THE McLEAN REPORT

 EDITION 29 DECEMBER 2006

 

 

Hello again!!!!  

The end of the year and Christmas is nigh.  

It’s been a really busy year for me. I continue to pick up new clients from all walks of business which makes the job so interesting and exciting.  

My family are off on our regular January holiday to Mount Maunganui in the first half of this coming January.  

Seasons Greetings to you and here’s wishing that you have an enjoyable festive season and the best of success in life and business.  

Kind regards

MURRAY McLEAN  

 

Inside…

PAGE 2

Tale of Two Entrepreneurs:

* Donald Trump

* Richard Branson

 

PAGE 3

Prison for Tax Evader

 

PAGE 4

How can you boost Gross Profit- in Dollars and G.P. Margin?

 

PAGE 5-6

Family Trusts

 

PAGE 7

20 Ways to Save on your Mortgage

 

PAGE 8

Tax Titbits:

* Depreciation Recovery

 

 

 

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www.mcleanandco.co.nz

 

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)  

            Page 1 December 2006 Newsletter

      McLEAN AND CO DECEMBER  2006  NEWSLETTER  PAGE 2     

 

TALE OF TWO ENTREPRENEURS  

Donald Trump - Billionaire Real Estate Tycoon and Host of The Apprentice

Donald Trump has a long list of accomplishments. While he may be best known in pop culture for The Apprentice, he built his reputation and his fortune (and lost it and built it again) in commercial real estate. He has developed some of Manhattan 's most prestigious office buildings, residences and hotels, as well as casinos, hotels and golf resorts in prime locations like Atlantic City , Palm Beach and Palm Springs . He is also owner of the Miss Universe, Miss USA and Miss Teen USA pageants.  

Early Life: Donald Trump was born June 14, 1946 , into a very privileged upbringing. He attended New York Military Academy and Fordham University before transferring to the Wharton School at University of Pennsylvania , where he received a bachelor's degree in economics in 1968. From there, he joined his father's real estate business in Brooklyn . "My father was my mentor and I learned a tremendous amount about every aspect of the construction industry from him," says Trump.  

Real Estate Boom: In the early 1970s, Trump shifted from his father's focus on middle-class rental housing and turned toward commercial real estate development. The city of New York was offering sizable tax breaks to willing investors. Trump's dealmaking skills allowed him to secure loans with little collateral. This was a powerful combination, which allowed him to build an empire in real estate and entertainment, becoming somewhat of a celebrity in the process.  

Bankruptcy: Though Trump is known for turning bad real estate into lots of money and understands the psychology of making deals, he still fell victim to the recession of the late 1980s. Unable to meet loan payments, he declared business bankruptcy in 1990. Rather than risking a court fight, his creditors agreed to a debt restructuring. He managed to stay out of personal bankruptcy, even though he had accumulated some $900 million in personal debt.  

Turnaround and Turnaround Again: Trump was forced to relinquish his new airline, Trump Shuttle, and to sell off his largest Manhattan real estate parcel. He did, however, oversee the construction of the buildings placed on the site, in exchange for a cash fee and a portion of future profits. By 1994, Trump had repaid much of his personal debt and some of the $3.5 billion in business debt. But the rollercoaster continued. In November 2004, Trump Hotels & Casino Resorts filed for Receivership, but emerged from it in May 2005.  

"The Donald": Nicknamed “The Donald,” Trump is popular for his extravagant, flamboyant, arrogant, cocky personality. Part of his business tactics is media exposure. He stands out from the others as he speaks his mind and will refuse your handshake as he sees it as a barbaric gesture to hand out germs. He criticizes others publicly and exploits his “know it all” intellect. He is a consummate self-promoter who understands the power of branding. The name "Trump" always appears in the name of his buildings. 

