THE McLEAN REPORT

 EDITION 32 DECEMBER 2007

   

Welcome again and Hi

 

Hello again!!!!

 

Well, well, well- hasnít the year gone fast.

 

It has been a year full of change for a number of tax related matters. This issue covers recent and future tax changes.  

Seasons greetings to all clients. May you have an enjoyable festive season and may 2008 be fruitful for you.  

Myself, Iím off to my usual holiday spot in Mount Maunganui in January 2008 for some  well earned (at least I think so)  R & R..  May you all enjoy any holiday breaks you have arranged too.  

 Kind regards

 

MURRAY McLEAN

 

InsideÖ

PAGE 2/3

Quotations from famous Entrepreneurs.

 

PAGE 3

Business Tax Changes

 

PAGE 3

GST Returns- Sending these to IRD

 

PAGE 4

Saving with PIES

 

PAGE 5/6/7

Property Transactions

 

PAGE 7/8/9

Aligning Provisional Tax with GST Returns

 

 

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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)

 

            Page 1 December 2007 Newsletter 

      McLEAN AND CO DECEMBER 2007  NEWSLETTER  PAGE 2     

QUOTATIONS FROM FAMOUS ENTREPRENEURS ON ENTREPRENEURSHIP

 

"When you reach an obstacle, turn it into an opportunity. You have the choice. You can overcome and be a winner, or you can allow it to overcome you and be a loser. The choice is yours and yours alone. Refuse to throw in the towel. Go that extra mile that failures refuse to travel. It is far better to be exhausted from success than to be rested from failure."
- Mary Kay Ash, founder of Mary Kay Cosmetics

"An entrepreneur tends to bite off a little more than he can chew hoping he'll quickly learn how to chew it.
- Roy Ash, co-founder of Litton Industries

"Business opportunities are like buses, there's always another one coming."
- Richard Branson, founder of Virgin Enterprises

It's as simple as that. A lot of people have ideas, but there are few who decide to do something about them now. Not tomorrow. Not next week. But today. The true entrepreneur is a doer, not a dreamer."
- Nolan Bushnell, founder of Atari and Chuck E. Cheese's

"Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service. It is capable of being presented as a discipline, capable of being learned, capable of being practiced. Entrepreneurs need to search purposefully for the sources of innovation, the changes and their symptoms that indicate opportunities for successful innovation. And they need to know and to apply the principles of successful innovation."
- Peter F. Drucker, "The Father of Modern Management"

"I never perfected an invention that I did not think about in terms of the service it might give others... I find out what the world needs, then I proceed to invent."
- Thomas Edison

"The important thing is not being afraid to take a chance. Remember, the greatest failure is to not try. Once you find something you love to do, be the best at doing it."
- Debbi Fields, founder of Mrs. Fields Cookies

"We were young, but we had good advice and good ideas and lots of enthusiasm."
- Bill Gates, founder of Microsoft Corporation

"Our success has really been based on partnerships from the very beginning."
- Bill Gates

"Entrepreneurs are risk takers, willing to roll the dice with their money or reputation on the line in support of an idea or enterprise. They willingly assume responsibility for the success or failure of a venture and are answerable for all its facets."
- Victor Kiam, best known for his "I liked it so much, I bought the company" ads for Remington electric shavers

"If it really was a no-brainer to make it on your own in business there'd be millions of no-brained, harebrained, and otherwise dubiously brained individuals quitting their day jobs and hanging out their own shingles. Nobody would be left to round out the workforce and execute the business plan."
- Bill Rancic, winner on Donald Trump's "The Apprentice"

"The cover-your-butt mentality of the workplace will get you only so far. The follow-your-gut mentality of the entrepreneur has the potential to take you anywhere you want to go or run you right out of business--but it's a whole lot more fun, don't you think?"
- Bill Rancic

"Nobody talks about entrepreneurship as survival, but that's exactly what it is and what nurtures creative thinking. Running that first shop taught me business is not financial science; it's about trading: buying and selling."
- Anita Roddick, founder of The Body Shop

 

(cont Page 3)

      McLEAN AND CO DECEMBER 2007  NEWSLETTER  PAGE 3     

"I have always found that my view of success has been iconoclastic: success to me is not about money or status or fame, its about finding a livelihood that brings me joy and self-sufficiency and a sense of contributing to the world."
- Anita Roddick

"Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper. The second is that you're generally better off sticking with what you know. And the third is that sometimes your best investments are the ones you don't make."
- Donald Trump, real estate and entertainment mogul

