own' Flat or Office Allowable
You can claim expenses if you occupy an 'own-your-own' office or get income from letting an 'own-your-own' office or flat.

Usually, the company formed to own the building levies its shareholders for their share of the rates, insurance, maintenance, and other outgoings. Sometimes the levy includes a charge for depreciation, but when it does not, the owner-occupier still makes a claim at the appropriate rate on the share of the cost of the building.

Employers who take up shares in 'own-your-own' flat companies to get accommodation for employees are entitled to depreciation on that part of the cost of their shares in the flat-owning company which relates to the building, in the year first used.

When capital improvements are made later, the cost should be added to the cost of the building for calculating depreciation. The 'cost of building' that is calculated will then be apportioned to each owner-occupier in the proportion that their shareholding bears to the total shareholding in the company.

Property Leased for Inadequate Rent
Where property is leased for an inadequate rent, or the lease makes no provision for payment of rent, IRD may determine what is an adequate rent for that property and the amount is deemed to be income derived by the lessor. This applies where:

  • The lessee is a relative of the owner of the property, or of one of the owners (if the property is jointly owned), or a relative of any member of a partnership which owns the property
  • The property is leased to a company under the control of the lessor or any relative of the lessor, or under the control of any one lessor or a relative (where there is more than one lessor)
  • The property is leased by a company to any person

LTCs (Look through company) 

An LTC (Look Through Company) exists for tax purposes only. An LTC retains its identity as a registered company and is therefore still governed by the Companies Act.

To become an LTC, a company must meet all the eligibility criteria for the whole of the income year. If there is a breach, the company cannot use the LTC for that tax year or for the two tax years following.

  • Generally, an LTC's income, expenses, tax credits, gains and losses are passed on to its owners. These are allocated to owners in proportion to the number of shares they have in the LTC. Owners can also deduct expenditure incurred by the LTC before they became a member, if they pass certain tests
  • Any profit is taxed at the owner's marginal tax rate. The owner can use any losses against their other income, subject to the loss limitation rule
  • The loss limitation rule ensures that losses claimed reflect the owner's economic loss in the LTC
  • The owners of an LTC are treated as holding the LTC's property directly in proportion to their shareholding. When owners sell their shares they are treated as disposing of their share in this property and may have to pay any tax associated with this, if certain thresholds are exceeded
  • If the LTC ceases to exist or becomes an ordinary company, the owners are considered to have disposed of their shares at market value
  • Look-through applies for income tax purposes only. Under company law an LTC retains its corporate obligations and benefits, such as limited liability
  • An LTC is still recognised separately from its shareholders for:
    • GST (goods and services tax)
    • PAYE and employer tax responsibilities
    • FBT (fringe benefit tax)
    • RWT and NRWT (resident and non-resident withholding tax)
    • ESCT (employer superannuation contribution tax) and
    • RSCT (retirement scheme contribution tax)
    • The income tax rules for company amalgamations

The main Advantage of being an LTC

An LTC may be a popular entity for certain small enterprises because losses can flow through to a shareholder.

The main disadvantages of being an LTC

Profits are taxed at the marginal rate not the corporate rate. And of course there are the usual costs related to statutory compliance for companies.

See us First 

Please contact us for tax implications that may arise from a purchase or transfer of investment properties.
 
Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.


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Income Tax – Child Support

Child support is not family support. It only affects families where a parent is not living with the children, and is a payment made by that parent to help support the children. Family support, on the other hand, is Government income assistance that is available to all families, subject to income limitations.

Those Affected by Child Support
Child support may apply to:

  • Any parent who lives apart from a child
  • A sole parent
  • A parent who cares for a child from a previous relationship
  • A caregiver (including a relative) bringing up children
  • A parent sharing custody of children with the other parent
  • A person with a spousal maintenance order or agreement registered in the Family Court
  • A person with a child maintenance Court order or Court-registered agreement

Child Support Agency
The Child Support Agency of the IRD administers child support. It accepts and processes applications for child support, calculates the amount required to be paid by the liable parent, and collects the amount. It will also collect and pay out:

  • Spousal maintenance (maintenance paid to a spouse where there are no children)
  • Court-ordered child maintenance
  • Any maintenance agreed to by a voluntary agreement, even when it is not registered in the Family Court

Objections
Objections to a child support assessment should be made within 28 days of receiving the notice of assessment. The grounds for objection are limited to the following:

  • There were no grounds for the application to be made
  • The notice of assessment is incorrect
  • If the objection is allowed, the child support liability is reassessed. If the objection is not allowed, there is a period of 2 months to appeal to the Family Court

Payments of Child Support
Child support payments are a debt due to the Crown. They are calculated for one month and are to be made by the 20th day of the following month. This can be done in the following ways:

  • By deduction from salary and wages along with PAYE income tax through the employer's PAYE system
  • By automatic payment from a bank account
  • By direct payment to the Child Support Agency of the IRD

Penalties
Any payments of child support not made by the due date incur a penalty of 10% of the outstanding amount (with a minimum of $5), which is increased by 2% for each month that the amount remains overdue.

The IRD may write off penalties in some circumstances. Penalties must be written off when:

  • Liable parents keep to debt repayment arrangements entered into within 3 months of the assessment for their first payment being issued
  • An initial penalty is greater than the arrears to which it relates and the liable parent has no history of late payments

Employer's Responsibilities
An employer may be required to deduct child support from the earnings of employees who are liable parents.

In this case, Inland Revenue Child Support will issue the employer with a child support deduction notice (CS503) which authorises and instructs the employer to deduct child support. The notice shows:

  • The employee's name and IRD number
  • The pay period from which child support deductions should commence
  • The amount to be deducted from each pay
  • An employee reference (if applicable)

Child support has priority over all other deductions from an employee's pay, apart from PAYE. Thus child support must be deducted before student loan repayments, superannuation, or union fees.

However, child support deductions may not exceed 40% of an employee's net (after tax) earnings. If an employee would be left with less than 60% of their net pay if the full amount of child support were deducted, the employer must not deduct the full amount of child support. This is only likely to occur when an employee receives less pay than usual (eg due to unpaid absences).

A liable parent with more than one source of income can elect to have the whole child support amount deducted from a single income source, even if this deduction is more than 40% of their income from that source.

The deduction may not exceed 40% of their total after-tax income from all sources. Before 24 July 1999, the amount of child support deducted from any one income source could not exceed 40% of that income source, which meant that deductions from more than one source of income were necessary in some cases.

Child support deductions must be paid to the IRD by the same dates as for PAYE:

  • Small employers: the 20th of each month
  • Large employers: the 5th and 20th of each month

Records of child support deductions must be kept by employers for at least 7 years.

Offences and Fines
Fines of up to $15,000 for each offence may be imposed upon an employer for a first offence, thereafter the fine may be up to a maximum of $25,000 for each subsequent offence. The offences include:

  • Failure to deduct child support payments
  • Failure to pay child support deductions to the IRD by the 20th of the following month
  • Disclosing information about an employee's child support obligations
  • Discriminating against employees because of child support liabilities

The employer and the employees and agents of the employer are prohibited from disclosing information about any employee's child support obligations, except to the Child Support Agency or in the course of running the business (such as providing information to auditors).

A conviction against the employer may result in a fine of up to $15,000 for the first offence.

See us First
To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.


GOT A QUESTION?

BACK TO BUSINESS ABC

Claiming Income Tax Losses

Generally, where a taxpayer's annual allowable deductions exceed annual gross income for an income year, the taxpayer has a net loss.

Loss Entitlement
A taxpayer with a net loss for an income year is entitled to carry that loss forward to the immediately succeeding income year as an available net loss.

The taxpayer may then deduct it from, or set it off against, the net income for that immediately succeeding income year.

There is no time limit on when a net loss can be carried forward, but a net loss cannot be carried back to a previous year.

Where net losses are incurred in 2 or more income years and carried forward, they are deducted or set off in the order in which they arose.

Losses in a Partnership
Losses incurred in a partnership, except for special partnerships, are allocated to the partners who then include that share of the loss in their own personal income tax returns

Losses in a Companies
Where a company has brought forward losses from a prior year, or is a member of a group against whose profits it wishes to offset its losses, the statutory tests for the preservation and transfer of those losses must be satisfied.

Companies with 66% shareholding commonality as to voting interests and, if applicable, market value interests, may be treated as a ‘group of companies’ for the purposes of loss offsets and subvention payments.

Use of Losses to pay Shortfall Penalties
A taxpayer can elect to use a net loss to pay a shortfall penalty.

The taxpayer can do this if the net loss is available to be offset against the taxpayer's net income in the income year the shortfall penalty is imposed, provided the taxpayer notifies Inland Revenue of the election by the due date for payment of the penalty.

The losses used may be either current year losses or losses carried forward from a previous year. There is no requirement that the losses must have been incurred since the introduction of the shortfall penalty rules.

If a taxpayer elects to use current year losses, the losses are deemed to be offset at the time the election is made.

The election to use a use a net loss to pay a shortfall penalty may be in either written or verbal form. ‘Income year’ includes any part of a year taken into account for the purposes of carrying forward or grouping company losses.

A wholly-owned group of companies may elect to use a loss incurred by one company in the group to pay a shortfall penalty imposed on another company in the group.

The amount by which the penalty is reduced is the amount of the loss multiplied by the taxpayer's lowest marginal tax rate. That is:

Each dollar of net loss used to pay a shortfall penalty counts as an amount equal to:

$1 × tax rate

‘Tax rate’ means the rate of tax, or the lowest marginal rate of tax, that would apply to the taxpayer during the return period to which the shortfall penalty relates. For companies, the tax rate is 33%. For individuals, the tax rate is the lowest marginal tax rate.

Example: In the case of a company, a loss of $1,000 would be sufficient to pay a penalty of $330 ($1,000 × 33%).

Once a net loss has been used to pay a shortfall penalty, that loss is no longer available for any other use.

Inland Revenue’s Approach
A taxpayer who has no losses carried forward from prior years, or has insufficient losses to eliminate both tax and penalty, but who expects to have losses in the current year, can elect to use those losses, even though the final loss for that current year has not been established.

If the taxpayer does incur sufficient losses for that current income tax year, the shortfall penalties are deemed to have been paid by the due date.

However, if at the end of the income year the taxpayer does not incur sufficient losses, late payment penalties and interest will be imposed on the tax shortfall penalty that should have been absorbed by the losses.

Losses can only be used to offset Income Tax Penalties
Penalties which relate to anything other than income tax are not assessable income items and the losses cannot be offset against them. Losses are not available to be offset, for example, against shortfall penalties on PAYE, as this is not income tax to the employer.

See us First Before Making any Financial Decisions
To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

Claiming Entertainment Tax

As entertainment expenditure can give significant private benefits, there are specific limitations on deductions for this when making a claim for tax purposes. These limitations restrict deductibility to 50% on a wide range of entertainment expenditure.

What Does it Apply To?
The regime applies to expenditure on: 

  • Corporate boxes – corporate boxes, marquees, or tents, and similar exclusive areas at sporting, cultural, or other recreational events or activities occurring off the business premises of the taxpayer. (This includes expenditure on tickets or other rights of entry to such boxes or other areas.) 
  • Holiday accommodation – accommodation in a holiday home, time-share apartment, or similar leisure venue (not including accommodation which is merely incidental to business activities or employment duties). 
  • Pleasure craft - yachts or other pleasure craft. 
  • Food or beverages food or beverages provided or consumed: 
    • As an incidence of the type of entertainment listed under the other three headings
    • Off the business premises
    • On the business premises at a party or in a boardroom, executive dining area, or other similar exclusive area

The regime also applies to the extent that allowances, reimbursements, or expenses are paid to employees for employees’ expenditure on a specified type of entertainment and the allowance or reimbursement is exempt from tax.

Specified types of entertainment provided to employees will, in certain circumstances, be subject to fringe benefit tax, rather than the 50% non-deductibility rule.

Entertainment that is Excluded
Some expenditure will not be subject to the 50% non-deductibility rule. This expenditure will be fully deductible providing it satisfies the deductibility criteria.

Food or Beverages 

  • Food or beverages consumed while travelling in the course of business activities or employment duties, unless: 
    • The travel is principally for the purposes of enjoying entertainment
    • Consumed at a meal or other function at which an existing or potential business contact is a guest
    • Consumed at a party, reception, celebration meal, or other similar social function
  • Food or beverages consumed at a conference lasting at least 4 hours, unless the event is principally for the purpose of entertainment. 
  • A reasonable amount of food or beverages consumed by an employee to the extent that the employer pays an allowance or reimbursement for overtime for the cost of food or beverages, and the allowance or reimbursement is exempt from tax. 
  • A reasonable amount of food or beverages provided as morning or afternoon tea in a boardroom, executive dining room, or other similar exclusive area, or provided at a conference unless the event is principally for the purposes of entertainment. 
  • A light meal provided by an employer to employees in a boardroom, executive dining room, or other similar exclusive area where the meal is enjoyed as part of the employees’ business or employment duties.

Advertising or Promotional Activity for General Public

  • Entertainment to the extent to which it is sponsored principally to advertise or promote a business or goods or services to the public, provided existing business contacts, employees, or associates are not given any preference. 
  • Entertainment that is merely an incidental part of a function open to the public or a trade display principally held to advertise or promote a business or goods or services.

Entertainment Consumed Outside New Zealand 

  • Entertainment enjoyed or consumed outside New Zealand.

Entertainment Provided at Market Value 

  • Entertainment provided for market value in the ordinary course of business.

Samples 

  • Entertainment that is a sample provided for advertising or promotion purposes to someone other than an employee or associate.

Charity 

  • Entertainment provided to members of the public for charitable purposes.

Reviewer

  • Entertainment that is provided to a person who is reviewing it for a paper, magazine, book, or other medium.

Entertainment which is Taxable to Recipient

  • Entertainment that is gross income of the person who enjoys or consumes it.

Fringe Benefit Tax or Entertainment Tax?
Entertainment that is a fringe benefit to which fringe benefit tax applies is also excluded from the entertainment tax regime. Entertainment provided to employees or their associates that would be subject to the 50% non-deductibility rule will instead constitute a fringe benefit subject to FBT where:

  • Either the employee may consume or enjoy the benefit at the employee’s discretion or the entertainment is consumed or enjoyed outside New Zealand
  • The benefit is not consumed or enjoyed in the normal course of employment duties

The adjustment is made annually in the GST return for the period in which the due date for filing the annual income tax return of the business falls.

The amount of this GST adjustment is not deductible for income tax purposes.

Common Entertainment Expense Items
The following table provides guidance on the treatment of certain entertainment expenditure.

 Deductible

   

 Subject to FBT

 Activity

 50%

 100%

Taking client (existing or potential) out to lunch or dinner

 Yes

 No

 No

Meals with clients while you are out of town on business

 Yes

 No

 No

Overseas business travel including meals with clients

 No

 Yes

 No

Golf club subscription for a shareholder employee paid by the company

 No

 No

 Yes FBT

Gym membership for a staff member paid by the employer

 No

 No

 Yes FBT

Dinner for a salesperson while out of town on business (no client present)

 No

Yes 

No 

Hire of a launch to entertain clients

 Yes

No 

No 

Parties and other social functions (whether at the office or elsewhere), eg Friday night drinks, staff Christmas parties, reception for existing or potential customers

 Yes

No 

No 

Conferences, educational courses, trade displays

 No

Yes 

No 

Morning and afternoon teas and light meals provided during working hours

 No

Yes 

No 

Non-taxable meal allowances paid to employees working overtime

 No

Yes 

No 

Samples of food and beverages for advertising purposes

 No

Yes 

No 

See us First
To assist you in meeting the necessary legal or tax requirements or if you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

 
GOT A QUESTION?

BACK TO BUSINESS ABC

Conflicts of Interest for Company Directors

A company director must not allow personal interests to conflict with duties to the company. The director is liable to account to the company for any profit derived from breach of this duty, even if the company sustains no loss and even if the director has acted honestly.

Potential Conflicts
The key areas of potential conflicts of interest are:

  • Contracts with the company
  • Loans to directors
  • Insider trading
  • Seizing the company’s business opportunities

Use of Company Information 

  • Directors cannot make use of information gained through their position to make a profit for themselves.
  • This duty is extended by The Companies Act which forbids an officer (defined to include director or employee) from making improper use of their position, or of information gained by virtue of their position, to gain an advantage for themselves or any other person, or to harm the company.
  • Therefore, directors are prohibited from using information to make a profit for themselves or for anyone else by dealing in the company’s shares where that information is not generally available to the public.
  • This applies to all companies, whether listed on a stock exchange or not.

When Company Information Cannot be Used

  • The Companies Act sets out the circumstances where a director may
    • Make use of, act on, or disclose corporate information
    • To whom it may be disclosed
    • For what purposes
  • A director who has gained information as a result of their position as director or employee of the company must not disclose that information to any person, or make use of or act on the information, except:
    • For the purposes of the company
    • As required by law
    • For the purposes of disclosing their interests

When Company Information can be Used
A director may make use of, act on, or disclose information if:

  • Details are entered in the interests register
  • The director was first authorised to do so by the board of directors
  • The use of, acting on, or disclosure will not, or will not be likely to, disadvantage the company

Disadvantaging the Company

  • There is conflicting case law as to whether a disclosure, use, or acting on of information is likely to disadvantage the company.
  • The cases deal with what is known as a ‘corporate opportunity’.
  • Disadvantage to the company has been found in cases where the company has been unable to make use of the corporate opportunity (through lack of resources or because a third party would not contract with the company), or the company chooses not to make use of the corporate opportunity.
  • Directors have been held liable where third parties have offered corporate opportunities to a director and intimated that they would not deal with the company itself.
  • The courts have held that the director should have tried to secure the benefit of the opportunity for the company where that opportunity was within the company’s line of business.
  • Otherwise, the director should have declined the opportunity.
  • Breach of this obligation makes the director liable to account for any profits arising out of the opportunity.

If in doubt, a director should seek the approval of all the shareholders of the company in writing before disclosing, using, or acting on information which may be prejudicial to the company.

Seizing the Company’s Business Opportunities

  • Conflicts of interest where a director could profit by taking up a business opportunity that rightfully belonged to the company, must be avoided
  • This duty is very strict. It is breached even if the company itself cannot take up the opportunity for reasons such as a lack of funds
  • This means that it is not necessary to show that the company suffered a loss in order to establish a breach of duty.
  • The director is liable to compensate the company for any loss suffered by it. They must also account to the company for any profit
  • A director can be held liable for breach of this duty in situations where, eg the director resigns as a director of the company to take up the opportunity

See us First
Talk to us before making any financial decisions.  We can assist you in meeting the necessary legal or financial requirements, or if you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.


GOT A QUESTION?

BACK TO BUSINESS ABC

Corporate Insolvency
What Happens When a Company Fails


It is not uncommon for a company to encounter financial problems at some stage during the development of its business. It may not have the resources to sustain the growth of the business, or its directors may not have enough experience to deal with the problems the company is facing. The company may be able to trade out of its financial difficulties – or it may not. When a company fails, what happens?

Alternatives
When a company fails one of three things usually happens. The company:

  • Is placed into receivership
  • Enters into a compromise with its creditors
  • Is put into liquidation

Receivership
Debenture holders (usually banks) or other secured creditors have the power to appoint a receiver to a company. The receiver takes control of and preserves the assets over which the secured creditors have security.

Receivers may be appointed by the court or privately by the exercise of a contractual power contained in the documentation creating the creditor’s security.

A receiver’s powers and duties are set out in the Receiverships Act and in the relevant security documentation.

Receivership can offer an opportunity to reconsider and restructure a company’s affairs and does not necessarily always mean the end of a business.

When the receivership option is followed, the only objective is to look after the secured creditor. The receiver looks after the secured creditor and has a duty to realise the assets of the company to repay the secured creditor. However, it should be noted that receivers have a legal duty not to take any action that would affect the rights of unsecured creditors.

Compromises with Creditors
A compromise is an agreement between a company and its creditors. Most compromises have two basic features. They provide that:

  • Creditors will be paid their debt in part or in full over a period
  • During the term of the compromise, debts are frozen and no creditor may take any action against the company

Often a compromise can be an alternative to receivership or liquidation – giving the company the opportunity to survive.

Under the Companies Act, for a compromise to succeed it must be approved by 75% in number and 75% in value of each class of creditor affected by the proposal. Creditors have the right to vote for or against the proposal and to vote for or against amendments to the proposal. Each class of creditors affected by a compromise must vote as a class. There will usually be a meeting of creditors to discuss the proposal, which gives creditors the opportunity to ask questions and ask for modifications to the compromise (if appropriate).

In order to satisfy creditors, it is recommended that an independent compromise manager be appointed to manage the proposal. Also, the documentation should be professionally prepared, comply with the Companies Act, and be comprehensive and informative.

If a compromise does not work out then the company may be put into liquidation by creditors.

Liquidation
A company is placed in liquidation by the appointment of a named person as liquidator.

In practice, a company will usually be put in liquidation through one of the following three methods:

  • Special resolution of the shareholders
  • Decision of the board of directors following an event specified in the constitution to cause liquidation
  • Court order following an application by either the company, a director, a shareholder, or a creditor of the company

Ordinarily, when a company is placed in liquidation through either of the first two methods a private sector liquidator will be appointed. Where a company is put into liquidation by court order, either the shareholders or creditors will choose their own liquidator or the Official Assignee will be appointed.

The duties and powers of the liquidator are clearly set out in the Companies Act. The liquidator has a duty to take possession of, protect, realise, and distribute the proceeds of realisation of the company’s assets to its creditors and (if any surplus remains), to its shareholders. The liquidator looks after the interests of all creditors. Once the liquidation is complete the company is struck off the companies register.

The liquidation of companies is governed by a complex set of statutory rules. Once liquidation commences, the same procedure is followed in all cases. There is no distinction between solvent and insolvent liquidation.

The effect of liquidation on the company, its directors, and its creditors is immediate and serious. Principally:

  • From the date of liquidation, the liquidator will take custody and control of the company’s assets. 
  • If the company is still trading it will usually be closed down. 
  • Although directors will remain in office, their powers will be limited. 
  • Directors have a duty to co-operate with the liquidator to enable the affairs of the company to be fairly and equitably resolved. It is an offence to conceal or remove property or records of the company. The liquidator has wide powers to seek information from directors. 
  • Directors will be required to complete a statement of affairs covering matters including the history of the company, trading, the company’s assets and liabilities, and legal claims against the company. 
  • From the date of liquidation, an unsecured creditor cannot, without the permission of either the court or the liquidator, start or continue any legal proceeding against the company or its property, or start to enforce rights against the property of the company. 
  • Creditors will receive reports from, and have meetings with, the liquidator throughout the liquidation process and the liquidator must have regard to the views of creditors. 
  • In certain circumstances, the liquidator or creditors may have the right to take action against directors, eg where the company has traded recklessly or while insolvent.

