More than you ever wanted to know about ACC (and a bit about how to reduce your levy)

Clients, particularly new clients, often ask about “registering” with the Accident Compensation Corporation, ACC.

The short answer is that no registration is required. ACC will find you!

When you file an income tax after 31 March each year the salary and wages information (including shareholder salaries) from that return is sent from Inland Revenue to ACC. ACC then calculates the amount of levy based on the business’ Business Industry Classification (BIC) number and the amount of salary and wages paid. Each employee is only charged a levy up to $118,191 of salary and wages so if an individual earns $150,000 a year then they will only be charged a levy on their earnings to $118,191.

Your BIC number is determined by the industry you operate in rather than the type of work you do. So if you do general administration work then you may be able to use an administration code but if you do administration work for a forestry company then you will need to use the forestry BIC.

Industries with higher accident costs will have higher levy charges.

The levy is made up of several portions: current and residual portions of the work account levy, current and residual portions of the earner levy, and the health and safety in employment levy. The earner levy is charged through the PAYE system for employees but is part of the total employer levy for shareholder employees.

When you set up your business you will generally be asked for your BIC when you register for GST or obtain an IRD number. If you already have an IRD number but are below the $60,000 GST registration level then ACC will contact you for your BIC.

Because your first ACC levy is charged after the business tax return has been filed, it may be some time before you receive your first ACC invoice. For example, if your income tax return for the year ended 31 March 2014 is filed in October 2014 you may not receive your ACC levy invoice until the following February or March. At the same time ACC will send you a provisional invoice for the current year based on last year, usually resulting in a large bill for your first year.

Very roughly you would expect the levy to be around $1,000 for every $100,000 of salaries and wages paid.

A couple of things to remember about earnings cover under ACC:

  • it only covers accidents and not illness. You may therefore want to have some income protection insurance
  • you may not have reasonable loss of earnings cover if you are in your first year of operating your business. You may therefore want to consider Cover Plus Extra – see below for more details.

Earner levy deductibility

While the cost of the ACC levy is deductible for both GST and income tax purposes, the earner levy is not deductible for either. The earner levy constitutes the bulk of the levy.

For employees who are on PAYE it is deducted from the employee’s regular pay in addition to their PAYE so is considered a personal cost, not a business cost. Therefore for the self-employed and shareholder employees this portion of the levy is not deductible for the employer even though the employer may pay for it.

Reducing your levy

Given that the ACC levy is a significant cost for any business, we recommend that you review the BIC to ensure it is appropriate for your business and to consider Cover Plus Extra as an option to reduce both cover and premium costs.

There are also various ways to reduce your levies such as a discount if you have a low payroll (less than around $500,000) and can demonstrate good workplace safety in a high risk industry, reduced rates if you have a history of no claims etc although these can be easier to achieve if you operate in a trade rather than a desk role.

CoverPlus Extra

Around 12 years ago ACC introduced a new product called Cover Pus Extra for shareholder employees. While the levy is calculated to a maximum of $118,191 per shareholder employee, Cover Plus Extra allows you to choose a different level of cover with a corresponding effect on the levy premium.

So for example if you usually earn $100,000 in shareholder salary, you may decide that you only need cover for income of $60,000 or less if you have an accident and cannot work. You may be happy to have a lower level of ACC cover because you have income protection insurance or have income from other sources.

The lower level of cover reduces the premium but ACC’s computer systems cannot calculate the Cover Plus Extra premium when the cover is taken out each year. You will be charged the standard premium and after year end ACC will manually calculate the amount of premium refund you are due. With a large backlog recently ACC has been running up to 2 years behind in paying these refunds.

ACC is a complex cost for any business so for everything you ever wanted to know about ACC levies go to their website at www.acc.co.nz.

Changing accountants – yes/no/maybe?

How hard is it to change accountants? Not hard at all – much easier than changing banks.