"My son is now an 'entrepreneur'. That's what you're called when you don't have a job."
- Ted Turner, broadcasting entrepreneur

"I had to make my own living and my own opportunity! But I made it! Don't sit down and wait for the opportunities to come. Get up and make them!"
- Madam C.J. Walker, creator of a popular line of African-American hair care products and
America 's first black female millionaire

 

BUSINESS TAX CHANGES

 Two key tax changes for businesses were introduced by the government in the 2007 Budget

          A cut in the company tax rate from 33% to 30%, for all companies and some saving vehicles, to take effect from 1 April 2008

          A proposed 15% tax credit for businesses doing qualifying research and development .  Businesses will be able to claim the tax credit in conjunction with their normal tax return process.

 

GST RETURNS- SENDING THESE TO IRD

When your GST returns and payments are due,  remember to continue sending in your completed return along with the payment slip and your payment - IRD need the information and calculations on your GST return to process these.

Since IRD removed the carbon copy from the GST returns, some taxpayers have been detaching and sending in just the bottom payment slip portion of their returns with their payments. This has meant that IRD have been unable to process them.

Although you don't need to keep a copy of your GST returns by law, it is strongly suggested that you  take a photocopy or scan a copy for your own records. However, if you do this, please remember to send IRD  your original signed returns.  As Accountants we require the copies for your year end accounts preparation service.

 

PLEASE ADVISE US IF YOU GIVE OUR NAME TO THIRD PARTIES WHO ARE LIKELY TO RING US FOR FINANCIAL INFORMATION ABOUT YOURSELVES

We frequently get calls from the likes of finance brokers and credit card companies requesting financial information about clients, which we are happy to do to assist our clients.   These are usually legitimate calls from these third parties in response to clients applying for loan finance, hire purchase agreements, credit cards and the like.  However we adopt a policy that we do not disclose any client's financial information to any third parties unless we have specific approval by the client to give that information- from our point of view if the call is not legitimate and we provide personal information we could face significant consequences.  If we do not have this approval we refuse to give the information to the third party, which may cause some holdups in requirements of clients.   It is requested and suggested that if clients give our name to such financiers as a referral or source of information in support of such an Application (which usually means that the third party will ring us to obtain personal financial information) that we are contacted immediately and given approval to release any personal financial information that may be required in support of the Application. 

       McLEAN AND CO DECEMBER 2007  NEWSLETTER PAGE 4      

SAVING WITH PIES

From 1 October 2007 , the taxation  of income from New Zealand managed funds is subject to the introduction of Portfolio Investment Entities (PIES)

WHAT IS A PIE?

A PIE is a new class of collective investment vehicle for companies or managed funds that meet ce4rtain criteria and elect to be subject to PIR rules.   One of the key changes is that under the new rules, a PIE pays tax on behalf of New Zealand resident investors at the investorís elected tax rate, or Prescribed Investor Rate (PIR).  This is instead of the flat rate of 33% that occurred prior to that date.  An investorís PIR broadly reflects their personal tax rate in the last two income years.  There are two valid PIRS for individuals, 19.5% or 33%.  The top PIR rate will reduce from 33% to 30% from 1 April 2008 .

Investments held in joint names, with investors on different tax rates, will have tax deducted at the higher investors PIR rate. And investments held through trusts can elect to have PIR deducted at 0% or 33%.

There is a need to advise your PIR and IRD Number to the financial institution you deal with- many Financial Institutions would have asked you for this.  If you donít advise the Portfolio Tax Rate Entity (PTRE)  the PIR and IRD Number to their PIR, then the PTRE will apply at the default rate of 30% (33% from 1 April 2008 ) The fund will then pay the tax on your behalf by selling units in the PIE to reflect the tax payable. They then pay the tax to IRD (or obtain any tax refund due).  This takes place either at the end of the year or when you fully withdraw from a PIE.  You will be provided with a Tax Certificate at the end of the year, detailing your PIE income, foreign tax credits, New Zealand tax credits and the PIE tax paid or refund received.

HOW CAN THIS BE BENEFICIAL TO INVESTORS?

The PIES will be beneficial to investors in the following manners:

          PIES investing in New Zealand and certain Australian shares will not be taxed on any gains made when the fund sells the shares.  Only the dividend income from these shares is taxable.

          If you are on the 19.5% or 33% marginal tax rate, tax will be paid at your correct rate and you will not pay any more tax than you need to.   From 1 April 2008 , those on the 33% marginal tax rate will pay tax at no more than 30%.

