Unravelling the roles of accountants and bookkeepers
For years, accountants have been the go-to for compliance, taxes, and discussing business financials. While bookkeepers have also been around, they’ve often been seen as redundant if you already have an accountant. So why would you need a bookkeeper when your accountant can do much of the same job?
A bookkeeper is all about the details
A bookkeeper really gets to know your business inside and out, managing day-to-day tasks with precision, and is typically the pro when it comes to systems and software. From invoicing to payroll processing, chasing debtors and filing GST, they ensure records are tidy and compliant, freeing you from administrative burdens to focus on growing your business. Freeing up your time to work ON your business and generate income is a smart business decision.
Accountants, however, focus on the broader financial picture. While some may handle detailed tasks, many prioritise overarching insights, potentially missing finer operational nuances. Nevertheless, they excel at compliance, tax management, business structuring, and providing strategic guidance.
In essence, while accountants ensure compliance and offer strategic guidance, bookkeepers handle the operational nuts and bolts, making them invaluable for business success.
Choosing the right business structure
Business structure is crucial, impacting your legal responsibilities, operations, salary, and tax obligations. Changing structures – for example, going from a sole trader to a limited company, can be relatively easy, but should be done with guidance from your accountant. Each structure has its pros and cons.
Three main structures are likely to be more relevant for FCANZ members, so let’s focus on these: Sole Trader, Limited Company, and Partnership.
Sole Trader: This is the simplest option, requiring no formal registration beyond possibly obtaining an NZBN number for credibility. As a sole trader, you own all business assets and liabilities, and paying yourself is straightforward. It’s ideal for small operations with turnover under $80,000, as compliance is minimal, though you bear all business risks personally.
Limited Company: Setting up a limited company involves registering with the Companies Office, specifying directors, shareholders and shares to allocate. Shareholders own the company, while directors manage it. This structure offers legal separation between personal and business assets, reducing personal liability. However, compliance requirements are more extensive – annual financial statements and tax returns, annual renewal of company office registrations, keeping company registers, and various other tax compliance requirements such as FBT tax, Dividends, etc.
While sole trader status suits smaller, simpler businesses, for turnover exceeding $80,000, restructuring to a limited company can offer tax advantages and provide legal protection, but entail greater administrative requirements.
Partnerships: Partnerships occur when two or more sole traders combine resources and skills for a joint business venture. A detailed partnership agreement is crucial, outlining each partner’s contributions, ownership percentages, profit/loss distribution, exit strategies, and dispute resolution methods.
There are two types: registered partnerships, which have an IRD number and file partnership returns (IR7); and informal partnerships, which don’t have an IRD number and allocate income and expenses to each partner based on percentage of ownership. Income and expenses are returned in each partner’s IR3 return, and also populated in an IR10.
Partnerships can register as employers, but partners can’t be employees without IRD approval. Legal liability is similar to sole traders, based on a percentage of each partner’s ownership. Compliance involves partnership financials and individual tax returns.
When GST registration matters
You must register for GST once your turnover hits $60,000 in any rolling 12-month period, not just from one financial year or calendar year. We recommend voluntary registration if you anticipate reaching the $60,000 threshold early on in business, or if you want to include GST in your prices from the start. Early registration allows you to claim GST on initial expenses and assets you purchase during business set up. You can’t backdate GST claims on purchases prior to being registered for GST.
Navigating Provisional tax
Provisional tax means paying your future income tax in advance. There are currently four methods IRD use to calculate provisional tax, two of them being Standard and AIM (Accounting Income Method). If your Residual Income Tax (RIT) exceeds $5,000, you’ll need to pay provisional tax.
Standard Method: Is calculated based on last year’s RIT, plus 5%. Standard provisional tax is payable in three instalments through the year – August, January and May. You are protected by the safe harbour rule as long as you make all your instalments in full and on time, and as long as your RIT is less than $60,000. The Standard method doesn’t consider potential business growth or decline, and you may end up with a tax wash up at the end of the year, resulting in more tax to pay, or a refund.
AIM (Accounting Income Method): Utilising accounting software, AIM calculates actual business profit or loss every two months, aligning with bi-monthly GST. It’s beneficial for businesses with seasonal or fluctuating incomes, new businesses, or uncertain financial situations, offering flexibility and smaller, more manageable instalments.
While AIM’s precision aids cash flow management, only accountants can file AIM returns as they require regular adjustments through the year and have to be filed through practice software.
Valuing your time in business management
In business, your time is precious, potentially dictating whether you opt for accounting software or stick to spreadsheets. After all, none of us start a business to drown in admin tasks.
Software can be costly, but consider the time saved compared to manual management. From an accountant’s viewpoint, software streamlines record-keeping, GST filing, reporting and tax preparation.
Yet, spreadsheets remain an option. If you choose this route, ensure your template is comprehensive, updating it regularly and backing it up with bank statements, receipts, and invoices.
Without software, accessing real-time financial reports can be challenging, hindering your business overview and financial understanding. Manual records can also create problems when you require real time reports to provide to lenders or banks.
Keeping receipts
Recent Inland Revenue updates reduce the need for detailed records for expenses under $200. For Expenses over $200, you will need to keep taxable supply information. Software like Xero can record the required taxable supply information (a combination of receipts, bank statements, supplier agreements or contracts), simplifying this process. However, we would recommend that manual record-keepers still keep copies of receipts.
For asset purchases, follow these guidelines: Assets under $1,000 can be fully expensed, while assets over $1,000 will need to be added to an asset register and depreciated over time. Keep receipts for all asset purchases, especially if the purchase results in a GST refund. Typically, IR will query these and request verification.
When acquiring second-hand assets, the second-hand goods rule allows GST claims, even when purchasing from a non-GST registered person, as long as the asset is a business asset and will be used to generate business income.
Getting ready for year-end
When it comes to year-end and submitting your information to your accountant, it’s best to be proactive rather than wait until your accountant is chasing you.
If your annual returns are filed in a timely manner, you have more time to pay taxes and make better business decisions.
However, if your accountant requests this information, make sure you have it all ready to go!
- Reconcile Xero to date or update your Excel spreadsheet
- Carry out a stocktake
- Export PDF bank statements confirming closing bank balances
- Get together all your loan statements
- Make sure you have asset purchase information – receipts and or loan agreements
- Motor vehicle log books or mileage records
- Compile Home office expenses
- Receipts for any expenses paid with cash or personal funds
If you have a manual record system, you will also need to export bank statements for the full financial year, and potentially need to provide receipts for the bulk of your transactions.
Three methods for claiming motor vehicle expenses
Log Books: Keep a log book if your vehicle is used for business over 25% of the time. Log trips, distances, and reasons for 90 days. The book is valid for three years as long as the business doesn’t change more than 20%. Use apps or physical logs.
Claiming Up to 25% of Running Costs: You can claim 25% of fuel, maintenance, insurance, etc., without a log book. This method requires potential substantiation if requested by the IRD.
Claiming Actual Costs: Claim 100% of expenses for a primary work vehicle, including depreciation. No mileage recording is needed, but proof of expenses is required. Be ready to demonstrate the vehicle’s business use to the IRD.
Haley Reyners, Owner and Director of My Two Cents Accounting, leads a team of 14 Bookkeepers and Accountants. They offer hands-on services to businesses across Northland and New Zealand for over a decade. Their services include setup, training, business structuring, bookkeeping, cashflow management, software, accounting, and advisory support.
Article written by Hayley Reyners
Published in WIRED issue 73/JUNE 2024 by Fencing Contractors Association NZ
