EMAIL NEWSLETTER MAY 2002  

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.

INDEX

1. IRD Targets Black Economy

2. Income Tax During First Year of Business

3. Voluntary Disclosures

4. Request for Non-Standard Balance Date 

5. Claiming of Property Expenses for Farmers who are not Full-Time Farmers

6. Paid Parental Leave

7. Residential Property Investment-    Features and Taxation.

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:

• Provisional Tax-   Basics, How Does it work?              www.mcleanandco.co.nz/page22.htm

• Goods and Service tax-   Basics, Some Suggestions     www.mcleanandco.co.nz/Page15.htm

• Venture Capital                                                              www.mcleanandco.co.nz/Page65.htm

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

• 2002 National Standard Costs for Specified Livestock www.mcleanandco.co.nz/Page58.htm

IRD TARGETS BLACK ECONOMY

IRD has launched a new campaign to try to recoup taxes on some of the millions of dollars that changes hands in the black economy.   The programme, launched in partnership with the painting and electrical industries, will attempt to understand why some businesses choose to do cash jobs.

IRD Commissioner David Butler says they want to offer education and guidance, rather than just the threat of audits and stiff penalties.   He says that penalties are the big stick and they're keen to make sure the carrot is also out there as well.

INCOME TAX DURING FIRST YEAR OF BUSINESS

The first year of business is not tax free.   If, at the end of a first year in business, you have made a profit, you will have to pay tax on this. 

If you have not been making tax payments during your first year in business, the tax will need to be paid by 7 February in the following year if you have a 31 March balance date  (or. if you have an agent, by 7 April).

If you want a balance date other than 31 March, you must apply in writing to IRD stating the resons why.  Please refer to our article below on non-standard balance dates.

After your first year in business you may be required to pay income tax in three instalments during the income year.   This is called Provisional Tax.    For information on this refer to our article in the "Relevant Business and Taxation Articles"  section above.

If you are a sole trader and have a student loan, you may also have student loan repayments to make.   After your first year in business you may have to make interim payments.

VOLUNTARY DISCLOSURES

The New Zealand tax system is based on voluntary compliance.    It relies on taxpayers meeting their obligations under the tax laws, for example, filing tax returns and returning all income.   The voluntary disclosure system provides an incentive to taxpayers to detemine their correct tax liability.   It also reflects the savings to IRD from voluntary admissions of irregularities and other benefits of co-operation by taxpayers.

A taxpayer may make a vountary disclosure either before being notified of a pending audit or investigation (pre-notification disclosure) or after the first notification but before the audit or investigation occurs (post-notification disclosure)

The disclosure must be full and complete.   The minimum details required are:

• taxpayer's name (name, trade name, IRD Number, address, date of birth or incorporation, contact telephone number and contact times)

• the nature of the errors and ommissions

• an explanation as to why the errors or ommissions occurred

• adequate information to enable an assessment of the tax shortfall to be made

• a declaration signed by the taxpayer, if possible

• further information as is necessary to make an assessment

Taxpayers can make a voluntary disclosure in any one of the following ways:

• by visting an IRD office

• by telephone call

• by letter, fax or email

• during an interview

By making a full and complete voluntary disclosure, a taxpayer will get the advantage of reduced levels in any shortfall penalty imposed.   If a taxpayer makes a pre-notification disclosure, the level of any shortfall penalty will be reduced by 75%.   If a post-notification disclosure is made, the reduction in shortfall penalty will be 40%.

REQUEST FOR NON-STANDARD BALANCE DATE

Taxpayers can apply to have a balance date that coincides with their year end.   Any such application must be in writing and must state fully the reasons for the application.  

Any approved non-standard balance date continues to apply until the taxpayer requests that it be altered.   Where a non-standard balance date (a balance date other than 31 March) is adopted, the income derived during that year is deemed to have been derived during the year ending with the 31 March nearest to that balance date.   This means that a balance date falling between 1 April and 30 September (inclusive) is dated back to the previous 31 March, while a balance date falling between 1 October and 30 March (inclusive) is carried forward to the following 31 March.

