McLEAN AND CO. Chartered Accountants

Accounting          Taxation         Business Advice and Development Assistance           Audits                             

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

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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 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:



  1. Employee vs Independent Contractor.

  2. What is an LAQC?

  3. Cash Flow Really is King

  4. Employment Agreements



It is a dilemma you may have to  face at some point during the life of your small business. The company is growing nicely but there is only so much you can do. Adding to your human resources can result in additional revenue and less chaos in your business life. Should you hire a new employee or an independent contractor?

Hiring an independent contractor or new employee is an important business decision. To guide you to the best possible decision, consider the pros and cons of hiring an employee or an independent contractor:


Pros of Hiring An Independent Contractor

    Reduced Overhead: The attraction of hiring an independent contractor is the reduced costs in: expenses, payroll, benefits, and other overhead costs.   Lower overhead means less stress to bring in new business revenue to cover costs.
    No ACC Levies to pay. The Independent Contrator is totally resposible for his/ her own ACC Levies.
    Work On Demand: Hiring an independent offers flexibility to the changing work demands of your company. You have the ability to take added opportunities as they arise, and during slow periods, have greater cost control. Your contract workforce often comes fully trained and highly specialized.


    Pros of Hiring An Employee

    Dedicated Loyalty: Making the commitment to hire an employee can result in having an individual with stronger loyalty than an independent. Added loyalty can result in more productivity. Good  staff will be ready to take on additional roles to help your company grow.
    Multiple Roles: Staff in small organizations will often perform a variety of roles. This provides various learning opportunities for staff and a flexible, diverse workforce for the company.
    Improved Work Flow: With a steady stream of business, having an employee can be much easier to coordinate projects. Trying to juggle multiple freelancers to meet project deadlines can be a challenge.


    Cons of Hiring An Employee

    Added Responsibility: The burden of your small business providing for your family becomes even greater as you have to allocate payroll for your staff and help them provide for their families.
    Extra Overhead: Not only are there the costs of employee benefits and payroll to consider, but you may also have to  move to a bigger space, sign a lease, and purchase equipment.
    Becoming A Manager: As your small business grows in staff, you become less involved in practicing your trade and more involved in people management issues. Your company will be exposed to employment related legal  issues. Independents will often require less management due to more motivation from being self-employed.


    Cons of Hiring An Independent Contractor

    Lack of Control: Part of what makes a contractor independent is their ability to choose the control over the work performed. Contractors may have additional projects and may have less commitment than an employee.
    No Fixed Rates: Your small business may find the perfect independent contractor to work with but the rates charged can vary by project and overall market demand. With an employee you can usually set the pay rate until the next review date.


    LAQC stands for loss attributing qualifying company.

    A LAQC is a limited liability company that has formally chosen to pass on any losses it makes to its shareholders. These shareholders can offset the losses against their personal income, to reduce the amount of personal income tax they pay. However, shareholders are personally liable for any income tax not met by the LAQC.

    Advantages of an LAQC

    Losses made by a LAQC can be passed on to shareholders, who can use them to reduce their personal income tax. The shareholdings in the company can be changed to direct the losses where appropriate for tax purposes.
    LAQC’s have the commercial benefits of a limited liability company, including protecting shareholders from unpaid business debts.
    Dividends paid by a LAQC are tax-free, except to the extent that imputation credits are attached.
    Capital gains can be distributed tax-free without winding up the company.


    Disadvantages of becoming a qualifying company

    Shareholders are personally liable for any income tax not paid by the LAQC.
    The cost of administration. For some people, administration costs can reduce the advantages of an LAQC to the point where they may be better off operating under a partnership or as a sole trader.
    Qualifying Company Election Tax may be payable when a company first becomes a LAQC.
    The tax benefit of company losses incurred before becoming a LAQC are forfeited.
    A LAQC cannot group with non-qualifying companies for loss offset or subvention payments. A loss offset is where one company has a profit and the other a loss, and they are part of the same group of companies. The profit company can offset the loss of the other company. This is done in the tax return or using something known as a subvention payment
    Once the losses have been attributed to the shareholders of a LAQC, the LAQC loses the right to use them itself for tax purposes.


    How can a business become a LAQC?

    To be eligible to become a LAQC a company must be New Zealand-owned, and have no more than five shareholders (unless it is purely a flat-owning company).

    People related within one degree (for example,. couples, or parents and children) count as one shareholder.

