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McLEAN AND CO.
DIRECTORY \Manager Address ( Office
Facsimile Number ( Web
Sites www.taxreturns.co.nz www.taxreturnz.co.nz Email
Address murray@taxreturnz.co.nz ** ** Taxation
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McLEAN AND CO DECEMBER
2005 NEWSLETTER PAGE
2 FIVE STEP MORTGAGE GUIDE House buying is like looking for a needle in a haystack - it's often
hard finding the home you love and that fits your budget. Chances are
you'll also have to negotiate a mortgage. So how do you go about getting
a good deal on a mortgage?
McLEAN
AND CO DECEMBER 2005 NEWSLETTER
PAGE 3
CHOOSING YOUR LOAN FINANCE TYPE Your home is likely to be the
biggest purchase of your life, and a mortgage your biggest financial
commitment. Deciding which type of mortgage - fixed, floating or a mix
or both - can save you thousands of dollars over the lifetime of your
loan. Fixed Interest Rate
McLEAN
AND CO DECEMBER 2005 NEWSLETTER PAGE 4
UNDERSTANDING FINANCIAL
STATEMENTS For
most small business owners, the term financial statements refers to
three key documents – the Income Statement (or Statement of Financial
Performance), the Balance Sheet (or Statement of Financial Position) ,
and the Cash Flow Statement.
The
descriptions and tips below are designed to ensure you use these
documents effectively, to give you a solid grounding in basic financial
controls. INCOME
STATEMENT How you should use it? Look
at it to make sure that you are making money. An income statement shows
you whether you are making money when all expenses are taken into
account. It is useful because many business owners overlook overhead,
insurance or other expenses when conducting an informal profit analysis.
It can be helpful to create an income statement for a specific product,
project or client, to be sure that each part of your business is firing
on all cylinders. How often you should refer to/create? A
monthly income statement is advisable for many small businesses. Any
more often may be too much for you to find time for, any less frequently
and you may miss problems that are brewing. BALANCE SHEET What it is?
A
snapshot of a company’s assets and liabilities including so called
non-cash items such as depreciation. How you should use it?
Typically
created to coincide with your income statement because it complements
your profit picture (income statement) by providing a complete view of
all assets and liabilities. A balance sheet provides a picture of what
your equity in the business is worth. How often you should refer to/create?
Time
its creation to coincide with your income statement. CASH FLOW STATEMENT What it is? Also
called a “sources and uses” statement, this document lists your
sources of income and your uses for this money, e.g., what you spend
money on. A cash flow statement tells you what your cash position is
currently and how you have progressed from your previous cash position
to this one, in other words, where your money has gone. How you should use it? One
of the most important documents for small business owners, a cash flow
statement presents a picture of where your business’ money goes. It is
useful for determining if you are spending wisely. How
often you should refer to/create?
Monthly
timing suits many businesses, but more frequent is appropriate if you do
a high volume of business BUSINESS SURVIVAL Your chances of surviving is business are said to be double if you have
regular accounting reports. The bigger your business the more often you
need to analyse its profit. By
monitoring the progress of the business, you can correct trends early.
McLEAN
AND CO DECEMBER 2005 NEWSLETTER
PAGE 5 DEALING WITH CASHFLOW PROBLEMS Many small businesses experience cashflow problems occasionally and need
working capital.
For
most, the immediate response is to go to the bank and ask for an
overdraft or overdraft extension. But the money might be there in your
business. To unlock your hidden funds, and make your business more
efficient at the same time, you need to look closely at your assets,
customers and suppliers. ASSETS
Your
assets include debtors,
stock, pre-paid expenses, vehicles, plant and equipment, fittings and
property. Each of
these is a possible source of funds. Debtors Are
you letting some customers have the free use of your money for months?
This is a common occurrence in small businesses where the owners are so
busy getting products out the door or services completed that they don't
pay enough attention to basic business procedures. Many customers will
take advantage of this 'free money', but your business isn’t a bank. Stock
Do
you have excessive capital tied up in stock? This can occur if you are
carrying large numbers of items
that you could obtain from suppliers at short notice, or if you have too
many slow-moving items. It’s
important to regularly review your stock levels and turnover rates, and
your purchasing policies. Can
you free up money by reducing stock? What about moving out of the
slow-moving lines or having a quick Pre-paid
expenses These
pre-paid expenses often relate to services. For example, you might pay
your insurance bill for the year all in one hit, but you could arrange
to pay small monthly amounts. There might be an additional cost for
doing this, but you must weight the extra cost against the advantages of
12 small payments which your cashflow can comfortable handle versus one
large annual payment. Fixed Assets
Fixed
assets can often be the source of a significant amount of cash. Do you
really put all your assets to full use? You might be able to sell off
little-used assets and hire suitable replacements when you require them.