Finally
Talk to us if you think that your company may be facing financial difficulties. We will be able to provide you with comprehensive advice on your options.

See us First Before Making any Financial Decisions
To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.


GOT A QUESTION?

BACK TO BUSINESS ABC

Customers Legal Rights

The New Zealand Commerce Commission is one of the most active regulators in the country. Importantly, small businesses are not immune to Commerce Commission scrutiny. All small businesses must be aware of a number of well-established principles when dealing with consumers, some of which are discussed below.

Selling Goods and Services
Imaginative promotion of products and services is a normal part of attracting customers to your business and encouraging them to buy.

However, when you advertise or talk with your customers, take care that each selling point is factually correct. The only exception is puffery or self-evident exaggeration, eg 'whiter than white' or 'the best thing since sliced bread', where it is unlikely that any customer would take it seriously.

It is equally important to consider all facts together when examining the overall impression created in the minds of average consumers in the target audience. You must be careful that the impression of the goods and services is not misleading. In other words, it is insufficient for each point to be 'technically' or 'narrowly' correct.

Even silence can be misleading where it is clear that customers have the wrong idea about the product or service, and are relying on your advice. Predictions can also be misleading if there is no reasonable basis for making them.

Specific care must be taken when you are referring to: 

  • The characteristics of the product or service that are likely to be very important to your customers 
  • Your competitors' products, services, or businesses
  • The characteristics of the product or service that are subject to variation

Advertising Price
Any price savings or discounts advertised must be genuine and give the customer enough information to explain how they are calculated.

For example, state whether your new prices are a reduction on: 

  • Your normal selling price, ie the price at which you usually supplied the goods before the advertisement
  • The manufacturer's recommended retail price, as long as this is the price at which the goods are normally sold
  • Competitors' prices (but you must be sure you know what your competitors' minimum prices actually are)

Any price comparisons must be between substantially similar goods and services.

When advertising or using 'point of sale' promotional material that discusses price, you must: 

  • State clearly the full cash price if you are quoting a deposit, or weekly or monthly terms (also stating if this is inclusive or exclusive of GST)
  • Make it clear if other charges, eg for delivery or installation, are included in the stated price
  • Make sure consumers know what accessories, if any, are included or not included in the price

Price Fixing
Any agreement between you and one of your competitors on the price you intend to charge is illegal. Such agreements do not have to be in writing – even a 'nod and wink' understanding that can take place anywhere may constitute price fixing.

Sharing your Market
Agreeing to share the market among competitors is illegal. The Commission has found many businesses to be illegally sharing markets. The forms in which offences can take place include:

  • Agreeing not to sell certain products where those products are sold by a competitor
  • Allocating customers to each competitor in a market with an understanding not to 'poach' customers
  • Agreeing not to compete outside a specified area
  • Agreeing to share customers or products so a sales revenue parity can be maintained between competitors

Refunds
In most cases, your customers are entitled to a full refund when the: 

  • Goods or workmanship is faulty
  • Goods are unsuitable for the purpose the customer told you about before the sale
  • Goods do not match the sample the customer was shown
  • Goods differ from the way you described them, or from the way they are described on the packaging

Generally, you do not have to provide refunds where customers have: 

  • Changed their minds about the purchase 
  • Discovered they can buy the goods or services more cheaply elsewhere
  • Examined the goods before buying, and were aware of the fault (it is useful to note any such defects on the invoice or docket)

Competing with Market Leader
A firm with a substantial degree of power in a particular market cannot use this for the purpose of damaging a 'small' competitor. This can be done by refusing to deal with a competitor, or by offering to deal on such unfavourable terms that the offer amounts to a refusal.

Small businesses that are adversely affected can lodge a complaint with the Commission.
 
However, a supplier does not have to supply everyone. The onus is on the business seeking supplies to show that the supplier's action was taken with the purpose of eliminating or substantially damaging the business, or deterring or preventing it from entering that market.

Small Print
Small print is commonly used in advertising, promotions, and other marketing material. It sometimes changes or contradicts the overall impression created by print, pictures, and other promotional elements. The courts have stated that 'small print cannot save a representation from being misleading'.

12 Tips for Avoiding Misleading Representations and Product Descriptions

DO

  • Give current and correct information
  • Give all the relevant facts
  • Make sure the overall impression is correct
  • Avoid ambiguous statements
  • Back up claims with facts
  • Note important limitations or exceptions
  • Correct misunderstandings

DON'T 

  • Guess the facts
  • Leave out relevant information
  • Use unnecessary technical jargon which may confuse
  • Make promises you are unable to keep or predictions that are not founded on a reasonable basis

See Us First
If you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

Disputing an IRD Assessment

Disputes sometimes arise because a taxpayer and Inland Revenue have not reached agreement on a tax position taken by a taxpayer. If no agreement can be reached on some or all of the issues identified, there will need to be a disputes resolution process.

Disputes Resolution Process
The steps in the dispute resolution process are:

  • Either party issues a notice of proposed adjustment (NOPA)
  • If the dispute is less than $15,000 and does not involve significant legal issues it can be resolved by small claims
  • The responding party will issue a notice of response (NOR)
  • If the NOR is not accepted, a conference is called to discuss issues
  • If issues are still not resolved, a disclosure notice is issued
  • A SOP is then issued by each party and the matters are resolved in court

Notice of Proposed Adjustment (NOPA)
A NOPA is the first formal step in the disputes process. It can be issued by either party.

The purpose of a NOPA is to ensure that the party receiving the notice is aware of the arguments on which the other party is relying.

A NOPA must contain the following:

  • The items to be adjusted
  • The tax laws on which the adjustments are based
  • An outline of the facts giving rise to the adjustments
  • The legal issues arising from the adjustments
  • The propositions of law relied on or distinguished in the adjustments

When Inland Revenue issues a NOPA, the taxpayer then has the opportunity to dispute these adjustments before the assessment is issued. The intention is that, in most cases, the dispute will be settled before the assessment is issued so that no further proceedings will be necessary.

Acceptance
If the NOPA is accepted in writing, the disputes process ends and an amended assessment is issued.

If either party fails to respond to the NOPA within 2 months they are deemed to have accepted the NOPA, and an amended assessment is issued.

Late Response
If the taxpayer fails to respond to the NOPA the 2-month period, they may be able to obtain an extension of time to respond. They must prove there are exceptional circumstances are that beyond their control and provide reasonable justification for a late response.

Small Claims
If the dispute is less than $15,000 and does not involve significant legal issues it can be resolved by small claims.

Notice of Response (NOR)
If either party do not accept any part of the NOPA, they must notify the other party by issuing a NOR within 2 months of the date of issue of the NOPA.

The NOR is the vehicle used by the recipient of the NOPA to formally reply to the proposed adjustment. It must specify: 

  • The items in the NOPA that are considered incorrect; 
  • The tax laws relied on; 
  • The facts in the NOPA that are considered incorrect; 
  • Any further facts relied on; 
  • Any additional legal issues that are considered to arise; and 
  • The propositions of law relied on regarding the response notice.

If the NOR is not accepted a conference can be called to discuss the NOPA.

Conference
The purpose of the conference is to facilitate the resolution of any disputed facts and issues that have been raised in the NOPA.
At this stage the dispute can be resolved and an amended assessment issued.

Disclosure Notice
If the dispute is not resolved because the NOR is not accepted, Inland Revenue may issue a disclosure notice to the taxpayer. A disclosure notice may be issued at any time from the issue of a NOPA. The disclosure notice must include Inland Revenue’s statement of position, and must also advise the taxpayer of the effect of the evidence exclusion rule.

A disclosure notice requires both Inland Revenue and the taxpayer to detail in writing their respective statements of position.

Statement of Position
A statement of position (SOP) is then issued by each party and the matters are resolved by adjudication or in court.

Each SOP must:

  • Give an outline of the facts on which the party intends to rely
  • Give an outline of the evidence on which the party intends to rely
  • Give an outline of the issues that the party considers will arise
  • Specify the propositions of law on which the party intends to rely

Inland Revenue Starts Dispute
If Inland Revenue starts the dispute, then Inland Revenue must issue a SOP at the same time that a disclosure notice is issued. The taxpayer must then file their own SOP within 2 months of the disclosure notice.

Inland Revenue may reply to the taxpayer’s SOP by providing additional information. They must do this within the 2 months of the date of issue of the taxpayer’s SOP.

Taxpayer Starts Dispute
If the taxpayer starts the dispute, the taxpayer must issue a SOP within 2 months of the date of the disclosure notice. Inland Revenue have 2 months to prepare a SOP in reply to the taxpayer's SOP.

Extension
The High Court may allow an extension if either party applies before the 2-month response period expires, and certain conditions are met.
Also, the parties may agree that either can add additional information to their statement of position at any time.

See Us First
To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

Farming or Agricultural Business?

When determining if an activity constitutes a farming or agricultural business, you need to consider whether the activity constitutes a business, and whether it is carried on for farming or agricultural purposes.

Are you in Farming or Agricultural Business?

Certain deduction and incentive provisions are only available to those taxpayers who can show that they are carrying on farming or agricultural business.

The test is generally met where it can be established that the intention of the taxpayer is to make a profit.

Inland Revenue accepts that any of the following activities are carried on for farming or agricultural purposes: 

  • Apiarists, beekeeping 
  • Animal husbandry
  • Dairy farming
  • Grain and seed growers
  • Market gardening
  • Orchardists
  • Poultry farming
  • Sharemilking
  • Tobacco growing
  • Viticulture and growing grapes

Inland Revenue rulings and case law have determined that the following activities are not within the definition of a farming or agricultural business: 

  • Dealing in livestock
  • Leasing or bailing livestock (as bailor)
  • Aerial top-dressing
  • Providing services to persons carrying on farming or agricultural business, eg agricultural contracting, seed cleaning, dressing, etc

What is Considered Income
Items of income derived from a farming or agricultural business include:

  • Compensation for condemned stock
  • Depreciation recovered on sale of farming assets
  • Proceeds from sale of minerals, metal, timber, or flax
  • Prize money won at any agricultural show
  • Estimated value of meat and produce used for private or domestic purposes
  • Grazing fees, and leasing and rent for farm property
  • Proceeds from the sale of dairy produce
  • Proceeds from the sale of meat
  • Proceeds from the sale of wool
  • Income equalisation deposit scheme refunds and interest
  • Insurance proceeds for crop or stock losses
  • Produce, wool, and livestock on hand at balance date
  • Stud fees
  • Unexpired portion of accrual expenditure

Crops

  • Where growing crops are purchased with land, and where a separate price is identified, the purchaser may claim a deduction for the allocated portion. The vendor will be the recipient of gross income for that amount.
  • Where no separate price is allocated, the crops cannot be regarded as trading stock but as part of the land. In such circum-stances, no allowance is made for a deduction to the purchaser, or income to the vendor.

Forestry

  • The sale of timber whether milled or standing is included as gross income
  • The sale of land with standing timber is deemed to be a sale of timber

General Items of Deductible Expenditure
The usual principles governing the deductibility of business expenditure apply to farmers just as for any other taxpayer.

Accordingly, items such as telephone rental, newspapers, and the business proportion of motor vehicle expenses, are all deductible to the extent that they are incurred in the production of gross income.

In addition to ‘normal’ business expenditure, there are some deduction rules peculiar to farming: 

  • Where food (as part of lodging) is provided to employees and the actual cost of this cannot be determined, the CIR will allow a deduction of $10 per person per week. 
  • Where the domestic dwelling is situated on the farm property, 25% of any outgoings on house power or house repairs and maintenance constitutes deductible expenditure. This applies mainly to full-time farmers, although in certain circumstances part-time farmers may also qualify. 
  • Expenditure incurred on fertiliser and lime, including the spreading of it, is deductible either in the year incurred or any of the following 4 income years (the taxpayer can choose). 
  • Wages paid by farmers to their spouses for farm work performed, eg cooking for employees etc, will be deductible provided the prior approval of the CIR has been obtained.

Farm Development Expenditure
A basic principle of tax law is that expenditure on improvements to land is capital expenditure and is not deductible for tax purposes (although specific land improvements may be depreciable under the depreciation regime).

However, farmers are allowed to deduct certain expenditure of a developmental nature. Immediate deductibility is available for expenditure incurred on: 

  • The destruction of weeds, plants, or animal pests detrimental to the land
  • The clearing, destruction, and removal of scrub, stumps, and undergrowth
  • The repair of flood or erosion damage
  • The planting and maintaining of trees for the purposes of shelter and preventing and combating erosion
  • Construction of fences for agricultural purposes, including the purchase of wire or wire netting for the purpose of rabbit-proofing new or existing fences

While the taxpayer must be engaged in a farming business on the land, ownership of the land is not a prerequisite for a claim for a deduction.

See Us First 
To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

FBT Examples and Issues

Fringe benefit tax (FBT) is a tax imposed on employers who provide fringe benefits to employees. FBT is intended to tax fringe benefits that had previously been received free of tax and encourage a switch from remuneration paid in the form of non-taxable benefits to cash remuneration, which is subject to tax in the hands of the employee.

What are Fringe Benefits?
Some fringe benefits included in the legislation are: 

  • The provision of a motor vehicle
  • Employment-related loans
  • Subsidised transport
  • Discounted goods and services
  • Other fringe benefits
  • Sickness, accident, or death benefit fund contributions if exempt income
  • Certain superannuation contributions after 15 December 1989
  • Any specified insurance premium or contributions to any insurance fund of a friendly society if not gross income
  • Non-cash dividends
  • Entertainment provided to an employee where it may be enjoyed at a time chosen by the employee, or if the entertainment is enjoyed or consumed outside New Zealand and other than in the course of employment duties

Who has to Pay
The liability to pay FBT is dependent on the existence of an employment relationship.

A benefit is not a fringe benefit for FBT purposes unless it is provided or granted by an employer to an employee ‘directly or indirectly, in relation to, in the course of, or by virtue of the employment of the employee’.

Example 1
Jim works full-time in his father's motorcycle repair shop. His father, who operates his business as a sole trader, gives Jim a motorbike for his 21st birthday.

Although Jim is an employee of his father, no FBT liability arises because the gift was not given to Jim by virtue of the employment relationship but rather out of natural love and affection for a family member.

(If Jim's father operated his business as a company, instead of as a sole trader, the provision of the free motorbike to Jim would still not be subject to FBT, but it would constitute a dividend, being company property distributed for less than market value to an associated person of a shareholder.)

Example 2
Jim (from the previous example) purchased a new set of bike leathers from his father's business at 20% discount. The same discount is available to all employees. In this case an FBT liability arises because the benefit was provided by virtue of the employment relationship.

Other Fringe Benefits
In addition to benefits provided by employers directly to current employees, the following are also subject to FBT:

  • Fringe benefits provided to employees who have not yet commenced working for the employer
  • Fringe benefits provided to former employees
  • Fringe benefits provided to associated persons of employees
  • Fringe benefits provided to employees by third persons with whom the employer has entered into an arrangement

Car parks
Benefits provided and enjoyed on the employer's premises are exempt from FBT. The exemption includes a car park provided to an employee where:

  • The car park is on land or in a building owned or leased by the employer
  • There is an exclusive right to occupy the property
  • There is a legal estate or interest in that property

The exemption also applies to a space in a public car park where the space is subject to a lease between the employer and the proprietor of the car park This ruling applies to 31 March 2005 and includes the following examples.

Example 1
Employer provides employees with car parks on land across the road from where the employer conducts its business. The employer leases the land under a written and enforceable lease agreement. The leased land is part of the employer's premises. The car parks are exempt and no FBT liability arises. It does not matter that the employer carries out no business on the leased land.

Example 2
Employer arranges parking at a commercial car park for three employees. No particular spaces are designated for them, but they are able to park in a reserved area in which spaces are always available for the three employees. The car park is not part of the employer's premises because the employer does not have ownership or legal possession of the car parks. Specific car parks are not allocated to the employer. The car parks are not exempt and are subject to FBT.

Example 3
Employer arranges parking at a commercial car park for three employees. The employer is allotted three specific parking spaces. The car park proprietor bills the employer directly. The car parks are not subject to a lease or rental agreement. Although the employees have exclusive use of three specific spaces, the car park is not part of the employer's premises because the employer does not have ownership or legal possession of the car parks. The employer merely has the right to use them. The car parks are not exempt and are subject to FBT.

Example 4
A company with many employees enters into a written and enforceable agreement to lease the whole of the top floor of a nearby car park building. Only the company's employees can access the car parks. The leased car parks are part of the employer's premises. The car parks are exempt and no FBT liability arises.

Payment of FBT
FBT is collected each quarter – a quarter being the 3 months ending on the last days of March, June, September, and December.

Within 20 days from the end of the quarter, every employer must file an FBT return showing the details requested in the return, and must pay the due amount of FBT within the same period.

The time for filing the return for the fourth (March) quarter is extended to 31 May.

Where no fringe benefit has been provided, a nil return is required. There is provision for this requirement to be waived by the CIR.

Where FBT is paid on an annual basis, it is calculated in the same manner as it would be calculated for fringe benefits provided or granted in the four consecutive quarters that comprise that year.

The annual FBT return is due by 31 May following the year end, together with the FBT and any use of money interest owing. Use of money interest is calculated from the day a quarterly FBT payment would have been due, to the day of annual payment.

No interest is payable where an employer pays FBT on an annual basis.

See Us First
If you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

Long-Term Business Finance

Long-term business finance includes instruments which service a financing need for periods greater than one year. These include, term loans, leasing, hire purchase,
and revolving credit.

Term Loan
A term loan is an advance of money repayable in full by a fixed date.

The agreement may provide that the advance will be reduced by instalments before the fixed date.

It may also be known as a fully drawn advance.

A facility providing for repayment in one sum on maturity is termed a ‘bullet’.

Advantages 

  • Certainty of conditions applicable to the advance
  • Amortisation of principal by regular instalments
  • Interest will usually be payable monthly in arrears. The lender will be able to enforce its agreement for the principal outstanding and accrued interest
  • An interest-only loan with single repayment may be negotiated

Disadvantages 

  • Inflexibility of conditions
  • Available for one-off transactions only
  • Variability of interest rates

Leasing
A lease involves the hiring of goods by one party who owns the goods (the lessor) to another party who uses the goods (the lessee). The lessee does not have the right or option to buy goods at the end of the term or otherwise.

Leasing is a method of acquiring the use of specific goods, normally plant and durables, but not the ownership of them (as in hire purchase). There is a liability to pay rent for the goods over the period while the lessee has the use of the goods. At the end of the agreed period of use, unless the lease is renewed, the goods must be returned to the lessor.

Advantages

  • Leasing is a very flexible method of finance and allows for different cash flow and taxation results to be achieved
  • Leasing offers a financing method largely uncontrolled by statute, making it the most flexible. Even with taxation limitations, leases can still be structured on a tax-effect basis to provide lower rentals. Because the nature of the transaction involves supply by the owner, there is not the problem of registration of charges or obtaining consent of debenture holders which arises, for example, in finance by chattel mortgage
  • An operating lease is still an off-balance-sheet method of acquiring the use of plant or equipment

Hire Purchase
A hire purchase transaction involves the hiring of goods by one party (the hirer) from the owner of the goods (the owner) where the hirer has an option to purchase the goods before the end of the term, and obtains title on completion of the contract.

Hire purchase is a method of acquiring specific goods, normally plant and durables, by instalment payments.

It may be used for some floor plan (demonstration model) transactions. There is a liability to pay the purchase price plus terms charges (interest component) over a period, while the hirer has the use of the goods. When all payments are made, ownership passes.

Advantages 

  • Has been used for about a century and the law and practice is well settled. It can be used to supply goods to be acquired by the hirer. In a lease, the hirer has no right or option to acquire the goods
  • Can be used by the owner to pay income tax on the financing method which might otherwise not be available
  • Because the nature of the transaction involves supply by the owner, there is not the problem of registration of charges or obtaining consent of debenture holders which arises in, for example, finance by chattel mortgage

Disadvantages

  • Statutory requirements and compulsory conditions and warranties have made hire purchase rates higher than those for leasing
  • The statutory format is inflexible on some matters

Revolving Credit
Revolving credit is a facility provided by a financier to an agreed maximum limit where periodic repayments of a fixed amount are required.

Amounts repaid are available for re-drawing.

A new drawing may be utilised in making a required repayment.

Advantages 

  • Flexibility in the form of credit amounts and term
  • The ability to draw credit so that bills or loans are utilised over shorter periods, thus attracting current interest rate or bill discount rates
  • Notification as to changes in interest rates and other charges

Disadvantages

  • If the rates of interest or bill discount rates are volatile, the borrower will be subject to fluctuations in cost, unless rates are fixed for a period
  • The lender, in granting a facility to be drawn at the discretion of the borrower, has some uncertainty in how much the facility will be called on at any particular time
  • In the case of a fixed-rate facility, the lender must commit to that rate for that time, even though the lender’s own cost of funds may vary

See Us First

  • Before making any financial decisions
  • To assist you in meeting the necessary legal or financial requirements
  • If you consider that any of the issues contained in this fact sheet may affect you

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

Short Term Business Finance

Short-term business finance includes instruments which service a financing need for a period of less than one year. These include overdrafts, debtors factoring, debtors management, and promissory notes.

Overdraft
An overdraft is a bank lending arrangement. An overdraft arrangement is usually subject to an annual review by the bank. An overdraft is usually repayable on demand by the lender and is generally used for working capital needs rather than for major capital projects.

Advantages 

  • An overdraft is a convenient way of borrowing money and paying accounts by cheque, with interest charged on the daily overdrawn balance outstanding
  • An overdraft provides short-term finance on a needs basis
  • Amounts may be drawn or repaid at any time
  • Amounts of any denomination are able to be drawn
  • Subsidiaries or other persons may be granted drawing rights

Disadvantages

  • Interest rates may be varied at the lender’s discretion
  • The amount overdrawn is repayable on demand
  • Hidden costs of establishment fees, unused fees, limit fees, commitment fees, and administration fees may increase the cost of this facility considerably

Debtors – Factoring
Factoring involves selling debts, which are usually trade debts, to a purchaser (the factor) for a discounted price. Many small businesses have few assets to offer as security for working capital finance, except stock and debtors. A business which only provides services has debtors, but no stock. Factoring is a method of obtaining finance by selling the right to receive payment at a future date in exchange for receiving a discounted amount now.

Retention Account
The factor may hold back money from the purchase price in a fund to cover bad debts. An agreed percentage of the purchase price of each debt may be retained to cover bad debts and the balance paid to the client only after all debts have been paid from the fund or from the debtor.

Guarantee
The client may have to guarantee that all or some debtors will pay their debts, and if they do not, the client will have to pay.

Recourse
Normally the client will be liable to pay the factor if the debt is wholly or partly irrecoverable, whether it is for invalidity, set-off, or due to another reason.