          If your marginal tax rate is 30%, you will have tax deducted from PIE income at 33% (or 30% from 1 April 2008 .

          As long as you provide your correct PIR, the tax deducted on your investment income will be final tax and does not need to be included in your tax return.

          Income earned via a PIE will not affect your entitlements to family assistance (under Working for Families) student loan repayment and child support obligations.

          If however you provide a PIR thatís lower than your correct rate then the income allocated by the PTRE is not excluded income.  This means you will need to include this income in your tax return, and it may be taxed at 39% if your total income puts you into this tax bracket, and possibly effect any child support and student loan payments.  The tax paid  on this income would be allowed as a credit in your tax return

          Dividends or distributions received from PIEs are not separately taxable and are not required to be included in your tax return.

PROPERTY TRANSACTIONS- QUESTIONS AND ANSWERS

When is the sal e of a property taxable?

Under current law, income tax may apply to profits made on property sal es in a range of circumstances:

When land was bought with the intent to resell.
When land has been developed or subdivided.
When the seller is a dealer in land or a builder, or is associated with a builder dealer or developer.

In these circumstances, tax should be paid on the profits, just as it should on income from other kinds of investment.

(cont Page 5)

      McLEAN AND CO DECEMBER 2007  NEWSLETTER PAGE 5     

How many houses can I buy and sell before I must consider tax?

There is no set figure. When any property is purchased for the purposes of re sal e, the profit may be taxable, depending on individual circumstances.

What if I'm not a developer, dealer or builder (or associated with one) and I have not subdivided the land?

Your intent when you purchased the property will determine if the profit from the sal e of a property is taxable or not. If your main purpose was a plan, desire or aspiration to sell the land when you purchased it, then it is most likely that the profits made are taxable.

How does IRD determine my intent?

While your stated intent is considered, the evidence and patterns of sal es will also be a determining factor as intent is often verified by action. To determine intent, we may look at statements you made to a bank manager or advisor when you bought the property including any plans which may have been made or discussed.

What if I lived in the property?

The sal e of a family home is not normally subject to income tax. However profits may be taxable if the homeowner has established a pattern of buying and selling the properties in which they reside or the main intent when buying was for profit.

What is the 10-year rule?

There are special rules for people involved in either the business of developing or subdividing land, or people involved in the building industry.

These rules also apply when the property is held by an  associated person of a builder or developer.

Intent when a property is purchased is usually the determining factor in whether profits from property sal es are taxable. However in the case of builders and developers, if the property is sold within 10 years the profit may be taxable regardless of the original intention when it was purchased.

What are the penalties for not declaring profits made from property sal es?

The penalties range from 20% to 150% of the tax that should have been paid depending on the circumstances leading to any omission. However they can be significantly reduced by coming forward voluntarily.

I think I should have paid tax on my profits, but didn't include them in my return. What should I do?

You should consider making a voluntary disclosure.

What are the benefits of this and how do I make a voluntary disclosure?

Penalties are significantly reduced if you come forward before IRD contact you. This is true of all disclosures not just those about property.

You may be entitled to a 75% reduction in the penalties that would be applied if your activity is detected by us in some other manner.

There is also an amendment in a bill currently before Parliament that reduces the penalties faced if you make a voluntary disclosure before being advised that you are to be audited. The amendment means that if you make such voluntary disclosures you will not attract a shortfall penalty if you have not taken "reasonable care" or for having taken an "unacceptable tax position". That change would take effect from 17 May 2007 , the date of introduction of the bill.

(cont. Page 6)

      McLEAN AND CO DECEMBER 2007  NEWSLETTER PAGE 6     

 

How do I prevent penalties being applied?

You can prevent penalties by voluntarily complying with your tax obligations and declaring and paying tax on all taxable sal es. .

Am I supposed to pay tax on the property I have just sold?

That largely depends on your intention when you purchased the property.

If you bought the property with the main intention of making a profit then the answer is probably yes. If you purchased with the intent of residing in the property as your home then the answer is probably no.

However everyone's circumstances are different and all the facts need to be considered on a case by case basis. You should look at the facts surrounding your purchase and apply these to the question "What was my main reason for buying the property?"

If you are still in any doubt after you have done that you should seek professional advice.

