Provisional Tax 101

Imagine making loads of money during the year, but you never thought about keeping something aside for the tax man. Imagine the surprise you’d get at the end of the year when you get a huge bill from IRD.  

That’s why provisional tax was implemented. To avoid nasty surprises like that. 

Provisional tax is a ‘peace of mind’ tax. A ‘risk-reducing’ tax. 

Allow us to explain.

 

What Is Provisional Tax?

In simple terms, when you pay provisional tax, you are paying tax for the year you are currently in, even though you don’t know what your earnings will be yet. For instance, let’s say you estimated that your tax bill for 2021 will be $6,000. You will then pay three instalments of $2,000 each during the year. 

When you do your annual accounts at the end of the year, you’ll calculate tax on the actual profit. If you paid too little, you’ll have to make an additional payment, called terminal tax. If your actual profit is less than what you estimated, and you paid too much provisional tax, the IRD will refund the difference. 

Let’s say your tax bill for 2021 is $7,000 and you paid $6,000 in provisional tax throughout the year, you’d need to pay an additional $1,000. Similarly, if your final tax bill is only $5,000, and you paid $6,000 during the year, the IRD will refund $1,000 back to you.

Who Needs to Pay Provisional Tax?

You only need to pay provisional tax if your total tax bill (residual income tax) for the previous year was more than $5,000 (previously it was $2,500). You can still volunteer to pay provisional tax if your prior year’s tax was less than $5,000.

How Are Provisional Taxes Estimated? 

There are a few different options available to calculate provisional tax, but most businesses use the standard (safe harbour) option. 

On the standard option, the provisional tax payable is calculated as follows:

Residual income tax payable from prior year + 5% 

On this option, those with a balance date of 31 March will pay three instalments with the following deadlines: 

#1: 28 August

# 2: 15 January

#3: 7 May 

 

Payments May Overlap 

Something that often confuses our clients is that they’d need to make payments for both the current and the following year in the same year. For instance, your final bill for 2020 is due on 7 April 2021 (if you work through a tax agent like us). By this time, you would have already made two provisional payments towards the 2021 year. 

 

In Conclusion 

Provisional tax was put in place to help you avoid a huge tax bill at the end of the year. It’s designed to work similarly to Pay As You Earn (PAYE) that wage-earners pay on their monthly wages monthly. 

If you need any help or if you have more questions, get in touch with your account manager.

How to Stay on Top Of Your Business Finances

Finances aren’t sexy. But ignoring that part of your business can have a detrimental impact on your business.

Does this sound familiar? 

“If I work hard, my finances will sort itself out.”

“I’m too busy to worry about the numbers now.”

“I don’t understand accounting; my accountant can sort it out for me when my tax bill is due.” 

Simply put, these beliefs are wrong. Here’s why:

  • If you work hard you may be successful. But that’s not a guarantee. You may work on things that aren’t profitable or that don’t move your business forward in any way. The key is to work hard on the right things. And you’ll only know what the right things are when you delve into the numbers.
  • You may be too busy because you don’t have a handle on your finances. You may spend time on unproductive, non-profitable tasks without even knowing it.
  • You can’t wait until the end of the year to analyse your numbers. It would be too late. If you want to succeed, especially in such an uncertain time as now, you should plan ahead, measure your performance regularly, and make strategic decisions as and when they’re needed.  

So, what should you do instead?

 

Turn Your Vision into Measurable Numbers

It all starts with developing a vision and a plan for your business. 

Once you’re clear on what you want to achieve, you should put numbers around your vision. For instance, develop a cashflow forecast and other performance metrics that would help track how you’re doing against your goals. 

You should also measure your metrics on an ongoing basis and use the numbers to make the right business decisions. For instance, if you’re finding that one of your services is unprofitable, you may want to drop it like a hot potato, and channel your marketing bucks towards a more successful product. Or you may decide to work on improving productivity in your production team. 

 

Which Financial Metrics Should You Measure?

There are many financial metrics to track. Trying to cover them all may be overwhelming. Instead, focus on a few ones at the start, and add more as you begin to understand your finances better.

Here are the most important financial metrics to start with:

 

Your Cash Flow 

Staying on top of how much money is flowing in and out of the business is crucial. If you don’t plan ahead you may run out of cash just before a pay run, or you may have to say no to a marketing opportunity that can bring in thousands of dollars in the long run.

 

Debtors/Debtors Days 

Keep on top of your outstanding debts and how fast people pay you. If you don’t follow up frequently, you may not be able to recover the debts at all. There’s a saying that people pay those who scream the loudest. 

