January 2011
It is difficult enough to make a profit these days, and the consequent taxation payable, without the burden of a badly constructed balance sheet. What is a badly constructed or lazy balance sheet? It is one that does not deliver to the business tax efficiencies.
That tax efficiency is maximising tax deductions from debt used to fund the business, either externally from the bank, or funded internally by shareholder advances.
External debt should extend to all debt as a starting point, including any debt on non business assets that can be re-structured through the business balance sheet.
Having partners in a business with different levels of private debt is no impediment to these ideas.
Internal debt such as shareholder loans should also have an interest charge levied, preferably to a family trust as the lender, creating an ability to income split with trust beneficiaries, but to also reduce any use of money interest (UOMI) costs. This structuring is critical to making your balance sheet work for the shareholders, by creating tax deductions, and the opportunity to reduce tax paid, and to avoid UOMI. It is not difficult to re-structure the balance sheet to remove the laziness, achieve these benefits.
Additional benefits also accrue to minimise the risk of shareholder advances to the business, by taking security after the bank on these advances, elevating the lender to a position ahead of unsecured creditors in a winding up.
To find out how to achieve these advantages, contact Robert Willis at CST Nexia Ltd.
DDI: 09 261 1651 Mobile:021 274 7350 Email: rwillis@cstnexia.co.nz
Important: Items contained in this newsletter are general comments only and do not constitute advice. Changes in legislation may occur quickly and clients are recommended to seek our formal advice before acting in any of the areas.