 

ALIGNING PROVISIONAL TAX PAYMENTS WITH GST- BASING PROVISIONAL TAX PAYMENTS ON A PERCENTAGE OF GST TAXABLE SUPPLIES

The provisional tax rules have been amended.  The changes will combine the payment of provisional tax with GST, thereby reducing the number of interactions taxpayers have with IRD. The changes will mean both tax payments can be made on the one form and will enable taxpayers who have a GST refund to offset the refund amount against their provisional tax liability.

There is a new provisional tax GST payment method available, called   the GST ratio method for calculating provisional tax Ė under this instalments will be able to match their provisional tax payments with their cashflow.

The GST due date change will apply to taxable periods ending on or after 31 March 2007 . Aligning provisional tax payment dates to GST due dates and the GST ratio method to base provisional tax payments on a percentage of GST taxable supplies will apply from the 2008-09 income year.

 ALIGNING PROVISIONAL TAX PAYMENTS WITH GST PAYMENTS

Provisional tax payments will be aligned with GST payment dates. Provisional taxpayers who are registered for GST on a two-monthly basis will pay provisional tax on their 2nd, 4th and 6th GST returns for the year. Taxpayers who pay GST monthly will pay provisional tax on their 4th, 8th and 12th GST return for the year. For example, a March balance date taxpayer will pay provisional tax on 28 August, 15 January and 28 April. Taxpayers who account for GST on a six-monthly basis will only have to pay their provisional tax twice a year with their GST.

Provisional taxpayers who are not registered for GST will pay provisional tax on the 28th day of the 5th, 9th and 13th months after balance date. That is 28 August, 15 January, and 28 April for a March balance date taxpayer.

Voluntary payments of provisional tax can be made at any time. Taxpayers on monthly or two-monthly GST taxable periods can make voluntary payments on their GST form in the months when they are not required to make compulsory provisional tax payments.

Also as a result of combining the two taxes on the one GST form, taxpayers with a GST refund will be able to offset the refund against their provisional tax liability. When a taxpayer offsets their GST refund against their provisional tax liability and their GST refund is subsequently reassessed resulting in the refund being reduced, the taxpayer will be given at least 30 days after the notice of reassessment is issued to pay the tax shortfall before the late payment penalty is imposed.

 (cont Page7)

 

 McLEAN AND CO DECEMBER 2007  NEWSLETTER PAGE 7     

 
ALIGNING GST TAXABLE PERIODS

The vast majority of GST-registered taxpayers have their GST taxable periods aligned to their balance date. However, a small percentage of GST-registered persons whose GST taxable periods are not aligned to their balance date will be required to align their GST taxable periods. Inland Revenue will contact those taxpayers affected. This will occur during the 2007-08 income year.

GST RATIO METHOD

Another option has been introduced for the calculation of provisional tax - basing provisional tax payments on a percentage of GST taxable supplies. At present, taxpayers can choose whether to base their provisional tax either on the standard method of 105% of last year's residual tax or to estimate their provisional tax. Starting from the 2008-09 income year some provisional taxpayers will be able to base their provisional tax payments on a percentage of their GST taxable supplies. This provides taxpayers with another method of calculating their provisional tax which may be better suited to their particular circumstances.

Businesses whose income is declining or taxpayers whose income fluctuates during the year may benefit from this method. However, this method of calculating provisional tax liability will not benefit everyone.

Taxpayers will qualify for the Ratio Method if:

the taxpayer's residual income tax liability for the previous year exceeds $2,500 and does not exceed $150,000; and
the taxpayer was registered for GST for the whole of the previous tax year and the previous year was not a year in which they began a taxable activity; and
their ratio for the current year is between 0 - 100%, and
for the current tax year the taxpayer files GST returns on a monthly or two-monthly basis.

To use the GST ratio method taxpayers must fulfil the above criteria and forward an election to the Commissioner before the beginning of the income year. The Commissioner will calculate the ratio and advise the taxpayer of their rate before their first provisional tax payment due date.

When a taxpayer chooses to use the GST ratio method they are required to make six provisional tax payments (every two months) along with GST. Monthly GST payers would pay provisional tax on every second GST return.

A taxpayer must discontinue the use of the GST ratio method if:

the taxpayer's GST registration ends in the current tax year; or
as a result of a reassessment they no longer qualify; or
the taxpayer changes their taxable period to a six monthly taxable period; or
the taxpayer has failed to file a GST return by the due date and the return is still not filed within 60 days of the due date.

A taxpayer can also elect to discontinue the use of the GST ratio method at any time.

