EMAIL NEWSLETTER
AUGUST
2006
Welcome
again to the McLean
and Co. Newsletter
in which we discuss current taxation and business matters. We trust
you find it informative. Any feedback would be welcomed.
McLean
and Co. is a
home based chartered accountancy practice based in Clive, Hawkes
Bay.
Readers are invited to peruse the practice website
www.mcleanandco.co.nz,
which lists
services
provided, gives contact details and indicates how to become a client, contains
an extensive base of articles on business and taxation matters, and has
links to other websites that may assist your business. Being a
small firm itself, McLean and Co. strives to provide a personal and
professional service largely to a self employed person and small business client
base. Enquiries are welcomed.
We
are happy to accept new clients. Please contact ourselves at the contact
points highlighted above if we can assist you in your accounting and taxation
requirements. Our website lists information required for this in the following
link:
INDEX
-
Employee
vs Independent Contractor.
-
What
is an LAQC?
-
Cash
Flow Really is King
-
Employment
Agreements
EMPLOYEE vs INDEPENDENT CONTRACTOR
It is a dilemma you may have to face at some point during the life of your small
business. The company is growing nicely but there is only so much you can
do. Adding to your human resources can result in additional revenue and less
chaos in your business life. Should you hire a new employee or an
independent contractor?
Hiring an independent contractor or new employee is an important business
decision. To guide you to the best possible decision, consider the pros and
cons of hiring an employee or an independent contractor:
Pros of Hiring An Independent Contractor
- Reduced Overhead: The attraction of hiring an independent contractor is
the reduced costs in: expenses, payroll, benefits, and other overhead
costs. Lower overhead means less stress to bring in new business revenue to cover
costs.
- No ACC Levies to pay. The Independent Contrator is totally resposible
for his/ her own ACC Levies.
- Work On Demand: Hiring an independent offers flexibility to the changing
work demands of your company. You have the ability to take added
opportunities as they arise, and during slow periods, have greater cost
control. Your contract workforce often comes fully trained and highly
specialized.
Pros of Hiring An Employee
- Dedicated Loyalty: Making the commitment to hire an employee can result
in having an individual with stronger loyalty than an independent. Added
loyalty can result in more productivity. Good staff will be ready to
take on additional roles to help your company grow.
- Multiple Roles: Staff in small organizations will often perform a
variety of roles. This provides various learning opportunities for staff
and a flexible, diverse workforce for the company.
- Improved Work Flow: With a steady stream of business, having an employee
can be much easier to coordinate projects. Trying to juggle multiple
freelancers to meet project deadlines can be a challenge.
Cons of Hiring An Employee
- Added Responsibility: The burden of your small business providing for
your family becomes even greater as you have to allocate payroll for your
staff and help them provide for their families.
- Extra Overhead: Not only are there the costs of employee benefits and
payroll to consider, but you may also have to move to a bigger space, sign a lease, and
purchase equipment.
- Becoming A Manager: As your small business grows in staff, you become
less involved in practicing your trade and more involved in people
management issues. Your company will be exposed to employment related
legal issues. Independents will often require less management due to more
motivation from being self-employed.
Cons of Hiring An Independent Contractor
- Lack of Control: Part of what makes a contractor independent is their
ability to choose the control over the work performed. Contractors may
have additional projects and may have less commitment than an employee.
- No Fixed Rates: Your small business may find the perfect independent
contractor to work with but the rates charged can vary by project and
overall market demand. With an employee you can usually set the pay rate
until the next review date.
WHAT IS AN LAQC?
LAQC stands for loss attributing qualifying
company.
A LAQC is a limited liability company that has formally chosen to pass on
any losses it makes to its shareholders. These shareholders can offset the
losses against their personal income, to reduce the amount of personal income
tax they pay. However, shareholders are personally liable for any income tax
not met by the LAQC.
Advantages of an LAQC
- Losses made by a LAQC can be passed on to shareholders, who can use them
to reduce their personal income tax. The shareholdings in the company can
be changed to direct the losses where appropriate for tax purposes.
- LAQC’s have the commercial benefits of a limited liability company,
including protecting shareholders from unpaid business debts.
- Dividends paid by a LAQC are tax-free, except to the extent that
imputation credits are attached.
- Capital gains can be distributed tax-free without winding up the
company.
Disadvantages of becoming a qualifying company
- Shareholders are personally liable for any income tax not paid by the
LAQC.
- The cost of administration. For some people, administration costs can
reduce the advantages of an LAQC to the point where they may be better off
operating under a partnership or as a sole trader.
- Qualifying Company Election Tax may be payable when a company first
becomes a LAQC.
- The tax benefit of company losses incurred before becoming a LAQC are
forfeited.
- A LAQC cannot group with non-qualifying companies for loss offset or
subvention payments. A loss offset is where one company has a profit and
the other a loss, and they are part of the same group of companies. The
profit company can offset the loss of the other company. This is done in
the tax return or using something known as a subvention payment
- Once the losses have been attributed to the shareholders of a LAQC, the
LAQC loses the right to use them itself for tax purposes.
