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