McLEAN AND CO.
P.O. Box 10 , Clive 133 Main Rd, Clive Tel. (06) 8700952 Fax. (06) 8700955
Golden Rules of Investment
The Importance of Accounting www.mcleanandco.co.nz/Page63.htm
Cutting Costs in your Business www.mcleanandco.co.nz/Page80.htm
Business Legal Structures www.mcleanandco.co.nz/Page128.htm
Setting Prices www.mcleanandco.co.nz/Page105.htm
Negative Gearing www.mcleanandco.co.nz/Page126.htm
TAX- WHAT IT IS AND HOW DOES IT WORK
Tax is tax paid as you go for people in business.
It is not a separate tax. When
you fill in your Income Tax Return to calculate your end-of-year tax bill, you
deduct the provisional tax you have paid during the year, so the end result is
that you will not pay tax twice.
Generally you pay
Provisional Tax in a particular year if in the previous income year your
Residual Income Tax (which is the income tax that is calculated that you have to
pay after deducting rebates you can claim and also all tax paid during that year
except for provisional tax) was $2,500 or more.
You are, however,
liable for Provisional Tax in the first year of business in the following
|If you are an individual and you
stop receiving income from employment and begin to derive gross income from
a business, and your residual income tax for the past four years was less
than $2,500 per year, and your residual income tax for the current year
|You are a non-individual (e.g. a
company) who commenced business during the year and have not been deriving
business income in the previous four years and your Residual Income Tax
calculated at the end of the year is $2,500 or more.|
There are two options for working out Provisional Tax payable:
under this option the Provisional Tax to pay is the previous year
Residual Income Tax plus 5%. If
in the Income year you pay the Provisional Tax it is subsequently found that
you have underpaid the Provisional Tax in comparison to your calculated
Residual Income Tax liability you are not charged penalties (unless your
residual income tax turns out to be $30,000 or more), and if was too much
IRD will not pay you interest for this.|
|Estimation Option- under
this option you can estimate your Provisional Tax if you believe it will be
different than the previous year Residual Income Tax plus 5%.
If it is subsequently
found that you have underpaid the Provisional Tax in comparison to your
calculated Residual Income Tax liability for the year you will be charged
interest, and if you have you have overpaid IRD will pay you some interest
for doing so.|
Once you make an
estimate, you cannot change to the standard option for that year.
You can re-estimate any number of times up to your third instalment date,
when your last estimate becomes final.
Most businesses tend to
select the Standard Option, unless they believe the following year profit will
be significantly different.
If you donít
believe your Residual Income Tax in the following year will be $2,500 or more,
even though you paid Provisional
Tax in the current year, you can choose the Estimation Option and estimate Nil.
If this turns out to be the case you will not be liable for interest, but
if you were liable to pay Provisional Tax you will be charged interest by IRD.
Provisional Tax is
payable in three instalments, on the 7th day of the 4th, 8th
and 12th calender months after the
previous year balance date. For
example if you have a 31 March balance date, Provisional Tax payments are due on
7 July, 7 November and 7 March.
If you are registered
with a tax agent and you were not liable to pay Provisional Tax in the previous
income year but are liable in this income year you can escape paying in the
three instalments if your Income Tax Return for the previous year has not been
filed in time for an Instalment, but instead you must pay the full liable amount
but in two instalments (7 November and 7 March) or in one instalment (7 March)
after the date the Income Tax Return is filed.
If your Provisional
Tax instalments are paid late or are short paid, you incur penalty and interest
charges in relation to the late or under payments.
If the Provisional
Tax paid during an income year is more than the Residual Income Tax calculation
at the end of the income year, you will get an income tax refund fror the
difference. If it is less,
you will have to pay the difference to IRD.
Many businesses have
a free year in the first year from paying income tax (due to the fact that they
donít have to pay income tax until their first year Income Tax Return is
processed) , but then find that they have to pay two lots of income tax in their
second year of business (being the tax calculated for their first year plus
Provisional Tax for the second year).
It is this factor which causes a number of businesses to fail in the
second year due to the fact that the business has not been budgeting and putting
money aside in the first year. The
IRD will accept voluntary payments in the first year even though they are
technically due then, and this is an option that businesses should consider if
the owners believe that the amount will not be able to be saved otherwise.
