Tax Policy Scholarship showcases the next generation of talent
Four bright young industry minds have emerged as finalists in this year’s Tax Policy Scholarship Competition, an annual prize hosted by the Tax Policy Charitable Trust.
The biannual competition, which supports the continuation of leading tax policy research and thinking in New Zealand, enters its fourth round in 2022. The first competition was run in 2015.
The scholarship is designed to inspire the next generation of tax industry leaders. This year, entrants under the age of 35 were invited to propose significant reforms to our current tax system or analyse potential weaknesses and unintended consequences from existing laws, and propose changes to address them.
Entrants were asked to tackle one of three topics: environmental taxation, tax administration, or the powers granted to the Commissioner of Inland Revenue to collect information for tax policy purposes. Participants were invited to address the topics with creative ideas backed up by reasoned research and analysis.
We are delighted to announce the four finalists for this year’s competition, selected by our panel of leading tax industry professionals.
Daniel Doughty
Daniel is a Senior Consultant with EY in Wellington. He has proposed the introduction of a small business consolidated reporting regime to simplify tax reporting for small companies.
The regime would consolidate pre-existing tax obligations into a single report to be filed every second month. Inland Revenue would send an automated income summary out at the end of the year, similar to those currently prepared for individuals.
Mitchell Fraser
Mitchell is a Tax Solicitor with Mayne Wetherell in Auckland. Mitchell is concerned that the recently-expanded powers granted to Inland Revenue to collect information for tax policy purposes could create unintended consequences.
He believes the new powers risk political interference, conflicting with the IR’s need to be politically neutral. Mitchell proposes identifying alternative means to collect this information, including through Statistics New Zealand.
Vivien Lei
Vivien is Group Tax Advisor with Fisher & Paykel Healthcare, and finance lead with the Fisher & Paykel Healthcare Foundation.
Vivien proposes to change New Zealand’s environmental practices through the introduction of an impact-weighted tax regime. Under this model, organisations would be taxed on their net positive or negative impact on the environment.
Jordan Yates
Jordan is a Senior Tax Consultant with ASB in Auckland.
Jordan believes the tax policy landscape is fractured, and suffocated by political roadblocks. His proposal is to establish an independent statutory authority that would be responsible for the independent management of fiscal policy, as it relates to the tax base.
Selecting a winner
The finalists were announced on 2 June, and each will go on to develop a 4,000-word submission on their proposal.
The four will be invited to present their final proposals and answer questions at a function in October 2022. The winner will be announced that evening.
Our Tax Policy Scholarship Competition celebrates creative thinking from young professionals and also provides a springboard for the brightest industry minds to develop their careers.
Nigel Jemson, the winner of the 2019 competition, says: “Entering the competition was a terrific opportunity for me to grow and develop my tax policy thinking and connect with leading minds in the tax community. Winning the competition has given my career a boost and since, I have enjoyed a range of great roles in tax for leading businesses, Spark and PwC, and continued my involvement in and passion for New Zealand tax policy.”
Chris Cunniffe, Tax Policy Charitable Trust Committee Member and TMNZ Chief Executive, says this year’s entries underline the strength of the next generation.
“We’re consistently delighted with the breadth and the freshness of thinking young people bring to this competition. The competition provides a forum to share ideas, and secondly, ensures that creative tax policy is not the sole domain of people who have worked in the industry for a long time. As an industry, we are open to fresh thinking and new ideas.”
Tax Policy Charitable Trust Chair John Shewan says the entries prove the industry’s future is in good hands.
“New Zealand has been very fortunate to have so many competent tax leaders involved in developing policy for the betterment of our country. It’s very exciting to be around the next generation of future tax policy influencers, who are already, at a young age, focused on innovative opportunities to enhance the tax landscape.”
Michelle Redington, Chief Tax Counsel at Inland Revenue, who was the guest speaker at the event where the four finalists were announced, says it is fantastic to see the Tax Policy Charitable Trust create opportunities for the next wave of tax policy thinkers.
“Throughout my career, I have been very lucky to be supported by some of New Zealand’s preeminent tax leaders, who have been fantastic teachers and mentors,” she says. “I’ve enjoyed a diverse career in tax, spurred on by a need to solve complex problems, and I’m proud to be able to give back to the next generation of talented tax enthusiasts.”
