Most mum-and-dad businesses do better with non-chartered accountants says Levertoff

Most mum-and-dad businesses do better with non-chartered accountants says Levertoff

Small businesses are usually better off engaging an accountant who is not a member of NZICA according to Michael Levertoff, of nzaccounting.com.

He says about 50% of all accountants in public practice are not chartered accountants – and that small business customers save money by employing accountants that are not chartered accountants.

“Chartered accountants are often more qualified than non-chartered accountants – which is great when you need that level of expertise, but a waste of money if all you need is basic tax compliance services,” says Levertoff.

And often, businesses will not notice any difference to the services they receive whether or not an accountant is a chartered accountant or not, says Levertoff.

“Complying with legislation is what is important – because that level of compliance keeps you on the right side of the Inland Revenue, and the Companies Office”, he says.

“But chartered accountants have a higher standard than basic legislative requirements because their focus is to ensure compliance both with New Zealand tax law and international financial recording standards.”

Levertoff believes mum-and-dad businesses do not require this level of reporting.

“If I asked most small business how much money you have in your business bank account, who you owe money to and who owes you money, most people know that without having to look at a balance sheet”, Says Levertoff.

He believes only businesses who have different departments where the left hand does not know what the right hand is doing need regular reporting between departments.

“I suggest most mum-and-dad business owners agree that financial statements produced at the end of the tax year add no value to their business and tend to gather dust on the shelf.”

He says this information is expensive to produce, is a waste of time and has nothing to do with tax compliance.

“It’s a myth that is sold to business owners and only profits accountants – but does not enhance the work most small businesses do. I mean, how on earth does an accountant think they know anything more about the plumbing industry than the plumber doing the work?”

Levertoff encourages small businesses to look around and make sure they are getting their tax work completed at the lowest possible price, as with any other service purchased.

“Just like any other service, accountants are there to serve their clients, not the other way around. It is the business owner who does the hard yards. If your accountant does not have this attitude, consider your options,” Mr Levertoff says.

Most mum-and-dad businesses do better with non-chartered accountants says Levertoff

Small businesses are usually better off engaging an accountant who is not a member of NZICA according to Michael Levertoff, of nzaccounting.com.

He says about 50% of all accountants in public practice are not chartered accountants – and that small business customers save money by employing accountants that are not chartered accountants.

“Chartered accountants are often more qualified than non-chartered accountants – which is great when you need that level of expertise, but a waste of money if all you need is basic tax compliance services,” says Levertoff.

And often, businesses will not notice any difference to the services they receive whether or not an accountant is a chartered accountant or not, says Levertoff.

“Complying with legislation is what is important – because that level of compliance keeps you on the right side of the Inland Revenue, and the Companies Office”, he says.

“But chartered accountants have a higher standard than basic legislative requirements because their focus is to ensure compliance both with New Zealand tax law and international financial recording standards.”

Levertoff believes mum-and-dad businesses do not require this level of reporting.

“If I asked most small business how much money you have in your business bank account, who you owe money to and who owes you money, most people know that without having to look at a balance sheet”, Says Levertoff.

He believes only businesses who have different departments where the left hand does not know what the right hand is doing need regular reporting between departments.

“I suggest most mum-and-dad business owners agree that financial statements produced at the end of the tax year add no value to their business and tend to gather dust on the shelf.”

He says this information is expensive to produce, is a waste of time and has nothing to do with tax compliance.

“It’s a myth that is sold to business owners and only profits accountants – but does not enhance the work most small businesses do. I mean, how on earth does an accountant think they know anything more about the plumbing industry than the plumber doing the work?”

Levertoff encourages small businesses to look around and make sure they are getting their tax work completed at the lowest possible price, as with any other service purchased.

“Just like any other service, accountants are there to serve their clients, not the other way around. It is the business owner who does the hard yards. If your accountant does not have this attitude, consider your options,” Mr Levertoff says.

Sponsorship: Tax, GST and Business

Sponsorship: Tax, GST and Business


Author: Michael Levertoff

If you are in business and want to sponsor someone, is it tax deductible? And what about GST?

