Preparing for the end of the financial year
The end of another financial year is fast approaching and with that in mind we’ve put together our top tips to ensure you are ready… Top tip # 1 Get your records ready. Whilst most of the information will be in Xero we do require some items from you: Top tip # 2 Don’t forget about your home office. If you are completing work from home, a portion of your home expenses can be claimed as a business expense. Common home expenses that can be used in this calculation are rates, home & contents insurance, power, internet/phone and rent or mortgage interest. You will also need to provide the total area of your house along with the total area of the space set aside for work related tasks. For more information about this, check out our previous blog Tax tips with MHCO part 1 – Claiming Home Office Top tip # 3 Complete a stock take. If you carry stock of more than $10,000 then you will need to complete a stock take so we know how much stock you have at 31 March. Stock can heavily affect your profit, and therefore tax, so it’s important we get this right. When completing the stock take we need the GST exclusive figure. The amount you give us should be the lower of what you paid for the stock and its estimated value. (9 times out of 10 this will just be the cost value). Top tip # 4 Write off bad debts. Don’t pay tax on money you won’t receive! If you have done all you can to recover a debt and are ready to write them off, you need to make sure this is done before 31 March in order for the tax deduction to apply. If you are unsure how to write off a debt give us a call. Also if you haven’t already, consider sending the debt to a debt collection agency such as these guys: https://www.collectit.co.nz Top tip # 5 Remember the minimum wage increase. Just a reminder that the minimum wage will increase by $1.10 in April, from $18.90 to $20.00. If you have adult employees (16 years and over) earning less than $20.00 an hour, you are legally required to increase their wages from 01/04/2021. Update 23/03/2025: From 1 April 2025, the minimum wage will increase. For adults, this increases from $23.15 per hour to $23.50 per hour. The starting out and training minimum wage will also increase from $18.52 per hour to $18.80 per hour. If you employ anyone on the minimum wage, it is essential that you change their pay rate in your payroll system from 1st April 2025. 1 April 2025 falls on a Tuesday this year, meaning that it likely falls in the middle of your pay period. If this is the case, it may be worth getting in touch with your payroll provider for instructions on how to update a pay rate in the middle of a pay period. Top tip # 6 ESCT Threshold Changes The new financial year will also see adjustments to the thresholds for the Employer Superannuation Contribution Tax (ESCT). Income Range: $0 – $18,720$18,721 – $64,200$64,201 – $93,720$93,721 – $216,000$216,001 and upwards ESCT Rate: 10.5%17.5%30%33%39% Remember that if your employee has more than one job, you need to ensure you select the ESCT rate which reflects their full income. Top tip # 7 Consider your goals for the upcoming year. As we close out another financial year, ensure you take a moment to reflect on the year that was and then look forward to the upcoming year. Even more so, in these uncertain and unsettling times, it’s important to refocus and ensure you have an up-to-date business plan and third party to help you set your goals and help coach you to achieve them. We are here to help. Get in touch with us if you want to update your business plan, reset your goals, prepare a budget, or, have a business coach to help guide you and your business through the next year. Get in touch with us if you have any questions or concerns – the MHCO team.
Setting up the right legal and financial foundations
So, you’ve got the idea and the business plan ready to roll. But what are the main legal and financial areas you need in place to keep your new business compliant? Whether it’s registering as a limited company, or setting up an accounting system that meets the latest digital requirements, it’s important to get the basics right. How to tick the right compliance boxes: As a director, it’s your job to make sure your new business meets its regulatory requirements and stays compliant with the latest business and tax laws. To help you get the basics sorted, here are 5 core areas to consider: Talk to us about setting up the right foundations As you can see, ticking those compliance boxes can get complicated. We’ll help you lighten the compliance load by getting the legal and financial foundations sorted. Get in touch to see how we can help.
