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. has installed Norton Antivirus software to minimise risk of virus transmission in the provision of this service.

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.

INDEX

1. Relevant Business and Taxation Articles

2. Company Incorporation/ Advantages/ Disadvantages

3. Family Assistance

4. Changes to the Rebate Claim Process - Childcare Rebate

5. 2003/2004 ACC Levy Rates   

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:

• Analysis and Interpretation of Accounts                www.mcleanandco.co.nz/Page71.htm

• To Lease or Own                                                     www.mcleanandco.co.nz/Page21.htm

• Debt Options- if you are unable to pay IRD debts   www.mcleanandco.co.nz/Page47.htm

• Improving Cashflow                                                 www.mcleanandco.co.nz/Page36.htm

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:

COMPANY INCORPORATION/ ADVANTAGES/ DISDAVANTAGES

 McLean and Co.  offer as part of their services assistance to their clients with company incorporation and would be happy to assist you in company incorporation and your subsequent accounting and taxation requirements.

The setting of up a business entity as a company  may not be appropriate and necessary for all business entities for self employed persons and small business firms.  Here are some of the advantages and features and disadvantages of the company structure:

ADVANTAGES AND FEATURES  

• Can have any number of business owners (shareholders) providing varying levels of investment capital and personal services.   A sole trader is limited to one  and a partnership normally will have fewer partners than the business owners of a company.  

• Provides limited liability,    Claims against the company fall on the company, not the shareholders .    That is there can be a separation of business risk from the shareholders personal assets.    A company allows shareholders to limit their maximum possible liability for the debts of that company.    If a shareholder holds 50 $1.00 shares in a company, that shareholder's liability for the company's debts is limited to $50.00 (liability can be increased in situations where shareholders and directors provide guarantees to Banks or other Financial Institutions to cover the company's borrowings)     Similarly, shareholder's loans to the company can also increase the potential risk in the event of financial collapse of the company.    This situation is to be contrasted with the position of a sole trader or partner in a firm, where their liability for the debts of that business is unlimited.

• Registration of the Name.   Once a name is approved by the Registrar of Companies no other company can be registered with an identical or near identical name.    There is no register for unincorporated bodies such as sole traders or partnerships.

• Separate legal entity.    An individual can not enter into a contract with himself but a shareholder can enter into a contract with the company.    As a consequence of this a shareholder may be employed by the company and may also loan money to the company on the same basis as any unrelated party.

• May offer tax advantages when the tax rates for companies and individuals differ e.g. tax rate for companies is 33c in $, whereas tax rates for individuals differ (19.5c to $38,000, 33c $38,000-$60,000, 39c over $60,000).

• Taxation and employing Relatives.     By introducing family members as employees and/or as shareholders income splitting is possible to enable tax less tax to be paid at the higher rates.     Approval from the Inland Revenue Department is required to allow a claim for wages paid to a spouse of family of a sole trader or of a partner in a partnership.   Restrictions are placed at the hourly rate which can be paid.     With a company there is no such restriction.    The amount of remuneration paid is to be in keeping with the value of the work undertaken.

• Tax-Dividend Imputation.     With the introduction of dividend imputation from the 1st of April, 1988, double taxation has been removed.     Companies now pay tax at 33c in the dollar on any profit earned after allowing for shareholders salaries.      If the company's tax paid profit is later distributed to shareholders as dividend they get an imputation credit for the tax the company has already paid on their behalf.

• May confer the impression of greater credibility and that the business is “serious” and there for the long term.

• Continuity.     If a director pulls out, or a shareholder wishes to sell part or all of his or her shares, the company is not affected with a new director or shareholder.     This would be different with a sole trader or partnership.     Both of these business forms would have to create a new entity.

• Provides more options for funding e.g. raising of equity, venture capital.   

• Borrowing.     Arranging security for a loan can be both cheaper and easier for a company than an individual.    A company may grant a floating charge over its assets, both present and future, by the granting of a debenture.     Individuals, on the other hand, cannot do this and must grant specific charges over specific assets.    A company can grant a charge over its undertakings whereas an individual would have to provide a detailed schedule of all assets to be charged for the charge to be effective.    Under the debenture, new assets acquired by the company would automatically be covered by the charge and existing assets sold in the course of the business would be released from the charge.     In the case of an individual where a new asset was acquired a new charge would have  to be prepared.   Similarly where an asset was sold a release would have to be executed to release the asset from the charge.

• Security for Shareholders Loan.    It is possible for a shareholder to have their lending to the company secured by way of a debenture.    In the event of the company experiencing financial difficulties, eventuating in a wind up of the company, the debenture holder would stand to rank ahead of the unsecured creditors in distribution of the residual assets.

• Easier to sell part of company than a sole trader or partnership business structure- just sell some of the shares.   

• Distribution of the Company's Loss Amongst Shareholders.    It is possible to separately register the company with Inland Revenue Department with Loss Attributing Qualifying Company (LACQ) status.     In the event of the company experiencing a tax loss in a future year, this loss can be distributed to the shareholders (in the same year).     The result is, losses which would otherwise be held within the company, awaiting future profits to offset these losses, can be used immediately by the shareholders to reduce their individual personal tax liabilities.     An example of the use of an LACQ company is the purchase of a rental property which is heavily mortgaged or a forestry company from its start up.        In the early years both situations are likely to have losses.   These losses would be able to be distributed year by year to the shareholders-  with LACQ status these distributions would not be possible. 

DISADVANTAGES     

• Does not protect you from personal liability as a director.    If it can be shown that you continued trading when the company was insolvent you can be held to be personally liable for the debts of the company.

•   Directors must be fully aware of the financial operations of the company to prevent it trading while insolvent.

• Does not provide any opportunity to spread business income to family members on lower marginal tax rates other than through legitimate wages.

• Business losses have to remain in the company (unless the company is a loss attributing qualifying company) and cannot be offset against a shareholder’s taxable income from other sources.

• A public company has to declare financial results publicly and has to be audited.

• Depending on profit levels in first year, may have to start paying income tax earlier than other business structures.