How to manage cashflow over Christmas
Everyone loves the middle of summer and spending time with family and friends over Christmas, but it can be a challenging time of year for many small and medium-sized Kiwi businesses.
According to a poll conducted by the Employers and Manufacturers’ Association, more than half of businesses experience cashflow constraints between January and March.
It’s hardly surprising. The period after Christmas is traditionally slow for many companies, with people away enjoying their holidays. Consumers also tend to reduce spending after the expensive Christmas and New Year period.
Businesses can come under pressure for a number of reasons. Earnings will be down if companies shut over the break, while others will feel the pinch if they have paid bonuses before the end of the year.
Considering these facts, it’s understandable that many businesses struggle to manage cashflow and make provisional tax payments on 15 January every year.
Unfortunately, the Inland Revenue doesn’t factor in these seasonal challenges. It expects payments to be made on time and charges taxpayers late payment penalties of up to 20 percent per annum and use of money interest (UOMI) if tax is not received on the due date.
Your options for managing cashflow
What are the best options for businesses that want to manage cashflow and free-up money over the summer?
Tax pooling is IRD-approved and can be used to defer provisional tax payments to a time that suits the taxpayer without incurring late payment penalties and UOMI.
This method is cheaper than using many traditional forms of finance. Rates at Tax Management NZ (TMNZ) start from below eight percent, and tax pooling doesn’t affect existing lines of credit. Also, no credit checks or security are required.
The full amount of finance doesn’t need to be paid back if less tax is owed than first thought. The finance arrangement can be easily extended as well.
How tax pooling can help
Say you want to defer a $5,000 provisional tax payment for six months. You would pay TMNZ a one-off, tax-deductible interest amount and TMNZ would arrange the $5,000 provisional tax payment on your behalf.
The interest amount is based on the amount of tax financed and the period of maturity, so in this instance, it would be roughly $205.
The provisional tax payment is held in an IRD account administered by the Guardian Trust. Guardian Trust instructs the IRD to transfer the tax into your IRD account when you repay the $5,000 principal in six months’ time.
The IRD treats the $5,000 provisional tax as being paid on time once the transfer is processed. It’s that simple.
Ready to ease your seasonal cashflow worries? Get in touch with our team to discuss tax pooling options today.
Find our latest resources on tax pooling and calculating tax using the Standard Uplift method here: https://www.tmnz.co.nz/calculating-provisional-tax/
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 Tax Management NZ (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 (IRD).
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 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 IRD ones.
“He recommended Tax Management NZ and that freed up cashflow.”
Breathing space from IRD 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 IRD interest and late payment penalties.
It operates with the blessing of the taxman, too.
TMNZ makes a date-stamped payment to IRD 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 IRD account and IRD treats it as if Bart himself has paid on time. This eliminates any IRD 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 IRD 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 IRD?
“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. Feel free to contact us for more information about our service or if you have any questions. We're happy to help. Alternatively, you can register with TMNZ here.
What is a cashflow forecast, exactly?
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”.
Tax Management NZ has produced a guide called Better Cashflow Management. You can download your free copy here.
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.
How to set up processes that can help relieve your cashflow pain
There's a parable about a man who built his house on rock and a man who built his house on sand. When the rains came, the latter lost everything. It seems evident that only a fool would build on sand, but you will be surprised by how often all of us resort to the easy way out – shortcuts and compromises – all the while telling ourselves we'll sort it out later.
Putting in place a good cashflow structure for your business is like giving yourself a solid foundation for the future, but it's not unusual for the process to be plagued by compromises.
The good news is that it's never too late to start.
Businesses have a way of starting small and evolving organically. In the early days of a company, customer relationships may be more personal and unique. You may be tempted to agree to special arrangements like payment terms and methods. You tell yourself you need the business, but this can quickly become messy and will most certainly impact your business further down the line.
If you have been in business for some time but you're tired of struggling with cashflow, or your company is relatively new, it's never too late or too early to start with setting good cashflow policies and processes. The most important thing is not to be wishy-washy about your policies and structures but to act consistently and firmly, no matter how tempted you may be. Like most temptation, giving in brings pain later.
Reminder emails and texts
Spark does it. A day or so before your telephone bill comes due, you will most likely get an email reminder from Spark. If a big corporate like Spark can send reminder emails, why can't your small business? A common reason for not sending reminders is that we want to protect our customer relationships. Remember the man who built his house on the sand?
Set in place a reminder email to go out the day before your invoice is due. If you can implement the policy at the start-up stage or if you are already in business and are worried about ruffling feathers, apply the reminder email or text rule to all new customers moving forward (at the very least).
