Accounting          Taxation         Business Advice and Development Assistance           Audits                              P.O. Box 10 , Clive        133 Main Rd, Clive          Tel. (06) 8700952         Fax. (06) 8700955 

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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.  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 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.



We are happy to accept new clients.  Please contact ourselves at the contact points highlighted above if we can assist you in your accounting and taxation requirements. Our website lists information required for this in the following link:



  1. Relevant Business and Taxation Articles.

  2. IRD 2004-2005 Annual Report

  3. Recent Legislation for Family Assistance and Student Loan Interest

  4. You need Finance for your Business-  Should you Borrow or Sell Shares to Investors?

  5. Margin

  6. What to Check before Signing a Lease



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:

The Importance of Accounting      

Borrowing Money                          

Rental Property Income                 

Choosing a Business Name           

Obligations of a Landlord               



The recently issued Inland Revenue Department Annual Report for the year ending June 2005 underlines how the tax coffers have been bulging in recent years.

The department collected $32.8 billion in direct taxes, up 12.3 per cent on the previous year and $9.2 billion in indirect tax, up 4.5 per cent.

IRD said the strength of the economy had led to an increase in both the numbers of taxpayers and the amount they were paying.

"There has been especially strong growth among small business and salary and wage earners," the report said.

Like Treasury, IRD also failed to predict the growth with the total tax take 6.1 per cent more than it forecast.

Despite many picking a downturn in the economy, IRD is still forecasting the tax take to steadily increase over the next five year.

While taxpayers were handing over more to the taxman they were also racking up increasing levels of tax debt.

Total overdue debt was $2.8 billion at June 2005, up 23 per cent on the previous year,

This was made up of $1.3 billion in non-collectable debt and $1.5 billion under instalment or for collection.

The report said that audit activity including investigating tax avoidance and evasion schemes had generated $541 million in additional debt, a 35 per cent increase on the previous year.

Despite the greater tax debt and tax take, less use was being made of debt and hardship provisions.

The 2004/2005 year had resulted in 42,662 cases worth $83 million being written off compared to 43,250 cases worth $86 million in the previous 12 months.

The penalty and interest component of total debt fell from 43 per cent to 41 per cent.

The report reveals that the department also failed to meet some of its targets when it came to answering tax enquiries.

It said an increased number of high volume days impacted on its ability to meet target standards for timeliness in answering calls.

It managed to answer 60 per cent of tax agents' calls, 75 per cent of employer calls and 54 per cent of debt collection calls within its 20 second time limit.

When it came to "general service" calls, 48 per cent were answered within 60 seconds on days when call volumes were below 17,500.

On days when the number of calls was above that, people waited an average of nearly six minutes for a reply.



Legislation was recently tabled in Parliament 0n 8th November, 2005  honouring Labour’s election promises to make student loans interest free and to expand the Working for Families package.

The family tax relief provisions raise the threshold at which family income assistance begins to abate from $27,500 to $35,000 and reduce the abatement rate from 30 per cent to 20 per cent.

The bill will be fast-tracked through all its stages before the House rises in mid-December so that the changes can take effect in the year beginning 1 April.

The interest free student loan policy would apply to existing and new loans and had been designed both to cut the cost to students of tertiary study and to encourage skilled New Zealanders to invest their skills in the New Zealand economy.    With some exceptions, people will have to be living in New Zealand to qualify for the interest free loans.

"Borrowers will be deemed to be non-resident when they have been out of the country for more than 183 consecutive days. Short visits [31 days or less] back to New Zealand will be counted as if the person had remained overseas.

"New Zealanders returning home will, after 183 days back in the country, have any interest charged on their loan from the first day of their return reversed. Trips overseas of 31 days or less will be counted as if the person had remained resident in New Zealand.

As a further inducement to encourage people back, non-resident borrowers who are in default for non-repayment of their loans will have their penalties cancelled under a special amnesty if between 1 April next year and 31 March 2007 they agree to keep their current liability up to date for two years.

Inland Revenue will have the discretion to exempt from the residency rule people, and the partners of people, who are overseas:

for postgraduate study;
in a work posting for a New Zealand-based employer;
working on a volunteer basis or for a token payment for a recognised charitable organisation, in which case the exemption will apply for up to two years;
on an unplanned period of absence - for example, visiting a sick parent;
unavoidably delayed from returning to New Zealand within 183 days due to unexpected circumstances such as illness.
For reasons relating to Inland Revenue's computer system, it would continue in the short term to charge interest during the year and write it off at the end of the year and that this would show on borrowers' statements but that it would be an administrative entry only.



