Chartered Accountants, Business Advisers, Palmerston North, New Zealand, Coombe Smith

More & More Paper Less

hamishpryde@coombesmith.co.nz (Hamish Pryde) — Wed, 11 Sep 2024 01:16:02 GMT

Paper is everywhere. We spend a lot of time and money moving paperwork around. But with today’s technology it is now possible to get rid of paper entirely. Digital documents are simpler, easier to store and send, more searchable and permanent.

How long does it take to post a document to somebody via the ole stamp and envelope method, that is snail mail? It is more efficient and timelier to email the document. How many times do you go to print a document at home and find that your printer has run out of ink?

Why do we still hold onto printing paper documents? Sometimes it’s just because that’s what we’ve always done and let’s face it change can be difficult at first.

Paper alone is cheap. But when you start paying for printers, toner, servicing and maintenance, paper starts to look more expensive. Let alone the storage cost. Paper tax records for seven years can be quite a few boxes of paper.

We have embraced some paperless technology as part of a modern business practice. This includes digital signatures, digital collaboration, paperless minutes of business improvement and coaching meetings, electronic work papers and my new digital notebook which I am enjoying.

We send questionnaires via email to you to gather vital information to enable us to prepare your annual financial statements. This is a PDF document. Instead of printing the questionnaires you could save the document down into a folder of your choice then edit the PDF document and return to us.

How do you edit a PDF document you ask? Once you have opened the document the Adobe online editor lets you do some things for free. The online editor works in any web browser and lets you add text, sticky notes and highlights. Click on the fill & sign button to the right of the document, then in the top toolbar click Iab text button. You can add text directly on the PDF document. Have a try next time you have a PDF document open.

Xero and Farm Focus users can attach invoices directly to the transaction loaded into Xero. Then if you are looking at the rates expense in the profit and loss account or farm working account, you can drill down into the rates code and see the transactions. Then attached to each transaction is the rates invoice if you use this great functionality. All invoices can now be stored in the cloud.

So why paperless?

Productivity - electronic documents are instantly and simultaneously available to everyone who needs them. Reduce waiting times with less risk of loss or damage.
Cost savings - you will save money on printing, postage and associated costs. You could pay less rent because you won’t need all that space for your files.
Security - electronic documents are more secure than printed ones. Digital records can be password protected and rendered unreadable through encryption. Printed documents are only as secure as their proximity to a copy machine.
Reduced Clutter - paperwork on desks and shelves are not only untidy it’s inefficient too. The organisation of digital files is simpler and your office will look much neater. That will help you clear your mind to focus on your business.
Environmentally friendly - less printing means fewer trees cut down for pulp and less energy used to make and transport paper.
Disaster recovery - if there is a fire or flood, recovery from the backup is much easier with digital storage them with paper.

There are great help articles available in Xero or Farm Focus if you are not attaching invoices to payments already. To find out how click on the links below:

If you would like to explore ways you can go paperless we can help.

Budget Tax Changes

Tue, 10 Sep 2024 23:23:09 GMT

The Back Pocket Boost

Budget - Tax Threshold Changes

Budget 2024

The core of the 2024 New Zealand Budget is tax relief for working families and restrained public spending. Households anxious about cost of living and job security make cautious consumers. Businesses coping with rising overheads and shrinking retail spends tend to tighten up to maintain cash flow. Changes to the bright-line test and interest deductibility made it easier for property investors but removal of the First Home Grant makes it harder for first home buyers. If we can cool inflation during the second half of the year, interest rates might cool too. It is hoped that the boosts to the back pocket and to families will inject a bit more optimism in the meantime.

The Back Pocket Boost

Changes to personal income tax thresholds take effect from 31 July. This is designed to give New Zealanders some breathing space after several years where higher wages dragged them into higher tax brackets due to inflation.

Businesses need to note that the current thresholds apply for the first 3 months and 30 days of the 2024–25 tax year; the new thresholds for the remaining period. For the 2024-25 year only, composite tax rates will apply:

Taxable Income Composite tax rate

0 – $14,000 10.5%

$14,001 – $15,600 12.82%

$15,601 – $48,000 17.5%

$48,001 – $53,500 21.64%

$53,501 – $70,000 30.00%

$70,001 – 78,100 30.99%

$78,101 – 180,000 33.00%

$180,001+ 39.00%

Employers need to ensure their payroll providers make the necessary changes to their systems for 31 July.

The tax threshold changes have a knock-on effect on fringe benefit tax (FBT), employer superannuation contribution tax (ESCT), retirement scheme contribution tax, RWT and prescribed investor rates.

RWT is affected from 31 July 2024. Taxpayers who pay RWT on interest and dividend income should consider whether they should change their elected RWT rate to align with increases to the personal income tax threshold.

Happy to discuss any queries you may have on these changes.

When Is the Sale of Land Taxable?

Sat, 24 Feb 2024 22:00:00 GMT

When Is the Sale of Land Taxable?

The relevant provisions of the Income Tax Act 2007 that deal with land sales are CB 6A to CB23B and DB26 to DB28.

Land Acquired for purpose or with the intention of disposal – Section CB 6

If, at the time the land was acquired, the purchaser intended on selling the land, any profits derived on sale will be taxable. The key test of section CB 6 is the intention or purpose when the taxpayer acquired the land.

A purpose or intention of disposing of the land does not need to be the only purpose or intention you had when you acquired the land. At also does not need to be your dominant or main purpose or intention. It is enough if disposal is one of your purposes or intentions.

Disposing of the land has to be more than a vague idea, or just a possibility or option in the future. For the intention test to apply, the taxpayer is required to have a firm purpose or intention of disposing of the land.

A common example of this is where a farm is purchase that has more than one dwelling on it and the additional dwellings are surplus to requirements. At the time of purchase, the purchase or intention was to subdivide and sell off the surplus house and curtilage. In this case any profit derived on sale of the subdivided dwelling would be taxable, as it was purchased with the intention of selling it.

It is up to the taxpayer to show that they did not acquire the land with the intention or purpose of selling it. This is a subjective test and it is common for Inland Revenue to request information from banks, real estate agents and other parties to ascertain evidence of the purchase or intention. Be aware that any tax advice document we provide you is privileged information and as such you should contact us before disclosing any information to the Inland Revenue.

There is no time limit on this provision which means that applies regardless of how long the property has been owned

Subdivisions Where the Work Undertaken Is More Than Minor – Section CB 12

If a taxpayer carries on an undertaking or scheme involving the development or division of land into lots and that undertaking or scheme began within 10 years of acquisition of the land any profits derived on sale will be taxable if the development or division work is not minor.

Inland Revenue has recently issued interpretation statement IS20/08 Income Tax - When Is Development or Division Work "Minor"?

Inland Revenue has confirmed that whether development or division work is more than minor depends on an overall assessment of the facts of each case having regard to what has been done relative to both the nature and value of the land involved.

The following factors must be considered:

My acid test is whether a spade has been placed in the ground moving dirt. By putting a spade in the ground there is likely to have been work of more than a minor nature undertaken.

Work of a minor nature can include drawing lines on a map moving the boundary or creating one.

Major Development or Division – Section CB 13

If a person carries on an undertaking or scheme involving the development or division of the land into lots and the development or division work involves significant expenditure, any profits derived from the sale will be taxable.

Section CB 13 (1) (iv) details what major development is as including significant expenditure on any of the following:

There is no time limit on this provision, which means that it applies regardless of how long the property has been owned.

In order to determine the amount of profit derived on sale, a deduction is permitted under section DB 27 for the value of the land immediately before the start of the undertaking or scheme.

Rezoning of land – Section CB 14

If a person disposes of land within 10 years of acquisition and at least 20% of the profit is derived from a factor such as rezoning, a consent granted, a decision of the environment court, removal of a condition or covenant or the like, any profit derived on sale will be taxable.

To determine the amount of profit derived on sale, a deduction is permitted under section DB 28, which is calculated at 10% of the excess multiplied by the number of years the property was owned. This deduction is in addition to the cost price of the property.

Associated to a Dealer or Developer – sections CB 9 and CB 10

If a person disposes of land within 10 years of acquisition and at the time of acquisition that person was associated with a land dealer or developer, any profit derived on sale would be taxable unless the residential land or business premises exclusion and sections CB 16 and CB 19, respectively, applies.

This does not apply to any land acquired prior to becoming associated to a land dealer or developer.

Associated to a Builder – Section CB 11

If a person disposes of land and within 10 years before the disposal the person completed improvements to the land and at the time the improvements began the person was associated to a builder, any profits derived on sale will be taxable unless the residential land or business premises exclusion and sections CB 16 and CB 19, respectively, applies.

This does not apply to any land acquired prior to becoming associated to a builder.

This is a short summary of the land taxing provisions which in themselves can be quite taxing. For advice on your specific circumstance we recommend seeking professional taxation advice early.

Wrap up: all you need to know about the Government’s COVID-19 wage subsidy scheme

Wed, 01 Apr 2020 22:00:00 GMT

Wrap up: all you need to know about the Government's COVID-19 wage subsidy scheme

This commentary applies to wage subsidies made under scheme after 4pm on 27 March 2020.

Wage subsidies are available for businesses significantly impacted by COVID-19.

The subsidy is for 12 weeks. It is:

· $585.80 per week for a full-time employee (20 hrs or more)

· $350.00 per week for a part-time employee (less than 20 hrs).

The payment is made as a lump sum to the employer - $7,029.60 for a full-time employee and $4,200 for a part-time employee.

Sole traders and the self-employed are an "employee" for the purposes of this subsidy.

Criteria

The wages subsidy is available for businesses that have experienced a 30% decline in revenue (actual or predicted) that is related to COVID-19 for any four weeks between January and 9 June 2020 compared to the year before.

To qualify for the subsidy, the business must:

· be physically located in New Zealand

· if the employers is a company, it must be registered with the NZ Companies Office

· have employees that are legally working in New Zealand

· have taken active steps to mitigate the impact of COVID-19 before making the application (including but not limited to engaging with your bank, drawing on your cash reserves as appropriate and making an insurance claim);

· retain the employees for the period of the subsidy.

The subsidy applies to the following businesses:

· sole traders

· self-employed persons

· companies

· registered charities

· non-government organisations

· incorporated societies

· post-settlement governance entities.

Decline in revenue

The business must have experienced a minimum 30% decline in actual or predicted revenue over the period of a month when compared to the same month last year. (For new businesses that have been operating less than a year, a reasonably equivalent month). The revenue loss must be attributable to the COVID-19 outbreak.

"Revenue" means the total amount of money a business has earned from its normal business activities, before expenses are deducted.

Retain the employees for the period of the subsidy

Employers must agree that, for the duration of the subsidy, they will make best efforts to retain those employees for which the subsidy is paid. Employers must also:

· Make best endeavours to pay staff at least 80% of their usual wages; if that isn't possible, to pay at least the rate of the subsidy that applies to that employee. This applies even if all business activity has ceased.

· However, if the employee's usual wages are lower than the rate of the subsidy, continue paying that lower amount for the duration of the subsidy.

Employee consent

Businesses must discuss with their employees and gain their consent (in writing, if applicable) to sharing their personal information with the Ministry of Social Development. Details required to be shared will include:

· name

· date of birth

· IRD number

· employment type (whether they are full-time or part-time).

Details required on the application form

Businesses must supply:

· the business IRD number and New Zealand Business Number (NZBN) if applicable

· business name, address and contact details

· name

· address

· employee details for those in the application (name, date of birth, IRD numbers, whether full or part-time).

Business interruption insurance

You must repay the subsidy (in whole or part) if you receive business interruption insurance for any costs covered by the subsidy.

Employees with fluctuating hours

Businesses with employees on fluctuating or variable hours should use an average to work out whether to apply for the full-time or part-time rate. For example, a business could use the average hours worked each week:

· over the last 12 months, or

· if employed for less than 12 months, over the period of time you the employee has been with the business.

COVID-19 wage subsidy: tax consequences

The Government's 12-week wage subsidy (available for both employees and the self-employed) is paid in one lump sum to the employer.

The tax treatment for the employer is as follows:

· the lump sum is excluded income

· no GST applies to the lump sum receipt

· when the payment is passed on to employees (either in one lump sum or spaced out so that it is paid as part of the employee's usual wage payment cycle) no deduction can be claimed

· PAYE must be deducted.

The tax treatment for the employee is as follows:

· the payment is taxable remuneration and subject to PAYE, ACC levies, KiwiSaver contributions and student loan repayments at the date of payment.

· the payment is also a taxable receipt for the self-employed, shareholder-employees, partners in a partnership and sole traders (all of whom are treated as the employee for the purposes of the wage subsidy).

If the wage subsidy is being paid in one lump sum (or other than according to the employee's usual pay cycle) this should be discussed with the employee, as adverse tax consequences could result. For example, if the payment was made in one lump sum before 1 April 2020, this could push the employee into a higher tax bracket and/or could affect their eligibility to receive family tax credits and other entitlements.

References:

Income Tax Act 2007, ss CX 47, DF 1.
Goods and Services Tax Act ss 5(6D), 5(6E), 89

Goods and Services Tax (Grants and Subsidies) Amendment Order 2020

Tax treatment : Commentary:

Those that receive a wage subsidy will receive a lump sum which represents a number of weeks before and after balance date. We recommend coding the wage subsidy received to a separate Sundry Income code (No GST).

Thinking through the mechanics of this and how it effects your tax position.

For March Balance dates when preparing your annual accounts we will need to either:

a) Ensure the wage expense is reduced by the amount of wage subsidy that applies for the period up until balance date, by an amount that represents the number of pay periods and number of employees of wage subsidy received. That is; if there has been one pay period for five employees, a total of $2,929 ($585.80 x 5) would need to be recognised as a reduction of the wage expense.

b) Show the amount of wage subsidy received for the period as sundry income. A total of $2,929 ($585.80).

In both cases the balance of the wage subsidy actually received not yet used to offset employee costs shall be recorded as income in advance as a liability on the Balance Sheet/Statement of Financial Position. This liability will be extinguished in the 2021 year as the period of wage subsidy is used up.

We believe the option of showing the wage subsidy received for the period as sundry income is much easier and will not distort total wage expenditure for management and comparative purposes. The correct tax position is also calculated.

Employment law obligations

Employers receiving the wage subsidy are subject to the following:

· any changes to an employment agreement (including to rates of pay, hours of work and leave entitlement) cannot be made without the written agreement of the relevant employee

· employers can pay the wage subsidy to their employees according to their usual pay cycles, or at other intervals as agreed with the employee

· employees cannot be compelled or required to use their leave entitlements for the period that they receive the wage subsidy

· employers must retain the employees named in the application for the period that the subsidy is received

· the subsidy can only be used for the purposes of meeting the named employees ordinary wages and salary

· employers remain responsible for paying their employees ordinary wages and salary

· The ordinary wages or salary of an employee are as specified in the employee's employment agreement as at 26 March 2020. (For employees who have left the business as a result of the business being adversely affected by COVID-19, but have been subsequently re-employed on or after 17 March, the wages or salary are as those as at the date that the employment relationship ended).

Note that the previous sick leave scheme has been merged into the wage subsidy scheme to prevent double-dipping. Originally designed when few people were in self-isolation, it is no longer fit for purpose. The Government is working on arrangements for those in essential work requiring sick leave due to COVID-19.

For more information see:

https://www.workandincome.govt.nz/products/a-z-benefits/covid-19-support.html#null

https://www.workandincome.govt.nz/online-services/covid-19/declaration-wage-subsidy.html

Government Covid 19 Package

Tue, 17 Mar 2020 22:00:00 GMT

Below we have compiled up-to-date information from the New Zealand Government, Ministry of Health and MBIE

New Zealand's business support package

Yesterday the Government announced its business support package, noting it is one of the largest packages in the world on a per capita basis.

The $12.1billion package includes:

For more detail on the business support package and Government factsheets, see here .

Staying well informed
Keeping reliably informed, understanding the symptoms of COVID-19, staying up to date with developments and making sure your business is as prepared as possible will help you make better decisions.

MBIE has collated some great resources for businesses here that we recommend reading through and bookmarking. This includes everything from health and travel guidance, to how to create a business continuity plan.

Taking care of wellbeing
We know that there's a growing need for mental health support in small businesses, and times of uncertainty can be particularly challenging. If you want talk about any issue you are currently experiencing, do pick up the phone. We are happy to chat.

Hamish & the Team at Coombe Smith (PN) Limited.

New Trust Law

Tue, 24 Sep 2019 23:00:00 GMT

New Trust Law!

There is a new trust law for New Zealand which was enacted late July 2019. This is the Trusts Act 2019 which takes effect from January 2021. This leaves a short 18 month window before the changes apply.

New rules for managing information.

