EMAIL NEWSLETTER JUNE
2005
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
-
Who
Pays Tax.......and How Much?
-
Individual
Income Tax- Common Questions
-
Franchise Section on our Website
-
Latest
Credit Card Data
-
Contractor
or Employee?
-
How
to Increase your Investment Returns through Gearing
RELEVANT
BUSINESS AND TAXATION ARTICLES
The
McLean and Co. website contains an extensive number of articles prepared by
McLean and Co. relating to taxation and business matters. Here
are a selection that will be of interest:
WHO
PAYS TAX........AND HOW MUCH?
The following were some key finanancial facts detailed in the
2005 Budget
| Individual taxable income |
Number of people
|
Tax paid
|
|
($)
|
(000) |
% |
($m) |
% |
|
Zero
|
178
|
6% |
0 |
0% |
|
1-10,000
|
495
|
16% |
311 |
1% |
|
10-20,000
|
994
|
32% |
2,471 |
12% |
|
20-30,000
|
360
|
12% |
1,674 |
8% |
|
30-40,000
|
309
|
10% |
2,135 |
10% |
|
40-50,000
|
253
|
8% |
2,448 |
12% |
|
50-60,000
|
141
|
5% |
1,824 |
9% |
|
60-70,000
|
104
|
3% |
1,725 |
8% |
|
70-100,000
|
141
|
5% |
3,251 |
15% |
|
100,000+
|
85
|
3% |
5,295 |
25% |
|
All
|
3,060
|
100% |
21,134 |
100% |
This table includes tax on New Zealand Superannuation and major Social
Welfare benefits, but excludes ACC levies and anyone who is under 15.
Data are projected for the year ended June 2006.
|
AVERAGE INCOMES
| Average individual wage earnings: |
($)
|
| - full-time earner |
42,920 |
| - part-time earner full year |
15,878 |
Full-time earner works for more than 30 hours per week.
|
| Average family gross income: |
($) |
| - couple with children |
82,370 |
| - couple with no children |
67,829 |
| - sole parent |
26,324 |
| - single person |
26,720 |
Includes benefits and other non-wage income for year ended
June 2006.
|
Core Crown Expenses in 2005/06
$48.2 billion
Core Crown Revenue in 2005/06
$53.3 billion
INDIVIDUAL
INCOME TAX- COMMON QUESTIONS
How do I get a record of what salary or wages I
received for the year?
You can request a summary of earnings from Inland Revenue Department.. This
shows your income paid and tax deducted by each employer and ACC earners' levy
paid.
In previous years I have included the cost of my
income protection insurance. Can I still claim this?
Expenses such as income protection insurance can be offset against your
taxable income. This reduces your taxable income by the amount of your
expenses, and therefore reduces your tax.
Depending on your circumstances, you can claim expenses in one of the
following two ways.
 | You can claim expenses on a personal tax summary. You may receive one
automatically in June from Inland Revenue department but if not, phone IRD in July to ask for one. You can
either:
 | Tell IRD about the expenses over the phone, or
| Fill in your expenses and send the personal tax summary back to
IRD. |
|
| If you file your IR3 tax return, you can claim your expenses at Box 25. |
|
What are some of the expenses I can claim if I am a
salary or wage earner?
Expenses you claim are:
| commission on interest or dividend income (but not bank fees, as they
are private expenses)
| interest on money you borrowed to buy shares or to invest - as long as
the investment will produce taxable income
| premiums for loss of earnings insurance, provided the benefit from the
insurance policy is taxable income
| expenses incurred in earning income that has had withholding tax
deducted
| additional expenses incurred in earning partnership income, such as
interest on capital borrowed to purchase a share in the partnership
| fees you paid someone to complete your tax return. |
| | | | |
These last three expenses are usually claimed on an IR3 tax return as they
are business expenses and not associated with salary and wage earners.
Is it compulsory to be on the right tax code?
Yes, this is covered in section NC 8 of the Income Tax Act 2004.
What happens if I don't give my IRD number to my
bank or employer?
Your IRD number is the link between Inland Revenue Department and your bank or
employer. If you don't provide your IRD number to your bank or employer they
are required to deduct tax at the no-declaration rate. This is presently 45%
on salaries and wages, and 39% on interest.
Why isn't a personal tax summary issued
automatically to everyone?
Most people pay the correct amount of tax during the year, so they don't
need to deal with IRDs at the end of the year.
If you aren't sent a personal tax summary and you don't have to request
one, you can choose to request one after July.
Why can't I claim rebates for a housekeeper,
childcare or donations on my IR 3?
