The Good News Blog

What a difference an economic downturn makes. The New Zealand Herald reports on the good-news results of an intriguing survey by business advisory firm Grant Thornton, which took the economic pulse of 7400 chief executives in 36 nations — including 200 from New Zealand — and also identified those offering the most business opportunities.

On the optimism front — something we’re into on this blog — the survey offered a strikingly different reading than a similar exercise conducted a few years ago might have detected. Fifty-seven percent of chief executives in emerging markets such as China and Brazil said they felt positive about their country's economic prospects — compared to a measly 2 percent in more mature economies such as New Zealand.

Not only are these so-called BRIC countries leading the world back to prosperity, the surveyors say, New Zealand businesses need to be well prepared to engage with them.

Indeed, according to Peter Sherwin, a business adviser for Grant Thornton, the emerging economies were developing at such a rate that ignoring them could also be a serious risk for local businesses.

How New Zealand companies might best capitalise, however, is largely a matter of the quality of business-performance advice they receive — and, as one stateside commentator cautioned this week, how governments best direct their policies toward fostering productive investment and smart planning rather than mere financial speculation.

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Many of our newspapers seem to have been a bit downbeat this past week. The Aussie news media has been anything but, however, and stuck inside this week’s endless coverage of the coming general election is a goodie for anyone who likes their good economic news in 4/4 time.

The Australian newspaper reports that JB Hi-Fi met expectations this week with a 26 percent rise in full-year profit. The electronic retailer has also flagged sales growth of 17 percent in the current financial year.

The announcement is particularly relevant on this side of the Tasman because the group has been particularly active in New Zealand over the past couple of years.

What’s more, the Australian reports, JB Hi-Fi expects to be opening 18 new stores in both countries over the coming months.

This is particularly heartening news given the widely publicised (but clearly exaggerated) reports of the death of the music business.

As the electronic retailer’s positive results would suggest, it’s following the right business-performance management and advice that counts for the most.

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Good news, for the most part at least, for the world’s most important economy: a recent survey of stateside economic activity finds that the American recovery continued apace during the second quarter of this year with more businesses hiring workers and fewer cutting jobs. The same survey did find a slightly slower pace of recovery

Over all, the latest survey by the influential National Association for Business Economics found 31 percent of businesses added workers between April and June, the highest level in three years. And 39 percent of those surveyed say they expect to hire more workers over the next six months — the most since January 2008. Manufacturers (the sector of most interest to New Zealand) reported the strongest increase in demand and profitability, while finance, insurance and real estate sectors (the last two of less importance in our part of the world) saw the slowest growth.

More than two-thirds of respondents expected the American economy to grow by more than 2 percent this year.

Perhaps the most interesting finding was the news that respondents say the eurozone's debt crisis should have little or no effect on their business, although more than a third of those surveyed did think Europe's credit woes will moderately hurt growth.

That’s particularly heartening for those of us in the good-news business, because some commentators in New Zealand appear to making a little too much of the various issues going on in Europe, many of which seem to have more to do with government overspending than problems in the private sector.

All in all, a pretty good start to the economic week.

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Interesting to see the New Zealand Herald this week zeroing in on an business-performance issue close to our heart: succession planning. Or rather, the lack of it.

The piece quotes Grant Thornton warning baby-boomer business owners to take steps now if they want to sell their firms in an increasingly crowded marketplace.

Thornton's latest global business survey has found New Zealand leads the world in the proportion of private businesses that are likely to be sold in the next 10 years. Nearly seven in 10 businesses here are expected to change hands during this period compared with 29 percent of businesses in the US and 27 percent in Britain. The global average is believed to be around 25 percent.

Preparing to sell could be a process that took three to five years, Thornton adviser Paul Kane tells the paper, noting that privately owned businesses tend to concentrate on enhancing cashflow, reducing costs and managing day-to-day operations.

That is understandable to some extent, Kane says, but to maximise the selling price to a third party the business owner really needs to present a compelling vision of what the business could become rather than a historical perspective.

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The New Zealand Herald’s Mood of the Boardroom survey is always worth a read. The latest exercise went fairly big on the good-news angle this year, noting how even sectors hit hard by the recent economic downturn have appreciated the learning experience.

All the same, the centrepiece of last week’s spread had Finance Minister Bill English taking a bitter-sweet position on the country’s economic fortunes.  Saying that some government departments were double the size they were five years ago, English said there would be no more money for the next three to four years for the public sector.