The legislation is designed to make trust law more accessible and easier to understand. This is to ensure beneficiaries can enforce the trusts in which they have an interest. Trustees will have obligations to:

The legislation makes trustee duties and responsibilities very transparent. If beneficiaries are better informed, trustees will be more accountable. Trustees will need to be on top of their game - particularly professional trustees who are held to a higher standard of care.

New skill sets required

Managing expectations will be an important part of the trustee's role going forward. For example, managing expectations between:

The Trust will no longer be a secret. To discharge my duties as a professional trustee I have given some consideration to preparing an advisory letter (refer below to a draft template) to beneficiaries to front foot questions and queries that will cover a number of the new requirements but also that the Trusts purpose is to first look after the primary beneficiaries which is almost always the settlors.

As a senior member of the New Zealand Trustees Association (NZTA member 1006) I shall continue to take a lead to help you as a co-trustee to discharge your duties as Trustee in the appropriate manner. We shall discuss this further at our next annual trustee meeting.

Template letter Example:

XX September 2019

Beneficiary

Address Line 1

Address Line 2

Town/City

Good morning

I write to you in my capacity as a trustee of the XXXX Trust which I will call "The Trust."

Your parents formed the trust in 19XX and arranged that they, their children and grandchildren would all be beneficiaries of it. The Trust is what is known as a "Discretionary Trust". This means none of the beneficiaries have any right to any money or property from the Trust. Each of the beneficiaries has only a right to be considered by the trustees for a distribution.

Discretionary trusts are common in New Zealand. They are generally established by parents for themselves and their family. The parents will typically want to try to ensure they have enough funds to support themselves from the Trust for the rest of their lives.

Trusts are set up for a number of reasons including asset protection, creditor protection, avoidance of death duty, rest home subsidiaries and/or relationship property purposes.

Many parents have not wanted to inform the children of the fact that the Trust has been created and that the children are discretionary beneficiaries of it, from a fear their children, on learning these things, might become demotivated in the expectation that they will receive substantial sums of money from the Trust. This is not intended to be the case with the XXXX Trust. Your parents made it clear when the Trust was created that it was not to become a means for demotivating children. If the trustees believe making a distribution to a beneficiary may weaken a child's resolve to work hard and succeed on his/her her own merits, the trustees are unlikely to make distributions to that person.

If the trust has sufficient liquid assets to be able to make distributions, the trustees may be willing to consider making loans to children or assisting them with the payment of educational fees in the hope that such forms of financial assistance will assist the child to further his or her career based upon his/her own self-motivation.

Beneficiaries of the Trust are entitled to be given a copy of the Deed of Trust (most New Zealand Trusts are formed with such a document) together with the Trust's annual financial statements. If you would like to see the Deed of Trust and the Trust's most recent financial statements can you, please let me know and I will provide you with copies of them.

You should feel free to contact me or any other trustee if you want more information about the Trust but in doing so you should be aware that in general, trustees do not have to disclose any details of the discussions and deliberations concerning any distributions they make or decide not to make.

If in the years ahead you would like to bring to the trustees attention any reasons why you consider they should make a distribution to you, you should feel free to do so, you should be aware the trustees are likely to be guided in their response by some fundamental principles, namely:

They will not want to make distributions if they may be intercepted by a spouse/partner or by a creditor.

The Trusts primary beneficiaries shall remain the Trustees primary concern at this point in time.

Why do We Need to Ask For Information

Mon, 06 May 2019 23:00:00 GMT

New Zealand has passed a law called the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (we will call it the AML/CFT law). The purpose of the law reflects New Zealand's commitment to the international initiative to counter the impact that criminal activity has on people and economies within the global community.

Recent changes to the AML/CFT Act mean that from 1 October 2018, accountants are required to comply with its requirements. This law requires accountants to do a number of things to help combat money laundering and terrorist financing, and to help Police bring the criminals who do it to justice. The AML/CFT law does this because the services accountancy firms and other professionals offer may be attractive to those involved in criminal activity.

The law says that accountancy firms and other professionals must assess the risk they may face from the actions of money launderers and people who finance terrorism and to identify potentially suspicious activity. To make that assessment, accountants must obtain and verify information from prospective and existing clients about a range of things. This is part of what the AML/CFT law calls "customer due diligence" ('CDD').

CDD requires an accountancy firm to undertake certain background checks before providing services to clients or customers. Accountants must take reasonable steps to make sure the information they receive from clients is correct, and so they need to ask for documents that show this.

We will need to obtain and verify certain information from you to meet these legal requirements. This information includes:

To confirm these details, documents such as your passport (preferred), driver's licence or your birth certificate, and documents that show your address, such as a current bank statement will be required.

If you are seeing us about company or trust business, we will need information about the company or trust including the people associated with it (such as directors and shareholders, trustees and beneficiaries). If we don't already have this information.

We may also need to ask you for further information. We will need to ask you about the nature and purpose of the proposed work you are asking us to do for you. Information confirming the source of funds for a transaction may also be necessary to meet the legal requirements.

If we are not able to obtain the required information from you, it is likely we will not be able to act for you. We will be precluded to do so by law. Before we start working for you, we will let you know what information we need, and what documents you need to show us and let us photocopy.

Please contact us if you have any queries or concerns.

Hamish Pryde – Coombe Smith (PN) Limited – AML Compliance Officer

Loss Ring Fencing on Rental Properties

Wed, 20 Mar 2019 22:00:00 GMT

Loss Ring Fencing on Rental Properties

The government will introduce loss ring-fencing on residential rental properties, which is scheduled to become law effective from 1 April 2019. This means it will apply for the 2020 tax year. The tax legislation proposed is complex and politically motivated.

What Changes are proposed?

For years, residential property investors have been able to use losses on rental properties to offset their personal tax. Residential rental properties are often "negatively" geared. This means that the expenditure exceeds the income, resulting in a loss. The government has proposed ring-fencing these losses and preventing investors from using any losses against their personal tax.

How will it work?

At its most basic, any losses will be carried over to the next income year. The losses won't be able to be utilised until the investment makes a profit.

The ring-fencing will apply on a portfolio basis, so if an investor has more than one property, losses on one can be offset against profits on another. Interestingly, there is the option to opt out. Investors can 'elect' to have any losses ring-fenced on a property by property basis. This could be useful for portfolio investors if the ring-fenced losses on a property are likely to exceed any gain when sold. However, no one buys a property with the intention of making a capital loss.

For many investors, it will take some time to pay down a mortgage before the investment becomes profitable. The ring-fenced losses won't be utilised until quite some time in the future. We foresee that there will be upward pressure on rents, to try and get the rental property to at least break even.

What can losses be utilised for?

Future residential income and any income on the sale of residential land e.g. any capital gain caught under the Bright-line test rules. Importantly, losses can't be used to offset income from other investments.

What about Trusts?

Trusts will also have losses on residential properties which are ring-fenced. These losses won't be able to be applied against other income, such as shares or managed funds.

Is my Look Through Company now useless?

Losses will no longer flow through to the shareholders automatically. Losses will be allocated to the shareholders to be used against future profits from residential properties.

Closely-held Companies?

Losses will be ring-fenced the same way. However, the shareholder continuity rules will apply when a shareholder reduces their shareholding. This means that the losses can be forfeited, often quite unintentionally.

Where there is more than one company in a group, the losses will be able to be transferred to another company, but only if the companies in the group have identical shareholder(s) i.e. they are wholly owned.

What property is excluded?

a) A taxpayer's main home if they are renting out part of it;

b) Mixed-use assets as there are already specific rules on these;

c) Any property that was bought from the outset with the intention of resale;

d) Certain accommodation provided for employees, and:

e) Property owned by 'widely-held' companies (e.g. 25+ shareholders).

When is it intended to take effect?

The bill needs to work its way through all stages in Parliament and there may be changes to the bill, but it's been signalled to become legislation effective from 1 April 2019.

What's our view?

It's unfair if there is an actual economic loss to deny a tax deduction. It also is unfair to target one sector of the economy and treat it differently from say a commercial rental. The compliance costs and administration will be high.

We believe that there will be less people willing to stick their neck out and buy a rental property. Rents will increase as a result.

Example 1 - Individual

Bert is paid an annual salary of $100,000 with PAYE deducted of $24,580. He owns a residential rental property which makes an annual loss of $10,000.

Loss Ring Fencing will mean Bert can no longer deduct the $10,000 from his personal income so no PAYE refund. He will have to carry $10,000 of expenditure forward to the next tax year where it can be offset against property income in that year and so on.

What if - Bert in year 4 sold the property for a $40,000 profit that is taxable under the bright line rules and accumulated rental losses at that point of $35,000. Bert can allocate the $35,000 of the accumulated rental losses to reduce the taxable gain on the property to $5,000.

What if – Bert in year 6 sold the property for a non-taxable $100,000 gain (ignoring any possible capital gains tax) and accumulated rental losses at that point were $60,000. The $60,000 remains ring fenced for Bert to use against any future residential rental property income he may have.

Example 2- Trust

Ernie is a trustee and one of the beneficiaries of Sesame Trust. Sesame Trust has a residential rental property which makes a loss of $10,000 for the year. Sesame Trust also has other investments to the value of $300,000 which generated income of $30,000 for the year.

The net trustee income of $20,000 has been allocated to Ernie. However, because of loss ring fencing there is taxable income remaining in the trust of $10,000. In effect the loss from the residential rentals will be carried forward to offset future years residential rental income.

Example 3 – Look Through Company (LTC)

Big Bird Ltd is an LTC that owns a residential rental property which makes a loss of $10,000. Under the new proposed legislation, the $10,000 loss will be ring fenced for the owners and allocated to future residential rental income from the LTC.

C onclusion:

There are many more complicated scenarios which we shall deal with on a case-by-case basis dependent on the specific facts.

New Trust Law proposed

Wed, 20 Mar 2019 22:00:00 GMT

New Trust Law Proposed

There is a bill currently before Parliament which when enacted will be the first big change to New Zealand's trust law in more than 60 years. There is estimated to be more than 500,000 Trusts operating in New Zealand. Nobody knows for sure as there is no central trust register like the company's register.

The proposed changes include:

1) Extending the perpetuity laws

Now when you set up a family trust the Trust it can only exist for a maximum of 80 years then you must wind it up and distribute assets. The proposed legislation suggests extending it to 125 years. This is because people are living longer, and Trusts are often part of significant succession planning.

2) More information access for the beneficiaries

The Trust bill in draft form proposes giving most Trust beneficiaries the legal right to financial reports on the state of the family trust - meaning beneficiaries will be able to request more information including who is getting what. Whether beneficiaries have the right to request this information under our current law is a grey area. This will likely open a can of worms for the Trustees. Trusts are often been set up for the benefit of the primary beneficiaries usually mum and dad and the trust's principal purpose was to care for them first and then the children.

3) Trustees duties will be clearly defined

There are three groups of behaviours the Trusts Bill classifies:

The first are mandatory duties which a trustee must follow are set out in the act.

a) A trustee must know the terms of the trust.

b) A trustee must follow the terms of the trust.

c) A trustee must act honestly, and in good faith.

d) A trustee must act for the beneficiaries of the trust.

e) A trustee must exercise the powers they have for a proper purpose

The second group of behaviours are governed by the "default" duties for a trustee to act with reasonable care and skill, to invest prudently, not to do things for their own benefit, and to act impartially towards beneficiaries.

The third group of duties are about the information trustees must keep, and which of them must be made available to beneficiaries. These are to keep records (including of trust assets, trustee decisions, and changes to the trust), and to make them available to sane, adult beneficiaries.

We have been asked to act as Trustee on a number of occasions. We have an understanding of business, finances and are already privy to your financial information as your trusted advisor. We have to wear two hats if asked to be a trustee. One as your accountant, the other as you co-trustee.

Our experience can help you discharge your trustee duties in the appropriate manner.

We are happy to discuss any concerns you may have.

Mixed-Use Assets Legislation

Sun, 06 May 2018 23:00:00 GMT

Mixed-Use Assets New Legislation

From the beginning of the 2013–14 tax year owners of "mixed-use" holiday homes will have to work out their income tax obligations differently.

You have a mixed-use holiday home if during the tax year; your property is used both for "private use" and "income-earning use".

What is "private use"?

Private use of your property means:

• Use by you or your family, even if rent is paid.

• Use by non-associated people if you earn rent at less than 80% of market rates.

What is "income-earning use"?

Income-earning use of your property means use by a non-associated person from which you earn rent at 80% or more of market rates.

Exemptions

If your income from income-earning use is less than $4,000 for the year, you can opt to keep the holiday home outside the tax system. That means your rental activity doesn't need to be included in your income tax return. You don't return any of your income and you can't claim any of your expenses for the holiday home. You can also choose for your rental activity to remain outside the tax system if:

• You make a loss, and

• Your gross income from income-earning use is less than 2% of the rateable value of the property.

What income is taxable?

You must pay income tax on rent earned from income earning use. Any rent from private use is exempt from income tax.

What expenses are deductible?

Expenses from mixed-use holiday homes fall into three categories:

1. Fully deductible. You can claim 100% of any expense which relates solely to the income-earning use of the holiday home. Examples: Costs of advertising for tenants, costs of repairing damage caused by tenants.

2. Not deductible. You can't claim any expenses relating to the private use of the holiday home.

For example: Costs of a boat and quad bike stored in a locked garage and unavailable to the non-associated people renting the holiday home.

3. Apportioned. If an expense relates to both income earning use and private use, you need to apportion it using this formula:

Apportionment formula:

Expense × _____ _Income-earning days__________

Income-earning days + private-use days Examples: mortgage interest, rates, insurance

Record keeping

Please keep records so that we can work out your tax obligations at the end of the tax year. Your records should show: private-use days, income-earning days, the expenses you paid, and the name of each tenant together with their relationship to you and the rent they paid.

This new legislation changes to way your income shall be calculated. If you can begin your record keeping under the new rules immediately that shall greatly assist in the preparation of your 2014 income tax returns.

Carry forward of Losses

If you make a loss from your mixed-use holiday home, and your gross income from income-earning use is less than 2% of the rateable value of the property, you can not claim the loss in the current year. You will have to carry forward the loss to offset against income from your holiday home in a future tax year.

A New Way of Paying Tax AIM

Mon, 26 Feb 2018 22:00:00 GMT

A New Way of Paying Tax – The Accounting Income Method

The IRD are trying to simplify Provisional Tax. They have introduced and are pushing for the "Accounting Income Method" ( AIM ). You may have heard about it.

It's coming and from the 1 April 2018 it will become available for small businesses that use IRD approved accounting software. This means you're able to pay Provisional Tax based on your business's profits. The idea is good – pay your tax when you earn the money. The detail isn't so good – the devil is in the detail.

The problem historically is that you usually make three even Provisional Tax payments in August, January and May for a March Balance date, (November, March and July for June Balance dates). This is fine if your income is consistent across the year, but a nightmare if you have a quiet patch (like the Christmas shutdown) and need to pay Provisional Tax.

To solve the problem, AIM matches your tax payments and business income during the year. This sounds good right? Not always. AIM will work well for some (a few) taxpayers but not for others. It works well for those who have a 100% tidy accounting system. If your Xero, or other approved cloud based system is in perfect shape, then it may work great. If it's messy, or out of date, stock or livestock not included, principal and interest separated amongst other things then your tax payments will be messy under AIM.

You also can't use AIM if you're operating under a partnership or Trust structure or if your turnover is more than $5m, or if you have overseas investments.

But wait there's more fish hooks to consider. When deciding whether to use AIM, it's important to remember the following under AIM:

1. Tax losses are only available when the previous year's tax return has been filed, and it ignores group offsets.

2. Livestock Farmers need to value stock at each installment date.

3. Trading Stock (what you buy and sell) needs to be included in your accounting software (this means either running a perpetual stock system, or by doing physical stock takes every 2 months).

4. Depreciation and fixed assets can skew when you are paying tax, especially when you're not doing management accounts with your GST Returns.

5. Accounts payable and receivable need to be included, note they must be already if you're doing GST on an invoice basis.

6. Private Expenditure (e.g. home office or vehicle expenditure) must be adjusted for at each installment date.

7. Shareholders Salaries become a nightmare. Most companies can pay a significant portion of the taxable profit to the shareholders using a shareholder salary. Most companies do not make any provision for shareholder salaries payable until the end of the year when the final profit is known. AIM only covers the tax payable for the company, not necessarily the shareholder's provisional tax.

8. Remember that using this method you the taxpayer are providing the IRD a mini set of financial statements every two months and therefore far more information about your business activity than is currently occurring.

Not all of these tax adjustments will apply to every taxpayer but, if the relevant tax adjustments aren't included in the tax return at each installment date, the taxpayer may end up paying an incorrect provisional tax amount.

It should be noted that penalties can apply if AIM is used inappropriately. It must be remembered that this AIM method was first floated in 2016. Since then the use of money rules have changed. See below for a commentary on the new Use of Money Interest Rules.

