Are you a business owner trading via a limited company? Did you know that you can legitimately claim for private goods and services paid for by your company?
Yes you can, and it doesn’t matter what you claim – flights, a hotel bill, a present for your kids (or yourself), a new outfit – they’ll all be OK. One small catch, the amount you spend cannot exceed $300 per quarter per owner.
OK, it’s not a huge amount, but it all helps in these tough times right? And why pay them a cent more than you need to, I say?
If you need help to slash your taxes contact Nick on 0800 ASK NICK or email email@example.com.
Over the 30 years I’ve spent in tax I’ve seen some pretty daft – and downright stupid – ways that business owners have invited the IRD to punish them for tax evasion. They just don’t think things through, taking the hugest risks by assuming the IRD are asleep or not interested. Well, having been involved in many tax investigations, let me tell you that they are no fun at all if you’re on the receiving end!
- Living on thin air
As we allknow, living from day-to-day is expensive, so if your drawings are consistently low and you have no other sources of income, it’s like a red rag to a bull.
- Paying undeclared takings into the bank
It matters not whether the accounts are in your name, that of your other-half, your kids or your mum, if you can’t explain where the cash came from it’s like an own goal.
- Involving others
Many business owners pay employees undeclared takings or tell others they’re doing cash jobs. Guess what happens when the employees get the push or they fall out with friends or their partner? Yes, the IRD Confidential Anonymous information line rings hot, as happened with a restaurant owner client of mine in London.
- Using diverted cash in substitution
In pre-Eftpos days a client of mine in the UK drew no cash from any of his bank accounts for five years and the IRD was thrilled to see that he hadn’t paid for any petrol or shopping via cheque or credit card. This was a strategy he lived to regret!
- Using credit cards in locations where you’re not supposed to be
Another client of mine went skiing every year in Switzerland, paying in diverted cash. All went well until one year, he ran out of Swiss francs and popped into the duty free to buy his mum a present, and without thinking used his credit card! The IRD noted that no flights or hotel bills appeared on bank or credit cards and it turned out to be a very expensive slip!
- Buying assets
A bit like the trip to Switzerland, a further client had used diverted cash to buy flash cars and a boat. Seeing as these stand out a bit, it didn’t take the IRD long to cotton on that there was low hanging fruit going begging!
- Paying for materials via credit where the job is for cash
Why would you pay for materials legitimately and then use these in a cash job? All the IRD have to do is trace through a test selection of materials to sales invoices which doesn’t take them very long at all. Builders, in particulars, even those that have in business for 25 years, just don’t seem to realise how easy this is for the IRD.
- Low gross profit margin
If you take out that much cash out of the till it’s going to significantly reduce your gross profit margin. What that means is that you are going to stick out like a sore thumb when the IRD run your figures through their new benchmarking system. Getting noticed at the IRD is not good for your finances or your stress level!
Posted in Accounting, Business, Tax
Tagged assets, avoiding tax audit, business practices, cash, credit card, diverting cash, IRD, low income, New Zealand Tax, Profit Margin, tax audit
If you’re an employer watch out, there are important changes which took place on 1 April 2013.
KiwiSaver Contribution Rate Increase
The minimum contribution rate for employers and employees will increase from 2% to 3% of gross salary or wages from the first pay period starting on or after 1 April 2013. The changes will affect your payroll calculations and the details you enter on your Employer monthly schedule (EMS).
Primary and Secondary Schoolchildren
As part of the Government 2012 Budget, the tax credit for children was repealed from 1 April 2012. This tax credit covered the tax on the first $2,340 of income from employment for employees under 18. If you pay salary/wages or schedular payments to schoolchildren, you must now deduct tax and record their details on your EMS. If your employee or Inland Revenue request you to, you will also need to deduct KiwiSaver employee contributions for existing KiwiSaver members under 18 years of age. You don’t need to make employer contributions.
Employees under 18 are not subject to automatic enrolment.
ML And ML SL Tax Codes Can No Longer Be Used
PAYE should be deducted using the M or M SL rates from 1 April, unless the employee provides a new Tax code declaration (IR 330).
Tax Code Declaration (IR 330).
These have all changed, so throw all the old ones away and order some new ones from the IRD.
Student Loan Repayment Rate Change
The repayment rate for standard student loan deductions will increase from 10 cents to 12 cents.
What This Means for You.
Your old PAYE tables are of no use, so if you’re still in the Dark Ages get some new ones. If you’re using payroll software, this needs updating.
Perhaps it’s time you used an expert to process your payroll, it’s cheaper than you think!
Many small business owners (even those who’ve been in business for many years) get themselves worked up about GST but it’s generally pretty simple here in NZ providing you keep good business records.