The Apprentice: Trump is host and producer of the reality series The Apprentice, where several lucky candidates fight to become part of his organization. Each week one contestant is asked by Trump to leave with the now-familiar, "You're fired!" (Trump has filed a trademark claim on the phrase). Trump was paid a mere $50,000 per episode for the first season, but is now paid a reported $3 million per episode. He has expanded The Apprentice with an additional series featuring Martha Stewart.  

Just How Much Is Trump Worth?: The Forbes 400 lists Trump's net worth as $2.7 billion. Trump himself claims to be worth over $5 billion. But an October 2005 New York Times Magazine article says that both of these claims are exaggerated, and that most likely he is not even a billionaire.  

Family Life: In 1977 Trump married fashion model Ivana Zelničkova and they have three children: Donald, Jr. (1977), Ivanka (1981) and Eric (1984). They were divorced in 1992. In 1993 he married actress Marla Maples, and together they have one child, Tiffany (1993). They divorced in 1999. In 1999, he began dating model Melanija Knavs, and they were married in 2005. Knavs gained some notoriety after a tell-all about her sex life with Trump on the Howard Stern show, followed by a nude layout in GQ magazine.

  

Richard Branson - The Rebel Billionaire and the Ultimate Multipreneur

Whether in business or in thrill-seeking, this billionaire can do it better than anyone else, or at least his track record says so. From building an empire of over 200 companies and 25,000 employees to breaking records in the air or on the water, Richard has done it all. How did he become one of the richest men in the world? The simple answer is he delivered old products and services in new ways while focusing on industries in which the customers were poorly served and serving them better.  

The Beginning: Born in England in 1950, he was an entrepreneur from the start. With two failed endeavours (growing Christmas trees and raising budgerigars) already under his belt, by the age of 16, this serial entrepreneur had begun his first successful company (a student magazine) and was on his way to extraordinary success. By the age of 20, he had founded a small mail order record retailer called Virgin, and shortly thereafter, he opened a record shop on Oxford Street in London .

 (cont. Page 3) 

      McLEAN AND CO DECEMBER  2006  NEWSLETTER  PAGE 3     

Virgin Tops the Charts: By 1972, Virgin had signed their first artist, Mike Oldfield. 5 million copies later, Virgin Music had made a name for itself, later signing household names such as the Sex Pistols, Culture Club, The Rolling Stones, Phil Collins, Genesis, and Janet Jackson. Crafty yet controversial, provocative yet memorable, Virgin was soon to be a world renowned brand name.

Virgin in the Air: Formed in 1984, Virgin Atlantic Airways was profitable in its first year. Its three classes of service - Economy, Premium Economy and Upper Class – include free in-flight drinks and meals, often including ice cream, and seat-back personal TVs, which was pioneered by Virgin. Upper Class passengers can request complimentary limousine service to and from the airport and have access to Virgin’s Clubhouse Lounge at London ’s Heathrow Airport , where massage and grooming services are available.  

Other Virgin Conquests: With an appetite for broken industries, Virgin has continued to diversify its interests. In 1997, Virgin attempted to redefine the railway industry with high-tech trains and an advanced level of service. In another move, the company launched Virgin Mobile. Appealing to the younger demographic, the company does not require contracts and puts a hip spin on the traditional cell phone business. Virgin even has its own soft drink and vodka, although neither has been a tremendous success.  

And Finally, the Coolest Virgin Endeavour: At $200,000 a pop, Virgin Galactic plans to take customers into suborbital space, offering customers the chance to experience weightlessness for seven minutes on a scaled up version of SpaceShipOne. Richard Branson and some of his closest family members will be on the inaugural flight some time in 2008.  

The Thrill-Seeker: Richard Branson has attempted several world record-breaking feats. In 1986, he crossed the Atlantic Ocean in a boat, in the fastest recorded time ever. The following year, he crossed the Atlantic in the Virgin Atlantic Flyer at speeds in excess of 130 mph. In 1991, at speeds of up to 245 mph, he crossed the Pacific, travelling 6,700 miles. Finally, in 1998, he made a record-breaking flight trying to circumnavigate the Earth that was cut short by bad weather, travelling from Morocco to Hawaii .  