How can a business become a LAQC?
To be eligible to become a LAQC a company must be New Zealand-owned, and
have no more than five shareholders (unless it is purely a flat-owning
company).
People related within one degree (for example,. couples, or parents and
children) count as one shareholder.
All shareholders and directors must have elected that the company become a
LAQC, and all directors must have elected to become personally liable for
their share of any income tax not paid by the company.
The company must not receive more than NZ$10,000 in foreign-sourced,
non-dividend income per year.
To make the change, shareholders and directors must complete an Inland
Revenue form (IR436). Once Inland Revenue has
confirmed the change, the new LAQC status applies from the start of the next
financial year.
LAQC and the Family Home
Inland Revenue has expressed concern about taxpayers selling their private
home to a LAQC, then claiming tax deductions – saying this may be tax
avoidance. Where tax avoidance is proven, the taxpayer must pay the tax
avoided as well as a penalty of 100 percent of the tax avoided. Use of money
interest will also apply
CASH FLOW REALLY IS KING
Understanding and managing Cash Flow can make or break your business.
One of the most important lessons business people have to learn, often
painfully, is that cash really is king. It doesn't matter how much
money is coming in the future if you don't have enough money to get from
here to there. Employees can't wait on wages/salariues to be paid
until your customers pay.
Your landlord doesn't care that you're talking to investors and will have
the money in a couple of months. Suppliers may not be willing to extend your
credit any further and you may not be able to purchase the goods you need in
order to deliver to your customer and receive payment.
More businesses fail for lack of cash flow than for lack of profit. Why
is this? Two main reasons:
- Business owners are often unrealistic in predicting their cash
flowand tend to oversetimate income and underestimate expenses.
- Business owners fail to anticipate a cash shortage and run out
of money, forcing them to suspend or cease operations, even though they
have active customers.
This is a difference between profitability and cash flow:
Profit is the difference between income and expenses. Income is
calculated at the time the sale is made, rather than when full payment
is received. Likewise, expenses are calculated at the time the purchase is
made, rather than when you pay the bill.
Cash flow is the difference between inflows (actual incoming
cash) and outflows (actual outgoing cash). Income is not counted until
payment is received and expenses are not calculated until payment is made.
Cash flow also includes infusions of working capital from investors or
debt financing.
Cash flow is often calculated on a monthly basis, since most billing
cycles are monthly. Most suppliers will typically allow somewhere close to
thirty days to pay. However, in a cash-intensive business with a lot of
inventory turnover, such as a restaurant or convenience store, it may be
necessary to calculate on a weekly or even daily basis.
How to Project Cash Flow
- Start with the amount of cash on hand - your current bank account
balance(s) plus actual currency and coin.
- Make a list of anticipated inflows - customer payments, collection on
bad debts, interest or investment earnings, etc. List not only the
amount, but also when it will be coming in.
- Make a similar list of anticipated outflows - wages, monthly
overhead costs, payments on accounts payable or other debt, taxes payable or
set aside for future payment, equipment purchases, marketing expenses,
etc.
Put it all into a spreadsheet in chronological order
. If at any point
you have negative cash balance, or even a very small one, you have a
potential problem.
It's best to be extremely conservative, i.e., estimate inflows lower and
sooner and outflows higher and later. If you end up with a cash surplus, it
can cover you for an unanticipated cash shortage in the future, or be
invested in something to help grow your business - you won't have a problem
finding something useful to do with the money. On the other hand, if you end
up with an unanticipated cash shortfall, you can end up damaging your
credit, losing suppliers, having to cut employees, or out of business
entirely.
Track Your Actuals
Keep a copy of your forecast, but track your actual cash flow as well.
Comparing it to your forecast will help you realize where you have
mis-estimated or overlooked something in your planning. Past cash flow
statements and future cash flow projects are among the core financials you
will need as part of your business plan for potential investors. After a few
months of tracking it, you'll also find it an indispensable management tool.
EMPLOYMENT AGREEMENTS
Every employee employed after 2 October 2000 must have a written
employment agreement. It can be either an individual agreement or a
collective agreement.
There are some provisions that must be included in employment agreements
by law, and there are also a number of minimum conditions that must be met
regardless of whether they are included in agreements. Employment law also
provides a framework for negotiating additional entitlements.
This section looks at the rules governing employment relationships in New
Zealand under the Employment Relations Act from the start of the
relationship, through to how it is formalised in an employment agreement and
how it can end.
The Employment Agreement Builder
The Employment
Agreement Builder can help you to put together a draft employment
agreement for your employee. It clearly shows you which clauses are
compulsory, which clauses reflect minimum conditions that the employee is
entitled to regardless of their inclusion in their employment agreement, and
which clauses can be included voluntarily to meet the needs of you and your
employee.
