The Budget – was it good for North Harbour SMEs?

The biggest hurdle for most will no doubt be the increase of the GST rate from 12.5% to 15%, which will require business owners to consider both pricing decisions and practical application. The increased GST rate will need to be either absorbed into current prices or perhaps some will take the opportunity to increase prices to improve margins. Changes in pricing will have practical as well as market implications with packaging, marketing material and advertising needing to be updated. Flowing on from these changes, many businesses may need to amend budgets (for changes in price and / or margin) and consider any impacts on cashflow, particularly if using the invoice basis for GST.

Reporting systems will need to be set up so that they can cope with running two GST rates at once, and as the change is effective from 1 October many taxpayers will need to file a two-part GST return for the period spanning
the change. 

Other implications arising from the budget changes include maintaining a dual Imputation credit account for tax paid at the 30% and 28% rates, and depreciation rate changes which prevent the depreciation of buildings and remove the ability to apply 20% loading to property, plant and equipment. We expect the removal of the ability to claim depreciation on buildings to increase the burden of income tax on a significant number of North Harbour SMEs due to the strong trend of local businesses buying their premises through another entity and leasing it back to their company. This has been a very attractive and wide spread investment activity, so the removal of the tax deduction for depreciation will have a negative impact on many business owners, as they will no longer have the cash saved due to the tax deduction to reduce debt. We expect many landlords to review rents, and to increase where possible to assist with this cash flow difficulty.

Many SMEs are structured to utilise Trusts or LAQCs, and they will also be impacted by changes to the LAQC regime, and limits to its use. Any tax benefits derived be having such a structure in place may be removed. It would certainly pay to get individual tax structures reviewed in preparation for the changes. 

Finally, in order to monitor compliance with the tax legislation the budget has appropriated $120 million over the next four years to fund audit and compliance activity in relation to property transactions, debt collection and the hidden economy. This highlights the role of a businesses’ accountant or financial advisor, and with increased focus on compliance SMEs need to ensure proper records are kept and IRD payments made as due. The IRD has been quoted by the media as saying that they expect to achieve a $5 return for every $1 invested in audit activities, and at the moment they are over-achieving. This should serve as a warning to those that push the gauntlet a little too far.

The underlying objective of the budget changes is to spur on economic growth through rewarding reinvestment and efficient use of resources. This goal will only be realised if businesses work with their advisors to realise new efficiencies, develop innovative new offerings and manage expenditure. For those prepared to move to a new way of operating in the business environment these budget changes certainly provide the opportunity for forward-thinking businesses to thrive. Overall, our assessment is that this budget gets the thumbs up for SMEs in North Harbour.