The Spark email reads:
Hi there,
This is a friendly reminder that your bill is due on 21 April 2021. If you haven't already, please pay $xx.xx on or before the due date.
Very easy, very simple. Do the same with your business.
Past due invoices
When an invoice becomes past due, do you put off calling to follow-up? Do you tell yourself that you'll wait a couple of days because you're sure they'll sort it soon enough? The truth is that most late payers do eventually pay, but that doesn't mean it's the right thing to do, and it does nothing to help your cashflow. If the bill is past due by one day, pick up the phone or at the very least send an email reminder. Opening up a dialogue sooner rather than later gets you paid quicker.
Consider automating past-due follow-up emails to save yourself the time and the angst of doing it yourself.
Set clear payment terms
Corporate clients may resist your payment terms, or you may choose to adopt standard industry payment terms, and that's all acceptable – so long as you have payment terms that will spare you cashflow pain. Agree on these with your customers upfront and get it in writing either in your contract or email.
One cashflow enabler you might want to try is putting a deposit condition into your payment terms, like 25 percent or even 50 percent upfront.
Invoicing is not an afterthought
Set aside a specific day to do all your invoicing and stick to it.
Business owners can get so caught up delivering the work that they leave their invoicing to the last minute. Sometimes if, for example, a client hasn't signed off on a piece of work, you may want to delay sending an invoice. However, if the client is the reasonable reason for the delay, then you should invoice regardless on the day you are due to invoice.
Processes and policies, particularly those related to cash inflows and outflows, are the bedrock of your business. Build on them, and you will have a solid foundation when those rainy days come.
Tax Management NZ has produced a guide called Better Cashflow Management. You can download your free copy here.
How active observation of the world around you can help cashflow
Researchers in Italy have found that farm animals like dogs, cows and sheep can detect an earthquake up to 20 hours before it occurs. Perhaps it is ionisation of the air caused by rock pressures or that animals can smell gases released from quartz crystals before the quake. The lesson business owners can take from this is that actively tuning into the world around you can help detect and manage cashflow challenges before they occur.
Good cashflow management is more than formally monitoring, analysing, and optimising the net amount of cash receipts minus cash expenses in your business.
It is also about actively observing your customers, sector and community.
In a recent blog post, the director of the Newmarket-based accountancy practice BetterCo Advisory & Accounting, Alister Siew, warned business owners to be vigilant in the community because rising property prices were causing changes in neighbourhood demographics (usually towards the more affluent). For example, where once fast movers like a 'pie and an energy drink' were the go, a more affluent market may want gourmet pies and smoothies.
Siew's advice was not to wait until the changes reflect in the cash register. Too often, businesses owners become aware of differences when it's too late because they are not actively monitoring the world around them. If a once-popular product or service suddenly slows down, investigate why this may be the case. It could be that your market is changing or a new competitor is on the scene.
You may find that a once regular and reliable client suddenly starts paying late, ignores your emails or changes their payment or buying patterns. It may be time to put trust aside and start taking action to mitigate your risk. Meet with them to find out what's going on. Speak to other suppliers.
The PESTLE Analysis
The PESTLE Analysis is one useful active monitoring tool to help you protect your cashflow and your business from a broader perspective.
Briefly, PESTLE is an anagram for Political, Economic, Social, Technological, Legal and Environmental factors which may impact your business. It helps identify threats and opportunities before they become significant.
Political factors: Politically, the Government of the day may be under pressure and looking for some wins. Is this an opportunity for you?
Economic factors: A slowdown in the construction industry, for example, may signal trouble for one or more of your clients. Step up your communications with the client and keep an eye on their accounts for any changes.
Social factors: The #MeToo movement, Black Lives Matter, working from home, rising anxiety and an ageing population are examples of social trends that may impact your business, your marketing or other business activities. Be aware and respond accordingly.
Technological factors: The digitisation of business, an increase in cyberattacks, and remote care solutions bringing doctors into the home are examples of tech factors that offer both threats and opportunities.
Legal factors: Changing legislation, for example, a shift from minimum wage to living wage and the Government's crackdown on property investors and speculators, will have implications for some. What will you make of it?
Environmental factors: It's not so much the effect that global warming, recycling and stainless steel straws or polluted waterways could have on your business, but how your markets, suppliers, and Government will respond to those developments that may impact your cashflow and your business.
Keeping your finger on your cashflow is not only understanding your income and expenses. Understanding what's going on in the world around you positions you to plan better, respond faster and detect threats and opportunities before your competitors.
Solve your cashflow headache and get paid on your terms
When you leave your local Mitre10 store with your new BBQ in tow, do you tell the cashier to invoice you on the 20th of the month? Have you tried that with New World, or PB Tech lately? It begs the question: Why should your businesses be any different?
