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August 2005

Investing in publicly listed companies

  IF you are saving for retirement, there are only four ways to achieve this. They are:
    1. Invest in real estate. 
    2. Invest in other people's businesses.
    3. Lend your money for interest.
    4. Collect valuable assets, such as antiques, paintings and postage stamps.
  This article focuses on investing, in other people's businesses, but only publicly listed companies. Here are some suggestions:
    • Look for monopolies or semi-monopo1ies. These companies have some ability to control their market. We have only four or five power generating companies. Only Contact Energy is publicly listed. The others are government owned. Competition is limited. You might reasonably expect these companies to continue, subject to government intervention, to make above-average profits.
    • Avoid companies which, to compete, must continue to invest heavily in expensive machinery. This absorbs their cash flow and affects their ability to pay dividends. The greater the competition the slimmer the profits.
    • The days of putting your share scrips in your bottom drawer and forgetting about them have gone. Firstly, you don't get scrips any more. Even if you did, you should be continually monitoring your investments. Company directors can make unwise decisions. These may include take-overs for too high a price and venturing into new markets. For example, Michael Hill International started selling shoes. The venture was not particularly successful and the company withdrew from that market.
    • Many investors take a short-term view. Capitalise on this. They will sell out of a good company just because of one piece of bad news. Contact Energy shares fell when Contact was looking at changing its cornerstone shareholder. Sky City suffered from the smoking ban. Ask yourself, is this a temporary or permanent setback? If temporary, you have a buying opportunity.
    • Keep cash reserves, if you can, to take up opportunities.
    • Beware of advice, even from experts. We know of a financial advisor who recommended Feltex shares. A client relied on the advisor's suggestion and bought some shares when the company floated. Ow!
    • Sell your mistakes. We all make them. Get out early. The client referred to in the Feltex example bought the shares for $1.70 each and sold out at $1.63. After the dramatic fall in the share price, he feels rather good about his selling decision. He sold his mistake.
    • Keep your successes. Resist the temptation to "take a profit". Good shares should carry on upwards.
    • Invest in industries you understand. Warren Buffett avoided the Dot.Com companies.
    • Research. The more you learn, the safer your investments will become. Warren Buffett is the second richest man in the world. He has achieved extraordinary success investing in shares. Books have been written about how he does it. Why not read some of them? Read newspapers, books about businesses and go to seminars. You'll reduce your mistakes.
  Should you diversify? If you do, you increase the risk of making a bad investment!

Credit in new Consumer Act

  WE think this article should interest you as a consumer as well as helping our retailer clients. The Credit Contracts & Consumer Finance Act 2003 makes several changes to consumer credit arrangements. It applies only where credit is provided to an individual primarily for personal purposes and, in general, only to consumer credit contracts.
  The lender must get the borrower to sign a declaration about the nature of the lending, before entering into any contract.

Disclosure requirements

  The Act still requires the lender to make initial, continuing, variation, guarantee and requested disclosure, but the kind of disclosure is now different. Disclosure must now include, among other things:
    • annual interest rate;
    • details of interest charges and how they are calculated;
    • particulars of interest-free periods;
    • amount of fees and charges;
    • amount of default interest charges and fees;
    • "statement of right to cancel" in the form prescribed by the Act.
  Initial disclosure must be made within five working days of the contract being signed. The Act provides a model disclosure statement. If used, it is presumed that disclosure has been properly made.

Interest

  The key changes relating to interest are:
    • the lender cannot charge or debit interest for any day before the end of that day;
    • interest rate changes, including, changes to the base rate, can be disclosed before the change takes effect by a statement published in a range of newspapers or in accordance with the Act's regulations;
    • a lender will be able to charge a higher rate of interest if the borrower has defaulted in payment and while that default continues.

Fees

    • Credit fees and default fees must not be "unreasonable".

Repayment — part and full

    • Borrowers can now have the right to repay the loan in full at any time and no consumer credit contract can prohibit this. Lenders may decline a part re-payment if expressly permitted by the contract.
    • Lenders will be able to charge "reasonable" re¬payment fees.

Re-opening credit contracts

    • Borrowers will still be able to reopen both consumer and non-consumer credit contracts for oppressive conduct by the lender.
    • Borrowers can also seek certain changes to the contract if they have suffered unforeseen hardship. This may be where the borrower is unable to meet their obligations because of illness, injury, loss of employment, termination of relationship, or other through reasonable cause. Applications under hardship provisions can be made only if the debtor has not defaulted and is not in excess of a specified credit limit.

Why a trust?  

  HERE is a list of reasons why you might want a family trust.
    • To protect personal wealth.
    • To protect your partner if you need long-term care. Your assets could be sold to pay for this.
    • To protect your children from the financial consequences of a bad relationship.
    • In case a government reintroduces estate duty.
    • To allocate income to family members who are on low tax rates.

He just did it!

  IDEAS are useful only if you do something about them. Most of us dream and that's as far as it gets.
  A young professional had some ideas for his practice. We challenged him to do something about them. We suggested he select just one idea and implement it within a month. At the end of the month we asked how he got on.
  "In future," he said, "I will charge for XYZ service I have previously supplied for free." He did it! He changed something in his practice and his income will rise as a result; not only next year but indefinitely. We issued him with another challenge. "How about another change before Christmas?"
  For most of our clients, if they were to implement just two significant changes a year, something they had always thought of doing and never got round to, they would be likely to boost their profits, permanently. Do the same thing year in and year out and you will get the same result. If you have some ideas — JUST DO IT.

