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.nz,  which 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.

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:

INDEX

1. Proposed Changes to the Depreciation Rules

2. Asset Distributions on Death

3. Business Names

4. What you Need to Know about Record Keeping

5. Get in Touch with your Competion

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:

PROPOSED CHANGES TO THE DEPRECIATION RULES

 On 12 July 2004 the Inland Revenue Department published an Issues Paper regarding proposed changes to the depreciation rules.  the publication of this paper was anticipated after various announcements from Dr Michael Cullen over the last six months that aspects of the depreciation regime were going to be reviewed.

There are a number of specific changes that are outlined in the depreciation paper, but the major changes are as follows:

Long Life v Short Life Assets

The Paper draws a distinction between assets that can be considered short life (i.e. plant and equipment) and those assets that can be considered long life (i.e. buildings) and suggests that short life assets might be better off being depreciated on a double declining balance basis and that long life assets are better off being depreciated on a straight line basis.  If these changes were adopted then the depreciation rates for buildings would decrease, but depreciation rates for short rate assets would increase significantly.

Depreciable Intangible Assets

There are proposals to change the definition of depreciable intangible property so that certain intangible proerties will be depreciable without having regard to whether it can be used for tax avoidance purposes.

Residential Rental Properties

The IRD are concerned that there is an element of tax advantage for investment in residential rental properties and buildings more generally.  The concern has been raised that the current method of calculating depreciation leads to accelerated depreciation deductions on buildings and also that residential property owners are claiming separate deductions for different parts of a building such as electrical wiring, plumbing, carpets and internal walls etc.   To combat this the IRD have proposed two options a follows:

1. A list of separately depreciable assets will be identified as is the practice in Australia.  Various assets that are currently being depreciated such as wiring, plumbing and internal walls will be excluded from the list.   It will be up to the taxpayer to obtain a market valuation of the depreciable assets at the time of purchase
2. All assets will be depreciated as part of the building at the proposed depreciation rate of 2%.   The IRD argues there would be advantages to the taxpayer as no valuations would be required and there would be a wider scope for repairs and maintenance deductions on a go forward basis.

The IRD have invited submissions on the Paper.

ASSET DISTRIBUTIONS ON DEATH

IRD have also issued a Policy Paper dealing with the transfer of certain assets upon the death of a taxpayer.  The Government announced on 1 July 2004 that comprehensive rules in this area will be introduced.   It is expected that these rules will be introduced in a tax bill to be considered by Parliament later this year.

The proposals will mainly affect depreciable property such as rental properties and land and shares which give rise to taxable gains on disposal  i.e. assets held on revenue account.   There are three main proposals:

1. There will be a deemed disposal and acquisition of a deceased taxpayer's assets and liabilities at market value on the date of death
2. "In kind"  asset distributions by companies and trusts, including estates of deceased persons, will also be treated as disposals and acquisitions at market value
3. Gifts will be treated as "in kind" distributions and dealt with as noted in 2 above

Based on the prosals, two valuation points will be required.   First, when the individual dies and second, when the estate/ asset is distributed to the beneficiaries. This will mean any gains at the valuation points will be assessable income in the case of revenue property and in the case of depreciable property, a depreciation recovery may arise based on a disposal or market value

The general rule, however, is subject to the following exceptions:

1. Rollover relief will apply when the sole beneficiary is the deceased's spouse.  This relief is available both on the taxpayers' death and on any subsequent distribution of the estate to the spouse.   The practical effect is that the deceased's tax values will transfer directly to the spouse and no tax liability arises on death.  If a distribution is made to anyone else who is not a spouse (including a trust) then a tax liability could arise.
2. Rollover relief will be available in relation to forestry assets of a taxpayer, both on the taxpayer's death and on any subsequent distribution of the estate to the beneficiaries, where the beneficiaries are close relatives of the deceased.  Close relatives are defined as relatives within the second degree of relationship.  Without this exception, a taxpayer's death could trigger a significant tax liablity for the estate on large unrealised gains on forestry assets which the estate could be unable to satisfy without selling the assets.
3. There will be only one valuation point i.e. date of death, when the estate is distributed immediately after probate is granted and the following circumstances apply:

****  the deceased's estate is left to charity, other than specific  legacies or assets that are not in the tax base, or

****  the deceased's estate is to left to close relatives only, and

****  the net income of the estate is distributed while the estate is under administration, and

****  the deased estate is transferred to the beneficiaries as soon as possible

A concession will also be brought in to ensure that a taxpayer's death does not lead to capital assets being brought into the tax base. For example on the sale of land which has been purchased and not developed and there  was no intention to make a profit-  this concession will ensure that the ten year period will continue to run as if it has not lapsed on a taxpayer's death-   thus the estate and the ultimate beneficiaries will not be liable for tax, unless they sell the land within the ten year period.

These changes are very important for taxpayers that hold business assets and rental properties in their own name as they will be faced with depreciation recovered issues and a realisation of taxable gains.