If a taxpayer discontinues the use of the GST ratio method before the first provisional tax instalment date, they can elect to use the standard or estimation method of calculating provisional tax. However, if a person discontinues the use of the GST ratio method after the first provisional tax instalment date, the taxpayer is required to estimate their provisional tax payments for the remainder of the income year.

CALCULATION OF RATIO

Once the taxpayer elects to use the GST ratio, IRD will calculate the ratio and advise the taxpayer. The ratio is based on the taxpayer's residual income tax liability for the previous year divided by their taxable supplies figures for that year, expressed as a percentage and rounded to the whole percentage figure.

Residual income tax for previous tax year

100

Total GST taxable supplies for corresponding income year

 

(the resulting percentage is rounded to the whole percentage number)

      McLEAN AND CO DECEMBER 2007  NEWSLETTER PAGE 8     

When information on residual income tax or GST taxable supplies is not available for the previous income year, the taxpayer would use the information for the year and corresponding income year before the previous income year.

However, if the previous year or year before the previous year is a transitional year the taxpayer should ignore the transitional year and use the residual income tax and GST taxable supplies figures for the year before the transitional year.

 

CALCULATION OF PROVISIONAL TAX LIABILITY

To calculate provisional tax payments the taxpayer multiplies the ratio by their total taxable supplies for the two-month period (monthly payers will add the taxable supplies for two return periods).

When a taxpayer sells an asset they can elect to take account of the sal e in calculating both the current year's provisional tax liability and the calculation of the GST ratio in the following year. To make the adjustment the asset has to exceed the greater of 5% of the taxpayer's taxable supplies for the previous 12 months or $1,000.

Example 3: Calculating provisional tax using the GST ratio method

Angela sells second-hand computers over the internet and meets all the criteria to qualify for the new rule. Angela is a two-monthly GST payer and decided that she wants to base her provisional tax on her GST taxable supplies starting in the 2008-2009 income year.

The Commissioner advises Angela that her ratio is 8%. This is calculated from her residual income tax and taxable supplies figures for the 2006-07 income year. Her residual income tax and taxable supplies for that year were $20,000 and $250,000 respectively. By dividing the residual income tax figure by taxable supplies and expressing the result as a percentage, we get the ratio of 8% (20,000/250,000
100 = 8%).

Angela must apply the ratio to each of her GST period's taxable supplies to determine the amount of provisional tax payable. Angela's taxable supplies for her first GST period amount to $13,000 and her provisional tax liability for that period will be $1,040 (13,000
8% = $1,040). The same formula must be used to calculate her provisional tax liability for the other five GST periods.

   

PROVISIONAL TAX DUE DATES FROM 1/4/2008

PROVISIONAL TAXPAYERS NOT REGISTERED FOR GST

Balance Date

Provisional Tax Instalment Dates

 

 

31 March

          28th August

          15th January

          7th May

Not 31 March

          the 28th of the

          5th

          9th

          12th month after the balance date

If the balance date falls in December or April, an extension is given to 15 January and 7 May respectively

 

(Cont. Page 9)

      McLEAN AND CO DECEMBER 2007  NEWSLETTER PAGE 9     

PROVISIONAL TAXPAYERS  REGISTERED FOR GST WITH 31 MARCH BALANCE DATE

Provisional Tax Calculation Option

GST  Filing Frequency

Instalment Number

Instalment Due Dates

Standard or Estimation

One or Two Monthly

Three Instalments (no change)

          28th August

          19th January

          7th May

Standard or Estimation

Six Monthly

Two Instalments

          28th October

          7th May

Ratio

One or Two Monthly

Six Instalments

          28th June

          28th August

          28th October

          15th January

          7th May

Ratio

Six Monthly

The ratio option is not available

 

 

PROVISIONAL TAXPAYERS  REGISTERED FOR GST WITH NON STANDARD BALANCE DATES

Provisional Tax Calculation Option

GST  Filing Frequency

Instalment Number

Instalment Due Dates

Standard or Estimation

One or Two Monthly

Three Instalments (no change)

          The 28th of the

          5th

          9tth

          13tthafter balance date.

 

Standard or Estimation

Six Monthly

Two Instalments

          the 28th of the

          7th

          13th months after balance date

Ratio

One or Two Monthly

Six Instalments

          the 28th of the

          3rd

          5th

          7th

          9th

          11th

          13th months after balance date.

          7th May

Ratio

Six Monthly

The ratio option is not available

 

  

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 2007 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 2007 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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