Find out more about the Tax Policy Scholarship Competition, here.
Using the Due Date on myIR statements may needlessly expose you to UOMI
Let's talk about how TMNZ can help you to avoid interest charges with payments at P3.
Unfortunately we're seeing many clients buying tax at the wrong dates. We believe this is caused by the confusing way Inland Revenue displays the Residual Income Tax liability on the myIR statements. If a taxpayer doesn’t meet the safe harbour threshold of less than $60,000 RIT for the relevant tax year, paying tax at terminal tax date will cost you Inland Revenue Use of Money Interest (UOMI).
Why is this?
- Inland Revenue myIR transaction detail statements show the tax due split on what amounts are liable for late payment penalties and what amounts are not.
- As late payment penalties are charged on the lesser of the standard uplift amounts and RIT/3 for all provisional tax dates, they will usually show two amounts for the P3 date. The standard uplift amount will be shown as due at P3, and the balance of current year RIT will be shown as due at the Terminal Tax date.
- However, what is not clear on myIR is that use of money interest will be charged on the combined P3 total, from P3 to the date the tax is paid.
- So those that are not transferring the combined total at P3 but transferring the amount at the terminal tax date, will incur interest from the P3 date.
How can I stop this?
When transferring or purchasing tax from the TMNZ tax pool, you should be doing this for the combined P3 amount at the P3 date. This will mean you avoid interest charges.
To find out more, get in touch.
Disclaimer: This article is correct as at 19 April 2022. It is subject to change.
TMNZ’s sustainable office: how we moved and improved our environmental footprint
Our new Auckland office aligns with our ambition to build a more sustainable future for Aotearoa. Here’s why we made the move.
When we kick-started the process of finding a new Auckland home last July, we were eager to do things differently and place a strong emphasis on sustainability. At TMNZ, we’ve always been conscious of the environment, but we wanted to go a step further as we developed our new corporate headquarters.
We wanted to ensure people and the environment were at the heart of our new workspace design. We needed to find the right setting for our Auckland employees and develop an office that would help us become more sustainable. Moving required a holistic approach, incorporating climate change, environmental degradation, and waste mitigation.
“We wanted to create a great workplace for our people to enjoy. They were involved throughout the project,” says Amanda Thorpe, TMNZ’s Head of People and Culture. “Our people helped us select the office space and we ran engagement sessions with employees to discuss aspects of the design. We worked together to make our vision a reality for both TMNZ and the Whakatupu Aotearoa Foundation, as we continue to support the trust’s philanthropic efforts.”
The environment is a big focus for TMNZ and the Whakatupu Aotearoa Foundation. Through the Foundation we look to invest in initiatives that tackle climate change, environmental degradation, declining biodiversity, and waste. It was very important to us to give the same environmental focus and attention to the design of our new workplace.
Building a sustainable home
We selected an office at 23 Customs Street in Auckland and enlisted Peter Doyle, from NOWW Advisory and Wingate Architects, to help us build an eco-friendly workspace. Together we explored how we could reduce our environmental footprint with each decision.
”Materials used in the new space have been chosen with sustainability in mind,” says Sarah Bryant, Associate Senior Interior Designer at Wingate Architects. “TMNZ’s new home features Jacobsen’s carpets made from recycled drinking bottles, Tarkett hard floors manufactured from recycled PVC, and Green Tag Certified Autex Cube ceiling tiles, made with at least 40 percent recycled materials.”
We selected sustainably-sourced mataī joinery and panels, and recycled rimu tables. We also chose sustainable furniture fabrics for every chair and stool.
No detail was too small; desktop surfaces at TMNZ are now made of all-natural linoleum, produced from pure oxidised vegetable linseed oil and natural pine rosin. We also made use of recycled products, including a reused office pod that hosts our breakout meetings.
Making an impact, without waste
While we took a careful approach, moving from one place to another inevitably produces waste. In our case, much of our old furniture was no longer suitable for the new office. Our people worked to find a solution and struck upon an idea to recycle and make a social impact at the same time.
To ensure nothing went to landfill, we teamed up with All Heart NZ, a charitable organisation that works with corporates to redirect and repurpose unwanted corporate and construction items. The organisation offers ‘Reduce partnerships’, which help to further develop the sustainable, ethical, and social aspects of procurement and supply chain management. All Heart NZ has established a national circular solution for redundant corporate items, which creates employment, volunteerism, and training opportunities while supporting local community need.
