Winning the paper war: How to break shackles of tax compliance

Chartered accountant PETER SIBBALD shares some professional insight into how to get on top of your taxes and reduce the costs of running a business.


The most frequent grumble I hear from the self-employed and business owners is that the Government is strangling them in ever higher compliance costs.

Just to rub salt in the wound, at year-end accountants contact them with a crooked smile on their faces, looking uncomfortably like the sight of a circling dorsal fin in Waitemata Harbour.

But the battle need not be all one-sided. Despite the constraints of the environment businesses are forced to operate in, there are still things they can do to significantly reduce compliance costs.

"I leave it all to my accountant."

This is the most common comment I hear when talking to business owners (when travelling incognito as a respectable member of the community).

Big mistake! Although using a chartered accountant is essential to running a business, there is much you can do to keep costs down and obtain true value from your professional adviser.

TRY AND SECURE A FIXED FEE FROM YOUR ACCOUNTANT

It can be done. With the traditional time-based billing used by accountants, there is no incentive for your year-end accounts to be processed quickly or efficiently. The abundance of powerful new software available to your accountant has dramatically increased their productivity over the past few years. Ensure you receive a slice of these savings via a fixed, all-inclusive fee.

GIVE QUALITY INFORMATION TO YOUR ACCOUNTANT

Nothing frustrates accountants more (and therefore drives your bill up) than receiving incomplete or poor-quality information. For example, reconcile your bank account every month. If you don't know how, then learn.

MAINTAIN YOUR OWN ASSET SCHEDULE

This does not need to be a depreciation schedule, but merely an accurate list of what assets you own, when purchased, full descriptions, cost, whether they were bought new or second hand, any trade-ins etc. When you forward your year-end records to your accountant, give them copies of all invoices pertaining to assets bought or sold, and copies of all lease or hire-purchase contracts.

Where possible, split assets into sub-assets to take advantage of the most favourable IRD depreciation rates allowed. For example, with a rental property many of the fittings can be depreciated at a substantially higher rate than the building.

While you're at it, look at last year's depreciation schedule. Ensure assets are being depreciated on the diminishing value method, not the straight-line method. The tax savings can be enormous.

If you code your own bank statements (whether they are paper copies or in electronic form), give good descriptions of any unusual transactions. And does your accountant use electronic bank statements like 'Banklink'? For many small businesses this offers a tremendous saving in money and time, and also provides the basis of preparing your GST returns and year-end accounts.

COMPANY ADMINISTRATION CHARGES

Don't let your accountant sting you for this! If they do, then do some of the routine admin tasks yourself. If you are incorporating your business (in general, every business should be formed into a company structure), then do it yourself. It takes around 15 minutes and costs $60 online. The same applies when filing the annual Companies Office return. This costs $15 online and takes 15 minutes. Do it yourself!

MANAGING YOUR DEBTORS

The highest priority to your business should be to get the monthly debtor statements out on time and manage the aged debtors balance to ensure prompt payment is received. All too often the admin staff in small businesses (or the spouse in the case of sole proprietors) are underskilled and overworked. Without exception, run a debtors package and work the monthly trial balance. The quicker your customers pay you, the lower your bank fees and financing charges will be.

Send your invoices out on a weekly basis (not the more usual 20th of the month or when the shoebox gets full). Follow up with a monthly statement and a polite call a week later if payment is still outstanding. Cash is king, and don't you forget it!

Consider outsourcing your routine bookkeeping tasks if you cannot absolutely depend on your internal systems. The Accounting Doctor franchise (and others) has a competitively priced and efficient monthly service, giving you the advantage of fixed cost and a guaranteed and effective service.

E-FILE

If you prepare your own GST returns, ensure you are on a six-monthly basis, not the more usual two-monthly return (obviously, if you are due large refunds then this would not apply). E-file both your GST returns and your employer returns via www.ird.govt.nz.

ACC EXPERIENCE RATING

You can apply for a 10 per cent, 15 per cent or 20 per cent discount on your ACC rates by requesting a Workplace Safety Management Practices audit, conducted free by ACC.

YEAR-END TAX PLANNING

There is often little you can do after March 31 to reduce your taxes. So think about the following now:

If you are likely to buy an asset in the new financial year, bring forward the purchase. If an unconditional agreement is signed before March 31 that commits you to the purchase, a deduction for one month's depreciation can be claimed, even if no more than a small deposit was paid.

If you can legitimately do so, stream income to a taxpayer with a lower tax rate (for example, a spouse) via the payment of a director's fee or management fee. Whether you can do this legitimately depends on your business structure and operating methods.

Identify and write-off bad debts before March 31. After then, it's too late.

DO PAPERWORK AT HOME? YOU MAY QUALIFY FOR A HOME OFFICE DEDUCTION

Look at all expenses you owe at balance date, and claim a deduction for these. This includes telephone, rent, suppliers and so on.

Any expenses paid out of your pocket that did not go through the books? Parking meters and petrol can all add up to a worthwhile figure for a small business.

DIRECT CREDITS, AUTOMATIC PAYMENTS AND INTERNET BANKING

Have all GST or other tax refunds paid direct into your bank account. Likewise, ensure that your debtors pay you by direct payment to your bank account, not by cheque. The old excuse "it's in the mail" is just that, and no longer appropriate. Avoid writing cheques, and set up recurring expenses on automatic payment. Use the technology that's available - internet banking.

Despite what you may have been told, a little learning is not a dangerous thing. Business owners are, by necessity, generalists. It is an essential prerequisite that they know a little about a lot. Accounting should be at the forefront of this learning to ensure the success of your business. Don't be intimidated - ignore the words and focus on the concepts. If you would like some more business advice, then you are most welcome to a copy of my newsletter, The Tax Slasher. Just drop me an email.

TIP SHEET

Negotiate a fixed fee from your chartered accountant

Give your accountant quality information

Maintain an asset schedule

Check your depreciation schedule - is diminishing value (DV) being used?

E-file

Return GST on a six-monthly basis

Use internet banking

Maintain an aged debtors balance - and use it

Consider outsourcing

April 1 really is April Fool's Day. Plan your year-end tax deductions before March 31

* Peter Sibbald is author of the best-selling business book Slash Your Taxes Now! published by Reed Publishing. Contact him at feedback@petersibbald.co.nz.