The end of the financial year is fast approaching for the majority of businesses. Here are a few areas you may wish to look at now which will help us minimise your tax bill.

1. Trading stock

We’re not talking about livestock here, but the general rule is that inventory must be valued at the lower of cost or realisable value. A general adjustment for obsolescence will not cut it with the IRD. Any business that carries more than $10,000 in inventory must perform a physical stocktake at year end – and you should take this opportunity to dispose of obsolete stock or write it down to its net realisable value.

2. Repairs and Maintenance

It may be worthwhile to bring forward repairs and maintenance before the end of the financial year, as this will also bring the tax deduction forward by a year.

3. Retentions

Retentions on building contracts are generally taxable in the year the contractor becomes legally entitled to receive them. Building contractors should be mindful of this at year end.

4. Employee Expenses

Expenses such as holiday pay, bonuses, long service leave or redundancy payments can be claimed as a tax deduction in the year ended 31 March 2012 as long as they are physically paid by 2 June 2012. Keep this in mind when planning these payments.

5. Business expenses paid privately

Business expenses paid privately often fall through the gaps – and the opportunity to claim a tax deduction is lost. Now is a good time to gather up any receipts – and to reimburse yourself from the business so there is a clear paper trail.

6. Bad debts

Where you write off a debt that has no reasonable expectation of being paid after taking all reasonable steps to recover it, this is tax deductible. The catch is that you must have physically written the debt off before the end of the financial year, so now is the time to consider this.

7. Fixed Assets

Now is a good time to review last year’s fixed asset schedule, as the book value of assets can be written off as a tax deduction where they are no longer used by the business and the cost of disposing of the asset is likely to exceed the value.

8. Prepayment of expenses

Most expenses cannot be fully claimed as a tax deduction if you choose to prepay them just before the end of the financial year. But there are some potential exceptions like stationery, postage, courier charges, vehicle registration, road user charges, rates, journal subscriptions or accounting fees which can be paid in advance and claimed as a tax deduction. No, we’re not fishing for payment in advance for this year’s accounting fees – but I’m sure you can see some possibilities here.

And for those few clients who have not yet provided their records for the year ended 31 March 2011, do it now! The final deadline for most clients for filing with the IRD is 31 March 2012 – and there will be almost no chance of us getting your work completed on time unless we have your records before the end of February!

 

For a week or so back in July, we figured it might be time for those with floating business or residential borrowing to fix the rates on say half of their debt.  At that time we were seeing June 2011 quarter annual inflation figures well above expectation – as well as higher than expected economic growth.  The writing seemed to be on the wall for floating rates to edge upwards sooner rather than later.  Floating residential rates at that time were around 5.75%pa – and although three year fixed rates were up close to 7%pa, it seemed reasonable to hedge against those floating rates rising.

Then we saw bad economic news in Europe and North America swamp any fragile recovery in New Zealand – and with it any likelihood that floating rates would rise.  So most people whose business or residential borrowings were floating back in July are probably still floating today.

But things are changing again.  Floating residential mortgage rates with most banks are still around 5.75%pa – unchanged from where they were last July.  But fixed rates have edged down over the last few weeks with three year rates now down around 6.1%pa at the major banks.

So although the chances are not high of the OCR increasing any time soon, perhaps it’s time to consider paying a little extra for the security of locking in the historically low three year fixed rates currently on offer?  You can be sure that when the masses start jumping from floating rates to fixed, the banks will bump fixed rates up quickly – and today’s opportunity will be lost.

So will one be better off riding the nice low floating rates for a few more months – or paying a little more today in return for locking in today’s nice low three year fixed rates?

The answer to that question depends on how soon the Reserve Bank starts to lift the OCR.  The general consensus amongst economists is that this will occur around the end of 2012.  If the Reserve Bank acts a little sooner, then fixing now will in hindsight look like a rather smart move.  But if rises in the OCR are delayed into next year, riding the floating rates will have in hindsight seemed the smarter move.

But now that the margin between floating and three year fixed rates is much smaller than it has been in recent times, the certainty from fixing now comes at very little cost.  If – like 63% of Kiwi businesses and households – your borrowings are on floating interest rates, I’d urge you to give this some serious thought.

Would a “fat tax” be a step too far?  Could the tax system perhaps encourage Kiwis to be healthier?

It already does.  Imagine how many more Kiwis would die prematurely from smoking related conditions if not for the fact that cigarettes are artificially expensive with around 70% of their price made up of tax?

Who would seriously argue the excise duty on cigarettes should be removed?  Not many, I’d say.

So I followed with interest the debate around Labour’s proposed removal of GST on fresh fruit and vegetables.  A significant number of Kiwis die prematurely each year from conditions related to obesity, so maybe Phil Goff was onto something with this one?

Labour’s premise was that if fresh fruit and veges were less expensive, Kiwis would on average substitute them for less healthy options and the overall health of the nation would improve.  Interventions through the tax system clearly work for smoking, so why not use the GST system to fight obesity?

Not unreasonable on the face of it, I thought.

