TOTALACCOUNTING Chartered Accountants

Accounting                               Taxation                                   Business Advice and Development Assistance                                        

 P.O. Box 10 , Clive         133 Main Rd, Clive           Tel. (06) 8700952          Fax. (06) 8700955 

Email murray@totalaccounting.co.nz                                  Website www.totalaccounting.co.nz

 
EMAIL NEWSLETTER FEBRUARY 2015
 

Welcome again to the TotalAccounting Newsletter in which we discuss current taxation and business matters. We trust you find it informative.  

 

NEW CLIENTS

We are happy to accept new clients.  We would be happy to assist colleagues and acquaintances as new clients.

 

 

INDEX

  1. Do you provide Accommodation or Meals to Employees?

  2. Borrowing Money to Finance Business Activity

 

DO YOU PROVIDE ACCOMMODATION OR MEALS TO EMPLOYEES?

New rules, effective from 1 April 2015, clarify the tax treatment of accommodation and meals you provide to emplyees.  The rules also cover allowances paid to reimburse employees for accommodation and meal expenses.

Key Changes

Accommodation and accommodation payments are tax exempt for employees:

  • on out of town secondments for up to two years
  • on capital projects for up to three years
  • who work at multiple workplaces on an ongoung basis
  • who attend meetings, training courses or conferences as part of their jobs

Some employees have longer tax exempt time periods. Specific rules apply to:

  • people working on Canterbury earthquake recovery projects
  • New Zealand Defence Force personnel
  • ministers of religion
  • people working overseas

Meals and meal allowances are tax exempt for employees:

  • on work related travel up to three months
  • who attend meetings, training courses or conferences as part of their jobs

What You Need to Do

Employers must ensure they tax their employee's accommodation and meals correctly.  Receiving accommodation or meals can effect their employees Working for Tax Credits Entitlements, Child Support payments and Student Loan obligations. 

How to Tax a Benefit Allowance

Definition

Benefit allowances are the provision of the benefit or payments made in addition to salary or wages that benefit the employee. Examples include:

  • food allowances
  • clothing allowances
  • accommodation allowances
  • farm or cottage board.

What the taxable value of the benefit is

Unless exempted the taxable value of the benefit is the difference between the market value of the benefit provided, and any amount the employee actually pays.

Note

If providing free board you need to take into account what is being supplied, eg, meals, own room, power and phone when calculating the taxable value.

How it is taxed

The taxable value of the benefit is added to the employee's wages each pay period it's paid in and PAYE is deducted from the total. Include this in the gross earnings when you complete your Employer Monthly Schedule (IR348).

Example

Regan works on a farm with a farm house on the property. His employer lets him rent the farm house for less than the market value. Regan will have to connect and pay for any of his own utilities, eg, power, phone, internet, etc.

Market value of accommodation $150 per week
Rent paid by Regan $100 per week
Taxable value (to be added to wages and taxed) $50 per week

If Regan is paid a weekly rate of $500 each week, the calculation is:

Weekly gross $500
Taxable value of accommodation $50
Total gross $550
PAYE on $550 $85.37
Regan would be paid the following:
Weekly gross $550
Less taxable value of the accommodation $50
less PAYE $85.37
Net amount paid to the employee $414.63

When completing your Employer Monthly Schedule (IR348) Regan's gross will be listed as $550 (inclusive of the taxable value of the accommodation).

 

BORROWING MONEY TO FINANCE BUSINESS ACTIVITY

Borrowing money is one of the most common sources of funding for a small business, but obtaining a loan isn't always easy. Before you approach your bank for a loan, it is a good idea to understand as much as you can about the factors the bank will evaluate when they consider making you a loan.  This discussion outlines some of the key factors a bank uses to analise a potential borrower.   

Key Points to Consider
Your bank will review the following key points:
 

Ability to Repay/ Capacity
The ability to repay must be justified in your loan package.  Banks want to see two sources of repayment -- cashflow from the business, plus a secondary source such as collateral, as security.  In order to analyse the cash flow of the business, the lender will review the business's past Financial Statements. Generally, banks feel most comfortable dealing with a business that has been in existence for a number of years because they have a financial track record.  If the business has consistently made a profit and that profit can cover the payment of additional debt, then it is likely that the loan will be approved.  If however, the business has been operating marginally and now has a new opportunity to grow or if that business is a new business, then it is necessary to prepare a thorough loan package with detailed explanation addressing how the business will be able to repay the loan. 