Philanthropy: Having started his first charity at the age of 17, Richard has continued to be generous throughout his life. He is currently a trustee of multiple charities, including the Virgin Healthcare Foundation, a charity focused on AIDS and health education. Most recently, he pledged $3 billion over the next ten years to fight global warming in which he will invest all profits from his train and airline divisions in renewable or clean energy initiatives. 

Luck or Skill?: Benjamin Franklin once said, "The harder I work, the luckier I get." This surely holds true for Sir Richard Branson, who has worked tirelessly throughout his career. Even Sir Richard Branson himself agrees and has been quoted as saying, "We were lucky to sign Mike Oldfield and we were lucky to get hold of the Sex Pistols in 1977. We've also been lucky that people liked Virgin Atlantic's unique airline service across the Atlantic , and I was lucky to survive all my balloon and boat trips!" So, it is probably some combination of the two, but without skill, all the luck in the world would not result in one of Sir Richard Branson's greatest accomplishments – knighthood.

As impressive as his portfolio, his bank accounts, and his list of accomplishments may be, though, perhaps Branson's greatest accomplishment is in creating an absolutely fabulous life for himself. He travels the world, spending winter holidays with his family at his South African game preserve and summers at his private island in the Caribbean . As he put it in a 2003 interview with Fortune, "I don't think of work as work and play as play. It's all living."

 

PRISON FOR TAX EVADER

Recently a Hawkes Bay man was jailed for 18 months.    The reasons for the sentence were:

·        $176,000 was owed to IRD and he had no means to pay it back

·        there were 37 instances of failure to pay PAYE and failure to file tax returns

·        the offending had occurred over a six-year period and related to 92 different tax returns.

The moral of the story is obviously to file your tax returns and pay your taxes on due date.

 

      McLEAN AND CO DECEMBER  2006  NEWSLETTER PAGE 4     

HOW CAN YOU BOOST GROSS PROFIT- IN DOLLARS AND G.P. MARGIN?  

Very Important Tip
* higher prices are not the only way to boost gross profit margins - keep reading this LONG list!

Option 1 - Increase Dollars of Gross Profit by Increasing Total Sales
* make sure your advertising is effective - monitor each programme and either keep  it as-is, refine it, or drop it. Don't just change it for its own sake, if it works!
* make use of in-store displays and demonstrations
* make sure the exterior appearance and identification of the business is clean,  professional and helps customers find your store
* employ effective, hard-working
sal es staff (and train and motivate all people to stay  that way!)
* seek referrals from existing customers
* seek referrals from related businesses
* use staff incentives and competitions to encourage up-selling or
sal es of  companion lines - you can even use this to promote sal es of older stock items or  slow-moving stock
* measure the conversion rates in your business. For every 100 prospective  customers, how many ask for a propo
sal ? Of those, how many ask for a  demonstration? then how many eventually buy? Increasing the effectiveness of the  sal es process can lead to rapid increase in sal es, without any additional cost or  time.
* increase the average
sal es size:
• sell higher quality or enhanced features
• use merchandising and display to group related products together or to promote  seasonal lines
• stock displayed at close to eye-level generally sells better
• using more lineal space for a product generally promotes
sal es of that product (i.e.  allowing twice the shelf space will generally lift sal es of that product)
• look at your stock and
sal es mix to ensure that they closely match each other
• sell accessories or add-on products: either have your staff do this at point-of-
sal e,  or use signs and 'deals' in the store to encourage purchase of additional, related  items
* increase repeat trade from customers:
• through positive, friendly and helpful staff
sal es staff members' ability to understand customer needs - promoting only the  products of genuine value to the customer
• business image /appearance /housekeeping
• provide regular follow-up
• create 'clubs' for groups of customers; use newsletters or email or letters to tell them  about relevant products; run special events just for regular customers etc; add  promotional pieces into (e.g.) your mailings of monthly statements
• provide high quality service


Option 2 - Manage The Margin
These pointers largely influence the 'cost' aspect of 'Cost of Goods Sold'.  Improvements to gross margins can be achieved here without the firm's customers even realising what is going on.

