By Christopher Raynal,
The Director of Master Accountants Group Limited,
Auckland, New Zealand

admin[at]masteraccountants.co.nz
www.masteraccountants.co.nz

I wish I had a dollar for every time that I’ve been asked the question, “What can I do to cut my taxes?”

It is easy for most tax accountants to be blasй about this question, to sometimes question the motives of clients raising the question. They may even treat it as a joke, and answer it in an offhand way.

On the other hand, clients may believe that tax accountants have the knowledge they seek and have to be coerced or goaded somehow into revealing the information to them. It may appear to our clients at times that tax accountants are working for the Tax Office (IRD, ATO or IRS, depending on your country). The term ‘tax compliance’ seems to support this view.

To be sure, tax accountants are trained in tax law, and have dual duties to their clients and the Tax Office, especially if they are registered as Tax Agents. The Tax Agents obligations to the Tax Office are discharged by ensuring that their clients lodge their tax returns according to their lodgement schedule with the Tax Office, and that the tax returns are prepared in compliance with the prevailing tax laws, tax rulings and interpretations.

The Tax Agents obligations to their clients are discharged by correctly applying tax laws, tax rulings and interpretations when they prepare their clients’ tax returns. Tax Agents should go further and advise their clients how to organize their tax affairs better and assist them to achieve better tax results…all within the prevailing tax laws.

That is the theory…the normative assessment, or what should be in other words. Just as there is market failure, there is also failure at times in what tax accountants do and fail to do. There are times when the tax accountant does not keep up-to-date with tax laws, so provides the wrong advice. This can be to the detriment of the client in not claiming what can be legally claimed or in claiming what cannot be legally claimed.

Accountability is a term that has been in vogue for at least the past decade. Tax accountants have to be accountable to their clients, just as we require every one else in a position of trust to be held accountable for their actions. So, clients do have a reasonable right to ask the question mentioned above…and to expect an answer.

What can be done?

Firstly, using different tax or business structures is one way to do it. By different structures we are referring to business on own account, partnerships, companies, trusts and joint ventures. There is usually a reason why one form is preferred to another. It may be commercial reality, such as people expect to see a business being conducted by a company.

It may be that the number of investors dictates it be a company, so that management can be installed to look after their interests and limit liability. It may be the type of product that dictates a joint venture, such as gold mining. And partnerships may be appropriate when it is a business to be worked by a husband and wife. Trusts may be preferred where asset protection is an issue.

Be that as it may, the Tax Office treats each entity differently. Sometimes, expenses can be claimed by a company that cannot be claimed by an individual or a partnership. And partnerships are not taxed, but the net income or loss is distributed to the partners. Companies and Trusts are taxed as separate taxpayers from their owners. This can provide opportunities for reducing tax, depending on marginal tax rates of the entity and the shareholders or beneficiaries, and also to reduce provisional tax.

Secondly, you can claim more expenses if you know what you can claim. Your tax accountant can provide you with a list of business deductions. There may be some expenses that you did not know you could claim. So, it is worth asking your tax accountant. If they cannot provide you with a list, you would have to wonder if they are organized to assist their clients and if they really do know what can be claimed.

Thirdly, you can avail yourself of tax favoured investments, such as afforestation projects. Film incentives are no longer available in New Zealand, but are still available in other countries. Forests take a long time to come to harvest, often up to 25 years. Some types of trees can be harvested in 8 to 10 years, so afforestation should not be ignored. There is also the warm fuzzy feeling to be gained from helping the environment.

Finally, you can invest in rental properties. They can give you tax breaks over the years, and then you do not pay tax on the capital gains (in New Zealand). So it's like double-dipping for New Zealand investors. Even in those countries with capital gains taxes, it is still a good way to reduce taxes, by receiving tax breaks, and increasing your wealth at the same time.

End-of-Year Tax Planning

This article has not touched on the usual end-of-year tax planning of which most accountants advise their clients in the lead up to the end of the tax year. All of these measures are well documented every year; however they only serve to defer tax from one year to the next.

That is why I have not covered them in this article. Apart from the annual rollout of these measures, and no need to duplicate them, they are not truly cutting your taxes in any real sense.

The measures dealt with in this article can be used to dramatically reduce your taxes in a very real way!

Christopher Raynal is the Director of Master Accountants Group Limited, a tax and management consultancy based in Auckland, New Zealand. The practice specializes in rental properties, wrap mortgages, small business development and asset protection structures. The website may be accessed at www.masteraccountants.co.nz for further articles of interest.

Published - January 2006