AIM may suit:

1. Taxpayers who have up to date accounting information on a monthly basis used to manage their business throughout the year.

2. Taxpayers whose income does not fluctuate significantly.

3. Taxpayers with income concentrated in the latter part of the income year.

4. Taxpayers with an annual steady accumulating income (that is, the business continues to make profit month to month, rather than fluctuating between profit and loss).

AIM may not suit:

1. Taxpayers who do not have robust accounting processes (using software, spreadsheets or manual accounting records).

2. Taxpayers with seasonal income concentrated in the beginning of an income year.

3. Taxpayers with large amounts of overseas income resulting in large end of year income adjustments.

4. Taxpayers with complex tax adjustments that require year end calculations.

In summary - while AIM is well intentioned, it will be more or less meaningless in practice. If you think it's for you, or if you're interested in finding out more, feel free to get in touch.

Use of Money Interest Changes

Under the previous rules, most provisional taxpayers had to pay their tax liability in 2 or 3 instalments, with interest charged (or credited) on any under (or over) payments. This meant that many taxpayers had to start estimating their year-end tax liability as early as four months into the financial year, and unexpected events could expose some taxpayers to an interest charge. Many taxpayers deliberately overpaid their first provisional tax instalment in order to avoid exposure to a future interest charge.

There was a 'safe harbour' rule which meant that interest was not usually charged when individuals had a tax liability less than $50,000, and when non-individuals had a tax liability of less than $2,500. However, filing an estimate automatically cancelled the 'safe harbour' status.

Under the new rules, this 'safe harbour' rule has been extended to $60,000, and will apply to both individuals and non-individuals. In other words, trusts and companies can now apply this rule. As before, filing an estimate will automatically cancel the 'safe harbour' status, and a new requirement is that all provisional tax instalments must be paid on time.

These new use of money interest rules lessen the interest exposure for many taxpayers who are not 'safe harbour' taxpayers. Under these new rules, interest will only be calculated from the last instalment date, and by then most taxpayers will have a good idea of what their year's tax liability will be. For taxpayers with a 31 March 2018 balance date, this means that interest will only be charged from 7 May 2018, not 28 August 2017, which could be very good news.

To qualify for this concession:

1. All but the last instalments were calculated using the standard method (the final instalment can be calculated using either the standard or estimation method), and

2. All instalments were paid on time.

This is a much fairer system for which if proactive should see the imposition of use of money interest greatly reduced.

Ho Ho Ho! Knowing what’s deductible

Sun, 27 Nov 2016 22:00:00 GMT

Do your plans for the festive season include functions to celebrate with clients and the team? What about gifts? If they do, here are some tips on the tax implications.

Entertainment

When you're entertaining clients or colleagues, some entertainment expenses are tax deductible while others aren't. It can be tricky working out what's deductible as a business expense and what isn't.

The basic idea is that an expense is business-related if you spend the money to help your business earn income. Most business-related expenses are fully deductible. If the expense doesn't help your business earn gross income, it's private and you can't claim it as a tax deduction.

It becomes a little trickier when there's an element of private enjoyment. You might think that the firm's Christmas party for clients is a business related expense and should be fully deductible because it's promoting your business, products or services. However:

Generally speaking, if there's an element of private enjoyment, the expenses (in addition to the food and drink) associated with events where you entertain clients and/or staff will only be 50% deductible. For instance, this would include the hire of crockery, glasses, waiting staff and music.

There are exceptions. Entertainment supplied for charity is 100% deductible. For instance if you throw a Christmas party for the children's ward at the local hospital, this is fully deductible. Entertainment enjoyed outside New Zealand is 100% deductible. If you take the team to the Gold Coast for Christmas (lucky them) it will be fully deductible. However, if they contribute towards the cost of their airfares (or anything else), you will need to reduce your expense claim by the amount of the contribution.

Functions and events

Some entertainment expenses are fully deductible but some are not. Use these examples as a guide.

GST

If that's not enough to think about, you will need to make a GST adjustment for entertainment expenses which are 50% deductible. This adjustment will be required to be made at the time your income tax return is filed. Of course, we can help and advise you on this.

Gifts

The rule of thumb with gifts is that if they consist of food or drink, you can only claim 50% of the expense as a tax deduction. If you are giving out gift baskets or hampers and some of the contents are food or drink, but not all, the food or drink items are 50% deductible but the other gift items are 100% deductible. When you come to claim the tax deduction, you will need to apportion the expense between the 100% deductible items and the 50% deductible items.

Gifts to clients

If your Christmas giving includes gifts to clients, remember that some gifts will be fully deductible while others will be only 50% deductible. Use these examples as a guide.

FBT on gifts and entertainment

If you are giving gifts to your team you may also be liable for fringe benefits tax. There's a $300 exemption from paying FBT per employee per quarter so if the value of the gift is less than $300 you may be exempt. However, if the value of total benefits for an employee goes over $300 for the quarter year (and provided the total value of all benefits doesn't exceed $22,500 for the year), the full value of the benefits is subject to FBT.

As for entertainment events, if you invite your team to an event that qualifies as a business-related entertainment expense which is only 50% deductible, you are not liable for FBT as well. So if you are entertaining employees at a party or you've hired a launch or holiday accommodation and the expenses for that are only 50% deductible, it isn't subject to FBT. (On the other hand, if the event is being held outside New Zealand, it will be subject to FBT.)

There are exceptions to this that make it a tricky area so if you'd like more information on a whether a specific event you're hosting is 50% deductible but may also be liable for FBT, please contact us.

Free Trade & TTPA

Sun, 21 Feb 2016 22:00:00 GMT

Free Trade & TPPA

The Trans-Pacific Partnership Agreement (TPPA) is a hot topic at the moment but free trade is at the centre of what the twelve nations are trying to achieve.

Wouldn't it a better place if there were no restrictions on our trade? Quotas and tariffs are designed simply to protect the country that imposes them for the benefit of those industries that perhaps can't produce a commodity as cost efficiently as others that wish to export to the country that needs the product.

Let the market forces decide! If there is a demand for a product, people will supply it. The price will be what a willing buyer and willing seller agree. Get back to basics.

Supply and demand – an economic theory, the relation between these two factors determines the price of a commodity. This relationship is thought to be the driving force in a free market. As demand for an item increases, prices rise. When manufacturers respond to the price increase by producing a larger supply of that item, this increases competition and drives the price down. Stated another way, generally, if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be.

Tariffs and Quotas upset the free market. What is your competitive advantage when you make something? Is it the natural resources available - the sun, rain and wind? Or is it intellectual property (IP) the know-how and can do we possess? We have an abundance of wind that makes wind farming cost efficient. We have large green spaces and the conversion of grass into milk is legendary around the world. Providing subsidies to farmers to grow nothing (fallow fields) has long been a bone of contention. Who are they helping by providing money for nothing? There is no encouragement to better the farming practices.

In business we are constantly looking to better what we do, to be efficient in our processes and production. We work towards making a good margin on the products we make and export to the world. The sale of our products at fair prices should not be sabotaged by tariffs and quotas protecting locals who don't have the skills and resources we have. We should have fair trade for all.

Hamish Pryde

16 February 2016

Reporting Requirements for Charities

Thu, 28 May 2015 23:00:00 GMT

Reporting Requirements for Charities

New reporting requirements for Registered Charities came into force from 1 April 2015. This means that Registered Charities will need to prepare Financial Statements in line with these new standards.

People in business generally don’t like paying tax

Tue, 12 May 2015 14:00:00 GMT

As a sequel to the "Some past outrageous tax expense claims" article that I wrote earlier, I thought it was important to complete the picture.

People in business generally don't like paying tax – but if you are not paying tax you are simply not making money!

The New Zealand thought process is "If we can just sneak a few more tax deductions, or just reduce that tax bill just a little more, I feel like I'm winning".

Let's say you sneak through about $3,000 of extra expenses that are potentially 'dodgy' and don't really relate to the business, and are more of a private nature. To be claimable expenses must meet Section DA 1 (Income Tax Act 2007): The General Permission Test – expenditure incurred in deriving business income; or they are unclaimable as they fall under Section DA 2: The Private Limitation Test – that is the expenditure is of a private or domestic nature.

The question is "What happens when you get found out?" Now the IRD can go back generally four years, so whilst we are in 2015, the IRD can go back four years, so four years for a March balance date will take you right back to 1 April 2011. Let's say you made a claim in 2011 for $3,000, and the tax benefit was around $990. So you saved $990 of tax four years ago. If you get caught out you might think – "Fair enough, I'll pay the $990 back". Sadly, that is not where the situation ends. There will likely be shortfall penalties applied. A shortfall penalty, when applied, is a percentage of the tax shortfall, a deficit or understatement of tax, resulting from certain actions of the tax payer, which includes making claims that are not accepted.

There are five categories of fault or breach, with a specified penalty rate for each category.

So the penalty increases in proportion to the seriousness of the breach.

Therefore, depending on the type of claim made, there could be a 20% to 150% penalty on the original tax outstanding. So, for instance, if it was an abusive tax position, the $990 now becomes $1,980. But like late night infomercials ~ but wait there's more! Not only is a shortfall penalty incurred, but there will also be use of money interest charged, which will be applied on the shortfall of tax and on the penalty applied.

Use of money interest is currently charged at 9.21%, and has fluctuated over the last four year. If 8% is used as the average over the last four years, the shortfall tax and penalties on the now disallowed claim you made four years ago would now be sitting at $2,694, which is almost as much as the original claim itself.

That is why when we are preparing annual accounts, we review certain expenditures, especially in the areas of repairs and maintenance, which is always an area of increased scrutiny by the Inland Revenue Department, to ensure that if reviewed, the position of shortfall tax and penalties is not a burden that you will have to face.

Once again, the area of taxation is complex, and if in doubt, it pays to check and ask your accountant ~ someone who knows.

Some past outrageous tax expense claims

Mon, 11 May 2015 14:00:00 GMT

What you can claim as a tax deduction is based on legislation and case law. The law is "Income Tax Act 2007" (plus amendments and related regulations) and has two parts that need to be considered:

Section DA 1: The General Permission Test – expenditure incurred in deriving business income.

Section DA2: The Private Limitation Test – that is spending that is not of a private or domestic nature.

Expenditure deductions must be necessarily incurred in production of assessable income and not private in nature. The legislation is a very thick volume, and new amendments to the Income Tax Act 2007 and a raft of amendment acts are passed on a regular basis. To keep on top of the legislative changes takes many hours of what some might call unproductive time to be spent to remain informed. When we know the legislation, we can advise appropriately to ensure our clients do not take an unacceptable tax position resulting in back taxes, penalties and use of money interest. In extreme cases of tax ignorance, this can result in jail time.

Some quick examples I can recall of things that have been attempted to be claimed that could have resulted in the aforementioned back taxes and penalties if we had not advised against:

· Glasses – Needed to see of course, however, by the same nature, if you had heart surgery then you should be able to claim the many thousand-dollar surgeons bill. You need to live to pay tax of course. However, a private limitation would override the claim.

· Motorised Sheep Dip Stirrer – sounded reasonable until it turned out to be a Honda 150 HP motor. The motor was powerful enough to propel the boat at the lake by the way.

· Business clothes are generally not claimable. They may be necessary for modesty but that is a private limitation. There are two exceptions. Firstly if the clothes are a uniform, branded and a requirement to be worn by all in the business and not something, that would be suitable to wear on the weekends. Secondly, protective in nature. Protective clothing is prescribed and includes steel cap boots, gumboots, gloves and rainwear.

· You can't claim your lunch. Yes, you need it to live to earn money to pay taxes, but again a private limitation. If you are entertaining in the course of business, taking a client out to lunch, or suppliers to a rugby match, that has a whole set of rules and usually only 50% deductible.

· Doctors bills and physio. This is private expenditure. The main reason for this expenditure is for your health or wellbeing.

· Flu Injections for staff - The flu injection relates to health and safety and has a specific legislation authoritative support to enable a claim and be exempt from fringe benefit tax.

· Illegal activities are not tax deductable. This includes all fines, whether they be for speeding, overstayed parking or for overloading.

· Sky TV, if you are a farmer and need it for the weather channel perhaps. However, you would need to apportion the total cost for the non business related channels.

What you can and can't claim is not always straight forward and each situation is different. If in doubt, it pays to ask your accountant ~ someone who knows.

Top 7 Strategic Tips for Consistent Goal Achievement

Wed, 18 Feb 2015 13:00:00 GMT

course, if most people had achieved success, the self-improvement books and articles

such as this one would not be needed.)

Possibly, the answer to this question lies within the process of goal planning and goal

achievement. Using the following strategic 7 tips may help you to consistently achieve

more goals and increase your dream for incredible success. (Note: Understanding that

goal setting or planning and goal achievement is a process is critical when using the

following 7 strategies.)

1. Goals must be written. Committing a goal to writing creates permanence not

found in just having a mental thought or dream. Written goals have greater clarity and

provide for a more detailed focus. (NOTE: Just think about what happens when you

forget your grocery list.)

2. Goals require criteria. Much like the favourite recipe of Aunt Emma, a goal also

requires specific ingredients that are always used to ensure consistent, high quality

results. The S.M.A.R.T criteria are one such example.

3. Goals must be stated positively. For example, writing a goal that begins "I will not

gain 10 pounds" has just the reverse affect on the brain. The brain due to negative

conditioning tunes out the not and hears "I will gain 10 pounds." A better written goal

would be I will lose 10 pounds.

4. Goals should build an emotional buy in. The "why" for achieving the goal needs

to be answered. This response should include both the rewards and consequences

specific to achieving or not achieving the goal.

5. Goals should include positive affirmation or what I call belief statements.

These positive self-talk statements help to continue a strong mental image for achieving

the goal.

6. Goal should identify all the potential obstacles, challenges or problems that

need to be overcome to achieve the goal. By taking the time to think about all the

potential reasons for not being successful, you have potentially avoided the many

OOP's that happen when we work to achieve our goals.

7. Finally, goals should be yours or what some call WIFFM (What's In It For Me).

We achieve those goals that are most important to us because we created them.

Achieving goals for others does not deliver the same emotional high than when we truly

own the goals.

Remember , the key to success is consistency. These 7 great tips should help you

become more consistent and more successful because as the old expression goes

success breeds success.

25 Things to Think About in Business

Tue, 03 Feb 2015 13:00:00 GMT

3. Do not fight the IRD, they have all the money and the resources; instead work with them.

6. Negotiate with the Bank. Banks can be helpful ~ don't be afraid to ask.

8. The business is there for you to achieve your goals.

12. Every customer is different, ask questions to get answers.

23. Never sign personal guarantees to creditors (if you can avoid it).

25. Understand your customers, and get on their shopping list.

For Change to Occur Successfully

Tue, 11 Nov 2014 13:00:00 GMT

The best way I have heard of making change happen, is this: If you had to walk each day through a paddock and the grass was head high, you would walk the path that you have always walked through. The path is the way you always go because it's easy, the grass is all beaten down to a dirt track. For change to occur, it takes about 30 days doing the different action for it to become the new norm. For instance if you took a new route through the paddock, it's hard; you have to beat the grass to one side and trample it down. If you do this for three to four days it gets easy each day. However, if you revert back to the easy track for a couple of days; when you go back to the new track, the grass would have stood up and you would have to start all over again. It's effortless to take the easy route. But if you want change to happen, it will take 30 days of taking the different track. Then after 30 days, the new track will be trodden enough to make it the new easy route. Change can effectively happen if you stick with it !!!

Market Value Property Valuations & GST

Tue, 04 Nov 2014 13:00:00 GMT

The importance of the GST treatment for the sale and purchase of land, particularly in respect of Auckland District Law Society agreements, cannot be understated.

The need for care and certainty continues to be highlighted with the Court of Appeal's recent approach to Market Valuations of property.

In a recent family dispute, the Court held that whether the current Market Value of a property includes GST must be determined by the context of the Deed.

The dispute centred around the distribution of Estate assets. In particular, one son (who had long resided in a property), was going to have property transferred to him personally (or through a nominee), at a GST exclusive value. He was not registered for GST. The other children disputed this, with another brother arguing for a GST inclusive value to be determined.

Submissions were made to the Court supporting each side. Relying on Case Law, the Court held that the correct Market Value of the property in this case was a GST exclusive value.

A clause in the Settlement Deed had expressly referred to the transfer of other Estate properties, holding that the four children would share equally in the cost of any tax payable. The Court also found that an entitlement to "Market Value" is exactly that, not "Market Value plus GST". Furthermore, there could not be two separate Market Values, to be determined by the GST status of the purchaser.

In assessing the contract, the Court found that there was no suggestion that the Property Valuer's' had failed in providing a correct Valuation of the property. Accordingly, the Valuation could not be challenged.

How could this affect you?

GST has long created difficulty for many New Zealander's. Recovery of GST amounts and potential penalties from the Inland Revenue Department mean that it is crucial to ensure your GST treatment is correct when valuing property or entering into any type of transaction. As the finding in this case explains, the outcome will vary depending on the context of each arrangement.