Notification or Non-Notification
In some cases, the debtors are notified of the sale to the factor and the factor collects the debt directly. In other cases, the debtors are not notified, and pay the client who remits these receipts to the factor. Non-notification may be better for a client who does not want debtors to know how the client is raising funds.

Debtor Management
A type of factoring is debtor management, where the factor does not buy the debts, but simply collects them for the client.

Pitfalls
Book debts fluctuate during the business cycle and contain some risks for all parties, but mainly for the financier as follows:

  • A debtor may refuse to pay, claiming a set-off against the client
  • The client may factor fictitious debts
  • The client may attempt to factor the same debt with different financiers
  • The debtor may pay the client who then fails to pay the factor

Advantages
This has advantages for businesses without computerised accounting and collection methods and will also give the client the benefit of the factor’s knowledge of the credit rating of various debtors. Also:

  • Factoring is a simple method of obtaining working capital finance. There are few complications in documentation, registration, and stamp duty
  • If debtor management is included, this may assist a small business in administering its finances, providing controls, etc
  • Cash is usually provided on delivery of invoices or at least within 7 days
  • Factoring does not distort the balance sheet
  • The factor may accept the full credit risk

Disadvantages
Most of the disadvantages fall against the factor and therefore this arrangement is usually more expensive than other forms of short-term funding.

Promissory Notes
A promissory note involves a borrower making a written promise to pay the bearer of the promissory note the face value of the note on a certain date.

Unlike a bill of exchange, there are no third parties named on a promissory note. The credit stands or falls on the name of the maker, and is often referred to as one name paper.

For these reasons, only first class credit-rated companies should consider issuing promissory notes.

Advantages
Promissory notes: 

  • Are short and simple
  • Are readily transferable, independent of any underlying transaction
  • Give the lender the advantage of providing money under a document which can be readily cashed or used as security to obtain cash
  • Give the borrower the advantage of having more than one lender as a source of large-scale fundraising

Disadvantages

  • Promissory notes lack flexibility in variations of term, floating interest rates, etc. On a long-term transaction, periodic ‘roll-overs’ would probably be required
  • For the borrower, the transfer independently of the underlying transaction is a disadvantage

See Us First
To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

Gifts & Sponsorship

Individuals (whether in business or otherwise) making gifts or donations to charities may qualify for a rebate.

Gifts Generally
Generally, the person making the donation (the donor) is unable to claim a tax rebate if they receive anything in return for making the donation.

Sponsorship Generally
Sponsorship is when you pay to promote your business in a way that also benefits the persons or organisation you are sponsoring.

According to Inland Revenue, costs for sponsorship are deductible where there is a connection between the expenditure and the business.

In order for Inland Revenue to accept that this ‘connection test’ exists, you must show that your business is being promoted by incurring the sponsorship expenditure.

The following factors are taken into consideration: 

  • The specific terms of the sponsorship agreement. For example, a specific requirement for the recipient to promote the business, and the extent and prominence of the business exposure specified in the agreement, are both relevant. 
  • The place of the sponsorship arrangement in a coherent marketing strategy. For example, if a business's market research has identified that potential customers frequently attend cultural events, then part of its marketing strategy may be to sponsor such events in return for its name and products being promoted during the event. 
  • The relationship between the market (or potential market) and the taxpayer's business. For example, market exposure at a tennis tournament is directly related to the business of a sports equipment retailer. 
  • The relationship between the expenditure and the resulting income derived. For example, the sale of 10 tractors at an agricultural field day, by a tractor manufacturer sponsoring the event in return for being able to display the tractors, shows a direct relationship between the sponsorship expenditure and the derivation of income.

Note: The deduction for sponsorship expenditure available in any particular income year may be limited to the portion that relates to that income tax year.
 
Example 1
Bunty is a sole trader who operates a motor mechanic business. He sponsors the local rugby league team.

Under the terms of the sponsorship agreement, which covers the year to 31 March, Bunty agrees to pay up-front a sum of $3,000 towards the team's running costs.

In return, the team agrees to display Bunty's business logo on all rugby uniforms, bags and vehicles used by the team during the year.

The cost incurred by Bunty will be fully deductible. The requirement that the team display his business logo on the uniforms, bags and vehicles indicates that the expenditure was incurred to promote his business and is therefore deductible.

Example 2
Suppose Bunty (from Example 1) also agreed to reimburse the team for the purchase of their van (ie the team owns the van), provided his business logo is prominently displayed on it. Alternatively, what if he instead purchased the van himself, retaining ownership of it, but allowed the team to have full use of it provided his business logo is prominently displayed on it.

Where Bunty reimburses the team for the purchase of their van, although the van is an asset it is not considered that the asset prohibition applies since Bunty does not own the van himself, nor did he acquire it. Therefore, no enduring asset results to Bunty from this expenditure.

However, if Bunty purchased the van himself and retained ownership of it, the capital prohibition would apply as the expenditure results in an enduring asset (ie, the van) owned by him. However, a deduction for depreciation may be allowed.

Example 3
Jenny is in business as a scuba-diving instructor. She enjoys horse riding and watching horse riding competitions. She decides to organise a gymkhana with prizes being given for the winning rider.

She arranges for a billboard to be erected at the site of the competition with her business name, etc, on it. She expends a total of $2,000 in arranging the competition.

In this case, Jenny's scuba-diving instructing business bears no relationship to horse riding. The attendees are not a natural audience for scuba-diving promotion so as to reasonably form a potential market.

This, considered with the fact of Jenny's private enjoyment of horse riding, strengthens the conclusion that there is no identifiable connection between the expenditure and her business.

While there is some business exposure in the form of a billboard, the expenditure on the competition was likely to have been incurred for private enjoyment, with any business promotion being incidental to that private enjoyment purpose. On this basis, and in the absence of further evidence as to Jenny's purpose in incurring the expenditure, no deduction would be allowed for expenditure on the competition.
 
Example 4
John is a shareholder-employee of ABC Ltd, a marine products supplier. His hobby is to race yachts. ABC purchases a yacht, which John races in various yachting competitions.

The company's name and logo is painted on the hull of the boat. Here, a physical asset is acquired by the business and therefore no deduction is allowed.

However, because the company's name is displayed on the yacht, and ABC's business of supplying marine products would be potentially promoted in a yachting competition, a deduction for depreciation will be allowed. The fact that John enjoys yachting does not preclude a depreciation deduction being allowed.

How to get Started
Talk to us if you are considering sponsoring an event or sports team.

We will be pleased to assist to ensure you make the most of any tax advantages that may be available.

See Us First Before Making any Financial Decisions
To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you. 

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

Giving Credit and Getting Paid

Having an effective credit policy in place before supplying goods or services is critical for the effective control of cash flow in your business. Before giving credit to any new customer, some time should be spent ensuring your business will be protected if the debtor has difficulty meeting payments. Time spent doing an initial credit assessment can save money and frustration.

Should I Give them Credit?
Before making a decision about giving credit you should gather and evaluate some information about the applicant. The assessment of a new account doesn’t require guesswork. There is a certain amount of readily available information that should be gathered before granting credit to any new customer.

The following checklist can be used to assess a customer’s credit risk:

  • Trading name – does this differ from the registered name? 
  • Where is the registered address? 
  • Names of the business owners, directors, etc
  • Business structure – is it a company, trust, sole trader, or partnership? 
  • History of business – when did the business begin operating etc? 
  • Business premises – are these owned or leased? 
  • Details of banker – which bank do they use? 
  • Trade references – what do other suppliers say about this customer?

If further information is required, the following additional sources can be considered: 

  • Trade suppliers
  • Mercantile Gazette, newspapers, and trade journals
  • Credit bureaus
  • Sales staff
  • Published financial statements/annual reports

How can I Protect Myself?
Where possible it is always best to obtain some form of security from credit customers to protect your business. Four types of securities are set out below.

  1. Third party guarantees and personal guarantees
  2. These are guarantees given by individuals (often company directors) to suppliers or creditors. Individuals give the suppliers or creditors access to their personal assets if the debt to the supplier is not paid.

  3. Caveats over property
  4. A caveat is a prohibition that prevents a person from obtaining a further mortgage or selling a property without the consent of the person whom filed the caveat. Consent is usually given in exchange for payment of any debt secured by the caveat, or when the payment can be substituted with a fresh security.

  5. Mortgages
  6. Mortgages over real estate (buildings and land) are powerful forms of security, because they give the mortgagee the right to sell the property where there is a default in payment.

  7. Legal title in goods – Romalpa clause
  8. The purpose of a Romalpa clause is to protect the seller from the insolvency of the buyer where goods have not been paid for. Title in the goods does not pass until payment is received. Typically a clause on the invoice states ‘Title will not pass until these goods have been paid in full’. Under the PPSA, the supplier will need to register the security.

Early Warning Signals
To ascertain whether your customer is suffering financial difficulty, you need to find out about their business. This requires close monitoring that does not have to be time-consuming or expensive, and may help you avoid high debt collection costs or bad debts. Typical warning signals include:

  • Comments such as ‘We are suffering temporary cash flow problems’
  • Adopting delaying tactics – unjustifiably complaining about work done or goods delivered or saying ‘Can you send me a copy of the invoice?’
  • The person responsible is always ‘out of the office’ or ‘unavailable’
  • Them not being aware of the debt or when it was due

Before granting further credit to overdue accounts, a few basic questions must be asked. Some of the more critical ones are:

  • Is the debtor short of working capital, ie cash?
  • Is the debtor known to be in financial trouble?
  • Does the debtor normally pay on time? 
  • Is the debtor’s business growing or getting smaller? 
  • Has the debtor requested additional terms of payment before? 
  • Has the debtor suffered a significant reduction in staff numbers or has the business downsized?

Common Customer Excuses

Despite checking customers’ creditworthiness, payment difficulties can still arise. The following is a list of common excuses and the responses you can use to encourage an earlier payment:
 

 Customer Response
 The cheque’s in the mail Could you tell me when it was posted, the number of the cheque, and the amount?
 I’ll have to check my records and get back to you I would appreciate that, but to save us time and money, could you please look it up now?
 I’ll call you back with the details I will make a note that you will call me back. If I do not hear from you this afternoon, if I phone you at 3pm, will you have the details?
The person who placed the order no longer works here Was the order personal or for use in your company?
PERSONAL: Can you tell me how I can contact them?
COMPANY: Who uses the goods now? Can you put me through to them?
We have a cash-flow problem at the moment, and are awaiting a large payment. As soon as it arrives, I will pay you I am sorry to hear that, but I am sure you realise that your account is 30/60/90 days overdue. I suggest you arrange to send me a post-dated cheque, or pay the account in three instalments with three post-dated cheques.
We will not be paying this account until a credit note has been raised Could you tell me how much the credit is for? I suggest that you deduct this amount and send us a cheque for the balance with a copy of your invoice. When we receive your cheque we will adjust the balance of your account

Next Steps
Talk to us. If you want to set up a credit policy, we will be pleased to assist. Remember, once you have set in place a credit policy, it will be up to you to use it effectively to get the best out of your business. If you consider that any of the issues contained in this fact sheet may affect you, see us first.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

GST:  Things to Watch Out For

GST is charged by GST-registered persons on the supply of goods and services in the course of a taxable activity.

Impact on Cash Flow 

  • The impact of any transaction on the cash flow should be considered before entering into it
  • Generally, GST improves cash flow, because you will accumulate and hold the tax periodically paid to IRD for an average of 2 months
  • This effect is enhanced for retailers, who sell for cash and purchase on credit, but diminished if the terms of trade are reversed
  • GST favours early collection of debts by suppliers, and full use of any credit period offered (in the absence of prompt payment discounts)

Common Problems
There are common GST problems that you should be aware of to avoid any disadvantage. Some of these are discussed below.

Payment of Deposits
The effect of the payment of a deposit for goods and services is often not recognised for GST purposes. Given that GST is generally payable at the time an invoice is issued or at the time any payment is received from a customer (whichever comes first), the payment of a deposit will generally result in a supply being deemed to have been made at that time for GST purposes.

Therefore, as the supply is made at the time the deposit is paid, the full GST for the supply must be accounted for at this time. It is irrelevant that the deposit may represent only a small part of the total price and may not even be enough to cover the GST.

For example, in a sale and purchase transaction for $112,500 (including GST), the purchaser may be required to pay a deposit of $11,250 (10%). On payment of the deposit, the supplier will be required to account for GST of $12,500 (being the GST on the total supply). The supplier will have received $11,250 and paid out $12,500, resulting in a net cash outflow of $1,250.

In such situations, the contract or agreement between the parties should consider and provide for payment of sufficient deposit to match the GST that will have to be accounted for.

Court-Awarded Damages and Settlements
The area of court-awarded damages and settlements made out of court is also of some concern. For example, where a party to a contract has not satisfied its obligations under the contract and the court awards damages to the other party, the question arises as to how GST should be accounted for in relation to the amount awarded.

Generally, the nature of the transaction to which the claim relates would indicate whether there is any liability for GST, ie where a damages award relates to the non-payment by the purchaser for a taxable supply of goods and services, it would seem that there will be a GST liability.

However, if the non-payment had related to an exempt supply of goods and services, no GST liability would arise. Where such situations occur, it is often difficult to determine the nature of the underlying supply and the nature of the damages that are being awarded.

Where a GST liability does arise, the supplier is required to account for GST at the time the amount was awarded or settled and, as this factor may not have been considered, the amount may not compensate for this. Similarly, if GST was not considered at the time the amount was awarded or settled, the cost to the payer could be lower than intended, as an input tax refund could be available to them.

However, these problems may be avoided if adequate consideration is given to GST at the time the amount of damages or the settlement is calculated.

It should also be noted that in some circumstances the damages or settlement paid may not be regarded as consideration for any supply of goods or services. In these circumstances, there will be no GST consequences arising from the payment of the damages or settlement.

Transactions in the Nature of Hire
Hire purchase transactions are another area where problems commonly arise.

Where a supply of goods and services is under a hire purchase agreement, the supply is deemed to occur for GST purposes when the agreement is made, and the full GST must be accounted for at this time.

A hire purchase agreement can be compared with an agreement to hire, where a supply arises each time a payment becomes due or is received, and the GST is payable only on those instalment payments.

For GST purposes, the term ‘hire purchase agreement’ has the same meaning as defined in the Hire Purchase Act 1971. As this term is defined very widely, situations often arise where transactions are mistakenly considered to be agreements to hire when in fact they are hire purchase agreements. The resulting mistake is an underpayment of GST, in that GST is incorrectly partially accounted for each time a payment becomes due or is received, rather than in full when the agreement is entered into.

To avoid such mistakes, transactions in the nature of leases, rents, hire by instalments, etc require careful consideration for GST purposes.

Zero-Rating
The zero-rating of certain supplies of goods and services often raises difficult questions, eg you may believe that the sale of an asset should be zero-rated and, therefore, not charge GST to the buyer. However, if the sale should not be zero-rated, and GST should have been charged, you will have to account for GST output tax to IRD.

This unexpected cost may not necessarily be recoverable from the buyer (depending on the contract). Alternatively, GST may mistakenly be charged on a supply of goods and services when the supply should have been zero-rated. In this situation, the buyer will have paid GST to the supplier but will not be able to claim an input tax deduction. The supplier will have incorrectly paid output tax to IRD but will be able to claim this back.

This problem has been alleviated, to an extent, for the supply of a taxable activity as a going concern. It is provided in the GST Act 1985 that where the parties agree in writing that the supply is zero-rated as a going concern, and the contract or agreement does not provide for a price increase because of GST if it is not so zero-rated, and the supply is in fact not zero-rated, the supplier may increase the consideration for the supply by the amount of GST at the standard rate.

There may still be a delay for a supplier in recovering such GST amounts, eg if there is a dispute as to whether or not the supply comes within the zero-rating provision. It may still be beneficial to include an express provision within the contract that also provides for the time at which the supplier can recover the GST.

The application of zero-rating is not abundantly clear in a number of areas. In the past, there has been considerable uncertainty as to the zero-rating of taxable activities sold as a going concern. In particular, the question arose as to what is, or is not, a going concern. There is now a statutory definition of ‘going concern’.

These uncertainties cause practical difficulties in the concluding of business transactions and contracts, as the GST considerations are not the same for each party. Also, the disadvantage suffered by one party may result in an advantage to the other. It is clearly important that purchasers and vendors fully consider GST before finalising transactions.

See us First
If you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

How to Reduce your Accounting Fees 

There are a few simple things you can do to help us reduce your accounting fees. These will help make the annual accounting and taxation return process more efficient. It will also help minimise the effort on this part of our services so we can focus on helping your grow your business.

Information
Occasionally we will send you information about topics that affect you. Take a moment to read the information and contact us if you have any questions.

Include Us
We can provide advice before a transaction takes place and look for any possible tax advantages or opportunities that may not be available to you once the transaction has been completed.

Advise Us of Any Changes
Quite often, changes happen throughout the year that can have an impact on what accounts need to be prepared and therefore impact on our fee.

  • There are different information requirements for different types of business. By talking to us earlier we can let you know what is required and when it is required. We can also give you advice on the implications of any decision.

Examples of situations where we can assist are:

  • Business structure changes, eg a partnership may decide to start operating as a company
  • Key staff moving on or joining the business
  • If you start or stop selling products or services
  • Movement into new markets, eg international
  • If you’ve received funding from third parties, eg new shareholders or loans from friends or relatives

Are You Preparing the Right Records?
Accounting Software
Talk to us before you start preparing any records. We can advise you on the information we will need, exactly how we will need it, and the best type of software solution for your particular purposes.

Maintain Your Accounts
We encourage clients to set up and maintain their accounts regularly on a daily, weekly, or monthly basis whether they are hard copy or PC-based.

This will help save time at the end of the year, but more importantly provide you with information to help run your business.

Reconcile Your Accounts
Reconciling your accounts will help minimise errors and ensure all transactions are accounted for. The important accounts that should be reconciled are bank accounts, suppliers, and debtors.

Label and Store Documents
Label all documents, eg invoices, hire purchase agreements etc and file them in a logical systematic order. This will make them easy to find at a later date.

IRD Returns
Include all copies of material prepared throughout the year for the Inland Revenue Department.

These include GST and FBT returns, motor vehicle logbooks and any interest or dividend certificates.

Schedules
In our annual questionnaire, we will include a list of schedules that we will need to be completed. Note: Not all the schedules may apply to you. Call us to discuss which ones apply to your circumstances.

The schedules cover issues such as:

  • Accounts payable owing by you
  • Accounts receivable owing to you
  • Stocktake
  • Investments
  • Business use of home
  • Assets sales and purchases
  • Investments
  • Private use of business assets

Timetable
It is important that we agree on a timetable before we start work on your accounts.

While we have an arrangement with the Inland Revenue Department that permits us some flexibility in filing your tax return, as you will appreciate, we have extremely tight deadlines and it is important to adhere to them.

If for any reason you are unable to provide the information when requested, you should contact us as soon as possible so that we can redeploy our resources and discuss a new date.

Producing your Annual Accounts and Tax Returns
After delivery of your information according to the agreed dates, the following steps will occur:

  • Your information will be reviewed to ensure you have completed your annual questionnaire and any subsequent discussions. We shall contact you on any points or queries found during our review
  • After any queries have been resolved preparation on your account will begin. Again, there may be additional information that you will need to provide
  • When your final set of accounts has been completed, a copy will be sent to you for your records

How to get Started
Ask us for a copy of the annual questionnaire. The annual questionnaire can be used throughout the year to make sure you are retaining the right records.

Talk to us about any details required if you are unsure. Also, we can help set up procedures and processes for your business that will help provide the information required in the right format and at the right time.

See Us First
If you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

Income Tax:  Repairs and Maintenance

Repairs and maintenance can represent a substantial expense within a business and therefore can have a huge impact on the tax you have to pay. For this reason, Inland Revenue has a strict policy on repairs and maintenance clearly explaining what is considered repairs and maintenance and deductible and what is considered capital expenditure.

Repairs and Maintenance Generally
What are repairs?

  • ‘Repair’ is restoration by renewal or replacement of subsidiary parts of the whole. Expenditure of this nature can be an allowable deduction
  • ‘Renewal’ is reconstruction of the entirety (not necessarily the whole, but of substantially the whole subject-matter)
  • Only expenditures on repairs and maintenance are deductible as ‘repairs’. The principal features are that:
    • Expenditure on repairs, maintenance, and alterations must be not be capital expenditure
    • Expenditure required to maintain an asset in the same condition as when you acquired it is deductible
    • Expenditure on an asset over and above making good wear and tear is not deductible

Repairs and Maintenance to Ancillary Plant
Expenditure is deductible when it is:

(a)    Repairs and maintenance of existing equipment
(b)    Alterations not amounting to significant improvement

Expenditure is of a capital nature and not deductible when it is:

(a)    Installation of new equipment
(b)    Replacement of a whole new asset
(c)    Major alterations to the extent that they are an improvement

Repairs and Maintenance for Rental Investments
Investments in rental properties have proved to be very attractive to New Zealand taxpayers. However, property owners should be aware of the following:

  • Repairs and maintenance expenses are only claimable if the repairs were carried out while the tenant was still living in the house or the house was still available for renting. 
  • Often overseas owners returning home realise the damage done to the property after the tenants have moved out – and because of the change to private use, IRD may not allow a claim for repairs of such damages. There have been instances in the past where such claims have not been allowed. Unless IRD is satisfied with documentary evidence to the contrary, a couple owning a property jointly cannot split rental losses unevenly. Often the higher income earning spouse claims all or most of the losses, when they should be split equally.

Repairs and Maintenance to Buildings and Fittings
You need to take particular care with repairs and maintenance on buildings and fittings. The following is a list of common types of repairs to building and fittings, along with comment on how the expenditures are likely to be treated for income tax purposes.

Payment For

Expense

 Asset to be Depreciated

Architects' and consultants' fees

 

 X

Braces to strengthen a building — structural alteration

 

 X

Building alterations – cutting a new doorway

 

 Unless alteration to inner fixtures

Building alterations – replacing doors

 X

 

Building alterations – installing of new doors where no door existed

 

 X

Building site expenses

 X

Cartage

 

 X

Dilapidation and deferred repairs and maintenance

 Normal recurring expenditure

Work of a major nature

Drainage, sewerage

 

 X

Electrical work

 

 X

Fire or earthquake precautions

 

 X

Fire losses

 

 X

Foundations

 

 X

Hand basins and toilets  

 Installation

Heating systems

 Repairs

 Installation

Lawns and levelling  

 X

Lifts  

 X

Murals  

 X

Parapets  

 Initial or full replacement

Paths and flagstones

 Normal repairs

 X

Pillars

 Moved to new position

 Removed altogether and replaced

Ramps  

 X

Rental property repairs

Must form part of a continuous income-earning process, or one which has discontinued but is soon to be resumed. It must be related to income earned at that time or shortly afterwards

 
Septic tanks  

 X

Shelter trees (other than farmers)  

 X

Shop fronts modernisation  

 X

Skylights  

 X

Strengthening building  

 X

Strongroom

 Moved to new position

 Installation

Windows

Replacement of damaged window with new window of same type

 Construction
Replacement of wooden framed with metal
Removal of windows and making good the walls

Windows tinting

 Subsequent treatments

 Initial treatment
Yard  

 X

See Us First
If you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

Increasing the Value of your Business

It is common in business today to hear people talk of adding value to a business. The term seems to be worn out by politicians and big business but how does it really affect you? While it can be easy to spend the work day focusing on making decisions, these seemingly minor decisions can have a huge impact on the value of your business and its long-term prospects.

