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Why choosing the right accountant is critical for small business

The importance of choosing the right accountant cannot be over-stated.

If you are a small business owner, no day seems long enough to accommodate all that you want to do. In all probability, you are a “one-man band” who wears many hats and has to handle everything from sales and marketing to purchasing and administration. The best way to tackle this problem is to prioritise and decide what you need to do yourself and what is best done by outsourcing work to other specialists – such as an accountant.

Almost certainly, you are unlikely to have accounting and tax expertise and this is a job that you should immediately trust to an outside expert. No matter how small your business, the right accountant is an invaluable business partner who can add value in many ways, beyond the obvious services of accounting and tax.  They will be a highly competent professional and examples of the areas where they can assist you are:

Accounting services. Like many small-business owners, you may have considered maintaining the books of accounts yourself and this is no bad thing because it will give you hands on familiarity with every aspect of your business.  However, it is wise to consider outsourcing – simply because it might take up a good deal of your time that would be better used elsewhere.  One way to handle this problem is to ask your accountant to choose a good accounting software package that is easy to operate and implement.

Tax services.  A good accountant will be pro-active about your tax planning and, well before the end of the year, they should be consulting with you to structure your business for maximum tax efficiency. You should, however, ensure that they do not flirt with the limits of tax laws and use dubious tax loopholes that could land you in trouble later.  They could save you quite a bit of money on tax that you might have otherwise unnecessarily paid.

Business advisory services.  An accountant can be a great help when it comes to designing and implementing business systems so that your business can run more smoothly.  They can help you carry out a cost benefit analysis to ensure that any investment in your business will have a positive impact on your bottom line.  They can help you draw up business plans that will serve as a blueprint and a guide. Finally, they can help you identify sources of finance and assist you when negotiating and finalising your funding.

As you can see, building up a mutually rewarding and fruitful relationship with your accountant will have immense long-term benefits. As they gain better understanding of you and your business, encourage them as part of their accounting services to be pro-active in suggesting ways to improve your bottom line. On your part, for any decisions that have major financial ramifications, you should seek to consult your accountant before making them.

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Implications for residential investment property owners

In the build up to last month’s budget, the government made no secret that it wanted to overhaul the tax treatment of residential property investments.

In his 2010 budget, Bill English summed up the property investment aspects of his budget as an effort to introduce a fairer tax system to ensure that the tax treatment for investment properties is consistent with other types of investment.

This article sets out a summary of the changes that will impact residential property investments.

Changes to depreciation
With effect from the 2011-2012 income tax year, residential (and commercial) landlords will no longer be allowed to claim depreciation allowance for buildings with an estimated useful life of 50 years or more.  Under existing rules, landlords, property investors generally claimed either a 2% or 3% deduction on the purchase value of the building. 

With immediate effect, the 20% loading on some plant and equipment (P&E) has been removed on all new P&E bought since 20 May 2010.

Changes in how Loss Attributing Qualifying Companies (LAQCs) are treated
LAQCs have long been a popular structure for many New Zealander residential property investors.  The main attraction has been that losses could be deducted to reduce LAQC shareholders’ taxable.  

These are going to be changed.  But, currently, there isn’t enough information available on how the new LAQC regime is going to work.  Bill English commented that, after after a brief consultation period, new legislation will be introduced so that, with effect from 1 April 2011, LAQCS will be taxed as limited partnerships.  Submissions will close on July 5 2010.

Tax losses will continue to be attributed to shareholders, but taxable profits will also be attributed to those shareholders and not retained within the company.  Therefore profits may be taxed at the shareholders’ top personal income tax rate of 33%, rather than at the lower company tax rate of 28%.

Changes to GST
With effect from 1 October 2010, GST will rise from 12.5% to 15.0%.  This will have a real impact on residential investment property owners as the cost of insurance, rates, property management fees, and professional services will increase.

As many residential investment property owners are not normally registered for GST, they will not be able to claim back the GST component of these expenses.  So unless rent is increased to offset these additional costs, residential investment property owners will see less cash in the bank.    

The changes to depreciation on buildings may have major cash flow implications.  Added to that, the changes to the LAQC regime are wide reaching.

If you are an investment property owner, you should contact us to review your property investment portfolio.  You’ll need to consider the implications these changes will have for you.  You should also seek advice before buying more investment properties or changing existing ownership structures.

The IRD has recently indicated that it intends to increase its audit activities on investment properties and will investigate these transactions more regularly.

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The best way to save money on your tax

Everyone knows that tax, like death, is inevitable. Are you going to take the attitude that because it is inevitable, you are going to do nothing about it? Do you really know how much you shell out in income tax and other taxes every year? Nobody is suggesting that you evade taxes but wouldn’t you like to reduce them to the minimum? Do you know and appreciate the difference between tax avoidance and tax evasion?