If you are contemplating or in the process of a major transaction, please consult us to ensure there are no unexpected tax costs.

How the 80/20 Rule Help Us Be More Effective

Thu, 09 Oct 2014 13:00:00 GMT

In the very early 1900's, an Italian economist by the name of Vilfredo Pareto created a mathematical formula describing the unequal distribution of wealth he observed and measured in his country: Pareto observed that roughly twenty percent of the people controlled or owned eighty percent of the wealth. The assumption is that most of the results in any situation are determined by a small number of causes. A management thinker Joseph Juran developed this philosophy further in the 1940's, and suggested that this can be applied in business.

The vital few and the trivial many

The "80 / 20 Rule" means that in anything (workers, customers, etc) a few (20%) are vital, and many (80%) are considered trivial. In Pareto's case, he found that roughly 20% of the people in his country dominated with 80% of the wealth. It has been suggested that you can apply the "80 / 20 Rule" to almost anything.

There are business examples that 20% of customers are responsible for 80% of the business income. Others like 80% of your stock come from 20% of your suppliers. Then why is it that 80% of your staff problems come from 20% of your staff? The formula appears to work in both directions.

How Pareto's Principle can help us

The value of the Pareto principle in management is in reminding us to stay focused on the "20% that matters". Of all the tasks performed throughout the day, one could say (based on Pareto's principle) that only 20% really matter. Those tasks in the 20% very likely will produce 80% of our results. Therefore, it is critical that we identify and focus on those important things.

When the fire-fighting "crisis of the day" begins to eat up precious time, remind yourself of the critical 20% you need to focus on. If anything in the list of activities and action items has to be left undone, be sure it is not listed in that critical 20%.

Do not ignore the 80%

Thinking about the 80%: If 20% of your employees are likely to produce 80% of your results, you should focus your limited time in management of only that 20% – the so-called superstars. However, this proposed implementation of Pareto's principle to management is potentially flawed because it overlooks the fact that 80% of your time should be spent doing what is important, or most likely to deliver the greatest return. By helping your "average" salespeople become better; you are more likely to reap greater results than by dedicating the same management effort to helping the fewer "superstar" salespeople become terrific. In this case, the sheer numbers work against you spending time only helping manage and improve the few great workers. Thus, it is wise to evaluate various management situations and apply the Pareto principle appropriately ~ and wisely.

Work Smart

It is not only important to do things right, but also to ensure you are doing the right things. Pareto's principle should serve as a reminder to us to stay focused on investing 80% of our time and energy on the 20% of work that is really important. It is not just important to "work hard" and "work smart", but also to work smart on the right things.

Promote Creativity and Innovation within your Business

Wed, 10 Sep 2014 14:00:00 GMT

Whether you are planning a new product, a new business venture, or simply brainstorming, here are some tips to help boost creativity and innovation within your business:

1. Do not assume the current way is the right way

Challenge long standing processes that are currently used within your business and promote evolution of new systems and ideas for your business. Be as innovative as you like.

2. Ask the questions - What are you doing and why?

Do not stray from your original mission unless it's clear that the new route will be beneficial. Always align your tasks with your goals, however make sure that you assess these regularly so you know what you are doing, and why. You can use this as a form of tracking.

3. The first solution may not be the most effective

4. Meet new people in new Industries

It is amazing what happens beyond your bubble. Open yourself for new viewpoints and creative avenues that could relate to your business. Find out about Business Networking evenings in your area and go along. Take team members that you think might be interested in what is being presented; you may be surprised at what you learn about other industries.

5. Inspire the team with real business success stories

Encourage them to learn and relate. Invite guest speakers to team meetings or watch inspirational clips together on YouTube.

6. You can not learn less

Regularly research new ideas or possibilities. You never know what will trigger a fantastic idea. Most of this can be done online through social media; but encourage brainstorming and team input on projects or product business possibilities.

7. Do not bury issues - Celebrate them!!

Make problem solving fun, and have the team break from their daily tasks to brainstorm. You could learn a lot from their fresh perspectives, and they will enjoy being a part of the decision making process.

8. Your employees are your first and most important customers

Treat them with the necessary respect and value their opinions.

What is Profit?

Wed, 06 Aug 2014 14:00:00 GMT

Most people say: "It's what's left over after everything else is paid".

Let's re-state that definition. Profit is your goal. It's what you're aiming for. It's the very foundation of your business model because without profit, your business isn't going to do very well.

Without profit, rarely will your business ever be able to give you what you want. The first question to ask then is: "How much money do you need every year to live the life you want?" Assuming you never have to work again, how much do you need to be able to pay all of your bills, cover all of your expenses and do the things you want to do? Is it $100,000? $250,000? $2 million? Add another 40 percent to your answer and you have the estimated net pre-tax profit figure your business needs to make.

Once you have that number, estimate a realistic Net Margin that your business could and should generate. Net margin shows how much of each dollar earned by the Company is translated into profits. Some businesses will only be able to generate a 10% net margin. Other serviced based business can generate as much as 25% - 30%. Whatever you estimate, take your profit figure and divide it by the net margin to calculate the gross sales your business will need to generate.

Let's suppose, for example, you need $100,000 each year to live your life. If you add 40% to that figure, your profit number is $140,000. The thinking here is that your business will generate $140,000 in profits, of which $100,000 goes into your pocket. If you work at the Company, you will also get a salary commensurate with what you would pay someone else to fill that position. In other words, your $100,000 return is your reward for starting the business and for all the effort, worry, hard work and risk invested.

Let's also assume that a good net margin for this business is 20%. In other words, 20% of every dollar of gross sales is net profit. Following the calculation above, that would mean this business would need to generate $700,000 in sales annually - ($140,000 / 20%).

You now have the means to calculate your profit goal!

Once you have a profit goal, you need a strategic plan on how to get there. This will need more questions answered like:

Ã˜ Who is your ideal customer? Describe them.

Ã˜ How often will they buy from you each year?

Ã˜ How much will they spend on their average purchase?

Ã˜ How many new clients will you need to generate annually?

Ã˜ How loyal will they be?

Ã˜ How many years will they continue to buy from you?

Ã˜ What products and services will you be selling?

Ã˜ What geographic areas or markets will you be serving?

Answer these and get your Chartered Accountant and Business Advisor to help, and you are on the right track.

Do it yourself .... (or not?)

Sat, 12 Jul 2014 14:00:00 GMT

We are a country of "do-it-yourselfers", which for the most part, is a good thing.

However, there are some things that should be left to the experts. You wouldn't let your dentist operate on your brain, you would definitely leave that to the brain surgeon! I probably would not get my optometrist to fix my oven either.

This brings me to some recent events, where people have attempted to understand some finer points of tax legislation.

The Income Tax Act 2007 and its associated updates, regulations, and surrounding case law, which is interpretations of the Income Tax Act - if they were printed out and stacked on the floor, I would think that the stack would be nearly as tall as me!

Our tax legislation is complex in a lot of areas. I was asked recently by a member of the legal fraternity for a second opinion. Long story short - what had occurred was that a client had rung and spoken to a representative at the Inland Revenue Department concerning "GST on going concerns". They had also looked at the Inland Revenue Department's website, and did look at a "GST on going concerns" section, but the section they were looking at, and relied upon, bore no relation to their actual circumstances, and in fact, was quite misleading.

Now, the trick is, with any answer research, is to ask the RIGHT questions. In this instance, the researcher asked the wrong questions, but got the 'right answer' to their questions. The result of their research, and the action they took resulted in tens of thousands of GST to pay, when in fact, if done correctly, there would have been no liability at all!

Now, to be fair, the Inland Revenue's website contains a lot of useful information, of a general nature. However it does not contain ALL information, and does not apply to ALL circumstances.

Similarly, if you ring the Inland Revenue Department, the person at the end of the phone that you ask a question of; you must remember that their answer must be tempered for the fact that you do not know their qualifications, how much experience they have had in their job, or what their particular skill set is.

Generally they are very helpful, however, if you want an opinion you can rely on from the Inland Revenue Department, you must apply for a "binding opinion" The binding opinion is provided by an IRD tax professional, similar to a tax professional in public practice; with similar qualifications and experience. This binding opinion is not a free service. There is no liability on the Inland Revenue Department for "general advice" provided, and no responsibility to "get it right".

Therefore, if you are wanting to "Google" it or ask for a general opinion, if it is for something that is not overly important or the risk of getting it wrong is not great, then I would agree that that is fine, however if the risk of getting it wrong, by not asking the right questions of the right people, is too great..... then remember that you should always get the brain surgeon to operate on your brain and the optometrist to look at your eyes.

Hamish Pryde

11 July 2014

Baby's IRD Number

Tue, 10 Jun 2014 14:00:00 GMT

It is now as simple as ticking a box on the birth registration form to confirm that you would like an IRD number for your child.

If the baby's birth has already been registered, you will need to apply for an IRD number in the usual way.

Why Companies Fail

Mon, 02 Jun 2014 14:00:00 GMT

There are, however, some common themes, and some of these include:

1. Over-reliance on one customer

It is not uncommon in Insolvencies to find that the failure of the Company has come about because it has over-relied on one large customer. The sudden failure of this customer, or the decision by that customer to go elsewhere, has decimated the Company's turnover and profitability.

Directors do not always have the marketing skills to get out and promote their business, nor the financial understanding to see ways to restructure their Company; to take into account the sudden loss of a major customer, and to bring about recovery of the Company.

2. Economic downturn

A sudden and unforeseen downturn can sometimes lead to the Company cutting its prices in an endeavour to retain customers and obtain new work. Often this is done with no thought as to what it actually 'costs' to do the work.

It can be that the prices are reduced so much that there is no margin, and in fact the hole is dug deeper; instead of creating further cash and profit to fix the hole created previously.

3. Lack of administration and accounting skills

Often Companies are created because someone is 'good' at doing what they do. The tradesperson, or somebody with a passion for retail, thinks that it is a good idea, and that they would be better off working for themselves than working for someone else.

While they are very capable plumbers, builders, electricians, etc, they have never been involved in running a Company and managing the financial challenges before.

They often start with a few tools and a vehicle, no working capital, and no administrative systems in place. Many do not keep accurate records, fail to keep good financial information, never review operating performance, and simply exist from day-to-day.

Often we see that when there is money in the bank account, it is spent on personal items, such as a new car or a holiday; without giving any thought to things like GST, PAYE, and the ever looming tax debt.

What generally follows is a failure to pay the debts as they become due, and often the Inland Revenue Department becomes the largest creditor.

The cumulative effect of these failings is a downward spiral, until such time as the bank refuses to extend the overdraft, and a major creditor, most likely the Inland Revenue Department, threatens to wind them up unless the debts are paid.

4. Red flags that indicate all is not well

These include:

i. Failure to pay GST and PAYE on time, or at all. PAYE is the worst tax to be in arrears, as this is money held on trust, deducted from employees' wages, and should not be available for business operational purposes. This is not the Company's money!

ii. A steady increase in outstanding creditors, and increased age of the creditor debts. For example the 90 days + creditors amount is ever increasing.

iii. There is always a need for the Shareholders to put money into the Company to pay the Company day-to-day debts.

iv. GST refunds, perhaps two or three in a row. This means the Company is consistently spending more than it earns, as there is no GST on one of the biggest expenses, which is wages.

v. Insistence by creditors for 'cash on delivery' meaning the account is outside normal terms of trade.

How CS Insolvency can help!

A lot of the causes of Company failures come back to the fact that there needs to be good systems in place, and good financial information available on a timely basis. Business owners also need to seek, receive, and act on good advice.

What needs to occur is putting in place improved management and financial reporting systems.

a· Restructuring the current debt through negotiations with lenders, and compromises with creditors.

b· Identifying areas within the business where the Company may need to engage other outside expertise, such as marketing and legal advice.

c· Identifying the Company's 'point of difference', and why it exists in the first place.

d· Is the pricing appropriate? Are the mark up and margins at acceptable levels?

People do not create businesses to fail, but often new businesses fail to plan, fail to seek advice, and fail despite the best efforts of the Directors.

Flu Injections

Tue, 13 May 2014 14:00:00 GMT

We have seen a number of clients' paying for employees to receive flu injections. We can see the logic in spending a few dollars now to help prevent staff spending time off work sick. These can be provided on site by a nurse, vouchers provided, or employees reimbursed after paying themselves.

The provision of flu injections to staff is a deductible expense to the taxpayer and coded to general or staff expenses. It does not give rise to an FBT liability. The flu injection relates to health and safety, which has an FBT exemption.

Section CX24 of the Income Tax Act 2007 provides that a benefit provided by an employer to an employee is not a fringe benefit if it is "related to the employee's health and safety" and "is aimed at hazard management in the workplace".

How to improve Business Value

Sun, 16 Feb 2014 13:00:00 GMT

How to Improve Business Value

A successful small business sale begins with a solid grasp of business valuation. The valuation can make or break a business sale because for many sellers, attaching a dollar value to their company is a touchy subject - especially if they have spent years building it from scratch to a profitable enterprise.

A valuation process is a skill that is not derived from a simple formula. It involves subjective judgment coupled with acceptable market valuation methodologies and should be undertaken by experienced advisors.

Remember - the actual value of your business is the amount someone is willing to pay for it in the business-for-sale marketplace. Personal feelings about your company's worth have no relation to the value determined using sound valuation methodology, accurate documentation and other factors that could potentially influence value.

Business valuation experts often find that sellers are surprised to discover that the valuation process yields a lower-than-expected asking price for their business. The good news is that if you are not happy with your business' estimated value, there are steps you can take to increase the business potential value before putting it on the market. It is important to start immediately however, as you need to start planning usually years in advance to make the kinds of changes that substantially improves the value of your company.

From a buyer's perspective, proven profitability and future earnings potential are the most attractive qualities in a potential business acquisition. By documenting a multi-year record of accomplishment of profits and positive cash flow, you can drive up the value of your company-substantially! Get your business advisor involved to help you plan for profit improvement. The investment in professional advice will pay big dividends on the eventual sale price.

It is also important to strategically position your business for future earnings, identifying advantages your business either has or will have in the general marketplace. What is your point of difference from the competition? Also, identify and fix any areas of weakness. Does your business have a key person or over reliance on certain customers or industries?

Another strategy for improving business value is basic organisation. Carefully maintained financial records, documented employee policies, sales scripts, manufacturing documentation, the how to manual, think "McDonalds" a tidy workplace and/or workshop - it all counts when it comes to the amount buyers are willing to pay for your business.

Simplicity has value, and the easier it is for buyers to understand your business and see themselves in the driver's seat, the more likely it is that your business will sell for its full value.

Employment Agreements are a must

Sun, 13 Oct 2013 13:00:00 GMT

A recent Employment Relations Authority (ERA) ruling further proves how vital Employment Agreements are. An employee was awarded $3,000 after the ERA ruled that she had been unjustifiably disadvantaged through the lack of an Employment Agreement.

Order of events :

In 2008, the employee accepted an advertised role offering 25 hours per week with flexibility and potential for 40 hours during peak times. A year later, the employee requested more hours and the role expanded. After six months, the extra work was reduced, along with the employee's hours.

The employee claimed that she then verbally applied for, and accepted, a vacant full-time position at the Company. One of the employer's three Directors later stated there was no offer of a full-time role, no documentation confirming the alleged appointment, and no staff announcement. In addition, he said that he lacked the authority to make such an appointment, and was only able to adjust hours.

Down the track the amount of work declined, and the employer reduced the employee's hours. She resigned and raised a Personal Grievance.

The verdict:

It was decided that the employer acted without good faith by not providing an Employment Agreement. Had he done so, confusion surrounding the employee's hours could have been avoided. This in turn might have prevented a further finding to the employer's disadvantage relating to reduction in the employee's working hours (for which compensation of another $7,000 was awarded).

Where an employee is not covered by a Collective Agreement, the law requires an individual Employment Agreement to be in writing.

This promotes greater certainty and trust - which can only be a good thing.

Tax Deductions

Sun, 29 Sep 2013 14:00:00 GMT

What can I claim as a tax deduction?

What you can claim as a tax deduction is based on legislation and case law. The law is Income Tax Act 2007 (plus amendments and related regulations) and has two parts that need to be considered:

Section DA 1: The General Permission Test - expenditure incurred in deriving business income.

Section DA2: The Private Limitation Test - that is spending that is not of a private or domestic nature.

Expenditure deductions must be necessarily incurred in production of assessable income and not private in nature. The legislation is a very think volume 3722 pages in fact and new amendments to the Income Tax Act 2007, are passed on a regular basis. To keep on top of the legislative changes takes many hours of what some might call unproductive time to be spent to remain informed. When we know the legislation, we can advise appropriately to ensure our clients do not take an unacceptable tax position resulting in back taxes, penalties and use of money interest. In extreme cases of tax ignorance, or deliberate evasion can result in jail time.