Some taxpayers are
slow in filing returns each year, and due to this are not sure exactly what
should be paid in Provisional Tax each instalment.
In this instance, if it is the belief that Provisional Tax will be
payable as it is expected that Residual Income
Tax will be more than $2,500 in that income year,
Provisional Tax instalments should still be paid on due dates based on
the previous year instalments plus 10% to escape or minimise penalties.
Government has recently announced that Interest rates on unpaid and overpaid tax
will increase from 8 March 2005. The interest rate on unpaid tax will
increase from 11.93% to 13.08%, and the rate on overpaid tax will increase
from 4.83% to 5.71%. The new rates apply to all revenues and duties.
HARDSHIP AND DEBT
Paying the correct amount of tax under the law is an important community responsibility. The revenue collected through the tax system funds government spending, including community services, hospitals and schools.
Some taxpayers have difficulty in making your payments on time. The following are some frequently asked questions, and answers, that may help.
|I currently owe
Student Loans.||I currently owe
Child Support.||I won't be able to pay
my tax on time, what can I do?||I currently have overdue
tax and need to know what my options are.||What will happen if
I don't pay?||How can I pay?||Interest
and penalties, how do they work?|
HELPFUL HINTS WHEN CHOOSING A RETURN PREPARER AND RETURN FRAUD
The following is a report of recommendations as to choosing a Tax Return Agent as issued by the IRS ( US Government Tax Body)- in some cases the quotes are applicable to USA.
|Avoid tax preparers who claim they can obtain larger refunds than
||Avoid preparers who base their fee on a percentage of the amount of
||Use a reputable tax professional who signs your tax return and
provides you with a copy for your records.
||Consider whether the individual or firm will be around to answer
questions about the preparation of your tax return months, or even years,
after the return has been filed.
||Review your return before you sign it and ask questions on entries
you don't understand.
||No matter who prepares your tax return, you (the taxpayer) are
ultimately responsible for all of the information on your tax return.
Therefore, never sign a blank tax form.
||Find out the personís credentials. Is he or she an Accredited Tax
Preparer, Enrolled Agent, Certified Public Accountant (CPA), Licensed
Public Account or Tax Attorney? Only attorneys, CPAs and enrolled agents
can represent taxpayers before the IRS in all matters including audits,
collection and appeals. Other return preparers may only represent
taxpayers for audits.
||Find out if the preparer is affiliated with a professional
organization that provides its members with continuing education and
resources and holds them to a code of ethics.
||Ask questions. Do you know anyone who has used the tax professional?
Were they satisfied with the service they received?
||IRS cautions taxpayers to be wary of claims by preparers offering
larger refunds than other preparers. Check it out with a trusted tax
professional or the IRS before getting involved.|
Return Preparer Fraud generally involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. Preparers may also manipulate income figures to obtain fraudulent tax credits.
In some situations, the client (taxpayer) may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on their tax returns. However, when the IRS detects the false return, the taxpayer must pay the additional taxes and interest and may be subject to penalties and criminal prosecution.
The IRS Return Preparer Program focuses on enhancing compliance in the return-preparer community by investigating and referring criminal activity by return preparers to the Department of Justice for prosecution and/or asserting appropriate civil penalties against unscrupulous return preparers.
While most preparers provide excellent service to their clients, the IRS urges taxpayers to be very careful when choosing a tax preparer. You should be as careful as you would in choosing a doctor or a lawyer. It is important to know that even if someone else prepares your return, you are ultimately responsible for all the information on the tax return.
Tax evasion is a risky crime, a felony, punishable by in USA by five years imprisonment and a $250,000 fine.
GOLDEN RULES OF INVESTMENT
Understanding core principles of investing usually dictates the success or failure of any wealth building strategy. The following are key investing principles and the building blocks upon which successful plans are formulated:
Compound interest works like this. When you invest money you earn interest on your capital. The next year you earn interest on both your original capital and the interest from the first year. In the third year you earn interest on your capital and the first two year's interest. Its very much like a snowball effect. As your capital accumulates interest, and interest and interest, it becomes bigger and bigger.