The 'practice' of paying invoices on the 20th of the month is not something enshrined in law, anywhere. If anything, it is a convention. When you get paid comes down to the terms and conditions you negotiate.
Ahead of the 2020 election, the Labour-New Zealand First coalition government was vowing to tackle big businesses that make SMEs wait 60, 90 and even 120 days for payment, describing it is an unfair imbalance in power.
Government Minister Stuart Nash, a one-time small business owner, told media that when he was in business, he needed the money but he worried that if he hassled his clients too much, they wouldn't give him more work.
Xero's Small Business Insights 2020 reports that the average payment times are currently 25.1 days compared to 30.8 days at the peak of the COVID-19 crisis.
Payment terms of the 20th of the following month – in reality, the 25th or the 30th of the next month if you're lucky – are a significant contributor to the challenge of a healthy cashflow. It has a knock-on effect because it means that the company that gets paid late pays late.
At the start of a relationship, the sale is all-important. Terms and conditions are highly fluid because nobody wants to sacrifice the deal. Still, it comes down to whether or not you want to set yourself up to be a successful and stable business with the right clients or one that is desperate and clinging to every scrap that comes along.
1. How you begin sets the tone
At the start, establish good terms and conditions that will work for your business and make it a condition of sale that those terms are agreed. It may be that your terms are cash on delivery, seven days or 30 days.
The point is that traditions and conventions obligate your business only in so far as you allow. Decide what kind of business you want to run, set the terms and conditions that are a win/win for both you and your customers and stick to them.
2. Avoid surprises
Make sure new customers understand and agree to your payment terms. Payment on the 20th of the next month is a modern convention, which means customers may assume that the 20th is acceptable to you – and it may be. However, if your payment terms are payment on delivery, seven days or even three days, make sure your customer knows at the start.
3. Reinforce your payment terms
Make sure your payment terms are on your invoice, along with your preferred payment methods like direct credit or credit card.
4. Follow up
It's tempting, for both small and larger businesses – owners and accounts people – to let a few days slide, especially if the relationship is new and bedding in but, remember, how you begin sets the tone of the relationship.
If payment is one day late, send a friendly reminder email. If the email reminder is not acknowledged, then follow-up to make sure the other party received the email and there has been no missed communication.
While you set your terms and conditions and it is not necessary for you to be confined by convention, the critical success factor to getting paid on time and staying on 'good terms' – no pun intended – with your client, is communication.
Communicate, communicate and communicate.
How to grow your tax advisory through thought leadership
There's a so-called old piece of wisdom that says: “Absence makes the heart grow fonder.”
In reality, it is an old wives’ tale because it isn't true – not for relationships and not for tax advisory businesses. If you want more business, if you want more referrals and more growth, you need to up your 'visibility' in a way that is relevant to your audience.
Thought leadership is one way to achieve this goal.
The founder of the networking organisation Business Network International (BNI), Dr Ivan Misner, has what he believes is the most critical concept in networking.
“The VCP Process® – visibility, credibility, profitability – is a continuum,” he says. “Once you achieve credibility (and not before), you then need to start asking for referrals in order to achieve profitability. Profitability does not result automatically from visibility and credibility.”
What Misner is describing is true of marketing as well. While marketing – regardless of your methodology – will help you achieve visibility with your clients and potential clients, which in turn leads to credibility, you still need to do the hard work. In networking, it's asking for referrals. In your online marketing, it's about proving you are an expert, you are trustworthy, and you are good at what you do.
In this COVID-19 environment, opportunities to meet people face-to-face and interact personally to clinch new business and maintain existing business, are reduced. There is more emphasis on digital ways of working, shopping and socialising. While many accounting firms were dealing with the disruptions brought to reporting and compliance (and the rise of greater emphasis on advisory), COVID-19 is accelerating the change.
In this new climate, tax advisory businesses are advised to grow their online presence and visibility – to expand their digital footprint – in a way that establishes their credentials as expert and trustworthy.
Thought leadership can help you do that.
1. Be valuable
We are living in an age of content shock. There is quite literally a deluge of content (list stories, how-to stories, updates and reports). For example, content about the increase in the provisional tax threshold is relatively common. It is important content, it is of value, but it is not valuable because it is common. By all means, it is the kind of content that any practice should be creating and sharing, but it won't earn you thought leadership.