Some quick examples I can recall of things that have been attempted to be claimed that could have resulted in the aforementioned back taxes and penalties if we had not advised against:

What you can and can't claim is not always straight forward and each situation is different. If in doubt, it pays to ask.

Look Through Companies - Re visited

Tue, 17 Sep 2013 14:00:00 GMT

An LTC is transparent for income tax purposes in the sense that all of its income and expenses are considered to be derived or incurred directly by the shareholder and not by the company. In this sense, the company operates like a partnership, whereby the LTC will file a tax return for the purposes of calculating the shareholder's income, but will not be directly assessed for tax. This means that losses and profits will be deducted or taxed at the owner's marginal tax rate.

Remember, an LTC is tax fiction " an LTC retains its identity as a registered company and therefore is still governed by the Companies Act. In addition, an LTC is not transparent for other taxes such as GST or FBT.

In an LAQC, losses were attributed to shareholders in accordance with their shareholding interest in the company. Under the LTC rules, a shareholder will derive a loss, but will be restricted to offsetting that loss against other income if the shareholder does not have a sufficient ownership basis in the company. If the shareholder is unable to use their loss, or part of their loss, the loss is carried forward until they meet the eligibility requirements for utilising the loss. In some cases, determining a shareholder's ownership basis will give rise to a significant increase in compliance costs.

The other major differences between the two regimes are first that a shareholding change will not require the company to re-elect to be an LTC. Secondly, unlike a QC, the sale of shares in an LTC triggers a deemed disposal of the underlying assets of the company. Thirdly, a company's status as an LTC is only revoked by a revocation notice or by the company ceasing to meet the eligibility criteria (such as the number of shareholders). This could create some issues for the shareholders, in that whilst all shareholders must elect for the company to become an LTC, it only takes one shareholder to revoke that election.

A QC can declare and pay a shareholder salary, however an LTC cannot. For a salary to be paid to a working shareholder, an employment contract must be in place and regular payments made with PAYE deducted.

The LTC rules are detailed and careful consideration as always is required to determine what the best option for you business structure.

Don't be blase about Tax Debt

Mon, 02 Sep 2013 14:00:00 GMT

When it comes to paying bills, we often tend to be blase and put our financial responsibilities into the too hard basket.

Ignoring debt is the easy option at the time, but eventually things catch up with you!

When it comes to paying tax, it is even more important to stay on top of your obligations to avoid potential tax debt.

"So what happens if I do get behind ?"

You should try to avoid getting to this point, but it is likely the IRD will contact you if you miss your payments.

In most scenarios, tax debt will result in the following charges:

Late filing penalties and interest

Late payment penalties

Non-payment penalties

If you do receive a letter from the IRD, it pays to act quickly. There may be a variety of payback options available to you. If you want to know more, call us and we can work with you to get back "in the black".

Do you want more sales?

Mon, 02 Sep 2013 14:00:00 GMT

You have a great product or service. You have ensured your overheads are under control. You have plugged the leaks. But at the end of the day, there's no money for you. Does this sound familiar? If only you could sell more!!!

Now if you had the sales skills of Arkwright from the corner shop in "Open All Hours" where you could sell anything to the unsuspecting customer, that would be helpful. However, a lot of work today behind the scenes has to happen to make tomorrow's income.

How do you get people to come into the shop? What happens when they come in? How do you communicate with them? Do you have a sales script? Do some of your sales solutions help both parties to have a win / win situation like the following?

Arkwright: "Scotch broth? That's very exotic. I'm afraid I don't have any in small tins, only large tins."

Mavis: "Oh"

Arkwright: "I can't cut it in half Mavis, it all f-f-flops out. Tell you what, I'll sell you a large tin but I'll only charge you for two small tins."

The whole sales process starts long before someone walks into the shop. Have you ever planned out how you are going to achieve your sales? Was this something you did when you first went into business and created a business plan? Have you updated this?

Why should the customer choose to do business with you? Is there a compelling reason why any prospective customer should choose you above all other options...including the option of doing nothing.

Palmerston North Accountancy and specialised business advisory firm - Coombe Smith (PN) Limited, is holding a free "Do you want more sales?" evening at 5:30pm on Tuesday, 8 October 2013 to provide the answers and give you the secret, with four strategies to choose from.

Places are limited, so don't delay!!! Book your space for this free event.

Register now by calling us on (06) 357-6006, email info@coombesmith.co.nz or visit www.coombesmith.co.nz/moresales

Shareholder Current Account explained

Sun, 04 Aug 2013 14:00:00 GMT

The shareholder current account is essentially a loan either to or from the company. Often when companies begin the shareholder pays up the share capital of $1,000 and the balance of the needed capital for the business is a shareholder advance. A loan to the company to allow the company to trade, think working capital.

This loan to the company at the beginning is the opening entry in the shareholder advances account (current account). During the life of the company, dividends or shareholder salaries declared to the shareholder can increase the current account. The current account can be reduced by drawings from the company.

Overdrawn Current Account

A common concept that is misunderstood by business owners is the concept of drawings. In its simplest form, drawings are cash taken from the business for personal use. Drawings are not a tax-deductible expense of the business. However, if you take drawings as a shareholder of a limited liability company, you cannot take out more than you have put in. Otherwise, this is known as an interest free loan and FBT is payable. Not a great outcome!

As a shareholder (if you are not already receiving a PAYE salary or wage) you may take drawings in lieu of wages during the year out of the profits of the business, then when the annual accounts are completed and the companies profit is determined, a salary will need to be paid to cover any drawings. The shareholder will be liable for tax on this amount in their personal income tax return. Care must be taken not to take more in drawings than the company is making. This may leave you in the position of an overdrawn current account where either FBT is payable or the company must charge you interest, which is taxable income to the company at 28 cents and not a tax deductible expense to the shareholder.

We find this a confusing discussion point with many business owners, who see their drawings from the business as wages. They are only wages, if a salary is declared and paid from the company's profit. However, if the company did not make any profit, it is not in a position to pay a salary and you will end up with an overdrawn current account.

To fix an overdrawn current account there are three ways. The first is to repay the loan from the company - that is put the money back. Secondly, the company needs to earn a profit to allow an increased shareholder salary to be paid. Finally, by declaring a dividend. However, this will be limited to any retained earnings or past capital gains and the company must be solvent both before and after a dividend or shareholder salary declared.

The advice in this article is general in nature and there are specific Income Tax Act 2007 and Companies Act 1993 legislation (read fishhooks) that need to be avoided depending on your individual circumstances. For advice on your specific situation, call the writer for a discussion.

Mark up vs Margin

Mon, 08 Jul 2013 14:00:00 GMT

Mark-up versus Margin - What is the Difference?

Is there a difference ??? Damn right there is !!!

So, which is the most important one ??? It is the margin !!!

More and more I hear these two terms are being used interchangeably to mean gross margin, but that misunderstanding is likely to be to the detriment of the bottom line.

Mark-up and Gross Margin are not the same! A clear understanding and application of the two within a pricing model can have a drastic impact on the bottom line. Speaking in terminology, mark-up percentage is the percentage difference between the actual cost and the selling price, while gross margin percentage is the percentage difference between the selling price and the gross profit.

Where should my focus be to optimise profitability? Many mistakenly believe that if a product or service is marked up, say 25%, the result will be a 25% gross margin on the income statement. However, a 25% mark-up rate produces a gross margin percentage of only 20%.

How to Calculate Mark-up Percentage

By definition, the mark-up percentage calculations is cost X mark-up percentage, and then add that to the original unit cost to arrive at the sales price.

For example, if a product costs $100, the selling price with a 25% mark-up would be $125.

Gross Profit Margin = Sales Price - Unit Cost = $125 - $100 = $25.

Markup Percentage = Gross Profit Margin / Unit Cost = $25 / $100 = 25%.

Sales Price = Cost X Mark-up Percentage + Co = $100 X 25% + $100 = $125.

How to Calculate Gross Margin Percentage

Gross margin defined is Gross Profit/Sales Price. In this example, the gross margin is $25. This results in a 20% gross margin percentage:

Gross Margin Percentage = Gross Profit / Sales Price = $25 / $125 = 20%.

Not quite the "margin percentage" we were looking for. So, how do we determine the selling price given a desired gross margin? It is all in the inverse of the gross margin formula, that is:

By simply dividing the cost of the product or service by the inverse of the gross margin equation, you will arrive at the selling price needed to achieve the desired gross margin percentage.

For example, if a 25% gross margin percentage is desired, the selling price would be $133.33 and the mark-up rate would be 33.3%:

Markup Percentage = (Sales Price - Unit Cost) / Unit Cost = ($133.33 - $100) / $100 = 33.3%

Focus Where ???

Therefore we need to focus on our gross margins, that are required to cover our overheads and generate a profit at the bottom line. The mark-up is simply the tool used to work out the required selling price.

Do you know your mark-up and selling price of the goods you sell?

If you do not, then you are driving with a blindfold and will crash!!!

Work out your margin and mark-up using the formulas above and if the result is unexpected, you have the tools to make a change.

Make a choice ...

Sun, 23 Jun 2013 14:00:00 GMT

Our annual scholarship workshop day has been, and the reception from the participants showed that they were all "raving fans!" Without exception the "very useful" box was ticked on every feedback form!

Do we as business owners take time to work on our business and on our attitude?

It all comes down to choice. We can choose to have a good attitude at work, or a bad attitude. We can choose whether we want to make a difference or not to our lives, and our businesses.

If you are unhappy with the results you are achieving, have you made a conscious choice to attempt to make a change?

We talked about Decision x Actions = Results. While you may make a lot of decisions, without taking action you cannot get a result. To get a different result you need to decide and take a different action.

For business improvement to occur, it will take investment of time and money. There is no magic wand or super elixir. To make a change, you have to want change to occur. Once you have chosen the path that you want change to occur, you need to take action. You need to act on it!

The choice to make change was valid, so you need to execute?!

One of the feedback comments was: "Absolutely awesome, you guys are really down to earth and approachable" ~ Kelly from The Petcare Company.

So …. "Don't just sit there - do something!!!"

(Catchphrase from Basil Fawlty to Manuel in the 80s comedy classic Fawlty Towers.)

Are you brave enough?

Tue, 28 May 2013 14:00:00 GMT

Are you brave enough to tackle the bad or the ugly in your business? Should you admit that at times you are the handbrake or that you create the bottleneck? Are you still doing things in your business that you know you shouldn't? If you keep doing the same things, don't be surprised when you achieve the same result. Whatever it is upsetting your day, slowing your business down, taking your time up or feeling you need to clone yourself - tackle the problem head on! Line it up and hit it with some shoulder like a "smash-em bro" league tackle, and take the wind out of the problem. Address it - deal with it - and move on. Be honest! Ask for help if you can't fix it yourself. The longer you let it fester, the more poisoned your business could become. Is your business plan outdated? Are your KPI's current, have they been reviewed or forgotten about? Do you have a marketing plan or a budget to just spend, and hope the money comes back to you? Do your monitor anything? If you monitor and measure it, you can manage it. Don't just turn up to work each day, make a difference, do something different! Make plans, get help, take actions and get a better result! Hamish Pryde

Overseas Income Tax Residence Summary

Tue, 07 May 2013 14:00:00 GMT

Overseas Income

If you receive overseas income and are a tax resident in New Zealand, you shall be taxed in New Zealand on your worldwide income.

Tax Residence

In New Zealand, a person's liability for income tax depends on the person's residence status. The concept of residence for tax purposes is based mainly on the "permanent place of abode" test or on a quantitative test.

The rules for determining an individual's residence for tax purposes are:

# The permanent place of abode test : A person is deemed to be a New Zealand resident if that person has a permanent place of abode here, whether or not that person also has a permanent place of abode overseas.

# The 325-day test : To cease New Zealand residency, a person must be absent from New Zealand for a period or periods exceeding in aggregate 325 days in any 12 month period. Non-residence commences from the first day of absence.

The permanent place of abode test takes precedence over all the other provisions.

Consequently, an individual whose permanent place of abode is in New Zealand remains a tax resident, despite an absence from New Zealand of more than 325 days in a 12 month period. However, when determining residency, both the permanent place of abode test and the 183-day test must be applied.

Factors that, therefore, require consideration in determining whether there is a permanent place of abode in New Zealand are:

1. The length of time spent in New Zealand.

3. Employment history.

4. Whether the taxpayer's family has accompanied him or her to or from New Zealand.

6. Whether annual leave is taken in New Zealand or the overseas country.

Normally all and not just some of these factors are examined to determine an individual's permanent place of abode.

Double Tax Agreement

New Zealand has double tax agreements with a number of countries. If a double tax agreement exists, this means that any tax deducted from earnings in the overseas country is allowed as a tax credit for taxation due in New Zealand. The tax credit is limited however to the lesser of the tax deducted overseas or the equivalent taxation due on this income in New Zealand.

Hamish Pryde - Chartered Accountant and Business Advisor -

Why Choose You?

Mon, 15 Apr 2013 14:00:00 GMT

In the news the other day, a representative of a child care facility that was struggling financially was complaining that there were at least 30 child care providers in the Mount Eden area in Auckland and something should be done? Be done by whom I ask?

If there are 30 different providers of child care services, I bet they are not all equal.

They will all be different on:

1. The qualifications of teachers.

2. The facilities, area, and equipment.

3. The teaching programmes.

4. The mix of children.

5. The provision and / or quality of meals.

6. Reputation.

7. Price.

It's a case of supply and demand. What do the parents of the area demand?

Perhaps the ones complaining should look at themselves. How do they compare to their competitors? Are they providing a similar experience? What is the quality of care? Does the market place know they exist and can appreciate what they offer? What is their point of difference?

Instead of moaning and whinging about it - do not expect everything to go well just because you open a child care facility, and do not just expect people to come to you.

You first have to work on why the people should come!!

Thinking of selling your business

Wed, 27 Mar 2013 13:00:00 GMT

A short practical guide to achieving the best price for your business.

If you have thought about selling your business, you may or may not know what to do next. How do you prepare and present your business for sale to achieve the best possible price?

The process includes:

A. Why are you selling?

To sell your business you have to have a buyer. A buyer will buy for his reasons, not yours. Your attitude and what you say can drastically de-value your business. Comments like "the place can't run without me" will make any potential buyer run to the hills or they will drastically reduce their offer price.

You need a genuine reason for the sale. Buyers will not pay top dollar for a business that is broke. By broke I mean in the way of making losses or without systems, contracts and a future.

B. Price

This is the most important part in selling your business. Sellers will have one view; buyers another; accountants another. There are different ways to value a business, some more complex than others and each method has its advantages and disadvantages. Valuations are usually based on a combination of methods. The skill lies with the valuer to reach a suitable valuation conclusion.

Because buyers and sellers usually have different ideas about what a business is worth, it is a good idea to get an experienced Chartered Accountant who undertakes many valuations to assess a business. A well-prepared, balanced and independent valuation can help speed up negotiations and offer a more complete picture of the value of a business.

C. Prepare for Sale

Potential buyers will want to look at the books. An experienced valuer will present the annual Financial Statements in a special format that shows the Earnings Before Interest And Taxation (EBIT), or a variation depending on the industry. The idea is to show the operating results of the business before interest costs and taxation, as this can vary from business to business. In addition, lists of all the assets will be compiled with market values. Copies of major contracts, lease agreements, staff details and operating hours will be required for the purchaser's due diligence.

D. What is Goodwill?

Goodwill is the value of the business over and above the tangible assets and needs to be worked out. Goodwill is the assets of the business other than tangible assets, which are assets you can see, and touch like the truck and trailer unit. There are many intangible assets in the makeup of any business and working out the value of these is not straightforward. Intangible assets are such things as brand, copyrights, intellectual property, business systems, good reputation and loyal customers and are generally referred to as the 'goodwill' of a business and are often considered to be where the real profit of a Company lies.

The difficulty though is working out how much this goodwill is worth. Often the vendor's view will vary considerably from that of the potential purchaser. You need to get an objective opinion from your Accountant experienced in business appraisals, to assess the value of the business including the goodwill.

To maximise the sale price of the business may take two to three years working with your accountant to maximise the eventual sale price.

E. Mistakes to Avoid

How many times have we heard people say, "If only I'd done that"? In selling your business, you may only get one chance of getting it right, so you need to be aware of the possible mistakes such as:

1. No preparation

Unbelievably, many businesses come to the market without a single idea of what is involved in the sales process and what they want to get out of the sale. It is vital that you understand these aspects and have a firm plan for what you would like to achieve. If you are poorly prepared, it will show, frustrate buyers and waste everybody's time. The end result is NO SALE . Do not underestimate the amount of time and effort it will take to get a positive result. It can take two to three years to get a business ready for sale.

