Johnston Associates Chartered Accountants

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Financial Strategy for the Holidays

Have you got a strategy for a financially stress-free holiday period?

Holiday breaks are a time to spend with family, friends & have a chance to recharge for the year ahead. We look forward to warmer weather and finally setting up an out-of-office email for the break. However, for business owners, this time can be stressful without careful cash-flow planning.

Even if you do continue to operate through the holiday shutdown season, your customers’ financial behaviour may not remain the same.

It can be pretty disappointing to work hard all year only to find that once you have paid staff, overheads and creditors, you have little or nothing left in the bank to cover your own time off.

The strategies and tips shared below are generalised, however, we are here if you need to budget and prepare a cash-flow forecast. We can also help if you need assistance in applying for short term finance to get you through the break.

Why is cash-flow planning particularly important at this time of year?

Staff leave needs to be covered in addition to your normal fixed overheads like rent, creditors and tax compliance. The budget and forecasting process ensures you know your numbers and are prepared. If you are shutting down, you won’t be driving revenue during this period and sales may take time to get started again in the new year.

Here are some simple strategies that can help

  • Decide your Christmas and holiday break dates – confirm these with staff, customers and suppliers.
  • Budget and plan for annual leave – remember the pay rates may be higher than standard hourly rates, also factor in statutory public holidays.
  • Decide – if you are going to pay out leave in full at the beginning of the Christmas break or continue to pay as usual throughout the break.
  • Review your work in progress (WIP) – plan to complete jobs or services that can be invoiced and paid before Christmas (remember if you don’t invoice and get paid before Christmas, you may not see the money until mid to late January).
  • Capacity planning – There is often a rush to get everything done before Christmas, whether it’s the kitchen benchtop installed or the beauty treatment before the break, so make sure you have the capacity to maximise on this.
  • Stock-take – Do you need to order in goods now to be able to complete work in progress? Check that there is stock on hand available.
  • Making an arrangement with the IRD – if you find you can not make payments, it is possible to apply for an instalment arrangement. There are costs associated with this, however it may provide a solution that gets you through the holiday period. Talk to us, we can help.

Need financial support?

If you can’t make ends meet, now is the time to organise short term financial relief like an arranged overdraft of loan, rather than hoping it will come right. Please let us know if you need any help with cash-flow forecasting, budgeting or finance applications.

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Are you owed a refund from ACC?

If you were in your first year of self-employment between 2002 and 2017, or paid provisional ACC levies after ceasing trading, ACC may owe you a refund. Customers receiving refunds will also receive an interest payment.

ACC will refund:

  • all first-year levies collected between 2002-2017 from self-employed customers who worked full-time (averaged over 30 hours per week over the financial year), did not have a mix of employee and self-employed earnings and did not cease being self-employed in the same year.
  • all businesses who paid provisional invoices and weren’t required to do so because they later ceased trading or changed their business structure.

ACC expects the refund process to be completed by 31 March 2019.

What you need to do

To find out if you may be eligible for a refund go to acc.co.nz or use MyACC for Business. If you may be eligible, you’ll be prompted to provide up-to-date contact details.

For more information and updates about ACC levy refunds go to acc.co.nz, call 0800 222 776, or email business@acc.co.nz

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Ring-fencing of residential rental losses

Draft legislation has been introduced to restrict the way losses from residential investment properties can be used for tax purposes. It is possible the draft legislation will change as it works its way through the Parliamentary process, but its objective will remain.

That objective is to prevent rental losses being offset against other types of income to reduce the investor’s overall tax payable. The changes will take effect from the start of the 2020 income year – ie 1 April 2019 for most taxpayers.

We will be watching the progress of this draft legislation with interest. We expect the resulting law changes will have substantial implications for investors whose rental activities continue to generate losses, or whose future intentions – for example, changed debt or financing arrangements, acquisition of additional properties or planned repairs and maintenance expenditures – may result in negative rental returns in any given year. In a worst-case scenario the proposals have the potential to prevent residential rental losses from ever being used.

There are essentially three things an investor should do before these rules come into force on 1st April 2019:

Firstly, review the maintenance requirements on your buildings. If you are budgeting for repair work in the future that would be costly enough to create a loss in your portfolio, it may be sensible to consider undertaking this work in what remains of the 2019 tax year. You have only four months left to generate deductions that won’t be subject to ring fencing.

