Tax Management – a New Year’s Resolution

Another year passes us by, and it is a natural time to reflect on what was achieved as well as to establish new goals for the New Year. You may want to save for that big overseas trip, drink only in moderation, lose that extra 10kg you’ve hung onto since high school, or all of the above.

But as a business owner, nearly all New Year’s resolutions will revolve around the bottom line. Other than increasing sales and productivity, the focus must go on costs. The recession cut most of the fat off unnecessary or excessive expenditure, so what is left?

For most NZ businesses, the cost associated with the collection, administration and payment of tax represents one of the highest overheads, yet it receives little or no active attention as to how it is managed. In addition to the compliance costs, the costs of getting it wrong can be crippling when you consider the potential imposition of shortfall penalties and use of money interest. With Inland Revenue actively focusing on increasing the tax take, how comfortable are you with your historic position?

Payroll taxes and GST obligations are normally driven from the internal processes that in many cases have not been reviewed since inception, often due to lack of resources and time. If the original system contains a minor error, this can compound into a sizeable discrepancy due to the high volume of transactions. Investing in a review of these obligations often highlights areas for increased efficiency and provides scope for potential savings, particularly now when a number of the thresholds and exemptions have been recently increased. For example:

Can GST obligations be deferred by changing your accounting basis or filing frequency?
Would group GST registration drive savings (particularly where a holding company exists)?
Are all of the fringe benefit exclusions being considered?
Can you change from twice monthly PAYE payments to monthly?

The results of such reviews often significantly increase the available cash flow through the deferral of certain obligations while providing the business owner with comfort that their obligations have been met.

If an error is identified it can be actively managed, which results in an overall lower cost for the business.

Income tax is a different beast again. The only sure thing is that you’re going to have to pay – the exact amount, though, depends upon prevailing business conditions. But fluctuations in the trading environment are of no interest to the Inland Revenue, which still demands that taxpayers accurately estimate and pay their tax in three equal instalments. When businesses inevitably under or overpay their income tax, the IRD pays interest at a paltry 1.82% yet charges it at 8.91%.

The introduction of tax pooling intermediaries provides a tool for businesses to allow them to reduce their exposure to this interest cost and manage their cash flow requirements. Tax pooling intermediaries operate "tax pooling" accounts with Inland Revenue. Businesses deposit tax payments into these accounts until the intermediary instructs Inland Revenue what to do with them. Depositing funds with a tax pooling intermediary increases a business’s flexibility with regards to those payments – they can be easily transferred, refunded or sold to another business to achieve a higher interest return.

In the event of an underpayment, it is possible to make a request to purchase a historic tax payment via a tax intermediary to reduce the interest costs and eliminate any penalty exposure.

Like all business costs, tax must be actively managed. The festive season can leave businesses with little to celebrate. The accumulation of financial pressures from costs such as holiday pay, statutory holidays and continued overheads without any corresponding income stream can turn an enjoyable break into a serious hangover.

With the start of a new year, and a range of tools available to assist with tax management, consider taking a proactive approach to your tax obligations in 2010. You may be surprised with the positive effect it will have on your cashflow and compliance costs.

Further information:

Dan Lowe
P +64 (0)9 308 2531
M +64 (0)274 759 556
E dan.lowe@nz.gt.com