McLEAN AND CO. Chartered Accountants

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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.  



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



  1. Property Tranactions- Questions and Answers

  2. Tougher Action on Property Speculation

  3. How much should you Charge for your Product or Service?





 The 2007 Budget included  increased funding for Inland Revenue Department to strengthen auditing of property transactions to ensure people pay their fair share of tax.

The increase in funding will support and enable existing audit activity to be strengthened in an area of risk that IRD have been actively pursuing for a number of years. These questions and answers seek to answer most general questions  have on this area.


When is the sale of a property taxable?

Under current law, income tax may apply to profits made on property sales in a range of circumstances:

In these circumstances, tax should be paid on the profits, just as it should on income from other kinds of investment.


How many houses can I buy and sell before I must consider tax?

There is no set figure. When any property is purchased for the purposes of resale, the profit may be taxable, depending on individual circumstances.


What if I'm not a developer, dealer or builder (or associated with one) and I have not subdivided the land?

Your intent when you purchased the property will determine if the profit from the sale of a property is taxable or not. If your main purpose was a plan, desire or aspiration to sell the land when you purchased it, then it is most likely that the profits made are taxable.


How does IRD determine my intent?

While your stated intent is considered, the evidence and patterns of sales will also be a determining factor as intent is often verified by action. To determine intent, we may look at statements you made to a bank manager or advisor when you bought the property including any plans which may have been made or discussed.


What if I lived in the property?

The sale of a family home is not normally subject to income tax. However profits may be taxable if the homeowner has established a pattern of buying and selling the properties in which they reside or the main intent when buying was for profit.


What is the 10-year rule?

There are special rules for people involved in either the business of developing or subdividing land, or people involved in the building industry.

These rules also apply when the property is held by an associated person of a builder or developer.

Intent when a property is purchased is usually the determining factor in whether profits from property sales are taxable. However in the case of builders and developers, if the property is sold within 10 years the profit may be taxable regardless of the original intention when it was purchased.


What are the penalties for not declaring profits made from property sales?

The penalties range from 20% to 150% of the tax that should have been paid depending on the circumstances leading to any omission. However they can be significantly reduced by coming forward voluntarily. Find out more about shortfall penalties.


I think I should have paid tax on my profits, but didn't include them in my return. What should I do?

You should consider making a voluntary disclosure. You can find more information in our booklet Putting your tax returns right (IR280). You can read or download a copy at Forms and Guides on


What are the benefits of this and how do I make a voluntary disclosure?

Penalties are significantly reduced if you come forward before we contact you. This is true of all disclosures not just those about property.

You may be entitled to a 75% reduction in the penalties that would be applied if your activity is detected by us in some other manner.

There is also an amendment in a bill currently before Parliament that reduces the penalties faced if you make a voluntary disclosure before being advised that you are to be audited. The amendment means that if you make such voluntary disclosures you will not attract a shortfall penalty if you have not taken "reasonable care" or for having taken an "unacceptable tax position". That change would take effect from 17 May 2007, the date of introduction of the bill.

Find out more about not taking reasonable care and unacceptable tax position.


How do I prevent penalties being applied?

You can prevent penalties by voluntarily complying with your tax obligations and declaring and paying tax on all taxable sales. If you are unsure then seek professional advice.


Am I supposed to pay tax on the property I have just sold?

That largely depends on your intention when you purchased the property.

If you bought the property with the main intention of making a profit then the answer is probably yes. If you purchased with the intent of residing in the property as your home then the answer is probably no.

However everyone's circumstances are different and all the facts need to be considered on a case by case basis. You should look at the facts surrounding your purchase and apply these to the question "What was my main reason for buying the property?"

If you are still in any doubt after you have done that you should seek professional advice.


What do I do if I might not be able to pay my tax?