But I had my doubts about the success of this particular concept.  Food items are carefully priced to the market – almost always at a price that ends in .99c.  If bananas sell for $2.99/kg now they would not stay for long at $2.60 after the removal of GST – they’d soon creep back to $2.99 with an increased margin for the retailer.

And with the election behind us, we’re unlikely to put that debate to the test in real life New Zealand any time soon.

But the idea of using the tax system to influence behaviour hasn’t gone away – and nor is it the exclusive territory of the Labour party.  John Key removed depreciation allowances on buildings because he also believed that changes to the tax system could be used to modify people’s behaviour – in this case dampening the Kiwi love affair with property investment.

So back to the idea of using the tax system to fight obesity.  Is that workable, or would such a scheme just amount to meddling around the edges of a larger problem?

By looking to Denmark we can soon get the answers to those questions.

On 1 October the Danish parliament introduced a new “fat tax” with the intention of reducing cardiovascular disease, obesity, and diabetes.  The tax imposes a price increase based on formula of 16 krone per kilo of saturated fat on any food that contains more than 2.3% saturated fat.

Bold.  And a world first.

Will the fat tax change behaviour enough to increase the average Danish lifespan or improve the health of the Danish people?  I guess we’ll know for sure in ten years or so when the results of longitudinal studies become clear.

But how about us Kiwis?  Is this the sort of intervention our political leaders should be considering?  Would this be too much intrusion into our lives – and an affront to our free will?  Or is it appropriate that the state puts some energy into countering the millions spent by multinationals who market tobacco and calorie-rich convenience foods that on average reduce our life expectancy?

I think it’s an interesting concept that has merit – and I’ll be watching with interest to see how this unfolds in Denmark.

 

What a difference one word makes:   From 1 April 2011, the Employment Relations Act was amended to change the test of whether a particular action by an employer was justified – for example a dismissal.  Before 1 April, the key question was what “would” a fair and reasonable employer have done in the circumstances – but since 1 April the question is what “could” they have done.

So what?

Good question – and one that has now been addressed by the Employment Relations Authority (ERA) in the case of Sigglekow v Waikato DHB.

Mr Sigglekow was a psychiatric nurse employed by Waikato DHB.  Under his care were patients with mental health issues and criminal histories.  Over time, there had been a number of incidents where Mr Sigglekow had been discovered sleeping on the job.  He was dismissed on the basis that sleeping on the job amounted to serious misconduct.

Sounds reasonable on the face of it, right?

Mr Sigglekow took a personal grievance for unjustified dismissal, which gave the ERA a perfect opportunity to put the 1 April amendments to the test.  And the ERA ruled in favour of Mr Sigglekow finding that his dismissal was unjustified.

The ERA found that the dismissal was unjustified because the DHB had been inconsistent in dealing with the incidents of sleeping on the job.  They had not dealt with earlier incidents severely, then they had dismissed Mr Sigglekow for a later incident.  Also the DHB had failed to conduct a full and fair inquiry into the incidents – and had failed to seek Mr Sigglekow’s response to the information they had.  In short, the ERA found that a reasonable employer “could” not have dismissed Mr Sigglekow because insufficient enquiries were made into the allegations – and because no action had been taken when the employee was first discovered sleeping on the job.

Under the 1 April amendments, the ERA must now consider what “a fair and reasonable employer in the circumstances of the actual employer could have decided and how those decisions could have been made”.

Interestingly, the commentary around this decision seems to suggest that the resources of the employer will be relevant; that the bar is higher for an employer with for example a dedicated HR person – and perhaps higher still where there is an HR team or department.  Well-resourced employers will need to take extra care to ensure that allegations are investigated thoroughly and that they get the procedural elements right.

But rather than dwelling on the semantics of “could” versus “would” when making decisions that might later be challenged, we suggest that business owners  use good faith as their guiding principal when dealing with their crew.

When investigating allegations of serious misconduct, an employer acting in good faith should always do these things – regardless of whether the circumstances seem as cut and dried as a person sleeping on the job while responsible for the criminally insane:

Properly investigate any allegations;

Put the allegations to your employee without withholding any relevant information you might have;

Genuinely consider the employee’s responses to the allegations;

When considering an appropriate response, you should take into account how other similar instances have bean dealt with in the past – whether in relation to the particular employee or to other employees.  And finally before acting, ask yourself “could a reasonable employer take your intended action given all of the circumstances?”

It will be interesting to see where the ERA and the Employment Court might go from here in further interpreting the 1 April amendments.

 

“What doesn’t kill you makes you stronger”.  Friedrich Nietzsche famously said that in 1886.  And Kelly Clarkson said it again this year, so it must be true.  

The last few years have been tough, but almost without exception our clients have emerged at the end of 2011 stronger and more confident about the future than they were  this time last year. 

It has been a huge year at Elevate CA – and a huge year for our clients, so we’re looking forward to a relaxing Christmas break.  We’re hoping you do the same!

 

The Elevate CA office will close on Friday 23 December – and we will reopen for business as usual on Monday 16 January.  If you do need to get in touch over the holidays, Rebecca, Fraser and Dean will check emails every few days.  Contact details are here >>>.

 

Hope you have a fantastic and well deserved Christmas break, and we look forward to working with you refreshed, revitalised and ready for action in 2012.