Everybody is feeling the pinch right now and many businesses are holding on to their money in fear of running out. That is flawed thinking because if everybody stops paying each other, the economy would halt. But if we keep on paying each other, the economy can keep on turning and recover over time. 

As much as we would like to help others out, we need to think about ourselves as well.

 

Profitability

We often put too much of a focus on increasing sales, but forget about profitability. For instance, if you’re in the service industry and things aren’t as busy as usual, you may spread out the work to fit the time you have available. That would increase your labour bill, making the business unprofitable. Instead, look for ways to be more productive and rather spend your extra time on bringing in more clients.

 

Take Control of Your Business Finances

Planning your finances doesn’t come naturally to everybody. Just like we may need your help with a haircut or drawing up a plan for a new house, so do you need our help to make sense of your finances. Get in touch with us so we can help you to stay on top of your finances and take control of your business’ destiny. 

Why You Should Hit the Reset Button on Your Business

The country is slowly starting to wake up from the slumber it has been in for the last two months. Every day, a few more shops and businesses are opening their doors again. And although we still need to keep our distance and use hand sanitizer a gazillion times a day (ask anyone who’s shopping for winter clothes), it’s good to be around people again.

That doesn’t mean our businesses are safe yet; most took a huge knock to their income, many closed their doors for good. But maybe the scariest thing right now is the uncertainty. We know things are going to be different, but we don’t yet know how things are going to play out.

When we’re faced with this level of uncertainty, we typically fall back on one of these common reactions:

  • Getting lost in feelings of overwhelm and frustration. In worst cases, paralysis can set in and instead of thinking ahead and planning for problems, we just react to them as they happen, or ignore them completely and hope they go away. 
  • Playing the blame-game. It’s easy to want to blame someone when things get out of control, whether you’re blaming yourself, someone else, or external forces you have no control over.
  • Just carrying on with a business-as-usual mindset. This doesn’t sound like such a bad idea, but it is. The world has changed – in many ways that we don’t even realise yet – and to act as if nothing changed can be devastating to your business.

So, what is a better way to handle the road forward? 

 

Look at Your Business with Fresh Eyes

The crisis gave us the opportunity to take a step back and evaluate what is really important to us and our businesses. To think about how we can do things better. 

Now is not the time to handle your business with kid gloves. You may need to rip things apart and stitch them back together again, in a completely different way. This is not easy to do, so here’s a step-by-step process to help you to reevaluate your business and come up with a plan for a lean, resilient business that can weather the storms.

 

Step 1: Distance Yourself from the Business 

Before you do anything else, you first need to remove your feelings from the equation and look at your business as if it’s someone else’s. Forget about the blood, sweat, and tears you already invested – as long as you view your business through the lens of its history, you’re not going to come up with fresh ideas for its future.

This is often hard to do on your own; we’re too near to our own creations. If you need help, set up a meeting with us so we can help you work through the change. We may not understand your business and industry the way you do, but we can ask the right questions to trigger the light bulbs to go on in your head. 

 

Step 2: Do Your Homework

What is broken in your business? Think about your day-to-day processes, the way you serve your customers, or the products you currently offer that don’t serve a post-corona world.

Also, look at the trends in your industry. Will similar businesses turn to online shopping? Will there be a bigger focus on exports? Which new products will be manufactured locally that were previously imported? 

Countdown recently opened the first purpose-built e-store in the country, and many are following. In the recent budget speech, more money was allocated to boost the export industry and to help small businesses who want to incorporate e-commerce into their business models. Maybe these are trends worth exploring.

 

Step 3: Define Your Vision and Goals

Once you’ve done your homework, you can start to paint the picture of where you want to take your business. What do you want to achieve? How do you want to do business? Do you, or your staff, want to work from home more often? Do you want to add online shopping or meet with your clients through Zoom? Which products or services do you want to offer?

Break your vision down into actionable goals and put a date and numbers around your goals. If you need help creating your forecasts, let us know.

 

Step 4: Create a Step-by-Step Roadmap

The next thing you need to do is to put a more detailed A-Z plan together. What are the steps you need to take to go from where you are now, to where you want to be? 

Think about where the gaps are in the business. What do you currently have in place that doesn’t serve the new direction; what is not aligned with the new vision?

Also consider the new business risks – both specific to your plan, but also the industry and economy as a whole. What do you need to do to mitigate these risks? 

 

Step 5: Implement, Test, and Refine

Once you’ve created your roadmap, you need to implement it. But remember, the version you put in place now will not be the final version. It will change, and that’s okay.

