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.

 

NEW CLIENTS

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:

www.mcleanandco.co.nz/Documentationrequired.htm

 

INDEX

1. Who Pays Tax.......and How Much?

2. Individual Income Tax- Common Questions

3. Franchise Section on our Website

4. Latest Credit Card Data

5. Contractor or Employee?

6. 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:

• Goal Setting in Business                           www.mcleanandco.co.nz/Page81.htm

• Holidays Act 2003                                     www.mcleanandco.co.nz/Page124.htm

• Ten Step Strategic Plan                             www.mcleanandco.co.nz/Page131.htm

• Fixed or Floating Mortgages                     www.mcleanandco.co.nz/Page119.htm

• Property Development                              www.mcleanandco.co.nz/Page153.htm

 

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 

Key Points for Starting a Business

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:

• DoL’s employment relations webpage Who is an employee and who is not?
• Inland Revenue’s guide Self-employed or employee? (IR336, PDF 113kb)
• Employer’s classification of employees and self-employed staff (IRD)

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

• Call the Workplace Contact Centre on 0800 20 90 20 or visit the Department of Labour’s employment relations website.

 

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.