2. Inadequate financial records and information

Private businesses are set up to minimise tax, not show maximum profits. However, profit is one of the principal yardsticks of valuation. Low Profits = Low Valuation . If there is a good reason for low profitability and you can demonstrate solid results, make sure you document this. Nothing kills a deal quicker than failure to produce accurate, up-to-date, financial information or not answering queries quickly and efficiently.

3. Why do you want to sell?

This will be one of the first questions a buyer will ask you. Give some serious thought to why you want to sell. Common reasons include retirement, health, capitalisation or a career change. If the buyer isn't comfortable with your reason, they will simply walk away. If you have not made a firm decision to sell, whatever your motivation - don't . Wait until you're sure it's what you want to do and have a firm idea of what you want to achieve.

4. Non-qualified prospects

Beware the tyre-kickers, bargain hunters and general time wasters. Don't be afraid to ask for financial information or do background, credit and Company checks. A serious buyer won't mind. Make sure the buyer has the means and motivation to make a purchase. Use a quality business broker who will be able to check this thoroughly for you as part of their service. Be WARNED , you can waste significant amounts of time and money getting distracted by the wrong prospects.

5. Trying to sell yourself

Selling a business is a complex and time-consuming process. It is very easy to underestimate the process and think you can do it all. You wouldn't be the first or last to take your eye off the ball while trying to sell, letting your business suffer - weakening your sales proposition.

A buyer will automatically assume a position of advantage if they see you have chosen not to take professional help, especially if they equip themselves with an army of experts.

6. Over negotiating

Many a deal has turned sour because one side feels cheated. You may have to work with the new owner for a period post-sale. A skilful negotiator will work toward everyone feeling happy with the outcome.

Do what you do best - carry on running your business. Use your Accountant to help you. An experienced Accountant will guide you all the way through to completion of sale‚¬" hassle free and at the best possible sale price.

Prepare early for the sale of your business, the earlier you prepare, with the assistance of experts, to get your business in the best possible shape, the greater the eventual sale price.

"An eagle was soaring through the air when suddenly it heard the whizz of an arrow, and felt itself wounded to death. Slowly it fluttered down to earth, with its lifeblood pouring out of it. Looking down upon the arrow with which it had been pierced, it found that the shaft of the arrow had been feathered with one of its own plumes. 'Alas!' it cried, as it died"

"We often give our enemies the means for our own destruction."

~ "The Eagle and the Arrow" by Aesop

HJ Pryde ACA Coombe Smith (PN) Limited

Profit Planning

Wed, 27 Feb 2013 13:00:00 GMT

At the start of each financial year do we take time out to sit back and examine where the money comes from? We should!

The idea behind a profit plan is to inwardly reflect how you make money. It's part of working on the business rather than simply working in the business. This is an important concept. Working in the business is dealing with today's income or problems only. Working on the business is working on tomorrow's income. By preparing a budget or what I call a profit plan, is planning to succeed. Nobody is in business to make a loss. A profit plan is part of the overall business plan. It puts a target or goal in place broken down ideally into monthly, weekly and or daily targets and indentifying key performance indicators (KPI's). A KPI is something that has a major impact on your business. There are many factors affecting every business' performance, so it is vital to focus on a handful of these and monitor them carefully. By monitoring your actual performance compared to budget you can track the success of your business or identify problems earlier and as a result put steps in place to get back on target.

KPI's can be a number of things for example:

a) Number of business enquires each week

b) Conversion rate of enquires to sale

c) Average dollar sale

d) Gross profit margin achieved

e) Number of chargeable hours

f) Level of overheads

All of these KPI's measure the success or achievement towards the desired profit goal. If you can monitor it you can measure it. If the result doesn't measure up you need to do something about it. Any trends towards cash flow problems or falling profitability will show up in these KPI figures when measured against your profit plan. They will help you spot problems early on if they are calculated on a consistent basis.

By completing an annual profit plan you will benefit because you have thought about the problems of the future and tried to think about solutions to the potential problems. Perhaps a seasonal nature of the business. When applying for finance, or an extension to your overdraft, the bank wants to know if you have thought and considered how your business is going to operate in the period ahead. Have you undertaken some planning? Are you going to change the past results into better performance? How long will you be in overdraft?

The key is to plan. If you don't know where you are going, then any road will get you there.

HJ Pryde

Do you read your Financial Statements?

Wed, 13 Feb 2013 13:00:00 GMT

I recently had an example of some actions that astounded me somewhat.

The instance came about that an client had duly dropped in her records for processing each year for a number of years, and when the Financial Statements were prepared each year, she simply signed the Tax Return where indicated, and thought all was well. She never wanted to come in to discuss the accounts.

Not all was well when it came to light that she had sold her business and wanted to end the necessity to file a Business Tax Return with the Inland Revenue Department.

Upon ceasing the business, all assets must be accounted for, whether they are sold or retained. The largest asset was the land and buildings, from which the shop had operated.

Now the issue with buildings is that we get to claim a non-cash expense, essentially an allowance each year, in the books. Over a number of years, this depreciation accumulates to what can be a substantial figure, depending on how long the building was owned.

The problem with buildings is that they usually appreciate. Thereby when the building is sold, the written-down value of the building is such that there is depreciation recovered. This large sum of depreciation recovered is taxable, and can result in a large tax bill in the year of sale.

On topical note, the tax legislation has been changed with effect from 1 April 2011 and there is no longer a depreciation claim for buildings with a useful life of more than fifty years.

However, in this instance it came to light that the building had actually been sold a number of years earlier. Upon sitting around the table with the client and explaining the matters, the reply was "Well you do the books, and I thought it was all taken care of." It was pointed out that this is not a defence. We must remind out clients that they are responsible for the information provided, and they are responsible for the end result. We compile information based upon what they tell us, and if they do not tell us things, we are not mind readers.

I always prefer to go through the Financial Statements with our clients to make sure that they understand, and give them an option to ask any questions they may have, as this can avoid surprises of a nasty tax nature, well after the fact.

It is important to read and understand your own financial statements and tax affairs.

Hamish Pryde BBS, CA (PP)

Five Reasons You Need a Business Plan

Sun, 27 Jan 2013 13:00:00 GMT

Writing a business plan does not mean you have to hide away in a quiet place for weeks compiling a 20-plus page document. Chances are you will never look at the document again either because it is too big. It will have pride of place in the bottom drawer of your desk.

A business plan on a page is what is required. A business plan on a page as developed and used here at Coombe Smith contains all you need. Vision, values, objectives, KPI's targets and 4 - 5 goals with strategies on how to get there. The plan can be for 3 months or 3 years. The business plan on a page can have pride of place laminated on your desk or wall where you can refer to each day.

You need to plan to get somewhere and a business plan is the blueprint for success. You will want to plan in more detail if you are raising capital, finance or taking on a lot of risk-like investing your savings, leaving a job, or supporting a family. Less detail is fine if you are not raising money or taking on much risk. Nevertheless, either way, you need a plan, and here is why:

1. To avoid big mistakes: The last thing you want to do is work on your start-up for a year, only to realise you were doomed to fail from the start. Many founders learn the hard way that they did not set aside enough capital to reach their goals, took on partners with the wrong skills and resources, or do not have a viable way to make money. Developing and sharing a business plan can help ensure that you are sprinting down the right path.

2. To counterbalance your emotions: At times during your start-up experience, you will be manic-so passionate about your ideas you lose sight of reality. At other times, you will be overwhelmed by doubt, fear, or exhaustion. When your emotions get the best of you, having a business plan lets you step back, and take an objective look at what you are doing and why, what you know for a fact and what you are trying to figure out.

3. To make sure everyone's on the same page: Chances are, you are not building a company by yourself. Ideally, you will have partners, so you can launch faster, smarter, and with less need to pay employees or suppliers. Even if you do not have partners, you will have family, friends, and advisers involved. A business plan helps get everyone involved in your start-up heading in the same direction.

4. To develop a game plan: At a start-up, execution is everything. That means you have to set priorities, establish goals, and measure performance. You also need to identify the key questions to answer, like "What features do customers really want?" "Will customers buy our product and how much will they pay?," and "How can we attract customers in a way that's cost effective and scalable?" These are all things you will address during the business planning process.

5. To raise capital. If you raise or borrow money-even from friends and family-you will need to communicate your vision in a clear, compelling way. A good business plan will help you do just that.

Am I required to have financial statements complete for all trusts or just business trusts?

Wed, 05 Dec 2012 13:00:00 GMT

The Inland Revenue Department places a duty on Trustees to prepare financial statements and file tax returns if the Family Trust or other Trust earns income. Trustees may also have to prepare and file GST returns.

Trustees need to remember that they are personally liable for the affairs of the Trust and this includes paying any taxes that are due to the Inland Revenue Department.

Good record keeping, including having bank statements evidencing transactions the Trust has engaged in, is crucial to preparing accurate financial statements from which the Trust's tax returns can be compiled and the Trustees can be made aware of their taxation responsibilities.

Even if a Trust does not produce any income and simply holds passive assets such as a family home, it is still recommended that financial statements be prepared for the Trust. The financial statement will note advances made by the Settlors to the Trust, loans the Trust may have made to other entities, the gifting position, the assets the Trust holds and the liabilities the Trust has incurred. Again, such financial statements help the Trustees satisfy their duty when accounting to the Beneficiaries of the Trust. Reduced accounting fees will apply for the preparation of these types of financial statements.

Properly prepared financial statements are a great tool that Professional Trustees use to ensure the Trust is being administered correctly and that all Trust documentation is up to date and in place. Without financial statements, this task is severely hampered. Correspondingly, poorly prepared financial statements will be a hindrance to Trustees and in some situations can be very dangerous. A claim from beneficiaries could occur many years in the future. Copies of financial statements record past events, and is an important part of ensuring the Trust is separate and not an alter ego of the settlors, which means the Trust could be ignored and the assets treated as still owned by the settlers. Defeating the reason the Trust was set up in the first place. A little expense now to avoid a potentially costly mistake later.

Trustee's duty to account and keep records

Wed, 28 Nov 2012 13:00:00 GMT

Onus on trustees to act prudently

Wed, 21 Nov 2012 13:00:00 GMT

Gift Duty Repeal

Sun, 04 Nov 2012 13:00:00 GMT

Financial Decision Making

Tue, 16 Oct 2012 13:00:00 GMT

How do we undertake financial decision-making?

There are two parts to the decision making process. First, you need the right information. Do you have up to date financial data. Relying on last years, annual financial statements are of limited use if they are 18 months old. What has happened in the last 18 months? Have you the ability to obtain up to date financial information or do you need to update your tools. Is there a need for a software solution or a process change? Today there is software in the clouds. Funny term, but what it means is that the software is run over the internet. You can access it anywhere an internet connection is. The information is instant and current; provide you keep it up to date. Information is powerful.

Non-financial information should be used also. This includes reviews, promotional material, talking to others who use or have experienced the product or process. Seek out testimonials from raving fans of the product or process. If you are investing in shares or finance companies do you invest based on return alone? Smart money would say no.

Interpretation of the numbers is vitally important. Get an expert, perhaps a chartered accountant or a certified financial planner for investing advice to review what the numbers mean. Experienced people in this regard know what to look for and have experience to interpret what it means for you.

The second part of any decision making once you have the facts and numbers is to use your brain. By that, I mean:

B Benefits, what are they

R Risks, what are the risks involved

A Alternatives are there alternatives to buying this piece of equipment for example, lease, and buy in ready-made etc.

I Intuition, this is the gut feel. Does it feel right? Could you explain on national TV why it was a good idea?

N Nothing, doing nothing is a valid option.

Financial decision-making is all about good reliable information interpreted correctly and on a timely basis.

An example of financial decision-making can be what to do with your lotto winnings? After the initial excitement has worn off, perhaps after the new car, wardrobe and world trip, you decide to invest your money. Do you invest where your friends tell you? Do you invest in something with high returns? Remember high returns and high risk often travels together. Warren Buffet is the most successful sharemarket investor in the world (so far) and he always states it is important to understand what your money is being invested in. This applies to everything. Understanding is the key.

After you have gathered the necessary information, consulted a professional, considered the risks and alternatives, it feels right, then you have at least diligently followed a process to arrive at a decision that was right at the time.

Do I need to keep making a business plan?

Tue, 09 Oct 2012 13:00:00 GMT

You may have completed a business plan when you started your business. Was it a good idea then? Yes, of course otherwise you would not have been able to show yourself and maybe the bankers that you would achieve a reasonable amount of success in the first year that there would even be a second year. So why don't you keep planning, annually or better yet every 90 days.

The process of business planning is, in and of itself, a worthwhile pursuit as it forces you to remove yourself from the day-to-day activities and think of tomorrow's income.

A business plan is a roadmap for the business " a document that provides vision, goals and benchmarking. It creates momentum and provides an opportunity for a reality check " what worked last year, where the gaps are, and what next year is going to look like.

Business planning is important because it provides focus on tomorrow's income it will create a benchmark so you can recognise and acknowledge your wins as well as the areas you need to work on.

Business plans make owners and teams accountable. When the year has been mapped out, you can get on with running the business, rather than thinking about it.

Reasons for Good Goverance

Wed, 15 Aug 2012 14:00:00 GMT

Governance applies to all Company's regardless of their size. Businesses with a more formal structure tend to develop more quickly, and with a better and more clearly defined direction than those without.

To carry out the governance model you need Directors. Ideally an independent Director with the necessary skills and expertise is required. They have no financial interest in the success of the business; therefore their objective independent advice is more valuable.

Some compelling reasons why a good governance structure is needed:

1) It means you achieve the things you want to achieve, rather than get sidetracked on things which may not be that important.

2) It means you can adapt quickly to change whether it be to capitalise on an opportunity or steer the ship away from adverse conditions.

3) It is essential for a business that has a high debt ratio to ensure the business keeps that debt under control and not let the business deteriorate into a situation where the shareholders lose everything.

4) Banks will look at a business with a good governance structure more favourably than one that doesn't know how they are going until the Financial Statements are prepare the following year.

5) It helps keep you within the agreed overdraft limit and can reduce your interest rates if the bank can see you follow agreed plans and show discipline.

6) It helps enormously if you are going to have a successful succession plan. That can mean that if anything happens to the key person, there will be a clear path to follow for those left behind.

7) Better still good governance will address the succession issue and aid in realising the maximum value from the sale of your business, or it can become a legacy.

8) Finally, it is likely you will make a lot more money.

The usual reasons given for not putting a good governance structure in place are that it might cost too much.

The difference between goverance and management

Mon, 30 Jul 2012 14:00:00 GMT

The Difference between Governance and Management

For many businesses in New Zealand, the owners are also the directors and they manage the day-to-day activities. They need to wear "two hats" at times; one for the big picture, the governance, and one for the day-to-day events, the management.

Governance is setting the strategic direction and goals for the Company or non-profit organisation and acting as a guardian of the interests of the Company's shareholders or the benefactors of the non-profit work. Non-profit organisations have board members too that need to ensure the organisation operates efficiently and effectively to extract the best possible benefit out of the limited funds they obtain. Throughout this article, the term director covers non-profit board member as well.

We Kiwi's as a nation enjoy the building, making, creating, and the customer interaction part of business. Too many directors in New Zealand are guilty of being solely focused on the hands-on aspects of the business. This is to the detriment of the governance function, with not enough time spent "with their director's hat on" thinking about business strategy, structure, and direction. This can result in under-performance of the Company over the longer term, and in worst cases will put directors at risk of neglecting their legal obligations as a director.

How do we improve the governance of an organisation? The following are some good pointers:

Management is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively. Management comprises planning, organising, staffing, leading or directing in an effort of accomplishing goals set by the board of the entity. Management involves achieving results through managing the efforts of others.

Charters help steer

Mon, 16 Jul 2012 14:00:00 GMT

But in most cases the family business you so lovingly established and nurtured will only continue to succeed if everyone else in the family knows what the business is about, why you started it and what the objectives are.

Too often family businesses in New Zealand do not survive through to the second and third generation. Conflicts are common and, in addition to inadequate planning, often lie at the heart of the relatively high failure rate of small family businesses.

You need to define and explain your business so your children and other family members understand and appreciate the reasons for the sacrifices being made in the quest for ongoing business success.

The family business charter, or constitution, offers a good way to do this. It is a mechanism to assist the family in achieving its objectives. If you have not written one already for your family business, now is a good time to start.

State your dream at the beginning

Ideally a family charter is written when you are forming the business. That is when you state your dream, what your objectives are, and how this business will deal with pertinent issues relating to external management, family disputes, succession and so on. The constitution would outline:

# The objectives of the family.

# How the objectives interact with the business plan for the family business.

# How to deal with family disputes.

# The succession plan for the owner â€" both short term, in the event of an unforeseen circumstance, and long term; relative to retirement planning.