Avoid the factors that reduce your closing stock:
* eliminate shoplifting of minor items with: vigilant staff; well-located cash registers; use of mirrors etc to provide good supervision of all areas
* eliminate staff pilferage of minor items, through suitable penalties, training, etc
* eliminate or minimise damage to stock while it is in storage or on display - place it in suitable locations and use display units to protect it
* make sure that all stock received is checked against delivery dockets or invoices, so that you only pay for what is actually received in good order and condition
* make sure damaged stock is returned to supplier for replacement or credit
 

(cont Page 5)

      McLEAN AND CO DECEMBER 2006  NEWSLETTER PAGE 5     

Eliminate or minimise high-cost purchases:
* avoid placing too many small orders with high freight costs
* avoid dealing with too many suppliers - you'll lose quantity discounts
* avoid carrying too wide a range of stock (again, losing the scope for volume  discounts)
* take advantage of settlement discounts where they are worthwhile
* plan purchases according to likely demand or seasonal factors

Eliminate 'Depressed Sales Values' from the level of stock sold:
* check your pricing practices (inaccurate cost prices lead to incorrect
sal es prices)
* make sure you re-price stock (e.g. on old lines, or after a promotion)
* make sure your
sal es mix blends sal es of the low-margin items with sal es of higher  margin lines
* improve merchandising and display to encourage customers to buy products they  reasonably need
* eliminate excessive discounting (e.g. 'mates rates') by your staff
* minimise the extent of heavily-discounted 'end of season clearance
sal es'

Option 3 - Look at Your Prices
Check your pricing:
* adjust your markups so that your prices are not out of line with competitors' prices
* price some stock lines to keep customers coming back, then set a suitable margin  on the related product
sal es
* make sure all stock on hand is priced consistently (don't let customers pick the  cheapest from amongst identical items on the shelves)
* use technology to make price changes quicker and easier; or to create price tags  etc

 

FAMILY TRUSTS

The following comments relate generally to discretionary family trusts. They are intended to be by way of introductory comment only. Any person considering setting up a trust should seek specific specialist legal advice.

A Family Trust can be used to good effect to achieve a number of purposes including:

    * protecting the long term interests of yourself, your spouse and your children.

    * removing assets from the scope of family protection or testamentary promise actions

    * protecting your assets against claims by future creditors and predators.

    * protecting your assets against matrimonial property claims including the interests of your children against claims by their spouses

and incidentally

    * possibly maximising the benefits that can be obtained from Work and Income New Zealand

    * possibly obtaining other tax benefits including avoidance of the impact of some form of capital gains tax or other replacement for estate duty

    * enabling greater income tax deduction of charitable gifts

Separate Entity

A trust is a separate entity for tax purposes and is established by a Trust Deed. Under the trust deed the settlor, appoints trustees, usually a minimum of two, often three people, to hold the trust fund (usually started with a minimum of $10.00) on behalf of beneficiaries. Beneficiaries are usually discretionary with the trustees exercising their discretion in favour of particular beneficiaries from time to time.

      McLEAN AND CO DECEMBER 2006 NEWSLETTER PAGE 6    

Traditionally in family situations, "cross trusts" were used where one spouse settles a trust in favour of the other spouse, with the children as subsequent beneficiaries, and similarly the other spouse settles a trust in favour of the other spouse and the children. Since the abolition of death duties in December 1992 numerous commentators have stated that there is no necessity for the settlor to be separate from the beneficiaries in a trust.

As a consequence it is now common to have one trust covering the interests of both spouses and the children. Both spouses can be the trustees, although it is always desirable that there be at least one other independent trustee as well.
 

