7 TAX TIPS FOR FRANCHISEES
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What do new franchisees need to know about tax matters? Philip Morrison of Franchise Accountants offers a guide
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Philip Morrison of Franchise Accountants accepting the award for Service Provider of the Year 2015-2016
Anyone new to running their own business will soon find they’re on a steep learning curve, from understanding the operation and managing staff to dealing with suppliers, customers and all sorts of tax compliance issues. While the franchisor will help in many of these areas, tax issues often come down to the franchisee and their accountant. If you buy a business, though, even the best accountant can’t be looking over your shoulder all the time, so it helps if you understand the basics. Here’s an overview of the things every new business owner needs to know about tax.
There are two main reasons businesses fail. The first is Lack of capital, which is what happens when the owner puts insufficient funds (called capital or owner’s equity) into the business, or when there is too much debt on the business for it to service. This results in insufficient working capital – the money needed to fund the operations of the business on a day-to-day basis.
The second reason is Lack of tax planning, when business owners fall into the trap of using their trading income to fund the business without setting anything aside for taxes. When the tax bill comes in, they have nothing to pay it with. The IRD can shut down businesses that don’t meet their tax obligations. At the very least, they’ll impose stiff penalties, thereby making the situation worse. That’s why tax matters matter.
There is an array of tax types in New Zealand, some of which are described below. Please note: this list is not exhaustive nor should it be relied upon in place of a tax consultation. Specific advice should be sought as your tax requirements will vary according to your individual circumstances.
GST (Goods and Services Tax) Most franchise businesses will be required to be GST registered, but there are variations like filing frequency which can have a direct impact on the liquidity, cash flow and working capital requirements of your business. You’ll also need good systems for capturing GST collected and paid - see the article on GST for Beginners at www.franchise.co.nz/article/2099 for more information.
PAYE (Pay As You Earn) If your business employs staff, you will be required to be registered as an employer with the IRD. This involves filing payroll-related returns fortnightly or monthly, and making PAYE and Kiwi saver payments at designated dates. Payroll can be complex so we recommend using payroll software; also, being up to date with the Holiday Pay Act when calculating things like holiday pay, days in lieu and penal rates are tax matters that matter. By the way, putting yourself on PAYE wages as a self-employed franchisee may not be the most tax-efficient option – seek professional advice.
FBT (Fringe Benefit Tax) Your business may need to be registered for FBT, which is a far-reaching tax that can touch many aspects of a business from what perks you give your staff (eg. health insurance, staff discounts, low- or no-interest loans) to the use of company-owned vehicles. FBT is paid quarterly or annually. Each case needs to be evaluated on its own merits to be tax efficient.
ACC (Accident Compensation Corporation) This not a tax, but an insurance levy. There are two broad types: Employee earner levies paid via the PAYE regime, and Employer levies based on the industry category your business operates in. The employer levies are paid once your annual financial statements/tax returns are filed, so in the second year of trading you will often get two years’ ACC levies in one bill. Getting the details right at the start is important for maximum tax efficiency.
RWT (Resident Withholding Tax) This is the tax paid by New Zealand tax residents on passive income such as interest and dividends. You may need to deduct RWT on behalf of some contractors and pass it to the IRD under the PAYE filing regime.
NRWT (Non-Resident Withholding Tax) This is most common with franchisees who pay royalties to a franchise based offshore. This is a specialised area of tax knowledge, so seek out a franchise-experienced tax accountant to advise you.
Income Tax This is the single biggest area of change when you move from being an employee to self-managing your tax. You will become responsible for paying your own tax, usually three times a year as a provisional tax payer. Provisional tax is calculated from the annual financial statement your accountant prepared for the previous year and is based on your expected earnings for the current year. Once a year, a reconciliation is done which compares the provisional tax you have actually paid compared to what you should have paid. If your business has done better than expected, you’ll have to make up the shortfall: this is called Terminal tax. If you have earned less than expected and overpaid provisional tax, you will receive a tax refund.
It pays to calculate this as accurately as possible to avoid paying penalties and use of money interest, not to mention managing your cash flow better.
Company Tax This is payable where profit is not passed on to the shareholders but retained in the company. This also falls under the provisional tax regime and has its own set of rules, such as a flat tax rate of 28c in the dollar. It operates under guidelines set out by the IRD.
As a self-employed business owner, you are responsible for your own tax matters. As far as the IRD is concerned, ignorance is no excuse for not meeting your tax obligations. If you get behind, it can place a big strain on your business cash flow to catch up as penalties and interest charges accrue.
Here are seven things to make life easier as you start your journey into business ownership:
1. Get tax advice early from a franchise-experienced tax accountant.
2. Keep good records and keep your bookkeeping tidy.
3. Use software systems for your accounting and payroll needs.
4. Manage your cash flow with your tax obligations in mind.
5. Submit your records for annual financial preparation early.
6. Read your accountant’s newsletters to keep up-to-date with tax changes.
7. Save your tax money in a separate account so you don’t spend it.
Franchise Accountants offers a tailored induction service for new franchisees to help save you time, money and tax. Contact us today for more details.
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