Reflection: A Tool You Need

With another 31st December rolling on by Covisory turned 10 years old. Over the holidays my youngest 20+ child quizzed me on whether I had any resolutions for 2017. This led to some interesting conversations on the concept of reflection.

I’m not one of those people who each year makes resolutions. I freely admit that the cynic in me watches to see how long the resolutions of others will last in the coming year. We all know the routine firstly you fall for the line that it’s a new year so you need to make resolutions. You start with good intentions but as life encroaches, those resolutions either drift off into the too hard basket or are just forgotten.

These easy to make, on the spur of the moment, influenced by what is the latest trends are doomed to fail. Why? New Year Resolutions have on the most part no meaning. People expect to fail with them, there are no consequences on them if the result is not achieved.

Making resolutions is not the problem it is the built-in expectation to fail. If we live our business and personal lives without reflecting on our past experiences, we are bound to make the same mistakes. We cannot break through barriers by doing more of the same. Not only must we invest in action we also should work on deep and sustained reflection on an ongoing basis and not just once a year. Reflecting will not solve all the problems but it will help move you a tiny bit closer.

Let’s face it life is busy these days. We are all guilty of spending a lot of our time chasing the immediate reward, the near-term “goal” — in short, the expedient and the convenient. We are all obsessed with doing. What we are not so good at is stopping and taking a hard look at Why and What we are doing. Reflection may be a tool talked about in education but there is little application when we move into the workforce. Why not – are we afraid of what we will find?

If a business is not doing well it is easier to cast blame for problems on difficult customers or an investor. Alternatively, maybe we look to blame the government bodies regulating the industry, or competitors and who hasn’t blamed the computer or an application for our failures? We do not automatically ask in a situation what am I doing wrong or right? How could I improve? Our culture allows us to avoid personal responsibility – we are guilty of not owning problems or to finding ways to solve them.

If we do not take time out of our week, month or year to make room for the deep questions and thinking we fail to grow. We opt for the distracting items that fill our time. It is not about working harder. We need to work smarter and this means having the time for reflection so that we can make changes and improve on past performance.

Breakthroughs to a product, a company, a market or industry do not come from being busy and jumping between multiple tasks. Change comes from an opportunity to have structured periods of reflection. We need time to ponder, to question, to model, and to research. Reflection drives experimentation and sparks innovation. By reviewing the processes and results we add to our understanding, gain insight and allow companies to respond to change. By taking the opportunity to reflect we can make our businesses radically better.

In today’s culture, we as individuals and businesses are engineered to Do, we have not been encouraged to reflect. To add reflection to our lives allows us to embed concepts and theories into our practices. It fosters constant thought and innovation that provides the means to allow us to grow as both individuals and professionals.

Within Covisory ‘Reflection’ is a core component of how we operate both internally and when we work with customers. If you need assistance, we are always happy to support you with this process. Please Contact Us. With a new year before us let 2017 be the year to not only learn from our experiences but regularly reflect on those experiences.

I will leave you with the words of Margaret J. Wheatley an American writer and management consultant:

“Without reflection, we go blindly on our way, creating more unintended consequences, and failing to achieve anything useful.”

And Now for Something Completely Different…

My personal resonance with the above statement conjures up images of a goose-stepping John Cleese, one of the hilariously gifted Monty Python members and a skit entitled ‘The Funniest Joke in the World’. The joke was so funny that it was deadly. It ended up used as a weapon delivered across enemy lines by khaki-clad foot soldiers.

There are those reading this that will resonate with me – maybe a chuckle or two for old times’ sake. There are those who will have no resonance at all – either through a disregard for Monty Python’s slapstick humour or of an age where Monty Python is a reference accessed on You Tube.

It would not take Sherlock Holmes to determine that the author of this article is in the 50+ age bracket. As an age group, we should be applauded for surviving and prospering through 3 decades of unparalleled transformation and change. While empathy is scant from our finger tapping Facebook using Twitter communicating 20+ children the evidence of change is mind blowing.

My first steps in the noble profession of accounting were in the employ of a small accounting and audit firm in Oxford Circus in London. Computers were largely non-existent. Accounting was done through the manual entry of relevant numbers in aesthetically pleasing leather bound ledger books. These books were works of art. The first days of any new job were spent extrapolating the numbers from the ledger on to 8 column stationery. You became skilled in identifying where your Trial Balance didn’t balance. Gaining a thorough understanding of double entry and the picture the numbers were creating.

A particular memory was of a practitioner called Harry. Harry seemed ancient to us being in the 50+ age bracket back then. He only had one suit; identifiable by the biscuit stains that permeated the left lapel of the cross thread tweed. Harry looked after all the Chinese restaurants. The records arrived in boxes and in Chinese. He translated them to double entry and English. He delivered an accounting story that was accepted by the Revenue authorities. He was a skilled professional and worth a fortune to his clients. Harry made me realise that our noble profession is more about artistry and interpretation than computation and certainty.

