Preparing your budget for the
next financial year
Preparing
a budget is a crucial step in planning your business activity for the next
financial year. Operating a business without a budget is like taking
a road trip without a map.
One
of the benefits of having a budget is that you can compare results and quickly
identify where you are going off track and then take action to rectify the
situation. If your not meeting profitability target and sales are
down, look for items in the budget that can be trimmed or cut.
Preparing
a budget forces you to sit down and critically look at your business.
You need to think about where you want your business to go and how you're going
to get there. Start with looking at income and expenditure for this
financial year to identify opportunities or problem areas.
Goal
setting
A budget is just a
plan of the goals you would like to achieve. There is a saying ‘If
you aim at nothing, you will hit it with amazing accuracy.' Only by
having a goal can you do any better than in the past.
Once
you have set your goals, then you can start preparing your budget.
Here are some questions you should consider:
• Which market segments were more
profitable/least profitable?
• How can I expand the more profitable
segments ie. More advertising, specialisation, relocation or new location?
• Do I need extra or more qualified
staff and what will be the added expense?
• What training will they need?
• Am I expanding or consolidating my
business?
• Has there been an increase in business
input costs and how do I translate that across my product range or service?
• Will I need to make additional capital
expenditure ie. software/hard ware?
• Will I need extra funding to achieve
these goals?
• Where or how will I obtain this
funding ie. Overdraft facility, new business partner or bank loan?
• Are my margins realistic or too low?
• What is your break-even ie. Income =
overheads?
Keep
it flexible
Your
budget should be flexible enough to allow for economic or environmental changes
ie. Interest rate increases, long or short winters.
You
should review and update your budget regularly so it more accurately reflects
the current situation. Measure actual performance against budget and
make adjustments where necessary to keep your business on target and allow for
contingencies.
WORKING
FOR FAMILIES
Working for
families is a new government initiative to help working families gain
assistance. To view information to see if you may now be entitled to
receive family assistance under the new criteria, check out the website at
http://www.ird.govt.nz/related-sites/keyword/workingforfamilies/
FAMILY
TRUST- MUST IT HAVE AN IRD NUMBER?
In some cases
trusts are not deemed taxpayers, and there is no need to obtain an IRD Number.
If a family
trust is a taxpayer it must have an IRD Number and have a return of income
filed each year. Whether the trust is deemed to be a taxpayer
depends on whether it earns income or has any income-earning
assets. These would include:
If the trust has
no income and no income-earning assets it is not a taxpayer, therefore no IRD
Number is required. An example of this would be a family trust
that owns a family home but no other assets.
If you have a
family trust with an IRD Number that has been allocated in error, you can
contact IRD in writing and the IRD Number will be ceased.
INCOME
THRESHOLDS FOR STUDENT LOAN REPAYMENTS AND INTEREST WRITE-OFFS TO RISE
Income thresholds
for student loan repayments and interest write-offs will rise from 1 April 2005.
The income level
at which borrowers must begin to repay their loans will rise from $16,172 to
$16,588. The maximum income level for a full interest write-off
for part time students will rise from $26,140 to $26,799.
Borrowers whose
income is below the repayment threshold will not have to make repayments on
their loans and a large portion of their interest will be written off.
Full-time,
full-year students will continue to receive a full interest write-off while
they are studying, regardless of their income.
IRD
WARNS AGAINST INCOME SPLITTING THROUGH TRADING TRUSTS
Inland Revenue has recently warned professionals and others who are reducing their
taxable income by operating through trading trusts.
Following a ruling by the Taxation Review Authority (TRA), the department
warned people to "consider taking advice" as the arrangements may be
subject to review by IRD.
IRD had been asked to comment on common structures which have the effect of
income minimisation, involving income generated from professional or skilled
services using trusts.
It said interest in the issue, which was not new, had been rekindled
following a TRA case in which the authority held that a dentistry practice was
transferred to, and carried on, by a "trading" trust for tax
avoidance purposes.
"Inland Revenue has always looked closely at situations where
professional people conduct their business through trusts, and sometimes
companies, which they or their families control," said IRD deputy
commissioner Naomi Ferguson.
Ferguson said it was by no means the case that every professional operating
through a trust was doing so for tax reasons but the department had concerns
that some professionals, after becoming employees of associated trusts or
companies, were setting their incomes at levels considerably below what they
could earn as self-employed practitioners.
In these cases some, or all, of the difference in income might be
distributed by the trust to other family members as beneficiaries to save tax.
This can result in the professional appearing to earn an unreasonably low
level of income, she said.
"There may be legitimate reasons for these arrangements, and we will
look at each case on its own facts."
She said it was very difficult to set down rigid rules.
"We do not expect a full market salary to be paid where the business
is operating at a loss or is earning very little.
"However, where business income generated by the skills of the
proprietor is at, or more than a relevant market salary, we would expect at a
minimum that a market salary is paid. Our view is that generally, income
gained from personal skills should be taxed in the hands of the person who
generates the income."
IRD would consider several factors to assess the purpose of the
arrangement, including:
* The taxpayer's commercial reasons for using the structure.
* The way that arrangements are actually implemented and operated.
* The level of salary or drawings paid compared with any previous earnings
and with expected market salary rates for a person in a similar situation.
* The degree to which the business relies upon the specialist skills of the
proprietor
* The overall tax impact (including income diverted to associated
parties).
EARLY PAYMENT
DISCOUNT
An amendment in the Taxation (Venture Capital and Miscellaneous Provisions)
Act 2004 provides a discount of tax to encourage individuals who commence
receiving self-employed or partnership income to voluntarily pay tax in the
year before they become liable to pay provisional tax. This will help relieve
the financial strain faced by these taxpayers when they commence paying
provisional tax and have two years' worth of tax payments to make, namely
income tax for the prior year and provisional tax for the current year. The
amendment applies from the income year commencing 1 April 2005.
Who qualifies for the discount?
To qualify, the taxpayer has to:
The current discount rate is 6.7%.
Example
A taxpayer makes voluntary payments of $5,000 for the year ended 31 March
2006.
Their residual income tax for 2006 is $8,000.
The discount is calculated on $5,000 being the lesser of the voluntary
payments made and 105% of the residual income tax amount ($8,400).
The value of the discount is $335 being 6.7% of $5,000.
USE OF MONEY
INTEREST RATES TO RISE
To align with market interest rates, the interest rates on any unpaid and
overpaid tax will increase from 8 March 2005.
The new interest rates are:
