McLEAN AND CO MARCH 2006  NEWSLETTER  PAGE 2     

WHAT YOU SHOULD ADVISE ACC CORPORATION

We can assist clients to clarify charges with ACC Corporation, as ACC Corporation allow access in relation to your ACC Charge records to members of the Institute of Chartered Accountants on behalf of their clients, and have done so on a number of occasions, and are happy to do so for clients, but we find that a number of issues we have to address with ACC Corporation are a result of issues which ACC stipulate in the literature that  they provide to business people that the people in business should advise ACC themselves immediately on occurrence of the below mentioned instances:

Here’s some things you should advice ACC Corporation direct about:

ACC Corporation's telephone number is 0508-426837.

We would also suggest you look at all the details on your ACC Invoices before you pay them and check that the details being charged are your current circumstances as there could possibly be ramifications if you are paying on the basis of circumstances which are not currently correct.

RENTAL PROPERTY INCOME

Generally, any income that you receive from renting out a property will be liable for income tax, so you must include it in your tax return. This income could be from renting out land or buildings.

Tenancy Bond

Amounts received for tenancy bond and passed on to the Tenancy Bond Centre are not income.
Amounts received from the Tenancy Bond Centre for payment of damages, rent arrears etc, should be included as income.

Rates and Insurance
You can claim the rates and insurance on your rental property as an expense against the rental income.

Interest
If you’ve borrowed money to finance your rental property, you can claim the interest that you pay on this money as an expense.  

Agent’s Fees and Commission
If you use an agent to collect the rent and/or maintain the property, you can deduct the cost of the agent’s fees. Commissions paid to an agent to find tenants for the property are also deductible.

      McLEAN AND CO MARCH 2006  NEWSLETTER  PAGE 3     

Repairs and Maintenance
The cost of any repairs and maintenance that you do (or pay someone else to do) on the rental property is normally deductible as an expense.

Examples of repair and maintenance are:

    * Replacing a broken shower head
    * Plastering and painting a crack in the wall
    * Replacing a blown element in a hot water cylinder
    * Redecorating the property to return it to the state it was in when you brought it to use as a rental property.

However, there are some circumstances in which you cannot deduct the cost of repairs as an expense.

    * If you buy a rundown property and spend considerable amounts of money on substantial improvements or alterations before renting it out, you can’t claim the costs as an expense. The cost of the work counts as part of the cost of buying the property, so you should capitalize the costs and depreciate them.
    * If you carry out work which substantially improves the property, you will also have to capitalize the costs and depreciate them. For example, if you take down a badly deteriorated wall and put a conservatory in its place, you will have to capitalize and depreciate the cost of the work.
     * If you  replace part of your property in a different material than the previous material (e.g. if you place the roof in tiles whereas before the roof was in corrugated iron) this is regarded as an improvement not a repair. 

Motor Vehicle Expenses
If you use your own vehicle in the course of renting out your property (for example, travelling to carry out a property inspection or to do some repairs), you may be able to claim some vehicle running costs as an expense against your income.

Legal Fees
You can deduct as an expense any legal fees which you incur in arranging a mortgage to finance the rental property. You can also deduct the legal fees for drawing up a tenancy agreement, any bank administration fee for the mortgage, and the cost of a valuation. Legal costs involved in buying or selling a property are not deductible.

Mortgage Repayment Insurance
You can claim a deduction for the cost of any mortgage repayment insurance that you have on this mortgage.                                

Accounting Fees
If you use an accountant to prepare your accounts you can deduct the cost of the fees. Any fees paid when setting up the business, such as for investigating the viability of the business, are not deductible.

Depreciation
You can claim a deduction for depreciation on the rental property and any furniture or fittings in it which belong to you. Depreciation is an allowance to cover the cost of wear and tear and general ageing of the building and its contents.  You should be aware that if the property ceases to be a rental property (e.g. you sell it or go to live in it) that if the current market valuation is in excess of the original cost at that time that you will have to declare all depreciation previously claimed back as Depreciation Recovered in the year of sal e. If it is less than cost but more than Written Down Value in your Financial Statements you will have to declare back the depreciation recovered to date.  You should also be aware than if the current market value is in excess of original cost that that difference is capital gain and not regarded as taxable income.

