IRD  2004-2005 ANNUAL REPORT

The recently issued Inland Revenue Department Annual Report for the year ending June 2005 underlines how the tax coffers have been bulging in recent years.

The department collected $32.8 billion in direct taxes, up 12.3 per cent on the previous year and $9.2 billion in indirect tax, up 4.5 per cent.

IRD said the strength of the economy had led to an increase in both the numbers of taxpayers and the amount they were paying.

"There has been especially strong growth among small business and salary and wage earners," the report said.

Like Treasury, IRD also failed to predict the growth with the total tax take 6.1 per cent more than it forecast.

Despite many picking a downturn in the economy, IRD is still forecasting the tax take to steadily increase over the next five year.

While taxpayers were handing over more to the taxman they were also racking up increasing levels of tax debt.

Total overdue debt was $2.8 billion at June 2005, up 23 per cent on the previous year,

This was made up of $1.3 billion in non-collectable debt and $1.5 billion under instalment or for collection.

The report said that audit activity including investigating tax avoidance and evasion schemes had generated $541 million in additional debt, a 35 per cent increase on the previous year.

Despite the greater tax debt and tax take, less use was being made of debt and hardship provisions.

The 2004/2005 year had resulted in 42,662 cases worth $83 million being written off compared to 43,250 cases worth $86 million in the previous 12 months.

The penalty and interest component of total debt fell from 43 per cent to 41 per cent.

The report reveals that the department also failed to meet some of its targets when it came to answering tax enquiries.

It said an increased number of high volume days impacted on its ability to meet target standards for timeliness in answering calls.

It managed to answer 60 per cent of tax agents' calls, 75 per cent of employer calls and 54 per cent of debt collection calls within its 20 second time limit.

When it came to "general service" calls, 48 per cent were answered within 60 seconds on days when call volumes were below 17,500.

On days when the number of calls was above that, people waited an average of nearly six minutes for a reply.

RECENT LEGISLATION FOR FAMILY ASSISTANCE AND STUDENT LOAN INTEREST 

Legislation was recently tabled in Parliament 0n 8th November, 2005  honouring Labour’s election promises to make student loans interest free and to expand the Working for Families package.

The family tax relief provisions raise the threshold at which family income assistance begins to abate from $27,500 to $35,000 and reduce the abatement rate from 30 per cent to 20 per cent.

The bill will be fast-tracked through all its stages before the House rises in mid-December so that the changes can take effect in the year beginning 1 April.

The interest free student loan policy would apply to existing and new loans and had been designed both to cut the cost to students of tertiary study and to encourage skilled New Zealanders to invest their skills in the New Zealand economy.    With some exceptions, people will have to be living in New Zealand to qualify for the interest free loans.

"Borrowers will be deemed to be non-resident when they have been out of the country for more than 183 consecutive days. Short visits [31 days or less] back to New Zealand will be counted as if the person had remained overseas.

"New Zealanders returning home will, after 183 days back in the country, have any interest charged on their loan from the first day of their return reversed. Trips overseas of 31 days or less will be counted as if the person had remained resident in New Zealand.

As a further inducement to encourage people back, non-resident borrowers who are in default for non-repayment of their loans will have their penalties cancelled under a special amnesty if between 1 April next year and 31 March 2007 they agree to keep their current liability up to date for two years.

Inland Revenue will have the discretion to exempt from the residency rule people, and the partners of people, who are overseas:

YOU NEED FINANCE FOR YOUR BUSINESS- SHOULD YOU BORROW OR SELL SHARES TO INVESTORS?

MARGIN

What does margin mean?  In plain English it means the difference between what we sell something for and what it costs to deliver to the customer or Cost of Goods Sold (COGS).  Margin is often expressed as Gross Profit which means the same thing.  Margin or Gross Profit is quite different from Net Profit.  Net Profit is calculated after taking into account Overheads which occur whether you sell something or not, whereas Margin is calculated after taking into account only those costs necessary to produce or deliver to the customer.   For example Rent is an overhead which occurs whether we sell something or not, whereas delivery cost of goods sold only occurs when you actually sell something.

