CASH JOBS CRACKDOWN BY IRD

Posted on April 12, 2012 | Leave a comment

You probably saw the above headline recently, but if you missed it here’s a link to the story:

http://www.stuff.co.nz/business/industries/6696290/Cash-jobs-crackdown-by-IRD

Nowadays the ID don’t do many audits but if they do and catch you out it generally turns out to be a very expensive lesson, as you will be used as a warning to others. By the time they’ve added interest and penalties it’s a bit like a mortgage, you will owe them several times the actual tax you thought you’d saved in the first place!

It’s dead easy for the IRD to spot one of their “customers” (as we’re called these days!) who is doing a load of cash jobs, as the huge majority make the same old mistakes:

  • Benchmarking. Your trading results and your gross margin are compared to others in your line of business. Be prepared then to try and explain why you are doing so badly!

  • Low or No Drawings. Man can’t live on bread alone…….or in this case on nothing! A very common mistake!

  • No Cash Withdrawals. In the days before Eftpos I once took over the affairs of a trader from another accountant who was being investigated by the IRD who had drawn no cash from any of his bank accounts for 4 years, yet he hadn’t paid for any petrol or shopping by credit card or cheque over this period. Needless to say the IRD thought it was Christmas!

  • Unidentified Deposits. Any deposits paid into your bank accounts or those of your family are treated as diverted takings. They’ve heard all the excuses under the sun many times before – TAB winnings, gifts from mum, found it under a bush etc!

  • Involving Others. One of the best sources of information for the IRD are disaffected ex-employees, ex-spouses or suppliers or customers where cash deals have been involved! So silly yet still widely practised!

  • Paying using Credit for Materials or Parts for Cash Jobs. A mistake as old as the hills, the IRD just traces the things you’ve bought through to customer invoices, or not!

  • Buying Assets. If you buy a boat, car or toys like jet-skis where did you get the cash from?

  • Slip-Ups. It’s very easy to slip up and drop yourself in the mire, as a client of mine did whilst on holiday overseas. He had paid for the entire trip in diverted cash but just at the last minute decided to buy his old mum a gift at the duty free. Having spent all his foreign currency he used his credit card, just the once. The result? The IRD spotted this and assessed him for $30K worth of tax plus interest and penalties, assuming he had travelled overseas every year which he had apparently! Ouch!

For more advice on how to stay on the right side of IRD, just just join the ABAC community on Facebook. We answer all your business questions free and post regular business success tips.

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SLASH YOUR TAXES: CLAIM YOUR HOME AS A BUSINESS EXPENSE

Posted on April 5, 2012 | 1 Comment

Claims (or rather not claiming!) for use of home as office result in a lot of confusion for taxpayers, even those with accountants. Here are some of the more common questions which arise in practice:

I have business premises, Can I still claim use of home?

Yes most certainly providing you are doing some work at home and are careful to only claim what is reasonable.

My spouse already claims use of home. Does that mean I can’t?

No, just apportion the claim between you based upon the area you each use.

Some of my rooms at home are not used exclusively for business so does that mean I can’t claim them for use of home?

Not at all. Just ensure you claim only part of the rooms, perhaps based on a time apportionment.

My accountant says it’s not worthwhile claiming use of home. Is he right?

That depends on whether he or she is paying the additional tax which will arise if you don’t claim!

I work from my shed in the garden. Can I still claim use of home?

Yes you can, but you may have to apportion your expenses differently e.g. if for example you bought the shed later than the rest of your property omit the mortgage interest.

My mate John says my home has to be commercially zoned before I can claim use of home?

Not so, that’s completely irrelevant.

Jack at the pub doesn’t claim use of home because he hasn’t got a separate entrance for his business at home.

Well Jack needs a new accountant as that doesn’t matter either!

Don’t pay tax unnecessarily, get help with your claim for use of home for business.

If you have any questions regarding your use of home for business  or upcoming tax bill, join the ABAC community on Facebook. You’ll be able to ask all your questions and get real-time, practical answers -at no charge!
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SAVING MONEY BY CALLING IRD

Posted on March 29, 2012 | Leave a comment

Are you tempted to save money on your accountant’s bills by telephoning the IRD for advice? It could cost you a lot more!

Previous surveys have found, of the answers to taxpayer enquiries supplied by the IRD, nearly a quarter are wrong and more than half those dealing with GST are incorrect. The IRD is not responsible for its mistakes. You are expected to find the right answers and to seek expert advice if needed.

It is no use saying an IRD staff member told you, even if you can quote the person’s name and the date you were advised. If you have a tax problem, consult us: if we do not know the answer immediately we can find it.

Recently an acquaintance of mine told how she solved her tax problems. She would ring three different IRD officials with her question. She would then compare the answers and if there was one which suited her, she would accept it and make her tax claim accordingly. She figured if she were ever challenged she could always say she was advised by the IRD and followed this.

To be fair the IRD has a huge staff and it would be impractical for the Department to train all its employees, to the level of a tax consultant – after all, it us taxpayers who would foot the bill! Tax law is vast and it requires considerable experience to understand the nuances.

An example is the fine line between personal and business expenditure. Why, for example, if I have to have a car for work should the costs of running it between work and home not be tax deductible? If I need reading glasses to do my job, why should I not be able to claim them as a business cost? If I meet regularly with friends for a drink and I do business with them, why is this considered a personal cost? At other times, having a drink with business associates can be accepted as a business entertainment cost. We should not expect IRD staff to have such a detailed knowledge.

Tax law is built up from a mixture of statutes and case law. Every year there are acts of parliament and regulations which change tax law and there are cases decided in the courts which also change the law.

If you seek the advice of an officer of the IRD, you do so at your peril. There are numerous examples of the IRD changing its mind despite the taxpayers having fully disclosed all the necessary information leaving the taxpayers exposed to the tax, interest and penalties.