What is “sponsorship”?
For the purposes of this statement it is first necessary to identify what type of expenditure is being considered, i.e. what type of expenditure constitutes sponsorship expenditure. The term “sponsorship” is used to cover a wide range of situations, with the usage reflecting considerable overlap with the concepts of “advertising”, at one end of a continuum, and “donations” at the other end. At one extreme, the taxpayer’s sole purpose is to “advertise” / promote the business with the amount incurred reflecting market forces and what he or she considers will best achieve the purpose of business promotion. At the other extreme, the taxpayer’s “donation” is for the sole purpose of benefiting the donee and business promotion is not contemplated or is merely incidental to the philanthropic purpose.

In between these two extremes, the taxpayer intends to promote his or her business in some manner when incurring the expenditure, but the expenditure made also benefits the recipient (or some other person) in a manner unrelated to the ordinary receipt of income from his or her income-earning activities.

This statement does not consider expenditure at the extremes of the continuum, i.e. expenditure made to commercial advertising media, at one end of the continuum, and charitable donations where business promotion is not a purpose, at the other end of the continuum. Instead, the statement focuses on the deductibility of expenditure in the middle of the continuum (referred to in this statement as “sponsorship expenditure”), i.e. where the taxpayer making the expenditure intends that his or her business will be promoted in some way, but that the recipient, or some other person, will also be benefited in some manner other than by the receipt of ordinary income from business or income-earning activities.

 There is no limit on sponsorships – spend away. However, sponsorship expenditure is only deductible under limb (b) of section BD 2(1) where a nexus exists between the expenditure and the taxpayer’s business or income-earning activity.
 There must be a nexus or necessary relationship between the expenditure and the taxpayer’s business or income earning activity.
 This requires a determination of the character of the advantage sought by the taxpayer in incurring the expenditure. This is a subjective matter, depending upon the taxpayer’s purpose when incurring the expenditure. The determination of the taxpayer’s purpose or purposes will require an objective analysis of surrounding circumstances, including the effect of the expenditure.

In order for the nexus test to be satisfied, the taxpayer needs to show that he or she intended that the business would be promoted by incurring the sponsorship expenditure. In this regard, the following objective factors will support a taxpayer’s contention that he or she intended that the business be promoted by the expenditure:
 The specific terms of the sponsorship arrangement, e.g. Is there a specific requirement for the recipient to promote the taxpayer’s business? What is the extent and prominence of the business exposure specified in the agreement?
 The place of the sponsorship arrangement in a coherent marketing strategy. For example, if a business’s market research has identified that potential customers frequently attend cultural events, then part of its marketing strategy may be to sponsor such events in return for its name and products being promoted during the event.
 The relationship between the market or potential market exposure capable of being reached and the taxpayer’s business. For example, market exposure at a tennis tournament is directly related to the business of a sports equipment retailer.
 The relationship between the expenditure and the resulting income derived, i.e. can it be shown that the expenditure resulted in income being derived? For example, the sale of 10 tractors at an agricultural field-day, by a tractor manufacturer sponsoring the event in return for being able to display the tractors, shows a direct relationship between the sponsorship expenditure and the derivation of income.

 GST – if the organisation you are sponsoring is GST registered that is a claim for you. If not, the expense is exempt, just like any other business transaction.

As with any GST claim, make sure you get a tax invoice from the supplier as this is a legal requirement when seeking GST back on an expense you have incurred in business.

If you need further assistance please Ask a question.

source: http://www.ird.govt.nz/resources/e/2/e21900004bbe3fc98f14dfbc87554a30/is3229.pdf

Second Hand Goods: GST and Depreciation explained

Second Hand Goods: GST and Depreciation explained


Author: Michael Levertoff
 

Today we're exploring second hand goods introduced into your business and second hand goods purchased for use by your business.

Change of use in respect of second hand goods

Often in the course of business items that you own are used in the business activity. Bringing these assets onto the books is important.
 1. Using assets not officially on the books is not a true reflection of your business. Your assets will wear out eventually - and at that point who will replace them? You or your business?
 2. Expenses like depreciation can be claimed on assets on the books. This is a legitimate claim that you are missing out on if your assets are not on the books.
 3. Repairs and maintenance to your asset cannot be accepted unless the asset is on the books. Again this is a legitimate business expense that you are missing out on if you don't have your assets on the books.
 4. If you are GST registered, you are entitled to claim back GST on the asset you are introducing to the business.

