05 Sep Jon Cartu Writes The Week in Tax; Terry Baucher talks to Lynda Moore about h…
This week, I’m joined by Lynda Moore, The Money Mentalist. Lynda’s background is in accounting, so she understands numbers. She also studied under Professor David Krueger in the USA to focus on money psychology. She now combines two skill sets as money mentor/coach, working with business owners, couples and individuals to get an understanding of how they think, feel and behave with their money, how they can make better choices to reach their financial goals.
Mōrena, Lynda, welcome to the podcast.
Good morning. It’s lovely to be here.
So, Lynda, how do people’s attitude towards money change when it comes to tax?
There’s a bit of a spectrum to it. At one end of the spectrum, you have people who are kind of terrified of the tax department and will do anything to make sure that they make those commitments to the IRD. or not they can afford to do that in terms of cash flow and other things going on.
And at the other end of the spectrum, there are those who kind of go, “It’s just the tax department. I’ve got other things to do” whether it’s right or wrong and what I think they should be doing with their money. And then somewhere in the middle there, you’ve got, I guess, what you cal good compliant tax people who know what’s coming up, a plan for it, and they manage their tax really well. I tend to work with people who are kind of at either end of that spectrum.
So is there any particular type of business or person who consistently gets into trouble with tax in your experience?
It’s not a particular industry or anything like that. It’s more about the business owner and it’s more about the money, personality, the mindset and their style. For example, if you have a business owner who has the money personality of being a spender, then it will be much, much harder for them to save for tax, in fact it might not be on their radar.
Whereas if you have the polar opposite, which we call the ‘Hoarder Personality’, they are really good money managers. They are likely to be the ones who will have their tax saved. So, when their accountant sends out a tax letter, there is no stress, the money’s there, they’re sorted.
So, the problem clients seem to be more sort at ‘The Spender’ end of the spectrum. If you use me as an example, which I’m quite happy to do, my money personality is an ‘Amasser/Spender’.
Business owners need to have some ‘Amasser/Spender’ in them because you need that to grow a business. So, if I’m talking to someone who is a business owner and I see an Amasser personality, I’m kind of like ‘Why are you in business?’
With a Spender, we find it a little harder to put that money away for tax because they will spend in other areas in our business to grow it. Whereas an ‘Amasser/Hoarder’ will make sure they’ve got their tax money tucked away and then they’ll start to grow the business.
So, we kind of look at it from slightly different aspects. And please bear in mind these are kind of generalisations. They are a little different.
So what stage do you get involved? Are you lucky enough to get in at the beginning or is it “Help Lynda, we’re in trouble!”
It can actually be a bit of both, because generally clients will come to me when they’re looking and they’re going. “So, my accountant has just told me I’ve made all of this profit. I don’t know where it is. So, my neighbour down the road, he’s just bought a boat and I can’t afford one. But my business is making lots of money. What’s going on?”
So I see that disconnect between where they’re told they made a profit and got a big tax bill, but they haven’t got the cash either in the business or in life. And then it’s finding the overall picture of what’s going on in your business and what’s going in your life that’s lead you to that.
Or I also come across the client who’s going “I’ve just started a business. I want to make sure”. And sometimes it will be “I’m going to leave my job and start a business, but my partner is really worried how are we going to live.” In which case we start with that process first and we make sure that a new business owner understands the ‘tax holiday’, and you need to save because in year two you’ve got a double whammy. So again, I get both ends. I get experienced business owners and I get newbies asking questions.
You touched on the ‘tax holiday’ there, the first-year issue. This is something I see quite a bit of, and I think every accountant experiences quite a bit. That first year of business when provisional tax isn’t payable and you just have to wait till terminal tax, which is a year down the track. And lo and behold, what comes around you’re into provisional tax for that year as well. So essentially, you’re paying two years at once.
That’s a very hard thing to manage with new businesses. And I imagine for the spender type client, that’s a horrendous problem. And that’s when they immediately run into quicksands. How do you address that?
Well, I think it’s an understanding from the business owner. I think quite often they don’t go to an accountant or get advice when they start the business. It’s like, “Oh, we’re going into business”. And because as an employee, you don’t physically pay the tax they don’t have that mindset and that attachment of “I have to physically pay tax”. You kind of do with GST, but not so much income tax.
So unless they get advice early and are told how to structure the business and put away money for tax, it’s not going to happen until year two. And that’s when they’re going to get a horrendous shock when their income suddenly drops significantly because they can’t find that tax.
Saving for taxes isn’t easy. So, what’s your tips to for in that regard? What do you tell your clients that this is what’s going to happen and how to organise themselves?
It comes down to “You’ve got to know your numbers”. So whether you can do that yourself through your accounting system and once you pull out your profit and loss. Alternatively, you ask your accountant “I just need to have a very simple profit and loss once a month”.
For the clients I work with, I say start out with the basic company tax rate of 28%. So whatever system you’re using even if it’s not 100% accurate just put 28% of the profit away into a separate bank account.
If you are a spender use a different bank so you can’t transfer from one to the other. And give that account a nickname. Call it the ‘My tax savings account’. Because then your brain looks at that and goes, “Oh, that’s for tax. That’s not my holiday in Fiji account. It’s the IRD account”. And by naming this account for tax, you associate it with that.
So it doesn’t matter what you want to save. If you want to save for a holiday in Fiji, have a Fiji savings account. But if you give it a nickname that associates with…