fbpx

Creative Accounting

You wouldn’t normally attribute creativity to accounting, but there is such a thing. Wikipedia describes it as “accounting practices that may follow the letter of the rules of standard accounting practices but deviate from the spirit of those rules with questionable accounting ethics”. Having ‘spirit’ isn’t how we’d typically describe rules because they’re generally pretty boring. Nonetheless, they need to be followed, so let’s explore the rules around accounting, and when it crosses the line from being a bit creative, to very naughty.

The accounting spectrum

It’s helpful to think about accounting services on a spectrum. At one end, we’ve got Boring Bev; the accountant who acts as an agent for the Inland Revenue department. Bev rarely talks to her clients; instead, she just sends the accounts out 12 months after the end of year, files tax returns, and claims very little.

On the other end of the spectrum, we’ve got Sneaky Steve; the accountant who tries to manipulate numbers (sometimes correctly, sometimes incorrectly) and takes potentially big risks on behalf of the client to minimise tax (and sometimes avoid it). Now, you’ll notice I use the word minimise. What’s interesting is that under our tax law, we’re not allowed to avoid tax, but we can legally minimise it (and it’s every taxpayer’s right to do that). 

Somewhere in that wide range, there’s going to be a comfortable position for each taxpayer. I talk about this a lot, but it really is about communicating openly and honestly with your accountant and taking a proactive rather than reactive approach to your finances. Creative accounting isn’t necessarily something that we shouldn’t be practicing, but you need to work with a professional who knows how to find that middle ground where it’s working well for you, and the tax overlords. 

Offshore tax, just like in the movies

An example of accounting that’s a bit too creative is offshore tax, which was prevalent 15 – 20 years ago. Made popular in movies by bad guys laundering money and evading tax, people would set up an offshore company, go to a cash flow machine, and take cash out from their offshore bank account. At the time, the IRD wasn’t able to do a lot about it, but they’ve slowly started to tighten up the rules. 

I don’t recommend it, but if you want to go down that pathway, you’re basically waving a great big red flag in front of the IRD. In the last couple of years you’ll have heard of companies like Facebook and Google coming under fire for making lovely profits, and paying little to no tax. 

Creative accounting vs dodgy accounting 

Income tax is based on the Greek word Nexus, which means a connection or link. There needs to be a connection between spending money and a) running a business or b) earning income. As long as there’s a connection (generally speaking), we might be able to get a tax deduction. 

Some people will adjust figures relating to employee benefits or incentives to get tax deductions. Let’s look at Gary, for example. Gary works for a widget factory, and he’s paid a salary. His salary is tax deductible because that generates income for his company. But Gary’s boss has decided that he should get a golf membership, and unless this company is a manufacturer of golf clubs, there’s probably not much of a connection between Gary playing golf and earning income. Some of you might say, “but I do a lot of business on the golf course”, to which the IRD will say “ok then, keep a detailed logbook and every time you play golf, write down who you spoke to, how long you spoke for, and what was discussed”.  

On the dodgy end of the spectrum, there have been cases where people will pretend that the finite financial condition of the company is sound, so the business is attractive for potential investors. To me, that just reeks of fraud, not creativity. 

The advantages of creative accounting 

Let’s say, by definition, the creative accounting we’re talking about is legal (i.e. not completely off the spectrum). It’s about minimising tax, and not avoiding or evading it. In this case, the advantages are really simple; you keep the cash, the government doesn’t get it too soon, health and Welfare still gets covered, but your business can use that cash to grow. New businesses in particular need to minimise taxes, because they need that money to provide working capital so they can continue to grow. Working with a (reputable) professional account will help you to find a happy medium that works for you and your business.

Getting back on track 

Some people might fall down a rabbit hole or have worked with a previous accountant who has been a bit too creative with their tax. The good news is that we can work with people to get them back on track. For example, IRD gives taxpayers the ability to make a voluntary disclosure, which will help to avoid or minimize the amount of penalties that they impose, depending on the seriousness. If we feel that the taxpayer is probably on thin ice, it’s likely that we’ll work through a tax consultant, make a formal voluntary declaration, and work through it with the IRD. You need to be upfront and proactive – you never want to wait for the IRD to knock on your door! 

Working with the right people  

Work with an expert who knows damn well what they’re doing, helps you to understand your tax requirements, and has your business’s best interests in mind. Want to know more about us? Then, let’s chat to see if we can make great business together.

 

Want to know more about us? Then, let’s chat to see if we can make great business together.

Contact us now!

Share this article
Share on facebook
Share on twitter

Recent articles