You might be able to sell vehicles and lease others instead. Customers
Your
customers can be a source of business funds. Apart from the good debt
collection tactics referred to above, try these tactics: If
you're starting a new business, consider establishing it on a cash-only
basis to keep the funds
inside your business rather than locked up in If
you supply goods over a period of time, or if you're a service business,
ask if you can invoice for progress payments. Otherwise, you’ll have
to wait until the job is finished and then another 30 days or more
before you get paid. This approach also gives you an early warning if
the customer isn’t going to be pay, allowing you to cut your losses
and get out. It’s a very suitable approach for tradespeople
subcontracting to a developer. (cont
Page 6)
McLEAN AND CO DECVEMBER 2005 NEWSLETTER
PAGE 6 Suppliers
Ask
your suppliers if you can buy on consignment, meaning you don’t pay
until you make a WHAT
TO CHECK BEFORE SIGNING A LEASE
A
lease agreement is a major business commitment and therefore requires
caution. If the building or location turns out to be unsuitable, you
might (through a personal guarantee) find yourself and the business
committed to several years’ rent, even though you may have moved out
of the premises.
CHECK
THE LEASE
Always
get the lease checked by a lawyer with experience in commercial leasing
who can spot unfavourable clauses. The lawyer can help you negotiate
balanced terms.
Important
tip: Despite its name, a preliminary ‘Agreement to lease’ document
actually binds you to some essential terms that will appear in the final
lease. Don’t sign it or any other document before you have your
lawyer’s approval. LENGTH
OF THE LEASE
Whether
you should sign a short-term or long-term lease depends on your
circumstances. A new and relatively unproven business might see
advantages in the freedom of a short-term lease (or even a sub-lease if
one comes on the market) that allows it to test both the business
concept and the location without longer-term financial commitment. A
more stable and established business might value the security of a
longer tenure and see considerable merit in renewal rights.
Most
leases are medium term: for instance the 4 + 4 formula (four years lease
with the right of renewal for another four years) is popular. Get advice
from your lawyer and accountant on the term of your lease. SUITABILITY
OF THE PREMISES It’s
important to do research before you sign a lease. For a destination
business (a business like a supermarket or video shop that consumers
need to visit), a good location (high foot and road traffic, good access
and parking) is vital. Other businesses (for example, businesses that
sell to other businesses) might be more concerned with good access for
trucks and containers. THE
SEVEN FINANCIAL STAGES
Source-
Prudential Insurance
McLEAN AND CO DECVEMBER 2005 NEWSLETTER
PAGE 7 TAX TITBITS IF YOU ARE HAVING DIFFICULTIES MEETING YOUR TAX LIABILITIES?The
best way to make your tax payments is to plan ahead for them so you can
pay the full amount on time. There
are a range of options available for paying amounts due.
If you are unable to pay the full amount due on time, you
should contact IRD as soon as possible. You do not have to wait until
the due date for payment has passed. IRD
will discuss your current circumstances and help you determine the best
option for dealing with the amount due. IRD
will look at your current situation, your payment history and your
ability to meet future obligations. When looking at your individual case
we will follow established guidelines. Options
for payment are:
We
may need further information from you to determine the best options for
you. IF YOU THINK YOU CAN’T PAY BY
DUE DATE Contact
IRD before the due date to let them know about your financial
difficulties. Penalties and interest apply to tax bills that are unpaid
by the due date but, if your financial situation prevents you from
paying on time, IRD may for example set up an arrangement where you pay
the amount owing in instalments. If you contact IRD and make a formal
arrangement before the due date, as long as you meet all of your
obligations under the arrangement you will only be charged one late
payment penalty of 1%. No further penalties will be charged. Note
that even with an arrangement you are still charged interest on the tax
owing. So you may wish
to consider borrowing money from elsewhere so that you can pay the tax
bill by the due date. IF THE DUE DATE HAS PASSED AND
YOU HAVE AN UNPAID TAX BILL If
you make an arrangement after the due date, any penalties already
charged will stand. If you
meet all of your obligations under the arrangement, no further penalties
will be charged, however, use of money interest continues to be charged. NEGOTIATION PERIOD In
some instances when you contact IRD to discuss your payment options, IRD
may need further information from you to determine the best option for
you. This may require you to phone IRD back, complete a form or file a
return. You will be given a
specific timeframe to provide the information that we need. During
this time, IRD will not impose further late payment penalties or take
new debt recovery actions. Late
payment penalties and recovery actions will recommence only if a
conclusion is not reached before the end of the negotiated timeframe.