Understanding Tax: Use of Money Interest (UOMI)
Last time on our blog we discussed Terminal and Provisional tax. The fun is not yet over… this week we thought we might tackle Use of Money Interest, or for short, UOMI. So what is UOMI? Use of money interest is the IRD charging you interest on the tax you have underpaid, effectively trying to discourage you from using them as a bank. In their eyes, you have had the use of the money when you shouldn’t have had it, and as such it stands as an outstanding payment with them. When does it get charged? This question is a little bit trickier. Let’s look at our fictitious company, The Mad Scientist again. Remember how, for example one, in their second year they still had terminal tax to pay? They’d paid provisional tax of $29,400, but their total (residual) tax to pay for the year was $42,000. This meant that they still had $12,600 in terminal tax to pay. Well, in the IRD’s eyes, this means that they’ve had use of that money, when they shouldn’t have had. They believe that the company should have kept an eye on their profit, and adjusted the provisional tax they were paying as the year went by. For companies, if their residual tax for the year is $2,500 or more, and they have terminal tax to pay, then they will get charged UOMI on that amount. For individuals, the IRD is not quite so strict. If your residual tax to pay is under $50,000, and you were not aware you should be paying provisional, or you have paid the provisional tax that was calculated automatically from your previous year’s tax return, then you won’t be charged. However, if your residual tax is over $50,000, or you have estimated your own provisional tax and it was not enough to cover your residual tax, then you will also be charged UOMI. How do they calculate UOMI? Let’s again use The Mad Scientist as the example. As already discussed, as they have terminal tax to pay of $12,600 within their company, they will have UOMI to pay on that amount. The IRD calculates UOMI by saying that the total tax should have been paid throughout the year as provisional tax. This means that in their eyes, The Mad Scientist should have paid $14,000 at each provisional tax date. However, they only paid $9,800 on each of these dates, so the IRD charges interest at 8.27% (changed on the 8th May 2016) on the leftover amounts, from the dates it should have been paid till when it is paid. Let’s assume this is the terminal tax due date of the 7th of April the next year. For example: Provisional Tax Dates 1/3 of Residual Tax ActuallyPaid Leftover Days Overdue UOMICharges 28th August 14,000 9,800 4,200 587 $558.60 15th January 14,000 9,800 4,200 447 $425.37 7th May 14,000 9,800 4,200 335 $318.79 Totals: $42,000 $29,400 $12,600 $1,302.76 For smaller companies that may not be earning so much these charges may not amount to much. But if your company is starting to grow their profit, UOMI can be an unwanted sting. So how can you avoid UOMI? The best way to do this is to keep an eye on your profit as the year goes on. Also, UOMI works both ways. So if you happen overpay and end up with a refund at the end of the year, you will get interest back on it as well since the IRD has had use of your money. Of course, the interest rate is much lower when the IRD owes us – 1.62% in comparison to 8.27% – but at least it’s something. But if you don’t want to make wild stabs in the air as to how much provisional tax you are paying, talk to your accountant. Not only can they help advise you on this as the year goes by, you will also have a better idea on how your business is going, and be building a stronger relationship with your accountant. According to Xero’s research, this is a very good thing. Their research suggests that having a strong relationship with your financial adviser is good for your business. We agree. Here at MHCo, we strive to create, and maintain, strong relationships with all our clients. After all, their success is our success. So stop worrying about tax, and UOMI, and come talk to us. We’ll do our best to make tax easier to understand, and take the weight of not knowing off of your shoulders. Thanks, the MHCO team.
Understanding Tax: Terminal vs. Provisional
Tax. It’s the dirty word all business owners flinch at. Newcomers stress about that second year hit, and everyone winces when the lump sums leave their bank accounts. But how many business owners understand tax? And how many newcomers know what to expect? We thought we’d put together a blog breaking down some of the basic facts about tax. That way, maybe, when you next hear the word you feel a little more prepared to face it. The Second Year Sting How many business owners have been warned about the tax hit, come their second year of business? In their first Financial Statements meeting we’ve heard many express their worry over it. After close to a year of trading without worrying about tax, suddenly the shadow of it looms over them and they can’t focus on anything else. How well their business is going, or how they could improve upon it, falls on ears deafened to all but tax. But what causes this second year sting? Terminal + Provisional Tax If trading has gone well, a new company will have a full year of profit to be taxed. On top of that, if they have done well enough, the IRD now also expects them to make instalments towards the tax they are going to have to pay for the coming year. This means that effectively they are paying two full years of tax in one. For the year that’s just been, they will be paying terminal tax. For the year that is still happening, they will be paying provisional tax. Terminal Tax Terminal tax is the wash-up tax, based on the tax return detailing the final profit for the year just been, the last tax instalment for a finished financial year. In the first year of trading it is the total tax to pay on that profit. But in other years the terminal tax is the leftover tax to pay on the total profit after provisional tax is accounted for. Provisional Tax Provisional tax is tax that