What is Value?
Value is subjective – it means different things to different people.

For many, value in a business sense simply means what they think something is worth, ie the amount someone is willing to pay.

Adding value means increasing the overall worth of your business to yourself and if you decide to sell your business to potential purchasers.

Why is Value Important?
In business, it can be very easy to focus on the short term, thinking that the long term will sort itself out. This is especially true if you have adopted a survival approach – just making sure you survive from week to week.

While survival is clearly essential when a business is just starting out, long term it can prevent you from maximising the value in your business.

Why Add Value?
Adding value to your business and having a long-term focus means looking beyond how the business can simply provide an income to those who work in it.

It means seeing how the business could:

  • Provide a better return to you
  • Be developed into an asset that could be sold at a premium
  • Be further developed or expanded into a business that can provide long-term security
  • Be developed into a long-term investment

Improving Business Value
Improving value in you business is achieved by focusing on four key items:

  1. Profitability 
  2. Predictability 
  3. Potential
  4. Priorities

1.    Profitability
You make a profit by simply selling a product or service for more than it costs.

Very few people would be prepared to invest their money into a business or enterprise that wasn’t profitable. Yet surprisingly, many business owners do just that, not intentionally, but because they have not spent the time to fully understand what costs or risks are present when operating a business.

It is important for the business to be profitable if it is to pay you a decent salary or wage and provide a return.

At a very simple level, there are only two things that affect profit – sales and costs.

If your business is not operating at a profit level you expect or need, you can simply focus on one or the other, or both.

Sales Side
This is by far the best way to improve the value of your business.

Following are some very simple but successful strategies you can adopt immediately in your business to improve your revenue:

  1. Increase the amount of each sale to each customer. (Add additional services or products to the original purchase that improve the overall sale to the customer). 
  2. Increase the price of your products and services. In the minds of many people, price equals quality. It is important to remain competitive, but also to let customers know the additional services your business offers justifies you charging a higher price. 
  3. Increase the number of times a customer purchases from you. For example, put your customers on a standing order for your goods or services or a long-term contract. Note: It is important to always keep in touch with your customers and let them know why they should be doing more business with you. 
  4. Remove or eliminate unprofitable products, services, and customers. While it is easy to offer goods or services, or carry unprofitable customers under the belief that they are attracting potential purchasers or will somehow improve, unless you can be absolutely positive that they will lead to additional sales you are better to focus your resources on the most profitable customers and parts of your business. 
  5. Introduce new products or services. While it is easy to offer a set range of goods or services, it is important to always be looking for future trends and opportunities to make sure your business remains competitive.
  6. Increase the number of customers. It can be easy, especially for new businesses, to rely on one strong customer to provide all of the business. This can pose huge risks especially if this customer should decide to go elsewhere or suffer a financial setback. A larger client base helps minimise this risk.

Costs Side
Reducing costs is a complex area and each particular cost reduction must be managed with extreme care.

There are two types of costs to focus on:

  1. Cost of sales
  2. Overheads

Cost of Sales
Lowering the costs of the goods or services you offer can be achieved by either:

  • Buying lower quality or cheaper raw material and merchandise
  • Negotiating a better deal with suppliers
  • Finding another supplier offering a better price

Note: Unless you intend to compete solely on price, lower quality may have a negative impact on your ability to charge a higher price.

Overheads
When lowering overhead costs, it is best to start with costs that do not have a direct impact on your ability to offer products and services.

Look for deals or, if possible, negotiate with suppliers of generic items such as electricity, mobile telephone, stationery, external service providers, etc. Remove rental costs by setting up your business to operate from your home.

With other overhead costs, lowering personnel costs is often seen as attractive way of achieving immediate cost savings but, depending on the type and scale of cut-backs, this might affect your ability to continue to offer goods and services.

2.    Predictability
Uncertainty exists in every aspect of business life. Risks are an inherent part of doing business, but eliminating or minimising those risks can improve the value of your business tremendously.

A business that is predictable offers security to others. Others are more likely to want to be involved in a business that is predictable, especially one that can provide regular consistent levels of profitability.

For example, investors feel more comfortable making a loan to a business with a solid track record than one just starting out or one that experiences huge shifts in profitability from year to year.

Similarly, a new business selling unproven or new technology is seen as less secure than an established business selling proven products and services.

Given that for small or new business it is sometimes not possible for the business to predict with any certainty how they will perform, investors are typically willing to substitute this lack of certainty for a greater return or may insist that the owners make a capital injection to ensure the business has a strong asset base and that they have a stake in seeing the business succeed.

A strong asset base is a good indicator that the business is financially sound.

The types of assets that offers investors comfort are such tangible items as plant and equipment, buildings and motor vehicles, cash or intangible assets such as intellectual property which includes patents, trademark, technological designs, and people.

People are probably the most important asset in the company. Properly managed, motivated, and rewarded, they can hold the key to building a valuable long-term sustainable business.

Note: You can improve your asset (cash) base through leasing or hiring equipment rather than purchasing it outright.

Although this affects the businesses profitability by introducing an additional cost it also strengthens the business by freeing up cash (vital in the early stages of a business).

3.    Potential
Where a business operates in a market that is expanding, it has a greater chance of achieving growth.

It is important to always look at the long-term prospects for your business and the potential your business has within the market it operates.

Markets that are declining or stagnant offer few opportunities to grow a business and thus to improve its overall value.

4.    Prioritise
Maximising the potential from these factors can considerably alter the value of your business, but it requires you to prioritise the the things you can do that will add value to your business such as:

  • Increasing sales revenue
  • Managing overhead and costs of sales
  • Selling only profitable products or services
  • Developing and retaining a strong loyal customer base
  • Reducing inventory levels
  • Managing cashflow
  • Managing and retaining staff

How to get Started
Talk to us. We can offer you advice and identify the profitable and unprofitable parts of your business. We can analyse your current sales and costs to demonstrate to you in clear plain language the impact minor changes can have.

Together we can prepare a straight-forward plan that will be easy to follow and provide you with means to add value to your business.

See Us First
If you consider that any of the issues contained in this fact sheet may affect you.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

GOT A QUESTION?

BACK TO BUSINESS ABC

Investments:  What are my Options?

There are many different types of investment. Some are riskier than other – and hence carry the potential for greater returns. The type of investment that is best for you will depend upon your investment goals and your investor profile (see factsheet: Investments – what to look for?). Here we examine the main types of investment options and how they compare.

Forms of Investments
Broadly, investments generally fit into four asset classes: 

  • Cash
  • Fixed interest
  • Property
  • Shares

What investment will be best for you will depend upon your investment goals, your level of risk tolerance, your time horizon, and your tax position, among other matters.

Cash
Examples: bank savings accounts, and term deposit investments.

This form of investment is easy, readily accessible, and low risk. Returns are low compared to other forms of investment, but are generally guaranteed, so your investment is unlikely to drop in value in the short term like others might. This makes this form of investment ideal for short term savings goals or for the purposes of keeping an emergency fund.

Term deposit investments are usually for a fixed short term, eg 3 or 6 months.

In summary: low risk – low return.

Fixed Interest
Example: bonds.

This form of investment is like an IOU issued by a company, local authority, or government. You give them money for a certain period and they promise to pay it back at a certain interest rate. Typical fixed interest investments are longer-term bank deposits, debentures, and corporate, local authority, and government stock.

Fixed interest investments are usually more volatile than cash but carry greater potential return. Generally bonds are not a good short-term investment. Small investors do not usually invest directly in bonds but rather through a managed fund (see below).

In summary: medium to long term – medium risk.

Property
Investing in property generally carries a much higher rate of return than cash or fixed interest investments and, therefore, is also fairly volatile or risky.

Returns from property investment come from rental income, after deducting expenses, and from capital growth in the property over time. Property is cyclical in nature – there are times when the market is low and when it is high.

You can choose to invest directly in property yourself or through managed investment funds which invest in property. Owning rental property directly for investment is like running a small business. You need to know the market and understand the risks/rewards and tax aspects to make the investment work well.

In summary: long term – medium to high risk.

Shares
When you buy shares you become a part-owner in the company and, therefore, are entitled to a share of the profits (dividends). You may also make a capital gain because the shares increase in value over time. Of course, capital losses are also possible.

Shares are generally considered the most volatile form of investment as prices of shares can vary from day to day and a range of complex factors affect share price performance.

Generally, any investment in shares should be geared towards a long term investment. However, when you need your money you will generally be able to sell your shares.

In summary: long term – high risk.

Direct vs Indirect Investment
You can invest directly in cash, fixed interest products, property, and shares (direct investment) or you can place your money in a superannuation scheme, unit trust or managed fund and have specialists look after the investment decisions for you (indirect investment).

Direct investment requires much more time and effort as you need to understand the relevant product and market yourself, and make all the investment decisions.

In a managed fund your money is pooled with other investors, and a professional manager invests it in a variety of investments, using guidelines that you provide. Managed funds come in many different forms and cover a variety of assets for different objectives. You pay a fee for this management service. Financial advisers, banks, and insurance companies can all advise you on managed funds that match your investment needs.

Diversification
A diversified investment portfolio is important because every investment carries some risk and can be subject to unexpected change. If you invest narrowly in one stock or one sector, an unforeseen event could hit you hard, but if your investment ‘eggs’ are spread around more than one basket then the risk against inevitable changes is reduced.

Allocation of Assets
As noted above, you should not keep all of your eggs in one basket. So what percentage of your investment portfolio should be invested in different forms of investments?
One way to determine the right mix is to look at age and risk tolerance. Investment portfolios also generally need to be reconsidered from time to time as a person’s circumstances change.

Age
In a person’s younger years, investment time horizons are longer and more volatility can arguably be tolerated. As a person approaches retirement, they become more dependent on income from investments, although modern life expectancies mean that it may still be important to maintain some longer term investments.

Risk Tolerance
The investment allocation decision is also dependent on a person’s attitude about risk and this tends to be a very personal decision regardless of age or other factors. Some people are simply prepared to take more risks than others.

The Next Step
Although we do not provide investment advice of any kind at the Accountancy + Business Advice Centre, we can refer you to capable investment advisors on request.

Disclaimer
Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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Investments:  What to Look for

Investment means different things to different people. To some, it is capital growth – building wealth over a number of years. Others have a shorter time horizon or are looking for regular income and/or a higher return on their money. When choosing an investment you need to ask a lot of questions, understand some basic principles of investment, and work out what type of investment suits your goals.

Identify Goals
One of the keys to putting together a successful investment strategy is identifying and understanding your investment goals and your investment budget.

It might be that you have a few different goals. For example, you might be saving for an overseas holiday, and saving for your retirement at the same time.

Each goal may require a different investment profile and hence a different type of investment.

Basic Factors
Most investments are generally a blend of the following factors:

  • Risk
  • Return
  • Duration
  • Liquidity

Risk
All investments carry some risk of losing value. But risk is usually directly related to return, so generally, higher returns mean higher risks.

An example of a low risk investment is a bank savings account – you know the return (interest), but compared to riskier investments, eg shares or property, it is not high.

Return
To work out the type of returns that suit you, ask this question: are you interested in income, growth, or a mixture of both?

If you need short term income from your investment, it is probably better to put your money where you can guarantee how much money it will earn, eg in a term deposit bank account. On the other hand if you do not need the income in the short term and want to grow a lump sum as much as possible, you can consider investments that don't guarantee returns from year to year, eg shares.

Duration
How long do you want to invest for? Generally investments break down as follows:

  • Short term – 1 to 3 years
  • Medium term – 3 to 7 years
  • Long term – over 7 years

For example, saving for an overseas holiday is generally a short term goal, whereas saving for retirement is likely to be a long term goal.

Liquidity
Liquidity is the speed at which you can convert your investment into money before the end of your investment period, without taking a loss.

An investment with high liquidity means you can get at your investment anytime, eg a bank savings account. Illiquid investments are those where it can take time to access your money without suffering loss. Property or going into business are examples of potentially illiquid investments.

Investor Profile
To determine your investment profile there are three basic questions to ask: 

  • How much money do you want to accumulate
  • When do you want the money to be available 
  • How much volatility or investment risk can you tolerate

Information – The Key!
Once you have established your goals and your basic investment criteria, the biggest difference between people who make money investing and those who lose it is the information they have.

You must do your homework before handing over any money. Most people who become victims of scams have invested on the basis of someone's word without investigating the investment properly.

Many investments offered to the public will require an investment statement and/or prospectus under the Securities Act or other laws, so there should be plenty of information available to assist you in making an investment decision.

A more difficult situation is where you are approached privately to make an investment, for example, by a friend.

Key Questions
The following is a list of key questions to ask when considering any investment. It is by no means exhaustive, but intended to assist you to narrow down a selection of suitable investment options and determine if an investment meets your investor profile and investment goals.

  • What sort of investment is this? What am I buying? 
  • Is the investment a direct investment or a managed fund? 
  • Who is providing the investment? 
  • How much money am I required to pay? How often? Can I stop contributions? 
  • What is the duration of the investment? 
  • What are the previous and forecasted returns? Over what time frame? 
  • What are the risks associated with the investment? 
  • Can the investment be altered? 
  • How easily can I cash in the investment? 
  • What fees and charges are associated with the investment? 
  • What information will I receive about the investment? How often? 
  • What taxes are payable on the earnings from the investment? 
  • Who can I contact about the investment? 
  • What other information is available about this investment?

Finally
Whatever the type of investment you are considering, keep asking questions until you are satisfied that you are in a position to make a fully informed decision, or seek a second opinion if you are unsure.

Remember saying 'no' is okay! Why hand over your money if you do not fully understand what will happen to it? We would be pleased to assist you to navigate the investment maze.

The Next Step
Although we do not provide investment advice of any kind at the Accountancy + Business Advice Centre, we can refer you to capable investment advisors on request.

    Disclaimer
    Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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    Records – Retention for Company and Tax Use

    There are various statutory requirements regarding the types of records to be kept, the form in which they should be maintained, and the length of time for which they must be retained. In practice, it may be necessary or advisable to keep additional records or to retain them for a longer time to provide evidence for litigation or other purposes.

    Companies Act 1993
    The Companies Act states specifically what types of company records must be retained, what must be available for public inspection, and how long such records must be retained. Generally, this period is 7 years.

    • The share register must record details of shareholders within the last 10 years.

    The company records that must be kept, usually at the company's registered office, include: 

    • The company's constitution
    • Minutes of all meetings and resolutions of shareholders, directors, and directors' committees within the last 7 years
    • An interests register
    • Certificates given by the directors under the Act within the last 7 years
    • Full names and addresses of the current directors
    • Copies of all written communications to shareholders, including annual reports, during the last 7 years
    • Accounting records and copies of all statutory financial statements for the last seven completed accounting periods
    • A share register

    Accounting records must be kept for at least 7 years after the completion of the transactions or the period to which they relate.

    These records must correctly record and explain the company's transactions and enable its financial position to be determined at any time with reasonable accuracy. They should also enable the directors to ensure that financial statements comply with statutory requirements and can be readily and properly audited.

    If a company's accounting records are kept outside New Zealand, accounts and returns must be sent to New Zealand to enable the company's financial position at 6-monthly intervals to be disclosed with reasonable accuracy, and to enable financial statements to be prepared as required by statute.

    Accounting records must be kept in written form and in English or readily accessible and convertible into a written English form.

    The Companies Act 1993 also specifies what must be kept available for inspection. Anyone may seek to inspect the: 

    • Certificate of incorporation
    • Company's constitution
    • Share register
    • Full names and residential addresses of directors
    • Registered office and address for service

    Shareholders may also seek to inspect: 

    • Minutes of all shareholders' meetings and resolutions
    • Copies of all written communications to shareholders, including financial statements and annual reports, during the preceding 10 years
    • Directors' certificates
    • The interests register

    Income Tax
    Business taxpayers must retain relevant records in New Zealand for at least 7 years after the end of the income year to which they relate. The CIR may require records to be kept up to a further 3 years where there is a current or intended audit or investigation of the taxpayer's affairs. These requirements apply to everyone who: 

    • Carries on business in New Zealand
    • Carries on other gross-income-earning activities in New Zealand (apart from employment)
    • Has investments
    • Makes specified superannuation contributions
    • Provides fringe benefits
    • Has an imputation credit account, dividend withholding payment account, branch equivalent tax account, or policy-holder credit account

    The records may be in a manual, mechanical, or electronic format. They must be kept in English and be sufficient to establish gross income and allowable deductions, fringe benefits, foreign dividends, entries to the various imputation or tax credit accounts, and specified superannuation contributions as appropriate.

    Where income tax returns are filed electronically, the signed hard-copy transcript must also be retained for at least 7 years after the end of the income year to which it relates.

    The records should include details of: 

    • Assets and liabilities
    • Goods bought and sold, and stock on hand
    • Services provided and supporting invoices
    • The accounting system

    In relation to trading stock, taxpayers must now keep all accounting records relating to the calculation of the value of closing stock. This requirement is relaxed slightly for small taxpayers, being those with a turnover not exceeding $3m. Such taxpayers have to retain records of valuation methods and their application in calculating the value of closing stock, except where they are not materially different from the previous income year.

    Trusts
    Trustees of trusts which have debt forgiven by creditors must keep records of those amounts together with records of distributions to beneficiaries 'for as long as the trust exists'. Furthermore, the trustee must take all reasonable precautions for the safe custody of these records.

    Pay-period taxpayers whose income has had tax deducted at its source do not need to keep records for more than 12 months after the year in which that income is received.

    Liquidated Companies
    Records do not need to be kept once a company has been liquidated. Employer monthly schedules are also exempt from the above requirements.

    Electronic Record Retention
    The key requirements for all types of electronic record retention are that the records must: 

    • Allow Inland Revenue to readily ascertain the amount of tax payable
    • Be complete and accurate copies
    • Be readily accessible, secure from alteration, and unauthorised access
    • Be capable of being retrieved and produced as a legible hard copy or supplied to Inland Revenue in electronic form
    • Be identical in format and in all other respects to the original records when they are reproduced in printed form

    Internet Transactions
    Taxpayers who carry out transactions electronically or through the internet must ensure that their systems capture all transactions completely and accurately. IRD approval should be sought for the use of symbols or abbreviations to facilitate the electronic transfer of GST tax invoices, credit notes, or debit notes.

    Emails
    Emails, including details of origin, destination and time, must be retained and accessible if they constitute business records. Taxpayers should ensure that their backup and recovery procedures will guarantee the availability of electronic records for the statutory record retention periods.

    Care must also be taken to ensure retrieval remains possible following changes of computer hardware or software.

    See Us First
    To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

    Disclaimer
    Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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    Legal Risks for Company Directors

    The risks that company directors face include potential personal liability and prosecution (including fine or imprisonment) under a wide variety of legislative provisions. The list of laws below gives you an overview and is by no means exhaustive.

    Taxation and Revenue Laws
    In broad terms the areas to watch out for include: 

    • Income tax (including PAYE and withholding taxes) 
    • Goods and services tax (GST) 
    • Customs and excise 
    • Fringe benefit tax (FBT) 
    • Accident compensation levies

    Building Act 1991
    The Building Act contains the requirements that all new building work must comply with. These requirements relate to the functional requirements of buildings.

    Directors can be held personally liable where the company breaches the Act. Fines range from $5,000 to $200,000.
     
    Commerce Act 1986
    This Act prohibits anti-competitive behaviour, ie anti-competitive arrangements between competitors (price-fixing) or use of a dominant position in the market place (resale price maintenance).

    The Act also prohibits the acquisition of a business if it will result in either the business taking a dominant position, or the strengthening of a dominant position.

    A director may be liable on conviction for a fine of up to $500,000 or to imprisonment for a term of up to 5 years for breaching the Act. Courts will order a penalty against an individual unless there are good reasons not to do so.

    Employment Relations Act 2000
    Under this Act, a labour inspector can commence an action against a company to recover minimum wages or holiday pay payable to an employee. If it is established that the amount is unlikely to be paid in full, the Employment Relations Authority can authorise the labour inspector to bring an action for recovery of that amount against the company director.

    If it is proven that the director directed or authorised the default in payment, the director is liable to pay the amount recoverable.

    Fair Trading Act 1986
    The Fair Trading Act prohibits misleading and deceptive conduct in trade. A breach of this Act can render a director liable to a criminal conviction and a fine of up to $200,000.

    Financial Transactions Reporting Act 1996
    This Act applies to financial institutions and those professionals who handle money, eg lawyers. It requires the gathering of appropriate information on the identity of depositors and other related information designed to prevent money-laundering.

    Directors of financial institutions (and their legal advisers) should make themselves aware of the legislation following the successful prosecution of a lawyer for failure to comply with the Act.

    A breach of this Act could result in imprisonment for individuals, together with fines of up to $20,000 for an individual and $200,000 for a body corporate.

    Health and Safety in Employment Act 1992
    This Act contains requirements relating to the provision of a safe and healthy work environment. Employers are primarily responsible under the Act. However, where a company fails to comply with the Act, its directors who ‘directed, authorised, assented to, acquiesced in or participated in, the failure’ are also liable to a maximum fine of $500,000 or imprisonment for a period of up to 2 years.
     
    Income Tax Act 1994
    Where an arrangement has been made for the purpose of depleting a company’s assets so that it is unable to pay tax debts, the Income Tax Act 1994 contains a special provision directing the tax liability of the company to its directors.

    Resource Management Act 1991
    This Act imposes a resource consent procedure that applies where a proposed business activity will have effects on the environment.

    A director may be civilly and criminally liable if their company breaches the Act. Criminal penalties can be up to a maximum of $200,000, plus $10,000 per day for each day the offence continues, and imprisonment for a period of up to 2 years.

    Securities Act 1978
    This Act imposes a disclosure regime relating to the offer of securities (eg shares) to the public.

    The disclosure regime contains requirements relating to prospectuses, investment statements, and advertisements. A director can be held civilly liable if an advertisement is untrue or omits a material particular, and can be ordered to compensate people who subscribed for any securities on the faith of the advertisement for any losses or damage sustained.

