Death & Taxes

Over the years, Franchise Accountants has worked with over 1000 franchisees in New Zealand. ‘Many of our clients have been new to business ownership, so part of our job is to help them understand what they are getting into,’ says founder Philip Morrison. ‘The other part is to keep them out of trouble.‘

Research shows there are two main reasons for business failure. One is being undercapitalised  – going into a business without doing your sums properly (you can read more about this in What Can You Afford?). But the second reason might surprise you – it’s defaulting on your tax obligations.

‘In any business, tax payments place pressure on cashflow,’ Philip explains. ‘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. This means that knowing the numbers that count, and building these into your cashflow plan, are critical.
‘Here are 10 tips to help franchisees avoid a fate worse than death. Stick these on your wall – and call us before it’s too late!’

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 – in order to help benchmarking across the network, some franchises 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 with your accountant is money well spent. It will ensure you know your working capital needs, breakeven position, cashflow pinch points and overdraft requirements. This removes financial stress 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).

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 relax, run a better business and enjoy more of what you earn.   

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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