THE   McLEAN   REPORT

  EDITION 25 DECEMBER 2004    

 

 

Welcome again and Hi

 

Hello again!!!!

 

Merry Christmas to all my clients and readers of this Newsletter.    Here’s wishing you a enjoyable and happy festive season and a successful 2005.  I’m looking forward to mine , and I’m sure you’re also looking forward to yours.

 

Due  to the fact that I will be away on holiday  January 5-12 2005 the office will be closed over that period.

 

Kind regards

 

MURRAY McLEAN

 

 

Inside…

PAGE 2

Golden Rules of Investment

 

PAGE 3

Golden Rules of Investment cont.

 

PAGE 4

20 Ways to Save on your Home Mortgage

 

PAGE 5

Tax Titbits

 

PAGE 6

Tax Titbits cont

 

PAGE 7

How Much is Enough for Retirement?

 

 

 

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McLEAN AND CO.  

 DIRECTORY  

Manager

Murray McLean , C.A. (Chartered Accountant)., Diploma in  Business Studies (Taxation Consultancy),   Diploma in Business Studies (Personal Financial Planning)  

Address

133 Main Rd , Clive , New Zealand

P.O. Box 10 , Clive , New Zealand  

Office Telephone Number

 ( Hawkes Bay STD Code 06) 8700952  

Office Facsimile Number

( Hawkes Bay STD Code 06) 8700955  

Web Sites

www.mcleanandco.co.nz

www.taxreturns.co.nz

www.taxreturnz.co.nz  

Email Address

murray@mcleanandco.co.nz

murray@taxreturns.co.nz

murray@taxreturnz.co.nz  

Memberships

**  Institute of Chartered Accountants of New Zealand   (with Certificate of Public Practice)

**   Taxation Institute of New Zealand

 

            Page 1 December 2004 Newsletter

      McLEAN AND CO DECEMBER 2004 NEWSLETTER PAGE 2     

GOLDEN RULES OF INVESTMENT

Understanding core principles of investing usually dictates the success or failure of any wealth building strategy.   The following are key investing principles  and the building blocks upon which successful plans are formulated:

Compound Interest

Compound interest works like this.   When you invest money you earn interest on your capital.   The next year you earn interest on both your original capital and the interest from the first year.   In the third year you earn interest on your capital and the first two year's interest.   It’s very much like a snowball effect.   As your capital accumulates interest, and interest and interest, it becomes bigger and bigger.

Dollar Cost Averaging

Purchasing your selected shares, or units in a managed fund, is best accomplished at a slow and steady rate over time, regardless of whether you think the market is about to rise or fall.   This approach, known as Dollar Cost Averaging, is a common way to remove the risk associated with making a large investment at any point of time, particularly when markets have been rising and may be ready for a correction.   This strategy not only helps to remove the emotional aspect of investing- it enforces discipline.  When market prices are falling, you get the benefit of automatically buying more units in a fund with each subsequent investment.  When prices are rising, you are buying fewer units.  The beauty of all this is the outcome- because you are buying more units when prices are lower and fewer units when prices are higher, the average cost of your units will be below the average cost of all units., assuming the market rises over time.

Don't Attempt to Time the Market

"Market timing" is buying and selling your investments based on a belief that you can pick the markets are heading in the short term.   Share market growth has often come in dramatic spurts that can easily be missed if you're sitting on the sidelines waiting for an anticipated correction or bear market to occur.    As the 1990s have shown us, the experts are often more wrong than right when they try to predict an upcoming market downturn.  Unless you have a crystal ball, your chances of picking market movements in the short term are minimal.   Trying to predict where the share market is heading can be a dangerous game that can lead to missed opportunities if you guess wrong.  Over the 569 months to June 2004, the New Zealand share market achieved over a quarter of its growth during the best 12 months of market performance.   Put differently, the New Zealand share market returned 12.7% per annum during this period.  If you were invested in shares for all but the 12 best months, your return would only have been 8.7% .

Stay in the Market for the Long Haul

Time has two beneficial properties- reinforcing the power of compound interest and reducing the risk of negative outcome.   It is important to understand that share markets are naturally volatile creatures. And in most cases managed funds will set a timeframe by which you can expect the fund to meet its target return- usually 5 years or longer.  Beware that not every year will result in a positive return on your investment.

