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. Tips for Paying Your Mortgage Off Earlier

2. Business Activity Remuneration

3. Companies Office Announces Changes to Filing Annual Returns

4. Pricing for Profit

TIPS FOR PAYING YOUR MORTGAGE OFF EARLIER

 The following examples are based on a $250,000 mortgage at 9% p.a. for a term of 30 years.

Pay your Mortgage fortnightly instead of monthly

• make half your monthly mortgage payment fortnightly
• this means you will make two extra payments a year
• on a $250,000 mortgage you can cut around eight years off your loan term
• you will save around $151,000 or 32% in interest rate payments

Increase your regular mortgage payments

• pay an extra $50 a fortnight on a $250,000 mortgage
• you could save up to 20% in interest rate charges or $95,000

Shorten your loan term

• change a $250,000 mortgage from a 30 year loan term to a 25 year loan term
• you could save up to 20% in interest rate charges or $95,000

Pay Lump Sums off your Mortgage

• paying $10,000 off a $250,000 mortgage could shorten your loan term by five years
• this would be a 23% saving in interest rate charges or around $108,000

Keep Mortgage Payments the same if the interest rate drops

• you could save money on interest and pay off your mortgage faster

BUSINESS ACTIVITY REMUNERATION

Sole Trader

If you are a sole trader you dont pay yourself a wage- you simply take money from the business when you need it for personal use. These takings are called "drawings".  Drawings are not regarded as a business deductible expense when calculating profit.  At the end of the year the full taxable profit or loss from the business is assessable to the sole trader.  The sole trader can engage other opersons and pay wages (and deduct PAYE). This is a business deductible expense.

Partnership

At the end of the year the net profit (without allowing for partners drawings) is shared in full between the partners.  The partners then pay tax on their share of the profit in their individual tax returns.  As with a sole trader, the amount the partners take as drawings can be more than their share of profit, and the drawings are not tax deductible.

A partner who works for the partnership can be paid a salary with PAYE deducted if there is a contract of service. The contract must be written and agreed by all the partners. Such wages would then be a deductible expense in the partnership Business Accounts. Partners paid in this fashion are not then eligible for the distribution of profits or losses as described above.

Company

Companies can distribute money in three ways:

• Shareholder-employees can periodically draw money from the company. At the end of the year the company calculates a salary amount on which the shareholder has to pay tax.
• Shareholder-employees can be paid a salary with PAYE taken out in the normal way
• The company can pay dividends to shareholders out of the profits that remain after tax. 

COMPANIES OFFICE ANNOUNCES CHANGES TO FILING ANNUAL RETURNS

The shift is being undertaken to enable the New Zealand business community to take advantage of the many benefits associated with online filing such as the lower cost of compliance.

The Companies Office will no longer be distributing paper annual returns to companies in their annual return filing month. However, companies that have not provided an email address will continue to receive their reminder by post.

PRICING FOR PROFIT

  Some typical methods of pricing are::
 

• Charge a bit less than or the same as competitors.
• Charge a bit more than the product or service costs.
• Charge as much as you need to earn to cover your costs i.e. Break-even.
• Charge what you can get away with.
• Charge what you think it's worth.
• ‘Cost’ the product or service and calculate a mark-up to provide an acceptable profit.

Follow competitors or the market
The problem with following competitors is that you don't always know how they calculated their price. It may be unsustainable in terms of the costs to deliver the product or service.

You may win sales from them in the short term but unless you develop a better way of pricing you are likely to go out of business eventually if the price doesn't cover costs.

They may have cash reserves to cover the shortfall between Costs and Price for a while and you may not. They may be able to ‘sit it out' until you go out of business trying to compete and collect all your customers later. 

Charge a bit more than the product or service costs
The  question here is ‘how much does the product or service cost?'.  

Your costs include your Cost of Goods Sold (direct product and service costs) plus your  overheads such as administrative staff, advertising, stationery etc.

Break-even analysis is the practice of calculating how much Revenue you need to cover COGS and Overheads. It is important in business to know your ‘Break-even situation'.

Charge as much as you can get away with
This is a great strategy so long as it covers your COGS and Overheads. It may work at first but if you don't keep a close eye on COGS and Overheads and they ‘creep up', it may turn out to be unprofitable in the end.

Charge what you think it's worth
Worth can mean different things to different people. What the customer thinks it's worth may be quite different to your perception.  You still need to keep a close eye on costs to ensure your margin is not being eroded by increased costs.

The issues relating to Price are as follows:

• Get the price right.
• Know the Costs.
• Keep the price right.

In order to get the price right you need to:

• Determine the cost of delivery of the product or service to customers excluding overheads.
• Know your Overheads so that you can work out your ‘Break-even' situation and how much you need to sell.
• Decide how much profit you want and calculate this into the Price.
• Know your Margin and report on it regularly to ensure it is not being eroded by increased costs.
• Know your customer satisfaction levels. Dissatisfied customers won't pay any price.
• Regularly review pricing and do small increases to cover increased costs. It is much easier to do small regular price increases than irregular large ones.

Keep the Price Right
Price increase can be a very controversial subject. Many business owners fear increasing prices because they think customers will go elsewhere. 

This scenario can have a positive impact on both profit and cash-flow. It is often more difficult to increase Revenue than to increase Prices. Many customers don't even notice a small increase and fully accept one to cover CPI rises. For many businesses failure to incorporate this into their price means they are absorbing increased costs and eroding margins.