the IRD asks you to pay for this year based on your historical profit as the year progresses. You are only required to pay provisional tax when your total tax to pay for a year is greater than $2,500. When this happens, the IRD estimates that for the coming year your profit will grow by another five percent, and instead of waiting for a full year for you to pay that tax, asks you to pay the tax on your profit as you earn it – PAYE for your business in a sense. Let’s break it down further. To do this, we’ll use an example of a fictitious company, The Mad Scientist Limited. In this example we will ignore Use of Money Interest, but please keep watch for our next blog post! The Mad Scientist Limited – First Year The directors at The Mad Scientist have had an excellent first year in 2016. After hunting down every opportunity they have ended up with a profit of $100,000 in their company. This means that the total tax they have to pay on their profit for that year is $28,000. As they have not paid any tax so far, this full amount is due as terminal tax on the 7th of April 2017. Because their total tax to pay is over $2,500, the IRD now expects them to begin paying provisional tax as they go while they are still earning their profit for the year – much like PAYE is paid as a salaried worker earns their wage. However unlike those on a salary, the IRD won’t know till the end of the year when the company’s tax return is filed exactly what the profit is. Instead, the IRD assumes that The Mad Scientist will grow by another 5% to earn $105,000 profit the next year. Based on this profit the total tax to pay would be $29,400, and the IRD splits this into three equal amounts during the year for you to pay, $9,800 on the 28th August 2016, 15th Jan and 7th May 2017. The Mad Scientist Limited – Second Year Example One: Let’s assume that The Mad Scientist completely exceeds the IRD’s expectations, and manage to increase their profit by 50%, earning $150,000 in their second year of business. This means that the total tax to pay on that profit for 2017 is $42,000. Remember that they have already paid $29,400 in provisional tax for 2017. This means that they only have $12,600 left to pay in tax, and this is called Terminal Tax to pay for that year. Once more, provisional tax is calculated based on a 5% increase on $150,000. Then $44,100 in tax is divided into three payments of $14,700 during the coming year. Example Two: But what if in the second year of business The Mad Scientist flounders? This year their profit doesn’t even break $100,000, and they only make $80,000. Based on this, their total tax to pay is $22,400 for 2017. However, due to Provisional tax, they’ve already paid $29,400. What happens now? As they’ve overpaid their tax by $7,000, they will receive this amount back as a refund. This means that for their second year of trading they won’t have any terminal to pay at all. They will still have provisional tax to pay however for the coming year, and this will be based on $84,000 in estimated profit. To Conclude Terminal tax is the wash-up of the tax for the year just been. Provisional tax is paying for the profit you are currently earning. As for Use of Money Interest? I think we’ll leave that till our next piece! Thanks, the MHCO team.
Tax Tips with MHCo – Part 2 Entertainment.
Welcome to the second installment in our five-part series – tax tips with MHCo. This series is aimed at small to medium businesses and is designed to increase understanding around some key tax topics that we often get asked about as well as educating businesses on a few common areas where they may be missing out on tax deductions that they are entitled to. In the first edition we discussed home office expenses, what is it, who can claim it, and how to calculate your home office. If you missed out, you can read the blog here: Today’s topic is Entertainment – What is it? What can you claim? And what can you only claim 50% off? Business doesn’t have to be all work and no play. There are many times in our business lives where we need to promote our business, our products and our services. We need to build contacts and we need to maintain our existing contacts and relationships. As well as this it’s important we keep our employees happy. How do we achieve all of these? Sometimes the answer includes ‘entertainment’. A couple of common examples of entertainment: As a general rule if an entertainment cost is helping you earn income in your business then it’s usually tax deductible. If not it’s likely to be personal (and therefore not tax deductible). Entertainment then has some very specific rules which help determine if the expense is fully tax deductible or only 50% deductible. Entertainment that is 50% deductible. Some entertainment expenses have a significant private element. If this is the case, then you can claim 50% as a tax deductible expense. Some common examples include: The cost of food and drink provided at the following venues is only 50% deductible. An exception to this is that light refreshments such as morning and afternoon teas are 100% deductible. Food and drink provided away from your business premise is also only 50% deductible. For example, taking a business contact to lunch at a local restaurant. (See below for examples of food and drink while traveling which is 100% deductible) Business expenses including food and drink consumed on the following are 50% tax deductible If you provide entertainment that fits into the 50% deductible category then supporting expenses are also only 50% deductible. An example could be the hire of crockery and music at the end of year Christmas function. As the Christmas function itself is only 50% deductible the supporting hire of crockery and music is also only 50% deductible. Entertainment that is 100% deductible. Some of the most common entertainment expenses that are 100% deductible are: If someone in your business buys a meal while travelling for business you can claim 100% of it. However, if there is an existing or potential