EMAIL NEWSLETTER
DECEMBER
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
-
Season
Greetings to All Readers
-
Removal
of 5 Cent Coins from Circulation- Effect on GST Invoices
-
Record
Keeping Duties of a Trustee
-
Partnership
Agreements- why Written Agreements are Important and What to Put in them
-
SWOT
Analysis for Small Businesses
SEASONS GREETINGS TO ALL
READERS
This being the last email newsletter for 2006, McLean and Co would like
to wish all readers a Merry Xmas and all the best for the New Year.
REMOVAL OF 5 CENT COINS FROM
CIRCULATION- EFFECT ON GST TAX INVOICES
5 cent coins were removed from circulation from 31 July 2006
. This means that for cash transactions retailers will be rounding
prices to the nearest 10 cents. An issue has been identified where a
supplier issues an invoice and then the recipient pays in cash in respect of
that invoice. In some circumstances this will mean, as a result of
rounding, the amount of tax charged in a transaction may alter. If a tax
invoice has previously been issued, section 25(3) of the Goods and Services
Tax Act 1985 would require that a debit or credit note be issued in respect of
this adjustment.
For example: A person receives a monthly statement/tax invoice from a
retailer in respect of supplies for the amount of $25.85 (inclusive of GST).
If they were to pay this account with cash the supplier will need to adjust
the consideration up or down to either $25.80 or $25.90 (depending on their
rounding policy.) The GST included in the transaction at $25.85 is
$2.87. At $25.80 it is also $2.87. However at $25.90 the amount of GST
increases to $2.88.
In the above example, because rounding up would mean the amount of GST
changes section 25(3) would require the supplier to issue a Debit Note showing
the change to the consideration. However, section 25(3B)
provides the Commissioner with a discretion to not require a Credit or Debit
Note to be issued where the Commissioner is satisfied there are or will be
sufficient other records available to establish the particulars of any supply
(or class of supply) and that it would be impractical to require a credit or
debit note to be issued.
It has been determined that, under the terms of section 25(3B), a Debit
or Credit Note need not be issued where the consideration for a transaction
changes due to the effects of rounding necessitated by the withdrawal of 5
cent coins from circulation. This is because usual practice is to show
the effects of rounding on the receipt issued by the supplier.
While a Debit or Credit Note need not be issued as a result of rounding,
the adjusted amount of tax is to be included in the appropriate GST
return. In the example above, the supplier needs to include output
tax of $2.88.
RECORD KEEPING DUTIES OF A TRUSTEE
A number of Acts regulate the administration and
record keeping of a trustee. The key points of this resposibility are:
- trustees have a duty of efficient management and
must ensure that assets are managed in an efficient and economic
manner. This means trustees must take all necessary precautions such
as those that would be taken by a prudent business person managing affairs
of his or her own
- trustees must keep and render to the
beneficiaries a full and proper record of their administration of the
trust assets, including appropriate accounting records and financial
statements. These records are the direct responsibility of trustees
along with tax returns and all documentation (including bank statements,
invoices etc)- all of which must be kept for a period of seven
years. Note that records relating to the management of the
trust, such as resolutions, deeds and the like, should be retained for the
life of the trust (up to 80 years)
- a trustee also has the duty to act personally in
managing the trust's affairs. This means trustees generally
cannot delegate their powers and discretions.
Some of the important steps trustees can take to protect themselves
against liability include:
- familiarising themselves with the trust deed and other relevant
documents, as well as all the trust's assets and any liabilities that may
be attached to them
- seeking beneficiary approval of proposed or current record keeping
procedures and ensuring records and accounts are kept
- regularly reviewing the financial performance and position of the
trust to ensure it is satisfactory
- meeting formally at least once a year to review investment
portfolios, strategies and distribution issues, and to consider and
approve the trust's accounts and balance sheet.
- meeting during the year to discuss major decisions such as the sale
or purchase of a significant asset. These decisions must be recorded in
resolutions of the trustee minute book (including where meetings are held
and resolutions approved over the phone, and minutes from the meeting
should be circulated and signed off by trustees as a record
- meeting on other occasions depending on the nature and extent of the
trust deed
- having separate trust bank accounts to ensure that personal and trust
funds do not become mixed up.
- ensuring the trust financial accounts are prepared by a professional
person and take other professional advice when necessary e.g. investment
advice.
PARTNERSHIP AGREEMENTS- WHY WRITTEN
AGREEMENTS ARE INMPORTANT AND WHAT TO PUT IN THEM
If you go into business with a partner, either in an actual partnership
structure or a company structure (where the ‘partner’ would actually be a
fellow shareholder), there is a temptation to rely on an informal or verbal
agreement about the nature of the business partnership. This temptation is
particularly strong when the proposed partner is a close friend, family
member, or lifestyle partner.
However, relying on an informal agreement can turn into a nightmare. We can
never guarantee how our relationships will turn out. We hope for the best, but
life brings many twists that can result in unexpected changes to
relationships.
The simple business rule to follow is: in business, be businesslike.
This means putting aside all emotional reasons in favour of good business
sense. It is also means clarifying the partnership agreement in writing to
avoid any future “But you said . . .” or “But you promised . . .” type
accusations and disputes.
Have A Written Agreement
If you’re going into a business partnership with another person, always
have an agreement in writing. It is important that each party has a clear idea
about what is expected of the other and what each will contribute to the
partnership.
Get legal advice on the agreement so both parties are protected. Also
consult business advisers or mentors.