Expenses that you can’t Deduct for Tax Purposes
You can’t for tax purposes, deduct capital or private expenses from your rental income. Capital expenses are costs you incur to buy or increase the value of a capital asset.    Examples of non-deductible expenses are:

    * The purchase price of a rental property, including legal fees charged to you specifically in relation to the purchase
    * The capital part of any mortgage repayments
    * Interest on money, which you borrow for some purpose other than financing the rental property, even if you use the rental property to secure such a loan.
    * The cost of repairing or replacing any damaged part of the property, if the repairs or replacement make improvements to the property, which increase its value.
    * Real estate agent’s fees and legal fees incurred as part of buying or selling the property.
    * The cost of making any additions or improvements to the property.

      McLEAN AND CO MARCH 2006  NEWSLETTER PAGE 4     

 If the Property is not Rented Out for the Full Year
You can only claim a deduction for any expenses that you incur while your rental property is either rented out, or is available to be rented out. If the property is neither occupied by tenants nor available for rent for part of the year, you will not be able to claim the full year’s ongoing costs, such as rates, insurance and interest.  For example, suppose you owned a property, which you lived in yourself for the first three months of the year, then you rented it out for the rest of the year.   When you work out your rental income for the year, you would only be able to deduct the ongoing costs for the nine months that the property was rented out, that is 9/12 of these expenses.        If a property is unoccupied and temporarily unavailable for letting for a short time, because of redecorating or other maintenance, the ongoing costs will still be deductible for that period. The redecorating or maintenance costs will also be deductible, as long as the work done does not amount to making capital improvements.

If the Property is Rented out at less than Market Value
Sometimes a person who owns a rental property will rent it out for less than its true rental value. This most commonly happens when a relative or friend of the property owner rents their  property at “mate’s rates”.

If you wish to claim expenses 100% in these circumstances, you should declare 100% of the normal market rental rate as income.

Record Keeping
You must keep enough records to be able to calculate the income and expenses of your rental property, and for IRD  to confirm your accounts. These records include:

    * A record of all receipts and payments
    * Bank statements, cheque butts and deposit books
    * Invoices and receipts
    * Working papers for all calculations, including your vehicle logbook                                                                                                             

  * A list of assets, and receipts with cost price and purchase date
    * A copy of the rental agreement and rent book
    * A copy of any loan mortgage agreement

You must keep accurate records of the purchases and sal es of your rental assets so, if IRD need to, we can check your depreciation deductions.  You must hold all these records for seven years, even if you stop renting out the property.

Paying Income Tax
As an individual property owner, or as a partner in a partnership you’ll need to send the IRD an Income Tax Return each year.   In this return you’ll need to include enough information to show how you worked out the amount of rental income after deducting expenses.

Goods and Service Tax (GST)
You cannot charge GST on residential rent, because renting out residential property is exempt from GST. Consequently, you cannot make a claim in a GST return for the GST on any expenses you incur for a residential rental property.

FEAR OF FAILURE

Most people seek success, not failure, yet many successful business persons have failed before succeeding.

Abraham Lincoln failed numerous times, he was defeated and rejected, but it didn’t stop him running, and then becoming, one of America 's most recognised and respected presidents.    Thomas Edison failed thousands of times before he successfully invented the light bulb. He would never have succeeded had he given up trying.   Joanne Rowling, creator of Harry Potter, was an unemployed single mother when she wrote her first manuscript.   Today she is one of Britain 's wealthiest women.    Walt Disney suffered financial problems and a nervous breakdown before achieving fame and fortune.

The truth is that:

Successful people don't fear failure; they view failure as a temporary setback, not a permanent position. Successful people don't give up-they believe they will succeed and focus on possibilities and tend to quickly rebound after a set-back or problem.

      McLEAN AND CO MARCH 2006  NEWSLETTER PAGE 5     

GETTING PAID ON TIME

Here are 12 ways to make sure your invoices are paid on time.

1.        Get invoices out promptly. Send them with the goods, or on the day the service is completed, instead of waiting until the end of the month.

2.        Get agreement on payment terms when you make a sal e. Your customer might negotiate with you, but once you’ve both agreed they should feel obliged to pay on time.

3.        Make new customers fill out a credit application form stating your conditions of trade. It pays to have the wording checked by a lawyer to ensure it covers everything correctly. You can get hold of a sample form quite easily by applying for hire purchase facilities at a large store, but it may not be applicable to your situation or may not be legally watertight so it’s best to seek help.

4.        Make sure the payment terms are spelled out clearly on your invoices (eg ‘Payment due on June 20’ or ‘Payment within 20 calendar days please’). Also include a statement saying: 'Please pay on this invoice as no statement will be sent.'