From the leather bound ledgers of not so long ago to where we are today. Memories of collecting information in strict sequence to be delivered to a computational beast that took the place of balancing the Trial Balance. Moving onto the first laptop, the floppy disk (what happened to them?), the internet to cloud-based accounting packages like Xero. The way we do things has inextricably changed for the better. Making a trial balance was numerically satisfying but a poor and expensive use of human resource.

The art of accounting has not changed. At a fundamental level accounting is about the concepts of communication and value. Conventions have been developed to try and standardise how we communicate the interpretation of value. But it can never entirely succeed, it can never be standard. In fact, it is arguable that this standardisation has made things less understandable not more.

Value is dictated by circumstance. A major asset in your balance sheet can easily become a major threat to your business e.g. a large debtor develops financial problems. Business is done through the interaction of human beings using the language of money measured by numbers. It is not the compilation of the numbers that is important but the interpretation. It is being able to communicate well the business story the numbers are telling. Technology is doing the compiling to allow us to do the interpreting.

You cannot separate numbers from the human aspects of operating a business. We come in all shapes, sizes, personalities, belief systems and values. Human beings will never come standard. Over the years there have been many theoretically valid generic products that have failed due to the human element. The most valuable professionals engender trust through values of integrity and objectivity. They understand and relate on a human level while communicating their skills.

I have no doubt that Harry would be as valuable today as he was in his day. His thorough understanding and personal skills would just be engaged more productively. If we could bring Harry back, he would probably think that this modern day way of carrying on was nothing more than ‘The Funniest Joke in the World’….

RETENTION OF TRUST RECORDS

We have seen a few cases recently where trust records such as trustee resolutions, financial statements etc have been disposed of. It appears these records have been destroyed along with the tax records for the trust after the 7 year retention period under the Tax Administration Act has finished. We want to remind everyone that apart from tax records all trust documents need to be retained for the trust, including all financial statements for the trust.

This is necessary especially if there are any queries about decisions taken by trustees in the past. Under the new anti-money laundering rules we are also seeing banks and other financial institutions request information about the original source of wealth transferred into the trust and this is hard to supply if all of the trust records have been destroyed.

Please contact Marcus Diprose if you need to discuss this further.

Insight | New Zealand #2 in world for doing business

New Zealand has been rated as the second best place in the world to do business according to Forbes Magazine’s 2015 survey.  New Zealand, improved on its 3rd place in the 2014 survey by one place with Denmark taking the top spot.

Reaching these conclusions Forbes graded 144 nations on 11 factors including property rights, innovation, taxes, technology, corruption and stock market performance.

The report finds that New Zealand offers a transparent and stable business climate that encourages entrepreneurship.

For the full article Forbes Magazine 2015 Survey

 

Insight | Cash for Dividends or Growth?

In the last year we have received several question from families debating whether they should have a policy around the amount of dividends that are paid.
There is often a conflict between family members working in the business who can see the growth opportunities for it, and therefore want to see cash retained, and on the opposing side, family members who are typically not working in the business, want more dividends because they then can use that cash to support their lifestyle or personal investments outside of the family dynasty.
Sadly, there are no right answers to these questions but it is good for the family to have a discussion and more importantly for there to be an agreed minimum level of dividends set as a percentage of profits.

Insight | Tax Transparency Debate

There has been some interesting recent dialogue in Australia around whether large private companies should disclose the amount of income tax they pay. Proposed legislation would have required private companies with revenue over $100m to disclose their tax contribution. Public companies already have to do this.
The counter debate against this was that it would make the family members vulnerable to kidnapping and being held to ransom. However, interestingly, Dick Smith (former owner of the now defunct retail electronics chain), argued that these families do this already by their ostentatious displays of wealth. Simply saying how much they paid in tax was confirming what people always suspected, ie they had lots of money and probably paid little tax!.
For now, the proposal has been scrapped, but it was an interesting debate.

Insight | Is compliance accounting dying?

We have been amused over the past few years at the growth of the talk around the death of compliance accounting.  The anti-compliance proponents will tell you that Xero and MYOB will soon mean that businesses don’t need accountants, or that the IRD will effectively do your compliance for you.  Neither of these is true.

 

While online accounting packages can certainly reduce compliance, it is still like a car, someone needs to know how to drive it and be willing to do so.

 

We do not believe that all businesses suit using an online accounting package, but even if they do, our recommendation is that they should use an accountant to review both the base recording of the information and the financial reports that are prepared from it.

 

For those that are not willing or able to do it themselves, thank goodness there will still be compliance accountants in the future.

 

The real risk to compliance accounting is not online accounting packages, but where the work is done, ie outsourcing.  With the growth of off shoring, increasingly it is going to be easier to get people in foreign countries with much lower charge out rates to do the actual processing at far cheaper cost than you can currently obtain in New Zealand. Xero and MYOB do not actively explain this.

Insight | Are Family Meetings are worthwhile cause?

From our experience family meetings can serve many purposes. Above all, they start and can continue communication within the family. Whether these are difficult topics or topics that are more routine.
Family meetings are also a good way to educate younger generations around issues like trusts, wills and estates and succession within a business.
In our experience it is never too soon to start holding family meetings and to improve communication.

