SMELLIE ON SME’s: Tax and the Christchurch quakes

Article – BusinessDesk

Feb 4 (BusinessDesk) – From the “you don’t say” department comes a 109 page report for the Inland Revenue Department by research firm Colmar Brunton telling us that a lot of SME’s in quake-ravaged Christchurch have found it hard to keep up …

SMELLIE ON SME’s: Tax and the Christchurch quakes

By Pattrick Smellie

Feb 4 (BusinessDesk) – From the “you don’t say” department comes a 109 page report for the Inland Revenue Department by research firm Colmar Brunton telling us that a lot of SME’s in quake-ravaged Christchurch have found it hard to keep up with their tax obligations.

The smallest businesses have struggled the most, since they had the least resources to fall back on.

The businesses that were already struggling and behind on their taxes got into a worse pickle. A few businesses gained from others going out of business, but for most, the two and a half years have been a predictably grim struggle.

Yet most continue to trade, albeit those who are still in the most trouble are on the whole not very optimistic about still being in business in two or three years’ time.

However, while some of the conclusions of the report are rather too obvious conclusions, there are some interesting observations.

Of the businesses surveyed, only 6% are still not trading. Of those, four out of five are not confident they’ll trade again within the next two years.

About one in five quake-affected SME’s say they’re “surviving”, and only 40 percent of those are confident they’ll hang on past the next two to three years. Here, the report suggests, the tax department and the company’s advisers have a particularly crucial role. Some of these businesses could be helped back on their feet with a careful payment plan to bring their tax obligations up to date.

Others should be put out of their misery, not that the report puts it that bluntly.

“Proactive assistance of Inland Revenue (and tax agents) could be a tipping point factor to avert failure,” the report says. “The timing of this assistance will be critical and will need to include some objective measures of the likelihood of the intervention sustaining the business into recovery or only staving off deepening debt and inevitable failure.”

Among the remaining SME’s covered in the survey, some 23 percent say they are “recovering”, meaning they expect to remain in business, have passed the survival stage, and expect still to be trading in two to three years’ time.

Some 17 percent – again about a fifth – have “recovered” and are either back to normal or doing better than before the first quakes in September 2010, while 33 percent were unaffected.

“Four in 10 SME’s have lower business income than before the earthquakes.”

Unfortunately, there’s a strong correlation between businesses struggling and those which were struggling anyway in the post-global financial crisis recession: the hospitality and retail trades particularly.

The research is intended as a benchmark survey, which the tax department will return to over coming years to try and assess how best to respond to businesses inevitably experiencing distress because of the Canterbury quakes.

That’s a good thing. But the message underlying the work is also clear: earthquakes aren’t an excuse for not paying your tax. IRD is willing to help, but unwilling to forgive.

Read that way, the analysis of what ails the quake-struck SME’s of Christchurch reads almost like a checklist of what any SME should consider if it wants to survive.

In essence, that boils down to one very simple proposition: if you’re consistently paying your tax from personal savings, borrowings, or the cashflow in the business, you should probably question whether to stay in that business.

There are exceptions, of course. Some companies have vast cashflows, so paying GST, provisional and terminal tax from cash on hand makes sense.

But for most SME’s, paying tax from cashflow is just a polite way of saying the business is operating hand to mouth.

If this sounds familiar, you might want to talk to your tax agent about how to start a savings plan to meet your tax obligations, or perhaps how to grow your business. One of the few positives the report found was that tax agents have deepened their relationships with the businesses they serve, digging deep to offer better advice and working hard to have stronger relationships with IRD.

As a result, 37 percent of all quake-affected SME’s received time extensions on overdue tax payments, another 21 percent negotiated instalment payment arrangements, and 14 percent had penalties waived.

As always, it’s better to talk tax problems through with the IRD than to let them fester, whether your business was in the Christchurch red zone or is in any other part of the country.


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