Tip to paying more tax - be sloppy
Every single person that I come across wants to pay less tax. Nothing wrong with that. It’s always been my opinion that it is a god-given right to manage your affairs in such a way that tax minimisation is optimised. All completely legally, of course!
But so many times, we find that our clients have gone ahead and done things that just mess things up completely. Business owners are a special breed – they are prepared to be risk-takers, they are often big-picture people and they generally hate bureaucracy, form-filling and detail. But the devil is in the detail, and it is that which will often cause the problems. That’s where the lawyers and accountants, working together, come in.
Case in point – a recent tax case. This is not one of our clients, but it could be. Holding Co. borrowed from the bank and lent the money to related companies (which were not subsidiaries) so they could buy business assets. They didn’t have a loan agreement, nor did they document in any way the terms and conditions of the loans. While interest was paid to the bank by Holding Co, it did not oncharge any interest to the related companies. IRD disallowed the interest deduction and it was upheld in court. And when you consider that the assets bought with the funds were two farms, you’d have to figure that the interest cost was pretty large. And therefore the tax cost will also be large.
It could have very easily been different. All that was needed were a few agreements between the two companies that set out the terms and conditions of the loans, and the additional rights that Holding Co got because they provided financial assistance.
The main areas we come across where lack of documentation can cause more tax to be paid are in relation to:
- Company vehicles
- Drawings by shareholders
- Setting salary levels for shareholders and/or their spouses
- Advances made by shareholders to companies (especially when it’s not done equally by all shareholders)
- Funding between related or associated companies
- Funding between parent companies and subsidiaries
- Unauthorised payments from a trust bank account
- Providing guarantees in support of borrowings by a related company or person
- Treating the company bank account or the trust bank account as if it is your piggy bank
- Buying assets in a company which could potentially have a personal benefit (eg an apartment in Queenstown, or a boat)
And the Solution?
Make sure that your accountant and lawyer talk to each other – ideally you should have a meeting with your key business advisers at least once a year focusing on where the business is going.
If you’re doing a big deal, make sure that both the accountant and lawyer are involved because we have different skills and ask different questions.
Don’t go for the lowest price accounting fees – if all you want from your accountant is the annual accounts & tax return and you push down the fees, then you will get exactly what you have paid for. Sometimes we need the space to have a decent look at the accounts to see what is really going on and a bit of a dig to see whether it is safe.
Be prepared to invest in a relationship of trust between yourself and your business advisers, because the more they know about you and your goals and aspirations then the more proactive advice & service you should receive. We will often send articles or referrals or links to our clients if we know what is of interest to them. The more we know about them, the more we think of them.