Combat Risk with Diversification

Diversification is one of the most fundamental rules of investing, so much so that professional portfolio managers live by it.   Diversification- spreading your money among many different investments, takes a middle road through the highs and lows of market performance, allowing your investment the opportunity to grow regularly with fewer fluctuations along the way.   Diversification is the most effective means of managing risk.   You'll be less affected by losses in any one investment and losses may even be offset by gains in other investments.  When diversifying remember to:  

      McLEAN AND CO DECEMBER  2004 NEWSLETTER PAGE 3     

1.        Reduce security or sector- specific risk-   purchase a broad range of investments across various companies and industries rather than a limited selection of individual securities.   This way, no single investment will dominate the performance of your portfolio

2.        Spread your money across the different asset classes (shares, property, fixed income and cash)-  each asset class has its own risk and return attributes.   Because the risks of one asset may complement the risks of another (asset classes often move in different directions and react differently to information), it may be possible to achieve higher investment earnings and reduce your portfolio's volatility.

Understand the Risk/ Return Trade Off

Asset allocation is the key to meeting your objectives-  it is often quoted that asset allocation explains 80-90% of a portfolio's absolute return.  Investing almost always requires you to trade off your desire for higher returns with your desire to control risk.  Too little return and you will not reach your financial goals.  Too much risk and you will not sleep at night.  Invariably investments advertised as providing high returns have greater risk associated with them than investments advertising mid stream or lower returns.  The solution to this problem is getting the asset mix right- cash, bonds, shares, property etc. and how much of each.   If you get your mix right, your portfolio is more likely to deliver what you expect.  Once you have decided upon a mix it is important to stick to it, unless your circumstances change.

Do Not Look at Past Performance to Pick Managers

Past performance is a very poor guide to future performance.   Investment manager selection should not be totally based on track records.   Of the 3 managers who finished in the top 25% returns on New Zealand domestic share funds in 2001 only 1 finished in the top 25% in 2003 also.

Rebalance your Asset Mix to stay True to your Tolerance to Risk

 As time goes by and markets experience ups and downs, your portfolio will experience gains in some asset classes and losses in others, causing your strategic asset allocation and actual portfolio to become unsynchronised.   This raises the need to make adjustments to counteract the fact that different asset classes have performed differently, and as a result now comprise different percentage of your portfolio.   This can be dome by:

1.        Adopting the Robin Hood rebalancing strategy- take from the rich (high performing assets) and give to the poor (poor performing assets)

2.        Buying new units in the under performing asset classes

3.        Let it ride, and let the market's natural cycle rebalance for you.

Allow for Inflation

Inflation- the increase in the price of goods and services, can wreck havoc on a long term investor's money.   Unless your returns keep balance with inflation, the value of your money erodes.  Your investments should be evaluated not only for their returns before inflation (nominal returns) but also for their returns after inflation.   A dollar invested in NZ Bonds between 1937 and 2003 earned a 6.7% average annual return.  Yet, according to the New Zealand Consumer Price Index, inflation during the same period averaged 5.7%.  The real rate of return for Bonds?   1%.   A dollar invested in New Zealand Shares over this period generated a 10.0% average annual return.  The real return- 4.3%.   That's over 4 times better than Bonds.

Call in the Experts

It can be a  good idea to discuss your investment strategies with financial industry professionals-  they may be able to assist in creating an investment strategy based on your particular circumstances and assist you in taking on appropriate investments.   

      McLEAN AND CO DECEMBER  2004 NEWSLETTER PAGE 4     

20 WAYS TO SAVE ON YOUR HOME MORTGAGE  

Everyone wants to pay of his or her mortgage quickly, with the minimum of cash outlay.   Here are a number of pointers to let you do just that-  check them all or those of interest to you personally:

1.        Reduce your term.  Your monthly payments will be slightly more but you will save a lot of interest in the long run

2.        Pay more than you are required to

3.        Make additional payments occasionally

4.        Pay at a higher repayment rate

5.        Pay fortnightly or even weekly instead of monthly

6.        Switch to a lender with a lower rate

7.        Shop around , particularly to some of the new non-bank lenders

8.        Choose a loan product that suits your personal circumstances. 

9.        Split your loan between fixed and floating to hedge your bets

10.      Research various lenders and stay in contact once you have you mortgage

11.      Some lenders offer a lower introductory interest rate or a gift if you take out a mortgage with them.   You should investigate these to ensure there are no hidden costs or pitfalls.

12.      Consolidate all your debts.  e.g. consolidate debts with high interest rates into a debt with a lower interest rate

13.      Avoid bridging finance.   You pay more for bridging finance and there are usually more costs involved

14.     Make sure your loan can be transferred- can you transfer the mortgage if you move house during the term

15.     Pay all the fees up front if you can.   If your cashflow permits it pay these costs upfront rather than adding them to the mortgage.   This means you are borrowing less and you will pay your mortgage off quicker

16.     Develop a relationship with a particular individual in the brokerage company you are dealing with

17.     Use your broker- ensure they shop around for the best deal for you, explain the advantages and disadvantages of each deal, and then you decide.