The thing to remember about GST is that it’s NOT your money, it is merely additional monies you’ve collected from your customers and have temporary care of. In return for this duty, you are permitted to claim the GST added to your purchases and costs. How good is that? You are being paid to collect the GST!
Of course that’s easier to accept for those of us who issue sales invoices and then add GST to the value that we’re billing for. For those who charge a GST-inclusive price like retailers and cafe owners it becomes easier to get confused and think that the GST belongs to them, especially when the selling price of the goods or services is set by market forces and would be the same whether you were GST-registered or not.
In other countries (like the UK and India) GST is called VAT or Value Added Tax, the reason being that you are only being taxed on the value you add as the goods and services pass through your business or get created. I think this is a better name as it better explains how it works.
GST is becoming popular across the world as governments love it – easier to collect, hard to avoid, and unlike Income Tax it’s hidden in the cost of what you’re buying.
Business owners complain about their GST bills, but in general, the higher your GST bills, the better, as this means your sales are high in relation to your costs (unless or course say your wage bill is out of control).
With only a very few exceptions you have to add GST to virtually everything you sell and can claim GST on virtually everything you buy or every service you use. The main exceptions on the sales side are:
- Rents on residential property
- Land transactions (but watch out for the necessary conditions)
- The sale of a business as a going concern (likewise watch out for the required conditions)
On the outgoings side watch out for:
- Bank fees and interest
- Suppliers who are not GST registered.
Now there are some complicated areas, like for example on entertaining where its 50% claimable, assets used privately or where you sell both GST-able and non-GST-able items, so you will need to seek help with these.
Going back to good business records, many and varied are the ways that people try and account for GST. These range from third-hand corrupt spreadsheets which don’t add up, to adding up the ins and outs on their bank statements to using 10 year old accounting software which still calculates the GST at 12.5% but there’s no substitute for some simple to use, cheap accounting software. The software I find business owners get to grips with quickest is Banklink – no accounting knowledge required, very cheap, and very easy to use.
Many business owners in New Zealand believe that the chances of being audited by the IRD are so slim that they don’t need to worry about it.
Well, speaking as someone who has been in little offices many times with clients being grilled by the IRD—and having been involved with clients whose homes and business premises have been raided by the IRD—I can tell you that being on the wrong side of the IRD is a frightening, stressful and very expensive place to be.
I wouldn’t recommend that experience to anyone in any possible way. It is important then to make sure that the IRD focus their attention on others, rather than you, which can be achieved relatively easy most of the time.
Read the full article here
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.
Here are some practical things you can do to place yourself in the best possible position to maximise your tax deductions:
(See full article)
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?
In the UK, you can enjoy income of £8,105 ($15,762 at the current interbank rate) before you pay any tax, unless you’re over 65, in which case the tax free amount is £10,500 ($20,418).
Even in little old Papua New Guinea, from where I’ve recently returned, it’s Kina 7,000 (about NZ $5,000) which means the typical worker there, at Kina 3 per hour, pays no tax at all.
You know where this is going now, right? Yes, because here in New Zealand we pay tax on every $ we earn, hang on no, on every cent we earn. All suffer the same – the poor, little old ladies supplementing their NZ superannuation, part-timers earning a few hundred $ to buy treats, and now even schoolchildren have had their tax free allowance taken away.
But there is hope still for the hard worker, as it is possible to significantly reduce your tax bill without breaking the law. This is what a good, proactive accountant is for. Yours isn’t? Time to change then!
Starting a business can be a stressful and expensive time so it pays to make sure you take advantage of all possible ways to save Income Tax and GST. One common oversight is not to claim for tools, equipment, furniture, computers, vehicles, reference books and any other assets or items owned personally and then transferred into the business upon commencement.
For many business owners these add up to many thousands, sometimes tens of thousands where vehicles are involved, so it is certainly worthwhile claiming as much as you can.
Where Income Tax is involved, it doesn’t matter what type of business entity you use but for GST, you can only claim where you are using a business entity like a company or a partnership. Watch out though, because there are detailed rules on the GST claimable if you originally bought the assets second-hand, which means you cannot claim any GST. Furthermore, the GST you can claim is limited to 3/23 of the lesser of:
- The purchase price you’re paying
- Their open market value
- The original GST included in the original cost to you
Just two further notes of caution. Remember that your business now owns the assets, not you, so if the business gets into difficulty it may be the last you see of them! Remember also that if you buy the assets back from the business there may be depreciation recovery or a GST liability.
If you need help with your business start-up and saving tax contact Nick on 0800 ASK NICK or get in touch by email. .
The information provided here is of a general nature and only applies in New Zealand. You should not act upon this information without obtaining appropriate professional advice and only after a thorough examination of your particular circumstances by an experienced tax adviser.