People are generally quite loyal and don’t like changing accountants even if they are unhappy with the service, the product or the price. Partly it is because the pain of the annual accounts process is soon forgotten and it is just another put off-able low priority chore to change accountants, and partly it is that they don’t know who to change to and are not confident that changing will improve things. A year quickly rolls by and the process repeats.

Some do change though – every week we get enquires from people who are not happy with their current accountant. When I hear their reasons it is often because their current accountant is either unresponsive, providing poor quality advice, expensive or all of the preceding.

I’m appalled and embarrassed to be in the industry when I hear that sort of thing. Sadly though it isn’t that uncommon, I was on an IRD run course a while ago and I was astounded how many accountants and tax agents were behind in their taxes with IRD. If you can’t look after your own affairs then you probably won’t do a very good job for your clients.

It is reasonable to expect your accountant to:

  1. Be responsive and available – answer the phone and emails promptly and treat you with respect.
  2. Provide excellent service. Give quality and timely advice, schedule the work and complete it when they say they will.
  3. Provide good value and no surprises. Charge a fair price and tell you what it will cost up front. You shouldn’t be charged for short phone calls and emails, that’s part of the service.
  4. Understand that each client is different and has different needs. Accountancy isn’t a factory producing identical widgets, it is service industry providing clients with the services they want.
  5. Be proactive – if things are going wrong for you they should fix it before it gets serious.
  6. Suggest you use Xero. I had to add this as we get so much feedback from our clients saying things like “we really like working with you and what you do for us, but one of the the best things you have done for us is recommend we use Xero”. We have never lost a client by recommending Xero (but we have gained quite a few).
  7. Allow you to choose to move accountants without trying to lock you into contracts that bind you (check the fine print). If you want to change accountants it is your choice, all you should need to do is pay for any work your current accountant has done to date. Any contract probably won’t be enforceable anyway.

So how do you change accountants? Easy, call us, find out what we can do for you and what it will cost then if you want to change to us you sign an engagement letter that lays out what we do and the costs and we take care of it from there. Sit back and enjoy the ride while we contact your previous accountant to get your records, and we link up to IRD as your accountants.

Later on if you change your mind about us, no problem, changing accountants is easy!

Martin

GST treatment for prepayments and overpayments in Xero

One of our clients recently recently asked me to explain how GST works with prepayments in Xero. After I has answered the question via a lengthy email he replied:

“If you put this explanation on your website I think it would drive a lot of traffic.
I tried to Google my query to find an answer, and there’s nothing.”

So here it is …

Customer prepayments are usually coded to a current liability code in Xero with GST so the GST is recorded when the prepayment is received. Confusingly there is a chart of accounts code in Xero called Prepayments that is a current asset for expenses paid in advance – better names for these would be Income Received in Advance and Expenses Paid in Advance. However for the purposes of this article Prepayments will refer to a current liability code for customer prepayments (i.e. income received in advance of delivering the service/product) as that is what Xero call it on the reconcile screens.

Overpayments are a bit different and are discussed at the end of this article.

The specific question our client had was if a customer pays a deposit for a service to be provided, and the deposit is reconciled as a prepayment in Xero, is the GST on the deposit being counted twice when the customer is invoiced for the service? The prepayment is allocated to the invoice and the invoice is eventually paid. The steps to do this in Xero are detailed in our FAQ here.

A good question. I’ll answer this by way of a worked example of a $100 plus GST deposit on a $500 plus GST sale. In Xero behind the scenes following occurs:

Step 1 – Reconcile the deposit as a prepayment
When the $115 inc GST is received it is reconciled to the prepayment ledger code in Xero. Xero records it as:

  • CR Prepayments $100
  • CR GST $15
  • DR bank $115

If this was the first transaction in Xero then: Prepayments = $100, GST = $15 and Bank =  $115. 

Step 2 – Create and approve the invoice

  • CR Sales $500
  • CR GST $75
  • DR Accounts Receivable $575

Sales = $500, Accounts Receivable = $575, Prepayments = $100, GST = $90 and Bank = $115. 