5.        Change the terms for some of your customers, or for new customers – eg if your payment terms are 14 days from the date of the invoice, reduce them to seven days.

6.        Establish minimum amounts of business a customer must buy before you’ll give them goods or services on credit. This reduces the time and paperwork costs involved in sending out accounts for tiny amounts of money. Alternatively, you could send friendly reminders regarding your terms, pointing out that the credit facility might be cancelled if business continues under the stated minimum.

7.        Follow up promptly when invoices aren't paid by due date. Be polite but firm. If you haven't the time to do this yourself, then appoint someone to do it for you.

8.        Establish the average age of your Accounts Receivable and set yourself the goal of reducing this age by a set target every month. If your customers or clients have been taking advantage of you because of your previous laxity in invoicing, then you may need to re-educate them. Do this politely so you don't offend customers:
"Have you received our invoice, Peter? I'm just checking that you're happy with the goods/services we provided?"

        "We've got a new invoicing system going here, because we've been a bit lax in the past. My accountant has set some tough goals                   for me to meet in reducing the average age of our Accounts Receivable, so if you could settle that invoice promptly I'd be most obliged."

9.        Ask for a deposit (even a small amount) so you do have something. Some people get a deposit that covers their expenses. This tactic at least allows you to stay in business.

10.     Consider offering a discount for prompt payment. Discounts aren’t a good option for low-margin businesses, but can be an option for high-margin operations. You have to work out whether the use of money gained earlier is worth the discount you're offering. Never give the discount if the person has missed the due date for the discount offer (some will try this on).

11.     Consider charging interest on late payments. But remember, this is only enforceable if the customer is aware of this penalty before the deal is struck. Ask a lawyer to write the contract wording for this tactic, and be careful how you apply the rule: it’s easy to lose customers if you’re too inflexible.

12.     Consider selling your debtors to a finance company. That way, instead of having to wait 30 days or more until an invoice is paid, you receive your money upfront from the finance company which, in turn, will collect the money from your customer. The finance company will of course charge you a commission for this service.

BRIBES ARE NOT DEDUCTIBLE FOR INCOME TAX

Bribes intended to influence a public official in order to act, or fail to act, to retain business, or obtain an improper advantage in the conduct of business, are explicitly not deductible for tax purposes.

As a member of OECD, New Zealand introduced legislation (Income Tax Act 2004 DB 36) to fulfil its obligations under the OECD Anti-Bribery Convention to stop paying bribes at home and abroad.         Our tax law uses the Crimes Act 1961 definition of a bribe as any money, valuable consideration, office, employment or any benefit whether direct or indirect.   The law relates to bribes to New Zealand and foreign public officials. The provision does not apply to a payment made (to a foreign public official) to expedite the performance of a routine government action when the value of the benefit is small.     In terms of risk, businesses trading on the international market must be conscious of the countries they are trading with to ensure compliance with the legislation. Transparency International (www.transparency.org)  lists the international corruption perception index.     It identifies 106 of 146 countries which score less than 5 on the 10 point compliance scale.   Sixty countries score less than 3 out of 10, indicating rampant corruption.

If you have treated bribes as tax deductible you may wish to consider using the voluntary disclosure regime to get your tax affairs into order.

      McLEAN AND CO MARCH 2006 NEWSLETTER PAGE 6    

9 SIMPLE TIPS FOR SETTING EFFECTIVE BUDGETS

Whether you're mapping a path to profitability or simply determining how much to spend on marketing, setting effective budgets can help your company manage money optimally. Budgeting is a crucial aspect of financial planning. It forces you to ask questions about the business decisions you make, which in turn helps you anticipate the resources you'll need to reach your goals.

Use these tips to design budgets that keep your day-to-day operations focused on success.

1. Set goals
Your spending priorities will be easier to identify if you begin the budgeting process with a clear set of goals and expectations. For example, you can streamline the development of a marketing budget if you're clear about what you want to achieve and what outreach tactics you expect to deploy. Similarly, if you're setting a budget for technology, it will be easier to pinpoint the amount you need to spend on staff training and tech support if you know your desired return on investment (ROI).

2. Get the big picture
It can be easy to underestimate the amount of money you'll need in different areas of your budget simply because you don't anticipate all the costs related to planned purchases. For example, if you're setting a budget for technology, include obvious expenses such as hardware and software, but also take into account "hidden" costs such as training, maintenance, and technical support. Many budgets are quickly thrown out of whack when these unanticipated expenses pop up.