# Management issues and the family's position on employment of external management personnel and external directors.

# The appropriate standards of performance and administration for the family business.

# A standard of conduct and commitment of family members to the business.

# Ongoing management training and skill development necessary for family members to enable them to progress in the management of the family business.

# How regular family meetings are to be held.

Bringing in Management

Wed, 04 Jul 2012 14:00:00 GMT

It's fast approaching - that time when you pass your business onto another generation of the family. This is what you've planned for from the day you first set up your business.

So, the next generation - who are they? Are they capable of taking over the reins? Do they even want to? While you may have planned for another family member to succeed you, do you actually have someone to fit the bill?

Naturally you could sell the business or hire a new Chief Executive. Perhaps most challenging, however, is the situation where you have a willing successor who is just not yet ready to take up the top job.

In this situation a temporary manager from outside the family could be brought in to bridge the transition gap between the founder and the next generation. The outside executive can act as coach and mentor and assist in the development of other members of the management team, both family and non-family.

This training and mentoring can be vital. Far too often family businesses do not survive through to the second or third generation because the successor does not have the necessary skills or the interest and enthusiasm to do the job properly.

Most often the problem lies in a lack of planning. A 1998 survey suggests New Zealand businesses do not pay nearly enough attention to succession planning. Results of the survey ("A survey of Family and Private Businesses in New Zealand, 1998" - by Peter Evans) showed only 17.3% of businesses had a written succession plan in place.

Be prepared to let go of the reins

However, bear in mind that bringing in someone else to run your business, and possibly groom your successor, is not always easy. Once you've decided to go down this route, you will have to accept this person is likely to do things differently. Just because you have done something the same way for years should not mean they need to continue with it. They bring to the job their own skills, fresh ideas and, potentially, current thinking, which can be a positive way forward for the Company.

You will need to develop some ground rules, including a detailed job description for the new executive. Then get out of the way and let the person get on with the job of managing the business. Do not confuse the scene by having two CEO's running the business. Draw up a set of rules, agree on a monitoring system and then leave them to take over the reins.

If you are planning to still have some involvement in the business, you need to define your role before the new person comes on board.

# How much time will you spend in the business?

# What is your role to be? Perhaps you will still be involved in strategic planning in a non-executive capacity, but attend Board meetings and review management reports.

A successful transition is unlikely if you, as the principal, are still involved on a day-to-day basis.

Unless there is proper planning and forethought, the employment of an outside executive into a family business could be a disaster. Define the duties and the responsibilities. Then select the person and, prior to the start date, agree on your expectations of the position and what your ongoing role will be.

Make sure you do not forget the team. This will be a big change, especially for other family members who may not be happy about someone else taking over what they may have considered their role. You need to prepare everyone for this new phase of the business and make the handover of responsibility very public and very clear that this person is now in charge.

The transition process can take time, so don't expect miracles overnight. But if properly planned and implemented accordingly, you should be in for a smooth ride.

Taking your business from the kitchen table to the board room

Sun, 24 Jun 2012 14:00:00 GMT

Taking your Business from the

kitchen table to the Board Room

Corporate governance is about working on the business not in it. In other words, being strategic rather than operational. Your business may have grown from the "mum and dad's" business where the decision making was often done around the kitchen table, and has graduated to the boardroom.

As businesses grow and have more opportunities, it is recognised that outside expertise is required. Small business owners may be very good at what they do, such as building, transport logistics or making widgets, but Boards of Directors play a crucial role in enabling businesses to achieve their mission or purpose, whether that is to create wealth for shareholders, or to deliver valued services to stakeholders.

Governance is all about getting ahead. It is about:

# Knowing where you want to be and how you're going to get there.

# Good decisions made on the basis of a clear view of the "big picture".

# Identifying the right opportunities and going for them.

# Identifying risks and devising strategies to manage them.

# Putting the interest of your business ahead of the interest of the individuals.

Governance applies to all Companies regardless of their size. Businesses with a more formal structure tend to develop more quickly, and with a better and more clearly defined direction than those without.

The office of Director carries with it a wide range of duties and obligations â€" ethical, legal and commercial. The "tone at the top" influences the whole organisation. A Director must act in good faith, and in the best interests of the Company. A Director must also encourage openness to challenge, and independent thinking, contributing to decision making.

A good Board of Directors will help organisations achieve:

# Greater clarity of roles and responsibilities.

# A unified understanding of vision, purpose and strategy.

# Greater accountability and transparency.

# Better understanding of the compliance environment and risk management.

# Improved decision making.

# Enhanced team dynamics and communication.

# Improved leadership.

An independent Director in a family business should not be there to rubber stamp the will of the founding Director (perhaps the mum and dad owner). The point of the independent Director is to be objective, to see the bigger picture, and help achieve the bigger goals more quickly.

A Business Advisor / Chartered Accountant makes an ideal independent Director.

Hamish Pryde BBS, MInstD, CA (PP)

Power of Attorney

Mon, 28 May 2012 14:00:00 GMT

We all should have a Power of Attorney â€" Have you?

I was asked today," Can a power of attorney see the financial statements?" Like most replies to these questions I answered, it depends.

Firstly, what is a Power of Attorney?

Power of attorney is an authority by which one person (the "donor") gives authority to someone else (the "attorney") to act in their name.

Why use it?

The idea of someone else being able to sign your cheques, sell your property, read your business financial statements would be a severe breach of your privacy and independence. However, if your health deteriorates or you go overseas and are unable to run your own affairs, having someone else to help who you trust is the best option.

Many people think their partner will be able to step in automatically but that is not the case. Even if you have been married 30 years, your spouse will not be able to deal with any accounts, policies or possessions if they are in your own name. They would need to go to court to be given that power. This could take months and cost thousands of dollars.

The best option is to arrange a power of attorney in advance. This needs to be done while the donor's mental capacity and judgment still allows them to understand what they are doing.

Types of power

There are two broad types of powers: "ordinary" and "enduring".

Ordinary powers are best used for temporary purposes â€" for example if you're going overseas and want someone to be able to send you cash from your accounts or to pay bills here.

Most advisers recommend an " enduring " power of attorney for longer-term protection. This works after you have become mentally incapable, while an ordinary power would lapse.

Enduring powers of attorney can relate to property or your personal care and welfare. One attorney can act in relation to both property and care and welfare.

Revoking an enduring power of attorney

You can vary, suspend or revoke an enduring power of attorney while you are still mentally capable.

Being a Power of Attorney .

You must act in the best interests of the donor. You must keep records of each financial transaction entered into under the enduring power of attorney while they are mentally incapable.

Therefore, to answer the question - if the Power of Attorney in relation to property has been activated, then it is important that the power of Attorney can see the financial statements. The power of attorney has a duty to ensure they have all the information needed to base decisions in the best interest of the donor.

Hamish Pryde

Coombe Smith (PN) Limited

What's the purpose of an Advertisment?

Tue, 08 May 2012 14:00:00 GMT

The real purpose of any advertisement is simply to get a response.

Notice, I didn't say, "To make a sale". Nor did I say, "To make an impression". Nor did I say, "To keep your name before the public". I said, "To get a response"

Do you ask your customers where they heard of you? If you don't know how new customers are hearing about you, then your marketing has no purpose and you might as well go to the bank withdraw $1,000, and throw it in the air and walk away! Only the big guys like Coke and Nike can afford to get their name out there to generate future sales. I haven't got a spare million bucks to get my name out there, nor have you.

You would rather take that money and invest in marketing that you know works. So find out what works. Every time someone buys, ask them "By the way, can I just ask where you heard about my business?" Tally this up on a lead sheet. Get everyone in your team to do this. After 14 or 28 days see where people come from. This way you can find out what is not working and what is. You can change your spending accordingly.

Always test and measure any marketing initiatives. You want a call to action, a response, a sale, you don't want to be famous for being famous, leave that to the Kardashians.

Transform your Business in 90 Days!

Tue, 10 Apr 2012 14:00:00 GMT

Palmerston North Accounting firm Coombe Smith (PN) Limited is sponsoring 25 business growth scholarships, each valued at $2,000, for local businesses seeking the opportunity to transform their business in 90 days!!!

The scholarships are for business owners ready to dig in, learn fast, work hard and get serious results. They will provide business owners with the necessary tools and confidence to develop 90-day plans for success.

Coombe Smith Director Hamish Pryde says "Business owners can be so busy working in the business that they are too busy with today's problems to deal with tomorrow's income. The Euro crisis and the price of petrol at record levels are things as business owners we have no control over. What we do have control over is our products, marketing, sales, delivery and systems".

Scholarship recipients will receive; attendance at a half day facilitated planning workshop where they will hear from guest speakers and receive hands on help developing a 90 day business improvement plan. A one-on-one coaching session with a leading business growth specialist, strategy videos from New Zealand's most successful marketing coach and a bonus networking session.

Applications open on the 16 ^th April 2012 and businesses interested in applying for a scholarship must do so before 18 ^th May 2012. To apply call 06 357 6006 or go to www.coombesmith.co.nz/90days to request an application form.

Scholarship winners will be notified 24 May 2012

Selling More to Existing Customers

Wed, 07 Mar 2012 13:00:00 GMT

One of the best - and easiest - ways to increase your revenue and profitability is to sell more to your existing customers. Many customers only know about the products they have bought from you. Simply telling your customers about all the products in your range can bring in more business.

Cross-selling and up-selling is all about relevance. Look at what your customers have bought before and offer them other relevant goods and services that might be useful. They will see this as good customer care, rather than an intrusive sales pitch.

Timing is everything. Where possible, focus on cross-selling and up-selling at the point of sale when customers are ready to buy. Offering upgrades, special deals and free gifts (such as three for two) is a great way to convince customers to spend a little more.

How to approach Existing Customers

Never underestimate the importance of your existing satisfied customers. It costs less to sell to them than it does to find new business. What's more, they are loyal, they tell you what you are doing right and wrong, they recommend you to their friends and, compared to new customers, they are less price-sensitive.

Selling to existing customers is quite different to approaching new prospects. You don't need to establish your reputation, skills or the quality of your products. The customer is already convinced. The fact that you're telling them about other useful products or services shows that you understand their needs and care about their satisfaction.

Your sales approach should reflect the fact that you already have a good relationship. Listen to your customers and let them give you feedback before you make your pitch. As long as you tell your customers about something that's appropriate to them, they will appreciate the offer.

Don't assume your customers know your products as well as you do. Most people are focused on one thing when they make a purchase. Has a customer ever said to you "I didn't know you did that?" Customers are often unaware of everything that a business can provide.

Take advantage of every customer touch point to show them what you can offer as part of your routine customer-care processes. You can also send newsletters and emails telling them about new products and special offers. After a sale, a courtesy call is a good opportunity to offer other goods and services. You can send reminders when services or check-ups are due. When shipping a product to a customer include a flyer highlighting other items which they might be interested in.

How to Cross-Sell

Cross-selling is an established sales technique that works. In a Chemist, you'll find mouthwash, dental floss and toothpaste next to the toothbrushes. On websites like iTunes, you'll find other recommendations next to the album you are buying.

Maximise the potential for cross-selling by positioning related items together, whether in your shop, on your website or in your brochure. Educate shoppers on the depth and variety of what your business offers. At the same time, ensure your employees are trained in cross-selling techniques, based on offering customers relevant products and services.

Incentives can be the best way to achieve extra sales, and it's very effective to bundle together related products in a package deal. If you run a carpet-cleaning business, don't forget to mention that you clean lounge suites and curtains too. You can also use endorsement to make a sale - recommendations from experts or other customers can convince customers to add more products to their basket.

How to Up-Sell

Getting customers to buy a more expensive product can be difficult. However, by encouraging your customers to spend a little more, you can significantly boost your sales.

There are two main ways to up-sell. The first method involves an in-depth understanding of your customers' requirements. The second approach is based on incentives and rewards for spending more. If you can combine both, you have a good chance of successfully up-selling.

Take a car sales pitch; for example. A customer comes in and is sure about the model they want to buy. The sales person asks a series of questions to find out more about their requirements. Then they show the customer the original model and a more expensive model that gives them everything they want. The customer likes the more expensive car but is concerned about the price. The sales person offers a discount and the deal is often sealed.

Explaining Foreign Investment Funds Rules

Wed, 08 Feb 2012 13:00:00 GMT

If you invest in your own name the key thing to look at is the total value of your overseas share investments. If the total is over $50,000 and they went up in value (including any dividends received) then you may need to pay some extra tax. If they fell in value (including the dividends) then there will be no extra tax.

If you invest via a Family Trust then the $50,000 limit is not relevant. Tax will be paid on the gain in the value of the portfolio regardless of its size and there will be no tax if it fell in value.

There are several levels of complexity with the new tax rules. We have mentioned only the most relevant in relation to your investments.

Key Terms

FIF Rules: Foreign Investment Funds

A FIF is a right in a foreign Company, foreign superannuation scheme or foreign life insurance. This will include Australian unit trusts and UK investments trusts.

Bonds and fixed interest funds are dealt with under the accrual rules.

The following funds are exempt FIF rules:

- PIE funds

- New Zealand shares (imputation credit accounts)

- Australian listed Companies (shares on the All Ords index, Australian resident which have a franking account)

- GPG (5 years), NZIT (2 years)

Funds that do fall under FIF rules are:

(This is only applicable if you held FIF investments at any time in your income tax year that cost in excess of $50,000 NZD (or $100,000 for joint investors - original value NZD), or your investments are held by a â€œnon-naturalâ€ person, such as a Company, or Family Trust.)

- Australian Unit Trusts

- OM-IP series funds (FDR calculation permitted)

- LionTamer funds (FDR calculation permitted opening value $1.00 per unit)

- UK listed investment trusts

- Macquarie Gilt Edge Access cash account (CV calculation only, FDR prohibited)

- ING Diversified Yield Fund, ING Regular Income Fund (exempt optional calculation FDR or CV allowed)

PIE: Portfolio Investment Entity

Most New Zealand based fund managers have converted their retail funds into PIE funds. Examples are Private Portfolio Service Master funds (PPS), and ING property Securities Fund.

PIR: Prescribed Investor Tax Rate.

This is your personal tax rate. From 1 October 2010 there here are four rates:

0%, 10.5%, 17.5% and 28% .

Trusts can select a PIR of 28% or 0%. The zero rate may be appropriate where the Trust has beneficiaries on low incomes.

NOTE: For investments in PIE funds held jointly the declared PIR tax rate must be the tax rate of the highest tax paying individual. The PIR rate needs to be the highest tax rate over the previous two years.

FDR Calculation: Fair Dividend Rate

For FIF investments where an individualâ€™s holding is greater than $50,000 the taxable income is calculated as 5% of the opening market value as at 1 April 2007. If the FDR method is used it must be used on the total FIF investments except where funds may have an FDR exemption.

This method should be used if the total value of an offshore shares portfolio (including dividends received) has increased by more than 5% during the tax year.

CV Calculation: Comparative value Method

A CV calculation is used where FDR is not allowed or the CV calculation results in a lower taxable value.

Comparative value = (closing market value + total sales proceeds + dividends received) minus (opening market value + total value of purchases).

This method should be used if the value of an offshore share portfolio has risen by less than 5% (or declined) during the tax year.

If the CV calculation is negative, losses fall to zero. The loss is not deductible. Where a fund is FDR excluded and a CV calculation has to be done eg. ING Diversified Yield Fund then if the CV calculation is negative the loss can be offset against other income and the loss can be carried forward to the next tax year.

Investors who qualify under the FIF Rules

You need to do a FDR or CV calculation if:

- You held FIF investments at any time in the 2008 income year that cost in excess of $50,000 NZD (or $100,000 for joint investors) or;

- Your investments are held by a â€œnon-naturalâ€ person, such as a Company, or Family Trust.

We recommend calculating FIF income by both FDR and CV method. If the CV method calculates as negative the income is returned on your statement as nil. If your CV calculation shows a lower assessable income then use CV. If the FDR calculation is lower then use FDR.

NOTE: If you do have investments in ING Diversified Yield fund or ING Regular Income Fund the IRD has deemed these to be exempt funds and allow the CV method to be used to calculate the loss and make it deductible against your other income. This loss can be carried forward.

This summary is provided to shed some light on why the calculation of your investment income is far more difficult than it used to be. The goal of the legislation is to receive more tax. However, the value of overseas investments have not performed as expected or desired over the last few years as a general observation. The tax take from this complicating legislation has not resulted in an increased tax take for the Government.

These reports is general in nature and for your specific investments please seek specific advice.

Hamish Pryde BBS, MInstD, CA (PP)

Director

8 August 2011

Test of Business

Wed, 18 Jan 2012 13:00:00 GMT

Test of Business

The word "business" for the purposes of the Income Tax Act 2007 includes any profession, trade, or undertaking carried on for profit. Consequently, the fundamental notion of the concept of a business is the exercise of an activity in an organised and coherent way to attain the end result of a profit.