Step 3 – Allocate the prepayment to part pay the invoice
When you allocate the prepayment to an invoice Xero reverses the original prepayment – the CR Accounts Receivable $115 is the part payment of the invoice.

  • DR Prepayments $100
  • DR GST $15
  • CR Accounts Receivable $115

Sales = $500, Accounts Receivable = $460, Prepayments = $0, GST = $75 and Bank  = $115. 

Step 4 – Reconcile the final payment from the customer

  • DR Bank $460
  • CR Accounts Receivable $460

Sales = $500, Accounts Receivable = $0, Prepayments = $0, GST = $75 and Bank  = $575. 

If you are registered for GST on a payments (cash) basis then $15 of GST is due in step 1 and the remaining $60 of GST is due in step 4. Total GST due $75.

If you are registered for GST on an invoice (accruals) basis  $15 of GST is due in step 1, another $75 in step 2 and -$15 in step 3. Total GST due $75.

Creating an overpayment in Xero codes it to Accounts Receivable (no GST). If the overpayment is refunded, the refund is created with no GST or if it is applied to an invoice the GST is recognised then. More information on handling overpayments in Xero in our FAQ here.

Our VOIP Phone system updated

We switched our phones over to 2talk VOIP in 2010 and until recently haven’t touched them – they just worked.

In that time we have grown and taken on more staff including a new practice manager (Maryanne). Fairly early on Maryanne started suggesting that we needed better phones, phones where you could see who was on what line and transfer calls around with the push of one button instead of three or four. Also I’d recently added yet another Panasonic analogue cordless phone with a Cisco SPA and couldn’t get decent call quality out it so I decided to revisit the phone system and see if we could go with VOIP handsets rather than using SPAs to connect analogue phones.

The broad requirements were:

  1. Better quality voice calls (quality seemed to have dropped off as I added more cordless phones!)
  2. Easier method of transferring calls
  3. A way Maryanne can see which line is in use (so she doesn’t transfer calls when we are on the phone already)
  4. A cordless phone for Baubre

First up I called my friendly account manager Mat at On Networks and asked for his advice on phones (I know I could have just got Mat to install one of their excellent VOIP PABX systems but where is the fun in that?). Mat promptly told me more than I needed to know about phones and lent me one of their Cisco SPA 303 IP phones.

The configuration was similar to the SPA adapters I had so I set it up and gave it to Maryanne. That sorted out requirements 1 & 2 for her.

For requirement 3 (see who is using their phone) Mat told me to look at BLF (busy lamp field) on the Cisco phone. I did and set it up but no go – looking at the debug logs BLF did not work with 2talk – disaster. So I logged a call with 2talk and they came back to say it was something they were working on but not date as to when it would be available – it was released the following week and after a bit of trial and error following the 2talk instructions  I had Maryanne’s phone showing busy lines in red – the only problem was there were not enough lights on the 303 for one for each person, so back to Mat to buy a Cisco 508G with lots of lights. Requirement 3 solved (and Lucy got the Cisco 303 on her desk).

Last requirement – a decent VOIP cordless phone for Baubre. Back in 2010 I’d purchased a Gigaset from Nicegear and had to return it as compared to a Panasonic handset it felt cheap and more importantly Baubre didn’t like it.

I went back to Nicegear and found that Panasonic now had a DCET VOIP cordless offering, the KX-TGP 500B, and at a pretty good price. One base station could support up to six handsets (three concurrent calls). Reviews were good, Hadley at Nicegear liked them, so I bought a base station and handset (I knew Baubre would be happy if I replaced her Panasonic with a …. Panasonic).

I almost didn’t need to configure this one, just put in the details needed to find 2talk and it worked. Really nice look and feel and excellent sound quality once I changed the default codec to be PCMA/G711a. I bought a couple more handsets, one to replace my cordless and one for a roving phone. Last requirement sorted!

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