All Heart NZ helped us to achieve a positive social and environmental outcome by redirecting 216 items weighing more than 6,500kgs. With items reused, repurposed, and resold, 100 percent of the benefit went to New Zealand communities in need.
Joe Youssef, All Heart NZ’s Founder and Chief Encourager says: “We know that improving the ways we source and dispose of corporate goods can positively impact our planet and people. We partnered with TMNZ to redirect all redundant materials in preparation for their office move. Together we created a sustainable solution and community impact to be proud of.”
Through our partnership, we added $16,700 in community impact value and avoided 7.6 tonnes of carbon emissions. All Heart NZ’s partnerships have supported 439 different communities throughout Aotearoa and the Pacific, helping them save or raise more than $9.1 million, while at the same time assisting corporate partners to divert more than 3.7-million kilograms from landfill.
A welcoming space for our people
Our office was designed for our people. Collaborative spaces and new technology will enable us to work together and with our customers and partners regardless of where they are in New Zealand. Technology including whiteboard cameras, immersive collaboration spaces and fully cable-free working will make us more connected than ever and reduce the need for unnecessary travel. What’s more, we have chosen technology suppliers that lead in terms of their sustainability commitments while at the same time provide a seamless employee experience.
We moved into our new workspace in March, and our environmental sustainability efforts continue. We have made an ongoing commitment to reduce waste sent to landfill and we’re constantly exploring new ways to improve.
TMNZ and the Whakatupu Aotearoa Foundation have a shared vision of a “restored and thriving Aotearoa”. Our new workspace will allow both organisations to come together with clients and charity partners in an open, inviting environment — one that has been designed to limit the impact on future generations.
While COVID-19 restrictions have prevented us from welcoming visitors into our new home so far, we look forward to showing customers and charity partners our new surroundings in the months to come as we mark new chapters at TMNZ and the Whakatupu Aotearoa Foundation.
Survey indicates property market cooling due to confusion
News release: Chartered Accountants Australia and New Zealand and Tax Management New Zealand
26 November 2021
A survey of chartered accountants and tax agents has revealed that incoming legislation intended to help cool New Zealand’s over-heated housing market is already having a major effect on investors – but largely because of confusion and lack of detail rather than clear policy.
The annual survey, jointly run by Chartered Accountants Australia and New Zealand (CA ANZ) and TMNZ, sought the views of 361 accountants in public practice, on recent tax policy developments.
Among the findings, the survey revealed that 70% of respondents have already seen clients change or voice their intention to change their residential property investment behaviours due to ongoing changes to the extended bright-line test, and proposed changes to deny interest deductions.
CA ANZ NZ Tax Leader John Cuthbertson said that further results from the survey show to key factors in play; the complexity of the proposed rules, and uncertainty as the details could change before the legislation is enacted in March 2022, despite the bright-line and denial of interest deductions coming into play from earlier this year.
“The survey suggests that the housing market has been given a policy placebo, in the form of legislation that is influencing behaviour before it is fully developed and enacted.”
“Residential property purchasers and investors typically react to the specific detail of legislation. However, in this case the market appears to be reacting to the complexity of the proposed legislations carveouts and inconsistencies, and the fact that it won’t know exactly what is in place until March 2022, despite it being backdated to capture activity in 2021.”
“To be fair, the Government’s aim was to cool down the overheated housing market, which is causing a range of economic and social issues, but we’re not sure this is the best way to do it.”
The survey shows that over 21 per cent of the respondents, or 1 in 5, feel ‘not at all confident’ about advising clients on the proposed new build interest limitation rules, and over 65 per cent of participants felt the phase out and denial of interest deductions would be somewhat or extremely difficult to comply with.
Similarly, almost 50% of respondents said they were either somewhat confident, or not at all confident on advising on the new build bright-line test.
“Because this policy hasn’t been developed in line with the generic tax policy process (GTPP), there’s a much higher chance of unintended consequences and collateral damage. The survey shows a considerable lack of confidence in how the legislation will work, and that will likely result in non-compliance and issues around who is captured and who isn’t.”
“It’s important to note that the level of complexity encountered will depend on the number of properties owned, banking arrangements in place and the mix of interest limitation rules and concessions in play,” added Mr Cuthbertson.