The use of money interest continues to be charged during the period of
negotiation. OVERDUE INCOME TAX RETURNS If
you are required to file a tax return and you have not yet done so, IRD
will estimate the amount of tax they think you owe. This is called a
"default assessment". You may also be charged a late filing
penalty. It is important that you file the overdue return so that your
correct tax position can be confirmed. You may even be entitled to a
refund.
McLEAN AND CO DECVEMBER 2005 NEWSLETTER
PAGE 8 TAX TITBITS FAMILY
ASSISTANCE INCREASES
Family
Assistance is made up of four types of payments – Family Support,
Child Tax Credit, Family Tax Credit and Parental Tax Credit. You may
qualify for one or more, depending on your personal situation. From
Some
families receiving a benefit will have part of their payments
transferred to their Family Support. This will affect their benefit, but
they will be better off overall with the increases to Family Support. From
From
If
you are already receiving Family Assistance you don't need to do
anything to get the increase. Your payments will be adjusted
automatically. If you are not currently receiving Family Assistance, and think you might be eligible from 1 April 2005, you can apply by calling Inland Revenue on 0800 227 773. HOW MUCH CAN YOU EARN AND
RECEIVE FAMILY ASSISTANCE? The
table below shows the income limit for each type of payment. The amounts
are based on all children being under 13 years. If you have children
older than 13 years you can earn more and still receive a payment.
Family
Tax Credit is for families who earn up to $18,368 (before tax) a year. DEPRECIATION
CHANGES
Significant
depreciation rule changes in the 2005 Budget were:
McLEAN AND CO DECEMBER
2005 NEWSLETTER PAGE
9 TRUSTEE OF A FAMILY TRUST- SOME HELPFUL
GUIDELINES Most
discretionary trusts provide that decisions of trustees are to be
unanimous. Most legal commentators agree that providing for unanimous
resolutions is a safeguard against abuse and, when there is an
independent trustee appointed, a safeguard against a claim that the
trust is a sham by creditors including the Inland Revenue. For
resolutions to be unanimous all the trustees must have put their minds
to the matter to be decided upon. It
is an established rule of law, that a trustee must not delegate his or
her duties or powers not even to co-trustees. Delegation is however
allowed where such delegation is specifically permitted by the trust
instrument, is specifically permitted by statute is practicably
unavoidable and is in the usual course of business and the particular
agent is employed in the ordinary scope of his or her business. A
trustee has a duty to act personally and this duty requires trustees to
be unanimous in any decisions they make. It
must not be thought, for example, that a co-trustee has delegated his,
her or its authority to the remaining trustee(s). The law is simply that
unless the trust deed provides otherwise - and we have suggested that
there are good reasons for not doing so - the trustees are required to
unanimously make a decision and have no authority to delegate to one of
their number a general authority to make decisions on their behalf. In
the recent New Zealand Court of Appeal case of Niak and Sommerville v
McDonald and Bank of New Zealand, an independent trustee who had not
been consulted about action which was in line with past practice, tried
to argue that the decision taken by her co-trustee was nevertheless
effective. The Court held that while there was an empowering clause
which authorised the trustee to appoint agents to implement decisions
made by them - it did not empower the trustee to delegate to an agent a
decision making authority which was reserved to the trustees. The
moral of this article is that trustees must consult, consider and record
all important decisions to be made in respect of the trust. Family
Trust administration has come under the watchful eye of both IRD and
beneficiaries. The courts
have set the following guidelines for trustees: ·
maintain
a separate bank account for trust transactions, including distributions
to beneficiaries
·
hold
regular meetings (at least annually)
·
have
a formal meeting agenda
·
keep
formal minutes of meetings and include these together with any
resolutions in the trust's minute book
·
minute
investment decisions
·
make
the minute book available to all trustees
·
ensure
formal and timely approval of the trust's annual financial statements.
·
make
formal decisions on the treatment of income
·
ensure
that the power to use majority voting is exercised only after all
trustees have been formally consulted on the issue
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