Aim for fairness: a lopsided partnership agreement will only generate
resentment that is likely to undermine the productivity a partnership is
designed to achieve.
Tip: After reading this article, give your lawyer the basics of what
you want covered and ask if you’ve missed anything vital, but don’t let
your lawyer try to cover every eventuality in a lengthy ‘legalese’
document. Retain some flexibility and ability to change things if conditions
change.
Points to Cover in a Written Agreement
Avoid possible disputes by clarifying these points:
- Business name
- The name of the business.
- Description of the business
- Location
- Duration of business
- Whether the business is for a specified term or ongoing.
- Professional advisers- who the Accountant and Lawyer willl be
- Bank- which bank the business will be with, who will be authorised to
sign cheques
- Contribution-What each partner will contribute in terms of money invested, skills, time,
and clients or customers (shared or separate), and in what amount.
- Responsibilities. What duties will each partner be responsible for?
For example, one partner may take responsibility for the day-to-day management
of the business and the other for marketing and promotion of the business.
Who
will be responsible for major business decisions? Who will plan regular
business meetings so all partners can understand what is happening in the
other’s area of responsibility.
- Cost sharing. How will the operating and overhead costs of the business be shared?
Who
will make expenditure decisions? What expenditure might each partner be liable
for? For example, one partner (fellow shareholder) in a company might wish to have
a new luxury company car every three years, the other might be content with a
medium sized car that is changed every five years. There is potential for
conflict and unhappiness unless sorted out in advance.
- Profit / Loss. How will profits or losses be shared?
Will this be in proportion to the
equity contributed to the partnership or business by each partner?
Or will
there be an adjustment for time, effort and skills contributed?
- Who owns what? Most businesses will generate some form of intellectual property
either in tangible form (such as a patented or developed product) or
intangible (such as a software program, a client database, or specialised
knowledge and skills). Who has ownership of this property if the partnership
or the company is dissolved? Ownership is not always clear-cut even in a
company situation. For instance, a patent may be in the name of a person, not
the business, although the business may have borne most of the costs of
developing the patentable product.
- Review process and Arbitration. It is useful to include a review clause in the partnership agreement (for
example, that the partnership should be reviewed annually) and also agreement
on an independent arbitrator if the partners reach an impasse. Consider
including a time limit on the partnership. For instance, the partnership will
be reviewed after one year and dissolved if it is not meeting the aims of each
party.
- Disputes. How will disputes between the partners be resolved, for example, by
arbitration?
- Transition. Partnership Agreements should include clauses covering transitional
possibilities, such as the procedure if a new partner joins, or an existing
partner dies, retires, or wishes to withdraw. For instance, if you were in business with a shareholding partner who decided
to leave the company you may want first option to buy out the partner’s
shares in the company rather than have the partner sell them to an outsider.
Check with advisers about insurance for partnership protection. Having
insurance means that in the event of death or disability of one of the
partners cash is available to allow the business to continue and at the same
time settle the estate.
Reasons for Going into a Partnership
The main reason for going into partnership is to create a better result
than could be achieved by one party acting alone. For instance, in
professional partnerships (such as lawyers, doctors and accountants) the
partnership allows each partner to share the overhead costs of business
premises and the administrative staff. In a business situation the aim might
be to achieve synergies by combining skills, such as marketing skills and
financial skills.
Whatever the aims of the partnership, to avoid possible future disputes, it
is important to clarify what results each party desires from the partnership.
SWOT ANALYSIS FOR SMALL BUSINESS
The new year is a good time to perform a SWOT analysis for any small
business owner.
A
SWOT simply stands for: Strengths, Weaknesses, Opportunities and Threats. Each
area forms a box on a grid and you fill in each section to help formulate a
marketing strategy.
Strengths and weaknesses focuses your business to look internally at what
your business can do. Many business are great at looking inward but fail to
look outside their company. Threats and opportunities are external; focusing
on the conditions of the real-world.
This is where a SWOT analysis is helpful. It challenges you to see
beyond your company walls to determine what opportunities are open for your
company and how to capitalize on your strengths.
While most of your analysis will be subjective, the SWOT can provide
multiple benefits to your small business. These benefits can include:
- insight into where your business can focus to grow.
- understand the industry structure by using a SWOT in your business plan.
- focus your advertising and marketing on areas that give you a
competitive advantage in the marketplace.
- the foresight to see looming threats and react proactively.
To effectively complete a SWOT for your organization,
look at the following examples:
Strengths
Consider your strengths relative to your competitors and from your
customers' perspective. For example, all your competitors may sell using
the telephone, whereas you use direct face-to-face selling. Anything a
customer wants that you provide and your competitor doesn't, can be a
possible strength.
- business location or product exclusivity
- patents.
- an established distribution channel
Weaknesses
It is far easier writing down your corporate strengths than weaknesses.
Think of objections your customers raise during the sales process. Think
of your competitors' remarks. Is there any truth to what they say?
- limited human resources and staff
- high cost of production
- products or service similar to competitors'
Opportunities
Your small business is influenced by the external environment, such as:
legal, political, technological, and cultural factors. Consider what can
make your business obsolete, and what will replace it. Threats can become
opportunities or vice versa.
- government regulation softening
- development of new technology
- growing trend and customer base
Threats
- new substitute products emerging
- price competition
- economic pressure
The SWOT analysis is a quick and simple tool to understand the overall
big picture. I t is the starting point of strategic planning.
The most important take-away from this exercise is to apply this
knowledge to your small business. Take all necessary actions to reduce the
threats to your company and position yourself to take advantage of the
opportunities.
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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