    A director can also be criminally liable for a maximum penalty of 5 years’ imprisonment, or a $300,000 fine, where an advertisement or prospectus containing an untrue statement is distributed. Directors of promoters are also liable.

    Tax Administration Act 1994
    This Act contains requirements relating to record keeping and the filing of tax returns. It renders directors liable where an offence is committed by a company by, or with the knowledge of, a director.

    Maximum penalties of up to $50,000 and/or 5 years’ imprisonment apply.

    See us First
    To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

    Disclaimer
    Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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    Minimising Risks for Company Directors

    It wasn’t so long ago that there existed a degree of glamour attached to being a company director with some company directors enjoying a status normally enjoyed by celebrities. Things have changed considerably. Company directorships now bring with them a complex range of responsibilities and considerable personal and professional risks which has seen many individuals refuse to accept directorships.

    Risks for Directors
    Regardless of the size of your company, as a director you have many responsibilities and duties under the law.

    Directors are potentially liable not only for breach of their duties under the Companies Act 1993, but also for breach by their companies of a wide range of law.

    Risks that directors potentially face include:

    • Actions by outsiders due to wrongful actions of management
    • Actions by creditors as a result of the company contracting when the company is unable to pay its debts as and when they fall due
    • Prosecution for failure to comply with other provisions of the Companies Act, such as:
      • Taking all reasonable steps to ensure the company’s accounting records correctly record and explain the transactions of the company
      • Ensuring the company’s financial statements and annual report are prepared and signed within the specified period
    • Personal liability for, among other matters:
      • Breach of director’s duties
      • Breach of any applicable legislation
      • Torts (wrongs) committed on behalf of the company and exceeding authority in entering into contracts

    If found liable a director may suffer a fine and/or imprisonment.

    Insurance and Indemnity
    To help a director meet the costs associated with defending or settling claims in connection with acts or omissions in their capacity as a director, a company can indemnify a director or take out insurance for the benefit of that director – but only in certain situations (outlined below). Other than in these situations, the Companies Act prohibits such indemnity or insurance.

    An indemnity is a contract between a company and a director providing that the company’s resources will be used to meet costs incurred in defending or settling a claim.

    If expressly authorised by its constitution, a company can indemnify a director for the following situations where the claims or proceedings relate to acts or omissions in their capacity as a director:

    • For costs incurred in proceedings in which judgment is given in their favour, they are acquitted, or which are discontinued
    • In respect of liability to any person (other than the company or a related company) or costs incurred in defending or settling any claim or proceeding relating to any such liability, other than criminal liability or a liability for breach of the duty to act in good faith and in the best interests of the company

    If expressly authorised by its constitution and with the prior approval of its board, a company may effect insurance for a director for the following situations where the claims or proceedings relate to acts or omissions in their capacity as a director:

    • Liability (except criminal liability)
    • Costs incurred in defending or settling any claim or proceedings relating to any such liability
    • Costs incurred by that director in defending any criminal proceedings in which they have been acquitted

    It is clear from the above that companies cannot generally effect insurance for directors against criminal liability.  It is also important to note that it is illegal to insure against fines for a breach of the Health and Safety in Employment Act 1992. However, insurance against court costs and compensation is permitted.

    Documentation
    If insurance is taken out, directors must sign a certificate stating that, in their opinion, the cost of the insurance is fair to the company. The company’s board (if applicable) or the director must ensure that particulars of any indemnity or insurance for its directors are entered in the interests register.

    It is important that directors ensure the constitution expressly permits such insurance, that board approval (if applicable) has been given, and that directors have completed their certificates.
     
    The director who is a beneficiary of the insurance will be personally liable to the company for the cost of the insurance if:

    • The procedural requirements are not met
    • There is no constitutional authority
    • Reasonable grounds do not exist for the opinion set out in the certificate, except to the extent that the director is able to show it was fair to the company at the time it was effected.

    Policy Content
    Directors’ insurance policies often have two parts:

    • Company reimbursement for indemnity payments
    • Directors’ liability insurance

    The premium needs to be appropriately apportioned. A 90:10 split is often referred to by commentators as being the acceptable cost split between the company and the directors.

    Particularly in respect of insurance (but also to a significant extent with indemnities), the fine print is crucial. What is covered and what is not, and the inter-relationship between company reimbursement, contractual indemnity, and directors’ liability insurance – all need to be reviewed carefully and critically.

    Taxation Issues
    The insurance premiums paid by the company should be deductible as an ordinary business expense. A director who receives no fees and is an employee may not be able to deduct the cost of the premium paid by them. If the director is paid director’s fees, deductions may be allowed. If no deductibility exists, grossing up of fees or salary is an option.

    An indemnity payout should also be deductible as an ordinary business expense. The indemnity payment will usually be a financial service for the purposes of GST, and therefore exempt.

    See us First
    Talk to us before accepting any directorship. Make sure you have considered the full implications of your decision, especially what might happen if things go wrong. Remember, if the business fails, creditors may not only look to recover money from the business but also your personal assets.

    Disclaimer
    Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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    Motor Vehicle Expenses

    The deductibility of motor vehicle expenses is given special treatment by the IRD reflecting the widespread use of the motor vehicle as a business asset and the ease with which usage can be switched between business and private purposes.

    Records Needed to be Kept to Ensure Accurate Claims are Made
    Self-employed individuals need to keep complete and accurate details of motor vehicle mileage and running expenses incurred.

    Such details should include invoices for: 

    • The purchase of the vehicle
    • Any permanent extras added to the vehicle
    • Lease agreements where applicable
    • All running costs including details of petrol and maintenance
    • The types of expenses that are likely to be deductible including fuel, oil, repairs and maintenance (tyres, servicing, parts, panel beating, cleaning, and so on), insurance, warrant of fitness fees, registration fees, road user charges, and parking

    Car Parks
    The IRD has confirmed that the cost of leasing a parking space for a business vehicle is deductible.

    According to the IRD, if a car is used extensively for business purposes, a deduction will be allowed for the cost of using a parking space. However, merely using a car as a matter of convenience for travel between home and place of business, is private usage and not deductible.

    Deductible Expenses
    If you use your motor vehicle partly for business purposes and partly for other purposes, only the proportion of the total motor vehicle expenditure (including depreciation) that relates to the business use may be claimed as a deduction.

    The business proportion must be determined by either maintaining a record of all business use, or by keeping a logbook of business use for a 3-month test period every 3 years

    You may choose between these two options.

    If a motor vehicle is not used for private or other non-business use or is not providing a fringe benefit, then no apportionment is required.

    Only self-employed individuals (including partners in a partnership) are required to apportion their motor vehicle expenditure.

    Log Book and Record Keeping
    There are two options available to ensure that all motor vehicle expenses are claimed:

    1. Log Book for Full Year
    2. One option for determining the business use proportion of a motor vehicle is for you to keep a record of all business trips made in the vehicle during the income year. You must maintain a complete and accurate record of the reasons for and the distances of all business trips, and any other details that may be required by the IRD. The business use proportion for the income year is the total distance of all business trips during the year divided by the total distance travelled by the vehicle during the year. 

    3. Three-Month Test Period
    4. Another option, where you use a vehicle for a combination of uses, is to instead keep a logbook for 90 consecutive days only, generally commencing on the first day of the income year in which you commence to keep the logbook. A record of the total distance travelled in the motor vehicle during the logbook application period must be kept.

      The business use during the 3-month test period is treated as representative of business use for the whole of the income year.

      The maintaining of a log book does not remove the requirement to keep records verifying the expenditure incurred, but simply apportions the use of the vehicle between business and private use, in order to determine the deductible expenditure.

    A Logbook Must

    • Be kept for a period of not less than 90 consecutive days, commencing on a date elected by you
    • Record complete and accurate details of the reasons for and the distance of business trips, and any other details required by the CIR
    • Record the total distance travelled by the motor vehicle during the period the logbook is maintained
    • Be kept for a period that represents or is likely to represent the average proportion of travel, for business and non-business purposes, of that motor vehicle for the logbook application period

    The ‘logbook application period’ is the period for which the business-use proportion established by a logbook will be used for apportioning motor vehicle expenses. The logbook application period cannot exceed 3 years.

    Note: If there are no records that can be used to establish actual business use, no deduction will be allowed.

    Tax Planning
    Much of the tax planning effort in relation to motor vehicles involves attempts to minimise the exposure to FBT.

    Motor vehicles may be ‘acquired’ as business assets in a number of different ways including outright purchase, hire purchase, operating lease, and finance lease. Another alternative is for employers to reimburse the running costs of vehicles owned by employees. Each option has different tax consequences which can be quite complex, involving income tax, FBT, and GST considerations.

    Example: A company has two shareholders and directors who are a married couple. The husband is employed by the company. For some years the company leased four motor vehicles for use in its business. The husband then decided to purchase four motor vehicles privately and lease them to the company at market rates. As a shareholder-employee, can he claim depreciation on the leased vehicles? He must claim a deduction for depreciation on depreciable property owned during an income year. As a shareholder-employee he incurred the depreciation expense as a result of leasing the motor vehicles to the company. The expense is deductible because the depreciable property owned is used in deriving gross income.

    See Us First 

    • Before making any decisions regarding motor vehicles purchases
    • We can assist you in understanding the legal or financial implications
    • If you consider that any of the issues contained in this fact sheet may affect you

    Disclaimer
    Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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    Partnerships

    Partnership involves two or more partners carrying on a business in common with a view to a profit. If these criteria are met then you are operating as a partnership and different legal rules apply than for a sole trader or a company. The Partnership Act sets out much of the law about partnerships, although it may be overridden on particular matters by the terms of a formal partnership agreement.

    What is Partnership?
    Partnership generally involves a contract between partners to engage in a business in order to make a profit. Ideally, the aim is that two or more people acting together should be able to achieve more than the sum of what those people could achieve by acting individually.

    In general, each partner contributes either assets, skill, or labour, although a partner may contribute nothing and still have the rights of a partner.

    Formation
    There are no formal requirements for the formation of a partnership, therefore arrangements between parties must be closely examined to determine whether a partnership exists.

    Unlike a company, an ordinary partnership does not need to be registered. However ‘special partnerships’ (allowing a person to be a partner on terms that their liability to creditors is limited) must be registered with the High Court.

    In most cases, the partners will formalise the arrangement between them by entering into a partnership agreement that governs their respective rights and obligations. In the absence of such an agreement, the provisions of the Partnership Act apply to regulate the partnership business and determine profit sharing.

    Effect of Partnership
    A partnership is not generally considered a separate legal entity from the partners.

    Control, authority, and responsibility for partnership decisions are shared (although this may be altered in the partnership agreement). In addition, the partners become jointly and severally liable for the debts of the partnership incurred while they are a partner, and every partner is an agent of the other partners within the scope of the partnership.

    A partner could, however, limit their liability by establishing a company to act as the partner in some circumstances.

    Relationship Between Partners
    At common law, a partnership is a fiduciary relationship in which partners are required to act fairly and in good faith towards each other. In addition, the Act, among other things:

    • Requires partners to render true accounts and to provide full information of matters affecting the partnership 
    • Prohibits partners from making private gains by reason of their membership of the firm. When a partner competes with their firm without the consent of the other partners then profits made from the competing business must be paid over to the firm

    Partners and Third Parties
    Every partner is an agent of the partnership and of the other partners in regard to partnership business. This means that any act done by a partner in carrying on the business in the usual way will normally bind the partnership and the other partners, unless it can be proven that the partner had no authority to act in that particular matter and the third party was aware that they lacked authority or did not believe them to be a partner.

    Dissolution
    The question of dissolution of a partnership usually arises when there is a dispute between the partners. The partnership deed will usually set out the grounds for termination of the partnership. The provisions of the Act apply in the absence of any term to the contrary in the partnership deed. These provisions allow dissolution:

    • On expiry of a fixed term; 
    • On completion of certain events; 
    • By notice from one partner; 
    • By death or bankruptcy of a partner; 
    • At the option of the other partners where one partner has a charge placed on partnership property for a personal debt; and 
    • Where the partnership business becomes illegal.

    In addition, a partner can apply to the court for dissolution on the grounds (for example) of insanity or incapacity of a partner, or because it is just and equitable that the partnership be dissolved.

    Profits and Assets
    The partners can agree as to the distribution of profits/losses made by the partnership. In the absence of any agreement, the Act provides that partners share equally in the profits/losses.
    On dissolution of a partnership, unless the partnership deed provides otherwise, the Act lays down the distribution rules to be followed. All losses, capital or otherwise, shall be paid first out of profits, then out of capital, and finally by the partners in proportion to their respective profit shares. The Act also provides that assets shall be applied in the following order: 

    • Paying debts to third parties
    • Repaying partners’ advances
    • Repaying partners’ capital
    • The residue in proportion to the partners' profit shares

    Tax Issues
    A partnership is not a separate legal entity and does not, itself, pay income tax.

    Instead it distributes the partnership income to partners and each partner is taxable on their share at their marginal tax rates. Despite this, a separate tax return must be filed.

    For GST purposes, a partnership is treated as a separate legal entity. The partnership must register for GST purposes and file GST returns if the annual turnover exceeds or is likely to exceed $40,000. Partners who incur expenditure on behalf of the partnership cannot separately register for GST purposes.

    Finally
    Talk to us before deciding on using a partnership as your preferred business structure. It is important that partners formalise arrangements between them and have confidence and trust in each other, because the actions of one partner may cause the partnership business to become insolvent. All partners will then become individually liable for the entire amount of the remaining business debts and legal liabilities.

    See us First Before Making any Financial Decisions
    To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.
     
    Disclaimer
    Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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    Payroll:  Paying Employees

    Money is one of the main reasons why people work, so it's important to get it right when you pay them. There are various laws that relate to salary and wages, and you should make sure that you're familiar with them. You must know how you have to pay employees, what deductions you can, can't, and must make from their pay, and know about the minimum wage and the records you have to keep.


    Note that the law can and does change quickly. The latest on pay legislation can be found on www.ers.govt.nz.

    How to Pay
    Employees have the right to be paid in cash (unless they work for the Government or a local authority) under the Wages Protection Act 1983. However, making cash payments can be time-consuming and less safe. It's fine to pay your employees by cheque, direct credit, or money order, but only with their signed agreement first.

    You should cover the method and frequency of paying wages in the employment agreement, or get the employee to sign an authorisation. There is no legally required frequency for paying wages. The law requires wages to be paid 'when they fall due'. Fortnightly is common practice in New Zealand.

    If payday falls on a public holiday, you should pay employees on the last working day before the public holiday. You're not required by law to give your employees a pay slip, but many employers choose to do so.

    Wage Records
    Under the Employment Relations Act 2000, you have to keep wages and time records for all your employees for at least 6 years (in case someone claims you underpaid them) and at least 7 years under tax law. You must include:
    • The employee's name, age, address, and the type of work they usually do
    • Whether the employee has an individual or a collective employment agreement
    • For employees under a collective agreement, the title and expiry date of the agreement, and the employee's classification under the agreement
    • The daily hours the employee works and the days on which they work in each pay period, if this information is used to calculate their pay
    • The employee's wages for each pay period and how they were calculated
    • Details of any employment relations education leave the employee has taken

    Minimum Wage
    You must pay your employees at least the minimum wage or else you will be in breach of the Minimum Wage Act 1983. It doesn't make any difference whether they are full-time, part-time, casual, a homeworker, paid by commission, or on a piece rate.

    You can get the current minimum wage rates from the Employment Relations Service. Website: www.ers.govt.nz. Tel: 0800 800 863.

    Equal Pay
    The Equal Pay Act covers more than just pay – it's illegal to treat someone less (or more) favourably based on their gender when deciding employment terms, work conditions, fringe benefits, training, promotion, and transfer.

    Deductions from Pay
    You're only allowed to make certain deductions from pay and if any are unauthorised, you may be breaching the Wages Protection Act 1983. The allowed deductions are:

    • Those required by law, eg PAYE, student loans, child support, Kiwi Saver and ACC
    • Deductions covered by the employment agreement
    • For superannuation contributions, medical insurance, and social club fees, if the employee has given their written consent
    • Deductions ordered by a district court
    • Recovery of overpayments you've made, although you have to follow certain procedures.

    The ACC earner levy is paid on top of the tax rates and is automatically added to the rates in the IRD's PAYE deduction tables. 

    PAYE (Pay as you Earn)
    PAYE is the system set up by the Income Tax Act for taxing the income of employees. You must deduct it from most payments you make to employees, and pay it to the IRD. It applies to all wages, salaries, and extra payments, (eg bonuses and lump sums).

    Make sure that all your employees fill in an IR330 form – this will provide the information you need to correctly deduct PAYE. With your PAYE payment to IRD, you must file an employer's monthly schedule (IR348), and a remittance certificate (IR345 or IR346).

    Keep deduction records. It's illegal to use PAYE deductions for anything other than paying them to the IRD. You can be fined if you don't make proper deductions, or don't account for them to the IRD.

    Student Loans
    Student loan repayments are made through PAYE. If an employee gives you a tax code ending in 'SL', you have to make deductions from their pay and lump sum payments.

    Student loan deductions don't have to be made from the earnings of casual agricultural employees, election day workers, people on withholding payments (eg contractors), or those on the 'no declaration' rate.

    Child Support
    You must deduct child support from an employee's pay if the IRD tells you to. They will send a notice telling you the employee's name and IRD number, the date when deductions must start, and their frequency and amount. Child support takes priority over all other deductions except PAYE.

    Contractors
    When paying certain contractors you have to make withholding tax deductions. The IR330 form lists the types and rates of withholding payment deductions. Also include these payments on your employer's monthly schedule.

    Fringe Benefit Tax
    If you give your employees benefits like low interest loans or a company car that they can use for personal use, you must deduct fringe benefit tax (FBT). The IRD form for FBT is IR420.

    Holiday Pay
    When on paid annual leave, the employee must be paid the greater of their 'ordinary weekly pay' and 'average weekly earnings' during the year. See our fact sheet on holiday pay. 

    Kiwi Saver
    Not only do you have to deduct Kiwi Saver contributions from employees pay but contribute yourself.  There are detailed rules to follow.

    Final Pay
    When an employee leaves, you must calculate their final pay, including bonuses, allowance, and commission.

    If they've worked for you for less than a year, you must add holiday pay of 8% of their gross earnings to their final pay (this will be 8% from 1 April 2007). If you let them take annual leave on pay during the first year it will be less than that, and you will need to work out how much money they are owed.

    If they've worked for over a year, include holiday pay for any untaken annual leave. The days of untaken annual leave is added to their last day, and they must be paid for any public holidays that fall within that period.

    Disclaimer
    Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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    Superannuation – An Overview

    Superannuation, in a similar vein to life assurance, has been fostered to varying degrees by governments of the day. This factsheet looks at the some of the alternatives available and information you should obtain before committing yourself to any scheme.

    Government Schemes
    Government Superannuation Fund Act 1956

    • For public servants
    • Contributions by public servants are not tax deductible
    • Pensions are not taxable
    • The income of the scheme is subject to tax
    • The Government Superannuation Fund is closed to new members

    National Provident Fund

    • Contributors receive pensions on retirement which are not taxable
    • The income of the Fund is subject to tax
    • The National Provident Fund is closed to new members

    New Zealand Superannuation

    • All New Zealand residents over the age of 65 are entitled to receive New Zealand Superannuation
    • New Zealand Superannuation payments are taxable, and are subject to a surcharge when the superannuitant receives income other than the New Zealand superannuation, and that other income exceeds a stated minimum
    • New government employees can join superannuation schemes operated by individual government departments under the Global Retirement Trust

    Non-Government Schemes
    Employers who establish superannuation schemes for their employees often call the schemes defined benefit or defined contribution schemes.

    Defined Benefit Scheme
    This is one where the benefits are defined in terms of factors which will not be known until (or near to) retirement, eg final salary, and years of service. Generally, they are unallocated schemes where the funds in the scheme are not allocated to any one member’s account. It is usual for the employer to make up any shortfall if the fund is insufficient. It requires periodic actuarial examination. 

    Defined Contribution Scheme
    One where the benefits arise from the contributions paid into the fund plus the net income. It is sometimes called an accumulation scheme as the funds are accumulated and credited to the member’s individual account. No shortfall arises as the benefits paid depend only on the amount of the funds standing to the credit of the member. This scheme does not require actuarial examination.

    Both these types of scheme may provide retirement benefits in the form of a pension or a lump sum.

    Investment Product and Adviser Disclosure Rules
    Superannuation schemes are required to issue an investment statement to investors and register a prospectus. There is an exemption for small employer superannuation schemes.

    In addition, investment advisers and brokers are required to disclose, before giving investment advice or receiving investment money or property: 

    • Any conviction for certain offences
    • Whether they have been adjudged bankrupt, or prohibited by an Act or by court from taking part in the management of a company or a business
    • Their procedures relating to the receipt and disbursement of the money, or receipt and distribution of the property

    At the request of an investor who is receiving investment advice, the adviser is required to disclose: 

    • The name of any relevant organisation with which the adviser has a relationship
    • The experience and qualifications of the adviser
    • The types of securities about which the adviser gives advice
    • Any indirect, pecuniary, or other interest in giving the investment advice
    • Any remuneration received from a person, other than the investor, in connection with giving the investment advice that is reasonably likely to influence the adviser in giving the advice

    There are sanctions for any investment adviser or broker who fails to comply with these disclosure requirements.

    Additional Information Requests
    A member of a registered superannuation scheme may receive (on request) a statement of the specific interest, mortality, and other assumptions and bases of calculation applied in determining the:

    • Value of the assets and liabilities of the scheme, for the purposes of an actuarial examination of the scheme
    • Benefits under consideration, where a member is considering a proposed change to their benefits

    Human Rights Act 1993
    The Human Rights Act has provisions that apply specifically to superannuation schemes. These special provisions provide for the following:

    • A scheme cannot require an applicant for membership to be of a minimum age
    • Schemes can treat males and females differently if this is able to be justified on the basis of actuarial or statistical data
    • Members can also be treated differently on the basis of disability or age, only if this treatment is able to be justified on the basis of actuarial and statistical data or opinion
    • Trustees can also still: 
      • Require an applicant for membership to be under a maximum age
      • Allow members to increase or reduce contributions either temporarily or indefinitely
      • Specify an age of eligibility for each type of benefit provided to members of the scheme
      • Require persons joining the scheme after 1 January 1995 to leave the scheme when they qualify for New Zealand Superannuation
      • Provide benefits on the death or disability of members of the scheme that decrease in value as the age of members increases
      • Provide benefits for members that differ in nature and amount according to the member’s period of membership in the scheme
    • Employers can no longer require employees to retire by reason of age.

    See Us First 
    If you consider that any of the issues contained in this fact sheet may affect you.

