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.

INDEX

1. The 17/5/2007 Budget- Some Tax Facts

2. The Budget- Key Facts of Kiwisaver

3. Employers- Timeline for Kiwisaver

4. How Much do I Need to Save for Retirement above NZ Super

5. Changes to Provisional Tax and GST

6. Company Incorporation

THE 17/5/2007 BUDGET- SOME TAX FACTS

• Company tax rate reduced from 33% to 30% from 1 April 2008
• The drop in the company tax rate has not been met by a corresponding drop in the trustee tax rate.  
•  A 15% tax credit for research and development where the expenditure is greater than $20,000 for each year the credit is claimed
• Kiwi Saver- as discussed below- the Budget is a timely reminder to employers that they need to be up to speed with their obligations and will need to take into account the effect of these budget changes in their empkloyee wage negotiations.
• $14.6 million will be allocated to the IRD to investigate property transactions
• Late filing fees for GST Returns will be introduced, and that the Commissioner will be able to offset refunds of a taxpayer to a tax shortfall of an associated person.
• The $630 threshold for donations made by individuals has been removed and from 1 April 2008 individuals will be able to claim a 33% rebate on donations up to their annual net income.  Companies will also be able to deduct donations up to its net income.

THE BUDGET- KEY FACTS OF KIWISAVER

Key facts on the Kiwisaver scheme and its latest enhancements.

* Employees who sign up must contribute either 4 percent, or 8 percent of their gross income.

* Participants will receive $1000 from the Government to kickstart their account and will receive a tax credit of 4 percent of their gross income, capped at $20 a week.

* Participants' savings schemes will claim the tax credit on their behalf.

* Starting from next year compulsory employer contributions will be phased in at 1 percent of an employees income, building up to 4 percent by 2011-2012. This contribution is tax free.

* Participants will be able to divert half of their and their employer's contributions to pay their mortgage.

* First home buyers can withdraw all of their savings to purchase their first home and after three years in the scheme will receive a deposit grant of $1000 a year, capped at $5000.

* The Government pays the administrative fees of Kiwisaver schemes.

EMPLOYERS- TIMELINE FOR KIWISAVER

MAY 2007  

• Employers need to decide on their policy regarding KiwiSaver
• Expect significant newspaper and television publicity of KiwiSaver  
• IRD will begin sending out employer starter kits
• IRD will be sending out KiwiSaver information packs for new employees
• KiwiSaver Scheme Providers will publish information on their websites to assist employees decide who they would prefer to manage their KiwiSaver funds

JUNE 2007  

• Employers may start calculating what they can afford to save- 4% of gross salary or wages or 8%
• Some employees may ask their employers for a 4% contribution to KiwiSaver
• Employees may start to seek advice from financial experts to explain how the different KiwiSaver schemes work
• Media coverage of KiwiSaver will intensify
• Employers that havent considered KiwiSaver will be doing so at the last minute.

JULY 2007  

• KiwiSaver begins- members can join
• Employers are required to provide new staff with a KiwiSaver information pack within seven days of starting work
• Employers also need to give IRD contact numbers and addresses of all new staff and those staff who want to opt in to KiwiSaver.

OCTOBER 2007  

• Fund managers receive their contributions the IRD has collected over the last 3 months
• New portfolio investment tax rules are implemented benefitting low tax rate investors

HOW MUCH DO I NEED TO SAVE FOR RETIREMENT ABOVE NZ SUPER?

(NZ Super after tax rate for single person living alone is approx $13,722 a year as at 1 April 2006)

 

Weekly savings required for a single person if he/she wants an extra $10,000 or $15,000 per annum once he/she turns 65
Age	An extra $10,000 pa	An extra $15,000 pa
35	$60 a week savings	$90 a week savings
40	$75	$120
45	$100	$155
50	$140	$220
55	$220	$340
60	$430	$665
Savings assume real rate of return of 2.5% per annum (after tax, fees and inflation).

CHANGES TO PROVISIONAL TAX AND GST

There are important changes happening to the way GST and provisional tax is paid from 1 April 2007, although the majority of the changes occur in the 2008 income year.

From 1 April, 2007

• You'll notice the dates change on GST forms.  Return periods should be changed to allign with balance dates

2008 Income Year

• Provisional tax and GST will be calculated on the same form and paid together for GST registered tax payers.  GST refunds can be applied to provisional tax payments due.
• 6 monthly GST payers will pay provisional tax 2 times on the GST payment dates
• GST Ratio method is introduced

For a standard March balance date provisional tax will be due on 31 August, 15 January and 7 May.

The GST Ratio Method applies to taxpayers who are registered for GST and have Residual Income Tax under $150,000.   Taxpayers who elect under this method will pay provisional tax 6 times a year based on a ratio of prior years Residual Income Tax over taxable supplies and multiplied by the current period's total taxable supplies.  IRD will calculate and notify the taxpayer of the initial ratio and any subsequent changes to the ratio.

The benefit of the ratio method is that provisional tax is paid in line with seasonal sales thereby assisting cashflow.   The ratio method is also a safe harbour in that Use of Money Interest won't be charged for taxpayers who qualify throughout the year.