Be flexible, and make changes as and when you need to. The quicker you can react when you see something is not working the way you expected, the more resilient the business will be.

 

How Are You Rewriting Your Story?

A change is as good as a holiday. But a disruption, like we’re experiencing now, allows us to completely rewrite our destiny – for the better. 

Boost Your Cash Flow During the COVID-19 Pandemic

The one thing most small and medium-sized businesses struggle with right now is cash flow. Many businesses have little or no income during Alert Levels 4 and 3, but your expenses didn’t go away, right?

Here are some of the measures introduced recently that could give you some breathing space:

  • Government interest-free cash loans
  • Cash boosting tax changes
  • ACC delayed invoicing

Scroll down for more information on each point.

As with most Covid-19-related issues, new measures are often issued in a rush and forever changing after the initial introduction. We are constantly getting more details, so stay tuned for more information coming your way.

 

Boost Your Cash Flow

Apart from the above, what else can you do to free up some cash? Here are a few actions you can take:

1. Rethink your costs: What do you really need? Are there any products or services that you can cancel?

2. Renegotiate terms: Of course, you can’t cancel everything because then you may not be able to do business anymore. So, ask yourself, are there any terms or costs that you can renegotiate?

3. Offer discounts: You can offer discounts to your clients if they pay their bills earlier. You can also offer discounts on products or services to entice more people to work with you and to move old stock.

4. Rethink your processes: How can you work more efficiently? The more efficient you are, the more money you save.

5. Review your stock holding: Can you reduce the number of stock items you hold at one time?

6. Rethink your capital expenditure: Hold off on buying new equipment if you don’t absolutely need it. Instead of buying a luxury item, consider whether a more basic item can do the same job.

7. Plan, plan, plan: There has never been a more crucial time to draw up cashflow and other forecasts. You also need timely financial reports to measure how your business is performing so that you can make tweaks and pivots quickly when needed. This is where BW Miller Dean can help. Make sure you get in touch so that we can help you to take control of your finances and safeguard your business.

 

Government Measures Introduced to Boost Your Cashflow

Government Interest-Free Cash Loans

A new loan scheme was introduced to help small and medium-sized businesses who are struggling due to revenue lost because of Covid-19.  Under this scheme, businesses who have less than 50 employees can borrow $10,000 plus $1,800 per employee, up to a maximum of $100,000. The scheme is also available to sole traders and self-employed persons.

Before you get too excited, remember that it is a loan and you will need to pay back what you borrow. Unlike previous subsidies introduced, this is only a temporary relief to help you through the worst.

Here are some of the key features:

  • The scheme is available to businesses with 50 full-time employees (or equivalent) or less.
  • The loan will be interest-free if you pay it back within one year. Otherwise, interest will be charged at 3%.
  • The maximum term is five years, but the government will not seek repayment within the first two years.
  • You can borrow $10,000 per firm plus $1,800 per employee.
  • Sole-traders can borrow a maximum of $11,800 ($10,000 basic plus $1,800).
  • You will need to meet the criteria for a viable business and you should be able to prove that your income dropped at least 30% due to Covid-19.

Applications will be open through myIR from 12 May and you have one month to apply, however, this deadline may be extended. Read more about the loan scheme here.

 

Cash Boosting Tax Changes

Here is a reminder of some of the recent tax changes introduced. These changes came into effect from 1 April 2020 and apply to the 2020-21 financial year.

  • Small assets costing less than $5,000 can be expensed immediately. This threshold increased from $500.
  • Depreciation on commercial buildings was reintroduced. If you claimed depreciation previously on the building, you have no option but to start claiming depreciation again.
  • You only need to pay provisional tax if your residual income tax is more than $5,000. Previously the threshold was $2,500.

 

ACC Invoicing Delayed until October 

The ACC usually sends out their invoices from 1 July, but for the 2020-21 year, they’ll issue their invoices only in October to give businesses some cash flow relief. Other invoices issued throughout the year will also be on hold for three months, and they’ll offer payment options once they send out invoices. Find out more here.

 

Protect the Lifeblood of Your Business

How well you have a finger on the cash flow pulse can make the difference between thriving in business and closing up shop.

There has never been a more crucial time to draw up cashflow and other forecasts. You also need timely financial reports to measure how your business is performing so that you can make tweaks and pivots quickly when needed. This is where BWMD can help. Make sure you get in touch so that we can help you to take control of your finances and safeguard your business.