Credit History
One of the first things a bank will determine when a person/business requests a loan is whether their personal and business credit is good.   Most banks have access to this information.  Therefore before you go to the bank, or even start the process of preparing a loan request, you want to make sure your credit is good.

If you have been late by a month on an occasional payment, this probably will not adversely affect your credit.  However, if you are continuously late in paying your credit, have a credit that was never paid and charged off, have a judgment against you, or have declared bankruptcy in the last 7 years, it is likely that you will have difficulty in obtaining a loan.

In some cases, a person has had a period of bad credit based on a divorce, medical crisis, or some other significant event.  If you can show that your credit was good before and after this event and that you have tried to pay back those debts incurred in the period of bad credit, you should be able to obtain a loan.  It is best if you write an explanation of your credit problems and how you have rectified them and attach this to your credit report in your loan package. 

Equity
Financial institutions want to see a certain amount of equity in a business.  Equity can be built up in a business through retained earnings or the injection of cash from either the owner or investors. 

Don't be misled into thinking that new businesses can obtain 100% financing.    A business owner usually must put some of her/his own money into the business.  The amount an individual must put into the business in order to obtain a loan is dependent on the type of loan, purpose and terms.  For example, many banks want the owner to put in at least 20 - 40% of the total request.

Example: A new business needs a $100,000 to start. The business owner must put $20,000 of her own money into the new business as equity.  Her loan will be $80,000.  The debt to equity ratio is 4:1.  Note also that this is only one of many factors used to evaluate the business -- just having the right debt/equity ratio does not guarantee you'll get the loan. 

Security/ Collateral
Financial institutions are looking for a second source of repayment, which often is collateral.  Collateral are those personal and business assets that can be sold to pay back the loan.  Most loan programmes require at least some collateral to secure a loan.  If a potential borrower has no collateral to secure a loan, he/ she will need a co-signer that has collateral to pledge. Otherwise it may be difficult to obtain a loan.

The value of collateral is not based on the market value.  It is discounted to take into account the value that would be lost if the assets had to be liquidated.

Questions Your Bank is Likely to Ask

The key questions the bank will be seeking to answer are as follows:

  1. Can the business repay the loan? (is cash flow greater than debt service?)
  2. Can you repay the loan if the business fails? (is collateral sufficient to repay the loan?)
  3. Does the business collect its payments for services rendered?
  4. Does the business control its stock?
  5. Does the business pay its accounts to suppliers?
  6. Are the business owners and managers  committed to the business?
  7. Does the business have a profitable operating history?
  8. Does the business match its sources and uses of funds?
  9. Are sales growing?
  10. Does the business control expenses?
  11. Are profits increasing as a percentage of sales?
  12. Is there any discretionary cash flow?
  13. What is the future of the industry?
  14. Who is your competition and what are their strengths and weaknesses?.

 

TOTALACCOUNTING KNOWLEDGE CENTRE AND ARTICLES ABOUT TAXATION AND BUSINESS IN GENERAL PRESS HERE FOR BUSINESS STARTUP KNOWLEDGE CENTRE PRESS HERE
FOR INFORMATION ABOUT COMPANY INCORPORATION PRESS HERE FOR PREVIOUS MONTH EMAIL NEWSLETTERS PRESS HERE

FOR PROPERTY INVESTMENT AND TAX INFORMATION PRESS HERE

FOR FRANCHISE INVESTMENT AND TAX INFORMATION PRESS HERE


The information provided in this email newsletter is for informational purposes only.   TotalAccounting accepts no responsibility for the opinions and information expressed in the information provided and it is provided "as is" without warranty of any kind.    The user assumes the entire risk as to the accuracy and use of this document.   Readers are asked to seek professional advice pertaining to their own circumstances.    The TotalAccounting email newsletter may be copied and distributed subject to the following conditions:
  • All text must be copied without modification and all pages must be included.
  • This document must not be distributed for profit.    

 

If we can assist further, please email TotalAccounting as follows:

 CONTACT TOTALACCOUNTING BY EMAIL BY CLICKING ON THIS LINK

BACK TO HOME PAGE