Thought leadership comes from creating content – blogs, podcasts, opinion editorials, videos et cetera – that are unique, and you achieve that by applying your unique expertise and interpretation to the events (like tax developments) going on around you. Always look to understand and communicate what it means for your audience at a granular level
2. Stand for something
Your clients and potential clients want you to have an opinion. It’s why they pay you. Thought leaders have an opinion, and they are not afraid to express it. If you try to be everything to everybody, you end up being nothing to nobody.
3. Aim for relevance
A content piece about how to improve cashflow is of value and also a common theme. Most companies, consultancies, banks and accounting firms have content about this. One way to differentiate your content and improve engagement is to add relevance by referring to the events and circumstances of the day.
For example, 'Maintaining cashflow this COVID-19 Christmas’ is current and timely. It is relevant because it refers to the issues of the day. Commentary about everyday problems and developments on the tax front should always be made in the context of the times in which we live.
In summary
It's not easy to 'stick your neck' out and establish your expertise, authority and trustworthiness through thought leadership, but nothing worthwhile is ever easy.
Whether you get more business from referrals or other marketing and sales methods, thought leadership will benefit your practice because it says that you know what you’re about.
How to overcome the pain of tax procrastination
With Inland Revenue (IRD) currently charging a penalty of seven percent interest, you would think that every single business owner in New Zealand would be highly motivated to get their tax issues sorted.
Why then, is tax procrastination a problem?
Tax is an obligation. We have no choice but to get on top of it. Whether that's paying on time if we can or, if we can't, making alternative arrangements. Solutions may include tax pooling through Tax Management NZ or reaching an agreement with IRD. However, there is a segment of Kiwi taxpayers who continue to bury their heads in the sand despite the potential pain it may cause.
However, tax procrastination, it turns out, is a 'thing' and it's not laziness either.
Dr Piers Steel, author of the book The Procrastination Equation: How to Stop Putting Things Off and Start Getting Stuff Done calls procrastination 'self-harm'. It's hard to argue with him when you consider the breath-taking tax penalty regime we face in New Zealand.
Dr Fuschia Sirois, a professor of psychology at the University of Sheffield, recently told the New York Times: “Procrastination isn’t a unique character flaw or a mysterious curse on your ability to manage time, but a way of coping with challenging emotions and negative moods induced by certain tasks — boredom, anxiety, insecurity, frustration, resentment, self-doubt and beyond”.
In short, we use procrastination to manage an immediate negative mood rather than with getting on with the task.
Beating tax procrastination
Carleton University’s Tim Pychyl suggests that the next time you feel inclined to put off something – like getting your tax sorted – you should simplify your focus down to taking the first step. The very next action helps shift your primary emotion.
“Once we get started, we’re typically able to keep going. Getting started is everything,” he says.
First tasks
Having a handful of obvious first steps you can take will help start you on that critical first step.
1. First step, get expert advice
If you are concerned about cashflow, particularly in this year marred by COVID-19, find a tax adviser (your accountant or tax consultant). Should you already have one, pick up the phone and speak to him or her about your options – even if it's to book an appointment.
Take that first step.
2. List your next steps
In partnership with your tax adviser, get an understanding of what all your options are. These may include tax pooling or coming to an arrangement with IRD for an extension, or a repayment schedule. Do you qualify for Working for Families or the temporary tax loss carry-back regime?
Knowing your options helps you put in place tangible next steps.
3. Reduce the workload
Sometimes the thought of having to gather all the bits and pieces of information we need can seem like a chore well worth postponing. To combat this, put in place a system that keeps your source of financial information at your fingertips.
One Auckland accounting firm reports that they have to chase at least 30 percent off their clients for 'bits of information' and it can take months. Most businesses are GST registered, which means that at least 90 percent of your needed business data is already available by the time you file your GST return. Almost every accounting software package on the market will likely have an app that lets you track receipts and other financial information in real-time.
According to research, procrastination (in all its guises) can be associated with high stress and related acute health problems. That's because the things we procrastinate never go away.
Avoid the costs of tax procrastination. Know what steps you're going to take and start taking them today.
Small Business Cashflow Loan Scheme: Do your homework first
A former economist at one of New Zealand’s largest banks has a warning for someone considering the Small Business Cashflow Loan Scheme: It could limit your future borrowing capacity.
That’s because banks may decline lending to anyone who has this type of debt on their books, as IRD may have first collection rights as a creditor if the applicant's business goes belly-up.
An overview of the scheme
Under the Small Business Cashflow Loan Scheme, the Government is offering interest-free loans of up to $100,000 to cover operating costs such as rent, insurance, utilities and supplier payments to those with 50 or fewer fulltime staff.
IRD will administer the loans. New section 7AA Tax Administration Act 1994 gives them the power to do so.