What does your liability for tax actually mean? Let us for a moment places your tax payment in perspective with your other expenses. Some statistics from the US suggest you spend about 17 percent of your income on housing and a little over 11 percent on medical expenses. Food and transportation will cost you roughly eight percent each. All this is however dwarfed by your tax payment which accounts for fully 32 percent of your income. If you feel that you are getting a raw deal, you are absolutely right because the government takes away in taxes as much as you spend on housing, transportation and food combined. When you talk about economising, you generally look at items of expense but shouldn’t you really be looking to save money on the #1 culprit-your tax payments?

Change your attitude about taxes. Do you want to continue to do nothing about your taxes because that is what is the fellow next door is doing? Or do you hate these unnecessary payments with a vengeance that makes you determined to do something. Recognizing that you can do something about paying unnecessary taxes is the first step to solving your problem. Are you now worked up enough to read on?

Saving on taxes pays long-term dividends. Let us assume that you find some tax saving strategy that will save you $4000 every year. If you invest this money every year for 30 years and you can manage an annual return of 11.5 percent every year you will accumulate over $1 million at the end of 30 years. Even if you can save only $2000 every year, you will still end up with a retirement nest egg of over half a million dollars. Certainly nothing to be sneezed at. Even more important, you have not cut your spending because the money has come from the government who would otherwise have taken it as taxes.

Devise your tax saving strategies: there is plenty of information available on how to save tax either on the Internet or in your local library. It is worth your while to do your research so that even if you identify several small savings, the cumulative effect on your financial position justifies spending time on it. Or you could simply go to a tax expert who will devise these strategies for you.

In this case, it is no exaggeration to use the old cliché that time is money. Get started on your efforts right away by hiring a quality tax expert and then let your savings multiply out of your taxes.

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How to avoid stress and save money on your New Zealand taxes

A good accountant can save you money on your tax by helping you to organise your affairs properly and to take advantage of all the possible tax deductions that are available. If you are running a small business in New Zealand, you are unlikely to have the knowledge or experience to manage your own tax affairs. When you consider return on investment, the fees that you pay a top-flight accountant will probably be one of the best investments you make.

However, even the best accountant is no magician, and unless your financial affairs are recorded and documented properly, there is not much that they will be able to do. You should also remember that the New Zealand IRD prefers that you appoint a tax agent (normally a chartered accountant) to administer your tax affairs.

The first step is therefore to organise your accounting and recording system in a manner that will minimise the difficulties of preparing your tax returns.

Here are some simple tips on how to organise your paperwork instead of stuffing it into the nearest available shoebox or desk drawer:

• Prepare and label folders for each month of the year. Place every piece of relevant paper in the appropriate folder. Whenever you have a little time, you can arrange the contents of a folder, and itemise income and expenses.
• Consider acquiring a corporate credit card to which you can charge all your expenses. The credit card company will present you with comprehensive and neatly itemised bills, in effect doing your dirty work for you.

Let us now consider a few ways in which you can reduce your tax bill.  A chartered accountant is the best guide, so rely on their advice.

Bring forward planned expenditure: If you happen to be planning to spend money on marketing or refurbishment and redecoration, incur the expenditure immediately. You need to spend the money anyway and doing it immediately will give you a nice little tax break.

Take advantage of capital deductions: Bring forward expenditure you plan to incur on items such as machinery or other fixed assets. In consultation with your chartered accountant, pick items that will give you the highest possible depreciation benefits. If you plan well, it is possible to find items that will give you tax benefits of 100 percent.

Do you really want to go on paying more tax than you should? If not, employ the services of a high-quality accountant and start planning your New Zealand tax.

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Your simple guide to New Zealand tax

If you are running a business in New Zealand, you are liable to pay tax on profits after deducting allowable expenses from your income. Many people have an irrational fear of tax issues but if you familiarise yourself with the process and the regulations and hire a competent accountant to help you with compliance and planning, you can maximise your tax efficiency.

The New Zealand Inland Revenue Department (IRD) expects you to submit a properly completed tax return every year and this is in turn based on your annual financial statements. The department prefers you to have a tax agent (normally a chartered accountant) to handle your tax affairs. If this is the case, they will normally allow you an extension up to 31st of March of the following year to file your return.

If you fail to meet this deadline, you will find yourself in an unpleasant situation with the following consequences:

• You could face penalties and “Use of Money Interest”.
• You will probably lose your “Extension of Time” with your tax agent.
• If you continue to flout IRD regulations, you could face stiff monetary penalties and possibly criminal charges.

Instead of delaying or being paralysed by fear, take decisive action and contact your accountant or your tax agent immediately. The process is not as complicated as you think. And you should let your accountant take charge of the process. Here is a sample of the kind of information you should provide to your accountant for the preparation of the tax return.

