The National Government tabled its 9th consecutive budget today and, unsurprisingly, there was very little in the way of tax incentives, initiatives or regime changes. The continual evolution of tax changes and regularity of tax Bills means that in recent times there have been very few tax surprises come budget day.
The key tax change this year, included in the Family Incomes Package, is the increase in income tax thresholds for individual taxpayers. Given these changes only apply from 1 April 2018, you will need to vote National to lock them in…
As you can see from the table below, the threshold changes apply to low and middle income earners. For those earning $22,000 per annum this equates to a tax saving of $560 each year, and for those earning more than $52,000 per annum, a tax saving of $1,060 each year. However, there is a sting in the tail for some – refer further below.
Tax rate Current tax thresholds From 1 April 2018
10.5% $0 to $14,000 $0 to $22,000
17.5% $14,001 to $48,000 $22,001 to $52,000
30% $48,001 to $70,000 $52,001 to $70,000
33% more than $70,000 more than $70,000
Other tax changes included in the Family Incomes Package are as follows:
- The Independent Earner Tax Credit (“IETC”) will be repealed from 1 April 2018. Previously, those meeting the criteria and earning greater than $24,000 but less than $44,000 received a tax credit of $520. This credit abated at a rate such that no IETC arose if income was over $48,000.
The increase in the income thresholds is therefore offset for some taxpayers by the removal of the IETC. For example, from the 2018/2019 income year, a childless salary and wage earner with annual taxable income of $44,000 will pay income tax of $6,160 with no IETC, whereas previously they would have paid a net amount of tax of $6,200 (income tax of $6,720 less the IETC of $520 = $6,200 net). A saving of $40 per annum or two latte and smashed avocado on toast combo’s. Note, whilst entitlement to the IETC was limited, this change will impact many taxpayers.
- Family Tax Credit rates have also been increased - for the first child by $9 a week, and for each subsequent child, by between $18 and $27 per week. The abatement rate has increased to 25% (previously 22.5%) and the abatement threshold reduced to $35,000 (previously $36,350).
The budget also signals that “black hole” expenditure is to be revisited so that more business expenses written off will become tax deductible. Black hole expenditure occurs where expenditure that has previously been capitalised is written off, but the amount written off is not eligible as a deduction for tax purposes (for example where the expense relates to the creation of depreciable property). The Government believes this will resolve a lot of black hole tax treatment.
In conjunction with the budget, a discussion document on black hole and feasibility expenditure has been issued.
Acknowledgement: NSA Tax
Quality, well trained, experienced, and reliable employees are invaluable to your business.
Problems with staffing can quickly cause much larger issues for your business. Losing key staff members can hurt the business – they take vital skills and knowledge (and potentially customers) with them. A customer’s bad experience can lead to a poor reputation, especially if that customer airs his/her complaints on social media. A fraudulent or dishonest employee can easily cause you losses amounting to tens of thousands of dollars and several sleepless nights.
The good news is that there are things you do to ensure your team is happy, productive, and providing the best experience for your customers:
- Make outstanding customer service one of your business’ core values.
- Make sure your new staff are properly trained in your business’ values and for their role, including how to deal with difficult customers and situations. It’s vital to have solid induction procedures in place to ensure all staff receive the same high standard of training and deliver the same high level of service.
- Your employees are an investment in your business so make sure you look after them. Provide them with good working conditions, adequate breaks, the tools they need to do their jobs effectively, and a happy work environment. Reward employees who demonstrate the values of your company and achieve KPIs. Staff that feel valued are loyal and engaged.
- Provide ongoing training. If you give your staff the opportunity to gain new skills and grow with your business, they’re more likely to stay engaged and see a future with your business (instead of someone else’s).
It’s also important that you protect your business from staffing issues:
- Ensure you have written employment agreements for all your employees. If you have any employees who have not signed their employment agreements, get them signed.
- Review your employment agreement every year or so to ensure that it is meeting your needs. If it’s not, get it updated.
- Talk to your insurance broker about the benefits (and cost) of taking out key person insurance and/or employee theft and fraud insurance.
Good employees are a great business asset. Putting the right strategies and tools in place can help you make the most of that investment.
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We have seen first-hand how natural disasters can negatively impact retail businesses. The 2011 Christchurch earthquake destroyed several buildings in the city’s CBD. The November 2016 Kaikoura earthquakes impacted several retail businesses in the North and South Islands.