    Disclaimer
    Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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    Property:  Purchases and Investments

    New Zealand does not have a capital gains tax and capital profits are generally tax-free. However, in certain circumstances land transactions will be taxable. Any land transaction requires that the particular circumstance be considered individually, as minor variations in the facts can have result in different tax outcomes.

    It is important to note that the following comments are general in nature and you should seek specific advice for your particular circumstances.

    Tax on Land
    There are seven situations where tax may be payable on profits derived from selling land. These are:

    1. Sale of land purchased for purpose of sale
    2. Sale of land by dealer
    3. Sale of land by developer
    4. Sale of land by builder
    5. Sale of land which has been re-zoned
    6. Sale of land in scheme of development or subdivision within 10 years
    7. Sale of land in scheme of development or subdivision
    1. Sale of Land Acquired for Purpose of Sale
    2. If, at the time you purchase land, one of your intentions is to resell all or part of it then the profits are assessable for tax. There are no time limits. If a clear purpose of selling existed at the time you purchased the land, the profit you ultimately make is taxable.

    3. Sale of Land by Dealer
    4. If the land was purchased for the purpose of the business of dealing in land, the profits from its sale are assessable even if outside the 10-year period. If you are a dealer, profits on any sale of land within 10 years are assessable – irrespective of whether the particular land was held as part of the business of dealing in land. If the sale or disposition takes place after 10 years from the date of purchase, any profit is assessable only if it is established that it was held as part of the dealing business. A sale by an ‘associated person’ is equivalent to a sale by the dealer personally, except that the profit is assessed to the associated person and not to the dealer. 

    5. Sale of Land by Developer
    6. If you purchased the land for the purpose of the business of developing or dividing land into lots, then profits from its sale are assessable even if outside the 10-year period. 

    7. Sale of Land by Builder
    8. Builders are treated in a similar way to that of a land dealer or developer except that tax may not be payable where the builder carries out substantial improvements to the land.

      Improvements have to be something more than minor in nature. Inland Revenue has indicated that substantial remodelling and renovation is contemplated but work involving normal repair or repainting, even where the building has been neglected as such, would be considered work of a minor nature. 

    9. Sale of Land which has Been Re-Zoned
    10. Tax is payable for gains from land sold within 10 years of being purchased, where at least 20% of the gains were due to one or more of the following factors:

      - The rules of an operative district plan under the Resource Management Act, or a change in those rules following the purchase of the land.  The likelihood of such rules being imposed or changed.
      - A consent granted in relation to the land under the Resource Management Act, or a decision by the Planning Tribunal, following the purchase of the land.
      - The likelihood that such a consent will be granted or a decision made.  The removal of any condition, obligation, restriction, prohibition, or covenant (including a designation or heritage order) in relation to the land following the purchase.  The likelihood that such a condition, obligation, etc will be removed.
      - Anything happening that is similar to (a) to (f) above, or the likelihood of such an occurrence or change.

    11. Sale of Land in Scheme of Development or Subdivision Within 10 Years
    12. Tax is payable for gains from land sold within 10 years where you as the taxpayer commenced an undertaking or scheme involving development or subdivisional work, not being work of a minor nature, on that land within 10 years of the date of the purchase of that land.

      It does not apply where Inland Revenue is satisfied that the development or division work is for the purpose of creating a development or division for use in and for the purposes of:

      - The carrying on by the taxpayer of any business on or from the land, excluding the undertaking or scheme
      - A private residence for the taxpayer and any member of the taxpayer's family living with the taxpayer
      - The deriving by the taxpayer of rents or similar revenues from that property.

      Note that a profit motive is not essential. 

    13. Sale of Land in Scheme of Development or Subdivision
    14. Tax is payable here only when the profits are derived from the development or subdivisional undertaking/scheme, as the value of the land at the date of the commencement of the scheme is allowed as a deduction. Note that Inland Revenue may ascertain the value of the land at the date of commencement of any undertaking in any manner it thinks fit. 

      See Us First 
       

    • If you consider that any of the issues contained in this fact sheet may affect you
    • Property transaction can be very complicated and require careful planning to minimise tax exposure
    • We advise clients to speak to us before making any property decisions
    • We can assist you meet the necessary legal or tax requirements

    Disclaimer
    Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      Selling Your Business

      Selling your business can be stressful. If you don’t feel confident in your ability to conduct the negotiations yourself, we recommend that you use the services of a professional adviser who will help achieve the best possible price and structure the transaction to your advantage.

      Grooming to Sell
      The state in which a business is sold can make a substantial difference to the price obtained.

      The better run a business is, the higher the value a purchaser will place on it, other things being equal.

      Once you decide to sell your business you should start the grooming process as soon as possible, as it may take some time.

      If grooming is done effectively, it can add substantial value to your business.

      Operations
      When considering buying a business, a purchaser will pay most attention to the current year’s results and next year’s expected results – this will give them an indication of the level of return expected on their investment.

      Therefore, when selling your business you should consider the following aspects:

      • Sales and margins
      • Operating costs
      • Cash
      • Debtors
      • Stock
      • Fixed assets
      • Bank overdraft
      • Creditors
      • Borrowings
      • Contingent liabilities

      Business Profile
      A business profile or ‘information memorandum’ is a document which provides prospective purchasers with sufficient information to enable them to assess whether they would be interested in making such an acquisition.

      A great deal of effort should be put into the preparation of the business profile as it will often be the document which has the biggest impact on the decision of the potential purchaser.

      The business profile should contain information on the following:

      1. Ownership and History
      2. Date of incorporation, changes in ownership, current ownership, and changes in the nature of operations.
         

      3. Financial Information
      4. The last 5 years’ summarised profit and loss accounts, projections for the next 2 or 3 years, the last year-end balance sheet, the most recent balance sheet, and (where necessary) commentaries on the results.The profit and loss account should exclude abnormal or non-recurring items and the interest costs of debt not to be assumed by the purchaser.

        The balance sheet should exclude any assets and liabilities that will not form part of the sale transaction.

        You must maintain a reconciliation between the financial statements included in the business profile and the actual financial statements.

      5. Nature of Operations
      6. Information on products, divisions, market share, research and development (including new products or services), significant accounting policies, and major suppliers, etc.
         

      7. Customers and Competitors
      8. Major customers and competitors, along with the market share and advantages held over competitors, should be disclosed only if this information is not sensitive and will not jeopardise the business.

        This may be part of a more general SWOT (strengths, weaknesses, opportunities, and threats) analysis.

      9. Facilities and Plant
      10. Location, area size, current state, market value, leasehold conditions (if applicable) of facilities, and the age, cost, book value, and replacement cost of plant.

      11. Management and Organisational Structure
      12. Age, qualifications, and experience (in the workforce, industry, and business) of key management personnel, organisational structure including the reporting structure, number of staff in each area, information systems (including computers and software).
         

      13. Other Staff
      14. A list of staff not included above by division and location, particulars of working hours, overtime policy, bonus scheme, holiday entitlement, redundancy terms, and training programmes.

      15. Future Developments
      16. This is probably the most important section and should include new products, markets, changes in business structure, objectives, and plans for expansion and growth.
         

      17. Reasons for Sale
      18. This will be one of the purchaser’s first questions, so a truthful explanation of the reasons for selling should be included.
         

      19. Other Information
      20. Examples such as financial statements and details of information summarised in above sections may be included in an appendix.

        The business profile must be well set out, well referenced, and easily readable. If the document is lengthy, it is useful to include a summary.

      Negotiation Process
      This stage is perhaps the most critical one of the whole sale process. You should prepare yourself by gathering information to try to achieve the best possible result in the negotiation process.

      Before entering the negotiation process, you should be aware of:

      • The method the potential purchaser has used to come up with an offer. With this knowledge, you may be able to point out any flaws or misunderstandings in their methodology.
      • The current market for similar businesses, so that you know comparative values and valuation methodologies.
      • Other offers for the business, or lack of them, which will affect the way in which negotiations are undertaken.
      • The price you want for the business, an acceptable price, and the lowest price you will consider accepting. Establish these levels in advance to avoid unnecessary delays.
      • Your available alternatives if you do not sell the business. If you have alternatives available, there is less pressure for you to sell or to accept an unreasonable price. Alternatives could include winding up the business, waiting for another year, and trying again after using different methods to attract offers.
      • Any concessions which you are prepared to give to the potential purchaser. Concessions may include the type of consideration, settlement period, vendor financing, the sale of the assets and liabilities of the business instead of the entity (to avoid any unforeseen liabilities), and taking responsibility for the collection of debts.
      • The potential purchaser’s reasons for buying the business. Having knowledge of the purchaser, their business, and their need for your business may help you to achieve a higher price.

      An awareness of the above information will enable you to exhibit confidence in the negotiation process – helping you obtain a higher price for your business.

      Structuring the Transaction
      After negotiations are completed, the two parties must determine exactly how and when you as the seller will be paid.

      Purchase and Sale Agreement
      The time it takes to complete this final process may be lengthy depending on the particular circumstances. It is important that any possible future tax, contractual, or contingent liabilities be identified and generally indemnified against.

      Why Use an Adviser
      Appointing an adviser to help you sell your business will take a considerable burden off you in terms of time and worry. An adviser will assist you in achieving the best possible price and transaction structure.

      Which Adviser to Use
      The adviser should be able to demonstrate they have successfully completed a number of similar transactions, innovative ways of structuring the transaction, an in-depth knowledge of the surrounding tax and legal implications, access to in-house databases and business networks, and a thorough understanding of all aspects of the sale process.

      The extent to which the above are satisfied would obviously depend on the degree of involvement required of the adviser and the costs that you are prepared to pay.

      In deciding which adviser to use, you should consider:

      • The adviser’s reputation and experience
      • The adviser’s fees
      • Whether the adviser can offer a complete service
      • Whether you are comfortable with the adviser, as you could be working together for a substantial period

      Advisers’ Fees
      The way in which advisers’ fees are charged varies between advisers and includes

      • Fees charged on a success basis, ie no sale, no fee
      • A flat quoted fee
      • A combination of the above two
      • Fees charged on a time-cost basis, with an upper limit

      See us First Before Making any Business Investment or Sales Decisions
      To help assess any business purchase or valuation to ensure that it meets the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.


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      Solvency Test
      Why You Need to Pass It


      The solvency test plays an important role in the management of companies. While a company is not required to be solvent on every day it trades, the test must be met when certain transactions are proposed. In many cases, as a result of prudent management, companies will meet the test fairly easily. However, directors of companies that are marginally solvent will need to know with certainty whether the test has been satisfied, as this may be difficult to establish at a later date.

      The Test
      To satisfy the solvency test:

      • A company must be able to pay its debts as they become due in the normal course of business 
      • The value of its assets must be greater than the value of its liabilities (including contingent liabilities)

      When to Test?
      The solvency test must be met on an amalgamation or if a company proposes to:

      • Make a distribution
      • Repurchase or redeem shares
      • Provide discounts to shareholders
      • Reduce shareholder liability
      • Provide financial assistance for acquiring the company’s own shares

      Mandatory Considerations
      In considering whether a company meets the test, directors must have regard to: 

      • The company’s most recent financial statements that comply with section 10 Financial Reporting Act 1993 
      • All other circumstances that they know, or ought to know, may affect the value of the company’s assets and liabilities (including its contingent liabilities).
      • The test implies that directors will not be allowed to close their eyes to circumstances

      Relying on Others
      Directors are also permitted to rely on advice from professionals or employees provided that:

      • The matter must be within the competence of the professional or employee
      • The director acts in good faith
      • The director has no knowledge that reliance on the advice is unwarranted

      Directors’ Obligations
      Directors are required to resolve that the company will be able to pass the solvency test immediately after the relevant transaction is implemented. The directors must also sign a certificate to that effect setting out in full the reasons for their opinion.

      Directors should, for their own protection, set out in detail the grounds for their opinion that the company is solvent. References should be made to valuations, reports, and advice taken or received on which the opinion is based. Failure to provide adequate reasons in the directors’ certificate may raise an inference, in hindsight, that the directors did not have any reasonable grounds for their belief.

      Standard form certificates should be avoided. Each certificate should be specifically tailored to the relevant company and its particular character and circumstances.

      Directors’ Liability
      Directors can be held personally liable if: 

      • They fail to complete a solvency certificate 
      • The procedure for authorising the relevant transaction has not been followed 
      • Reasonable grounds for believing that the company would satisfy the solvency test did not exist at the time the solvency certificate was signed
      • Between the date of approving the transaction and its date of execution, there has been a change in circumstances in relation to the company’s ability to meet the solvency test

      Directors who vote in favour of a distribution, but who fail to sign a solvency certificate, commit an offence and are liable, on conviction, to a fine of up to $5,000. Signing a certificate knowing it to be false or misleading is an offence punishable by a fine of up to $200,000 or imprisonment for a term of up to 5 years.
       
      Change in Circumstances
      Where after a transaction has been authorised but before it has been implemented the board ceases to be satisfied on reasonable grounds that the solvency test will be met immediately after the transaction is implemented, the transaction is deemed not to be authorised.

      Reasonable steps must be taken by a director to prevent a distribution being made if the director, having signed a solvency certificate, ceases to be satisfied that the company will satisfy the solvency test between the time of authorisation and the implementation of the distribution.

      Directors may be personally required to pay back unauthorised distributions to the extent they cannot be recovered from shareholders.

      Creditors’ Rights
      The purpose of the solvency test is to ensure that the rights of creditors are protected. However, the Companies Act 1993 does not provide creditors with any direct rights upon breach of the solvency test. However, creditors may be able to recover from directors personally in certain circumstances in the context of a liquidation.

      Finally
      The directors of a company doing anything affecting the structure of the company or in dealing with shareholders, must ask the question ‘do we need to deal with solvency test issues?’.
       
      Given the potential personal liability for breach of the solvency test requirements, directors must be hard-headed and realistic when assessing solvency, giving consideration to many different matters and taking reasonable steps to obtain all information relevant to forming an opinion on the solvency statement.

      How to get Started
      Talk to us for further advice on the application of the solvency test to your business. We will be pleased to assist.
       
      Remember, you may suffer liability if you beach the solvency test requirements or fail to give all relevant matters due consideration. However, we will always be on hand to help when needed.

      See Us First 
      Before making any financial decisions, to assist you in meeting the necessary legal or financial requirements and if you consider that any of the issues contained in this fact sheet may affect you.
       
      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      Tax Investigations

      It is common knowledge that Inland Revenue is increasing its reliance on auditing and investigating taxpayers’ affairs, and is more aggressive in its demands for access to information. These are practical guidelines for use in most situations.

      Information Requests
      Information requests will generally either be informal requests or formal demands.

      Examples of informal requests are telephone calls or letters requesting information without putting the recipient under a legal obligation to provide information. Some letters will routinely cite the Tax Administration Act 1994.

      Generally, requests for access to audit workpapers will only be made in exceptional circumstances, where inquiries are being conducted by the general audit units of Inland Revenue.

      Information will be requested first from the taxpayer.

      Inland Revenue will seek access to accounting and tax return workpapers containing information which supports the financial statements and/or the tax return.

      Requests will be limited for access to advice workpapers in which an accountant gives advice to a client on tax or other matters, and all workpapers in support of that advice, including due diligence and prudential review workpapers and those prepared for litigation.

      Access will be sought to the factual content of advice workpapers, but generally only after attempts have been made to obtain such information from the taxpayer.

      Powers of Inland Revenue
      The law gives Inland Revenue the power to require any person to furnish in writing any information and any books and documents which they consider relevant.

      They may remove and retain any books or documents for as long as it is necessary for them to carry out a full and complete inspection of those books and documents. They can also make copies of any books or documents produced for inspection.

      They are not allowed to retain the books or documents throughout the course of an investigation or otherwise beyond such time as is necessary for a full and complete inspection.

      It is an offence for a person to refuse or fail to comply with any such demand. However, it is a defence if the person proves that they did not have relevant information, books, or documents in their knowledge, possession, or control.

      The court may review the information to determine whether it is the subject of legal professional privilege.

      The provision specifically overrides any enactment or rule of law requiring the taxpayer not to disclose information or to keep information secret, or not to perform an obligation. Compliance with such a request from Inland Revenue will not be held to be a breach of any such enactment or rule of law.

      Inland Revenue can require written information, books, or documents to be produced to a particular Inland Revenue office.

      Full and free access does not empower Inland Revenue to force entry, even with reasonable force. Access is only authorised to allow inspection of books or documents. It is probable that inspection cannot take place without the taxpayer being: 

      • Told with some precision what the Inland Revenue officer seeks to inspect
      • Given time to determine whether anything which the officer seeks to inspect is or may be privileged

      It is only inspection that is allowed – not seizure. However, Inland Revenue is allowed to remove books or documents to make copies. Such copies are to be made, and the books or documents returned, as soon as practicable.

      Copies certified by Inland Revenue will be admissible as evidence in court as if they were the originals.

      The owner may inspect, and obtain copies of, books or documents removed by Inland Revenue.

      Books or documents requested for inspection must be considered by Inland Revenue or an officer of the Inland Revenue to be:

      • Necessary or relevant for the purposes of collecting any tax or duty
      • For the purpose of carrying out any other function lawfully conferred on the Commissioner
      • Likely to provide information otherwise required for the purposes of the Revenue Acts

      There must be a reasonable basis for Inland Revenue determining that the documents may do any of the above.

      Inland Revenue is not to enter a private dwelling except with the consent of an occupier, or under a warrant. Warrants:

      • Can only be obtained from a judicial officer (being a judge, justice, or registrar of a District Court)
      • Are valid for a period of 1 month from the date of issue or a lesser period, as the judicial officer considers appropriate
      • Must be in a prescribed form
      • Must be produced when first entering the private dwelling and after entering whenever reasonably required to do so

      Solicitor-Client Privilege
      One of the exceptions to Inland Revenue’s powers to examine or seize documents relates to documents which are subject to solicitor-client privilege.

      This privilege dates back to the 16th century. It protects the confidentiality of communications passing between a solicitor and their client by providing that such communications are not admissible as evidence in court, and may not be disclosed without the client’s consent.

      Although the law does not admit any accountant-client privilege, there may well be instances of communication passing between an individual and their accountants which qualify as privileged communications under solicitor-client privilege. An example is where the accountant, acting expressly as agent on behalf of a client, requests and receives a legal opinion on a particular matter. Also included would be copies of letters between a client and the client’s solicitors which may be in the accountant’s files.

      Similarly, communications between accountants and their clients, where the accountant is acting as agent for a solicitor, are protected from disclosure by solicitor-client privilege, although this situation is likely to be a rare occurrence.

      See us First
      To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      BACK TO BUSINESS ABC

      Trusts and Trading Trusts

      Accountants are not generally involved in the actual drafting of trusts, but it is appropriate that we offer some advice.

      Trusts Explained
      People commonly refer to trusts as if they are separate legal entities, just like companies are separate legal entities. Although this is convenient, it causes confusion because it is incorrect and misleading.

      A trust is simply a set of legally enforceable obligations. An essential feature of a trust is that a person, being the trustee, must use their legal entitlement to the trust property for the benefit of another person – the beneficiary.

      Why Create a Trust
      Asset Management
      As an owner of a property, you may:

      • Not wish to transfer the whole ownership but would rather divide the ownership among a number of people. Using a trust can facilitate this. 
      • Consider that absolute control of the property by a person is inappropriate to the way you want it managed. Using a trust means that person can benefit from a share of ownership of the property while ensuring they do not have control of its management. 
      • Want to transfer the ownership of your property, but not yet know who you want to transfer it to. Through a trust you can delegate the responsibility for choosing who should receive the benefit of this property to the trustee. The trustee may be in a better position to know how the trust property should be distributed either now or at the time at which they can make this decision.

      Obtaining Government Subsidies
      Currently, applications for rest-home subsidies from the government are means tested as to income and capital. The allowable asset level is extremely low.

      Where there is a large age difference between spouses, there may be spectacular consequences, as the younger spouse will also be means tested and will be expected to contribute disposable capital and income to pay rest-home fees for the older spouse.

      The Department of Social Welfare currently looks back 5 years as a matter of course to see whether the rest-home applicant has divested themselves of assets in that time. If they have, the application will probably be declined.

      However, if the applicant is a beneficiary under a discretionary trust this need not be disclosed under the current Department of Social Welfare means test. Therefore, if the applicant transfers assets to a trust early enough they may be able to obtain a rest-home subsidy. Note that there is no guarantee that these arrangements will prove effective.

      In addition to setting up a trust during your lifetime, you may consider setting up a trust in your will for your surviving spouse. This may at least protect the assets passing under the will should your surviving spouse enter a rest-home.

      Should I use a Trading Trust
      A trading trust is any trust in which the trustee carries on business as opposed to passive investment. As is the case with any trust, the trustee will be personally liable for trade debts.

      The type of trading trust considered here is where a company is used as the trustee. This approach is often used, and is designed to avoid the liability for trade debts falling on those who would otherwise be trustees.

      Liability of Trustee
      Under this form of trading trust, the trustee company will be fully liable for trade debts. The directors and shareholders of the trustee company will (at least in theory) not be directly liable to creditors for the trade debts.

      They may, however, be directly liable if they personally guarantee the trade debts or make a material misrepresentation about them. They may also be liable to the trustee company itself (but not to the creditors directly) if they breach their directors’ duties under the Companies Act.

      A trading trust will allow distributions to be made at beneficiaries’ tax rates rather than the company tax rate. This is because the trustee company will be earning income as trustee of the trading trust rather than on its own behalf.

      Distributions of income or capital will also be flexible. This is because income can be allocated to one or more of the beneficiaries of the trading trust rather than shareholders.

      Discretionary beneficiaries will also have no assets or liabilities relating to the enterprise. This is because the discretionary beneficiaries will only have a right to be considered for a distribution of the trust assets. This is not a property right.

      Discretionary beneficiaries are probably not liable for trustee’s liabilities either. Therefore, while the assets remain in the trust they will be preserved during a discretionary beneficiary’s bankruptcy.

      Insolvency
      A trading trust may well protect trust assets on insolvency and liquidation of the trustee company. This is yet to be decided, but is at least theoretically possible. The trustee company will not have full ownership of the trust assets, because it holds them on trust for others. Therefore, at first glance these assets will not fall into the pool of assets available to satisfy creditors’ claims.

      Under normal trust law, the trustee company will have rights to be indemnified from the trust assets. These rights are important on insolvency because a liquidator can claim under them and obtain access to the trust assets for the benefit of creditors. However, if the trustee company’s normal protection against the trust assets are excluded or lost the liquidator cannot reach the trust assets.

      Exclusion or loss of these protection rights is a key issue with ‘aggressive’ trading trusts. It also dramatically affects the solvency of the trustee company and its directors’ duties.

      Note that the courts are likely to view with suspicion attempts to exclude or limit trustee protection. It is seen as a device to avoid bankruptcy law, which makes exclusion even more difficult.