TMNZ Chief Executive Chris Cunniffe said the survey provides a good indication of how the proposed rules would be rolled out.
“In their current complex form, there’s likely to be a lot of variability in compliance with these laws. Especially as not everyone has a tax agent or accountant helping them.”
“While the extension of the bright line test to 10 years might land well for most mum and dad property owners, the denial of interest deductions and how that relates to new builds is likely to be misunderstood.”
“There’s opportunity for Government to provide greater clarity on the law changes and simplify certain aspects to help owners and accountants alike.”
New Survey Shows Inland Revenue Helpful, But Hindered
Press Release: Chartered Accountants Australia and New Zealand and Tax Management New Zealand
24 November 2021
Helpful, but hindered is the overarching finding in a new survey digging into public practice accountants’ experiences with Inland Revenue (IR).
Conducted by Chartered Accountants Australia and New Zealand and TMNZ, the survey of 361 members in public practice asked a range of questions about the timeliness of IR’s service, the quality of interaction, and the business support on offer.
“Over 80 per cent of those surveyed rated their agent account manager interactions positively over the last 12 months, which Inland Revenue should be pleased with,” said CA ANZ NZ Tax Leader John Cuthbertson.
“The flipside is that it is taking much longer for Inland Revenue to resolve queries. The number of public practitioners who say it’s taking more than 6 days to resolve their queries has risen from 5 per cent of respondents, to 47 per cent.”
Despite this, accountants and tax agents are positive about not only their interactions with account managers, but also the support measures that Inland Revenue has administered.
“Accountants and agents across New Zealand are telling us that the tax support provided by Inland Revenue has been as effective this year, as it was last year,” said Tax Management New Zealand Chief Executive, Chris Cunniffe.
“It’s been another turbulent year for businesses, and the tax relief and support measures have made a positive difference. It’s just that our survey shows it can take a while to get through to Inland Revenue, and to have queries resolved and assistance locked in.”
The appreciation of Inland Revenue’s support was illustrated by 85 per cent of participants reporting that they had clients who utilised the remission of interest and penalties for late payment of provisional tax due to COVID.
Additionally, over 71 per cent of participants have found it easy or not difficult, to enter into or assist clients with an instalment arrangement in the past 12 months. This covers all types of tax, including GST, PAYE and FBT, not just provisional tax.
The increased level of scrutiny and information required to access COVID support was also felt by survey respondents.
“Approximately half the survey respondents said that accessing COVID support was harder than in 2020. That’s not surprising, given the public’s desire for more scrutiny about who received support, and the declarations becoming more stringent during this year’s lockdowns,” concluded Mr Cuthbertson.
Provisional tax 101 — making things easy
Provisional tax breaks up the income tax you pay Inland Revenue (IR). It is paid in multiple instalments instead of one large sum at the end of the year.
You may have to pay provisional tax if you earn income where tax hasn't been deducted before you receive it. When your residual income tax (RIT) for the previous year was more than $5000, you will have provisional tax to pay. Residual income tax is the amount of unpaid income tax for the year minus any tax credits such as PAYE that you are entitled to.
Generally, you will pay provisional tax three times a year. For example, if you have a 31 March balance date (your end of financial year). In that case, your three provisional tax instalments are usually due on 28 August, 15 January, and 7 May.
These dates can change by a few days to avoid public holidays and weekends. They can also differ according to how you have calculated your RIT, so it's best to check in with your accountant or myIR to confirm your payment dates.
What if you miss your provisional tax payment?
When you file your income tax return and calculate your RIT for the year, you deduct the provisional tax you paid earlier. If you have paid more provisional tax than you owe, you will receive a refund from IR.
However, suppose you have underpaid your income tax for the year. In that case, you must pay the remaining balance or risk late payment penalties (LPP) and interest accruing on what you owe. IR interest is calculated daily on any outstanding amount that you owe. You can check the current interest rate here.
Don’t worry though, TMNZ can help. Read about our flexible ways of paying tax below.
Late payment penalties and interest
Penalties and interest on missed or underpaid tax may be charged as follows:
- one percent the day after the payment was due.
- an additional four percent if the tax amount (including LPP and accrued UOMI) remains unpaid after seven days.
- UOMI may be charged from the day after the payment was due - UOMI will be charged daily until you have paid your total tax amount, including late payment penalties and any accrued interest.