To be eligible, an applicant must show they have suffered a 30 percent reduction in revenue (à la the wage subsidy) and prove their business is viable.
The scheme will provide $10,000 to every business, plus $1800 for every fulltime employee.
For instance, a sole trader can borrow up to $11,800.
A company with 50 fulltime employees will get the full $100,000. That comprises the base loan of $10,000 and $90,000 for its staff.
The loan will be for a maximum of five years, with repayments not due in the first two years.
If a business pays the loan within the first year, no interest will apply. An interest rate of three percent applies otherwise from the start date of the loan.
Those utilising the scheme will enter a legally binding arrangement with IRD. You can find the terms and conditions of the contract here.
As at 9am on 22 May 2020, $824.516 million worth of loans had been approved and distributed to 47,664 applicants.
The scheme is available until 12 June 2020.
The implications of an IRD loan
Ex-BNZ economist Tony Alexander, speaking as part of TMNZ’s first virtual roadshow earlier this month, was asked his thoughts on the Small Business Cashflow Loan Scheme.
He says it’s important to remember it is not free money.
Anyone borrowing money from IRD should do so only to cover uncertain cashflow fluctuations over the next 12 months.
However, he has a warning for those looking to use the scheme. That is: What will your bank say the next time you approach them for core financing?
“If you do borrow [from IRD], and then you go to your bank and say you want to borrow money, they’re going to be factoring in that new debt which you have got there, debt which I’m guessing will rank higher when it comes to closing down the firm if necessary than lending to the bank,” says Alexander.
“I figured that’s why [the Government] did it through the IRD because they would have first call on the company in a closed down situation in advance of the bank, but I can’t be sure of that.”
Does IRD have priority?
Interestingly, IRD has amended the definition of ‘tax’ in various sections of the Tax Administration Act 1994 to include these loans. So yes, that gives them the necessary collection powers.
However, what is not certain is if these loans are a priority debt that move to near the front of the queue in the way that PAYE does when a business enters into liquidation.
We’re hoping Richard Owen, who is the small and medium enterprises customer segment lead at IRD, can clarify this at our next virtual roadshow on 17 June.
You can register for this event here.
Other things to note about Small Business Cashflow Loan Scheme
Below are the important terms and conditions of the scheme to note.
IRD calls the shots
IRD can change the terms of the loan contract with 30 days’ notice. It can also assign the loan to another party.
And they can audit your application at any time.
Beware the consequences of defaulting
In the case of an ‘event of default’, then the interest rate jumps to 10 percent.
This comprises the three percent someone normally faces under the scheme, plus IRD’s underpayment interest rate. The latter is currently seven percent.
At a time where the Government has stamped out loansharking, 10 percent interest is quite draconian.
An event of default can include someone:
- Breaching or not complying with any undertaking they are required to under the agreement they have with IRD.
- Failing to make payments of the loan due to the dissolution, termination, disestablishment, de-registration or winding up of a company.
- Failing to make payments of the loan due to the appointment of a liquidator, statutory manager, administrator, receiver, bankruptcy official or similar officer in respect to a person or any of their assets.
- Ceasing to carry on the business or organisation for which the loan amount was provided.
- Making any statement or providing information that is untrue, inaccurate or misleading.
See clause 9.1 of the terms and conditions document for more information about an event of default.
You will enter a payment plan after 24 months
Anyone who fails to pay their loan back within two years will put on an IRD payment plan.
From the date of the 24th month to the final repayment date (i.e. the date falling five years after the loan is made available to someone), a taxpayer must make regular instalment payments of principal and interest, as notified by the department.
Any such instalment payments will be calculated by IRD to spread the amount of the required repayments over this repayment period.
Failing to pay an instalment amount will trigger default interest.
You must remain in New Zealand
An individual borrowing money from IRD as part of the Small Business Cashflow Loan Scheme has a requirement to stay in New Zealand (other than for temporary absences like holidays) until they pay back their loan.
You must notify IRD of any changes
Anyone using the Small Business Cashflow Loan Scheme has an obligation to tell IRD if their company or organisation ceases to exist as soon as possible.
It is important you consider this if you are in self-employment.
After all, if you choose to put your business on hold and move back into an employment role, it may trigger a requirement to repay the loan.
IRD can share your information
The contract terms give IRD broad powers to share personal information with other government departments as well as debt collectors and credit agencies.
Do your homework first
We encourage anyone thinking about using the Small Business Cashflow Loan Scheme to read the terms and conditions, so they know exactly what they’re getting themselves into.
Moreover, take heed of Alexander’s warning about the impact it may have on getting a bank loan later.
However, above all else, seek expert advice about your situation before signing up to anything.