If you are unable to pay the full amount due on time, you should contact IRD as soon as possible. IRD will discuss your current circumstances and help you determine the best option for dealing with the amount due. You can also read or download our booklet Debt options (IR582) at Forms and Guides  on




Inland Revenue will expand its audit activity to ensure property speculators pay their fair share of tax, said Finance Minister Michael Cullen.

"Budget 2007 provides a further $14.6 million to Inland Revenue over three years to strengthen its auditing of property transactions," said Dr Cullen.

"Clearly, the big increase in housing investment in recent years has contributed to inflationary pressures with consequent flow-on effects for interest rates and exchange rates. Speculative activity has played a part in pushing up house prices and household debt levels.

"Giving Inland Revenue further resources to help it enforce existing law more effectively will increase confidence in the tax system and should help dampen the effects of property speculation on the housing market.

"There appears to be a growing risk from property transactions and perhaps a perception that it is easy to avoid tax on them.

"Under current law, income tax may apply to gains on property sales in a range of circumstances - such as when land was bought to resell or has been developed or subdivided, or when the seller is a dealer in land. In these circumstances, tax should be paid on the profits, just as it should on income from other kinds of investment.

"Managing compliance risks around property transactions is a key priority for Inland Revenue. It is important Inland Revenue has the resources to ensure the tax rules relating to property transactions are enforced.

"The Commissioner has said that more resources in this area would enable existing audit activity to be strengthened. Inland Revenue has targeted property transactions in recent years. The revenue from property auditing averaged $100 million between 2004 to 2006."




One of the most difficult, yet important, issues you must decide as a  business owner is how much to charge for your product or service. While there is no one single right way to determine your pricing strategy, fortunately there are some guidelines that will help you with your decision.

Before we get to the actual pricing models, here are some of the factors that you need to consider:

  • Positioning - How are you positioning your product in the market? Is pricing going to be a key part of that positioning? If you're running a discount store, you're always going to be trying to keep your prices as low as possible (or at least lower than your competitors). On the other hand, if you're positioning your product as an exclusive luxury product, a price that's too low may actually hurt your image.

    The pricing has to be consistent with the positioning. People really do hold strongly to the idea that you get what you pay for.

  • Demand Curve - How will your pricing affect demand? You're going to have to do some basic market research to find this out, even if it's informal. Get 10 people to answer a simple questionnaire, asking them, "Would you buy this product/service at X price? Y price? Z price?" For a larger venture, you'll want to do something more formal- -- perhaps hire a market research firm. 
  • Cost - Calculate the fixed and variable costs associated with your product or service. How much is the "cost of goods", i.e., a cost associated with each item sold or service delivered, and how much is "fixed overhead", i.e., it doesn't change unless your company changes dramatically in size? Remember that your gross margin (price minus cost of goods) has to amply cover your fixed overhead in order for you to turn a profit. Many business owners under-estimate this and it gets them into trouble.
  • Environmental factors - Are there any legal or other constraints on pricing?

The next step is to determine your pricing objectives. What are you trying to accomplish with your pricing?

  • Short-term profit maximization - While this sounds great, it may not actually be the optimal approach for long-term profits.  Tis is  common among smaller companies hoping to attract investment and  funding by demonstrating profitability as soon as possible.
  • Short-term revenue maximization - This approach seeks to maximize long-term profits by increasing market share and lowering costs through economy of scale.   Higher revenues at a slim profit, or even a loss, show that the company is building market share and will likely reach profitability., for example, posted record-breaking revenues for several years before ever showing a profit, and its market capitalization reflected the high investor confidence those revenues generated.
  • Maximize quantity - There are a couple of possible reasons to choose the strategy. It may be to focus on reducing long-term costs by achieving economies of scale.  Or it may be to maximize market penetration - particularly appropriate when you expect to have a lot repeat customers. The plan may be to increase profits by reducing costs, or to upsell existing customers on higher-profit products down the road.
  • Maximize profit margin - This strategy is most appropriate when the number of sales is either expected to be very low or sporadic and unpredictable. Examples include custom jewelry, art, luxury cars and other luxury items.
  • Differentiation - At one extreme, being the low-cost leader is a form of differentiation from the competition. At the other end, a high price signals high quality and/or a high level of service. Some people really do order caviar just because it's the most expensive thing on the menu.
  • Survival - In certain situations, such as a price war, market decline or market saturation, you must temporarily set a price that will cover costs and allow you to continue operations.
Now that we have the information we need and are clear about what we're trying to achieve, we're ready to take a look at specific pricing methods to help us arrive at our actual numbers.