      Even if the trustee company’s protection rights are lawfully excluded, the directors’ will run the risk of their duties being breached due to insolvent trading.

      A trustee is only entitled to recover properly-incurred liabilities. If the liabilities are improperly incurred, there will be no right of recovery by the trustee and thus no right of recovery by a liquidator. For example, if a trading trust deed only allows the trustee company to carry out chicken-farming, any liabilities incurred in cattle-farming will not be recoverable under the indemnity.

      However, this type of approach is dangerous. If a trading trust is set up with this intention, the whole scheme will be liable to attack as a sham because the trust deed will not truly reflect the intention of the parties.

      When forming a trading trust, there will always be a trade-off between protecting the trust assets and protecting the individuals who will be directors of the trustee company.

      If the trust deed claims to exclude or limit the trustee company’s indemnity rights against the trust assets, the exclusion or limitation may not be effective. If it is effective, a breach of directors’ duties may result. Therefore, much care is required when setting up and running this type of trust.

      See Us First

      • Talk to us if you are considering establishing a trust. Remember, when the trust is established it must be maintained
      • If you consider that any of the issues contained in this fact sheet may affect you

      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      Understanding Your Financial StatementS

      Financial statements are important tools which disclose how your business is performing – they are no good if left to 'gather dust'. They provide insights beyond calculating how much tax you may have to pay. To help you understand your financial statements, we have included an overview of the components which make them up.

      Statement of Financial Position OR BALANCE SHEET
      The statement of financial position (also called a balance sheet) is a statement of what your business owns and what it owes at a particular date. The statement includes assets, liabilities, and shareholders' funds.

      Assets = liabilities + shareholders' funds.

      • Assets: what your business owns or the resources of your business
      • Liabilities: what your business owes, eg amounts owing to outside creditors
      • Shareholders' funds (or shareholders' equity or owners' equity): share capital and profits retained in the business

      Only those items which can be given monetary values are included in the statement of financial position.

      Current Assets
      These are assets which are expected to be realised in cash, sold, or consumed within one year of balance date.

      It includes items such as cash on hand and at bank, accounts receivable (debtors), inventory (stock), prepaid expenses, and investments expected to be realised within one year.

      Investments
      These are assets held to increase your business wealth through either the receipt of distributions, eg interest, royalties, dividends, or capital growth. It can also include other benefits received by your business.

      Property, Plant and equipment
      These assets are held with the objective of earning revenue, directly or indirectly, and not for the purpose of sale in the ordinary course of business. It includes items such as land, buildings, plant, and equipment.

      Other Assets
      Other assets includes items such as intangibles, eg goodwill, patents, and trademarks, deferred expenditure, and preliminary expenses.

      Current Liabilities
      These are obligations which are expected or could be required to be met within one year of balance date. Items include accounts payable (creditors), accrued expenses, the current portion of long-term liabilities, and bank overdrafts.

      Long-Term Liabilities
      These are obligations which are not expected or could not be required to be met within one year of balance date. Items include mortgages and term loans.

      Shareholders' Equity
      This is the interest of shareholders or owners in the net assets (assets less liabilities) of the business. Items include share capital, capital reserves, revenue reserves, and retained earnings.

      Note: These classifications are a general guide and may change with different types of organisations and industries.

      Statement of Financial Performance OR PROFIT AND LOSS ACCOUNT
      The statement of financial performance (also called an income statement or profit and loss account, revenue statement, statement of earnings, or profit and loss account) is a statement of the results of your business operations over a particular period of time.

      Income – Expenses = Surplus

      Surplus is a measure of your business's performance and is used to pay dividends to shareholders or is retained in the business.

      Surpluses retained in the business are included within shareholders' funds.

      Sales
      Sales are the revenue arising from the delivery or production of goods, or rendering services to a customer.

      Cost of Goods Sold
      This is the cost of producing goods for sale, eg labour and materials.

      Gross Profit
      Gross profit is sales less cost of goods sold.

      Operating Surplus Before Taxation
      This is the excess of all revenues and gains for a period, less all expenses and losses of the period.

      Provision for Taxation or Tax Expense
      This is an estimate of the amount of tax that will be paid on the reported net profit.

      Extraordinary Items
      These are items which derive from events or transactions that are not expected to occur frequently, are distinct from the ordinary activities of your business, and are outside your control or influence.

      Net Operating Surplus after Tax and Extraordinary Items
      This is the bottom line. The final measure of earnings after deducting all expenses.

      Statement of Movements in Equity
      The statement of movements in equity is a reconciliation of the equity at the beginning of the period with the equity at the end of the period.

      Opening Equity
      This is the equity carried forward from the prior period.

      Net Surplus (Deficit)
      This is the excess of all revenues and gains for a period, less all expenses and losses for the period.

      Increase (Decrease) in Revaluation Reserve
      This is movement in the reserve resulting from a revaluation of fixed assets

      Other Revenues and Expenses
      These are other items required or permitted to be taken to reserves.

      Contributions by Owners
      These are amounts contributed by owners which do not represent liabilities.

      Distributions to Owners
      These are payments to the owners of the business, eg dividends.

      Closing Equity
      This is the sum of the opening equity and total recognised revenue of a period, less expenses, contributions from owners, and distributions to owners for the same period.

      Why is there Tax to Pay When I Have no Drawings?
      Clients sometimes comment that as they have made no drawings, they do not expect to have any tax to pay.  In simple terms, this is because tax is payable not on your drawings, but on the net profit or surplus the business has made.

      See Us First
      Understanding financial statements can be difficult. We can help explain complex tax and financial issues in plain English.

      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      Essential Features of a Valid Contract

      Contracts come in all shapes and sizes. Some are verbal, some are written. Some are formal, some informal. The use of the internet and electronic technology is also becoming increasingly common in the context of forming contractual relationships. It is, therefore, important to understand the essential features which make a contract valid, binding, and enforceable.

      What is a Contract?
      A contract is an agreement between two or more parties that is intended to be enforceable.

      A contract may be created: 

      • Orally
      • In writing (including by electronic means or through a website)
      • By inference or conduct
      • By a combination of all or any of the above

      Essential Elements?

      For a binding contract to be formed there must be:

      • An offer which is accepted and for which valid consideration is given
      • An intention to create a legal relationship
      • Certainty of terms

      Special rules and principles may apply to contracts that concern specific subject matter, such as employment contracts, the sale of land, and the sale of goods.

      The Offer

      • Must be communicated 
      • Can be revoked at any time prior to acceptance
      • Must be distinguished from an invitation to treat which is where a party communicates that it is prepared to enter negotiations with a view to forming a contract

      The Acceptance

      • Must be communicated
      • Must be of the offer made, otherwise it could be a ‘counter-offer’
      • If posted, occurs on the date posted, if by phone, fax, or email, it occurs when received

      Consideration

      • Must be ‘valuable’. Something must be supplied in return for the promise made by the offeror, eg money
      • Must not be unlawful or gratuitous
      • Must not be something already done or suffered (past consideration)

      Intention

      • The parties must intend to be bound by the contract. However, performance of the contract may be conditional on other matters occurring

      Certainty

      • There must be certainty as to the parties, subject matter, and price. However, a contract that leaves terms to be determined by a third party will not be invalid for uncertainty. 
      • Many contracts require parties to agree to standard terms and conditions. Make sure you read the fine print so that you understand what you are signing up to.

      Proving a Contract
      It may be necessary at some point to prove the existence of the contract or explain or defend its actions before a court or some other forum.

      An oral contract may be difficult to prove, for example, if the parties to the contract disagree on its terms or whether it was ever formed.

      A paper trail is important to proving a written or electronic contract. Care should be taken not to destroy relevant written evidence of a contract.

      Enforceability
      Although a contract may have all of the essential elements, it may not be enforceable because of some other issue, such as:

      • Lack of capacity of one of the parties (eg one of the parties is a child)
      • Where a mistake is made about the nature of the contract. Relief may be granted under the Contractual Mistakes Act 1977 where the mistake results in a substantially unequal exchange of values
      • Where there has been misrepresentation of a particular fact or facts inducing a person to enter into the contract. Under the common law and the Contractual Remedies Act 1979 there may be a right to cancel the contract and/or claim damages
      • Where a contract is illegal or immoral or is effected by duress or undue influence of one party over another
      • Where a contract unduly restrains a person in their trade

      Remedies for Breach
      Remedies for wrongful failure by a party to perform their obligations under a contract may include:

      • Damages
      • Cancellation of contract
      • Specific performance

      Damages
      Generally, damages will be awarded if the loss suffered:

      • Was caused by the breach
      • Is not too remote, ie the loss was reasonably foreseeable

      The amount recoverable is usually the amount necessary to put the party not in breach in the same position as if the contract had been performed.

      Cancellation
      In addition to damages, common law and the Contractual Remedies Act 1979 may allow a party to cancel or affirm a contract where the breach is due to a misrepresentation.

      Specific Performance
      This is usually granted for breach of contracts for the sale of land or unique personal property.

      It is not usually granted if damages are considered an adequate remedy; if they are against or for an infant; or to enforce a contract for personal services.

      Statute of Limitations
      The limitation period for all simple contracts is 6 years from the time the cause of action, eg breach, arises.

      Finally
      Never sign a contract unless you are sure you understand it. Generally, you will not be able to get out of it later. If there are any terms you are unsure about get legal advice.

      See Us First Before Making any Financial Decisions
      To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      BACK TO BUSINESS ABC

      What if your Customer Goes Bankrupt?

      Bankruptcy occurs when someone cannot pay their bills. It provides for the bankrupt’s affairs to be sorted out in an orderly manner so that both the bankrupt and the persons owed are treated fairly. A bankrupt person can be either male or female, married or otherwise, and may be a minor.  Note: Someone cannot be made bankrupt for a debt less than $200.

      How Does Someone Become Bankrupt?
      Before someone can be made bankrupt, there must have been an act of bankruptcy. One of the following things must have occurred:

      • They fraudulently gave one person owed preference over another person.
      • They avoided creditors by leaving, or attempting to leave, or are about to leave New Zealand, or if they are already out of New Zealand, remain out of New Zealand, or leave their home or remain absent to avoid creditors.
      • A creditor has served a bankruptcy notice and it is not complied with and there is no counterclaim.
      • They give notice to any of their creditors that they won’t be able to pay their debts.
      • At any meeting of their creditors, the person admits that they can’t pay their bills.
      • Possession has been taken of their property by a legal process and the judgment issued is not satisfied within 7 days after possession has been taken.
      • Prejudicing their creditors or preferring one creditor over another, the person removes or attempts to remove any of their property from anywhere, or conceals or attempts to conceal any of their property.

      Formal Steps
      A petition has to be presented to the High Court either by:

      • The person who is going bankrupt stating that that they declare bankruptcy.
      • A person owed money seeking the Court to declare the person bankrupt.

      Benefit to the Person being Made Bankrupt
      It may seem strange to think that there is any benefit to a person being made bankrupt.

      Although passing over almost everything they own, it could be said that a bankrupt person gains to the extent that they will be immune from legal action from creditors and ultimately will be released from their commitments.

      Benefit to Persons Owed
      The creditors benefit from the orderly conduct of the bankrupt’s affairs as there are strict procedures ensuring that no undue preferences are given.

      What Property Can be Sold
      The bankrupt’s property that is available to those owed includes all:
       
      Mortgaged property and  buildings;
      Land owned with others;
      Chattels, ie movable property such as a  piano. Also goods, stock, shares, units, bonds, money, and bills of exchange;
      Rights under contracts; and
      After acquired property provided it devolves on the bankrupt before discharge, eg bequests by will.

      What Cannot be Sold
      There are certain exceptions to the above as follows:

      • Where the bankrupt is holding the property merely as a trustee for others.
      • Household furniture and effects to the value of $2,000.
      • Tools of trade not exceeding $500 in value. Money to the value of $400.
      • Rights of action personal to the bankrupt.
      • Joint family homes - the home is protected to the sum of $82,000 (since 1996), except where the property is settled without the Registrar giving notice in the prescribed manner and the settlor is adjudicated bankrupt within 2 years after the date the property is settled.
      • Pension and welfare payments including accident compensation payments.
      • The Matrimonial Property Act 1976 gives the bankrupt’s spouse a protected interest in a one-half share of the matrimonial chattels and the equity of the matrimonial home to a total of $82,000 (since 1996). These assets, if owned by the bankrupt, pass to the Official Assignee and may be sold. The bankrupt’s spouse is entitled to a protected sum from the net proceeds of sale.

      What Happens to Someone who is Made Bankrupt
      The following is a brief summary of some of the effects of bankruptcy:

      • Publicity through notice in the Gazette and newspapers placed by the Official Assignee.
      • Cannot carry on business without the consent of the Official Assignee.
      • Notification to Official Assignee of change in address and certain other matters required.
      • Unless excused by the assignee
        • Surrender and delivery of all books, documents, etc;
        • Attendance at certain meetings;
        • Execution of certain transfers as necessary;
        • Disclosure of existence of property both at the time of bankruptcy and property which devolves in the bankrupt before discharge; and
        • Aid to the utmost in the administration of their estate.
      • A bankrupt cannot hold various positions under the Companies Act, including that of director.
      • Bankruptcy does not affect existing contracts, but the assignee assumes the position of the bankrupt. If the contract is incapable of being completed, bankruptcy may well be grounds for cancellation or the contract.

      See Us First Before Making any Financial Decisions ....
      To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      BACK TO BUSINESS ABC

      Who Needs to Get Audited?

       

      Some enterprises are required by law to have an audit of their financial statements.  Others may be requested to supply audited financial statements by a lender, donor, or other third party.  Many organisations choose voluntarily to enjoy the benefits of an audit by writing them into their constitutional documents.

       

      What is an Audit?

      An audit is essentially concerned with ensuring the reliability of financial statements. By law, an auditor must report on whether an entity’s accounts are true and fair, and whether they comply with generally accepted accounting practices and the requirements of any specific legislation applicable to the entity, eg the Companies Act 1993.

      An audit includes examining, on a test basis, evidence relevant to the amounts and disclosures in financial statements. It also includes assessing:

      • The significant estimates and judgements made in the preparation of financial statements; and
      • Whether the accounting policies applied are appropriate in all the circumstances, and are consistently applied and adequately disclosed.

      Benefits of an Audit

      An independent assessment of an entity’s financial statements can provide credibility to the financial statements and give greater certainty that the entity’s reports accurately reflect the position of that entity.

       

      Audits of financial statements, therefore, arguably bring considerable benefits in terms of:

      • The accountability and oversight of management of an entity; and
      • Transparency for external parties seeking to rely on the financial statements.

      However, there are also costs associated with the audit process and these benefits must be weighed against these costs, particularly in respect of smaller entities.

       

      Entities that may be Required to be Audited

      Issuers

      Under the Financial Reporting Act 1993 (‘FRA’), the financial statements of every reporting entity that is an ‘issuer’ must be audited.

       

      Issuers are defined as including:

      • Every person (including overseas entities and registered banks) who has allotted securities in accordance with the Securities Act 1978 through an offer made in a registered prospectus or investment statement, or by virtue of an exemption granted by the Securities Commission;
      • Managers of unit trusts; and
      • Persons listed on the New Zealand Stock Exchange.

      However, the FRA deems the following persons are not issuers:

      • The Crown;
      • Local authorities;
      • The Reserve Bank; and
      • Companies that have allotted securities but have less than 25 shareholders.

      Foreign Companies

      These are companies that:

      • Are overseas companies;
      • Are subsidiaries of overseas companies;
      • Have 25% or more of their votes controlled by overseas companies or subsidiaries thereof; or
      • Have 25% or more of their votes controlled by a person who is not ordinarily resident in New Zealand.

      Foreign companies must appoint an auditor and have their financial statements audited.

       

      Public Sector Entities

      The Public Audit Act 2001 (‘PAA’) and various other pieces of legislation require the audit of public entities.

       

      Public entities are defined in section 5 PAA and include (among others):

      • The Crown;
      • Airport companies;
      • Community trusts;
      • Crown entities;
      • Local authorities;
      • Maori Trust Boards;
      • State-owned enterprises;
      • Schools; and
      • Government departments.

      Other Entities

      Certain other types of entity also have specific requirements to be audited, such as:

      • Banks; and
      • Registered superannuation schemes.

      Entities that may not be Required to be Audited

      Charitable Bodies etc

      Many charitable bodies, trusts and incorporated societies do not need to have their financial statements audited by law, but nevertheless elect to be audited so that they present a more professional image when presenting funding applications as well as to reassure members that their financial affairs are in order.


      Exempt Companies

      Exempt companies and reporting entities that are not ‘issuers’ need not have their financial statements audited.

      • Have assets less than $450,000;
      • Have turnover of less than $1,000,000;
      • Are not, and do not have, subsidiaries; and
      • Do not have more than 25 shareholders.

      This means that for many family-owned businesses an audit is not a requirement.

      Finally
      Talk to us for further advice on whether your organisation is required to be audited and about the benefits and costs associated with auditing your financial statements.
      An audit may be a valuable tool to your organisation, even if not technically required by law.  

      See Us First Before Making any Financial Decisions ....
      To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.
       

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      BACK TO BUSINESS ABC

      Why you Need a Budget

      While budgets are time consuming to prepare, a well thought out budget can greatly improve the performance of your business and help identify problems and opportunities early on. Budgets are simply forecasts of the future, designed to plan and control money coming and going from your business.

      Why is it Important?
      The budget plots the course of the business for the year ahead.

      It is used as the benchmark during that year to monitor any differences between actual results and what had been expected.

      What’s Involved in Preparing a Budget
      The elements of a budget are:

      • Planning income and expenses for all areas of the business;
      • Coordinating all of these plans into one budget; and
      • Setting a yardstick to measure how the business is going.

      For the budget to work everyone who has responsibility for looking after parts of it need to participate in its preparation. Then, they have the motivation to make it work.

      Once the budget is agreed, it should be fixed for the whole period.

      If things change, the budget shouldn’t change. Instead, forecasts should be prepared and used as an additional planning and control tool.

      A forecast is simply based on the budget and prepared on a month-by-month basis.

      It allows for changed situations and is used to compare actual results against expected results.

      Budget Preparation (Step-by-Step Procedure)
      Step 1  Determine Budget Period
      Set a time period and relevant intervals, eg 6 months measured by weeks or one year measured by months.

      Step 2  Set Sales Budget
      As most budgets are primarily determined by the level of sales, it is necessary to make estimates of future sales quantities and the price at which these quantities will be sold.

      The need for realism in setting these figures cannot be over-stressed. An overly optimistic sales forecast may result in your business gearing-up or taking on additional resources that aren’t used and this can put financial stress on the business in later months, eg additional staff, larger premises.

      [Special note: This presumes that sales determine how many resources are needed. This is not always so, eg some businesses may produce and sell as much as physically possible. In this case, the amount produced would determine the budget.]

      Step 3  Production Budget
      How much you plan to sell, together with how much you want to hold as stock will determine how much you produce.

      Look for any physical limitations on your production (eg storage space) otherwise further capital may need to be invested. This would need to be provided for your capital expenditure plan.

      Step 4  Materials
      How much raw material you need is determined by how much you plan to produce. This requires planning for material inventories and purchases and when they will be needed. It will also make sure suppliers are able to provide material and give you the opportunity to purchase when prices are favourable.

      The amount of material you need, however, can really only be calculated properly by accurately estimating the price and quantity of raw materials to complete the finished product. It is a good idea to set up a cost system to help with this.

      Step 5  Direct Labour
      Calculate the labour you need to meet your production target.

      You will need to estimate hourly rates, taking into account lost time allowances.

      Step 6  Overhead
      The amount you produce also determines to a large degree the overheads you need. Watch overhead levels as certain fixed overheads cannot be readily scaled back in the short term.

      Step 7  Capital Expenditure
      As referred to above, to achieve various production levels or to ensure production costs are minimised certain capital expenditures may be required, eg new plant and equipment.

      You must make sure that this expenditure is economically justified before going ahead. It may tie up a lot of resources that could be better spent elsewhere.   

      Step 8  Period and Other Costs
      Selling, administration, and finance costs are determined from the level of sales, production, capital projects, and working capital needs.
       
      Getting the Budget Right
      Budgets necessarily involve estimation and prediction.

      The crystal ball is never clear.
       
      It is a good idea to test the budget at different levels of sales or look at different scenarios to identify the effects on profits and cash flows.

      Some Final Thoughts
      A budget should be your official financial plan for the period.

      However, as it is future looking, it will inevitably become dated as circumstances change and actual results are recorded.

      Because of these changes, regular re-forecasting over the next 12 months or for each period until the end of the year may be necessary to prevent the budget becoming dated.

      How to Get Started
      Once you are committed to developing a budget for your business we will be pleased to assist.

      Remember, when the budget is finalised do not put it in the bottom drawer and forget about it.

      It is a useful tool that when used effectively will assist you in getting the best out of your business.

      See us First Before Making any Financial Decisions ....
      To assist you in meeting the necessary legal or financial requirements and if you consider that any of the issues contained in this fact sheet may affect you.

      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      Why you Need a Business Plan

      The environment in which we work is constantly changing, and running a business is becoming more and more challenging. Quite simply, planning significantly increases your chances of success. If you don’t have a business plan, now is a good time to plan for and think about the future of your business. Businesses do not plan to fail, however, many business fail because the owners have failed to think how their business will survive beyond the next month, focusing more on getting by on a day-to-day basis.

      Why Bother with a Business Plan?

      • A business plan keeps everyone working towards common goals, rather than doing their own thing.
      • It helps you focus on what is important to business success, rather than trying to build a business by reacting to short-term whims or events.
      • It gives you the opportunity to identify potential problems in advance.
      • Also, a bank manager presented with an up-to-date business plan will not only be impressed by your management abilities, but can understand your financial needs properly and process the paperwork quickly.

      Types of Business Plans
      There are really two types of business plans:

      Short-Term Plans
      These cover the next 1-3 years and contain a detailed action plan for sales, production, human resources, finance, etc. The action plan should tie in with budgeted cash flows, projected profits, and investment in plant, debtors, and stock.

      Longer-Term Plans
      These cover 3 or more years. They spell out the direction of a business, and the key ways in which its aims will be achieved.

      Short-Term (12-Month) Plan
      Typical content of a 12-month plan includes:

      • Executive summary
        • What are the key goals that the business will achieve over the following 12 months in terms of sales dollars, new products, gross profit, return on investment, etc?
      • This year compared to past year
        • What are the major changes that will impact on profits, cash flows, and returns on investment
      • Detailed action plans
        • Marketing – market share, new product launches, better marketing efforts.
        • Production – new equipment, lower unit costs, etc.
        • Personnel – recruitment, overtime, new management appointments.
        • Finance – cash flow, profit and loss statements, and balance sheets.
        • Systems – what better systems are planned?
      • Contingency plans
        • Should a major event occur, what fall-back plans do you have in place?