Special IR interest rules under the Safe Harbour Provision
If you have used the standard uplift method to calculate your provisional tax:
- and your RIT for the year is less than $60,000
- and you pay all required provisional tax instalments on time and in full
Then you don't have to worry about incurring IR interest if the tax you have paid during the year is less than your actual RIT total. This is because you fall under what's known as the Safe Harbour Provision. Any final balance to settle your tax bill will be due by your terminal tax date. IR interest will only apply from your terminal tax date if you don't pay your balance by then.
The rules work slightly differently if the actual RIT is $60,000 or more.
In that situation, if you have paid all your instalments on time and in full, you will incur IR interest on the remaining balance until you have paid in full. IR interest is calculated from your final instalment date for that year.
Flexible ways to pay your provisional tax
With an IR-approved tax pooling provider, like TMNZ, you can smooth out your tax payments up to 75 days after your terminal tax date, so you have up to 22 months longer to pay your tax bill.
With TMNZ Flexitax, you can smooth out your payments to match your business cashflow. There is no up-front payment, and as long as you settle your arrangement by the date TMNZ provides, your IR account will show as paid on time. Meaning you'll never have to worry about LPP or high interest rates again (ours are extremely competitive). And of course, it's all tax deductable.
If you know when you'll have the funds to pay your tax, you can also delay your payment and move to a date in the future using Tax Finance. With Tax Finance, you can look ahead and match your tax payments to seasonal highs. Meaning you can avoid things that have the power to set you and your business back – like bank overdrafts and loans.
With Tax Finance, you choose a date or dates in the future when you know you can pay your tax. You'll lock in a competitive interest rate that you pay upfront. You can rest easy knowing that as long as you settle the arrangement by the date TMNZ provides, your tax will show as paid on time with IR. No late payment penalties, and you will have saved considerably on interest.
Better for your cashflow, better for your business.
What if I've missed my provisional tax payment?
TMNZ can help to wipe late payment penalties and reduce your interest cost if you have underpaid or missed your provisional tax. Contact your accountant or tax agent and let them know you want to pay your missed or underpaid provisional tax using TMNZ tax pooling. Or get in touch to see how we can help.
As always, we recommend you speak to your accountant with any questions.
Information correct as at 15/07/2024
Syncing provisional tax to cashflow
As a self-employed painter and decorator, Bart Taylor knows full well how business owners can get themselves into strife if they don’t plan for their tax obligations.
He speaks from his own personal experience.
That’s why Bart is happy to talk about how TMNZ enables him as a self-employed tradesperson to take the stress out of having to pay provisional tax on dates dictated by Inland Revenue (IR).
TMNZ offers Bart the flexibility to make the payments when it suits his cashflow.
As someone who doesn’t always get paid every week, that’s important because it offers his business some breathing space while he waits for the money he’s earned from completed jobs to land in his bank account and ensures that other important invoices can be paid in the meantime.
A bit about Bart
Bart owns and operates his own business in Christchurch.
He’s a one-man band and that’s the way he likes it. Plus, most of his work means he does not require a crew, although he will occasionally use contractors when required or on larger jobs.
Bart has been his own boss since 2013, when, at the age of 24, he decided to make a go of this painting lark on his own. The market in the Garden City was awash with painting gigs during the rebuild and becoming self-employed seemed like a low-risk move.
Fast-forward nearly eight years and his gamble has paid off. He is enjoying the benefits that come with self-employment and, as a husband and father in a young family, the better work-life balance he has achieved.
Tough tax lessons
Yet that’s not to say that everything has been a bed of roses during that time.
“Becoming self-employed has been a bit of a rollercoaster. Lots of learnings, lots of difficult times, hard times,” says Bart.
“First and foremost, I’m a tradesman, so I am a worker. The back office, the organisation, the financial side of things is not my strong point. With the tax side of self-employment, I managed it very poorly for years because I was so young.”
Like other business owners, Bart wasn’t as prepared as he should have been and was “stung” in his second year of trading. That was when two years’ worth of tax was due. Ouch.
He admits having to pay provisional tax was “rough for a little while”.
“In the trade industry, you don’t always get paid every week and you need cashflow to run your business,” explains Bart.
“My accountant saw there was a risk of if we paid that tax bill in full, that I might fall short in other areas and he wanted to make sure that my relationship with my trade suppliers stay good and that the invoices I need to pay get paid on time, not just the IR ones.