IRD require that salary, wages or withholding payments be reconciled to the year ended 31 March.

IRD normally allow a non-standard balance date in the following circumstances:

• the nature of the business makes a 31 March balance date appropriate   e.g. for farmers and orchardists

• where the date coincides with the balance date of a parent company

• for continuing estates, where the date coincides with the death of the deceased taxpayer

• for shareholder-employees, where the date coincides with the balance date of the company in which they are major shareholders and from which they derive their main source of income.   If they are major shareholders in more than one company, their balance date should be alligned to the balance date of the company which provides their main source of income.

CLAIMING OF PROPERTY EXPENSES FOR FARMERS WHO ARE NOT FULL-TIME FARMERS

There are certain expenditure categories that full-time farmers are able to claim on their business financial statements for income tax purposes that part-time farmers may not be able to claim.   These include dwelling expenses (i.e. 25% of depreciation, repairs, maintenance, insurance and domestic power) and full interest deductibilty of loans to acquire the farming property.

To be classed as a full time farmer:

• the farming income must be the primary income source

• the farmer must work on the farm for an average of at least 20-30 hours per week

• the farmer would have to be on a full-time ACC levy rate

• the situation would be the same for farm/forestry or forestry blocks

PAID PARENTAL LEAVE

Paid Parental Leave (PPL) is a government funded payment for parents, for up to 12 weeks, when they take parental leave from their job to care for their newborn child.

The PPL legislation has been passed and parents expecting a baby on or after 1 July 2002 may be entitled to receive payments.   Adoptive parents may also qualify if they adopt a child aged under five years.

The Department of Labour (DOL) administer the PPL scheme and is responsible for communicating the scheme to the general public.   IRD has been contracted as the payment agency and will process the PPL application forms and make payments to parents.

To be eligible, a parent must first qualify for parental leave from their job under the Parental Leave and Employment Protection Act 1987.    Parents are entitled to leave if they have worked for the same employer for 12 months.   They must also have worked an average of at least 10 hours per week, including at least one hour every week or 40 hours per month, and not taken any parental leave for another child in the previous 12 months. 

Self employed parents are not eligible to apply for PPL payments.

The maximum amount a parent can receive is $325 (gross) a week or 100% of normal pay, whichever is the lower.   PPL payments are treated as normal salary and wages and will be shown on a recipient's summary of earnings and personal tax summary.

A parent (birth mother or adoptive parent taking parental leave) can apply by completing a Paid Parental Leave Application (IR 880) form.     The parent and their employer must complete the application form.   The form is available from DOL's infoline on 0800 800 863 or it can be downloaded from DOL's website at www.ers.dol.govt.nz .    Further information on the scheme can be obtained by contacting DOL's infoline on 0800 800 863.

RESIDENTIAL PROPERTY INVESTMENT- FEATURES AND TAXATION

Benefits of Investing in Rental Residential Property in New Zealand

• capital appreciation ( not guaranted but occurs more than not)

• no capital gains tax

• no interest clawback

• no stamp duty on redsidential property

• no limit on losses available

• favourable depreciation rates.   It should be noted though that depreciation should be declared back as depreciation recovered income when the property ceases to be a rental property or is subsequenly sold at a value higher than cost

• stable government policies

• allows easy entry into the Investment Property owning field

• provides a service which has a high demand

• is the best security for lenders

• it is easy to spread your risk over several properties with several points of income

• it provides instant and consistent cash flow

• it protects the value of your investment (hedge against inflation) assuming property values increase at rates equal to or higher than inflation

• it provides an asset that is easily tradeable

• it is not time consuming

• many taxpayers derive more satisfaction and feel more comfortable with an investment which is  bricks and mortar and which they  can see, touch and take pride in as opposed an investment with a certificate.

Tax Advantages of Rental Property

• only rental earned is treated as assessable

• capital gain (the excess of sale price over original cost) is not treated as income