Secondly, if you are an investor with other business interests, consider booking a consultation to discuss the possibility of moving debts in your property entities to trading businesses. For example, you may have a trading company where you can refinance a shareholder loan account or you may have imputed retained earnings that have been reinvested in the business to date. Money could be borrowed in the business and used to pay out a dividend from retained earnings to shareholders who in turn use these funds to reduce debts in the property portfolio. The resulting interest costs in the business are deductible without being ring fenced and the property portfolio’s position is improved.

Thirdly, If you do have a loss making residential property portfolio, consider booking an appointment to examine the opportunity cost of retaining low yielding properties. If a property can be sold where more interest is saved through debt reduction than the lost rental income from the property the overall portfolio becomes more profitable, and now, more tax effective.

If you would like to know more about how these changes might affect you personally, please contact us for further information.

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Top accountancy firms excel at far more than just numbers

Chartered Accountants Australia and New Zealand (CAANZ) has published its second annual list of the top 30 accounting firms and we are delighted that Johnston Associates has been recognised as the leading firm in the $10m-$19.9m revenue range.

The top accounting lists benchmark firms based on revenue, pro bono hours, gender diversity and innovation.

Key findings from the data gathered indicate a pattern in accountancy that is at the core of Johnston Associates vision and practice – people, relationships, sound advice and interpreting numbers to deliver a business advantage are the key skills that define great firms.

“Once the perception was that to be a successful accountant, you needed a calculator, a good head for figures, and a less than sparkling personality. But the top three skills for accountants wishing to be successful in the coming five years are adaptability/agility, emotional intelligence and critical thinking. Increasingly totting up the numbers, and preparing financial statements, can be done by artificial intelligence, but it still requires humans to interpret the numbers, and advise business owners on how to take their next step forwards”, wrote the Sunday Star Times in its feature dedicated to the survey results.

Chartered Accountants Australia and New Zealand chief executive Rick Ellis said: “As automation moves in, the communicators, the problem solvers and the adapters will take over. Human and technology skills will be even more in demand.”

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Setting up a company – not always the best option

Often the first reaction when thinking of setting up a new business or undertaking a new venture is to establish a company. Companies are familiar to us, offer limited liability, are quick and cost effective to establish (at least at a basic level) and people feel as if they understand companies. However, despite their popularity, we commonly see situations where a company is not in fact the best option, due to some of the tax pitfalls that can arise from using a company.

Some situations where companies can present problems and increased tax costs include:

• Where one or more investors have tax losses available to them (or may do in the future)
• Where one or more investors are on lower tax rates for some reason
• Where one or more investors have dependents to whom income could potentially be distributed and then taxed at lower tax rates
• Where capital gains are likely during the course of the project or business
• Where one or more investors are overseas tax resident, or where New Zealand tax residents are investing overseas.

We recommend, particularly in these situations, that consideration is given to other structures such as a limited partnership, an unincorporated joint venture, or a look through company (LTC) rather than an
ordinary company. These can be put in place and deliver the same or similar commercial advantages (such as limited liability) but also potentially much improved tax outcomes in comparison to an ordinary
company structure. This is due to the fact these types of entities don’t pay tax themselves, rather each investor includes their respective share of the overall profit or loss in their own tax return, and they can then deal with the
tax consequences of that in their own way based on their own appetite for risk and their own circumstances. This also provides greater flexibility to adapt to law changes etc. in the future.

If you’re not sure about your situation give one of our specialist tax advisers, or your usual Johnston Associates adviser, a call so you know you’re on the right track.

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Annual Trust Review and Annual Minutes

There has been a perception amongst some commentators that with the abolition of gift duty, the need to have annual trustee meetings for a trust is no longer important.

Nothing could be further from the truth as the regime post gift duty and the current Law Commission Review of the Law of Trusts has, in our view, increased the need for trusts to be properly established and managed.

Good record keeping is essential. Where we prepare annual financial statements for the Trust, we also prepare Annual Minutes.

Those Trusts that only own the family home and have recently obtained an IRD number, should seriously consider having an annual meeting of Trustees and preparing annual minutes.

To talk to one of our experts please don’t hesitate to contact us.