Margin = Sales – Cost of Goods Sold
e.g. if you sell an item for $150 and your cost is $100 then your margin is $50 or 33.33%.

Margin can sometimes be confused with ‘Mark-up’.   

Mark-up is the amount or percentage that you ‘add on’ to the cost of a product or service to determine the sales price. e.g. if it costs you $100 to produce an item and your sales price is $150 then your mark-up is $50 or 50%.

Margin or Gross Profit is an important number to measure in any business whether it is product or service related.    Many businesses don’t measure Margin or Gross Profit regularly but wait and rely on their Accountant to tell them if they have made a Net Profit.     If you wait until well after the end of the tax year to find out this number your business could be in trouble and it could be too late to do anything about it.

In order to know if you will make a Net Profit you firstly need to know what your Margin will be before calculating your Overheads. If your Overheads outweigh your Margin then you will make a loss.

Margin is a vital number to measure in your business as variations can have a huge impact on many other results such as
• Net Profit
• Working Capital Requirement
• Cashflow
• Interest Cover


There are two ways to change your margin
• Price Change
• COGS Change

The first being Price change is mostly under your control.   It is vital to ensure you maintain your margin by regularly reviewing your pricing.  Small regular price changes are much easier to implement than rare big ones.  So it follows that the more often you analyse your margin and adjust prices to suit the more sustainable and profitable your business will be.

The second way to change margin is via COGS change.  This is one where you may have less control but nevertheless it needs to be constantly monitored in order to maintain margin.  We have a perfect example of COGS change occurring right now with oil price increases.  This phenomenon is having an impact on many items and consumers are the ones who will foot the bill by increased prices so that producers can maintain their margins.

Margin or Gross Profit is an important number to know when calculating Breakeven.   Breakeven is vital to know in business in order to determine if your business is sustainable and when it will make a profit.  reakeven is calculated by knowing what your overheads are and what your COGS are.  Once you know these two numbers you can calculate what you need to sell to breakeven.  This is particularly important to know in a business starting up as they often take a while to make a profit.  Funding is often required to cover the time until the business is in profit.

Lenders are particularly interested in business margin as they use this number to compare against the working capital requirement.  If the working capital requirement exceeds the margin then the business effectively has to borrow money to pay the interest on the loan.   This indicates a very unhealthy business from anyone’s perspective.   ‘Marginal Cashflow’ is the term used to describe the comparison of Gross Profit to Working Capital Requirement.

If you want to borrow money to grow your business then you need to have a really good handle on your Margin and how you plan to manage it. Lenders feel very uncomfortable with a business with erratic margins and no margin analysis in place.

WHAT TO CHECK BEFORE SIGNING A LEASE

A lease agreement is a major business commitment and therefore requires caution. If the building or location turns out to be unsuitable, you might (through a personal guarantee) find yourself and the business committed to several years’ rent, even though you may have moved out of the premises.

Check the Lease

Always get the lease checked by a lawyer with experience in commercial leasing who can spot unfavourable clauses. The lawyer can help you negotiate balanced terms.

Important tip: Despite its name, a preliminary ‘Agreement to lease’ document actually binds you to some essential terms that will appear in the final lease. Don’t sign it or any other document before you have your lawyer’s approval.

Length of the Lease

Whether you should sign a short-term or long-term lease depends on your circumstances. A new and relatively unproven business might see advantages in the freedom of a short-term lease (or even a sub-lease if one comes on the market) that allows it to test both the business concept and the location without longer-term financial commitment. A more stable and established business might value the security of a longer tenure and see considerable merit in renewal rights.

Most leases are medium term: for instance the 4 + 4 formula (four years lease with the right of renewal for another four years) is popular. Get advice from your lawyer and accountant on the term of your lease.

Suitability of the Premises

It’s important to do research before you sign a lease. For a destination business (a business like a supermarket or video shop that consumers need to visit), a good location (high foot and road traffic, good access and parking) is vital. Other businesses (for example, businesses that sell to other businesses) might be more concerned with good access for trucks and containers.

Also check if the Resource Management Act 1991 might apply.

Lease Checklist