The message here is clear – avoid ringing IRD for advice. If you are tempted, do not rely on the answer you receive!

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BIGGEST MISTAKES IN BUSINESS – No.1 False Break Even Point

Posted on March 22, 2012 | 2 Comments

In my 30 years in the world of owner-managed businesses I see one huge mistake time and time again. This is:

Not Knowing Your True Break-Point

Don’t know if you know it? Here are a few pointers. Your true break-even point:

  • Must cover all your outgoings including your Income Tax, GST, ACC & drawings
  • If you buy & sell goods or incur costs which vary with sales e.g. contract labour, your true break-even point must be measured in terms of your $ gross profit, not your sales.
  • Must be re-assessed regularly
  • Should also allow for items which don’t feature in your Profit and Loss account e.g. the principal element of loan repayments.

For more details on how to calculate your break-even point see this article.

This is a typical example of using an out-of-date or incorrect break-even point. Last year I was referred by a local business bank manager to a client (with a low gross profit margin) who was getting into difficulty and whose business borrowings kept increasing. When I met the client he said if his sales were $60,000 pm he was OK and could cover all his outgoings. This was in February, so I enquired if the sales for the year to 31 March were going to reach $720,000. He said “oh yes, about $850,000”. So of course, that didn’t stack up, as he was complaining about his overdraft which kept increasing. The problem? Because of price competition he was discounting which meant his margins were slipping which meant the historical gross profit margin his accountant had used to calculate his break-even point was way out of date!

Join the A+BAC community on Facebook to get all your break-even point questions answered free and get in to win one year of free accounting services!

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SAVING MONEY ON ACC PREMIUMS

Posted on March 15, 2012 | Leave a comment

ACC has recently changed the way it invoices self-employed clients with regard to their full or part-time status, dependent on whether you work 30 hours or more a week.

Information on your full or part-time status no longer flows through to ACC’s database on the IRD IR3 form. If you held part-time status last year and this year your earnings crossed the threshold you will receive a letter from ACC automatically confirming your change to full-time status. In all other scenarios it is up to you to formally confirm a change of status with ACC.

It would pay to check your invoice this year and call us if there’s any confusion. You could get stung, for instance, if you have been paying levies on the basis of part-time status, have an accident, and then declare full-time status. In such a case ACC may query it and can backdate invoices levies up to four years – ouch!

The other point about being part-time is that then you will only pay ACC premiums on your actual earnings whereas if you are regarded as full-time, you will pay ACC premiums on the current level of minimum earnings as set by ACC, currently $26,520. In these recessionary times $26,520 is a lot to some!

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REDUCING YOUR ACCOUNTING FEES

Posted on March 8, 2012 | Leave a comment

One of the best ways to reduce your accountancy fees is to get some decent accounting software and use it properly. It doesn’t matter that much what brand of software (we accountants are happy with MYOB, Quickbooks, Xero or any other software with a full general ledger) you use, as long as you use it properly. This means:

  • Making sure you reconcile the balance on the bank register to the balance on the bank statement at each month end, NOT the last statement date which is often part-way through the month. If you don’t know how to use the bank reconciliation routine don’t worry, just make sure all the transactions on the bank statements are accurately reflected on the software.
  • Ensure the amounts showing for Accounts Receivable and Payable agree to the balances showing on the general ledger/trial balance for these accounts or at least any difference is very small.
  • Clear out any accounts like undeposited funds or the electronic payment clearing account and reconcile the amounts in accounts for supplier or customer deposits or similar.
  • If you can BEFORE you prepare your GST returns reconcile the amounts recoverable or payable in GST ledger accounts.
  • Your accountant should be adjusting the balances on your accounting software for the balances showing on the Annual Financial statements as otherwise you cannot prepare any interim or regular management accounts which are so useful for managing your business and telling you on a timely basis whether you’re making or losing money.
  • MOST IMPORTANTLY of all you must LOCK the period after you’ve prepared each GST return to the date of the last GST return. It’s so easy to enter transactions in prior periods which makes a mess of the GST and probably means income or expenditure will be omitted from your Annual Financial statements.

Now many accountants more interested in feathering their own nests will tell you that you can’t use accounting software because it’s far too complex and that you’ll never get to grips with it. Well, in rare cases yes, but I find the great majority can if they invest the necessary time and effort. And the outcome? It’s wonderful – a one-stop shop for invoicing, your customer & supplier database, tracking your Accounts Receivables and Payables, time billing, job costing (the list goes on and on here) as well as reducing your accountancy fees!

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TAX CREDITS GOING TO WASTE

Posted on March 1, 2012 | Leave a comment

Following on from my blog post last week, Working for Families Tax Credits may be complicated but are still very generous and are going up further as from 1 April 2012:

Qualifying Child

Current Amount

New Amount
First child if under 16 $4,578 $4,822
Second child if under 13 $3,182 $3,351
Second child if 13 – 15 $3,629 $3,822

The current income thresholds below which Working for Families Tax Credits is available are:

Number of Children

Income Threshold
One $74,000
Two $90,500
Three $105,500
Four and more $120,500

With the recession resulting in a wholesale reduction in profits many business owners are entitled to Working for Families Tax Credits for the first time yet despite that, many accountants are still not helping their clients in this area. I have taken over several clients who were advised they were not entitled to Working for Families Tax Credits who were and who subsequently received substantial cheques from the IRD following my intervention. Another client who had never made a profit in his business (even before the recession) was told he couldn’t claim yet I obtained a refund cheque for him in excess of $15,000!

If you need help with your Working for Families Tax Credits or are not getting the advice and help you need from your accountants contact Nick on 0800 ASK NICK or email nick@abac.co.nz.

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