IRD 2004-2005 ANNUAL REPORT
The recently issued Inland
Revenue Department Annual Report for the year ending June 2005 underlines how the tax coffers have been
bulging in recent years.
department collected $32.8 billion in direct taxes, up 12.3 per cent on the
previous year and $9.2 billion in indirect tax, up 4.5 per cent.
said the strength of the economy had led to an increase in both the numbers of
taxpayers and the amount they were paying.
has been especially strong growth among small business and salary and wage
earners," the report said.
Treasury, IRD also failed to predict the growth with the total tax take 6.1
per cent more than it forecast.
many picking a downturn in the economy, IRD is still forecasting the tax take
to steadily increase over the next five year.
taxpayers were handing over more to the taxman they were also racking up
increasing levels of tax debt.
overdue debt was $2.8 billion at June 2005, up 23 per cent on the previous
was made up of $1.3 billion in non-collectable debt and $1.5 billion under
instalment or for collection.
report said that audit activity including investigating tax avoidance and
evasion schemes had generated $541 million in additional debt, a 35 per cent
increase on the previous year.
the greater tax debt and tax take, less use was being made of debt and
2004/2005 year had resulted in 42,662 cases worth $83 million being written
off compared to 43,250 cases worth $86 million in the previous 12 months.
penalty and interest component of total debt fell from 43 per cent to 41 per
report reveals that the department also failed to meet some of its targets
when it came to answering tax enquiries.
said an increased number of high volume days impacted on its ability to meet
target standards for timeliness in answering calls.
managed to answer 60 per cent of tax agents' calls, 75 per cent of employer
calls and 54 per cent of debt collection calls within its 20 second time
it came to "general service" calls, 48 per cent were answered within
60 seconds on days when call volumes were below 17,500.
days when the number of calls was above that, people waited an average of
nearly six minutes for a reply.
RECENT LEGISLATION FOR FAMILY
ASSISTANCE AND STUDENT LOAN INTEREST
Legislation was recently tabled in
Parliament 0n 8th November, 2005 honouring Labour’s election promises to make student loans
interest free and to expand the Working for Families package.
The family tax relief provisions raise the threshold at which family
income assistance begins to abate from $27,500 to $35,000 and reduce the
abatement rate from 30 per cent to 20 per cent.
The bill will be fast-tracked through all its stages before the House rises in
mid-December so that the changes can take effect in the year beginning 1
The interest free student loan policy would apply to existing and new loans
and had been designed both to cut the cost to students of tertiary study and
to encourage skilled New Zealanders to invest their skills in the New Zealand
economy. With some exceptions, people will have to be living
in New Zealand to qualify for the interest free loans.
"Borrowers will be deemed to be non-resident when they have been out of
the country for more than 183 consecutive days. Short visits [31 days or less]
back to New Zealand will be counted as if the person had remained overseas.
"New Zealanders returning home will, after 183 days back in the country,
have any interest charged on their loan from the first day of their return
reversed. Trips overseas of 31 days or less will be counted as if the person
had remained resident in New Zealand.
As a further inducement to encourage people back, non-resident borrowers who
are in default for non-repayment of their loans will have their penalties
cancelled under a special amnesty if between 1 April next year and 31 March
2007 they agree to keep their current liability up to date for two years.
Inland Revenue will have the discretion to exempt from the residency rule
people, and the partners of people, who are overseas:
For reasons relating to Inland Revenue's
computer system, it would continue in the short term to charge interest during
the year and write it off at the end of the year and that this would show on
borrowers' statements but that it would be an administrative entry only.
|for postgraduate study;|
|in a work posting for a New Zealand-based
|working on a volunteer basis or for a
token payment for a recognised charitable organisation, in which case the
exemption will apply for up to two years;
|on an unplanned period of absence - for
example, visiting a sick parent;
|unavoidably delayed from returning to New
Zealand within 183 days due to unexpected circumstances such as illness.|
YOU NEED FINANCE FOR YOUR
BUSINESS- SHOULD YOU BORROW OR SELL SHARES TO INVESTORS?
One way to differentiate between these two sources of
business funding is to think about it as being either equity
What is equity finance?
Very simply, equity finance represents the amount
invested as capital into the business.
An investor, in return for a contribution to the capital
of the business, receives a share of ownership. For example,
if you have contributed all the capital to your business then
you have 100% ownership. Alternatively, if you have a
partner and you both contribute half of the capital then you
would each have 50% share of the ownership (or whatever
amount the partnership
Equity finance means that you give up a portion of the
ownership of your business in return for an investor
contributing capital. Sources of equity investment include
partnerships, business angels and venture capitalists.
One advantage of equity finance is that in return for
giving up part of the ownership of your business you gain
access both to the investor’s capital and to networks,
managerial skills and expertise that you previously did not
For some businesses the use of equity finance can be the
key to growth.
What is debt finance?
Debt finance is money you borrow that needs to be paid
back, usually with interest.
It is the most common way that business owners gain
access to the funds they need.
For most businesses debt finance is likely to be in the
form of bank loans, from friends or families, overdrafts, or
hire purchase and leasing agreements from finance companies
and credit unions. Sometimes, particularly with bank or
finance company loans, the amount you owe is secured over
your personal assets, such as your house, holiday home or
The major difference between funding your business
through debt rather than equity finance is that with debt
finance you retain full ownership of your business.
Therefore while the risks remain yours, so do the rewards.
What does margin mean? In plain English it
means the difference between what we sell something
for and what it costs to deliver to the customer or
Cost of Goods Sold (COGS). Margin is often expressed
as Gross Profit which means the same thing. Margin or
Gross Profit is quite different from Net Profit.
Profit is calculated after taking into account
Overheads which occur whether you sell something or
not, whereas Margin is calculated after taking into
account only those costs necessary to produce or
deliver to the customer. For example Rent is an overhead which
occurs whether we sell something or not, whereas
delivery cost of goods sold only occurs when you
actually sell something.
Margin = Sales – Cost of Goods Sold
e.g. if you sell an item for $150 and your cost is
$100 then your margin is $50 or 33.33%.
Margin can sometimes be confused with ‘Mark-up’.
Mark-up is the amount or percentage that you ‘add
on’ to the cost of a product or service to determine
the sales price. e.g. if it costs you $100 to produce
an item and your sales price is $150 then your mark-up
is $50 or 50%.
Margin or Gross Profit is an important number to
measure in any business whether it is product or
service related. Many businesses don’t measure Margin or Gross Profit
regularly but wait and rely on their Accountant to
tell them if they have made a Net Profit.
If you wait
until well after the end of the tax year to find out
this number your business could be in trouble and it
could be too late to do anything about it.
In order to know if you will make a Net Profit you
firstly need to know what your Margin will be before
calculating your Overheads. If your Overheads outweigh
your Margin then you will make a loss.
Margin is a vital number to measure in your business
as variations can have a huge impact on many other
results such as
• Net Profit
• Working Capital Requirement
• Interest Cover
There are two ways to change your margin
• Price Change
• COGS Change
The first being Price change is mostly under your
control. It is vital to ensure you maintain your margin
by regularly reviewing your pricing. Small regular
price changes are much easier to implement than rare
big ones. So it follows that the more often you
analyse your margin and adjust prices to suit the more
sustainable and profitable your business will be.
The second way to change margin is via COGS change.
This is one where you may have less control but
nevertheless it needs to be constantly monitored in
order to maintain margin. We have a perfect example of
COGS change occurring right now with oil price
increases. This phenomenon is having an impact on many
items and consumers are the ones who will foot the
bill by increased prices so that producers can
maintain their margins.
Margin or Gross Profit is an important number to know
when calculating Breakeven. Breakeven is vital to know
in business in order to determine if your business is
sustainable and when it will make a profit.
is calculated by knowing what your overheads are and
what your COGS are. Once you know these two numbers
you can calculate what you need to sell to breakeven.
This is particularly important to know in a business
starting up as they often take a while to make a
profit. Funding is often required to cover the time
until the business is in profit.
Lenders are particularly interested in business margin
as they use this number to compare against the working
capital requirement. If the working capital
requirement exceeds the margin then the business
effectively has to borrow money to pay the interest on
the loan. This indicates a very unhealthy business
from anyone’s perspective. ‘Marginal Cashflow’
is the term used to describe the comparison of Gross
Profit to Working Capital Requirement.
