I seem to spend a lot of time digging new clients out of hole their previous accountants have shoveled them into. These are some of the issues I’ve had to deal with:
False Stock Write-downs
As we know, the higher the stock, the higher the profit, so a number of accountants encourage their clients to falsify the value of their stock. Now this is all very well but it’s only a temporary advantage, as it just increases your profit the following year. And it also gives rise to problem when you want to sell your business as you have to tell the buyer you’ve been cooking the books – what confidence will that give the buyer that you are a person to be trusted?
Management Charges
Another old favourite, if you have more than one entity, say two, with a profit in one and a loss in another, some accountants say they can save you tax by raising an invoice in the loss making company and sending this to the profit making company and just leaving it unpaid.
Again, it’s a short-term fix, as they can give rise to a whole heap of problems. For one, claiming a big GST refund in the recipient company. For another, in future years when you want to wind down your entities, the management charge reverses itself in the paying company and gives rise to a whopping tax bill! Come on now, think it through, if you’re going to do them at least pay the invoice at the time!
The silly thing is that if you have 66% common ownership you can legally swap the losses over anyway, without raising inter-entity charges!
Wages to Young Kids
As old as the hills, pay your kids for “working” in your business, they advise. Now yes maybe when they are 13 plus, but 8 years old? And never actually paying them the money, washing it through your drawings or in one case via an inter-company to a trust? If you have kids you’ll know they’d never work without being paid!
Backdating Dividends
A common ploy to deal with overdrawn advance accounts, it doesn’t actually work anymore because you now have to deduct RWT of 3% from the dividend at the time of payment. This doesn’t seem to have registered with some accountants!
Not Facing FBT
Yes FBT is nasty but there is often a better solution. Take cars for example, the most common problem. For one thing, you can make good the FBT equivalent via your advance account at the much lower Income Tax rate of 28%. Or you could keep the car in your own name and charge the company tax free mileage. Both are easy to deal with and save the pain of completing ridiculously complex FBT forms which have designed to be as difficult as possible to fill-in!
No RWT/NRWT
If you’re paying interest from your business to a related lender, maybe another entity you own or to yourself, you need to act like a bank and deduct tax before you pay the interest, whether the lender is overseas or in NZ. It’s not an additional tax where the lender is resident in NZ, it’s just tax up front. Large firms of Chartered Accountants just don’t seem to spot this!
Depreciation Clawback
Here the accountant claims depreciation on an asset which can only accumulate in value. When they want to sell the asset, the depreciation is clawed back and you end up, just like a new client of mine, with a tax bill of $40,000. Wouldn’t it have been more sensible not to have claimed the depreciation in the first place?
GST Claims on Asset Purchases
Unless it’s a commercial property which is going to be flattened for redevelopment in the future, it just doesn’t make sense to claim GST on an asset which is going to increase in value, especially as in many cases it’s property used for private purposes. What are you going to do, like two clients of mine, when you want to sell up and can’t face paying GST of twice the amount you claimed on purchase?
Honest and Practical Advice
It may be easier in the short-term but it’s not in the interests of our clients to give advice which is going to give rise to bigger problems later on. It’s necessary for us accountants to tell it like it is, to give honest and practical advice even though with some clients it will not be what they want to hear. For many like many things in tax, they don’t actually understand the implications of the advice they are being given, and they naively trust their accountants to suggest what is best, so that to me is not doing them any favours whatsoever!
If you need help to reduce your tax but still want to sleep at night contact Nick on 0800 ASK NICK or email nick@abac.co.nz
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Like it or not, income tax is high in New Zealand. As those of us in business know, it can be a struggle to pay in lump sums especially when the prices of what we buy keep going up, and our customers and clients lack the cash to pay for our goods and services. Therefore, it is very important to make sure that we’ve done all that we can to maximise our tax deductions.
Did you know that the amount you can earn in Australia before you pay tax is now $18,200 (about $23,100 NZD)? That’s NZD$444 per week or NZD$2,758 a month. Who said that tax rates in Australia are higher?