The key to this information is use it as a starting point to establish
conditions that best suit your particular relationship and situation, and
then reflect those conditions clearly in the employment agreement.
If you've already got an agreement but you'd like to know more about it,
the following is the Employment
Agreement Guide. This reference guide contains clauses you're likely
to find in a typical agreement, and provides you with common uses, rules and
definitions.
Covering Letters
You can also customise and download a range of covering
letters to send out with your employment agreement. These letters cover
the range of circumstances that the Employment Relations Act requires
employers to address when offering employment.
Good Faith
The Employment Relations Act 2000 has “good faith” as its central
principle. This means that employers, employees and unions must deal with
one another honestly and openly.
Specifically, the Act:
- promotes good employment relations and mutual respect and confidence
between employers, employees, and unions
- sets the environment for individual and collective employment
relationships
- sets out requirements for the negotiation and content of collective
and individual employment agreements
- provides prompt and flexible options for resolving problems in
employment relationships.
Booklet About Hiring Staff
Department of Labour have produced a comprehensive booklet about how to hire staff. This
booklet is being updated to reflect the amendments to the Employment
Relations Act that take effect from 1 Dember 2004. You are able to get a printed copy by using
the online
order form or contacting the Employment
Relations Infoline.
Who needs this information?
- Anyone who has a paid job or who employs other people in paid work
- Anyone intending to work or who has a new job
- Employers who want to know what they now have to do when employing new
staff
- Those negotiating new employment agreements
- Anyone who wants to know what can be included in employment agreements
- Anyone who needs information when an employment relationship ends,
such as in the event of dismissal, redundancy, retirement or
resignation.
What to put in Employment Agreements
Agreements must be in writing where there is no collective agreement
Under the Employment Relations Act 2000, where there is no collective
agreement the individual employment agreement must be in writing and must
include:
- the names of the employer and the employee (to make clear who are the
parties to the agreement)
- a description of the work (to make clear what the employee is actually
expected to do)
- an indication of where the employee is to work
- an indication of arrangements relating to working hours
- wage rates or salary
- a plain
language explanation of services is available to help sort out
employment relationship problems.
- a requirement to pay at least time and a half for work on a public
holiday
- for most employees, an employment protection provision that will still
apply if the employer's business is sold, or transferred or the employee's
work is contracted out.
Collective Agreements and their relationship to
Individual Agreements
The requirements for collective agreements are set out in the
following collective
bargaining section.
Employers must not undermine collective bargaining or collective agreements
by automatically passing on collectively bargained terms and conditions to
employees not covered by that collective bargaining or agreement.
Minimum Rights in Legislation
Some minimum terms and conditions of employment are imposed by legislation.
These terms still apply, even if they have not been written into the
collective or individual employment agreement. Employers and employees cannot
agree to do away with any of these entitlements. They can, however, agree to
better provisions if they wish.
The minimum legislative requirements cover the following issues:
You can get more detailed information about your minimum employment rights here.
What must not be in an Employment
Agreement?
Employment agreements must not include anything that goes against any law,
whether employment, civil or criminal law. Unlawful provisions in an
employment agreement cannot be enforced.
What other issues can appear in individual employment agreements?
There are a number of optional matters that are often found in employment
agreements. These are issues that employers and employees may wish to include
in the agreement or bargain about. The ERS website offers an Employment
Agreement Builder that enables you to develop an agreement that suits your
employment.
Holidays
There are holidays and leave rights that apply whether or not they are
included in an employment agreements. The employer and employee can agree to
apply better provision overall, but cannot agree to reduce any provision.
Annual Holidays
Employees are entitled by law to a minimum
of three weeks' paid annual holidays after being in the job for a year, or
to holiday pay for periods of employment less than one year.
Public holidays
The 11 public holidays in the Holidays Act apply unless the employer and
employee agree to substitute
other days .
If employees work on public holidays they must be paid at least time and a
half for hours worked on a public holiday. If it is a day on which they would
otherwise have worked they are also entitled to another day off as an
alternative holiday (a day
in lieu).
Sick Leave
Employees are entitled by law to five
days' sick leave after being in the job for six months, and for each
subsequent twelve months. If the leave is not taken, it can accumulate up to a
maximum of 20 days.
Bereavement Leave
Employees are entitled by law to three
days' bereavement leave after being in the job for six months, on the
death of an immediate family member.
Additionally, an employee is entitled to one days' bereavement leave where
the employer accepts that the employee has suffered a bereavement.
The information
provided in this email newsletter is for informational purposes only.
McLean and Co. accept no responsibility for the opinions and information
expressed in the information provided and it is provided "as
is" without warranty of any kind. The user
assumes the entire risk as to the accuracy and use of this document.
Readers are asked to seek professional advice pertaining to their
own circumstances. The McLean and Co. email newsletter
may be copied and distributed subject to the following conditions:
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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