There are many small but legal ways of ensuring the tax system is working for your business and not against it. Effective strategies for managing and minimising tax are important so here are our top 5.
The Inland Revenue accepts that what works for one business will not necessarily work for another and so offers choices to business owners around structure, timing, etc.
Ensure you have the right structure
There are different tax rates depending on the entity type, whether the business is trading as a company, a trust or a sole trader. If a company structure is the best for your business, then whether you decide to own the shares in a trust or in your own name will also impact the tax position.
An important consideration when considering structure is to always plan for the long term. Changing structure can be risky and expensive, especially where there is a tax benefit. Although the top individual tax rate is currently the same as it is for a trust, this may not always be the case. Many businesses have been caught out by changing their structure as a direct result of changes in tax rates, one of the more high profile cases being Penny and Hooper.
Other businesses within the group should also be considered. If there is a loss making company and a profit making company, a minimum of 66% common shareholding between the two companies will enable loss-offsets or subvention payments to take place.
Alternatively, with the right set of circumstances, a loss making business could trade as a Look-Through Company (LTC) passing the revenue and expenses out to the shareholder(s) in proportion to their shareholding. This can be an efficient way of utilising the loss, especially if the shareholders are on the top marginal tax rate.
Fund your tax using the lowest interest rate available
Because of the way the provisional tax rules work, Inland Revenue Department charge use of money interest if a company does not pay enough tax at its provisional tax dates during the year to cover its profit at the end of the year.
The current interest rate charged by Inland Revenue Department is 8.89% per annum. While some businesses are loathe to be charged interest by the Inland Revenue Department, the company may have insufficient cash flow and it is not always possible to obtain additional funding from a finance institution at an interest rate below that of the IRD. If this is the case, IRD can be a cheap source of unsecured finance.
Consider the best GST basis and taxable periods for your business
Timing of cash flow is hugely important to all businesses and can mean the difference between survival and demise in the start-up phase. When a business first registers for GST, it has a couple of decisions to make which can have a significant impact on its cash flow: the filing frequency and accounting basis of its GST returns.
If a business has slow recovery of its debtors, a good option may be to register on a payments basis so that the GST on its debtors is not payable until the funds are collected, rather than the invoice has been raised. Compliance costs should also be considered when deciding the basis to register on. Smaller businesses may not need a full accounting package which tracks debtors and creditors. A cashbook can be adequate, and is often preferable due to the ease of use and low cost of the software. Being registered for GST on an invoice basis with a cashbook package is quite tricky, so if a business requires no more than a cashbook for its day to day operations, it may be better for such a business to be registered on a payments basis for GST.
If your business will regularly be receiving GST refunds, it is wise to register on a monthly basis so the cash is received as early as possible from the IRD. If your business will generally be making GST payments, the payment should be deferred as much as possible by registering for longer GST periods.
An example of making these decisions with cash flow in mind is in the case of a property developer. In the early stages of its development, the business is receiving GST refunds as it has spent money on the development but will not receive any revenue until the end of the project. It therefore makes sense for the business to be registered on an invoice basis and to file GST returns monthly so the GST refunds are received as early as possible.
Ensure your day-to-day decisions are “tax efficient”
Following recent tragedies around the world, the importance of insurance has been highlighted. But not only should your business be adequately insured, the insurance can be structured in such a way that the insurance is either tax deductible or not.
Life insurance premiums are not tax deductible because the amount paid out upon claims is not taxable. Income protection insurance is tax deductible because when it is paid out, the amounts are taxed just like income. Key man insurance is a common form of insurance for a business, which is also generally tax deductible.
This is one example of how your Chartered Accountant should be able to help you on a day-to-day basis.
Do not get charged penalties
It is important that you are aware of the penalties that may be imposed for late payment and late filing. These penalties are cumulative, so by understanding how the penalties are calculated, you will be better able to minimise and preferably eliminate them.
IRD can also impose penalties for lack of reasonable care, gross carelessness, adopting an unacceptable tax position or more serious charges such as evasion. The chances of such penalties being charged are greatly reduced by seeking specialist tax advice, therefore taking “reasonable care”.
Certain simple decisions we make which defer cash outflows, can reduce the possibility of your business becoming another statistic.
Contact your Hayes Knight adviser or Nicola Pollard today and make sure that the rules are working for your business.
Senior Manager – Business Advisory Services
T: +64 9 448 3244