by Franchise Accountants
last updated 16/09/2021
by Franchise Accountants
last updated 16/09/2021
Philip Morrison of Franchise Accountants offers 10 tips to help franchisees be tax wise and keep calm
Buying a business is often a totally new experience for many potential franchisees, with a huge number of questions to work through. Taking advice will help you greatly on that journey into the unknown, and one area where experienced professionals can help you more than most is tax.
Research shows there are two main reasons for business failure. One is being undercapitalised (going into a business without doing your sums properly – see What Can You Afford? at www.franchise.co.nz/articles/2397). The other is defaulting on your tax obligations. By being careful, you can avoid both.
Cashflow and tax payments
Tax can often provoke a range of emotions from business owners, from fear, anger, panic or anxiety to the calm that comes from knowing you are prepared and have your bases covered.
In any business, tax payments place pressure on cashflow. Cashflow varies depending on the type of business, the payment terms you offer, and the seasonality of your sales. However, there are set time frames for payment of different tax types that are fixed and non-negotiable. The challenge is to match your business cashflow with these payment dates.
This means that knowing the numbers that count, and building these into your cashflow plan, are critical. Here are 10 tips to help you.
1 Know your responsibilities
As a business owner, you are responsible for all tax compliance. Broadly, tax types fall into two broad categories:
- Indirect taxes, including: GST, PAYE, withholding tax and non-resident withholding tax.
- Direct taxes, including: Income tax (based on the profits of the business), Dividend withholding tax.
2 Know what tax to save
Many new franchisees move from being a wage or salary earner to being self-employed. This can change the way you pay tax. Most franchisees become what are called ‘Provisional Tax’ payers, which means paying tax three – occasionally four – times a year. It’s the responsibility of the business owner to save the money to pay the tax when it is due.
3 Invest in the right software
While income tax is calculated by your chartered accountant, indirect tax requires you to have the right software in place to operate your payroll and calculate PAYE, Kiwisaver etc. There are many payroll providers to choose from, so do your homework and ask your franchisor or your accountant for guidance.
Calculating GST requires accounting software which captures the transactions that attract GST and helps compile a GST report. Again, there are several popular systems to choose from – we recommend Xero; however, some franchise systems mandate the software system to use so check this out first.
4 Diarise your payment dates
Don’t miss a tax payment date by being too busy running your business. Late filing penalties can compound, depending on how late you are. Know when tax dates fall due and enter them in your diary, or use Microsoft Outlook or Google calendar reminders.
5 Learn some tax terminology
Taxation has its own terms and naming conventions – for example, ‘terminal tax’. No one dies when you pay this tax – it’s a top-up income tax which applies when you have not paid enough in any given tax year. ‘UOMI’ stands for ‘use of money interest’, which is applied when you have not paid enough tax and the IRD charges you interest on top of your base tax. Knowing these terms will make your life easier at tax time.
6 Undertake tax cashflow planning
Tax planning and cashflow planning go together like a horse and carriage. Investing some time and money with your accountant is money well spent. During Covid, cashflow planning was the number one request from our clients. Take the lesson: know your working capital needs, breakeven position, cashflow pinch points and overdraft requirements from this exercise. It removes financial stress on business owners and helps you make better informed decisions.
7 Understand Provisional Tax
There are a range of provisional tax methods to choose from, each with pros and cons for your cashflow. Some have different payment frequencies, some offer refunds quicker than others. Ask your franchise specialist accountant which is best for you.
8 Understand GST and select the best method for you
In the same way, there are a variety of GST payment methods and frequencies. These can also have an impact on your cashflow, so consult with your accountant (see GST for Beginners at www.franchise.co.nz/articles/2561).
9 Select a tax-friendly business structure
What entity you choose to set up to purchase your franchise can be an important decision. Different entities can have different tax rates applied, with different rules and tax options. Seek advice before you buy to ensure that you have the most cost-effective structure for your particular business.
10 Be tax wise
As the above shows, tax can be complex and have a real impact on your cashflow. Good tax advice should pay for itself many times over so, before you buy a franchise, seek out an experienced franchise specialist accountant who can assist you with the decision and guide you through the process. That will help you run a better business, enjoy more of what you earn and, above all, stay calm at tax time.
This advice is of a general nature only and expert advice should be sought to get the right advice for your specific situation.
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