Blog

Ratings downgrade explained

Tue, 11 Oct 2011 00:24:00 GMT

A ratings downgrade is never ideal. Depending on who you believe, it could be an indictment on the government’s fiscal control of the economy, likewise it could be seen as the ratings agency being more sensitive to total net external debt (that is, private sector debt).

Effectively what it means is that the perceived ability of New Zealand to be able to pay back debt has been impeded from where it sat before the downgrade.

Traditional economics would tell us that the downgrade means an increased credit risk, vis-à-vis an increased cost of borrowing (for us – business and mortgage debt), and capital flight from foreign investors into safe haven countries (those with the highest credit rating). The capital flight would then push down our exchange rate, making it more expensive for us to buy from overseas, but easier for exporters to sell their products internationally.

As I say, that’s what traditional economics would tell us, and sorry if it was getting too jargonesk. What’s more interesting is to study those traditional indicators, and to see what’s really happening.

Before the Standard and Poors, as well as Fitch downgrade, NZ to US dollars were trading around $0.76, today it’s trading at, well, give or take $0.76 – there was a slight dip in the middle there, but it appears the currency has remained materially stable.

What about the thing that matters to most of us – interest rates? Well Darren Gibbs from Deutsche Bank has said that the “at the margin, it will probably raise the cost of funding but, in the scheme of things, it's not that huge", meaning we may well see a flow on of increased interest rates, but it’s unlikely to be material.

In an interesting turn of events, there is widespread speculation that the credit rating downgrade could keep the Official Cash Rate (OCR) down at 2.50% for a longer period of time. Which could see interest rates staying lower over the medium term – though I cogitate.

Yes, the government is spending too much on areas such as working for families and interest free student loans, and yes, private savings in New Zealand suck. In saying that, in the first time in a decade household consumption as a percentage of income has dropped below 100% (from a peak of 108%).

The reality is, we still hold an AA rating with a stable outlook, and we are just squabbling over the degree of excellence that we enjoy.

Death, taxes, and gifts

Wed, 05 Oct 2011 02:23:00 GMT

Gift duty has been around in New Zealand since 1885. It was originally established to make sure people didn’t simply gift their belongings on the deathbed, avoiding the imposition of death duty tax.

Death duty was abolished in 1992, however the Government at the time felt that gift duty was a useful mechanism to avoid tax planning, so kept it on the books.

With valuation of annuity data 25 years out of date and no provision for electronic filing of gift statements, the law had became antiquated.

There were recent revelations that gift duty costs New Zealanders $70 million a year in compliance – an aggregate of people paying their accountants and lawyers – while only providing the IRD a net one million of revenue a year. Eventually, the government made the decision to get rid of it

Come October the first it finally happened, Gift duty was repealed in New Zealand.

The key features of the change are:

Gift duty will not be payable for dispositions of property made on or after 1 October 2011.
Gift statements will not need to be filed for dispositions of property made on or after 1 October 2011.
Gift duty and gift statements will remain due for dispositions of property made prior to 1 October 2011.

It’s important to note here that Work and Income will still test for gifted assets when assessing benefit levels (Residential Care Subsidy) including as they operate under a different model.

There are plenty of consequences of this change, including people’s ability to immediately alienate property by putting it into trusts, which has benefits, but can also mean unintended loss of control if not carried out cautiously.

Further, if the Inland Revenue believe that a gift is motivated by tax avoidance, they can still challenge and reverse the gift. So there is still a place to speak to your favourite accountant.

Into the light

Wed, 21 Sep 2011 01:04:00 GMT

I have been remise not to blog on this earlier, but as many of you know we have recently moved into new offices.

We have just moved to the corner of Victoria Ave and Remuera Road (above Bakers Delight).

After finding an office with an excellent location we decided to go with it; though it was in a state of “great potential” – meaning a lot of renovations had to be done.

Renovation can be fun; then again, it can be exhausting, stressful, and taxing – excuse the pun.

When we started, this office was an old disused doctors surgery. The major jobs included breaking down internal walls, creating new walls, clearing the stairs, redoing the bathroom, grinding the floors, and recreating the lights, security, and generally cleaning up. It was a massive overhaul, but I am really pleased with the results.

The analogy that I like to use, is one of the staff said that we are no longer “mall accountants” which is where we were based until recently.

It is refreshing to come into a specially designed office every day, to have an architecturally designed meeting room, workspace, and kitchenette. It makes a real difference to productivity when your in a comfortable workspace. And the biggest change? Well, I can now see the sun from my desk – a real novelty!

Words to the wise

Tue, 19 Jul 2011 05:06:00 GMT

There are a bunch of challenges facing businesses at the moment. I want to share ideas and advice on how businesses can best operate in this difficult part in the trading cycle. I am trying to keep this at a bite size level, but out of each one of these ideas can spring a multitude of options.

The issues:

People are spending less
People are more savvy about how they spend
People are buying things online

The solution:

Understand and service your customers better

Be flexible, dynamic and embrace change

1) Understand and service your customers better

- Stop second guessing what you think your customers want – ask them!