In a matter of minutes, many businesses lost use of their premises and many retailers lost a significant amount of stock. Some retail businesses in Christchurch were unable to operate for months after the earthquakes while others never recovered. Some of those affected by the Kaikoura earthquakes are facing the same issues. While having a disaster recovery plan in place before you need it won’t prevent disasters from occurring, it could save your business by providing you with a well thought out plan that will help you to move forward.
It’s also important to properly insure your company and to review your insurance cover regularly to ensure your business is adequately protected. If you have business interruption insurance, it can help protect your business against loss of income suffered because of an unexpected setback. Key person insurance can provide monetary compensation/revenue replacement in the event that something happens to someone pivotal to your business’ ongoing success. There are also various insurance products available that cover stock, machinery, and plant. An insurance broker should be able to advise you on what insurance you should be carrying.
Changes in the economy can also wreak havoc on a previously stable business. The Global Financial Crisis caused a downturn in many retail markets, including New Zealand. Similarly, changes to legislation can see a booming retail business become unprofitable overnight, as happened to several retail businesses when the government banned previously legal party pills.
If you buy products or services from overseas, it is important to monitor foreign exchange rates. You can lock in foreign exchange rates (just like a fixed mortgage interest rate) to protect your business against exchange rate fluctuations. If the exchange rate drops after you lock in your rate, you could end up paying a little more (to cover the cost of the hedge) but, if there is any increase in the exchange rate, you know you will still be able to afford to pay your suppliers.
Running a business can be unpredictable. If your business has suffered an unplanned event or you’re looking to set up recovery plans, talking to a business risk or business strategy advisor could help guide you through these stressful periods.
Contact us to see how we can help.
In the modern world, retail businesses are part of our everyday lives and cater to our every need and want. For this reason, owning a retail company may appear to be a guaranteed way to make money. The reality for most retailers though is that they are surviving on ever-tightening margins because of competition and increasing overheads.
Retail is a cash hungry business so poor cash flow can put your business in serious financial trouble. Because stock ties up your capital, inventory problems and cash flow issues usually go hand in hand. To remain profitable, you need to continually turn over stock so that you have working capital available to pay your bills.
While you need well-stocked shelves and warehouses so you can meet your customers’ needs, you don’t want to be paying for products to sit in a store room or on your store shelves for an extended period. If you understand your customer base (who is shopping at your store, what products they want, and how much they are prepared to pay), you’re more likely to get your inventory/stock/cash flow balance right. You also need to understand your customer base to develop a marketing strategy that works effectively. If you can develop a loyal customer base, there should always be demand for your products.
Once you understand your customer base, you can ensure you’re stocking products that will move quickly at a price your customers are prepared to pay. If you misjudge your customer base and end up stocking any products that are not selling, discount them to move them on then replace them with products that sell. If people are not buying a certain product, that product is not making you any money, taking up valuable space, and tying up your capital. Focusing on reaching a target market by stocking certain types of products (such as eco-friendly children’s products or gourmet food products) can allow you to streamline your product line, raise product margins, and create a sustainable business. If you stay on top of trends in product margins and product lines that are relevant to your customer base, you can introduce the right products and capitalise on these trends. Making a profit on the goods you’re selling, puts cash back into your business, which is vital for its ongoing success.
Getting your inventory right can require some educated guessing and a bit of trial an error. If you’re not quite getting the balance right or you’re thinking about making changes to your business model, talking to someone independent could help you figure out what you can do to make your business a success.
For many people interested in entering the retail sector, a franchise may seem like a good option. You have the advantage of buying into a well-known brand with established national marketing campaigns, marketing strategies, and business plans.
Investing in a franchise seems like a safe bet for a viable business. These benefits come at a price. For franchisees who are not aware of or don’t understand the extent of the ongoing franchise costs they are agreeing to when they sign up to the franchise, these ongoing costs can get lead to serious financial trouble.
Ongoing Franchise Costs That Can Really Add Up
Buying into a franchise can be a great business decision. Before you dive in, it’s important to get professional advice. With a professional advisor by your side, you can set your business up for success.
You can find our article Thinking About Buying into a Franchise? on our website. For more general information on franchises, check out What Happens When a Franchise Changes Hands and 10 Things Every Franchise Owner Should Know.
In this global, brand driven world, name recognition is influential in driving a business’ success. In many cases, brand recognition can make or break a business.
The franchise model offers the advantage of a known brand together with systems and processes that have helped many business owners build successful businesses.