The rebate claims process is now separate from the tax return process. This
means you can get your rebate earlier - you won't have to wait until your IR 3
return is filed and processed. You'll get a rebate claim form (IR526)
automatically in April if you've claimed a rebate in the past, if you do not
receive one you can download one from www.ird.govt.nz
or request one from Inland Revenue Department. Complete it , sign it and post it in with
your receipts.
Why is the personal tax summary not available until
July when I used to get my taxpack in April?
Personal tax summaries can't be issued until all the employment details for
the year have been processed. Employers don't have to file the final month's
details (for the March month) for the tax year until 20 April, after which we
can process the information and generate the personal tax summaries.
How much tax will I pay if I have been made
redundant?
The tax you pay will depend on the combined total of the redundancy payment
and the grossed-up annual value of your income for the previous four weeks.
| If the total is $38,000 or less, you will be taxed at 21%.
| If the total is between $38,001 and $60,000 inclusive, you will be taxed
at 33%.
| If the total is over $60,000, you will be taxed at 39%. |
| |
Redundancy payments are not liable to earners' levy.
FRANCHISE
SECTION ON OUR WEBSITE
We have introduced a Franchise Section to our Website. The
following are the articles in it:
A
Consumers Guide to Buying a Franchise
Franchising
Basics
Franchising- Advantages/
Disadvantages
Pros
and Cons of Starting a Franchise
Buying
a Franchise- What you should Consider
Finding
the Perfect Franchise Opportunity
The
Franchise Agreement
Evaluating
a Franchise Agreement
Fifteen
Questions to Ask before Choosing a Franchise
Typical
Franchise Fees
Eight Steps
to Starting A Business
Looking at
Buying a Business- How Do I Decide which is the Right One?
Creating a
Successful Market Niche
Business
Strategy- a Choice of Three
Starting
in Business- Basic Tax Obligations
Business
Legal Structures
Comparison between Sole
Trader, Partnership and Company
Sole Trader
Business Structure- Advantages/ Disadvantages
Partnership
Business Structure- Advantages/ Disadvantages
Company
Business Structure- Advantages/ Disadvantages
Buying
a Business- Advantages/ Disadvantages/ What to Look for
Obtaining
a Business Loan- Key Steps
Borrowing
Money
What
you Need to Know about Record Keeping
LATEST CREDIT
CARD DATA
The latest credit card statistics show that:
| At the end of April we owed $4.076 billion dollars on our credit cards,
net of deposit balances
| Our billings totalled $1.8 billion in April, and for the year to the end
of April this came to $22.2 billion
| We used our credit cards overseas to rack up spending of $2.6 billion
over the year to the end of April
| Over the year to the end of March we were charged $503 million in
interest.
| The weighted-average interest rate charged in March was 18.8%
| 69.4% of the average amount owed at any time during March was interest
-bearing
|
| | | | |
CONTRACTOR OR
EMPLOYEE?
It is important to know
whether you are employing a contractor or an employee because
the tax, ACC and employment obligations are treated
differently for these two groups of people.
Other terms for a contractor are self-employed, and
self-employed contractor.
The Contractor Catch
Many businesses make the mistake of thinking they can
employ someone as a contractor, when in fact the relationship
is one of employer and employee. In most cases it will be
quite clear whether or not someone is an employee. Generally,
if the employer controls how and when the person’s work is
done, then the person is an employee.
Contractor or Employee?
How does an employer know if a person will be regarded as a
contractor or an employee? Contractors are people who are
employed under a contract for service whereas employees
are employed under a contract of service which requires
employees to be continuously available for the employer and to
accept a high degree of control by the employer.
There are tests you can apply. Two main issues are:
| The degree of control the employer has over the
person and the work involved. How much room for initiative
does the person really have?
| The degree of integration into the business. Does
the employer provide all the resources for the person?
What does the person have at risk? Does the person work
for other businesses as well? |
|
Inland Revenue and the Department of Labour both provide
questions to help define if the person is a contractor or
employee:
Generally, a person who is defined as an employee under
employment law will also be an employee for tax purposes.
1. TAX ISSUES (INLAND REVENUE)
It’s illegal to treat someone as a contractor to avoid
deducting tax. This is because employers are responsible for
their employee’s tax deductions. These include PAYE,
student loans and ACC payments. If Inland Revenue determines
that the contractor is really an employee, then the business
can be prosecuted for failing to deduct tax. In addition,
the taxes themselves will have to be paid.
This makes it important to be clear that the person
you’re employing as a contractor really is a genuine
contractor.
Withholding Tax
Even if the person is a contractor, employers in many
industry categories (such as caretaking, agricultural
workers, milk delivery, modelling and entertaining), are
still required to deduct withholding tax.
