McLEAN AND CO.

EMAIL NEWSLETTER JUNE 2002  

 

Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. A special welcome to new subscribers this month.   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.

 

INDEX

  1. Mail Out of Personal Tax Summaries by IRD Currently Under Way

  2. Receiving the Right Amount of Family Assistance

  3. Provisional Tax- What it is and How Does it Work

  4. If you are Due to pay Provisional Tax 7th July 2002 but havent completed your 2002 Income Tax Return yet-  How much Provisional Tax do you have to pay? 

  5. Trustee of a Family Trust- Some Useful Guidelines

  6. Smart PC Buying

 

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:

Tax Calender April 2002- March 2003             www.mcleanandco.co.nz/page24.htm

Current Tax Rates                                             www.mcleanandco.co.nz/Page4.htm

Pricing your Product or Service                        www.mcleanandco.co.nz/Page45.htm

Improving Cashflow                                          www.mcleanandco.co.nz/Page36.htm

Business Plan- Reasons for Preparation           www.mcleanandco.co.nz/Page27.htm

 

MAIL OUT OF PERSONAL TAX SUMMARIES BY IRD CURRENTLY UNDERWAY

Inland Revenue's annual mail out of Personal Tax Summaries is well underway, with 338,972 to be sent out by the end of June.

Personal Tax Summaries are being issued to those taxpayers the department has identified as needing an end of year square up. If taxpayers are expecting to receive a Personal Tax Summary but they have not, there is no need to contact the department at this stage. Inland Revenue is mailing the Personal Tax Summaries out progressively and expect to have this completed by early July.

However, there may be taxpayers who need to contact IRD in July. IRD will advise these taxpayers when and how to contact them closer to the time.

RECEIVING THE RIGHT AMOUNT OF FAMILY ASSISTANCE

Inland Revenue wants to make sure working families are getting the right amount of Family Assistance.

"We need to know, therefore, if working families who are receiving Family Assistance have had any changes to their circumstances," says Bruce Thompson, General Manager Service Delivery.

"This is important so we can ensure working families are receiving their full entitlement or that they are not receiving more assistance than they are entitled to, which they will then have to pay back at the end of the tax year."

Mr Thompson says the type of changes the department needs to know about includes any changes in a family's circumstances, such as a change in marital status (including de facto relationships). For example if there is a change from being a one-parent family to a two-parent family.

"It is also important if there is a change in the number of children a family claims for. This could include a new child in the family, a child leaving school to start work or a change in a shared custody arrangement.

"We also need to be advised of any changes to a family's income. For example, from 18 March the adult minimum wage is increasing, which could affect a family's entitlement. If a family's income does increase, it is important they let us know."

Customers can let Inland Revenue know of any changes to their circumstances by calling 0800 227 773.

"We're available from 8am to 8pm weekdays and 9am to 1pm on Saturdays. We'll be happy to help," says Mr Thompson.

 

PROVISIONAL TAX- WHAT IT IS AND HOW DOES IT WORK

 Provisional  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 circumstances:

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 exceeds $30,000.
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:

Standard Option-  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 don’t 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 don’t 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 not 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.

   

IF YOU ARE DUE TO PAY PROVISIONAL TAX 7TH JULY 2002 BUT HAVENT COMPLETED YOUR 2002 INCOME TAX RETURN YET- HOW MUCH PROVISIONAL TAX DO YOU HAVE TO PAY?

Some taxpayers may not have completed their 2002 Income Tax Returns yet, and therefore may not be sure exactly what should be paid in their first instalment for the 2003 Provisional Tax   (assuming they are March year end taxpayers).    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 the 2003 income year, 

Provisional Tax instalments should still be paid on due dates based on the Residual Income Tax for the previous year   (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) plus 10% divided by 3.

 

TRUSTEE OF A FAMILY TRUST- SOME HELPFUL GUIDELINES

Family Trust Administration has come under the watchful eye of both the IRD and beneficiaries.   The courts have set the following guidelines for trustees:

maintain a separate bank account for trust transactions, including distributions to beneficiaries

hold regular meetings (at least annually)

have a formal meeting agenda

keep formal minutes of meetings and include these together with any resolutions in the trust's minute book

minute investment decisions

make the minute book available to all trustees

ensure formal and timely approval of the trust's annual financial statements.

make formal decisions on the treatment of income

ensure that the power to use majority voting is exercised only after all trustees have been formally consulted on the issue

 

SMART P.C. BUYING 

The dynamics of the computer industry mean that each year we seem to be offered P.C.s that run quite a bit faster and better at a price that is just a bit cheaper.    There is a law that says whenever you buy a P.C., almost invariably a couple of months later you will see a competing product advertised that goes faster than yours for the same price, or performs as well as yours for $300 less.

There is no way around this.   Waiting for some new innovation that is now on the horizon to materialise in a few months simply postpones the problem rather than fixing it.     

Seven rules for P.C. buying are:

 Pack as much punch into your original purchase as you can.   Bundles usually offer value for money.   Upgrading later is less efficient.

Be honest with yourself about your requirements, and don’t be afraid to communicate them to a supplier.

 Check the software supplied, especially operating systems.   What versions will be supplied and will you get the manuals?

Discounts- it costs nothing to ask if you are an educational user, or if you are a private user is your employer about to buy P.C.s in bulk?

Think ahead.   Are your requirements likely to change during the useful life of the P.C.

A three year return-to-base warranty is the standard in the industry.   What is the supplier offering?

 Specialist applications are often best served by specialist suppliers, even if the initial outlay may be more than high street prices.

 

 

If we can assist further, please email McLean and Co as follows:

 CONTACT McLEAN AND CO. BY EMAIL BY CLICKING ON THIS LINK

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