Settlor

The settlor is usually the person or persons who will be transferring assets to the trust. In the case of a couple who intend transferring jointly owned assets to a trust both should be trustees as the settlor usually retains the right to appoint and remove trustees who often also have the right to appoint additional beneficiaries to the trust.

Some opinion suggests that for tax purposes the settlor should be some unrelated individual but we this doesn’t to have any advantage as the Inland Revenue Department will deem all individuals who transfer assets to a trust to have the same status as settlors.


Trustees

The trustees often may include the settlor or settlors and possibly family members. It is recommended that an independent trustee should also be appointed, often a lawyer or accountant. Without an independent trustee there is a much greater risk of the trust being defeated in a challenge by a creditor, the Inland Revenue or Income Support as being a sham. When choosing an independent trustee the settlor(s) should consider carefully the ramifications of the need to remove the independent trustee in the future - appointing a friend may also mean that upon removal not only a trustee is lost but also a friend.
 
The trustees control the assets of a trust and usually determine which beneficiaries benefit from the trust.


Beneficiaries

The beneficiaries can be whomever you wish and may include yourself, your spouse, your children, your grandchildren and such other people or organisations as you choose. As a result of changes to the accrual rules under the Income Tax Act 1994, beneficiaries should usually be natural persons for whom the settlor(s) have natural love and affection, or be tax exempt organisations, particularly charities. Otherwise an income tax liability may arise in the hands of the trustees on distribution to a beneficiary outside that definition. Most family trusts to be effective are discretionary with the trustees determining who receives income and capital.

With a discretionary trust an individual may be named as a beneficiary or come within a class of beneficiaries but unless the trustees exercise their discretion in that individual's favour the individual will not have any right or claim to any of the assets of the trust.


Memorandum of Wishes

A Memorandum of Wishes is usually completed by the settlor to indicate to the trustees how the settlor wishes the trust to be administered. The memorandum cannot be binding on the trustees or it will destroy the benefits of the discretionary nature of the trust.


Term

A trust is usually settled with capacity to run for up to the maximum term of 80 years. The term of the trust can be shortened should the trustees so wish but if the life of the trust is less than seven years, tax implications may arise where tax benefits have been gained through the use of the trust.
  

      McLEAN AND CO DECEMBER 2006 NEWSLETTER PAGE 7    

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.     Forget honeymoon rates and gifts.  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 up front 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 MARCH 2006 NEWSLETTER PAGE 8    

TAX TITBITS

DEPRECIATION RECOVERY

When you cease a business, sell or  dispose of a business asset, an adjustment is necessary in your end of year tax return to account for the gain or loss.  A gain is included as gross income and a loss (except buildings) as an allowable deduction.

Ceasing Business

Where an asset ceases to be used in a business, or if you cease business and don't sell your business assets immediately or if they are kept for private use, the loss or gain must be accounted for using the market value of the assets as at the beginning of the next income year.  You will have to make an adjustment in your income tax return for the year after the business ceased or the asset changed use, even if the loss or gain is not realised until a later income year.

Selling an Asset

When you sell or dispose of an asset (other than a pooled asset) for a different amount from its adjusted tax value, you must make an adjustment in your end of year tax return to account for the loss or gain. The adjustment is generally made in the year you sell or dispose of an asset except when the business has ceased (see above). 

You cannot claim a deduction for depreciation in the year that you dispose of an asset, except in the case of buildings.

Example:

 

Computer Purchased for  

$2,500.00

 

Deemed Depreciation Claimed

$1,000.00

 

 

________

 

Adjusted Tax Value (or Written Down Value)

$1,500.00

 

 

 

 

Computer Sold For

$1,900.00

 

 

________

 

Depreciation Recovered

$   400.00

 

 

 

 

The $400.00 is depreciation recovered and must be included in your income tax return as income in the tax year the computer was sold.

   

 

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 2006 OR EARLIER  INCOME TAX RETURNS?

We suggest you contact ourselves quickly  if you have  not as yet provided your records for the processing of your 2006 or earlier 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:

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

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