    All shareholders and directors must have elected that the company become a LAQC, and all directors must have elected to become personally liable for their share of any income tax not paid by the company.

    The company must not receive more than NZ$10,000 in foreign-sourced, non-dividend income per year.

    To make the change, shareholders and directors must complete an Inland Revenue form (IR436).  Once Inland Revenue has confirmed the change, the new LAQC status applies from the start of the next financial year.


    LAQC and the Family Home

    Inland Revenue has expressed concern about taxpayers selling their private home to a LAQC, then claiming tax deductions – saying this may be tax avoidance. Where tax avoidance is proven, the taxpayer must pay the tax avoided as well as a penalty of 100 percent of the tax avoided. Use of money interest will also apply



    Understanding and managing Cash Flow can make or break your business.

    One of the most important lessons business people have to learn, often painfully, is that cash really is king. It doesn't matter how much money is coming in the future if you don't have enough money to get from here to there.  Employees can't wait on wages/salariues to be paid until your customers pay. Your landlord doesn't care that you're talking to investors and will have the money in a couple of months. Suppliers may not be willing to extend your credit any further and you may not be able to purchase the goods you need in order to deliver to your customer and receive payment.

    More businesses fail for lack of cash flow than for lack of profit. Why is this? Two main reasons:

    1. Business owners are often unrealistic in predicting their cash flowand tend to oversetimate income and underestimate expenses.
    2. Business owners fail to anticipate a cash shortage and run out of money, forcing them to suspend or cease operations, even though they have active customers.


    This is a difference between profitability and cash flow:

    Profit is the difference between income and expenses. Income is calculated at the time the sale is made, rather than when full payment is received. Likewise, expenses are calculated at the time the purchase is made, rather than when you pay the bill.

    Cash flow is the difference between inflows (actual incoming cash) and outflows (actual outgoing cash). Income is not counted until payment is received and expenses are not calculated until payment is made. Cash flow also includes infusions of working capital from investors or debt financing.

    Cash flow is often calculated on a monthly basis, since most billing cycles are monthly. Most suppliers will typically allow somewhere close to thirty days to pay. However, in a cash-intensive business with a lot of inventory turnover, such as a restaurant or convenience store, it may be necessary to calculate on a weekly or even daily basis.


    How to Project Cash Flow

    1. Start with the amount of cash on hand - your current bank account balance(s) plus actual currency and coin.
    2. Make a list of anticipated inflows - customer payments, collection on bad debts, interest or investment earnings, etc. List not only the amount, but also when it will be coming in.
    3. Make a similar list of anticipated outflows - wages, monthly overhead costs, payments on accounts payable or other debt, taxes payable or set aside for future payment, equipment purchases, marketing expenses, etc.

    Put it all into a spreadsheet in chronological order .    If at any point you have negative cash balance, or even a very small one, you have a potential problem.

    It's best to be extremely conservative, i.e., estimate inflows lower and sooner and outflows higher and later. If you end up with a cash surplus, it can cover you for an unanticipated cash shortage in the future, or be invested in something to help grow your business - you won't have a problem finding something useful to do with the money. On the other hand, if you end up with an unanticipated cash shortfall, you can end up damaging your credit, losing suppliers, having to cut employees, or out of business entirely.


    Track Your Actuals

    Keep a copy of your forecast, but track your actual cash flow as well. Comparing it to your forecast will help you realize where you have mis-estimated or overlooked something in your planning.  Past cash flow statements and future cash flow projects are among the core financials you will need as part of your business plan for potential investors. After a few months of tracking it, you'll also find it an indispensable management tool.




    Every employee employed after 2 October 2000 must have a written employment agreement. It can be either an individual agreement or a collective agreement.

    There are some provisions that must be included in employment agreements by law, and there are also a number of minimum conditions that must be met regardless of whether they are included in agreements. Employment law also provides a framework for negotiating additional entitlements.

    This section looks at the rules governing employment relationships in New Zealand under the Employment Relations Act from the start of the relationship, through to how it is formalised in an employment agreement and how it can end.


    The Employment Agreement Builder

    The Employment Agreement Builder can help you to put together a draft employment agreement for your employee. It clearly shows you which clauses are compulsory, which clauses reflect minimum conditions that the employee is entitled to regardless of their inclusion in their employment agreement, and which clauses can be included voluntarily to meet the needs of you and your employee.

    The key to this information is use it as a starting point to establish conditions that best suit your particular relationship and situation, and then reflect those conditions clearly in the employment agreement.

