McLEAN AND CO.

Accounting          Taxation         Business Advice and Development Assistance           Audits                             

 P.O. Box 10 , Clive         133 Main Rd, Clive           Tel. (06) 8700952          Fax. (06) 8700955 

Email murray@mcleanandco.co.nz                                  Website www.mcleanandco.co.nz

 
 
EMAIL NEWSLETTER  APRIL 2006
 

Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. We trust you find it informative.  Any feedback would be welcomed.

McLean and Co. is a home based chartered accountancy practice based in Clive, Hawkes Bay.    Readers are invited to peruse the practice website www.mcleanandco.co.nzwhich lists services provided, gives contact details and indicates how to become a client, contains an extensive base of articles on business and taxation matters,  and has links to other websites that may assist your business.    Being a small firm itself,   McLean and Co. strives to provide a personal and professional service largely to a self employed person and small business client base.  Enquiries are welcomed.

 

NEW CLIENTS

We are happy to accept new clients.  Please contact ourselves at the contact points highlighted above if we can assist you in your accounting and taxation requirements. Our website lists information required for this in the following link:

www.mcleanandco.co.nz/Documentationrequired.htm

 

INDEX

  1. Relevant Business and Taxation Articles.

  2. Working for Families/ New Family Assistance Regulations

  3. Charitable Organisations- Are you Aware of the Charities Act?

  4. Guidelines for Establishing a Charge-Out Rate for your Business

  5. Loss Attributing Qualifying Companies

 

RELEVANT BUSINESS AND TAXATION ARTICLES

The McLean and Co. website contains an extensive number of articles prepared by McLean and Co. relating to taxation and business matters.    Here are a selection that will be of interest:

Accounting Concepts                               www.mcleanandco.co.nz/Page69.htm

Ten Step Strategic Plan                            www.mcleanandco.co.nz/Page131.htm

Tax Audits                                                 www.mcleanandco.co.nz/Page33.htm

Claim your Rebates!!!                               www.mcleanandco.co.nz/Page91.htm

Financial Management                             www.mcleanandco.co.nz/Page134.htm

 

 

 

WORKING FOR FAMILIES/ NEW FAMILY ASSISTANCE REGULATIONS

From 1 April 2006, many more families will be eligible for Family Assistance tax credits, and levels have been raised to include working families with higher incomes. For example, a family with three children earning $52,000 will be entitled to $160 per week. A family with two children and a combined income of $60,500 will qualify for $80 per week; a family with three children and a combined income of $83,000 a year will become eligible for $41 per week.  If children are 13 or older these entitlements increase.   If you have a family of six children you are entitled to claim financial help up to a combined yearly income of $142,120.

Family Assistance includes four types of payments, and families may qualify for one or more depending on their circumstances.

Family Assistance can be paid weekly or fortnightly based on a familyís estimated annual income, or in a lump sum after the end of the tax year.

Find out now if you're eligible [Working for Families website]

 

Further information

Further information is available on www.workingforfamilies.govt.nz, where you can also apply online.

Or call 0800 257 477 to find out if you may qualify and to request an application pack. It helps to have your IRD number handy when you call.

 

 

CHARITABLE ORGANISATIONS- ARE YOU AWARE OF THE CHARITIES ACT?

If you are a charitable organisation, or a member of one, you need to know about the Charities Act 2005 and what it means to you.

The Charities Act 2005 established a Charitable Commission to provide:

a registration and monitoring system for charitable organisations
support and education to the chairitable sector on good governance and management

Since it began operating on 1 July 2005, the Commission has been designing and building a register of charitable entities in New Zealand.  It will begin accepting registrations in mid-2006.

Registering with the Commission is voluntary and has no bearing on the legal status of charities.  If your organisation chooses not to register itself with the Commissioner it will still be able to call itself a charity and solicit funds from the public, but it will no longer qualify for tax exempt status.

To register, charities will be required to provide the Commissioner with documentation that proves the organisation is carrying out charitable purposes and activities.  Once registered , your charity does not need to provide documents to IRD also.  Instead, the Commission will inform IRD that they have registered the charity.

IRD will continue to be responsible for ensuing that eligible charitable organisations receive their tax exemptions.   In the next few months, IRD intend to issue a statement advising charities on the requirements for tax exemption. Organisations will have until 30 September 2007 to register before their tax status is affected.

The Charities Commission have published a booklet "A Guide to the Chaities act", which is on their website www.charities.govt.nz.

 

 

GUIDELINES FOR ESTABLISHING A CHARGE-OUT RATE FOR YOUR BUSINESS

Many service businesses find establishing a fair charge-out rate difficult. You obviously donít want to be uncompetitive in your charge-out rates. But you also donít want to set an unrealistically low charge-out rate that means youíre struggling to get anywhere. Here are some guidelines on establishing a fair but profitable rate for your business.

 

How to work it out

These are the six basic steps to take when working out a charge-out rate for your time:

  1. Decide what income you want from your business.
  2. Work out how many hours you can realistically charge out each year.
  3. Work out a chargeable rate to achieve your income.
  4. Work out your overhead costs, and an additional hourly rate to cover these costs.
  5. Add a profit margin.
  6. Check your rate against the competition.

1. Decide what income you want

Your target income should be based on things such as the standard of living you want, what you could earn elsewhere as a salary, or what you could earn by investing your money elsewhere, plus a risk margin for being in business.

Letís start by assuming that you want an annual income of at least $36,000 (before tax) from your business.

2. How many hours can you realistically charge out?

Be realistic about the number of hours you can charge out each year. For example, if you work 40 hours a week every week of the year, you could theoretically work 40 x 52 = 2,080 hours in a year. But this doesnít take account of holidays (say three weeks), statutory holidays (another two weeks) and sick leave (say another week). So the working year now shrinks to a more realistic 46 weeks of 40 hours, or a total of 1,840 hours.

But it is still unrealistic to imagine you can bill out all these hours. Some of your time will be taken up with non-chargeable activities such as administrative tasks, banking, meetings, tendering for work, promotional work, waiting for work and travel time, tea and other breaks.

One way to find out how much time youíre spending on such tasks is to keep a diary for a week, or longer if appropriate. Letís assume at a conservative estimate that these non-chargeable tasks take up 25% of your time.

So one quarter (460) of the 1,840 available hours needs to be deducted for these tasks. Subtracting 460 from 1,840 leaves you with a total of 1,380 chargeable hours.

3. Working out your charge-out rate to cover your income requirements

Now you can work out a charge-out rate to cover the income you want from the business. Youíre aiming to earn a minimum of $36,000 and youíre able to charge out 1,380 hours yearly. To get an income of $36,000 you must therefore charge your time out at $36,000 divided by 1,380, or $26.09 an hour. To this you must also add the ACC levy appropriate to your line of work.  Letís say the ACC levy rate for your activity is 4%. So $26.09 plus 4% =$27.13.

So in order to earn $36,000 a year, you must at least charge your time out at $27.50 (rounded up).

4. Work out your overhead costs, and an additional hourly rate to cover these costs

Your charge out rate needs to cover your overhead costs or you will be running at a loss. Your overheads should be detailed in your Business Plan or Cashflow Forecasts.  Or you can check your previous Profit and Loss Statement to identify them.

Letís assume, for this exercise, that they are something of this order:

Accounting fee $1,000
Advertising $2,000
Cleaning $500
Depreciation $1,000
General Expenses $500
Heat, Light, Power $1,000
Insurance $600
Legal Fees $600
Motor Vehicle $3,000
Printing $800
Rent $6,500
Repairs and Maintenance $900
Telephone $1,200
Other $200

TOTAL $19,800

Letís round this off to $20,000. So $20,000 divided by the 1,380 hours means you need to add another $14.49 to your hourly charge-out rate of $27.13, taking it to $41.62.

5. Adding a Profit Margin

So far the charge-out rate will enable you to achieve your required income, plus an extra amount per hour to cover your business expenses. Thereís one extra factor to add: a profit margin. In addition to making your target salary of $36,000, you also need to make a profit margin. This profit margin is compensation for the risks you take when you run your own business, rather than working in paid employment.

A profit margin of 15% would be $6.24 an hour, taking your final charge-out rate to $47.86. So realistically your charge out rate should be at least $48.00 an hour, or $54.00 per hour if youíre quoting on a GST inclusive basis. (GST of 12.5% per hour = $5.98).