One way to differentiate between these two sources of business funding is to think about it as being either equity or debt..

What is equity finance?

Very simply, equity finance represents the amount invested as capital into the business.

An investor, in return for a contribution to the capital of the business, receives a share of ownership. For example, if you have contributed all the capital to your business then you have 100% ownership. Alternatively, if you have a partner and you both contribute half of the capital then you would each have 50% share of the ownership (or whatever amount the partnership agreement dictates).

Equity finance means that you give up a portion of the ownership of your business in return for an investor contributing capital. Sources of equity investment include partnerships, business angels and venture capitalists.

One advantage of equity finance is that in return for giving up part of the ownership of your business you gain access both to the investor’s capital and to networks, managerial skills and expertise that you previously did not have.

For some businesses the use of equity finance can be the key to growth.

What is debt finance?

Debt finance is money you borrow that needs to be paid back, usually with interest.

It is the most common way that business owners gain access to the funds they need.

For most businesses debt finance is likely to be in the form of bank loans, from friends or families, overdrafts, or hire purchase and leasing agreements from finance companies and credit unions. Sometimes, particularly with bank or finance company loans, the amount you owe is secured over your personal assets, such as your house, holiday home or boat.

The major difference between funding your business through debt rather than equity finance is that with debt finance you retain full ownership of your business. Therefore while the risks remain yours, so do the rewards.




What does margin mean?  In plain English it means the difference between what we sell something for and what it costs to deliver to the customer or Cost of Goods Sold (COGS).  Margin is often expressed as Gross Profit which means the same thing.  Margin or Gross Profit is quite different from Net Profit.  Net Profit is calculated after taking into account Overheads which occur whether you sell something or not, whereas Margin is calculated after taking into account only those costs necessary to produce or deliver to the customer.   For example Rent is an overhead which occurs whether we sell something or not, whereas delivery cost of goods sold only occurs when you actually sell something.

Margin = Sales – Cost of Goods Sold
e.g. if you sell an item for $150 and your cost is $100 then your margin is $50 or 33.33%.

Margin can sometimes be confused with ‘Mark-up’.   

Mark-up is the amount or percentage that you ‘add on’ to the cost of a product or service to determine the sales price. e.g. if it costs you $100 to produce an item and your sales price is $150 then your mark-up is $50 or 50%.

Margin or Gross Profit is an important number to measure in any business whether it is product or service related.    Many businesses don’t measure Margin or Gross Profit regularly but wait and rely on their Accountant to tell them if they have made a Net Profit.     If you wait until well after the end of the tax year to find out this number your business could be in trouble and it could be too late to do anything about it.

In order to know if you will make a Net Profit you firstly need to know what your Margin will be before calculating your Overheads. If your Overheads outweigh your Margin then you will make a loss.

Margin is a vital number to measure in your business as variations can have a huge impact on many other results such as
• Net Profit
• Working Capital Requirement
• Cashflow
• Interest Cover

There are two ways to change your margin
• Price Change
• COGS Change

The first being Price change is mostly under your control.   It is vital to ensure you maintain your margin by regularly reviewing your pricing.  Small regular price changes are much easier to implement than rare big ones.  So it follows that the more often you analyse your margin and adjust prices to suit the more sustainable and profitable your business will be.

The second way to change margin is via COGS change.  This is one where you may have less control but nevertheless it needs to be constantly monitored in order to maintain margin.  We have a perfect example of COGS change occurring right now with oil price increases.  This phenomenon is having an impact on many items and consumers are the ones who will foot the bill by increased prices so that producers can maintain their margins.

Margin or Gross Profit is an important number to know when calculating Breakeven.   Breakeven is vital to know in business in order to determine if your business is sustainable and when it will make a profit.  reakeven is calculated by knowing what your overheads are and what your COGS are.  Once you know these two numbers you can calculate what you need to sell to breakeven.  This is particularly important to know in a business starting up as they often take a while to make a profit.  Funding is often required to cover the time until the business is in profit.

Lenders are particularly interested in business margin as they use this number to compare against the working capital requirement.  If the working capital requirement exceeds the margin then the business effectively has to borrow money to pay the interest on the loan.   This indicates a very unhealthy business from anyone’s perspective.   ‘Marginal Cashflow’ is the term used to describe the comparison of Gross Profit to Working Capital Requirement.

If you want to borrow money to grow your business then you need to have a really good handle on your Margin and how you plan to manage it. Lenders feel very uncomfortable with a business with erratic margins and no margin analysis in place.