Tax Payments: Separating the Myths from the Facts

As with everything relating to COVID-19, there is a whole lot of information circulating about tax payments that sounds too good to be true. And some are.

We want to clear up a few of the common misinterpretations about the recent tax reliefs announced and make sure you understand which are actually available to you so that you don’t get into trouble with the IRD.

 

Myth #1: I Don’t Have to Pay Tax at the Moment

All core taxes are still payable as due and you still need to submit your returns on time. However, the IRD has indicated that they would be more lenient with late payments.

This doesn’t give you the green light to ignore taxes altogether. If you’re in a position to pay your taxes, you should do so. If you could have paid, and you didn’t, the IRD is not going to act favourably towards you.

If you are struggling to make any tax payments, there are some options available to you. Contact us so we can discuss those options and help you work out a payment plan that best suits your cash flow and keep you off the IRD’s black book.

 

Myth #2: The IRD Won’t Charge Any Interest or Penalties If I Don’t Pay

This is partially true. The IRD has relaxed the eligibility requirements for remitting interest and penalties, but these will still be imposed automatically by the IR system.

To have these reversed, you will need to apply for remission to the IRD as soon as practicable. You will also have to jump through all the standard hoops and provide them with financial information to show that your financial difficulties, and the reason you didn’t pay, were related to COVID-19. Financial information may include bank statements, management accounts, and cash flow forecasts, and we can help you to get these together.

Read more about the remission requirements here.

 

Myth #3: I Can Get the Tax Back That I Paid in the Prior Year

You may have heard that the IRD is allowing businesses to ‘carry back losses’, or in other words, that you can get a refund for tax you paid in the prior year if you’re making a loss in the current year.

It sounds great, but it’s only partially true. As always, the devil is in the details.

The first problem with this statement is that the IRD hasn’t issued any details on how they’ll apply this rule. They promised to give us more clarity on the 27th of April.

What we do know is that, in order to claim back taxes that were paid in the 2020 year, you’ll either have to wait until your 2021 annual accounts are completed, or you’d need to do some pretty accurate forecasting to estimate your losses for 2021. This is difficult in the best of times, but even more so now with all the uncertainty around the economy. It would take a pretty good crystal ball to forecast losses for the rest of the year. If you make a claim based on an estimate, you would have to prove your loss at the end of the year once your final accounts are completed.

If you made a loss in the 2020 year, claiming back taxes that were paid in the 2019 year would be a bit easier. If that’s you, please get in touch with us about getting your 2020 accounts completed earlier so you can take advantage of this relief sooner than later.

 

Final Provisional Tax Payment for 2020

The provisional tax due on 7 May is the final instalment for the year ended 31 March 2020. The shut down didn’t happen until the end of March so many of you had a good, or normal, year in 2020. The full impact of the lockdown won’t really hit us until the 2021 tax year.

If you have made normal profits for the year ended 31 March 2020, then remember that the tax thereon is still due.

So, the question of whether or not to pay your last provisional tax payment for 2020 comes down to…

  • your cash flow situation, or
  • whether you’re pretty certain that you’ll make a loss in the 2021 year.

In either case, please reach out to us to discuss your options.

 

You Can’t Get a Refund on Taxes You Didn’t Pay

Another question we sometimes get from clients is whether they can get a tax refund, even though they never paid any taxes. When messages about tax reliefs and refunds are all over the news, it’s easy to get swept up in the excitement and forget the simple principles of how the tax system works.

Remember, the IRD can’t refund something that you never paid.

 

Summary: Assessing Your Situation

As you can see, nothing is straight-forward and what applies to one business may not be relevant to another. Here’s a quick summary of the most important points to consider when deciding whether to pay your tax now or if you should apply for a tax refund due to future losses: 

  • If you’re in a sound cash flow position and it looks promising that you’ll make a profit in the 2020 and 2021 years, pay your taxes.
  • If cash flow is tight, come talk to us about your options. We can introduce you to working through Tax Traders, a tax financing company, which gives you cheaper and more flexible payment options. Alternatively, we can help you to arrange a repayment agreement with the IRD.
  • If you made a loss in the 2020 year, but in prior years you made a profit, you can apply to the IRD to carry back your losses. Ask us to help you complete your annual accounts earlier.
  • If you expect to make a loss in the 2021 year, and you want to request that the loss is carried back to prior years, you’ll need an accurate cash flow forecast. Get in touch if you want us to help you to create a realistic forecast — we can’t see into the future, but we’re as near as you could get to a crystal ball.

 

The tax rules and interpretations are constantly changing. We’ll keep you informed of these changes via our newsletter.