Insight | New two year bright line tests for land

Just a quick reminder that the new land rules are in effect. These will tax the sale of a residential property within 2 years unless it was a personal residence, subject also to a few other exceptions.

 
The more problematic parts of this have been that:
1. All land owning trusts must be registered with the IRD and obtain an IRD number.
2. In the case of a trust that is an offshore person, the trust must have a bank account in New Zealand.

 
There have been some problems at a practical level obtaining both IRD numbers and opening bank accounts. There have been significant delays in these and consequentially it is important not to leave these to the last minute.

 
If you don’t comply with the new rules and provide IRD numbers or bank accounts, then land transfers cannot be registered. Also, they will effectively become self-policing for the IRD. Sales and purchases will basically be able to be electronically trawled to give the IRD lists of transactions to look at. The problem is that the banks may not actually want these clients as in excuse the IRD is simply forcing them to do its anti-money laundering checks.

 
The final step will be the withholding regime that will apply to offshore persons who dispose of properties within the two years. The proposed amount of withholding tax will be the lesser of:
1. 33% (or 28% in the case of a company) x (the difference between the sale price and the purchase price of the property); and
2. 10% of the purchase price;
3. The net land proceeds after secured creditors are repaid.

 
The purchaser will be required to hold these funds through their lawyer and to remit the money to the New Zealand Inland Revenue Department.

Insight | What a Year! Business is Definitely Booming.

Well, sorry for the delay in getting this latest newsletter out but 2015 has certainly been frenetic. Covisory has probably been the busiest it has been in many years. Despite the economic doom and gloom that may exist in New Zealand, especially in the rural sector given the demise of dairy payouts, our clients have seen a lot of activity and it has not been limited to any one particular area.
While the Fonterra payout may have come down and it is certainly affecting rural New Zealand, there are some positive signs in tourism, with meat prices firming, forestry showing strong improvement and the Bay of Plenty on a high with the massive rebound that kiwi fruit has seen.
While interest rates remain low, who only knows how long that will be the case. The new norm means that people are more likely to borrow money and invest in productive capacity and we welcome these opportunities for our clients. Many are grasping the opportunity to do things with their business that in the past, higher interest rates or productive constraints, had seen them reluctant to embark upon.

What we have been working on

To start with, it is probably been the busiest 5 months that Covisory has seen in many years.  We have seen a wide range of activities and has continued strong economic interest in terms of New Zealander’s doing business outside New Zealand, New Zealander’s doing business within New Zealand and particularly overseas parties coming to New Zealand to do business for the first time.

Some of the examples of things we have been doing include the following:

  1. Court appointed trusteeship of a major investment trust, meeting with beneficiaries and reviewing investment strategy.
  2. Negotiating for the sale of an agency business to the principal on behalf of the owners of the agency business.
  3. Structuring a significant acquisition of Australian commercial property by New Zealand tax resident individuals including the use of look through company structures to eliminate double taxation.
  4. Reviewing and restructuring international trust and business structures for ex-pat Kiwi now living in Australia.
  5. Assistance regarding winding up international trust structures for New Zealand and Australian resident beneficiaries under UK inheritance tax structures.
  6. Managing a number of IRD audits in relation to property transactions, privately owned companies and the IRD cash economy audits.

 

Family Businesses:

We continue to work with several families to help them through their succession process.  Some of these will see businesses sold to third parties, and the wealth retained within the family and used to grow current and future generations, investments and business activities.  In these cases Mum and Dad will help children enter into businesses that may have been different to what Mum and Dad have historically done.

Similarly, we also have several assignments at the moment where we are working with the family and existing management to determine the interest of the children and being involved, their ability and capacity to do so.  Through a series of interviews and testing we can determine and predict the likelihood of children to be successful within businesses in the future.  From this we can then work with them to grow their ability for both technical (eg engineering, accounting etc) skills or soft skills around people management, leadership and the like.  Given sufficient time, they can be “reprogrammed” to become the leader that their parents wanted them to be.

The key to this is to work with the family through the process and to gain an understanding of the individuals and families aspirations, together with the capacity of both the family and existing management within the business.  At an extreme, this can involve bringing in a CEO for a period of a few years with a specific view to mind the business between a handover from a parent to a child and to mentor the child into that role.  To often it is difficult for Mum or Dad to mentor a child to replace them, whereas the interposition of a interim CEO can often put a very capable third party into that role and give a far more successful outcome.

All family businesses are different so it is always a matter of working out what is the best way to achieve the desired result.

Trust Work:

With our move to formalise our trust work under Covisory Trust Services we have had the opportunity to be involved in many areas covering such assignments as:

  1.  Reviewing clients existing trust structures, updating trusts and reviewing clients overall affairs to optimise their trust and creditor protection.
  2. A court appointment as trustees in a disputes situation.
  3. Forming trusts for clients.
  4. International tax planning for clients using New Zealand foreign trusts.

 

All we need now is another good Christmas break with good weather, a relaxing time with friends and family and everyone will come back in 2016 with more confidence and excitement for what 2016 will deliver personally and for business.

As always, we have welcomed the opportunity to work with you this year, and look forward to doing so again in the future.