    If you've already got an agreement but you'd like to know more about it, the following is the Employment Agreement Guide. This reference guide contains clauses you're likely to find in a typical agreement, and provides you with common uses, rules and definitions.


    Covering Letters

    You can also customise and download a range of covering letters to send out with your employment agreement. These letters cover the range of circumstances that the Employment Relations Act requires employers to address when offering employment.


    Good Faith

    The Employment Relations Act 2000 has “good faith” as its central principle. This means that employers, employees and unions must deal with one another honestly and openly.

    Specifically, the Act:

    promotes good employment relations and mutual respect and confidence between employers, employees, and unions
    sets the environment for individual and collective employment relationships
    sets out requirements for the negotiation and content of collective and individual employment agreements
    provides prompt and flexible options for resolving problems in employment relationships.


    Booklet About Hiring Staff

    Department of Labour have produced a comprehensive booklet about how to hire staff. This booklet is being updated to reflect the amendments to the Employment Relations Act that take effect from 1 Dember 2004. You are able  to get a printed copy by using the online order form or contacting the Employment Relations Infoline.

    Who needs this information?

    Anyone who has a paid job or who employs other people in paid work
    Anyone intending to work or who has a new job
    Employers who want to know what they now have to do when employing new staff
    Those negotiating new employment agreements
    Anyone who wants to know what can be included in employment agreements
    Anyone who needs information when an employment relationship ends, such as in the event of dismissal, redundancy, retirement or resignation.


    What to put in Employment Agreements

    Agreements must be in writing where there is no collective agreement

    Under the Employment Relations Act 2000, where there is no collective agreement the individual employment agreement must be in writing and must include:

    the names of the employer and the employee (to make clear who are the parties to the agreement)
    a description of the work (to make clear what the employee is actually expected to do)
    an indication of where the employee is to work
    an indication of arrangements relating to working hours
    wage rates or salary
    a plain language explanation of services is available to help sort out employment relationship problems.
    a requirement to pay at least time and a half for work on a public holiday
    for most employees, an employment protection provision that will still apply if the employer's business is sold, or transferred or the employee's work is contracted out.


    Collective Agreements and their relationship to Individual Agreements

    The requirements for collective agreements are set out in the following collective bargaining section.

    Employers must not undermine collective bargaining or collective agreements by automatically passing on collectively bargained terms and conditions to employees not covered by that collective bargaining or agreement.


    Minimum Rights in Legislation

    Some minimum terms and conditions of employment are imposed by legislation. These terms still apply, even if they have not been written into the collective or individual employment agreement. Employers and employees cannot agree to do away with any of these entitlements. They can, however, agree to better provisions if they wish.

    The minimum legislative requirements cover the following issues:

    minimum wages
    annual leave
    public holidays
    sick leave
    bereavement leave
    parental leave
    leave for defence force volunteers

    You can get more detailed information about your minimum employment rights here.


    What must not be in an Employment Agreement?

    Employment agreements must not include anything that goes against any law, whether employment, civil or criminal law. Unlawful provisions in an employment agreement cannot be enforced.

    What other issues can appear in individual employment agreements?

    There are a number of optional matters that are often found in employment agreements. These are issues that employers and employees may wish to include in the agreement or bargain about. The ERS website offers an Employment Agreement Builder that enables you to develop an agreement that suits your employment.



    There are holidays and leave rights that apply whether or not they are included in an employment agreements. The employer and employee can agree to apply better provision overall, but cannot agree to reduce any provision.


    Annual Holidays

    Employees are entitled by law to a minimum of three weeks' paid annual holidays after being in the job for a year, or to holiday pay for periods of employment less than one year.


    Public holidays

    The 11 public holidays in the Holidays Act apply unless the employer and employee agree to substitute other days .

    If employees work on public holidays they must be paid at least time and a half for hours worked on a public holiday. If it is a day on which they would otherwise have worked they are also entitled to another day off as an alternative holiday (a day in lieu).


    Sick Leave

    Employees are entitled by law to five days' sick leave after being in the job for six months, and for each subsequent twelve months. If the leave is not taken, it can accumulate up to a maximum of 20 days.


    Bereavement Leave

    Employees are entitled by law to three days' bereavement leave after being in the job for six months, on the death of an immediate family member.

    Additionally, an employee is entitled to one days' bereavement leave where the employer accepts that the employee has suffered a bereavement.








    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: