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. 

Is It Time to Pivot Your Business?

The pandemic made it difficult, or even impossible, to deliver on your promise to your customer. Whether your promise is quality, consistency, the type of service or product you deliver, or how you deliver it, chances are you were forced to break your promise.

And that’s okay. But no-one needs to tell you that it’s not a sustainable way to do business.

If your business model is not working for you or your customers anymore, it may be time to pivot and find new ways to do business. This can be a short term shift just to get through the worst, or you may find a new model that would suit you better in the long run.

We’ve decided to look at some examples of how other businesses handled the changes and came up with a few ideas that may help you if your business is in need of a pivot.

 

Example 1: Going Online

If you provide in-person lessons, you can turn your lessons into online classes. Similarly, if you provide services, you can turn your skills into online courses to teach others how to perform those services themselves. 

Think creative arts, like music, painting, pottery making, dancing, but also other types of services, like dog grooming, language teaching, and how to colour your own hair. The opportunities are endless. 

One of our clients operating a gym launched an online website within a week and started running their normal classes online. They also have a library of training sessions available to their members.

The face-to-face aspect of these types of service are often very personal and the very reason why people pay for them. But online classes don’t need to be impersonal. For instance, if you provide online tutoring, you can still do your classes one-on-one for a personal touch, you can chat before or after the lesson as you’d normally do, and the feedback you give can still be catered specifically to that person.

If presenting classes online is new to you, it may be difficult to adapt and to get your head around the technology, but it will pay off. It doesn’t need to be complicated either – video calls made with WhatsApp works perfectly – and videos you record don’t need to be Hollywood-quality. It is the content that matters. If your lesson plans are top-notch and students get results, that is what will make you successful, not how well you package the course.

Going online is a huge opportunity for those who are willing to take the plunge because many of your competitors won’t. And as an added bonus, you can reach more people – across the globe. 

 

Example 2: Going Postal

It’s no secret that shops with an online ordering system, especially supermarkets, did well during the lockdown period. But what about other products and services?

For instance, a service like clothing alterations usually happens in-person. But what if you can still alter people’s clothes without meeting them in person?

Picture this: You get onto a WhatsApp call with your client where you guide them through taking their own measurements. They can also wear the clothing item and record a little video showing you where the problem areas are. They then courier the clothing item to you. You work your magic, altering the item, and then post it back to them. Yes, it would take longer and cost a little more, but it’s very convenient.

Another example is picture framing. You can have your consulting meeting with your clients over Zoom, they can choose a frame from your online catalogue, and send the item in through the post. After you framed the picture or painting, you can send it back again. If the client has photos they want to frame, they can even send the digital file to you which you can then print.

Other businesses that had great success using the postal service are Dollar Shave Club and Stitch Fix. For a monthly subscription, the Dollar Shave Club sends, you guessed it, razors to their subscribers. Stitch Fix puts together a box of clothes they think you’d like based on your style preferences; you keep what you like, and send the rest back.

The selling points of these companies are price and convenience. Another selling point you can add now, is necessity. 

A recent example of a similar business that was in the news is that of a Wellington-based couple who usually keep vending machines stocked with candy. Because they couldn’t get to their vending machines and the stock they had at home was nearing expiry date, they started to sell and deliver boxes of candy during lockdown. Many people used this service to send care packages to loved ones or medical personnel working in hospitals during lockdown. 

Can you turn your products into care packages? For instance, imagine if you could send care packages to your loved ones filled with Marino scarfs or beanies to keep them warm for the winter?

 

Example 3: Exploring Different Markets and Uses 

Another way, which needs a bit more thinking out of the box, is targeting different markets or looking at different ways to make money from your products or equipment.

For instance, if you own trucks that are used as pop-up shops at events, music festivals, or fairs, you can rent out your trucks to use as pop-up COVID-19 testing clinics.

If you’re a hotel owner, and you’re concerned about when international travel would pick up again, you may want to consider turning some, or all, of your units into rental apartments. (Note that the change-of-use rules for GST may apply.) With the housing shortage in Wellington, this may be a more secure way of making money at the moment.

Other examples we’ve seen are gyms renting out their equipment, like treadmills, to their clients during the lockdown period. Many clothing designers started making face masks and cosmetics manufacturers turned their focus on making hand sanitisers.

Most of these ideas are more of a short term solution to help through the crisis, and many would go back to their core focus once things are back to ‘normal’. 

 

Example 4: Developing New Products

For some businesses, what you’ve done before may never be in demand again. Or there may be a gap that opened up which was never serviced before.

One of our clients in the supermarket industry found that people were buying more chicken nuggets and oven fries than before. This was most likely to satisfy their craving for takeout, but also people who aren’t that comfortable with cooking. Meal kit companies, like Hello Fresh, have become very popular over the past few years. While these companies focus mostly on healthier food, people still want to eat junk food from time to time. So a focus on creating pizza kits, for instance, where you provide the raw dough for the base plus the fresh ingredients and instructions of how to bake it may be popular.

On the Edx online learning platform, a host of new courses were introduced related to COVID-19, most of them in the medical science fields. But one that caught our attention was a course by The University of British Columbia called “Re-imagine work: Strategies during COVID-19 and beyond. This course teaches students how to adapt to working from home and how to set up your office or shop to meet social distancing requirements.

 

Are You Considering a Pivot?

Whether you are forced to pivot in your business due to changes in the market, or you’re seeing new opportunities that you want to pursue, pivoting can be a scary but exciting venture. It’s also important to plan ahead while still being flexible. 

Get in touch with BWMD to help you to create a business plan and the necessary forecasts from the start so that you can be prepared for what’s to come. We can also help you on an ongoing basis to review your performance and adjust your plan as needed. 

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. 

Relaxation of Insolvency Provisions in the Companies Act

According to the Companies Act, directors can be held liable personally should they trade or take on debt if there’s a significant risk that they won’t be able to repay their debts when they become due. 

The uncertainty the Covid-19 pandemic brought has many directors wondering whether they should keep going, or rather throw in the towel. To avoid premature liquidations, the Government announced some relaxation from the insolvency rules.

If a company keeps trading and take on debt over the next six months, they will not be in breach of the Act, if: 

  • they believe the company will be able to keep trading, despite the difficulties
  • the company was able to pay the debts that fell due on 31 December 2019, and
  • the directors expect that they’ll be able to repay their debts within the next 18 months.

That’s the change in a nutshell. There are more intricacies and exceptions, so if you’re concerned about the going concern of your business, come chat to us first before you pull the plug, or just keep on trading.