A taxpayer will need to elect to use the ratio method in phone or by writing to IRD.

COMPANY INCORPORATION

As discussed above their may be tax advantages in setting up a company for your business activity, particularly when your business profit is in excess of $38000 (the level at which the personal marginal tax rate increases to 33%).   The Companies Office have announced some sizeable increases in their charges for incorporating a company from 1 July, 2007.    This will impact on companies incorporated after that date-  incorporation costs will rise from that date.    McLean and Co act to incorporate companies.  Our current charge for this task is  $250.00 plus GST , and we will likely charge $360.00 plus GST from 1 July, 2007 as a consequence of the above.

The setting of up a business entity as a company  may or may not be approprate for  business entities.  Here are some of the advantages and features and disadvantages of the company structure:

• Can have any number of business owners (shareholders) providing varying levels of investment capital and personal services.   A sole trader is limited to one  and a partnership normally will have fewer partners than the business owners of a company.  
• Provides limited liability,    Claims against the company fall on the company, not the shareholders .    That is there can be a separation of business risk from the shareholders personal assets.    A company allows shareholders to limit their maximum possible liability for the debts of that company.    If a shareholder holds 50 $1.00 shares in a company, that shareholder's liability for the company's debts is limited to $50.00 (liability can be increased in situations where shareholders and directors provide guarantees to Banks or other Financial Institutions to cover the company's borrowings)     Similarly, shareholder's loans to the company can also increase the potential risk in the event of financial collapse of the company.    This situation is to be contrasted with the position of a sole trader or partner in a firm, where their liability for the debts of that business is unlimited.
• Registration of the Name,   Once a name is approved by the Registrar of Companies no other company can be registered with an identical or near identical name.    There is no register for unincorporated bodies such as sole traders or partnerships.
• Separate legal entity.    An individual can not enter into a contract with himself but a shareholder can enter into a contract with the company.    As a consequence of this a shareholder may be employed by the company and may also loan money to the company on the same basis as any unrelated party.
• May offer tax advantages when the tax rates for companies and individuals differ e.g. tax rate for companies is 33c in $, whereas tax rates for individuals differ (19.5c to $38,000, 33c $38,000-$60,000, 39c over $60,000).  
• Taxation and employing relatives.     By introducing family members as employees and/or as shareholders income splitting is possible to enable tax less tax to be paid at the higher rates.     Approval from the Inland Revenue Department is required to allow a claim for wages paid to a spouse of family of a sole trader or of a partner in a partnership.   Restrictions are placed at the hourly rate which can be paid.     With a company there is no such restriction.    The amount of remuneration paid is to be in keeping with the value of the work undertaken.
• Tax-Dividend Imputation.     With the introduction of dividend imputation from the 1st of April, 1988, double taxation has been removed.     Companies now pay tax at 33c in the dollar on any profit earned after allowing for shareholders salaries.      If the company's tax paid profit is later distributed to shareholders as dividend they get an imputation credit for the tax the company has already paid on their behalf.
• May confer the impression of greater credibility and that the business is “serious” and there for the long term.
• Continuity.     If a director pulls out, or a shareholder wishes to sell part or all of his or her shares, the company is not affected with a new director or shareholder.     This would be different with a sole trader or partnership.     Both of these business forms would have to create a new entity.
• Provides more options for funding e.g. raising of equity, venture capital.  
• Borrowing.     Arranging security for a loan can be both cheaper and easier for a company than an individual.    A company may grant a floating charge over its assets, both present and future, by the granting of a debenture.     Individuals, on the other hand, cannot do this and must grant specific charges over specific assets.    A company can grant a charge over its undertakings whereas an individual would have to provide a detailed schedule of all assets to be charged for the charge to be effective.    Under the debenture, new assets acquired by the company would automatically be covered by the charge and existing assets sold in the course of the business would be released from the charge.     In the case of an individual where a new asset was acquired a new charge would have  to be prepared.   Similarly where an asset was sold a release would have to be executed to release the asset from the charge.
• Security for Shareholders Loan.    It is possible for a shareholder to have their lending to the company secured by way of a debenture.    In the event of the company experiencing financial difficulties, eventuating in a wind up of the company, the debenture holder would stand to rank ahead of the unsecured creditors in distribution of the residual assets.
• Easier to sell part of company than a sole trader or partnership business structure- just sell some of the shares.  
• Distribution of the Company's Loss Amongst Shareholders.    It is possible to separately register the company with Inland Revenue Department with Loss Attributing Qualifying Company (LACQ) status.     In the event of the company experiencing a tax loss in a future year, this loss can be distributed to the shareholders (in the same year).     The result is, losses which would otherwise be held within the company, awaiting future profits to offset these losses, can be used immediately by the shareholders to reduce their individual personal tax liabilities.     An example of the use of an LACQ company is the purchase of a rental property which is heavily mortgaged or a forestry company from its start up.        In the early years both situations are likely to have losses.   These losses would be able to be distributed year by year to the shareholders-  without LACQ status these distributions would not be possible. 

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