Four Models for Calculating your Pricing

As was said earlier, there is no "one right way" to calculate your pricing. Once you've considered the various factors involved and determined your objectives for your pricing strategy, now you need some way to crunch the actual numbers. Here are four ways to calculate prices:
  • Cost-plus pricing - Set the price at your production cost, including both cost of goods and fixed costs at your current volume, plus a certain profit margin. For example, your widgets cost $20 in raw materials and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs come to $30 per unit. Your total cost is $50 per unit. You decide that you want to operate at a 20% markup, so you add $10 (20% x $50) to the cost and come up with a price of $60 per unit.
    So long as you have your costs calculated correctly and have accurately predicted your sales volume, you will always be operating at a profit.
  • Target return pricing - Set your price to achieve a target return-on-investment (ROI). For example, let's use the same situation as above, and assume that you have $10,000 invested in the company. Your expected sales volume is 1,000 units in the first year. You want to recoup all your investment in the first year, so you need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price of $60 per unit.
  • Value-based pricing - Price your product based on the value it creates for the customer. This is usually the most profitable form of pricing, if you can achieve it. The most extreme variation on this is "pay for performance" pricing for services, in which you charge on a variable scale according to the results you achieve. Let's say that your widget above saves the typical customer $1,000 a year in, say, energy costs. In that case, $60 seems like a bargain - maybe even too cheap. If your product reliably produced that kind of cost savings, you could easily charge $200, $300 or more for it, and customers would gladly pay it, since they would get their money back in a matter of months. However, there is one more major factor that must be considered.
  • Psychological pricing - Ultimately, you must take into consideration the consumer's perception of your price, figuring things like:
    • Positioning - If you want to be the "low-cost leader", you must be priced lower than your competition. If you want to signal high quality, you should probably be priced higher than most of your competition.
    • Popular price points - There are certain "price points" (specific prices) at which people become much more willing to buy a certain type of product. For example, "under $100" is a popular price point.- notice how many items have  $0.99 price. Dropping your price to a popular price point might mean a lower margin, but more than enough increase in sales to offset it.
    • Fair pricing - Sometimes it simply doesn't matter what the value of the product is, even if you don't have any direct competition. There is simply a limit to what consumers perceive as "fair". If it's obvious that your product only cost $20 to manufacture, even if it delivered $10,000 in value, you'd have a hard time charging two or three thousand dollars for it -- people would just feel like they were being robbed. 
Now, how do you combine all of these calculations to come up with a price? Here are some basic guidelines:
  • Your price must be enough higher than costs to cover reasonable variations in sales volume. If your sales forecast is inaccurate, how far off can you be and still be profitable? Ideally, you want to be able to be off by a factor of two or more (your sales are half of your forecast) and still be profitable.
  • You have to make a living. Have you figured salary for yourself in your costs? If not, your profit has to be enough for you to live on and still have money to reinvest in the company.
  • Your price should almost never be lower than your costs or higher than what most consumers consider "fair". This may seem obvious, but many business owners seem to miss this simple concept, either by miscalculating costs or by inadequate market research to determine fair pricing. Simply put, if people won't readily pay enough more than your cost to make you a fair profit, you need to reconsider your business model entirely. How can you cut your costs substantially? Or change your product positioning to justify higher pricing?
Pricing is a tricky business. You're certainly entitled to make a fair profit on your product, and even a substantial one if you create value for your customers. But remember, something is ultimately worth only what someone is willing to pay for it.





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