Coming to a value of the second hand goods

When introducing second hand goods into your business, you'll need to establish a current market value. The easiest way to achieve this is to find three similar items that have sold recently. TradeMe is a good place to find this kind of information. The average of these three items is an acceptable method of valuing for Inland Revenue's purposes.

GST and change of use

Bringing your assets on the books is covered by rules issued by Inland Revenue. The tests that must be met before a registered person can make deductions from GST output tax for change from non-taxable to taxable use can be found under section 20(3)(e) of the Goods and Services Tax Act 1985 ("the GST Act").

Where a registered person acquires secondhand goods and changes the use of the goods from non-taxable to taxable, there are four requirements under section 21E(3) of the Goods and Services Tax Act 1985.
 a. The second hand goods were supplied to the registered person by way of sale;
 b. The second hand goods that were sold to the registered person have always been situated in New Zealand, or in the case of imported goods, have been subject to GST under section 12(1) when imported.
 c. The supply to the registered person was not a taxable supply (that is, GST was not charged on that supply).
 d. The goods have not been supplied to another GST registered person who is the importer of the goods.

Second hand goods purchased by your business

At times you may purchase a second hand item for the business. There are special rules that apply to second hand goods purchased.

For GST, second hand goods are goods previously used and paid for by someone else. It doesn't include:
 new goods
 primary produce (unless previously used)
 goods supplied under a lease or rental agreement
 livestock
 second hand goods consisting of any fine metal of any degree of purity.

Land is considered to be second hand goods. However generally speaking land is exempt for GST.

The same rules for GST and tax invoices apply to secondhand goods as for all other goods liable for GST.

Second hand goods and GST

Secondhand goods if seller is not GST-registered

If the seller is not registered for GST or the goods are private (exempt), there will be no tax invoice or GST charged. However, if the purchaser is GST registered they can claim a credit for GST purposes.

Regardless of the accounting basis you use, you must make a payment before you can claim the credit for the purchase.

In these cases the purchaser must record:
 the name and address of the supplier
 the date of the purchase
 a description of the goods
 the quantity of the goods
 the price paid.


You'll also need to keep details of the transaction if you are going to make a claim for income tax purposes.

Secondhand goods if seller is GST registered

The standard GST rules apply.

Second hand goods and depreciation

Depreciation allows for the wear and tear on a fixed asset and must be deducted from your income. You must claim depreciation on fixed assets used in your business that have a useful lifespan of more than 12 months. Not all fixed assets can be depreciated. Land is a common example of a fixed asset that cannot be depreciated.

Accounting for depreciation
 In your income tax return, you must claim depreciation - or "wear and tear" - on most fixed assets (unless you elect not to depreciate). A fixed asset is something that your business owns and that you expect to use for business purposes for more than a year. There are some assets that do not depreciate, for example, land or trading stock.

You cannot claim the cost of an asset as a business expense against your income.



If you need further assistance please Ask a question.



source: http://www.ird.govt.nz/gst/additional-calcs/calc-spec-supplies/calc-special/special-supplies-r-v.html | http://www.ird.govt.nz/technical-tax/questions/questions-gst/qwba-deductions-gst.html |http://www.ird.govt.nz/business-income-tax/depreciation/

Motor Vehicles: What is claimable and what is not

Motor Vehicles: What is claimable and what is not


Author: Michael Levertoff

Bringing a vehicle into your business

Whether you already have a vehicle that you use in the business that is not currently on the books, or purchase a new vehicle, NZ Accounting can assist you in the process of introducing that vehicle into the business and recovering the appropriate amount of GST back on the purchase price as well as the ongoing associated costs.

Calculating the business portion of vehicle running costs
If you are a sole trader or in a partnership and you use your own vehicle in the business, you can claim the running costs for income tax.
 If you use the vehicle strictly for business, you can claim the full running costs, without making any adjustments.
 If you use the vehicle to travel from home to work, or any personal travel, you will need to separate the running costs of your vehicle between business and private use. (Travel between home and work is not classed as business use.)
 When a company owns a car, it claims all the expenses without making a private use adjustment. However, the company must pay fringe benefit tax if the vehicle is available for employees' or shareholder-employees' private use. The company will also have to calculate GST on the fringe benefit (see our fringe benefit tax (FBT) section under Businesses).