• The details of any major property transactions
• Complete bank records and bank statements
• The details of all cash transactions
• Your general ledger, if you have one
• The details of your accounts receivable and your accounts payable
• Details of the inventories, fixed assets and motorcars

Your accountant will have more detailed requirements which you should fulfill scrupulously.  We generally send our clients checklists that help them collate the information we need and keep our fees down.

How to select a tax agent

Planning your tax affairs to minimise the strain on you and maximise your tax efficiency depends almost entirely on your choice of the chartered accountant to act as your tax agent. What you need is pro-active and efficient advice. Your accountant should:

• Stay in touch with you to inform themselves of how your business is going
• Provide you with input on major investment and financial decisions to maximise your tax advantage
• Help you to prepare a business plan and to monitor the progress in accordance with the plan. This will ensure that you can take timely corrective action as required.
• Help you to maximise your operating efficiency and streamline your cash flow.

Stop spending sleepless nights worrying about your tax affairs.  Find yourself a top-flight accountant who can shoulder some of your worries and assist in efficient management of your tax.

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Planning for success in your New Zealand business using your accountant

Your accountant will tell you that small business enterprises are the backbone of the New Zealand economy and are the biggest employers in the country.

Ninety percent of these enterprises employ less than 20 people each. This is not surprising, as New Zealanders are highly entrepreneurial and willing to give new business ideas a go. However, many of these entrepreneurs will lack knowledge and experience in business planning, and should turn to an accountant for help.  An accountant will provide input on a variety of issues and will express your ideas in meaningful financial terms.

A business plan is both a route-map and a blueprint. You can plan the best possible route to your objective and use milestones to measure your progress. Some people believe that business planning is akin to crystal ball gazing but this is not strictly true. If you can create a proper business plan with the help of a chartered accountant, you will be prepared for any unpleasant surprises or eventualities along the way.

Reaching the milestones that you created will let you know whether or not you are on course, and if not, what corrective action is required and when.

Business plans may be created in various ways depending on the advice of your chartered accountant but the following three elements will need to be addressed:

• Business Objective: This is what you are trying to achieve.  Since the purpose of starting a small business is to make money, a business objective should best be defined in financial terms. Common measures of business objectives include return on investment, return on capital employed, return on net worth, growth and so on. Your chartered accountant will help you to devise the appropriate measure.

• Business Strategy: Strategy is one of the most misused terms in business terminology, so be sure to understand it clearly.  If the objective is what you are trying to achieve, the strategy is how you are going to achieve it. Clearly, strategy has no meaning without an objective and vice-versa. If you cannot find a strategy to achieve your business objective, there’s a good chance that your objective is over ambitious.

• Business Behaviour: It is important to recognise that businesses behave just like people, and the objective and strategy must be in consonance with the behaviour. For instance, there is little point in forcing aggressive objectives and strategies on a highly conservative business.  If you must be aggressive, make sure that the right people with the right attitudes are in place first.

You can see for yourself that a sound business plan is an essential prerequisite for success. Why don’t you get started today by hiring a good firm of accountants?

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A guide to tax deductible expenses for the New Zealand property investor

Expenses that are deductible for tax for investments in New Zealand property follow the general principle that the expenses should have been incurred in connection with the property.  Thus expenses of the following nature would be fully deductible for tax:

- Accountancy fees for the preparation of property accounts,

- Bank charges both for loan applications and administration fees provided they relate to the property

- Small items of routine repair say for less than $5oo

Certain expenses, to be eligible for tax deductions, require some explanation.

Home office expenses: This is the claim for a tax deduction if you are running your property business out of your home. The costs that can be claimed include proportionate amounts of mortgage interest payments, insurance, utilities and so on.

The New Zealand IRD department is unlikely to allow home office expenses in the case of properties that are passively managed. In other words, your property investment needs to be actively managed and to qualify as a business. To qualify, the home office must not include a bed.  Apparently, the IRD department have been known to check. Consult a chartered accountant if you have any doubts.

Insurance: Any legitimate expenses in connection with insuring your home and its contents are fully deductible for tax purposes. Many property investors take out home and contents insurance on their income properties because many items are not covered by the replacement cover of a home insurance policy. Banks often stipulate mortgage insurance cover in the case of a high loan to value for income properties. These premiums are also fully deductible.

Legal fees: There are two elements to the fees – mainly fees for property conveyancing and fees for mortgage registration. The IRD will allow the deduction for mortgage registration but considers the conveyancing costs to be a capital cost and therefore not deductible. It is advisable to ask your lawyers to bill separately for the two elements. If no split is readily available, the normal practice is to claim a deduction of 50 percent of the total bill.