6. Is the rate competitive?

At this stage you might be worried that the charge-out rate is uncompetitive compared to what others in your industry charge.

In some cases you might have to remain within an industry scale of fees. In any event you do have to be aware of the average in your industry as you might struggle to get work if you are a long way out. Here are some options:

Lower than average

If your calculated charge-out rate is lower than the industry average, then you donít have a problem - instead you have an opportunity to earn a better income and you can set your sights higher. For example, if you determine that your charge-out rate should be $48.00 per hour and you know the industry average is $60.00 per hour, you can raise your rate to this level or close to it.

Charging too little for your skills and services can be as bad for business as charging too much because it can undermine peopleís confidence in you. They might wonder why you are so much cheaper than others.

Higher than average

If your charge-out rate is higher than the industry average, then:
It may be that other new start-ups are charging at unrealistic levels. There is little you can do to counter this problem. Your one consolation is that these people are not likely to be in business for long, but in the meantime they have spoilt the market for others.
Go over all the figures carefully again. Is anything unrealistic? One way to lower your charge-out rate is increase the number of hours you can charge out. For example, if you can bill out at $48.00 per hour, and there is plenty of work around, does it make sense for you to do administrative tasks that someone else could do at, say, $15.00 per hour? Increasing your billable hours will allow you to decrease your charge-out rate per hour and perhaps make your rate more industry competitive.
If your rate is still well above average, then you might look at emphasising the value-added components that justify the difference, such as guarantees, superior quality and service, backup and training.

(Acknowledgement- National Bank)

 

LOSS ATTRIBUTING QUALIFYING COMPANIES

A Loss Attributing Qualifying Company is simply a standard limited liability company, which takes on a tax election, to give it Loss Attributing and Qualifying Company status with the Inland Revenue Department.

This regime is only available to companies with fewer than five shareholders. It was introduced to try to make the taxing of small family companies similar to that of partnerships. It has provided an excellent flexible structure for property investors.

In many negatively-geared property investment situations, a tax loss is a result of the acquisition of the property. The Loss Attributing Qualifying Company is particularly useful given that the loss can be attributed back to the shareholders in the company.

Further planning can be done by considering the shareholding in the company, i.e. there may be an advantage in the highest income earner holding a greater shareholding in the Loss Attributing Qualifying Company to maximise the benefits of any tax losses.

Other advantages of the Qualifying Company regime are that any capital profits made by the company on sale of property can be distributed to shareholders tax-free, by paying an exempt dividend from the capital gain.

This was not possible prior to the Loss Attributing Qualifying Company regime, and again creates a more useful structure for property investors.

The flexibility of being able to change the ownership of the company provides the property investor with opportunities in the future, to restructure the ownership of the assets held by the company without necessarily having to incur recovery of depreciation on sale of the actual property itself.

These advantages should not be underestimated, as the effect of recovery of depreciation can be quite significant and can well become a deterrent to ultimately transferring property, for example to Family Trusts.

The only significant draw back of electing for your company to become a Loss Attributing Qualifying Company is that you accept personal liability for any income tax liability that the company may have.

In summary, Loss Attributing Qualifying Companies have become a widely used and flexible tool for property investors to ensure that their affairs are maintained in a flexible manner, and to ensure that planning is done to maximise interest deductibility against the rental income.

IRD Criteria for becoming an LAQC (summarised):

    * Must not be a foreign company;
    * Must have fewer than 5 shareholders;
    * All shareholders and directors must have elected that the company become an LAQC and not have revoked this status;
    * The directors must have elected to become personally liable for their share of any income tax not paid by the company (herein lies quite a big difference between regular companies and LAQCŪs);
    * All shares in the company must carry the same rights

 

 

The information provided in this email newsletter is for informational purposes only.   McLean and Co. accept no responsibility for the opinions and information expressed in the information provided and it is provided "as is" without warranty of any kind.    The user assumes the entire risk as to the accuracy and use of this document.   Readers are asked to seek professional advice pertaining to their own circumstances.    The McLean and Co. email newsletter may be copied and distributed subject to the following conditions:
All text must be copied without modification and all pages must be included.
This document must not be distributed for profit.    

 

If we can assist further, please email McLean and Co as follows:

 CONTACT McLEAN AND CO. BY EMAIL BY CLICKING ON THIS LINK

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