BUSINESS NAMES

Proprietors of new businesses often expend a great deal of energy deciding upon a name for their business attempting to ensure exclusive use of that name, when such exclusivity is in practice very difficult to obtain and expensive to enforce.

The reality is that sole traders and partnerships are free to use any business name they choose, but if it is the same as a Registered Trademark, or a Limited Liability Company’s registered name, they run the very real risk of litigation from the owners of the Registered Name or Trademark. This litigation process through the civil courts, while slow and expensive, will inevitably result in forcing the sole trader or partnership to stop using the registered name.

In New Zealand, unlike some other countries, a business name cannot be “registered” in isolation from a Limited Liability Company. If a Limited Liability Company is formed the first step is registering a name and the Companies Office moderates the applications and will reject a new company name that is too similar to an existing registered name. This is the process that ensures no two Limited Liability Companies have the same name, and there is a parallel process within the Intellectual Property Office regarding new Trademarks.

In effect if you create a Limited Liability Company you can be certain that another Limited Liability Company cannot be formed with a name exactly the same as yours, but you have no immediate control over existing or new businesses operating as sole traders or partnerships that choose to use your name. You can take them to court to force them to stop using your name but that will take time and money.

Similarly if you create a Trademark you can be certain that another Trademark cannot be formed with a name and image exactly the same as yours, but you have no immediate control over existing or new businesses operating as sole traders or partnerships that choose to use your name. You can take them to court to force them to stop using your name but that will take time and money.

If you operate as a sole trader or a partnership it is quite possible that someone else will use the same name and there is nothing you can do about that. In many sectors sole traders in different towns use the same name e.g. businesses called Budget Tyres exist in Palmerston North, Wanganui, Lower Hutt and Whakatane, who are apparently all separate sole traders, and they live with it.

WHAT YOU NEED TO KNOW ABOUT RECORD KEEPING 

The tax laws require you to keep records to back up the figures you supply to Inland Revenue – for example, the figures in your financial statements, your tax returns and other schedules and documents. This article explains the purpose of record keeping, the records you need to keep, and how long you must keep them.

Why keep records?
There are good business reasons for keeping proper records - apart from your obligations under the tax laws.

More accurate figures
Basing your calculations on records is more reliable than using your memory or estimates.

You'll save time and money
If you make an effort to keep your records up-to-date, it will be a lot quicker and easier to complete your tax returns. And if you have an accountant, they won't need to spend time putting your records in order. This can save accounting fees.

Audits will be less hassle
If you are in business, you can expect to be audited by Inland Revenue at some stage. During an audit, an Inland Revenue investigator will examine your tax return figures and verify them by checking back to your business records. If records are missing or inadequate, you may be faced with an additional tax bill. For example, the investigator may disallow an expense if there are no records to prove it took place. There are also penalties if proper records are not kept.

Good records are an advantage if you sell your business
Keeping proper records is good evidence that you've been running your business professionally. And you will be able to back up your claims about the status and performance of the business.

Records you need to keep
"Business records" consist mainly of source documents and books of account.

Source documents
A source document provides evidence that a transaction has occurred. Examples of those you must keep are:

Carefully file source documents in a logical order so you can easily retrieve them when necessary.

Books of account
There are many types of books of account (paper-based and computerised), but they all take the information from the source documents, collate it, and produce the figures which go in your financial statements and tax returns.

How long must you keep your records?
Keep all your business records for at least seven years from the end of the tax year or the taxable period to which they relate. Even after you stop operating your business, you still have record-keeping responsibilities.

Personal records
It's a good idea to keep all personal records and transactions separate from business records. This is best achieved by using separate cheque and savings accounts for the business. As with business records, you must keep all private records (including private bank account records) for seven years.

GET IN TOUCH WITH YOUR COMPETITION 

We all know that competition is an ugly word but competitors are a fact of life in business. If your business can't compete with other businesses, don't start it. You have to have some type of an edge.

You may have an excellent product or service, but if everyone else is selling a product or service similar to yours, just how much of the market can you expect to capture?

You will have to learn everything there is to know about your competition and understand their marketing strategies.

The best way to research your competition is to locate those you consider the largest threat to your potential business. Take the time to make a note of and acquire a feel for how your competitors deals with their customers, then answer these questions:

What appeals to you most about their website, introduction, setup etc.?

How large of an inventory do they carry?

Are their products display eye-catching?

What is their Alexa, Google, Yahoo, and AOL ranking?

Are their testimonials positive?

Are their prices in line and competitive with yours?

What do they offer that you could not?

Do they offer discounts?

Do they offer a return policy?

Do they offer any special services, such as free delivery?

Which areas could do with some improvement and could you improve in these areas?

Do they keep their online store up-to-date?

What means of promotion do they use (flyers, coupons, free gifts, etc.)?

Next, create a profile of each main competitor. Know how they advertise, why their customers shop there, what areas need improving, and how successfully you can expect to compete with them.

You may also develop ideas for improving and promoting your own business. Your success will lie in assessing and understanding your competitor's strengths and weaknesses.

Evaluate and compare your own strengths and weaknesses to stay in touch with the competition and succeed in your business

 

 

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