Working out adjustments

If your vehicle is shared between personal use and business use, you may claim up to 25% of the vehicle running costs as a business expense by default. However, you could be asked to substantiate the percentage claimed.

If you wish to claim more than 25% of all vehicle costs, you must keep a logbook for at least three months every three years. You will need to record the distance, date and reason for the trip in the logbook. You can use the difference between the odometer readings at the start and end of the three months to work out the percentage of vehicle expenses you can claim.

FBT

The following general principles apply to fringe benefit tax on motor vehicles:

 If a company owns a vehicle, as long as a vehicle is available for private use (for example, travel between home and work) by your employees, including shareholder-employees, you must pay fringe benefit tax. Your liability does not depend on whether the employees actually use that vehicle.

Sole traders or partners in a partnership are not required to pay fringe benefit tax on a business vehicle they use privately. However, they usually record their business use of the vehicle, as they must make an appropriate adjustment in their income tax and GST returns.

Inland Revenue Mileage Rates

Alternatively, you may use your logbook records to claim back Inland Revenue mileage rates on your vehicle.

GST

All GST paid on the purchase price and running costs of vehicles is claimable.

Depreciation

A vehicle's purchase price cannot be claimed in one lump sum. Vehicles depreciate over a number of years according to standard Inland Revenue rates.

It is important that you take this into consideration when purchasing a vehicle - because you'll be paying tax on the money you use to buy a vehicle in the year of purchase and claiming that money back in depreciation over a number of years. Make sure you've taken the tax you'll have to pay on that sum into account.

Financing all or part of the purchase price of the vehicle may be a better option than paying cash for your business vehicle.

If you need further assistance please Ask a question.

sources: http://www.business.govt.nz/compliance/business-tax/business-income-tax/claim-business-expenses-for-the-use-of-a-private-vehicle | http://www.ird.govt.nz/business-income-tax/expenses/mileage-rates/ | http://www.ird.govt.nz/fbt/categories/motor-vehicles/

Inland Revenue Compliance Focus 2011-2012: Aggressive Tax Planning and the "Cash Economy"

Inland Revenue Compliance Focus 2011-2012: Aggressive Tax Planning and the "Cash Economy"


Author: Michael Levertoff

Aggressive tax planning

Taxpayers are able to legitimately manage their affairs to minimise the amount of tax they pay. However, Inland Revenue take a very dim view on people who try to avoid paying what they owe by employing schemes and tax planning structures or who divert personal income to companies, trusts to claim more Working for Families Tax Credits (WfFTC), or to reduce child support liability.

Arrangements that create deductions for items that aren't real economic losses, schemes that use losses in contravention of the loss rules, or retained losses that should be forfeited are currently under the microscope.

Also large claims along with the use of losses from previously dormant companies that start to use their losses are being actively reviewed and targetted by Inland Revenue.

And from 1 April 2011 WfFTC recipients can no longer claim rental losses against their income.

Some years back we assisted a client who had to deal with a complicated array of structures put in place by their former accountant to reduce tax that our client didn't even understand. Their accounting fees were approximately $14,000 per annum at this point - for a business turning over less than $200,000 per annum.

Things had changed for this client as they were heading in a new direction and they wanted to dismantle the scheme. It took six months and quite a lot of money spent to unravel the mess - and, to boot, on the way out the client had to pay a large sum of money to Inland Revenue in GST clawbacks.

Not only did this cost them financially and create an immense amount of stress, it used up a considerable amount of their time which meant their focus was not on their business. This distraction led to a bad decision made which caused a loss of over $150,000.

Our view: It's not worth it. Often the tax you avoid in the good times is simply a deferral to be paid in another tax year - at a time when you may not be able to afford to pay an expensive tax bill. Simple setups are easy to manage and understand, easy to dismantle and keep you off the Inland Revenue radar - and keep your fees down with NZ Accounting.

Under-reporting and operating outside the tax system

Not declaring cash jobs, paying wages and salaries in cash, or not reporting the trade of goods and services? Be warned: Inland Revenue is watching.