Interest costs: This is by far the highest cost that a property investor is likely to incur and therefore requires careful consideration. The cardinal principle is that the borrowing on which interest deductions are being claimed should have been used for the sole purpose of acquiring the income property.  If the borrowing for the acquisition of the income property is not properly structured, there can be a considerable loss of tax efficiency. The situation is quite complex and you should consult your chartered accountant before structuring the finances.

Investing in New Zealand property can be a rewarding experience but before you begin to do so, retain the services of a top-notch accountant to handle your tax.

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How your accountant can help establish the right business structure

You should involve the expert services of an accountant as soon as you have decided that you are going to set up a business in New Zealand.

You will need to take a number of key decisions right at the beginning and your accountant can help you get these decisions right. Not that many of these decisions cannot be rectified later, but, if you get them right in the first place, you can get on with establishing your business.

You should note that the Inland Revenue recommends that every business owner has a business agent (normally an accountant) to oversee tax affairs.

Unless you have a substantial amount of business experience, you are going to need a lot of help in establishing a successful business. You will find that a good accountant is a one-stop shop for a whole host of business services that you may require. Their services range from accounting & taxation to business advisory services such as business planning and business organisation.

Obviously, your accountant is going to charge for their services, just like any other professional. But don’t be afraid of asking about their fees in advance so that you know exactly what their advice is going to cost.

Set up an appropriate business entity with the help of your chartered accountant. The three most common business structures in New Zealand are sole traders, partnerships and limited companies.  Here are just a few salient features for each one:

Sole trader

The owner or proprietor owns the business outright and is completely in control. The owner is entitled to all the profits (or suffers all losses) of the business and is personally liable for the business’ debts. There are much less registration formalities and business can generally commence immediately.

Partnership

Two or more people “join hands” to run the business and they share the investment and management duties. They share profits in a predetermined percentage and each partner is personally liable for all the debts of the partnership. It is always advisable to draw up a partnership agreement in writing so that there are no ambiguities or disputes later. Here again, only minimal registration is required.

Limited Liability Company

The company is a separate legal person and trades in its own right. The legal process known as incorporation and the reservation of the company’s name needs to follow procedures laid down in the Companies Act. The liability of the shareholders and directors is generally limited to their investment in the shares of the company, unless they’ve provided personal guarantees to lenders or can be proven to have traded recklessly.

So, with the help of your chartered accountant, you’ll be able to choose the structure that suits your business objectives. If you are about to start a business in New Zealand, all the best. Get the best start possible by hiring a top-flight accountant.

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Safeguard yourself against reckless trading with the help of your accountants

Have you considered asking your accountants for help if you are a director of a New Zealand business that is in trouble?

Does the thought of your personal liability in the event of reckless trading bother you?

No New Zealand business is immune to the global economic downturn and this may be a good opportunity for you to review your responsibilities with the guidance of your accountants. Read the rest of this entry »

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How your accountant can help you become a successful property investor

Your accountant should, at the very outset, help you to determine your investment goals in acquiring investment properties.

You may be looking for high rental yields (often at the expense of capital appreciation) or for high capital appreciation (with a sacrifice in the yield). Your accountant will help you to plan the correct mix of investments in a well balanced portfolio. Your portfolio should probably be tilted towards rental yields since you will see returns on your investment almost immediately. Investing for capital growth takes a lot of patience since you can never be sure how long you will need to hold the property. Your accountant will also almost certainly advise you to settle for the bird in hand.

Get your chartered accountant to explain yields

If you are investing for rental yields, the underlying assumption is that the value that you are willing to pay for a property depends on how much rent you will receive.

With the guidance of your accountant, establish a minimum yield below which you will not consider buying a property. You may decide that a minimum yield should cover all of your borrowing costs, assuming that you are borrowing 100 percent of the value of the property.

If mortgage rates are running at seven percent per annum, rental yield should be seven percent plus. In other words, let’s assume that you are considering a property for $400,000. You would only consider buying it if you can rent it for at least $28,000 per year. If you spend some time scouting out rentals for similar properties, you can arrive at a pretty accurate estimate of your yield.

Ask your chartered accountant about internal rate of return (IRR)

IRR is a more complex calculation but there are a number of spreadsheet software packages that will perform the calculation for you. Factors such as capital appreciation, rental, and expenses (like taxes and insurance and tax benefits) are included in the calculation.

The internal rate of return will be the return that you achieve on the capital that you have actually invested. For example if your return is $28,000 per annum on an investment of $360,000, your IRR is 7.78%.

IRR versus yield

Whilst IRR can produce a more accurate investment appraisal, subjective factors such as capital growth can render it unreliable. You are probably better off staying with the simple and easy to understand yield method. Concentrate on maximising rental returns and treat any capital growth as a bonus.

Rental properties have been an excellent investment for many Kiwis. You should consider them as an integral part of your investment portfolio. Get started on your investment plans today by getting in touch with your accountant.

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