18.     Selling and then buying- watch those agent’s fees- research different agents- can you sell your house yourself and avoid fees?

19.     Buying a home or rental investment property-  never pay the asking price. Do not let emotion rule your decision

20.     Trusts and other financial structures- you should look at structures which may give you tax savings or suit your long term asset planning.

 

      McLEAN AND CO DECEMBER  2004 NEWSLETTER PAGE 5     

TAX TITBITS

CHRISTMAS GIFTS AND THE ENTERTAINMENT TAX REGIME

Basically, any gift to a client or supplier which is in the nature of “entertainment”, such as food and wine, will be subject to the entertainment regime and the deduction will be limited to 50%.

Gifts which are not “entertainment” e.g. book vouchers, are 100% deductible.

CLAIMING GST WHEN YOU PURCHASE AN ASSET ON HIRE PURCHASE

You can claim GST on the full cost of an asset you purchase on hire purchase in the first month of the repayments. The reason for this is that subsequent payments will include loan repayment plus interest and both are exempt from GST.

SECOND HAND GOODS- RECORD KEEPING REQUIREMENTS

It is allowable to claim GST on second hand goods which are purchased for business use even though they may be purchased from a non-GST registered supplier.  In many cases you will not receive an Invoice. You should, however, keep a record of:

·          The name and address of the supplier

·          The date upon which the second hand goods were acquired

·          A description of the goods supplied

·          The quantity or volume of the goods supplied, and

·          The consideration for the supply.

DEDUCTIBILITY OF EXPENSES ON EMPTY RENTAL PROPERTY

It is generally accepted by IRD that there are periods where no rental income is derived from a rental property because of a change in tenancy or because a property is undergoing repairs.  However, if a property was empty for a significant period, IRD would need to be satisfied that there remained an intention of making a profit.   In this respect, it is necessary for the property owner to show that he/ she has actively marketed the property for rental purposes.  IRD may require evidence such as advertisements lodged or confirmation from a letting agent that the property was on the books as a rental.

TIMEFRAMES FOR TAX REFUNDS

Under current law, taxpayers are able to claim refunds up to a period of eight years for excess tax paid.  In proposed legislation, that timeframe reduces to four years except where there has been a “clear mistake” or “simple oversight” on the taxpayer’s part. To date IRD has not been forthcoming about what it considers to be a clear mistake or simple oversight.

LIABILITY FOR PROVISIONAL TAX IN THE FIRST YEAR OF TRADING- DIFFERENCE BETWEEN SELF EMPLOYED PERSONS AND PARTNERS AND COMPANIES

A person commencing person as a sole trader, or a member of a partnership who is allocated a share of partnership profits, or a shareholder in a company who is allocated shareholders sal ary, is not compelled to pay Provisional Tax in the first year of trading and will not be liable for IRD penalties if the Residual Income Tax calculated at the end of that first year of trading is $2500.00 or more.

However if the Residual Income Tax of a Company in the first year of trading is in excess of $2500.00 it is necessary for the company to pay Provisional Tax in that first year, and interest will be charged by IRD due to lack of paying this.

      McLEAN AND CO DECEMBER  2004 NEWSLETTER PAGE 6    

TAX TITBITS

DEDUCTIONS FOR STOLEN MONEY

There has recently been publicity about frauds perpetrated by dishonest tax agents who paid client’s tax  refund cheques and client’s cheques made out to IRD into their own bank accounts.   One question that arises is whether the clients can claim a tax deduction for the losses?

Section DB 33 of the Income Tax 2004 allows a taxpayer carrying on a business a deduction for losses incurred as a result of misappropriation of any property by a person who is employed by, or who renders services to the taxpayer for the purposes of that business.

The deduction applies to all types of property, so can include cash, trading stock or fixed assets.  No distinction is made between revenue or capital items.  The deduction is available in the year the loss is ascertained or such earlier year as the Commissioner considers equitable.

There are some exceptions.   Losses cannot be claimed when:

·          the amount has already been taken into account in calculating the income, such as cash or cheques stolen but claimed as items of expenditure, or

·          the theft is perpetrated by a relative of the taxpayer, or in the case of a company, by an associated person or a relative of the associated person, or in the case of a trust, by the creator of the trust, settler, or a beneficiary

The loss also needs to have been incurred in the course of carrying on of the taxpayer’s business.   In the case of tax agents, the agent would need to have carried out the theft in the course of rendering services to the taxpayer’s business for the loss to be deductible.