3. Build in increases
Some costs of doing business — such as sal aries and  insurance — are likely to rise steadily over time. To make budgets as accurate as possible, these line items should reflect expected annual changes. You can estimate the amount of these increases by reviewing cost of living forecasts, inflation rates, as well as your own historical spending trends.

4. Account for the domino effect
Spending changes in one area of business often impact others. For example, if you increase advertising spending, revenues may increase, but so will the amount you need to spend on customer service and fulfillment.    As you hone your spending plans, be sure to reflect the impact of changes throughout each area of your budget.

5. Consider losses
Every business will need to grapple with product returns, shrinkage, unpaid invoices, and other cash flow drains. Be sure to account for these losses in your budget. To gather information about the amount of returns or unpaid invoices to reflect, contact trade associations and industry organizations, or speak with established companies in your field about past trends.

6. Look at industry norms
You can use standard spending practices in your industry as a barometer for your budget. For example, if most businesses in your field spend 6 to 10 percent of revenues on advertising, this range is probably a good one for you to target. It's okay to vary from industry norms, but only with an understanding of how spending more or less than average will enable you to reach your goals. If you plan to double ad spending in your first year, document how the extra money will be spent and what the expected payback is.

7. Prepare for the unexpected
Every business has unanticipated costs — items like last minute opportunities to sponsor community events or unexpected technology glitches that need to be resolved. Put a line item in your budget to cover these expenses.

8. Share it
Review your budget with an accountant or financial advisor. He or she can verify that you've effectively covered the budgeting basics, and serve as a sounding board for spending decisions.

9. Be ready to revise
Chances are the initial budgets you set won't be perfect. Update your forecast quarterly or when new information or events impact your company. Compare initial plans to what actually occurred, and adjust figures accordingly. For example, if you discover you're not meeting profitability, look for areas of the budget that can be cut. If sal es are increasing, note which areas of your business will need to be enhanced to meet demand, and allocate more money to these areas.  

      McLEAN AND CO MARCH 2006 NEWSLETTER PAGE 7    

MANAGING YOUR TRUST

Most discretionary trusts provide that decisions of trustees are to be unanimous. Most legal commentators agree that providing for unanimous resolutions is a safeguard against abuse and, when there is an independent trustee appointed, a safeguard against a claim that the trust is a sham by creditors including the IRD.  

For resolutions to be unanimous all the trustees must have put their minds to the matter to be decided upon.  

It is an established rule of law, that a trustee must not delegate his or her duties or powers not even to co-trustees. Delegation is however allowed where such delegation is specifically permitted by the trust instrument, is specifically permitted by statute is practicably unavoidable and is in the usual course of business and the particular agent is employed in the ordinary scope of his or her business.  

A trustee has a duty to act personally and this duty requires trustees to be unanimous in any decisions they make.  

It must not be thought, for example, that a co-trustee has delegated his, her or its authority to the remaining trustee(s). The law is simply that unless the trust deed provides otherwise - and we have suggested that there are good reasons for not doing so - the trustees are required to unanimously make a decision and have no authority to delegate to one of their number a general authority to make decisions on their behalf.  

In the recent New Zealand Court of Appeal case of Niak and Sommerville v McDonald and Bank of New Zealand, an independent trustee who had not been consulted about action which was in line with past practice, tried to argue that the decision taken by her co-trustee was nevertheless effective. The Court held that while there was an empowering clause which authorised the trustee to appoint agents to implement decisions made by them - it did not empower the trustee to delegate to an agent a decision making authority which was reserved to the trustees.  

The moral of this article is that trustees must consult, consider and record all important decisions to be made in respect of the trust.

PROVIDING INCOME INFORMATION TO THIRD PARTIES

We get a number of calls from third parties asking information about client’s income.  Credit Companies to whom clients have applied for membership, and Bank and Finance Companies to whom clients have applied for loans, are common situations.  We don’t provide this until we have authorisation to do so by clients. Quite often we do not get this authorisation first from clients and we refuse to give the information.  If you wish ourselves to give information about your taxable income to third parties please contact us first as the processes you are attempting to do will be held up if you not have authorised us to do so, as we will not disclose such information, and also to avoid our action of refusing to give this information when you may require this information to be provided to the third parties urgently.

      McLEAN AND CO MARCH 2006 NEWSLETTER PAGE 8    

TAX TITBITS

FUTURE CHANGES TO IRD NUMBERS

Currently your IRD and GST number is 8 digits long.  From 1 April 2007 IRD will be adding another digit to all new and existing IRD and GST numbers, due to the fact that by then they would have issued all possible 8 digit combinations.   