Leaders of top-performing companies — the area Openside is most interested in — were obviously more upbeat, however, with the Herald survey of chief executives and small to medium-sized firms finding a 72 percent approval for the government's economic leadership, with the finance minister himself scoring a 4.06 rating out of five. By contrast virtually all those surveyed said Labour has yet to begin carving out a credible alternative to the government.

But the money quotes in the survey came from Lloyd Morrison, who says it's time for the country's leaders to commit themselves to getting New Zealand back on the international radar screen.

A recent trip to Europe opened Morrison's eyes to the urgent need to market a new "New Zealand story" — one that focuses on the long-term growth potential for New Zealand rather than just the old "New Zealand Experiment" story of the 1980s, which fascinated commentators at the time but doesn’t really offer much for business performance in the 2010s.

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New Zealand’s economy is set to ratchet up 3.2 percent annual growth over the coming two years, according to a group of leading economists who credit the good economic news on surging international commodity prices and historically low interest rates.

Gross domestic product will rise by 3.2 percent in the year ending March 31, 2011, according to the average estimate of the 10 economists surveyed by the Wellington-based New Zealand Institute of Economic Research Inc, a figure up by one-tenth of a percentage point on what they were forecasting just a few months ago. The rate would rise to 3.3 percent in the year ending March 31, 2012.

Also confirming the general trend has been the recent news that credit card billings in New Zealand rose during May amid an improving economy and certainty about tax cuts.

The broad consensus among the forecasts was of a rebalancing from consumption and housing towards exports, and a return towards trend growth, NZIER said. But there was considerable divergence of views on the residential construction sector's recovery, the exchange rate and the current account deficit.

Clearly this is as good a time as ever for companies to be tapping into the very best business planning advice!

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Nice to see Openside getting a mention as far away as the jolly old United Kingdom.

Under the slightly dramatic headline, Kiwi consolidator struggles to take flight, British accountancy writer Gavin Hinks appears to draw solace from the reported comments of Openside CEO Stephen Nicholas on the subject of succession planning.

Stephen was the subject of a recent piece in the National Business Review in which he lamented the fact that far too many accountants “are very good at dishing out advice on how to grow and exit a business, but are not so good at taking it."

He added: "Many accountants seem to be operating almost as sole traders rather than thinking about how to build a business for sale."

Which only goes to show, Hinks noted, that many businesses on either side of the world are experiencing “identical problems.”

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Here’s some good news for those of us in the economic heartland. Last month — which is to say, some weeks before the recent mid-term Budget — activity in the manufacturing sector hit a five-and-a-half year high.

According to the BNZ-Business New Zealand monthly survey of the sector, activity has increased across all regions and all firms, with production, new orders and employment all rising.

The Performance of Manufacturing Index rose more than 2 points to 58.9 in April. (Roughly translated, a reading well above 50 means manufacturing is expanding strongly.) The survey shows factories continued to expand production and orders are also picking up and, for the third month in a row, firms are making plans to hire more workers.

Australian growth is part of the story. But an upbeat attitude also has something to do with it. And who knows, last week’s Budget could yet be the icing on the cake.

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The tax package comprises:

• All personal income tax rates will be cut from 1 October 2010.

• After-tax earned incomes at all levels of taxable income will rise by more than the increase in GST.
• Secondary tax and resident withholding tax rates will be reduced from 1 October 2010, to align with the new personal tax rates.
• Individuals and families can work out how Budget 2010 tax changes personally affect them at www.taxguide.govt.nz

An increase in GST to encourage savings over consumption

• GST will be increased from 12.5 per cent to 15 per cent from 1 October 2010.
• Income support and other payments will be increased by 2.02 per cent from 1 October 2010, to compensate for this increase. These payments include:
  • All main benefits, Student Allowances and a number of supplementary benefits.
  • NZ Superannuation, Veterans Pension and CPI-adjusted Government Superannuation Fund and National Provident Fund payments.
  • Working for Families (Family Tax Credit and Minimum Family Tax Credit).

Reductions in tax for companies and savings vehicles to encourage investment and savings

• The company tax rate will fall from 30 per cent to 28 per cent from the 2011/12 income year. The Government will allow dividends issued after the new company rate takes effect to be imputed at the existing 30 per cent rate for two years if company tax has been paid at the 30 per cent rate.
• The top tax rate for most portfolio investment entities (PIEs) will fall from 30 per cent to 28 per cent, while the other PIE rates drop to align with the new personal tax rates, from 1 October 2010.
• The tax rate for life insurance policy holders and widely-held savings vehicles like unit trusts and superannuation funds will fall from 30 per cent to 28 per cent from the 2011/12 income year.

