Tax avoidance is legal, but a no-no

YOU might have read about the recent tax case called Penny and Hooper.

It was about two surgeons. They did not break any tax laws. All they did was to pay themselves low salaries from their companies to reduce the amount of tax they might otherwise have had to pay. There is nothing in the law to say they should not pay themselves a low salary as they explained in court.

Their problem was the amount of the salary was artificial. They would never have worked for such a low wage. If it had been realistic they would have been unlikely to have attracted the IRD’s attention.

If you contrive a way to reduce your tax, you could be accused of tax avoidance. The IRD might reset the figures as they think suitable and charge you interest and probably penalties.

If you contemplate paying yourself an artificially low or high salary to save tax, don’t be greedy. If the amount of tax is small, IRD is less likely to take any notice. A low salary can often be justified for good commercial reasons. Be ready to justify high salaries to those who are not full-time employees on the basis of hours worked, pay rates etc. Consult us if in doubt.

Promote the Real ‘Benefits’ of your Business

FIND out what makes your business special and promote these benefits when quoting.

Reliability, fair prices and so on are often cited as benefits, but they are actually features. They are vague, do nothing for the customer and are features that every customer now expects.

Notice how car advertisements no longer promote reliability – everyone expects their car to start every time and get them where they want to go without breaking down. Low fuel consumption would be a benefit, because car owners can see  the “benefit” of saving money.

A business can win work by promoting real benefits, even when the cost might be higher.

An example we know if is two painters who tendered to paint a new house. "A" quoted $24,500 and "B" $27,500. The owner accepted the higher price. He did his homework and noted the following.

· "A" was a bit short on detail in his quote. He asked "A" what he was planning to do for his money. The differences between the two were startling:

· "A" employed two brush hands, who were not tradesmen. "B", a tradesman, would do the entire job himself.

· "B" was going to re-prime the weather boards because he considered factory priming insufficient. He was also going to apply two top coats to the outside. "A" was going to do neither of these.

· "B" stated he was going to use the best quality paint and there was good reason to believe him. "A" made no mention of quality.

· "B" gave advice on how to make the job last as long as possible. There was no after-sales service from "A".

Two things will help you to win quotes at the prices you really want:

1 Be quick.

2 Tell your prospective customer why you should be chosen.

What benefits do you offer that others might not?

A Worthy Investment

THIS is a true story and has nothing to do with business. Nevertheless I think you will like it. It goes nicely with Christmas. A friend collects Clarice Cliff china. He showed me a beautiful tea set comprising about half a dozen pieces. “I paid $20,000 for that, which is about market value,” he said. “I bought it at auction and found out it was originally owned by an old lady in Tauranga. She saw it in a second-hand shop about 20 years ago, in Napier. She bought it for $7 because she thought it looked pretty. Now times are hard for her so she has sold it. I am so  pleased she was able to get a good price.”

Donations

AVOID getting involved in scams, even if you think they might be helping someone. This includes assisting a charity to dodge GST. For a donation rebate to be allowed, the charity must be approved by the IRD. Make sure your donation is legitimate.

Go to http://www.ird.govt.nz/donee-organisations/donee-organisations-index.html for a list of approved charities. The list is not always up to date but it is the best we can offer you.

 Rebate on School Fees.

THERE’S a common misconception you can claim a rebate for all school fees. The school must be state funded or be approved as a charity. The general school fee is not a compulsory payment so it is a donation. You can claim a rebate provided the donation is into the general fund of the school and is not ear-marked for a specific project. A donation for a school trip would not qualify.

SHOULD you keep till tapes? It is your job to prove you have accounted for all your income. You must therefore keep whatever evidence is available to help prove you are right. Yes, you do need to keep till tapes. Like other records, you need to hang on to them for seven years.

IRD is focusing on overseas superannuation schemes and the cash economy. Do not cash in your overseas superannuation without first consulting us as you could turn a non-taxable situation into one subject to tax. If you have an overseas pension scheme, not taken out in New Zealand, tell us when we do your tax return, even if you are not getting income from it. It could be taxable.

DON’T give discounts just to get business. It is one of the worst ways to promote new business as it comes straight out of your profit.

If you can reduce your price once, your customer will expect you to do it again. Further, if you can always afford to reduce your price, you are telling everyone you are overcharging.

By all means give a discount for a second or subsequent purchase immediately following an initial buy. You are catching the customer while in a buying mood. Discounting the second sale is good business as it is better to get some extra profit than none at all.

