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. Relevant Business and Taxation Articles.

2. Working for Families

3. Family Trust- must it have an IRD Number?

4. Income Thresholds for Student Loan Payments and Interest Write Offs to rise

5. IRD warns against Income Splitting through Trading Trusts

6. Early Payment Discount

7. Use of Money Interest Rates to rise

8. Franchises- Knowledge Centre

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:

• Back Claiming of Rebates                        www.mcleanandco.co.nz/Page57.htm

• Borrowing Money                                     www.mcleanandco.co.nz/Page123.htm

• What is an LAQC?                                    www.mcleanandco.co.nz/Page142.htm

• Setting Prices                                            www.mcleanandco.co.nz/Page105.htm

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

 

WORKING FOR FAMILIES

Working for families is a new government initiative to help working families gain assistance.  To view information to see if you may now be entitled to receive family assistance under the new criteria, check out the website at 

http://www.ird.govt.nz/related-sites/keyword/workingforfamilies/

 

FAMILY TRUST- MUST IT HAVE AN IRD NUMBER?

In some cases trusts are not deemed taxpayers, and there is no need to obtain an IRD Number.

If a family trust is a taxpayer it must have an IRD Number and have a return of income filed each year.   Whether the trust is deemed to be a taxpayer depends on whether it earns income or has any income-earning assets.   These would include:

• bank accounts

• shares or other investments

• business assets that produce income

If the trust has no income and no income-earning assets it is not a taxpayer, therefore no IRD Number is required.   An example of this would be a family trust that owns a family home but no other assets.

If you have a family trust with an IRD Number that has been allocated in error, you can contact IRD in writing and the IRD Number will be ceased.

 

INCOME THRESHOLDS FOR STUDENT LOAN REPAYMENTS AND INTEREST WRITE-OFFS TO RISE

Income thresholds for student loan repayments and interest write-offs will rise from 1 April 2005.

The income level at which borrowers must begin to repay their loans will rise from $16,172 to $16,588.   The maximum income level for a full interest write-off for part time students will rise from $26,140 to $26,799.

Borrowers whose income is below the repayment threshold will not have to make repayments on their loans and a large portion of their interest will be written off.

Full-time, full-year students will continue to receive a full interest write-off while they are studying, regardless of their income.

 

IRD WARNS AGAINST INCOME SPLITTING THROUGH TRADING TRUSTS

Inland Revenue has recently warned professionals and others who are reducing their taxable income by operating through trading trusts.

Following a ruling by the Taxation Review Authority (TRA), the department warned people to "consider taking advice" as the arrangements may be subject to review by IRD.

IRD had been asked to comment on common structures which have the effect of income minimisation, involving income generated from professional or skilled services using trusts.

It said interest in the issue, which was not new, had been rekindled following a TRA case in which the authority held that a dentistry practice was transferred to, and carried on, by a "trading" trust for tax avoidance purposes.

"Inland Revenue has always looked closely at situations where professional people conduct their business through trusts, and sometimes companies, which they or their families control," said IRD deputy commissioner Naomi Ferguson.

Ferguson said it was by no means the case that every professional operating through a trust was doing so for tax reasons but the department had concerns that some professionals, after becoming employees of associated trusts or companies, were setting their incomes at levels considerably below what they could earn as self-employed practitioners.

In these cases some, or all, of the difference in income might be distributed by the trust to other family members as beneficiaries to save tax. This can result in the professional appearing to earn an unreasonably low level of income, she said.

"There may be legitimate reasons for these arrangements, and we will look at each case on its own facts."

She said it was very difficult to set down rigid rules.

"We do not expect a full market salary to be paid where the business is operating at a loss or is earning very little.

"However, where business income generated by the skills of the proprietor is at, or more than a relevant market salary, we would expect at a minimum that a market salary is paid. Our view is that generally, income gained from personal skills should be taxed in the hands of the person who generates the income."

IRD would consider several factors to assess the purpose of the arrangement, including:

* The taxpayer's commercial reasons for using the structure.

* The way that arrangements are actually implemented and operated.

* The level of salary or drawings paid compared with any previous earnings and with expected market salary rates for a person in a similar situation.

* The degree to which the business relies upon the specialist skills of the proprietor

* The overall tax impact (including income diverted to associated parties). 

 

EARLY PAYMENT DISCOUNT

An amendment in the Taxation (Venture Capital and Miscellaneous Provisions) Act 2004 provides a discount of tax to encourage individuals who commence receiving self-employed or partnership income to voluntarily pay tax in the year before they become liable to pay provisional tax. This will help relieve the financial strain faced by these taxpayers when they commence paying provisional tax and have two years' worth of tax payments to make, namely income tax for the prior year and provisional tax for the current year. The amendment applies from the income year commencing 1 April 2005.

Who qualifies for the discount?

To qualify, the taxpayer has to:

• be either self-employed or a partner in a partnership
• derive gross income predominantly from a business (not interest, dividends, royalties, rents or beneficiary income)
• not be required to pay provisional tax in the income year
• make a voluntary payment of income tax before the end of the income year (31 March for a March balance date taxpayer)
• elect to receive the discount within the timeframe for filing a return of income for that income year
• not been liable to pay provisional tax in the previous four years, and
• never received an early payment discount unless they come within the four-year rule outlined below.

Once the taxpayer has made a voluntary payment they must keep a credit balance in their income tax account until the terminal tax date for the income year. The credit balance must be greater than, or equal to the lesser of the following:

• the amount paid as voluntary payments before the end of the income year, or
• the amount of terminal tax for the income year.

Taxpayers who are already provisional tax payers before they start to receive self-employed or partnership income will not be entitled to the discount as they do not face two years' tax payments in their second year in business and are already aware of the need to make provisional tax payments.

The discount is not available where a taxpayer only ceases paying provisional tax. For example, a business that is in a loss situation would not qualify for the discount.

Calculation

The discount is calculated on the lesser of:

• The amount of any voluntary income tax payments made for the year
• 105% of the residual income tax for the income year.

The current discount rate is 6.7%.

Example

A taxpayer makes voluntary payments of $5,000 for the year ended 31 March 2006.

Their residual income tax for 2006 is $8,000.

The discount is calculated on $5,000 being the lesser of the voluntary payments made and 105% of the residual income tax amount ($8,400).

The value of the discount is $335 being 6.7% of $5,000.

 

USE OF MONEY INTEREST RATES TO RISE

To align with market interest rates, the interest rates on any unpaid and overpaid tax will increase from 8 March 2005.

The new interest rates are:

• 13.08% for any unpaid tax, and
• 5.71% for any overpaid tax.

 

FRANCHISES-KNOWLEDGE CENTRE

The following are  the current articles in our Knowledge Centre about Franchises.  Click to read:

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

The Franchise Agreement

Evaluating a Franchise Agreement 

Fifteen Questions to Ask before Choosing a Franchise

 

 

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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