client present only 50% is deductible. For example – Anna, an employee, travels to wellington to attend a training event. Whilst in wellington Anna purchases lunch and dinner on the business credit card. These meals are 100% deductible as they are consumed while travelling on a business trip and there are no business contacts present. If you put on a conference or training event that runs for more than 4 hours, then food and drink provided is 100% deductible. This Entertainment is 100% deductible unless your own business contacts have more chance of enjoying the entertainment than the general public. The cost of giving away freebies to promote the business is 100% deductible. However, if these are given to employees associated with you then only 50% is deductible. Business entertainment consumed overseas is 100% deductible. GST on entertainment GST can be claimed on entertainment – just like it can with other business expenses. However, you can only claim GST on the portion of the entertainment that is deductible. So if entertainment falls into the 50% category then you can only claim 50% of the GST. When Entertainment can’t be Claimed Above we’ve listed examples of entertainment that can be claimed. But where are some of the common areas that people try and claim entertainment when they shouldn’t? The easiest way to judge it is whether it helps you earn income. For example – Shouting yourself lunch (because you left your nice pre prepared sandwiches on the bench!) in your home town is not claimable as entertainment. These items are considered personal, as whether you were at work or not you need to eat, so it is not considered an expense that relates directly to making your business money. That’s a wrap As you can see entertainment comes in many forms and many situations. Listed above are some of the more common examples. If you are ever unsure about what you can claim, then contact your tax advisor. Next week’s topic is GST. What is GST? What items attract GST, and what items don’t? How do we calculate your GST to pay or refund due? Thanks, the MHCO team
Tax Tips with MHCo Part 1 – Claiming Home Office
Introduction What is ‘entertainment’? Can you make a claim for your home office? Welcome to the first instalment in our five-part series – tax tips with MHCo. The end of financial year (31 March 2016) has now come and gone and with that many business across New Zealand will be readying themselves for another round of financial statements and tax returns. If you don’t already have your information ready for your accountant, then you should be thinking about this very soon. This series is aimed at small to medium businesses and is designed to increase understanding around some key tax topics that we often get asked about as well as educating businesses on a few common areas where they may be missing out on tax deductions that they are entitled to Today’s topic is claiming home office as a business expense: A large number of people who own a small/medium sized business complete work from home. The most common example is when a business owner has an office set aside at home for completing work-related tasks. If this is true then you can claim a portion of your home expenses as a business related expense. If you don’t have an office or area dedicated to work use you can still make a claim for home office. To calculate this we would use different criteria such as time spent on income earning activities at home. For today’s example we are going to presume a dedicated office area has been set aside for work purposes. Example The first step is to work out the percentage of the work area compared to the total floor area of the house. Let’s say John, who owns his own company, has a dedicated work office at home which is 15m2 in total. The total floor area of the home is 100m2. So John has a work related office which is 15% of the total home. He can therefore claim 15% of certain home expenses. John works out that his total home expenses over the last financial year were as follows: Rates $3,000 Insurance $1,100 Power $1,800 Total (including GST) $5,900 GST $770 Total Excluding GST $5,130 If John is not GST registered, then he can claim 15% of the GST inclusive total being $885. If John is GST registered, then he can claim 15% of the GST exclusive amount being $769. He can also claim GST of $115 (15% of $770) Example continued – Mortgage interest John can also claim a portion of his mortgage interest (but not principal). There is no GST on mortgage interest so it’s best to calculate this separately. John looks at his loan statements and works out he has paid interest of $20,000 during the year. He can therefore claim 15% of this being $3,000. Example continued – Telephone costs As John’s home acts as the center of operations for the business he is entitled to claim 50% of his home telephone costs. By looking at his phone bills John works out he has paid $1,080 during the year. This includes $141 of GST. John can therefore claim $70 of GST (50% of the total GST) and $470 for income tax purposes (50% of the GST exclusive phone bill) Adding up John’s entire home office claim (presuming he is GST registered) we get: Home expenses $769 Mortgage interest $3,000 Telephone costs $470 Total claim $4,239 Based on the company tax rate of 28% this would result in tax savings of $1,187 plus GST to claim of $185 ($115 + $70). Other considerations: Claiming a home office expense requires the same record keeping as any other business expense. It is therefore required that you have and hold the invoices for the expenses you are claiming. You can no longer claim depreciation on your house as a part of your home office. You can however claim depreciation on capital items such as office furniture & fittings, shelving etc. If you renting, we can still claim a portion of your rent for your home office claim using the same principles shown above. Next week Entertainment explained – what is it? What can you claim? And what can you only claim 50% off? Thanks, the MHCO team