Dollar Cost Averaging
Purchasing your selected shares, or units in a managed fund, is best accomplished at a slow and steady rate over time, regardless of whether you think the market is about to rise or fall. This approach, known as Dollar Cost Averaging, is a common way to remove the risk associated with making a large investment at any point of time, particularly when markets have been rising and may be ready for a correction. This strategy not only helps to remove the emotional aspect of investing- it enforces discipline. When market prices are falling , you get the benefit of automatically buying more units in a fund with each subsequent investment. When prices are rising, you are buying fewer units. The beauty of all this is the outcome- because you are buying more units when prices are lower and fewer units when prices are higher, the average cost of your units will be below the average cost of all units., assuming the market rises over time.
Don't Attempt to Time the Market
"Market timing" is buying and selling your investments based on a belief that you can pick the markets are heading in the short term. Sharemarket growth has often come in dramatic spurts that can easily be missed if you're sitting on the sidelines waiting for an anticipated correction or bear market to occur. As the 1990s have shown us, the experts are often more wrong than right when they try to predict an upcoming market downturn. Unless you have a crystal ball, your chances of picking market movements in the short term are minimal. Trying to predict where the sharemarket is heading can be a dangerous game that can lead to missed opportunities if you guess wrong. Over the 569 months to June 2004, the New Zealand sharemarket achieved over a quarter of its growth during the best 12 months of market performance. Put differently, the New Zealand sharemarket returned 12.7% per annum during this period. If you were invested in shares for all but the 12 best months, your return would only have been 8.7% .
Stay in the Market for the Long Haul
Time has two beneficial properties- reinforcing the power of compound interest and reducing the risk of negative outcome. It is important to understand that share markets are naturally volatile creatures. And in most cases managed funds will set a timeframe by which you can expect the fund to meet its target return- usually 5 years or longer. Beware that not every year will result in a positive return on your investment.
Combat Risk with Diversification
Diversification is one of the most fundamental rules of investing, so much so that professional portfolio managers live by it. Diversification- spreading your money among many different investments, takes a middle road through the highs and lows of market performance, allowing your investment the opportunity to grow regularly with fewer fluctuations along the way. Diversification is the most effective means of managing risk. You'll be less affected by losses in any one investment and losses may even be offset by gains in other investments. When diversifying remember to:
Understand the Risk/ Return Trade Off
Asset allocation is the key to meeting your objectives- it is often quoted that asset allocation explains 80-90% of a portfolio's absolute return. Investing almost always requires you to trade off your desire for higher returns with your desire to control risk. Too little return and you will not reach your financial goals. To much risk and you will not sleep at night. Invariably investments advertised as providing high returns have greater risk associated with them than investments advertising mid stream or lower returns. The solution to this problem is getting the asset mix right- cash, bonds, shares, property etc. and how much of each. If you get your mix right, your portfolio is more likely to deliver what you expect. Once you have decided upon a mix it is important to stick to it, unless your circumstances change.
Do Not Look at Past Performance to Pick Managers
Past performance is a very poor guide to future performance. Investment manager selection should not be totally based on track records. Of the 3 managers who finished in the top 25% returns on New Zealand domestic share funds in 2001 only 1 finished in the top 25% in 2003 also.
Rebalance your Asset Mix to stay True to your Tolerance to Risk
As time goes by and markets experience ups and downs, your portfolio will experience gains in some asset classes and losses in others, causing your strategic asset allocation and actual portfolio to become unsynchronised. This raises the need to make adjustments to counteract the fact that different asset classes have performed differently, and as a reult now comprise different percentage of your portfolio. This can be dome by:
Allow for Inflation
Inflation- the increase in the price of goods and servises, can wreck havoc on a long term investor's money. Unless your returns keep balance with inflation, the value of your money erodes. Your investments should be evaluated not only for their returns before inflation (nominal returns) but also for their returns after inflation. A dollar invested invested in NZ Bonds between 1937 and 2003 earned a 6.7% average annual return. Yet, according to the New Zealand Consumer Price Index, inflation during the same period averaged 5.7%. The real rate of return for Bonds? 1%. A dollar invested in New Zealand Shares over this period generated a 10.0% average annual return. The real return- 4.3%. That's over 4 times better than Bonds.
Call in the Experts
It can be a good idea to discuss your investment strategies with financial industry professionals- they may be able to assist in creating an investment strategy based on your particular circumstances and assist you in taking on appropriate investments.
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