A joiner (see article “Networking saves the business” on the front page) gives new customers referred to him a 5% discount as a thank you to the referrer. We think

people refer their friends primarily because they think you do a good job. We doubt the promise of a discount for someone else would encourage many people to recommend your business.

Many joinery businesses make quite small profits after taking out wages for the owners. Ten percent of sales is often good going. A 5% discount off sales represents a 50% cut in profit for a firm making 10% profit.

GEARING is the ratio of borrowed money to your own money. If you have a business which has a high proportion of borrowed money, you are said to be highly geared.

There is a very old saying in accountancy: “In good times get into high gear. In bad times get into low gear.”

If you think these are bad times, get your borrowing down.

Keep an eye on the proportion of your borrowed money to your total equity (what you own). If 80% of what you own is financed by borrowed money, you are taking a big risk in difficult economic times. In fact, you could be gambling. For small businesses, for “you” read firstly the business and then both your personal situation and the business combined.

If you want to reduce your business borrowing, you could:

· Consider hiring equipment rather than buying it.

· Subcontract to other firms. The extra cost of hiring another business to work for you may be a better choice than tying your money up in equipment which doesn’t get sufficient use.

· Tighten up on debtors (money owing to you). Reduce the time you allow for payment. Above all, police the outstanding bills, regularly, frequently and swiftly. Make notes of any promises and remind your bad payers about them if you have to keep following up.

· Keep an eye on your stock levels. If you have made some bad decisions, you have already lost money. Sell your mistakes early. Don’t over-buy.

“THAT line is currently on voicemail,” said the person on the other end of the telephone. “Would you like me to put you through to a live person?”

Wow! I have never been asked that before!

Your business probably appears to the public as being very much like that of your competitors. The way you treat your customers can make all the difference and give you the edge.

At a function recently, a woman was talking about restaurants. She said the quality of the service could make a big difference to how often she chose to go.

Get your staff involved with ideas for making your business special. Implement the best thoughts.

Ideas for improving your telephone reception and getting more business include:

· If you are out and can’t answer a call, get it to switch straight to your cell phone.

· Determine the maximum number of rings by which the phone must be answered and get everyone in the business to make sure this happens.

· If you can’t answer right away, have your answering message tell the customer you will return their call within x hours. Keep your promise.

· Train staff to answer the phone with a smile. Customers notice how the phone is answered. They can tell the mood of the answerer by the tone of voice.

· When taking a message which requires another person to ring back, get the phone number to save the need for it to be looked up.

One way small businesses can get an edge over their bigger competitors is to make it as easy as possible to be contacted.

CAFES are a great source of stories for our newsletter.

A café near our work has excellent sandwiches. It was lunchtime, just before 1pm. While I was there I watched four people come in, look in the food cabinet and walk out. All the sandwiches were gone. I told the owner she was letting customers walk out.

“All our sandwiches are fresh,” she said. “At the end of the day I throw out any which are unsold.”

She was sacrificing sales to avoid wastage. She was losing not only the four sales for the day but also repeat business. Customers who like sandwiches and find none will stop coming.

It’s one thing to get customers into your shop, but it’s another to make a sale. Focus on how to increase the proportion of those coming through the door into paying customers. If you can measure your performance, do so. Then set a challenge to improve.

Study how other firms succeed. Fire any sales person who asks a customer “Can I help you”. Learn better ways to sell and apply them. An obvious one is to show enthusiasm for the goods being looked at.

One client measures his companion sales. These are the sales you make as add-ons to the thing the customer came in to buy. He can tell if his staff is promoting additional sales and he rewards success.

Another area where clients miss converting sales is after a promotion. When the phone rings, get the caller’s contact details, as a priority. Then, if the call has to be dealt with later, a competent sales person can call back. You may also be able to add the caller to your database for future promotions.


Wishing you a happy and safe Christmas

January 15 2012

2nd instalment of 2012
Provisional Tax

(March Balance date except for those who
pay provisional tax twice a year)

Pay GST for period ended
30 November 2011

April 7 2012

Terminal Tax for 2011

(March April, May and
June Balance dates)

The IRD has reminded the public if they buy gold and then resell at a profit the gain is taxable. In fact, since gold never yields any dividends, even if you sit on it for years, it would seem a profit on sale could be taxable. What about gold coins? If you already have a collection of coins and add some sovereigns to it, is this part of your hobby? The answer, of course, will depend on the facts. The longer you keep the coins the more likely they are part of your hobby. Other evidence of your coin collection being a hobby would be your general activity and interest in coins.