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How to avoid tax payment surprises

A few weeks ago, Jacinda Ardern announced our borders will open soon. What great news. Let’s face it, the economy cannot sustain such an inflation hike and, as history shows, high inflation and too much credit in the market are pre-recession signs.

Once the borders are open, there is the possibility for the economy to benefit from overseas funds. At least that’s what we hope for. Bring on October 2022, the new normal is just around the corner.

Being a business owner is not easy under normal circumstances, but the last two years were really testing.

If you are still in business, paying wages to your employees and making money to feed your family, I applaud you.

There is a raft of skills we require to survive uncertainty and unprecedented events. You probably had to become innovative, hear what your customers want, learn how to serve a better product or service, and most importantly, give your clients the gift of attention and time.

Benjamin Franklin said “In this world, nothing is certain except death and taxes”.

The reality is, if you are making money, you have to pay tax, but the question is how to eradicate tax payment surprises.

Save for tax

You may have had a couple of occasions where your tax bill arrived two days before the due date and the money on your account was planned for wages and supplier bills.

The instant response is “why did the accountant send me this two days before the due date?” Fair call. And I will add this: “Why was I not advised last year to start saving for tax?”

 The best practice is from the day you start generating income to remember, that not all of it is yours, and tax bills grow with the increase in your revenue. 

The best practice is from the day you start generating income to remember, that not all of it is yours, and tax bills grow with the increase in your revenue.

May I suggest setting up the following procedures to eliminate tax surprises.

It may be hard at the beginning, but I guarantee once your tax pool becomes bigger, you will feel a lot more in control.

  1. Set up a separate bank account for your tax savings
  2. Transfer 25 percent of your Gross Revenue to your Tax account each month. Gross Revenue is the total funds you have collected from your customers.
  3. Watch your Cashflow. To be sustainable a business must have a positive cashflow from operating activities. If your operating cashflow is negative, you are losing money and need to address your pricing, review marketing and analyse costs.
  4. Anticipate your tax payments. Ask your accountant to prepare a schedule of tax payments for the upcoming 12 months, including PAYE, FBT, GST and Income tax, and put it on your wall.

Being in business today is challenging, but also an exhilarating venture. Remember, never in history were we able to advertise and reach customers in an instance and for a fraction of the cost. The technological progress truly opened entrepreneurial horizons and this is just the beginning. Keep up the great work and I hope to meet you one day and hear your story.

Related: Emerald business advisors – Putting the shine into business success

 

Valerie Rowe-mitchell
Valerie Rowe-mitchell
Accounting and other money matters with Valerie Rowe-Mitchell, owner of Emerald Business Advisers. Valerie can be reached on 07 579 5777 or valerie@emeraldbusiness.co.nz

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