Changes to depreciation rules to better reflect asset value reality

• No depreciation deductions will be allowed for buildings with an estimated useful life of 50 years or more (such as rental housing and office buildings) from the 2011/12 income year.
• The current 20 per cent depreciation loading on new plant and equipment will be removed, for assets purchased after Budget day. 
• Building owners will still be able to claim deductions for repairs and maintenance, to maintain the condition and value of their properties. They will also still be able to claim depreciation deductions for "fit outs" not considered part of the building. The Government intends to review the treatment of commercial “fit out” and, if necessary, amend the rules prior to 1 April 2011 to address any uncertainty in this area.
• Building owners will be able to apply to Inland Revenue for a provisional depreciation rate if they consider a class of buildings, has an estimated useful life of less than 50 years.

Thin Capitalisation reduces from 75% to 60%

• Stricter tax rules for foreign multinationals to reduce their ability to minimise tax payments in New Zealand. This means foreign-owned companies will be able to claim only tax deductions for interest payments on debt up to 60 per cent of their local asset value. The only exception is if the total multi-national group's debt ratio is higher than this. 
• Tax rules will change from the 2011/12 income year to reduce the interest deductions foreign multinationals can take by having high levels of debt allocated to their New Zealand subsidiaries.

Changes to loss attributing qualifying company (LAQC) and qualifying company (QC) rules to ensure investors are taxed at the correct rate

• LAQC and QC rules will be tightened from income years starting on or after 1 April 2011 to prevent people choosing to have losses deducted at their marginal personal tax rate but profits taxed at the lower company tax rate.

Making Working for Families fairer

• People will no longer be able to use investment losses, including from rental properties, to reduce their income and become eligible for Working for Families, from 1 April 2011.
• The Government will urgently reform other rules relating to income for the purposes of WFF, Student Allowances and the Community Services Card. These changes include ensuring trust income is counted as part of a family’s total income for the purposes of WFF. Resulting changes will apply from 1 April 2011.
• One part of the formula that adjusts Working for Families payments for inflation will be amended because it currently gives higher-income families a greater proportional increase than lower-income families.

Aligning tax rates for saving vehicles

• From 1 October 2010, the top tax rate for most portfolio investment entities (PIEs), including KiwiSaver accounts, will be reduced from 30 per cent to 28 per cent, while the other PIE rates drop to align with the new personal tax rates.
• The tax rate for savings vehicles like unit trusts and widely-held superannuation funds will also be reduced from 30 per cent to 28 per cent from the 2011/12 income year.
• Personal income tax rates, which apply to savings held directly, will be reduced across the board.
• Resident withholding tax (RWT) rates applying to interest earned through a bank account will be reduced so they align with the new personal tax rates from 1 October 2010.
• The rebalancing of taxation away from income taxes and towards GST will encourage savings rather than consumption.

Tackling tax avoidance and improving the integrity of the tax system

• IRD will get a significant funding boost (+$119.3m over four years, starting this year) to increase its audit and compliance activity around debt collection, the hidden economy and property transactions.
• GST rules will be changed to stop the use of “phoenix” GST fraud schemes. Transactions, particularly in the property sector, have been occurring between associated parties whereby one claims a GST refund and the other is wound up before it has to pay GST. 

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“The front page of New Zealand Dominion Post today explained how the wealthy kiwis use Trusts to dodge paying the top tax rate.  In NZ the current top tax rates are 38c for individuals earning over $70,000, 33c for Trusts and 30c for Companies.  While there is an underlying tax benefit to trade using a company that is owned by a Trust, the company must still pay  market salaries to any associated people or the transaction would be deemed tax avoidance.  As such the reality is that yes there is some minimisation of tax going on, but in general people are paying a reasonable amount of tax at the top rate.  I want to make one more point about Trusts, they are really good for protecting assets.  I was watching Campbell last night and felt really sorry for all those people who lost their life savings in one of NZ failed finance companies.  For those who are reasonably financially aware, we all know the rule about having a balanced portfolio of assets, otherwise known as don’t put all you eggs in one basket.  If these kiwi investors had put a Trust in place to handle the investments, they can appoint Trustees who can assist with sensible investment decisions.  Remember Trustees are bound to act in the best interests of the beneficiaries, which frequently include the children.  When the budget comes out tomorrow and the top individual rate is dropped to 33c and becomes aligned with Trusts, don’t chuck your Trust out the window, use it for the right reasons and not as a tax dodge vehicle.“

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