“He recommended Tax Management NZ and that freed up cashflow.”
Breathing space from IR to manage cashflow
That’s because TMNZ gives Bart the flexibility to pay his provisional tax when it suits his business, without the consequences of steep IR interest and late payment penalties.
It operates with the blessing of the taxman, too.
TMNZ makes a date-stamped payment to IR on Bart’s behalf on the date his provisional tax is due. Bart pays TMNZ at a time when it suits his cashflow.
TMNZ transfers the date-stamped payment to Bart’s IR account and IR treats it as if Bart himself has paid on time. This eliminates any IR interest and late payment penalties showing on his account.
“Sometimes the option of TMNZ, to be able to borrow some money for a short period of time, to make sure you hit that IR deadline, frees you up with your cashflow until that payment [you are waiting on] comes through,” says Bart.
“The fee of using Tax Management NZ is so low and affordable in comparison to the failings of if you ran out of money in that time, or the scramble and the stress, so it’s definitely worth it.
“It’s changed my perception around making these tax payments. It takes the stress off of it.”
And how does dealing with TMNZ compare to dealing with IR?
“You get a bit more of a personal touch with Tax Management NZ because you get a prompt response and it’s not a cookie-cutter [reply].”
Bart is one of many small business owners throughout New Zealand who benefits from the provisional tax flexibility TMNZ offers. Get in touch for more information about our service or if you have any questions. We're happy to help. Alternatively, register with TMNZ to explore tax pooling for yourself.
Easy money for business not always the best option
Not long ago, one financial adviser was heard to lament the Kiwi habit of using the mortgage to fund the business. Others turn to bank overdrafts or their personal savings – all of which some might argue are easy choices to make but not necessarily the best.
Research by YouGov, commissioned by small business lending specialist Prospa, found that 69 percent of SMEs use personal finances for business purposes – including credit cards – and one in four borrows from family or friends.
Approximately 21 percent had drawn down on the mortgage.
The difficulty of securing business finance from banks in New Zealand is well documented, but before you borrow or mix personal and business finance, consider the options below.
Self-finance
Consider reducing your costs as a way to self-finance your business.
Businesses incur costs, such as small but regular payments that slip beneath the radar. Work with your accountant to identify unnecessary expenses and ways to save on costs — review operational details like slow collections, bad debtors, and redundant or excessive inventory.
One consequence of tight cashflow is the failure to pay taxes on time. This leads to expensive Inland Revenue (IR) interest and penalty payments. Tax pooling with TMNZ will help save you money in the long term because you avoid interest and penalties.
Research alternatives
Tax pooling is an alternative and financially cost-effective way to meet your tax payments on time, but there are also many other ways to get business finance.
Government loan schemes, discount invoicing (you administer your sales ledger) or factoring (the factoring company administers your ledger) merit thought.
Other options may include attracting investors or turning to a second or third-tier lender who is more expensive, but you may not be required to put your house on the line.
Review payment terms
Together with your accountant, consider negotiating better terms with your debtors while also reviewing your current payment terms. Simply changing your terms to, for example, seven days with all new customers – or getting the agreement of existing customers – could make a big difference to your finances.
Ultimately, it may be that mortgaging your house is your best option but get expert advice first because easier isn't necessarily better.
What is a cashflow forecast, exactly?
TMNZ has produced a guide called Better Cashflow Management. You can download your free copy here.
Most people nod in agreement when they hear the fable of the ant and the grasshopper – the ant worked all summer while the grasshopper lazed about, only for a starving grasshopper to come begging at the ant's door in winter.
However, it's surprising how few business leaders apply the common-sense lessons the fable teaches.
Many could be forgiven for thinking that the fable is about the value of hard work, and it is to an extent, but it is also a story about prediction and preparation – know what's coming and prepare for it.
Your stock standard cashflow forecast is an essential tool for this purpose.
In its most basic form, a cashflow forecast is a table that 'predicts', over a specific time, a) the money the business expects to receive, and b) the money the company expects to pay out – in essence, how much money you expect to have on hand in any given period.
The benefit of a cashflow forecast is that it allows you to predict the lean times, like winter for the ant, and the good times, like summer for the grasshopper. Summer and winter are pretty straightforward, but real-life business is far more complex and needs to consider, for example, factors like seasonal variables, capital expenditure and increases in expenses like rents.