The question of whether a taxpayer is in business involves two aspects. These are the nature of the activities, which must amount to a profession, trade, or undertaking, and the intention with which the taxpayer engages in those activities (the venture must be carried on for profit). An intention to make a profit is sufficient, even though, when looked at realistically, there seems to be no real prospect that that goal can be attained.

Example:

Expenses were deductible where the evidence showed that the taxpayer intended to carry on a farming activity for pecuniary profit. The fact that the profit expectation is not realised is not a ground for saying that the activity is a hobby, and not conducted for gaining assessable income. Whether the venture is carried on with the required intention turns on the expressed intention of the person and an evaluation of the person's conduct.

Intention

Matters which may be considered in ascertaining a person's intention are:

Summary

Claiming losses from hobby operations can lead to the Inland Revenue Department denying losses in current and previous years, resulting in a short fall of tax. A hobby will never likely turn a profit. To claim losses as a result may "come back to bite".

Overseas Income

Wed, 23 Nov 2011 13:00:00 GMT

Overseas Income

If you receive overseas income and are a tax resident in New Zealand, you shall be taxed in New Zealand on your worldwide income.

Tax Residence

The rules for determining an individual's residence for tax purposes are:

The permanent place of abode test takes precedence over all the other provisions.

Factors that, therefore, require consideration in determining whether there is a permanent place of abode in New Zealand are:

Normally all and not just some of these factors are examined to determine an individual's permanent place of abode.

Double Tax Agreement

Hamish Pryde - Chartered Accountant and Business Advisor - October 2011

OM-IP Investments

Wed, 23 Nov 2011 13:00:00 GMT

OM-IP investments have traditionally been a popular investment with kiwis, although they are managed in Australia, and are denominated in Australian Dollars. Many kiwi investors will be unaware that OM-IP investments are, in fact, not tax resident in Australia, but in the Cook Islands. At first, this is not extraordinary news, but the tax implications could be onerous, if you have an OM-IP investment. Recent changes to the tax treatment of overseas investments puts OM-IP investments in the basket of â€œForeign Investment Fundsâ€, which may result in a tax liability, even if the investment has not returned any â€œincomeâ€ to you, which would usually be in the form of interest or dividend payments.

This has been an area of focus for the IRD for some time. We understand the IRD has details of approximately 37,000 investors in OM-IP and has called for those people to voluntarily disclose their foreign investment fund (FIF) income. To date, only a few hundred disclosures have been made. We are advised that once the Tax Information Exchange Agreement between New Zealand and the Cook Islands comes into effect (which will be some time soon) the IRD will start pursuing those investors.

How it affects you - Anyone that may have a FIF income tax liability as a result of an investment in OM-IP, should talk to us now on how best to approach the position in their circumstances.

If your investment is less than $50,000, you are ok as you qualify under the de-minimis rule and are exempt. If your investment is more than $50,000, this investment is subject to the foreign investment fund rules and a FIF calculation is required with your year end income for tax purposes.

If you had advised all investments and income per your annual questionnaire we send to you, we would have completed the necessary calculations for you.

Sales Tips

Mon, 07 Nov 2011 13:00:00 GMT

Sales focuses on the interaction between people. Many people fear being seen as a â€˜salespersonâ€™. Use the tips below as a refresher or pointer on how to sell more comfortably. Focus on the customer/client:when selling it is 90% about what the customer wants and only 10% about you! Listen:customers want to be heard and respected, listen well. Be positive:if you canâ€™t be positive about your product or service, donâ€™t try selling it! Build rapport: make the customer comfortable by building rapport through eye contact, body language, even the handshake. Be confident: practice may not make perfect, but it certainly helps you to improve. Build your confidence through practice or through attending clubs like Toastmasters Be balanced: many people focus so much on the details of their product and service that they donâ€™t focus enough on the sales process. Tell them what they need to know â€" not all you know. Dont overstretch: only agree to sell what you know you can deliver. Most clients are happy to start smaller and build up, but they rarely forgive you for knowingly overselling! Have fun: sales is a game, treat it as one and enjoy the selling process!

Do you have overseas earnings stashed in an Overseas Bank Account?

Wed, 12 Oct 2011 13:00:00 GMT

If you do, the Inland Revenue Department are looking for you. On 11 October 2011, Inland Revenue published a Revenue Alert which deals with the issue of New Zealand tax residents accessing income held in an offshore bank account using an offshore credit or debit card.

Key issue

"Inland Revenue is aware of New Zealand tax residents who may have taxable offshore income held in an offshore bank account, and this income may not be returned in New Zealand for income tax purposes. As well as paying less income tax, people who conceal income offshore will also pay less child support; decrease their student loan repayment obligation; and may claim a larger entitlement to Working for Families Tax Credit (WFFTC) than they should."

The arrangement that Inland Revenue is concerned with typically entails:

Inland Revenue has also found that some people are structuring their affairs by using entities such as offshore trusts, foundations and companies to make the income appear to be outside the New Zealand tax system.

Inland Revenue's focus

New Zealand tax law requires a person to return and pay tax on all of their income, including any income sourced offshore and received into an offshore bank account, if the person is a New Zealand tax resident at the time that income is derived.

Inland Revenue is carrying out audits on a number of New Zealand tax residents who have offshore credit or debit cards and who have been found to hold offshore bank accounts or receive offshore income. Shortfall penalties, late payment penalty and use of money interest will be imposed where appropriate.

Investigations are also being carried out "to determine if a person is using the arrangement described in this Revenue Alert to evade or avoid New Zealand tax."

"Inland Revenue will continue to work to expand its network of Tax Information Exchange Agreements (TIEAs) and continue to work with its treaty partners towards global tax co-operation to help determine if a person is using the arrangement described in this Revenue Alert to evade or avoid New Zealand tax."

When is a market salary unable to be paid?

Wed, 21 Sep 2011 14:00:00 GMT

When is a market salary unable to be paid?

Following on from the Penny & Hooper case, there are however times when a market salary cannot be paid.

Examples of this :

There may be other non-tax reasons why a business may pay the individual less than an arm's-length party would receive over the short-term. However, in those circumstances, there should be no significant distributions being made to entities associated with the individual.

If the reasons above exist, then the non-payment of a market salary should be a legitimate tax position.

If in doubt, ask your Chartered Accountant.

Are you being paid a market salary?

Tue, 20 Sep 2011 14:00:00 GMT

Penny & Hooper - The History and the Result

The Supreme Court has dismissed the taxpayers’ appeal from the Court of Appeal’s decision reported as C of IR v Penny and Hooper (2010) 24 NZTC 24,287 and held that the fixing of the taxpayers’ salaries at artificially low levels so that the incidence of tax at the highest personal rate was avoided constituted tax avoidance.

Background

The taxpayers practised as orthopaedic surgeons. Initially, they each conducted their practice on their own account but then restructured their practice arrangements. The restructuring of Mr Hooper’s practice occurred in 2000 and that of Mr Penny’s in 1997. Each set up a company to purchase their practice. The companies were owned substantially by the taxpayers’ family trusts. Thereafter, each taxpayer was employed by their respective companies at a salary the Commissioner considered artificially low. The balance of the practice income in each case was treated as company income and paid by way of shareholder dividend to the family trusts.

Mr Penny had established a company/trust structure several years before the increase in the maximum individual tax rate from 33 cents in the dollar to 39 cents in the dollar took effect from 1 April 2000. However, after the tax rate change took effect, he limited the level of his salary and arranged for his family trust to lend back to him (interest free and with no repayment terms) a large part of the distributions of company profits that it received by way of dividend.

The Commissioner made assessments increasing the taxable incomes of Messrs Penny and Hooper for the tax years ending 31 March 2002, 2003, and 2004 by the amount equal to the difference between the salaries actually paid and what the Commissioner assessed as commercially realistic salaries for their services. The taxpayers appealed to the High Court.

In a decision reported as Penny v C of IR; Hooper v C of IR (2009) 24 NZTC 23,406 , the High Court found that what each taxpayer did was not an arrangement, which had the purpose or effect of tax avoidance. The Commissioner appealed to the Court of Appeal.

The Court of Appeal reversed the High Court’s decision and declared the arrangements void against the Commissioner for income tax purposes. The taxpayers’ application for leave to appeal to the Supreme Court was granted ( Penny and Hooper v C of IR (2010) 24 NZTC 24,396 ).

The Supreme Court

The Supreme Court noted that the case differed from Ben Nevis Forestry Ventures Ltd v C of IR (2009) 24 NZTC 23,188 in which the Supreme Court explained the proper approach to questions of tax avoidance. In the present case, there was no question of the taxpayers failing to comply with specific taxation provisions. The trading structure adopted by the taxpayers was a choice they were entitled to make. There was also nothing unusual or artificial in a taxpayer then causing the company under his control to employ him on a salaried basis. There was also no failure to comply with any express requirement of the Income Tax Act in the setting of the salaries, since there was none. The Supreme Court said that this was therefore a case in which, compliance in other respects being accepted, it was possible to move straight to s BG 1 and to ask whether the use of the structure, which was adopted when the salaries were fixed, was beyond Parliamentary contemplation and resulted in a tax avoidance arrangement.

The Commissioner’s case was that the avoidance resulted from a single step taken by each taxpayer, which took advantage of an otherwise unobjectionable business structure. That step was the taxpayer’s actions on each side of the employment contract relationship (as controlling director of the employer and as employee) in setting an artificially low level of salary, which had the effect of altering the incidence of taxation. Once that artificial step was taken, matters proceeded in an orthodox manner with the payment of the bulk of the company’s profits on a fully imputed basis to the shareholding trusts. That step made possible the distributions of dividends and the benefits, which followed.

The Supreme Court held as follows:

1. Tax avoidance can be found in an individual step in a wider arrangement. That step, when taken can make the wider arrangement a tax avoidance arrangement. Where a particular step is done repetitively, such as in this case in the annual setting of the salary levels, the step may or may not amount to a tax avoidance arrangement depending on its purpose or effect on each occasion.

2. If the setting of the annual salary is influenced in more than an incidental way by a consideration of the impact of taxation, the use of the structure in that way will be tax avoidance.

3. The question of whether the fixing of a salary on a particular occasion involved tax avoidance could be answered by looking at the effect produced by the fixing of the level of the salary in combination with the operation of the other features of the structure.

4. The fixing of the low salary in this case enabled most of the profits of the company from the professional practice to be transferred by way of dividends straight through to the trust, avoiding payment of the highest personal tax rate, and then used by the trust for the taxpayers’ family purposes.

5. Although another purpose of the arrangement was the protection of assets from professional negligence claims, this could not have been the sole or dominant purpose because of the protection already in place through the combination of the accident compensation scheme and insurance cover. The taxation advantage produced by the fixing of the salaries at low levels was the predominant purpose.

6. Although the New Zealand tax statute and some business practices have changed considerably since the decisions of the High Court of Australia and the Privy Council in Peate v Commissioner of Taxation of Commonwealth of Australia (1962-1964) 111 CLR 443, affirmed [1967] 1 AC 308 (PC), Parliament has deliberately preserved, and in fact enlarged, the New Zealand general antiavoidance provision which corresponded to s 260 in Peate.

7. The artificially low salary settings in this case reduced each taxpayer’s earnings but at the same time enabled the company’s earnings (derived only because of the setting of the salary levels) to be made available to him through the family trusts. In reality, the taxpayers suffered no actual loss of income but obtained a reduction in liability to tax as if they had ( Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 (CA); Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 555 (PC) cited).

8. Although there was no concept of a commercially realistic salary to be found in the Income Tax Act, the Act does require that taxpayers should not structure their transactions with a more than merely incidental purpose of obtaining a tax advantage unless that advantage was in the contemplation of Parliament.

9. If the salary is not commercially realistic or, objectively, is not motivated by a legitimate (that is, non-tax driven) reason, it will be open to the Commissioner to assert that it was, or was part of, a tax avoidance arrangement.

The Supreme Court concluded that the taxpayers had failed to show that the Commissioner acted incorrectly in treating the arrangements made by the taxpayers as void against him for income tax purposes under s BG 1.

Penny and Hooper v C of IR SC SC62/2010 [2011] NZSC 95, 24 August 2011.

The Corporate Trustee Model

Mon, 05 Sep 2011 14:00:00 GMT

The use of Family Trusts has been around for a long time; hundreds of years in fact. However, the use of a Corporate Trustee is fairly new. I will not claim to have thought of the idea, but I am a big fan of the Corporate Trustee model.

The concept of Family Trusts is simple: You want to get rid of assets, to own less. You do this by selling the assets to someone else; however, you want to retain some control over them. A Family Trust allows the ownership of your valuable assets to be in someone else's name while you still have the use of them.

However, the Family Trust must be seen to be a separate entity and not an alter ego of you. There must be a separation of control. Usually an Independent Trustee is included as one of the Trustees, and this will often be the Settlors Lawyer or Accountant. You set up the Trust; you are putting assets into the Trust; you are the Settlors. Having an Independent Trustee helps avoid any suggestion that the Settlors continue to have control of the Trust assets, in which case Inland Revenue may argue that the Trust is a "sham" or an alter ego of you and therefore invalid. The IRD would ignore the Family Trust and treat the assets and income of the Trust as your own. This defeats the purpose of the Trust creation.

Trustee decisions must be unanimous, unless the Trust Deed allows for majority decisions. Trustees must ensure that proper records are kept of their decisions. The Trust has a lifetime of 80 years. The usual practice was to have three Trustees named on the Trust Deed. The Trustees are the people (or entity) that appears on the Title Deed of property and on the loan documents. If a Trustee was to change for whatever reasons, then new documentation and legal fees are required to effect the change. I believe that this is inefficient.

As a trusted business advisor, I am often asked to act as an Independent Trustee. I have many years experience in governance roles and hold a number of Director and Trustee positions. The use of a Corporate Trustee model also prudently manages my Trustee positions.

In general, the main duties of Trustees are:

Â· To act in the best interests of the beneficiaries of the Trust.

Â· To act in an even-handed manner between beneficiaries, and between groups of beneficiaries.

Â· Not to use knowledge or influence gained as a result of being a Trustee to advance the Trustees own position (except when the Trustee discloses his or her personal interest to the Settlor of the Trust and obtains the Settlors informed consent).

Â· To act personally rather than delegating decisions to others (except if the Trust document explicitly permits delegation).

Â· To act honestly and with the level of skill and care that would be expected of the reasonable businessperson in administering the affairs of others.

Â· To be thoroughly familiar with the terms of the Trust in the Trust Deed (the main Trust document), and with who the possible beneficiaries may be and what the assets and liabilities of the Trust are.

So how does a Corporate Trustee work? A Corporate Trustee is a Company and as such, normal Company rules apply. The Directors are the day-to-day managers. However, the Shareholder has the power of appointment of the Directors and must approve major transactions. This is the independence necessary to prove independence. The liability for negligent actions rests with the Directors of the Company.

Some Banks and Finance Companies do not understand Corporate Trustees and Family Trusts. They do not â€œgetâ€ the idea that a Family Trust is not a separate legal entity like a Company. A Family Trust is the name of the collective bosses of the Trust; namely the Trustees.

The owner of the assets of the Family Trust is the Trustee, who holds the assets for the benefit of the beneficiaries. Therefore, the beneficiaries are the most important people as they are the beneficial owner of the assets held in Trust. This is the most important concept.

The legal owner of the assets; the Trustee who holds the assets on trust for the beneficiaries (which in this case is the Corporate Trustee), should be the name listed as the owner. Nevertheless, the Bank will often want the Family Trust name as the owner so it fits into their understanding. The Bank will operate the account based on the signatures mandated to operate the account. Using the collective name will be fine.

The holder of the Power of Appointment of the Trustees is where the ultimate power lies. In the Trust Deed, the person(s) who hold the power of appointment shall be named here. This position can hire and fire the Trustees. It is important to understand your Trust Deed and what you can and cannot do; especially with the ultimate power of appointment.

The use of a Corporate Trustee is forward thinking; and is a more robust structure, which I thoroughly recommend.

The Dangers of Discounting

Sun, 07 Aug 2011 14:00:00 GMT

Discounting impacts perceived quality

Don't count on discount

Email Hamish

Just because it's always been done that way

Thu, 21 Jul 2011 14:00:00 GMT

The story goes:

Whilst a chap was at his girlfriend's parents for dinner one night, he noted that his girlfriend chopped off each end of the roast before placing it in the roasting dish to cook the roast.

Peaking his interest, he enquired “Why did you chop a centimetre off each end?" and the reply was “My mother always does it that way". His girlfriend's mother happened to be in the other room, so the chap promptly went and asked “When you cook your roasts, why do you cut a centimetre off each end"? The reply was “Because my mother always did that".

Her mother happened to be in the room and over heard this story and said “Well the reason for that was because my roasting dish was only quite small and I had to cut off each end so that the roast would fit".

The moral of the story, just because it has always been that way, doesn't mean that it is right!