Business owners struggling to find cash
This week's Business View contributor is Dianne Roberts, a principal with BDO Taranaki, a member of the BDO New Zealand network of independent chartered accounting and business advisory firms.
Column: Business view
OPINION: With major tax payments looming many business owners are struggling to find the cash let alone make accurate payment calculations following what has been a tough 12 months - and an uncertain time ahead.
While it's best to budget ahead for these payments, it's not an ideal world.
Fortunately there are two products available for businesses struggling to find the cash immediately to pay their liabilities or who want to minimise the damage interest and additional tax penalties can do if paying historical taxes. These are:
* Tax pooling, which is used when you have not paid sufficient taxes in the past. A tax intermediary is used to pay your tax on the actual due date, as if the money had been paid by you on time. There is an interest charge of course, but at rates significantly lower than those charged by Inland Revenue and you avoid any nasty additional tax penalties. Tax pooling also benefits those that overpay provisional tax as the tax intermediary pays a higher credit interest than Inland Revenue. But conditions do apply.
* Tax finance, which is used to pay for future tax payments. You select the amount of time required to finance the payment and pay only the finance cost up front. The principal balance is due at the end of the finance period or as soon as cash is available. Again, the interest cost is lower than Inland Revenue charges and the payment is made on the due date so you avoid any late penalties. There are no credit applications or security.
With 2009 terminal tax due on April 7, consider tax pooling to reduce the costs of any interest or penalty charges by Inland Revenue. Four weeks later (May 7) comes your third instalment of 2010 provisional tax.
Given the economic fluctuations of the past 12 months and uncertainty in the recovery, making accurate calculations is challenging. So tax finance may be a good option to ensure you have paid your expected liabilities.
If the financed amount is not needed, you can cancel the arrangement and may qualify for a refund of the finance charges you paid up front. But at least you have the comfort that some payment has been secured.
Ultimately tax is like any business expense and should be budgeted, so your cash flow can remain steady and you avoid owing Inland Revenue penalties and interest charges. Tips:
* Bank for tax. Some business owners, especially sole operators, should be banking a percentage of turnover now into a separate interest-bearing savings account to ensure sufficient cash is available - 35 to 40 per cent is usually enough to cover GST and income tax.
* Use software. Business accounting software such as MYOB and Xero ensures quick assessment of profitability for the year and supports an informed assessment of tax.
* Use your accountant. Have your accountant prepare your GST return and issue you with financial reports each GST period, reviewing the actual result to budget and prior years with attention to your tax position.
* Keep on top of your debtors. If they use you as their bank, you will end up going to your bank to pay your tax and they will charge you interest.
* Consider voluntary payments. You can make voluntary payments at any time to lighten the cash outflow on the date of the actual provisional payment.
- © Fairfax NZ News