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

We are happy to accept new clients.  We would be happy to assist colleagues and acquaintances as new clients.

INDEX

1. Increasing Gross Profit Margin

2. Estimate your Working for Families Tax Credits (1 April 2009 to 31 March 2010)

3. Job Support Scheme (the Nine Day Fortnight)

4. Losses from Finance Company Investments- can you claim your losses as a Bad Debt?

INCREASING GROSS PROFIT MARGIN

For trading type organisation (e.g restaurants, retail shops, tradesman, manufacturers) the Gross Profit Margin is a critical figure.  Very often the General Overhead Expenses remain reasonably constant from year to year, and must be recovered by earning of an equivalent amount of Gross Profit to at least achieve a break even profit. And thus also any excess derived in the Gross Profit in comparison to the Overhead Expenses, or Gross Profit derived which is less than the Overhead Expenses, will make or break a business.

How can you boost gross profit -in dollars and the GP margin?

Option 1 - Increase Dollars of Gross Profit by Increasing Total Sales
* make sure your advertising is effective - monitor each programme and either keep  it as-is, refine it, or drop it. Don't just change it for its own sake, if it works!
* make use of in-store displays and demonstrations
* make sure the exterior appearance and identification of the business is clean,   professional and helps customers find your store
* employ effective, hard-working sales staff (and train and motivate all people to stay  that way!)
* seek referrals from existing customers
* seek referrals from related businesses
* use staff incentives and competitions to encourage up-selling or sales of  companion lines - you can even use this to promote sales of older stock items or  slow-moving stock
* increase the average sales size:
• sell higher quality or enhanced features
• use merchandising and display to group related products together or to promote  seasonal lines
• stock displayed at close to eye-level generally sells better
• using more lineal space for a product generally promotes sales of that product (ie  allowing twice the shelfspace will generally lift sales of that product)
• look at your stock and sales mix to ensure that they closely match each other
• sell accessories or add-on products: either have your staff do this at point-of-sale,  or use signs and 'deals' in the store to encourage purchase of additional, related  items
* increase repeat trade from customers:
• through positive, friendly and helpful staff
• sales staff members' ability to understand customer needs - promoting only the   products of genuine value to the customer
• business image/appearance/housekeeping
• provide regular follow-up
• create 'clubs' for groups of customers; use newletters or email or letters to tell them  about relevant products; run special events just for regular customers etc; add  promotional pieces into (eg) your mailings of monthly statements
• provide high quality service

Option 2 - Manage The Margin
These pointers largely influence the 'cost' aspect of 'Cost of Goods Sold'. Improvements to gross margins can be achieved here without the firm's customers even realising what is going on.

Avoid the factors that reduce your closing stock:
* eliminate shoplifting of minor items with: vigilant staff; well-located cash registers; use of mirrors etc to provide good supervision of all areas
* eliminate staff pilferage of minor items, through suitable penalties, training, etc
* eliminate or minimise damage to stock while it is in storage or on display - place it in suitable locations and use display units to protect it
* make sure that all stock received is checked against delivery dockets or invoices, so that you only pay for what is actually received in good order and condition
* make sure damaged stock is returned to supplier for replacement or credit

Eliminate 'Depressed Sales Values' from the level of stock sold:
* check your pricing practices (inaccurate cost prices lead to incorrect sales prices)
* make sure you re-price stock (e.g. on old lines, or after a promotion)
* make sure your sales mix blends sales of the low-margin items with sales of higher  margin lines
* improve merchandising and display to encourage customers to buy products they  reasonably need
* eliminate excessive discounting (e.g. 'mates rates') by your staff
* minimise the extent of heavily-discounted 'end of season clearance sales'

Option 3 - Look at Your Prices
Check your pricing:
* adjust your markups so that your prices are not out of line with competitors' prices
* price some stock lines to keep customers coming back, then set a suitable margin
  on the related product sales
* make sure all stock on hand is priced consistently (don't let customers pick the  cheapest from amongst identical items on the shelves)
* use technology to make price changes quicker and easier; or to create price tags
  

 ESTIMATE YOUR WORKING FOR FAMILIES TAX CREDITS (1 APRIL 2009 to 31  MARCH 2010)

Click on this Link to start your calculation.

JOB SUPPORT SCHEME

(Also known as the nine day fortnight.)

This is a Government initiative, administered by Work and Income, to help employers retain employees who could otherwise be facing redundancy. Every employer with more than 100 staff in New Zealand is eligible, with some exceptions.  It is available from 27 March 2009. The Job Support Scheme is one of the Government's initiatives in response to the current economic situation. Work and Income has a role to play by supporting employers and helping employees keep their jobs.

Other information available is as follows:

• Information about the scheme and whether you're eligible at Work and Income's website.
• Information on employment relations, paid parental leave, holiday entitlements, sick leave and the job support scheme at the Department of Labour website.
• Tax obligations for employers.
• Tax obligations for employees.

LOSSES FROM FINANCE COMPANY INVESTMENTS- CAN YOU CLAIM YOUR LOSSES AS A BAD DEBT?

As many of the such finance companies are now in the hands of liquidators or receivers, investors are uncertain about the tax rules which might apply in cases where they are unlikely to receive full repayment of their investment.

If you are a  passive investor (as most investors are), and not in the business of holding and dealing in debt securities (including finance company deposits) then capital losses cannot be written off (the original principal amount invested plus any interest reinvested). However, individual investors can write off interest income in certain circumstances.

General rules for writing off Investment Income Losses

All income earned from investments is taxable. However some investors may find that they have been taxed on interest they have derived but not been paid yet. This is most likely to affect companies and trustees, but may also affect individuals. In general:

• You cannot obtain a bad debt or other tax deduction for any income you have actually been paid.
  
  For tax purposes, "paid" means distributed, credited, or dealt with in your interest or behalf, for example, interest paid to you in cash or interest you have chosen to reinvest. In most cases, if resident withholding tax (RWT) has been deducted from your interest payments, it is regarded as having been "paid".

• You may however be able to claim a bad debt deduction for the interest income you have included in your tax return, but which has not yet been paid.  

         This includes interest you expected to reinvest, but have not received. You can claim a tax deduction for the amount of interest written off in the year in which you write off the debt as bad.

This may, for example, also apply to "zero coupon" securities where all the interest is paid when the investment matures. If you have had to account for (or accrue) your interest income, you can write off the amount you have accrued if you consider it be unrecoverable.

General rules for individual (cash basis) Taxpayers

Companies, trustees and some individuals are taxed on an accruals basis and could be liable for tax on their accrued income, and might therefore consider the bad debt provisions.

However, the great majority of individuals are taxed only when they receive a payment, ie they are taxed on a cash basis. If you earn less than $100,000 from your total debt investments, you are taxed on a cash basis and you are therefore only required to return income when interest is paid to you.

Therefore it is  unlikely that the majority of individual investors will need to claim a deduction for a bad debt, as they are taxed on a cash basis and anything accrued but unpaid is not taxable.

Once interest has been reinvested it forms part of your principal or capital and no bad debt write off is available for capital amounts. In most cases RWT will have been deducted at the time your interest was paid to you, which is a clear indication that the interest has actually been "paid" for tax purposes.

Interest which is simply overdue is not considered as "paid" for tax purposes. So if you are taxed on a cash basis, which most individual investors are, you will not need to account for tax on any overdue interest. If you are not taxed that way however, you may have tax to pay and a bad debt write off could be an effective way to offset that liability.

If you do write off income, and later recover some of your investment from a receiver or liquidator, it will be first treated as a recovery of capital written off, then any balance will be treated as a recovery of interest written off  - and this amount will be taxable when you receive it.