Any amount deducted that is subsequently recovered, whether through insurance or restitution etc, is gross income in the year of recovery

WHEN DOES YOUR HOBBY BECOME A BUSINESS?  

You are probably operating a business if you charge other people for the goods/ services you produce, you supply your goods/ services on a regular basis and you intend to make a profit from supplying your goods/ services.  

PROTECTIVE CLOTHING AND UNIFORMS  

Generally the purchase, replacement or maintenance of conventional clothing is not tax deductible.   However, a deduction may be allowed when the clothing is necessary and peculiar to your business, or where abnormal expenditure is incurred on conventional clothing.

Uniforms

In order to qualify for a deduction, uniform items must be clothing that would not be normally be worn for private purposes and can be uniquely identified with your business.   The unique identifier could be a prominently displayed permanent logo or the uniform’s distinctive pattern, colour scheme or style  

Protective Clothing

Protective clothing is deductible providing the items are purchased for work.   This is likely to include:   hard hats, safety goggles, work gloves, milking aprons, work boots, leggings, ear muffs, overalls and rainwear.  

The protective clothing costs are not deductible if the items are purchased for a non-business activity,  such as fancy dress or a hobby.   Underclothes, socks, jeans, shirts and jerseys are conventional clothing items.   Only in rare circumstances will these be regarded as protective clothing.  

McLEAN AND CO DECEMBER 2004 NEWSLETTER PAGE 7    

 

HOW MUCH IS ENOUGH FOR RETIREMENT?  

In New Zealand today there are just over 150 people who are over 100 years of age.  Government statisticians are predicting that by the year 2050, there will be over 15,000 people who are over 100 years of age.  Medical advancement now allows us to have nearly any body part replaced, and each successive generation can expect to live longer than their parents.  It is no wonder that politicians are concerned that Government superannuation will not be able to support the aging population in the future, and that the eligibility age might have to be increased.  

Should we be saving for our retirement or paying off our mortgage?  For most of us, we should be clearing debt first and paying our mortgages as fast as we can.  However, with most Kiwis, once they have paid their mortgages, they start to enjoy their improved financial position and buy a new car, renovate the kitchen, go on overseas holidays or buy a bigger and better house and put themselves into debt again.  Meanwhile, one year, two years, or five years go by and while these Kiwis have a great time, their financial position does not improve.  While paying your mortgage should be your first financial priority, you must also ensure than once it is paid, you use the same savings regime to build a nest egg for your retirement.  

Why can’t we rely on the Government to support us in retirement?  Well we can under the present superannuation allowances, so long as we happy to stay close to home.  A married couple, each 65 or over, will receive $383.22 after tax each week in superannuation.  While some superannuitants can live on this income, they do live a very frugal lifestyle.  If you want to travel, visit the grand children and buy them nice presents, or go the rugby or cricket  tests in Wellington and Auckland, then you will need to have a retirement nest egg to supplement your Government superannuation……assuming it is still there when you turn 65!   

How much will you need in retirement?  That depends entirely on the lifestyle you want to lead, how much you want to leave your children, and how long you are likely to live.  I was recently advising a 67 year old client who was adamant he needed $1 million before he could retire.  He argued that he could live on the $50,000 income this (bank) investment would generate.  When asked how much he wanted to leave his children, he said that they had no expectation of inheritance, so I suggested that if he started spending some of the capital in his investment, he could retire tomorrow.  His children would much prefer to have him around now enjoying his retirement than going to his grave early and leaving a huge legacy behind.  I have never heard of anyone on their death bed saying they wished they had spent more time at work!

(Article supplied by Paul Gallagher, Integrate Financial Services, Havelock North)

 

All information in this newsletter is to the best of the authors' knowledge true and accurate.  No liability is assumed by the author, or publisher, for any losses suffered by any person relying directly or indirectly upon this newsletter.  It is recommended that clients should consult a professional adviser before acting upon this information.

 ARE YOU OVERDUE IN FILING YOUR 2004 INCOME TAX RETURN?  

We suggest you contact ourselves quickly  if you have  not as yet provided your records for the processing of your 2004 Income Tax Returns.            This will enable you to ascertain your tax position, pay any taxes on due date, avoid any potential penalties and interest oncosts, and meet your IRD filing requirements.    We are pleased to assist you in this service.

 

 

 

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

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