If you already have an IRD Number it'll have a zero added to the front of it e.g. 12-234-678 will become 012-345-678.  

If you apply for an IRD or GST Number after 1 April 2007 you'll be automatically issued with a 9 digit number.  

CHANGES TO WITHHOLDING TAX RULES

Currently, when you make withholding payments to a contractor who is trading as a company, you don't deduct any withholding tax.  However, shortly deductions will be required from payments to certain companies working in the agricultural, horticultural and viticultural industries.  

From 1 April 2006, if you hire any type of contractor (individual, partnership, trust or company) for services or work related to the pruning or thinning of fruit trees or vines, or the picking or packing of fruit or grapes, you must deduct withholding tax at the rate of 15 cents in the dollar, unless the contractor has a certificate of exemption or a special tax code certificate authorising deductions at a lower rate.

The changes to the rules are being made to reduce tax evasion prevalent in the fruit picking industry.  Some contractors are evading tax which makes it difficult for honest contractors to compete.  Deductions of withholding tax should help "level the playing field".  

A further change is that all payments for these activities will need to be recorded on the payer's employer monthly schedule, whether they deduct withholding tax or not.  The requirement to notify IRD of the details of the payments only relates to payments made for the specific work mentioned.  

If you are currently not an employer and you are a grower hiring a contractor or a contractor hiring a subcontractor you will need to register with IRD as an employer by 1 April 2006 .

CHANGES TO FAMILY ASSISTANCE

From 1 April 2006 , the income thresholds for family assistance will increase and the rate at which family assistance payments start reducing will change.  Families on higher incomes may now qualify for family assistance.  

Our website shows the income limits for each type of family assistance payment from 1 April 2006 .   Go to www.mcleanandco.co.nz and then Past Email Newsletters  and then  March 2006.

You can choose whether to receive your family assistance payments weekly or fortnightly based on your estimated income or as a single lump sum after 31 March based on your actual income.

If you are already receiving family assistance and you want to change to weekly payments (instead of fortnightly) just give IRD  a call on 0800 257 700. 

INCOME THRESHOLDS FOR REPAYMENT OF STUDENT LOANS

The income threshold at which borrowers must begin repaying their student loans will rise from $16,588 to $17,160 a year from 1 April, 2006 .  The increase is in line with annual movement in the September Consumer Price index of 3.36%.

      McLEAN AND CO MARCH 2006 NEWSLETTER PAGE 9    

TAX TITBITS

INTEREST FREE STUDENT LOANS FROM 1 APRIL 2006

Interest free student loans will be delivered by an interest write-off.   Your Inland Revenue and StudyLink Student Lloan statements will show interest being charged but if you are eligible, this interest will be written off after the end of each tax year (31 March). 

If you have met the 183-day requirement then leave New Zealand for 184 or more consecutive days, you may still be entitled to an interest write-off for the period up and including the date of your departure from New Zealand .  Any entitlement will be credited to your loan account after the end of the tax year (31 March).     

What is written off?

All the interest you are charged while you are eligible to the interest free loan will be written off.    IRD will write off the interest charged from 1 April 2006 , including any interest charged by StudyLink for the period you are eligible. This write-off will happen after the end of the tax year (31 March).  

Refunds requested on or after 30 November 2005 excluded from interest free write off

If you have requested a refund from your Student Loan account on or after 30 November 2005 (and the reason for your request was not due to significant financial hardship - see below for an explanation), you may not be entitled to have all of your interest written off.  This only applies to refunds for the 2005 and 2006 tax years.  Over-payments relating to tax years prior to 2005 can no longer be refunded.  (An overpayment is an amount paid in excess of a repayment obligation.)

However, you may still qualify to have all or part of this interest written off under one of the other interest write-offs.

Significant financial hardship includes significant financial difficulties that arise because of:

CHANGES TO PAYE DEDUCTIONS FROM 1 APRIL 2006

Employers would have received their 2007 PAYE Deduction Tables by now.

You should review these and use these from 1 April 2006   as PAYE deductions for employees will change from that date for the exact same amount of gross income.

The reason for this is that:

·         the ACC earner’s levy rate increases from $1.20 to $1.30 (GST inclusive) per $100 of earnings

·         the maximum earnings on which earner’s levy is payable increases to $96,619

·         employees who have a student loan and use the M SL tax code can earn up to $17,160 ($330 per week) before having student loan deductions made.