A lease agreement is a major business commitment and therefore requires caution. If the building or location turns out to be unsuitable, you might (through a personal guarantee) find yourself and the business committed to several years’ rent, even though you may have moved out of the premises.

Check the Lease

Always get the lease checked by a lawyer with experience in commercial leasing who can spot unfavourable clauses. The lawyer can help you negotiate balanced terms.

Important tip: Despite its name, a preliminary ‘Agreement to lease’ document actually binds you to some essential terms that will appear in the final lease. Don’t sign it or any other document before you have your lawyer’s approval.

Length of the Lease

Whether you should sign a short-term or long-term lease depends on your circumstances. A new and relatively unproven business might see advantages in the freedom of a short-term lease (or even a sub-lease if one comes on the market) that allows it to test both the business concept and the location without longer-term financial commitment. A more stable and established business might value the security of a longer tenure and see considerable merit in renewal rights.

Most leases are medium term: for instance the 4 + 4 formula (four years lease with the right of renewal for another four years) is popular. Get advice from your lawyer and accountant on the term of your lease.

Suitability of the Premises

It’s important to do research before you sign a lease. For a destination business (a business like a supermarket or video shop that consumers need to visit), a good location (high foot and road traffic, good access and parking) is vital. Other businesses (for example, businesses that sell to other businesses) might be more concerned with good access for trucks and containers.

Also check if the Resource Management Act 1991 might apply.

Lease Checklist



Is it suitable? Is there sufficient parking? Easy access for customers and/or trucks making deliveries?

Future Changes

Is it a growth area or an area in decline? Will any future changes affect the premises? (For example, a new road plan that will divert traffic.) Check with your local authority. Find your local authority through the map at this link.

Room for Growth

If the business expands, is there room for growth? Can you make alterations?


Check that both the landlord and the local authority will permit the signage you need to promote your business. Find your local authority through the map at this link.

Tip: Signage is important and can work for the business 24 hours a day. Consider how people find a bank in a strange town: they typically look for the familiar signage.



Are there zoning or any other council or local authority restrictions? For example, is the site a heritage building with restrictions on improvements or renovations? Does your business require Resource Consent? (e.g. for dangerous goods storage, discharge of effluents or noisy activities)?

Assignment or Subletting

Can you assign or sublet the premises if you have to move out? What are the restrictions on doing this? When do your obligations cease? Can you negotiate better terms?


Can you get insurance? Who pays, and what is covered? (Note: retail premises may need plate glass insurance.) Do you need additional indemnity insurance? Consult an insurance broker. Is the inevitable building insurance included in or additional to the rent?

Safety and Security

Who is responsible for the building’s security? Is there a sprinkler or fire prevention system or do you need one to get insurance? Does the building comply with earthquake regulations?

Other Tenants

Are they doing well? How do they describe their relationship with the landlord? Does the landlord keep the building in good order?

Rent Negotiations

Sometimes a landlord may agree to a form of rent ‘holiday’, e.g. 50 percent of the agreed rent for the first three months of tenure. This is less likely for a building in high demand. Landlords with premises vacant for a long time may agree to reduced rent or to free redecoration or other concession.

Rent Reviews and Ratchet Clauses

How often do rent reviews occur? Is there an agreed formula for rent increases? What are the provisions for arbitration in the case of disagreement over increases and who pays the costs? (Note: arbitration can be expensive.) Is there a ratchet clause? Can this be altered or negotiated? Discuss with your lawyer.


Who is responsible for maintenance inside and outside the building and who pays? Make sure you understand your obligations.

Tip: take photographs when you move in to record the existing condition of the building.

Operating Expenses

Especially in a multi-tenanted building, check the building’s operating expenses. Are these reasonable and within your means?

Landlord’s Costs

Are you responsible for the landlord’s lawyer’s costs in concluding the lease? Can you share these costs or get them capped at an agreed limit?

Lawyer’s Approval

It’s important to include a clause in any document that any Agreement you sign is conditional on your lawyer’s approval.


The information provided in this email newsletter is for informational purposes only.   McLean and Co. accept no responsibility for the opinions and information expressed in the information provided and it is provided "as is" without warranty of any kind.    The user assumes the entire risk as to the accuracy and use of this document.   Readers are asked to seek professional advice pertaining to their own circumstances.    The McLean and Co. email newsletter may be copied and distributed subject to the following conditions:
All text must be copied without modification and all pages must be included.
This document must not be distributed for profit.    


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