Kia ora Whānau.
Over the last weekend from 27 January 2023 until 29 January 2023, Tāmaki Makaurau (Auckland) was hit by severe flooding in many parts of the city. Many roads of the North Island are still closed due to the flooding. These floods have affected the livelihoods of many kiwis living in the North Island. Small business owners are some of those feeling the impact of the floods.
This article helps outline some steps that you can take as business owner to navigate the unexpected circumstances that we find ourselves in.
Make sure your team is safe during the flooding
The first and most logical thing to do is to make sure that your team members are safe. As I like to say, your team IS your business. Contact them and check if the flood affects them. Make arrangements based on their current situation.
Offer financial assistance to team members who are badly affected. Consider flexible working arrangements or time off for other team members. As the leader, you need to ensure that team welfare is top priority. Happy team equals to a successful business!
Check in with your insurance providers
You need to call up your insurance providers. If you deal with them via a broker, get in touch with your insurance broker ASAP. Get an estimate of how much the insurance will cover and prepare to absorb the rest. You will need to factor in any excess fees that you will have to cover yourself.
In events such as these, you can expect building and contents insurance to cover flood related damages. If you have business disruption insurance, this should be claimable as well, as long as you can provide evidence that it has impacted your business’ ability to operate.
Working out the tax treatment of insurance payouts
From a tax point of view, insurance claims are either:
- Capital Insurance payouts – These are payouts for the loss of fixed assets. For example, a business vehicle is badly damaged and you get a payout. That insurance payout is capital in nature and is not taxable for income tax.
- Loss of income insurance payouts – These are payouts for the loss of future income. This applies to business disruption insurance or key person insurance (which insures the income generated by key personnel in the business). This type of insurance payout is a replacement in income and thus is taxable under income tax rules.
Insurance payouts are generally GST Inclusive which means that you have to return any GST collected on payouts on your GST return. The only exception is life insurance which is GST exempt. It’s worth checking with your insurance provider if you are unsure.
Estimate the damage done by the flooding
In the aftermath of the floods, you will want to assess the damage done to your business premises. Identify which assets are still usable and which aren’t. If you carry trading stock, you will want to identify which are saleable and which aren’t.
Claiming tax deductions on asset/stock damage
You should write off any damage done to your assets and stock. You can do this by:
- Obtaining the cost price of your asset/stock
- Estimating the current value of it after the damage (you can hire a professional valuer for certain items like plant and machinery)
- Claiming the difference in value as a tax deductible expense.
For stock damage, you can claim the stock losses as a direct cost to your business. For fixed asset damages, you will need to apply for a special depreciation rate for that particular asset and provide evidence that it has had its economic value reduced due to the damage.
Review your business continuity plan and plan ahead for after the flooding
A business continuity plan is a great thing to have before a crisis. If you have one, its a good time to look at it now and see what your next steps are. You should also prepare a short-term budget (6 months or so) to forecast your business operations in the coming months. These forecasts should include things like:
- Any impact to sales figures based on reduced business capacities
- Any increase to expenses as a result of repairs and maintenances
- Sales reductions due to customers being affected by the floods as well
You may have to scale down your operations based on your forecasts. There may be team members who will leave. Customers may also have a tough time paying for your services. Have a chat with your accountant and talk to them about getting some forecasts done for your business.
Above all, be kind to each other
We’re all facing a tough time ahead. Be kind to your customers who have been affected by the floods. Consider giving them extended credit terms or discounts on their upcoming invoices. Have a chat with your suppliers as well. Share with them your current situation and ask for leniency on their payment terms.
Here’s how to directly help
If you’re looking to volunteer with ongoing flood relief efforts, Auckland based charity My Fund Action has put out a call for volunteers here.
If you are looking to donate to help flood relief efforts here’s where you can donate:
The Spinoff also has a handy list you can refer to here.
If you’re looking for an accountant or tax agent to talk to about your business’ financial situation, feel free to email me at firstname.lastname@example.org and I will do my best to help you out.
Kia kaha Aoteāroa.
We’re all in this Waka together.