Of course, you need to do your homework before you commit to buying into a franchise (we have written blogs on due diligence, leaving the franchise, and ongoing financial obligations for franchisees). You also need to consider whether being a franchisee is the right move for you. People often jump into a franchise without making a careful assessment of how becoming a franchisee will affect their lifestyle. If you don’t honestly assess whether you’re prepared to be a franchisee, you could be in for a big shock, after you’ve committed yourself to the franchise.
Your Knowledge and Skills: When choosing a brand to invest in and become a part of, most people are best to pick a business that compliments their existing skill set and knowledge. If you buy into a franchise without understanding the industry in which it operates, the franchisor’s assistance is not going to be enough to make up for your lack of skill and knowledge.
Time Commitment: It’s important to ensure you can dedicate the time required to make your business a success. Many franchise agreements set the business’ opening hours, which can be significant (for example, McDonalds). You will also need to be able to pick the right staff for your business and manage them well. In short, you will need to keep the doors open when the franchisor says and devote time to staff training while you’re establishing the business.
Degree of Control: Being a franchisee means you have less freedom than you would if you were running your own business. Everything from store layout to marketing and pricing are set by the franchisor, based on the franchisor’s experience and business model. While a franchise enables you to hit the ground running, the business model is inflexible. If you’re not willing to follow the franchisor’s lead, buying into a franchise is probably not the right decision for you – you’re more likely to be happier in the long term building your own brand.
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When considering any business venture, you need to plan for all eventualities. Once you’ve got the business up and running, you may find you’re not happy so you might want to sell up and move on. Alternatively, if your circumstances change, you may need to terminate the franchise agreement before the end of the term. Either way, you will need to understand all of the termination related clauses in the franchise agreement (another important reason to get legal advice before signing the franchise agreement).
The franchise agreement should set out:
If you signed a lease for the premises, leases for any equipment, and/or any fixed term supply agreements while operating your franchise business, you will also need to understand the termination related clauses in those documents.
If you do your homework and get professional advice, buying into a franchise can be a great decision. Once you’re signed up, if you hit a speed bump or you’re concerned about any aspect of your business, business advisors and turn around experts are there to help. All you have to do is ask.
Some potential business owners believe that buying into a franchise offers a degree of security. For some, it does. For others, it doesn’t. At McDonald Vague, we have seen our share of clients who have bought into a franchise believing they had a fool proof plan for success but have ended up in trouble. In many instances, the reason they’re in trouble is because they didn’t do their homework before signing up to be a franchisee.
If you’re considering buying into a franchise, it’s important that you look into every aspect of the business. After all, you’re buying into the brand and the franchisor’s ethos and you’re agreeing to follow the franchisor’s model. If there is a misalignment in values, you could get into trouble. If you can, talk to other franchisees about their experiences so you can get some idea of what it will be like to be part of that franchise and how members of the public view the brand. A Google search of the brand name can also provide people’s views about the brand, current and former franchisees, and the franchisor.
Financial Viability: While the franchisor will probably give you some financial information to work with, it’s important that you do your number crunching. It’s also a good idea to have an account or business advisor look over your numbers. A couple of high performing stores can skew the numbers and make the investment seem very attractive. It’s important you’re confident that you can make your business successful based on your projections, which must take into account the intended location of your store, that neighbourhood’s business and population demographics, and socioeconomic make up of the neighbourhoods near your store.
Ongoing Costs: When you become part of a franchise, you’re agreeing to pay more than just a one off joining fee. Franchise agreements contain ongoing financial obligations in the form of royalties, marketing, and training (you can find our blog on ongoing franchise costs here). If you don’t take these ongoing costs into account when carrying out your due diligence, you could be in for a big surprise, once you start running your business and it might be difficult to leave the franchise (you can find our blog on leaving a franchise here).
Get Advice: You need to understand all your obligation under the franchise agreement. For this reason, we strongly recommend that you have the proposed franchise agreement looked at by a lawyer and that you get legal advice on the proposed franchise agreement before you sign anything. We also recommend you consider how being a franchisee will affect your lifestyle (you can find our blog on preparing yourself for being a franchisee here). Once you sign that agreement, you’re in.
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If you're thinking about starting your own business, buying into a franchise can seem like a good option. Being part of a franchise means you will be part of an established brand with name recognition, group marketing strategies, and business plans.
The advantages that come with buying into a franchise come at a cost. In addition to the purchase price, you will have business set up costs, marketing fees, and training fees to pay. You will also have obligations to the franchisor to run your business in line with the franchisor’s brand, its image, and its processes.