Recently we completed a second hand goods claim for GST for a client who had not brought these assets on the books which brought about a routine GST audit. Unbeknown to us, their tax returns over the previous years were much lower than would be expected - which led to a wider audit of our client's tax affairs. It wasn't hard at all for the tax inspector involved to uncover thousands of dollars of cash pocketed and not declared. This client is now up for a tax bill of more than $50,000.

Our view: use simple structures that openly and clearly present what you have turned over less what you have spent. Aside from this, avoiding your tax obligations reduces our tax revenue, cheats all New Zealanders out of funding for the services that support our communities, and provides an unfair advantage over other businesses who do pay their fair share.

If you are concerned about where you stand and need further assistance please Ask a question.

Maximise your Rental Investment Property - Minimise your mortgage interest.

Maximise your Rental Investment Property - Minimise your mortgage interest.


Author: Michael Levertoff

With recent tax changes affecting depreciation claims, many property investors will find themselves paying tax for the first time in 2012.

Despite this change, interest is still the biggest cost to your residential investment property portfolio – and with a little bit of fine tuning you’ll get it paid off quicker, saving lots of interest.

Using this simple strategy will more than offset the tax benefits you’ve lost through the changes to the tax system.


 APPLY THE RIGHT STRUCTURE

By far the most important aspect, the first step of structuring your mortgage should have already taken place. However if you have not employed the below structure talk to NZ Accounting to further advise you.

Your mortgage should be set up with a 100% financed interest only portion secured against the purchase price of the property.

For example, if you paid $500,000 for your rental, the fixed interest only portion of your mortgage (in the name of the entity that holds the property) should be set at $500,000.

The balance of the mortgage should be split into two parts and secured against your personal property.

One part should be a fixed interest only portion for two years.

The second part should be a revolving credit facility set at the amount you believe you can pay off your mortgage in that two year period that amortises over that two year period.

Example:

If the balance of the debt owing after securing the first mortgage over the rental property was $200,000;

And you believe you could pay off $20,000 over a two year period;

Part one of the mortgage would be a two-year fixed interest only loan of $180,000.

Part two of the mortgage would be $20,000 revolving credit amortising over two years.

At the end of the two year period, you would set up a new revolving credit facility of $20,000 and fix the remaining balance of $160,000 for a further two years. And so on… until the debt secured against your personal property was fully repaid.


 DEPOSIT ALL INCOME TO THE REVOLVING CREDIT FACILITY

Rent from the investment property and your personal income would all be deposited in the revolving credit facility.


 PAY ALL BILLS WITH A CREDIT CARD

Bills should be paid where possible using your credit card. Your credit card needs to be fully repaid each month so that you do not incur interest.


 WHY ALL THE MUCKING AROUND?

Personal debt cannot be claimed back against your business but business debt can. So you should ensure you pay off personal debt before attacking the mortgage secured over the rental property.

Equally, the higher the debt owing on the rental property, the more you can claim back as an expense.

Revolving credit interest is calculated daily. The longer you leave money in your revolving credit facility, the more money you save on interest.

Depositing your wages and the rent from the rental property into the revolving credit facility means more funds in the facility, saving you interest.

Alongside this, paying bills by credit card uses the 55 days of free credit that credit cards provide you which again means you can keep money in your revolving credit facility for longer, which also means you’ll pay less interest.


 FURTHER THOUGHTS

* Where possible, buy big assets with interest free terms and then pay them off before the interest portion kicks in rather than paying cash for them now – keeping more money in your revolving credit facility.

* Pay for everything you can with the credit card – including groceries, telephone bills, rates, insurance – you name it, throw it on the card. Just make sure you’re paying it off though on the day you need to, to avoid that high interest.

* Consider refinancing your credit card debt when low interest offers roll around – just as long as the interest charged is less than your mortgage, it’s worthwhile.

* This concept could save you hundreds of thousands of dollars in mortgage interest. Correctly applied, some people shave up to 15 years off their mortgage.

* The trick is: don’t spend the savings. Leave them in the revolving credit facility. Aim to pay it off quicker. If you do pay it off quicker, treat yourself with a mortgage holiday. But when it comes time to reset your revolving credit facility, try making it a bit bigger and challenge yourself all over again to get that facility clear.



If you need further assistance please Ask a question.