To find out if you need to deduct withholding tax check
the categories listed on page 4 of the Tax
code declaration (IR330, PDF 138kb). If in any
doubt, check with the Inland Revenue by calling 0800 377
772.
You’ll find information on how to deduct withholding
tax on page 12 of Inland Revenue’s Employer’s
guide – information to help fulfil your responsibilities
as an employer (IR335, PDF 447kb).
2. EMPLOYMENT ISSUES (DEPARTMENT OF LABOUR)
The key point here is that a business cannot treat an
employee in the same way that it might be able to deal with
a contractor.
Employees have rights under the Employment Relations Act
2000 and other employment laws. Contractors are not covered
by the Employment Relations Act or some of the other
employment laws, such as the Holidays Act 2003. The general
civil law determines most of the rights and obligations of
contractors. Health and safety law applies to both employees
and contractors, although the expectations in each case are
different.
Case Study
A construction company terminated the contract of one of
its contractors for inappropriate behaviour. The person then
brought an unjustified dismissal claim against the company,
claiming that he was essentially an employee. In its ruling,
the Employment Relations Authority conceded that the ‘true
intention’ of the parties was to establish a contractor
relationship, but by applying other tests ruled that in
reality the relationship was one of employer and employee.
The Authority consequently ruled that the person was
unjustifiably dismissed and awarded him lost wages, holiday
pay, and $1,000 compensation for humiliation and distress.
Implications
This case highlights the need for employers to establish
as clearly as possible the real nature of their relationship
with contractors. If the contractor is really an employee,
then the employer cannot simply dismiss the person. Instead
the relationship between the employer and the
‘subcontractor’ must abide by all the provisions of the Employment
Relations Act 2000 and its amendments.
Further information
Inland Revenue
| Get help on the phone from the General Business Tax
Enquiries service on 0800 377 774 (have your IRD number
ready, however a general enquiry does not require an IRD
number). View other Inland Revenue contact
details .
| Arrange
online for an Inland Revenue business advisor to
visit you. |
|
Department of Labour - Employment
Relations
HOW TO
INCREASE YOUR INVESTMENT RETURNS THROUGH GEARING
When buying a rental
property, taking out a mortgage to allow you to purchase it is a common
practice. While a mortgage is usually a means to allow us to purchase a
property we cannot afford to purchase outright, when the numbers are right
gearing allows you to earn a higher return on your initial investment.
In its simplest form, gearing means borrowing to finance income-generating
activities. While the most familiar form of gearing is the probably the
mortgage, other financial instruments such as futures can also be used.
So if you can gear for property investment, can you gear for other
investments as well and reap the benefits? Theoretically the answer is
yes, however not many people to do it. The practicalities (and expenses)
of taking out a loan to buy shares or other investments tend to dissuade
people from considering gearing as an option to help them build their
investment assets and increase investment returns. However, there are
managed funds that use gearing so they can take away some of the hassle.
Gearing is profitable when the cost of borrowing is lower than the return
you earn on your investment. Take, for instance, a person with $200,000 to
invest who plans to buy a rental property (or any other investment) with a
yield of 8.5%. They can purchase a $200,000 house or borrow a further
$200,000 at 7.5% and buy a $400,000 house. The table below shows the
variation in returns that would be earned. This doesn’t necessarily just
apply to property, it could be any other investment too, such as a
portfolio of shares.
As borrowing to invest on your own may seem daunting, you may find that
another option that could enhance your returns is to seek out a managed
fund with a mandate that allows the fund to gear when there are suitable
opportunities. Typically these are growth-oriented funds such as NZ
Equities funds, as there is a cost to borrow that means that you need to
be investing in assets that have the potential to generate higher returns
to cover the cost of borrowing.
Generally there will be limits on the allowable level of gearing (for
instance, the manager may be allowed to borrow up to 20% or 30% of the
funds assets), and even then the manager might not practice it. A
financial adviser should be able to provide you with information on funds
that allow gearing as part of their investment strategy.
Gearing your investments increases risk. With gearing, the risk is that
your returns will not be high enough to cover the costs of borrowing, and
your returns will typically be more volatile. However, as we all know
higher returns must come with higher risks. Using a managed fund that
utilises gearing means that professional investment managers are
constantly assessing whether the environment is right for this approach
and whether the opportunities available justify the risks and costs at any
point in time.
You probably consider borrowing to buy a rental property quite normal,
necessary even, so if you are looking to enhance investment returns then
this could be a strategy for you. As always, we recommend you seek advice
from a financial adviser before deciding on or changing your investment
strategy.
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:
|
All text must
be copied without modification and all pages must be included.
|
This document
must not be distributed for profit.
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