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This month we put the spotlight on the responsibility of directors and provide them a refresher course on the Financial Operating Cycle. Plus, the IRD has begun pursuing New Zealand tax residents who have undeclared foreign sourced income.

 A wake-up call for company directors… It has not been a great 5 years for finance companies and their directors. The level of duty required by directors has been tested in recent court cases on both sides of the Tasman. The New Zealand cases of Feltex Carpets and Nathans Finance, together with the Healey (Centro) case in Australia, have helped put the spotlight on the role and responsibilities of directors - particularly in respect to reviewing and approving a company's financial statements (and offer documents).

While the above court cases centre on high profile companies, they do hold valuable lessons for all businesses, big or small:

  • Although directors can rely on expert advice, they cannot abdicate their own fundamental responsibility to review and approve a company's financial statements.
  • Directors must have sufficient knowledge of conventional accounting practices and must apply that knowledge based on information they received as directors.

Starting at the top - Sections 131 to 138 of the Companies Act 1993 outline the key responsibilities of a director. Whilst we are not going to list these down, it is a good idea to familiarise yourself with them. You may want to also skim your eyes over sections 373 to 386F - dealing with offences and penalties!

So how does this apply to me? As a director you have a responsibility to everyone that relies on your company's financial statements. Therefore it is also your responsibility to fully understand what your financial statements mean and thus ensure the best possible return on investment for everyone.

There are many New Zealanders out there who have come up with fantastic ideas and who have the courage and conviction to go out on their own and test the market. However, these same rising stars often dread handing over their financials to their accountant at the end of the year and discovering how much money is in their bank account.

So here is a useful tool to help take away some of the mystery surrounding your financial statements…

Your Financial Operating Cycle

Below is a visual representation of your financial statements:

C N - Dec 2011 jpeg

Your Profit and Loss (or Statement of Financial Performance) is a cumulative picture of the business over a period of time (typically one year). In other words, it shows your income less expenses to give you your net trading result. The key factors which can impact your Profit and Loss are pricing, margin maintenance and expense control. An analysis of your gross profit (sales less direct costs) and your net profit (gross profit less overheads) will provide you with key data to help run your business more efficiently.

Your Balance Sheet (or Statement of Financial Position) represents the most important information to a director as it provides a summary of the financial health of your business. Simply put, it shows how the Assets of the business are funded - either through external borrowings (Liabilities) or through owners' equity (Retained Earnings). It can help answer important questions such as "Can you meet your debt repayments on time?" "Where have you spent your profits?"

Retained Earnings are essentially the link between the two statements. Despite what you may have heard, when it comes to your profits, there are really just three fundamental uses for them:

  1. Invest in new assets (new equipment, technology, stock etc.)
  2. Repay your debts (bank, hire purchase, family funds)
  3. Distribute it amongst the business owners i.e. pay-out dividends.

For the long-term viability of any company, the business must supply suitable profits to satisfy all three requirements. A note of warning - don't get retained earnings confused with cash! As many a growing business will tell you - profits generally do not equal cash. In short, to fully understand your financial position you need look at both your Profit and Loss and your Balance Sheet - one is relatively useless without the other. As directors, you owe it to yourself (and your business) to understand your financial statements and to question until you do.

IRD Pursues NZ tax residents with undeclared foreign income

The Inland Revenue is actively pursuing New Zealand tax residents who have undeclared foreign sourced income. What are your tax obligations? What are the consequences if you don't comply? What should you do?

The IRD's concerns
In a recently issued Revenue Alert, Inland Revenue outlined its concerns about New Zealand tax residents with taxable foreign sourced income held in offshore bank accounts that have not been declared in New Zealand for income tax purposes.

The foreign sourced income deposited into these offshore accounts could include income sourced from a non-resident employer, foreign life insurance policies, superannuation schemes or from certain equity investments.

Your tax obligations
A New Zealand tax resident must return and pay tax on all their income, including foreign sourced income received into an offshore bank account, if the person is a New Zealand tax resident at the time the income is derived. Whether the foreign sourced income is ever repatriated to New Zealand is irrelevant.

An individual is likely to be a New Zealand tax resident if they:

  • are present in New Zealand for more than 183 days in total in a 12-month period; or
  • have a permanent place of abode in New Zealand.

Accordingly, despite being absent from New Zealand, a person could still be a New Zealand tax resident if they maintain a permanent place of abode in New Zealand.

Inland Revenue has signed Tax Information Exchange Agreements with a number of countries, including well-known tax havens. These Agreements enable Inland Revenue to identify a person's offshore bank accounts and obtain information about their international transactions.

The consequences of non-compliance
A New Zealand tax resident who has failed to return their offshore income is likely to incur shortfall penalties. These shortfall penalties may be reduced if the person makes a voluntary disclosure to Inland Revenue. However, if a person has deliberately avoided or evaded paying tax on their offshore income, criminal penalties may apply.

What should you do?
If you have an offshore bank account, a foreign credit card or have foreign sourced income and are uncertain whether you have satisfied your New Zealand income tax obligations, we recommend that you contact your adviser.

 Disclaimer:  Accplus Offer this newsletter to help you think about issues that may affect your business. Please contact us if you would like specific advice or assistance.  As the information given is general in nature Accplus Ltd does not give any warrenties as to the applicibility to your situation or to the accurateness of the information given.

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