When deciding whether to buy into a franchise, you will need to look at whether you have the technical skills, ability, and industry understanding to make the franchise work. You will also need to consider whether you have the ability to implement your own marketing strategy and business plan, which must align with the franchisor's brand and image – if you’re operating outside the terms of the franchise agreement, the franchisor may step in.
You also need to work out what the business is really going to cost you and how much it's going to make. Some franchise agreements require you to pay for ongoing marketing, training, and products. These additional costs really add up so it's important to conduct a business health check – and stress test it – as part of your due diligence. If your business is going through a bit of a tough patch, you may end up in a position where paying rent and franchise fees does not leave enough for your business to get by.
If you are a franchisee and your business is in financial trouble, or it may be heading that way, it is important that you get advice early. Not only do you need to consider whether you are breaching your director’s duties by continuing to trade, you also need to consider the consequences of insolvency under the franchise agreement.
If you think the problem is the franchise fees and that a hive down of your business might be the easy answer, think again. It's unlikely to be that simple. Most franchise agreements contain restraint of trade clauses that will stop you from leaving the franchise then immediately setting up in direct competition with the franchise. Some franchisors hold the leases for the franchisee’s premises, which could allow the franchisor to put another franchisee in the premises. Some franchisors hold the supply agreements with suppliers and act as a middle man in the supply chain. Some franchise agreements allow the franchisor to step in if the franchisee becomes insolvent. Most limit the franchisee’s ability to on-sell the franchise to a third party without the franchisor’s approval.
Buying into a franchise can be a great idea but it's really important to know what you're getting into. If you’re starting out, your franchise isn’t going to make anywhere near what the established top performing franchisees are making. It is important that you work out what the business is going to cost you to run and how much money it’s likely to make in both the short term and the long term. Only then can you decide whether you can make it work. Once you’re in, you need to monitor how your business is doing and whether you’re on track.
If you're thinking about buying into a franchise or you’re worried about your existing franchise, give us a call. We can help. You can also head to read more helpful articles on our website.
When it comes to due dates and business tax debt, the IRD don’t mess around. Business owners who shirk their tax obligations can quickly find themselves in trouble.
If you know your tax bill is going to be bigger than you can handle, it’s important to deal with that as soon as possible – ideally long before it’s due. If you can’t pay your tax bill, you should look at the following steps:
The IRD want to help you meet your tax obligations, so if you contact them as soon as you know there’s a problem, they can help you find a solution. It’s best to contact the IRD before the due date, if at all possible, as it increases your chances of being able to get favourable terms.
You should also file your tax returns on time, even if you’re unable to pay the tax owing. If you’re tax compliant, or seeking to be, the IRD will be happy to negotiate a payment arrangement for you to pay your debt off in instalments over time. This can help you with cash flow management while you try to turnaround the business.
If you are suffering from serious ill health then you may qualify for relief under the hardship provisions.
In some circumstances, the IRD will write off an agreed amount of your debt if they determine – based on their criteria – you are in serious financial hardship. They will take into account your payment history, your current situation, and your ability to meet future obligations. You’ll need to fill in the Disclosure of financial position IR590 form.
Bear in mind the IRD will look carefully into your household expenditure, and will require you to make adjustments if it’s significantly above average for your region.
In theory, your company structure is designed to protect your personal assets in the event of company insolvency or other financial difficulties. However, there are legal means to ensure you’re held liable.
Under a HD 15 of the Income Tax Act 2007, the Commissioner is able to go after personally-held assets of company directors and shareholders in order to recover tax debt. However, this only applies when director and stakeholders have entered into an agreement to purposefully deplete a company of its assets (an asset-stripping arrangement). Such an arrangement is also a breach of Director’s Duties. This clause is rarely utilised to recover debts.
Another Act, the Tax Administration Act 1994, makes provisions for non-compliance with tax laws. Under this Act penalties for a company’s non-compliance can be placed upon an officer of the company. A conviction under this Act could see a company director facing both a significant fine and time in prison. This same Act allows the commissioner to pursue a director personally for unpaid PAYE. The IRD has successfully brought many of these cases against company directors – in these cases the directors have been complicit in breaching their tax obligations.
If you’re having problems meeting your tax obligations, or you are trying to make arrangements with the IRD to pay arrears, it's best to be proactive, before you find yourself in even deeper trouble.
If you think your business is in financial trouble contact us to see how we can help.