If you want to borrow money to grow your business then
you need to have a really good handle on your Margin
and how you plan to manage it. Lenders feel very
uncomfortable with a business with erratic margins and
no margin analysis in place.
WHAT TO CHECK
BEFORE SIGNING A LEASE
A lease agreement is a major business commitment and therefore requires
caution. If the building or location turns out to be unsuitable, you might
(through a personal guarantee) find yourself and the business committed to
several years’ rent, even though you may have moved out of the premises.
Check the Lease
Always get the lease checked by a lawyer with experience in commercial
leasing who can spot unfavourable clauses. The lawyer can help you negotiate
Important tip: Despite its name, a preliminary ‘Agreement to lease’
document actually binds you to some essential terms that will appear in the
final lease. Don’t sign it or any other document before you have your
Length of the Lease
Whether you should sign a short-term or long-term lease depends on your
circumstances. A new and relatively unproven business might see advantages in
the freedom of a short-term lease (or even a sub-lease if one comes on the
market) that allows it to test both the business concept and the location
without longer-term financial commitment. A more stable and established
business might value the security of a longer tenure and see considerable
merit in renewal rights.
Most leases are medium term: for instance the 4 + 4 formula (four years
lease with the right of renewal for another four years) is popular. Get advice
from your lawyer and accountant on the term of your lease.
Suitability of the Premises
It’s important to do research before you sign a lease. For a
destination business (a business like a supermarket or video shop that
consumers need to visit), a good location (high foot and road traffic, good
access and parking) is vital. Other businesses (for example, businesses that
sell to other businesses) might be more concerned with good access for trucks
Also check if the Resource
Management Act 1991 might apply.
Is it suitable? Is there sufficient parking? Easy access for
customers and/or trucks making deliveries?
Is it a growth area or an area in decline? Will any future
changes affect the premises? (For example, a new road plan that will
divert traffic.) Check with your local authority. Find your local
authority through the map at this link.
Room for Growth
If the business expands, is there room for growth? Can you make
Check that both the landlord and the local authority will permit
the signage you need to promote your business. Find your local
authority through the map at this link.
Tip: Signage is important and can work for the business 24 hours
a day. Consider how people find a bank in a strange town: they
typically look for the familiar signage.
Are there zoning or any other council or local authority
restrictions? For example, is the site a heritage building with
restrictions on improvements or renovations? Does your business
Consent? (e.g. for dangerous goods storage, discharge of effluents
or noisy activities)?
Assignment or Subletting
Can you assign or sublet the premises if you have to move out?
What are the restrictions on doing this? When do your obligations
cease? Can you negotiate better terms?
Can you get insurance? Who pays, and what is covered? (Note:
retail premises may need plate glass insurance.) Do you need
additional indemnity insurance? Consult an insurance broker. Is the
inevitable building insurance included in or additional to the rent?
Safety and Security
Who is responsible for the building’s security? Is there a
sprinkler or fire prevention system or do you need one to get
insurance? Does the building comply with earthquake regulations?
Are they doing well? How do they describe their relationship
with the landlord? Does the landlord keep the building in good order?
Sometimes a landlord may agree to a form of rent ‘holiday’,
e.g. 50 percent of the agreed rent for the first three months of
tenure. This is less likely for a building in high demand. Landlords
with premises vacant for a long time may agree to reduced rent or to
free redecoration or other concession.
Rent Reviews and Ratchet Clauses
How often do rent reviews occur? Is there an agreed formula for
rent increases? What are the provisions for arbitration in the case of
disagreement over increases and who pays the costs? (Note: arbitration
can be expensive.) Is there a ratchet clause? Can this be altered or
negotiated? Discuss with your lawyer.
Who is responsible for maintenance inside and outside the
building and who pays? Make sure you understand your obligations.
Tip: take photographs when you move in to record the existing
condition of the building.
Especially in a multi-tenanted building, check the building’s
operating expenses. Are these reasonable and within your means?
Are you responsible for the landlord’s lawyer’s costs in
concluding the lease? Can you share these costs or get them capped at
an agreed limit?
It’s important to include a clause in any document that any
Agreement you sign is conditional on your lawyer’s approval.