      Long-Term (3-year) Plan
      Typical content of a 3-year plan includes:

      • Business background
        • Ownership – how long has the business been operating?
        • What are its services/products?
        • How is it organised?
        • What is its track record in marketing and production?
        • What is its current financial position?
      • Strengths and weaknesses
        • What are the good points – products, market penetration, location, key people? What are its weak points – management methods, lack of skilled personnel, lack of funds, too much reliance on one customer or one product? Is there too much reliance on one key staff member?
      • General business outlook
        • What is happening, or is likely to happen, that will improve the business or its competitors – eg new buying habits, the impact of technology, or a changing population?
      • Opportunities and threats
        • After considering the business outlook, what could be the advantages for your business? What potential problems might there be for your business?
      • Targets and strategies
        • Set initial business targets for your size, growth, market share, personal rewards, use of technology, the type of employer you want to be, etc. Work out ways in which you could achieve those targets (taking into account the strengths and weaknesses of your business now), and the likely opportunities and threats you will face over the coming years. Select the methods preferred and create an action plan that provides links to what needs to be done in the coming year.
      • Action plan
        • Set out the key actions on a year-by-year basis, and develop a broad financial picture of the cash flows, profitability, and sales that should result from the achievement of the key actions.

      How to Use the Plan
      With the short-term plan, you can monitor actual performance monthly, and by comparing it with actual performance you can identify any problems.

      Action should then be taken to bring the business back on target. If adverse trends are detected, such as continuous shortfalls in sales, crises can be quickly averted.

      How to Get Started

      • Talk to us.
      • Once you are committed to developing a plan for your business we will be pleased to assist.
      • Remember, when the plan is finalised it will be up to you to use it effectively to get the best out of your business. However, we will always be on hand to help when needed.
      • A plan does not need to be complicated or require volumes of pages. A good start is to write down what you are doing, why you are doing it, and how you could do it better.
      • A plan can be written on the back of an envelope. The most important aspect of the plan is to start you thinking about how you are going to keep your business going and making money.

      See Us First Before Making any Financial Decisions ....
      To assist you in meeting the necessary legal or financial requirements and if you consider that any of the issues contained in this fact sheet may affect you.

      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      Wills & Estate Planning
      Tax Issues when Preparing for your Death


      As accountants, we are not generally involved in the actual drafting of wills, but it is appropriate that we offer some advice on why and how they should be drawn up.

      Wills
      A will is a document declaring the wishes of the person making it regarding the: 

      • Dispursion or management of their property on their death or
      • Appointment of a person to carry out the instructions contained in the will

      A will is not intended to have any effect until the death of its maker and except in certain circumstances it is revocable at any time before this occurrence.

      A will can be amended or updated by a subsequent document adding to or altering the terms of the original document.

      The terms of a valid will are enforceable by the court and once death has occurred, the terms of the will can be varied only in exceptional circumstances.

      Why Have a Will?
      All persons over the age of 18 years who have any property whether personal property or real estate should for practical reasons make a will.

      There is no legal requirement which forces any person to make a will and the execution of this document is purely voluntary.

      If no will is made it can become cumbersome and costly to deal with the assets of a deceased person and the distribution of the assets may not be in accordance with what the deceased person would have provided had they made a will.

      Wills allow people to dictate how their property should be distributed amongst their family members. This can avoid creating bitter family arguments and hardship for dependent children.

      In the absence of a will, the property will be distributed to the beneficiaries according to a priority list, where all the family members (including the surviving spouse) will inherit a share in set proportions.

      Missing Wills
      If nothing more is known than that the will traced to the possession of the deceased (and last seen there) is not forthcoming on their death, the natural inference is that the deceased destroyed the will with the intention of revoking it.

      Making your Will
      Both solicitors and trustee companies provide professional expertise in the execution of a valid will.

      Standard will forms are available for the making of wills but unless a person is familiar with the technical aspects of both the use of language in drafting and the law relating to the making of a will, we strongly advise you to avoid this method of making a will.

      Tax Issues to Consider
      A major issue to consider is the possibility of accounting for GST where it is intended that assets will be bequeathed directly to the beneficiaries.

      If the deceased was registered for GST and the assets to be bequeathed were part of the deceased’s taxable activity, the transfer of assets to a beneficiary will constitute a taxable supply.

      The deceased’s estate is required to account for GST on the taxable supply.

      The beneficiary who acquires the assets may not be registered for GST and if not, they cannot claim GST input tax.

      Even if the beneficiary is GST registered they are only entitled to claim a GST input tax of one-ninth of the cost of the taxable supply.

      Unfortunately the cost to them is nil.

      The net result within the family group is a tax haemorrhage of one-ninth of the open market value of the GST assets bequeathed under the will.

      The bequeathed assets also do not constitute a ‘going concern’ for GST purposes as they do not meet part of the requirement of ‘going concern’ – that is, it should be ‘agreed in writing’ by the parties and this is not so.

      A possible solution to this dilemma could be that the will is altered to provide for the sale of the assets to the relevant beneficiaries, at the same time as a bequest of the resultant debt back on sale value.

      When Should a Will be Changed?
      Wills should be revised as circumstances change, for example when:

      • A person marries or enters into a de facto relationship – marriage automatically revokes an earlier will unless it is made in contemplation of marriage to a particular person
      • A person separates from a spouse or partner. Divorce does not automatically revoke a will but gifts to an ex-partner will be rendered ineffective
      • Children are born
      • A person acquires significant property
      • There is a change to relevant legislation, eg the Property (Relationships) Amendment Act 2001

      Summary of Time for Administration

      The following is a general guide only for relatively straightforward estates where there are no special complications.

      Where special circumstances exist, the administration can take considerably longer.

       1. Grant of probate 1 month
       2. Settlement of liability 3 months
       3. Sale of assets such as residence and investments 5-6 months
       4. Winding up of estate 9/10 months

       

      These are general guidelines only – speak to us.

      See Us First
      Talk to us. If you consider that any of the issues contained in this fact sheet may affect you.

      Once you are committed to preparing a will we will be pleased to assist and advise on any financial or tax factors that you may need to consider for your particular circumstances prior to seeing a solicitor.

      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      How to Improve your Cash Position
      Simple Steps to get Back in the Black

      It can be easy to focus all of your energy on making your business profitable. While making profit is important, even more important is ensuring your business has a positive cashflow. Many profitable or asset-rich business can fail simply because they run out of cash. Below we explain the importance of cash for your business and how you can improve it.

      The Difference Between Cashflow and Profit
      Cashflow

      • Cashflow is the lifeblood of your business
      • Cashflow is the amount of cash you have available to pay your bills
      • Cashflow can come straight from retained profits, your overdraft, or some other loan facility
      • Cashflow is not just about the amounts of money moving in and out of your bank account but is also dependent on the timing of these movements
      • The bottom line is that if you can't pay your creditors they may refuse to continue to supply you with goods and services that you need to fulfil your contracts with customers

      Profit
      This is the net difference between the total amount your business earns and all of its costs; cashflow on the other hand is your ability to pay your bills on a regular basis.

      The Need to Prepare a Cashflow Statement
      Predicting and planning for the high and low cash periods in your business helps ensure the success of your business over the long term.

      Managing cash is much easier if you can predict in advance what your cash situation will be and take steps to reduce the impact of any period when you may be short of cash.

      To do this you should produce a cashflow forecast.

      This will give you a month-by-month prediction of the amount of cash you are likely to require and when you will need it.

      It will also give you an idea of whether you may need to arrange finance or borrowing and the terms you would need. For example seasonal business may need finance to carry them through the off season.

      Ways to Improve your Cashflow 

      • Invoice immediately
        Rather than waiting until the end of the month to invoice, bill immediately or on a regular basis. When taking on long-term work, discuss with your client that you would like to get paid progressively rather than at the end of the job. 
      • Insist on payment immediately
        An easy way to avoid having to wait for payment is to insist on payment on completion of the job. Take your invoice book with you when working and write out the invoice right then and there. Ask your client for a cheque while your there. Note: Make sure you let your customers know this is how you expect to get paid. This does two things – it will weed out the customers who may have had trouble paying in the first place – saving you hassles. Also, it lets your customers make sure they are prepared for your request for payment. 
      • Give a discount for prompt payment
        A small discount can help improve customers pay. Two warnings: first, some customers will take the discount even if they don't pay on time. You may need to be selective on who you offer discounts to or have a firm policy on discounts and their expiry. Secondly, if your discount is too high, you may be giving away your profit. 
      • Let them pay by instalment
        Customers may feel they are unable to pay your bill because it is large. Your bill may go to the bottom of the pile. They may be more likely to pay other smaller bills. If you feel a customer may be a slow payer, let them pay with a series of predated cheques. [Note: Get all the cheques for the full amount at once. Also, don't extend any more credit until the bill has been paid in full.
      • Do credit checks
        Some people have a history of not paying. You can avoid getting these clients by checking out their credit worthiness. Ask for references and call other businesses that have dealt with them to see whether they deserve credit. 
      • Use barter instead of cash
        You could reduce the strain on your immediate cash if you need goods or services from someone and can barter goods or services of your own in return. 
      • Consider consolidating your loans
        If you have several business loans or related loans such as cars, equipment, credits cards etc, you may be able to consolidate two or more of these into one lower interest account and improve your cashflow. It may also be worth taking out a longer-term loan agreement in exchange for lower monthly payments.
      • Sell for cash or credit card rather than on terms if your industry practices permit.
      • Add late payment charges, fees, or interest when possible. 
      • Pay bills only on their due date (or later if possible) unless there is a discount for early payment. It may be that you are paying your bills sooner than you are getting paid which is causing the problems. 
      • Spread payments to your suppliers out over the month. 
      • Reduce stock on hand to only the most necessary items. 
      • Have a sale to move slow-moving items at cost. 
      • Lease instead of purchase equipment. 
      • Pay no more estimated taxes than necessary. 
      • Deposit cheques and cash daily. 
      • Use tax losses or credits. 
      • Increase sales. 
      • Increase prices. 
      • If you have traditionally sold to the trade – look at selling to the general public. They will expect to pay for goods and services immediately.

      How to Get Started
      Talk to us, if you feel you need help improving your cashflow. We can help We can analyse your cashflow and identify what the causes could be We can also prepare a professional cashflow forecast that will assist if you need to arrange additional finance through your bank.

      See Us First
      If you consider that any of the issues contained in this fact sheet may affect you.

      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      Depreciation

      Depreciation is allowed as a deductible expense for tax because assets decline in value and wear out as they are used.

      The depreciation regime creates a statutory right for a taxpayer to claim depreciation. Inland Revenue sets the depreciation rates and, in some circumstances, a taxpayer can apply to Inland Revenue for a special rate.

      Some assets cannot be depreciated for tax purposes, including:

      • Trading stock
      • Land and buildings
      • Financial arrangements under the accrual rules
      • Goodwill
      • Some types of intangible assets

      Goods and Services Tax (GST)
      If the taxpayer is not registered for GST, they can base their depreciation on the actual price they pay for an asset, including the GST component.

      If the taxpayer is registered for GST, they can claim the GST component of an asset's cost price as an input tax deduction. In this case, they claim depreciation on the GST exclusive price of the asset.

      Depreciation Methods
      There are two ways that a taxpayer can account for depreciation on their assets – either as an individual asset or as part of a group of assets (a 'pool').

      If a taxpayer wishes to calculate depreciation on individual assets they can use either of the following methods of depreciation:

      • Diminishing value
      • Straight line

      Alternatively, if the taxpayer wishes to depreciate a group of assets as a pool, then the diminishing value method must be used.

      Diminishing Value Method (DV)
      Depreciation is calculated each year by using a constant percentage of the property's adjusted tax value. The depreciation deduction progressively reduces each year.

      Straight Line Method (SL)
      Depreciation is calculated in each year at a constant percentage of the cost of the asset. This method is sometimes referred to as the cost price basis. The amount of depreciation claimed is the same each year.

      Pool Depreciation Method
      When property is pooled it must be depreciated using the diminishing value method on the average value of the pool for the year.

      There is no restriction on the number and/or types of pools that a taxpayer may set up. Different pools may be set up for the same types of assets. This may be useful where the assets are used in different locations or different rates apply. Different rates may apply because of different acquisition dates.

      The amount of depreciation that can be deducted is largely dependent on whether the property is a qualifying asset and the date on which the property was acquired.

      A 'qualifying asset' includes new assets (other than buildings) never used in New Zealand or elsewhere, or imported second-hand assets (excluding motor cars and buildings) used in New Zealand for the first time.

      Changing Depreciation Rates
      A taxpayer can choose between the diminishing value (DV) and the straight line (SL) method of calculating depreciation for any income year (except for fixed-life intangible property).

      The taxpayer can change the method they use to calculate depreciation of the taxpayer's assets from year to year, except when the asset is included in a pool.

      When the taxpayer changes calculation methods, the value that they calculate depreciation on is the current adjusted tax value, not the original cost price of the asset.

      New Assets
      Irrespective of which depreciation method is used, depreciation is claimed for each calendar month or part of a calendar month that the taxpayer has owned the asset in the income year and in which the asset has been available for use to derive gross income.

      Sale of Assets
      Depreciation may not be claimed in the year of sale of an asset, except for buildings. Depreciation can be claimed based on the number of months that the building is owned in that calendar year.

      When an asset that has been depreciated is sold for an amount different from its written down value (adjusted tax value) then a gain or loss on sale must be recognised for tax purposes.

      In calculating the gain or loss on sale, the costs incurred in selling the asset, such as commission and advertising, can be deducted from the sale price before the gain or loss is determined.

      Depreciable Intangible Property Acquired
      The following types of assets are depreciable intangible property:

      • The right to use a copyright
      • The right to use a design or model, plan, secret formula or process, or other like property or right
      • The right to use land
      • The right to use plant or machinery
      • The copyright in software, the right to use the copyright in software, or the right to use software
      • The right to use a trademark
      • Management rights and licence rights created under the Radiocommunications Act 1989
      • Resource Management Act 1991 consents

      Subject to some restrictions these assets may be depreciated over their legal life on a straight-line basis.

      Ceasing Business
      When the taxpayer ceases business and the business property is not sold immediately or is kept for private use, the loss or gain must be accounted for using the market value of the asset as at the beginning of the next income year.

      The adjustment is made in the income tax return for the year after the business ceased, even where the loss or gain is not realised until a later income year.

      See us First Before Making any Financial Decisions
      To assist you in meeting the necessary legal or financial requirements or if you consider that any of the issues contained in this fact sheet may affect you.

      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      BACK TO BUSINESS ABC

       

      Setting your Prices Made Easy

      Deciding where to set your prices is a tricky issue so what factors do you need to take into account when setting prices?

      • What prices are your competitors charging? If low, are their costs lower? If high, what, if any, additional value are they providing to justify their pricing?

      • Your level of costs/business infrastructure. Do you have high business overheads or extravagant tastes? Do you have a fancy office or work from home? You need to know your overheads, drawings and break-even point.

      • Are you a new or an established business? Despite the difficulty in increasing prices later it's a common strategy to gain market share quicker by undercutting the competition. On the other hand if you're established or reputable you can charge more. 

      • Your value proposition - where are you positioning your business in terms of adding value? At the $2 Shop end or on the luxury side? For more on this see "Adding Value Made Easy" on http://empoweryourbusiness.co.nz but in a nutshell customers don't choose a supplier by price alone, they consider a range of other factors like service, reputation or location.

      If you'd like to learn more about pricing I have some useful pricing calculators and checklists.

      If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail me at nick@abac.co.nz. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice. 


      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      Business Finance Made Easy

      The key to success in business finance is having sufficient working capital and not having enough is a mistake I see time and time again in business. Normally, there are only three sources of working capital available for owner-managed businesses:

      1. Owner's Funds. This could be funds initially invested into the business on set-up, or monies subsequently loaned to the business, maybe from undrawn remuneration.
      2. External Borrowing. This could be from banks, relatives, or finance companies.
      3. Retained Profits. These are undrawn profits from prior years, the cheapest and best source of working capital.

      Here are some pointers:

      1. Never underestimate the working capital required in a business.
      2. Always use cash flow forecasts to forewarn of periods of peak demand.
      3. Make sure you have adequate reserves of working capital, whether cash in the bank or an under-utilised borrowing facility.
      4. Keep on top of the management of your business at all times. If, for example, you don't collect your debts it will soon run away from you.
      5. Make sure you use decent accounting software so you can keep track of your working capital.
      6. Restrict your drawings to a level which allows the accumulation of retained profits. 

      Your working capital is your lifeblood in business so treat it like a lover, tenderly and with huge respect! 

       

      If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail me at nick@abac.co.nz. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice. 


      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

      GOT A QUESTION?

      BACK TO BUSINESS ABC

       

      ACC on Rental Properties

      ACC bills can be exorbitant so it's important to ensure you're not paying more than you need to, especially as the Accident Compensation Corporation seem to send out the bills as soon as they can without necessarily checking whether they're overcharging you!

      One area that does cause confusion is income from rental properties?  You may be wondering about why and whether ACC collects levies from rental income.  It comes down to whether your rental income is classified as 'active' or 'passive'.  ACC levies active rental income but not passive rental income.

      The difference?  Rental income is classified as active when you put in some effort for it.  For example, that might be mental and/or physical work collecting rents, inspecting the property, arranging for maintenance, finding tenants and so on.  Where there's not this degree of effort - for instance, where you have a property manager in place - the income is classified as passive. Isn't that a strange distinction?

      If you're running the rental property through a company, and distribute the income as shareholder salary, this would also be levied as active income.  Where income from 'passive' rental has been distributed to the shareholder as dividends, these are not subjected to ACC levies.

      If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail me at nick@abac.co.nz. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice. 


      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      Marketing Made Easy Using Free Stuff

      A new gym client of mine spent $25,000 on advertising and recruited 12 new members. A previous gym client many years ago opened and let prospective members use his gym for free for a month. He obtained 230 new members.

      Advertising rarely works for SME's yet it is often the sole marketing activity of many business owners. Instead, why not use the money to let customers or clients find out how good you really are?

      It's often a case of giving up time, but don't you have plenty of time when you're new in business or not busy? Isn't that better than sitting around complaining and getting depressed?

      So what could you offer for free? It's best to look for items of low cost to you but of high perceived value to your customers but if you're stuck here are some examples:

      • Free coffee/dessert - cafe or restaurant
      • Free scarf - ladies clothes
      • Free eye test - optometrist
      • Free gift - any business
      • Free pie - baker
      • Free haircut - hairdresser
      • Free health check - physiotherapist, chiropractor, vet etc 

      But.....be careful! Only offer free stuff to serious prospects, well targeted groups who have the money to pay! And don't fall into the "Free Dental Floss" trap like my dentist where it costs $300 to step over his threshold yet he offers $5 worth of free dental floss! Put yourself in your customer's shoes first.

      Using free stuff to market effectively is just one of the free or low cost marketing strategies you should be using to grow your business.  Do you know what the others are?

      If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail me at nick@abac.co.nz. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice. 


      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      Back to Business Basics Made Easy

      Operating a successful business is not rocket science but there are a number of things to keep in mind:

      • Line of Business. You've a much better chance of success if you're in a line of business where there are barriers to entry e.g. it requires a qualification, know-how, or you need a lot of money to set-up the business.
      • Avoiding Excessive Risks. Being in business can be risky but there's no point in placing the wellbeing of your family in dire risk. There are many who buy an existing business without doing their homework, who lack adequate working capital or assume unrealistic levels of sales or profit.
      • Not Over-Borrowing. There is good and bad debt and debt which is just plain crazy. Take, for example, those local businesses who borrow $50-$100k from the IRD without formal arrangements or use credit cards or so-called "interest-free" deals. Not only is it hard to catch up but they'll break the bank.
      • Reserves. That rainy day might be around the corner and it's non sensible to operate without reserves. If you can't save up an emergency cash fund at least make sure you have an unused credit facility available. 
      • Planning. If you're an established business you don't necessarily need a thick business plan (although that helps too) but you do need to know your break-even point, a budget and a cashflow forecast. I find that a business owner understands their business much better if they're involved in these areas.
      A well managed business can fund your retirement as well as give you a good living for many years. Ensure you give yourself the best possible chance of success.
    1. If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail me at nick@abac.co.nz. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice. 


      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      Business Improvement Made Easy

      It's a great shame that so few business owners make the most of their accountant. Yes it's true the accountant prepares the annual financials and tax returns but a good accountant is capable of much more. Here are a few things they can help you with. 

      Regular Management Information 
      To run a successful business you need timely and regular management information throughout the year and there's a proven link between the availability of regular financial information and business survival. With modern, low-cost accounting software it's never been easier.

      Break-Even Point
      For smaller businesses knowing your break-even point is vital to your ongoing business survival. And don't forget to ask your accountant to take account of your drawings, tax & ACC.

      Analysing Financial Data
      Get your accountant to explain your annual financials and look at trends, your gross profit margin and working capital tied up in Accounts Receivable or inventory.

      Key Performance Indicators
      You need to monitor the factors in your business that are critical to your success. For a trade business, for example, these would include labour productivity and the average hourly labour charge.

      Cash Is King
      It's important to understand the difference between cash and profit. Over 60% of businesses that go bust are still profitable!

      Learn from Success
      Your accountant has exposure to a lot of successful businesses so ask them how you compare with other businesses and what those who are very successful are doing.

      Business improvement doesn't have to involve complex or costly business strategies, it's often just common sense and making the most of the available resources. Your accountant should be one of the most important.

      If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail me at nick@abac.co.nz. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice. 


      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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      Minimising Business Risk Made Easy

      One of the craziest unnecessary risks is to trade as a sole trader or partnership rather than as a limited company just to save a few dollars. I regularly see examples of unincorporated business owners coming to grief:

      1. The husband and wife partnership who got into difficulty so used the finance readily available from the IRD. They now owe $95,000 in unpaid GST and their business is sinking fast. Unfortunately they are going to go down with the ship. 
      2. The sole trader who received a totally unexpected legal claim for $260,000. His insurance company refused to pay because they said the claim was late being notified. Bankruptcy beckons.
      3. Another husband and wife partnership has just received a demand for $200,000 from the liquidator of a customer who went bust a year ago. Their legal fees to defend their position are mounting. Liquidation of their own business is not an option because they are a partnership but that would have been the best choice.
      4. A new client was in a two-man partnership. His business partner ran up business debts willy-nilly and then cleared off to Australia. Guess who had to pick up the tab for his partner's debts? 
      All these business owners were of modest means and had families. Why would anyone risk their future well-being (and probably health) to save $500 or so?

      If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail me at nick@abac.co.nz. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice. 


      Disclaimer
      Important: This is not advice. Readers should not act solely on the basis of the material contained in this fact sheet which consists of general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents.

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