- Collect more meaningful information from your customers.

- Provide unique offerings based on customer wants.

- Reward loyalty, remember, everyone likes getting a bargain.

- Be more approachable.

2) Be flexible, dynamic and embrace change

- You need a web presence, your customers will be looking for you online.

- Embrace social media, facebook, twitter, linkedin.

- Keep an eye on your competitors, avoid “not invented here” philosophy.

- Don’t be complacent as Einstein said “Insanity is doing the same thing over and over again and expecting different results”.

- Stay up to date with trends in your industry, try to get ahead of the curve.

Head in the clouds

Tue, 12 Jul 2011 03:12:00 GMT

Technology is evolving rapidly, in true Darwinian form it is those who embrace change who prosper, and those who reject it that die.

With the advent of cloud computing small businesses have access to software and technology that they could not have dreamed of, or afforded, years ago.

At Cabbage Tree we do business in the cloud (and have physical offices) utlising technologies such as

Xero
Workflowmax
Smart Payroll
Capsule
Acclipse
Dropbox
Currently assessing Microsoft 365

The advantages are significant

We don’t have the cost of owning and maintaining expensive server infrastructure
We are always running the latest version of software
Support is readily available and free
Set up time and training is hours rather than days
No upfront costs for most apps and ongoing subscription costs are minimal
We are no longer office bound

Cloud computing allows Cabbage Tree to be leaner and more dynamic enabling us to better service our clients in a cost effective manner.

We get the best software, can use it on the run, and it doesn’t matter whether we’re sitting in the office on computers, or sitting on the beach on our iPads, we can be seamlessly servicing our clients.

As Popular Mechanics said in 1949 “Computers in the future may weight no more than 1.5 tons” In less than one lifetime, I can do most of my work, anywhere in World, from my iPhone.

Evolve or die.

For more information on cloud computing go to

http://www.youtube.com/watch?v=ae_DKNwK_ms

Budget 2011

Mon, 23 May 2011 05:54:00 GMT

There were no surprises in this year’s budget, which in itself is no surprise as it is election year.

The key changes that will impact our clients:

Kiwisaver

Disappointing approach taken to Kiwisaver, which I would have hoped would follow the Australian model, which has minimum employer contributions of 9%. Since inception the Australian super has raised over $1.28 trillion dollars and now Australians have more money invested in managed funds than any other country per capita.

The big changes

Tax-free employer contributions will end from April 2012. i.e. employees will be taxed on their employers contributions.
The government tax credit will be halved from $1042 to $521 from June 2012
The compulsory employer contributions will increase from 2% to 3% from April 2013

While disadvantageous to employees, I’m sure most kiwis will propensity to inertia will stop them from leaving Kiwisaver. Something is better than nothing, but I still believe for personal wealth creation and New Zealand’s capital markets, compulsory Kiwisaver is inevitable.

Working For Families

High-income families (combined income $125k +) will be disadvantaged around $12 per week.

Early childhood education

$550 million more has been put towards ECE over the next 4 years

Benefits

The normal indexing of super and benefit payments has been made.

Economy

Treasury are predicting that an extra 170,000 jobs, and growth to peak at 4% in 2013.

Death of the LAQC

Mon, 23 May 2011 05:48:00 GMT

As many of you will know on 1 April 2011 LAQCs are being outlawed

Clients with LAQCs have a number of options for restructuring their entities and the IRD has given a transition period for restructuring.

Options include changing status to

Qualifying Company
Limited liability partnership
Partnership
Sole trader
Standard company
Look through company

A new structure has been created called a Look Through Company (LTC). It is a company from a legal perspective, but from a tax perspective the IRD look through it straight to the shareholders. Profits and losses will be assessed in the shareholders’ tax returns.

LTC’s do not pay income tax as all of the income is directly passed to shareholders (who are responsible for their own tax).

The LTC regime is complex, and transferring from the LAQC structure may create real tax disadvantages for some of our clients.

Unfortunately there is no one size fits all solution, so we are performing reviews for those who want to ensure they transition to the most appropriate structure.

Welcome

Tue, 08 Feb 2011 22:13:00 GMT

Welcome to my first Blog, coinciding of course with the launch of the new Cabbage Tree website.

My launch into social networking (watch this space for Twitter, LinkedIn and Facebook links) is on the heels of the website and I’m committed to haul Cabbage Tree to new platforms in 2011.

I’ve long resisted social networking mediums however realise it’s time to embrace this culture, particularly as I see my four year old (Seth) using You Tube on his iPad!

Am keen to join clients LinkedIn networks and follow those who may be Tweeting so please let me know if you’re already on this path. Am keen to hear your experiences.
Mainly, I’ll be using these mediums to keep you up to date with tax changes and key dates. So, stay tuned and make sure you hit the site regularly to keep ahead of the curve.

Next blog will be on LAQCs and the recently confirmed changes that will be impacting many of you this year

Happy New Year