A cashflow forecast is not a sales forecast, which concerns itself with predicted sales in the coming period and sometimes errs on the side of optimism.
The cashflow forecast should include expected sales but err on the side of conservative – sales aim for the stars, the cashflow forecaster settles for the moon.
1. Determine the period
The ant and the grasshopper concerned themselves with summer and winter. Business leaders will often prepare an annual cashflow forecast, but some argue it's best to take the ant's lead and forecast for a shorter period – even six months, or at least plan to review your cashflow forecast quarterly.
2. Predict your income
Look back over the last couple of years to get a handle on averages as well as the ebb and flow of cash, accounting for seasonal fluctuations and unforeseen variables that have impacted you in the past. Some would argue that basing your cashflow forecast on past performance is looking back, not forward, which is why using your sales forecast is important. Your historical financials may help you temper the optimism of the sale forecast towards realism.
3. Add your costs and outgoings
Don't leave out the small expenses because they quickly add up. Remember that not everybody pays on time. Kiwi SMEs wait on average 24.1 days to get paid, according to Xero's Small Business Insights for December 2020. Consider the risks associated with cost increases, like telephones and other fees. Plan for the best, expect the worst.
4. Put your cashflow forecast to work
A good cashflow forecast will give you an idea of what to expect so that you can prepare now to address any issues. If, like the ant, you note that the winter months of June, July and August will be tight, take steps to prepare better or improve the situation.
In the words of Sir Richard Branson, “Never take your eyes off the cashflow forecast because it's the lifeblood of the business”.
Cashflow relief for farmers impacted by flood or drought
Those impacted by flooding in Canterbury or drought elsewhere in New Zealand have another option to manage their cashflow.
It’s called tax pooling.
It lets taxpayers defer their upcoming provisional tax payments to a time that suits them, without incurring interest (currently seven percent) and late payment penalties from Inland Revenue (IRD).
The service – which has been operating with the blessing of the taxman since 2003 – is available through an approved commercial provider such as Tax Management NZ (TMNZ).
The impact of extreme weather
The Government has declared the recent flood in the Canterbury region as a medium-scale adverse weather event.
As those in this part of New Zealand assess the damage and begin the clean-up following the large deluge of rain, a big dry is beginning (or, in some cases, continuing) to bite other parts of New Zealand. The drought has been classified as a large-scale adverse weather event.
Farmers impacted by these contrasting weather events are being encouraged to act early and assess their options if they need assistance.
For those battling drought, some tough decisions around stock and feed will need to be made. In the Canterbury region, flooding only compounds the financial pressure as many were also dealing with drought beforehand.
Cashflow will be important during this difficult period.
Help is available
Managing tax payments will be a key consideration in managing cashflow too.
IRD, to its credit, is exercising some discretion.
It will allow farmers and growers affected by the Canterbury flood to make early withdrawals from the income equalisation scheme.
For those whose current or future income will be significantly affected by drought, IRD will allow late deposits for the 2019-20 income year up to 30 June 2021.
Early withdrawals are also available in the case of a medium-scale adverse event or if someone is suffering serious hardship.
Please note a taxpayer must satisfy certain criteria for IRD to exercise its discretion around the income equalisation scheme.
There's also the option of re-estimating provisional tax.
However, while that allows someone to get a refund of tax they have paid earlier in the year, it does come with some risk.
Free up cashflow by deferring payment of provisional tax
Farmers growers with a May balance date are due to pay their the final instalment of provisional tax for the 2020-21 income on 28 June.
For a small interest cost, someone can use TMNZ to defer this payment.
We make a date-stamped tax deposit to IRD on behalf of a taxpayer on 28 June and the taxpayer pays us when it suits their cashflow.
A taxpayer can either pay the full tax amount at a date of their choosing or enter an instalment arrangement.
When a taxpayer satisfies their arrangement with TMNZ, IRD will treat it as if the taxpayer had paid on time. Any interest and late payment penalties showing on their account will be remitted.
A taxpayer has up to 12 months to pay their 28 June provisional tax with TMNZ.
TMNZ’s interest cost is much cheaper than what IRD charges when someone pays their tax late.
Please click here to register with TMNZ. Alternatively, feel free to contact us if you have any questions.