Assignment of income

  A CLIENT, taking the advice of his financial advisor, gave his wife a large sum to invest so she could derive the interest and the pair of them could save some tax. When we suggested this transaction amounted to an assignment of income, the financial advisor said she thought we were being pedantic. Be sure to take tax advice from those who know tax.
  If you lend money to another person for investment, so the interest can be taxed at a lower rate than it would be in your own hands, you are assigning your income. This is not permitted.
You can do several things:
    1. If you are the bread-winner, get all your income paid into a joint account. This now becomes family money. When invested the income belongs to both partners and can be split equally between the two tax returns. Half a cake is better than no cake. 
    2. You can enter into a matrimonial settlement. You agree certain of your assets will, in future, belong to you jointly and in this way you can share the income. This choice could be useful if you own rental properties and you want the rent to be shared.
    3. You could sell your investments to a family trust. Your spouse could be a beneficiary and all the income could be allocated just as you want it.
    4. There are several other ways of achieving the desired result, such as having a company owned unevenly.
  Your decision should not be tax motivated. For example, if you transfer your wealth to a family trust, your reason might be one or more of those listed on page 2 of this newsletter.

In brief

Attention doctors, dentists, health professionals

HOW old are the magazines in your waiting, room? Two things which most upset patients are:
    • Waiting too long for attention.
    • Old, tired magazines.
  Can you appoint someone to take charge of the magazine problem?

How to delight a customer

  A CLIENT contacted Amazon and purchased a book. It was to be sent by fast mail and would take two or three days. The book took two weeks to arrive. The client contacted Amazon. Without hesitation, the company apologised, cancelling all charges, including for the book. He thinks Amazon is wonderful and is telling, as many people as he can about the excellent way they handled his complaint. If you mess things up, make sure your customer is delighted with the way you handle the situation. Be generous.

87 ways to save

  Most of our clients like to save as much tax as possible. We can now supply you with a checklist of most of the common ways to minimise tax or avoid paying more than you need to. If you would like a copy, please email us and we will send back to you 44 pages of easily read tax advice. This material is copyright. If you have a friend who would like a copy, please get them to contact us and we will supply one.

Adding 20% to bottom line

  HOW many retailers remember the McDonald's suggestion -Will you have fries with that?"
  It's a powerful marketing tool. We know of a retailer who has made a point of adopting the idea for his business.
  He has a staff of eight. He ensures they all look for added-value sales by reciting a sales script, with variations for the different stock items they sell.
  He keeps track of the add-on sales with computer software, measures employee performance and reports to each staff member monthly.
  He has found that for every original sale, he is achieving an extra 40 percent for other sales made at the same time. His goal is to achieve a 75 percent add-on. He rewards his staff, not individually, but as a team.
  Our retailer is in a highly competitive industry. In spite of this, he has lifted his profit by 20 percent in one year.
  We give you these real-life examples in our newsletter to show you the theory really does work for those who take the trouble to apply it.

Wendy in Wonderland

  WENDY was on the phone. "Ross and I thought we might pop across to the Gold Coast for a break. There's a hairdressers conference on. Is this a tax deductible expense?"
  We often get similar calls. Overseas travel can be classified as:
    • Prime purpose of the trip is business.
    • It is mixed business and private.
    • Prime purpose of the trip is holiday with a bit of business. I told Wendy this and said once I knew more about her trip, I could tell her which classification it fell into, and what she could claim.
  "The conference is very important and I expect to learn a lot from it," she said. "I will come back with some good ideas which will keep our salon up to date and hopefully increase our sales. I wouldn't be going if it wasn't for the conference. I also want to visit a couple of big salons in Brisbane and I would like to pick their brains. Naturally, we also want to take a holiday; who wouldn't?"
  To save some time, I offered to email some notes on overseas travel and then explained the importance of keeping good records. "This will help to establish the prime purpose of your trip," I explained.
  If she is going to have discussions with a couple of salons in Brisbane, she is likely to contact them before she leaves. She should make notes of when she contacted them, who she spoke to and what was decided. Similarly, she should keep a diary of her trip. Often business trips lead to further contacts when the traveller returns home. She should also keep diary notes of these.
  I then explained which costs are tax deductible. "Where the trip is primarily for business, costs of travel there and back, accommodation while there and food together with related taxis are all tax deductible. Ross's fares are a personal cost. You would incur the cost of a hotel room regardless of whether Ross was there, so that's a business cost and your food, not Ross's, is claimable. Accommodation and meals on days on holiday are non deductible.
  "If your prime purpose was a holiday, tax deductible costs would be travel to and from your hotel to the conference and salons. The air travel and accommodation would be a private cost."

Depreciation clawback

  WOULD you like an unpleasant surprise? Try selling a rental property.
  Some years ago the tax law was changed. Before this, it was assumed that when you sold your rental property, the depreciation you had claimed on the building was a fair expense, which did not require correcting at the time of sale. The rules changed.
  When you buy a rental property, we divide the cost into three parts — value of the land, value of the building and value of chattels.
  When your rental property is sold, we calculate the proportion of the selling price which applies to the building. We compare this with its depreciated value. If this results in a gain, you will have to pay tax on the difference between the written down value and the amount you originally paid for the building. Clients often believe all the money they receive when they sell their rental property should be a non¬taxable capital gain. If you sell a rental property, be sure to put some money aside for tax: if you want to know how much, call us.

Make guarantees worthwhile

  NEW WORLD offers a 200 percent money-back guarantee. No doubt, if you were upset, the company would be prepared to honour this.
  An airline guarantees internet airfares are the lowest. If you find a lower one, they will refund the difference plus $10. Imagine the hassle of going through their call centre! To be credible, the guarantee needs to be worth having. Offering to refund the entire fare would be more convincing. That would drive people to book on the internet.
  Guarantees must be worthwhile.

Tax calendar

August 7         2nd instalment of Provisional Tax (December balance date)
October 7        3rd instalment of Provisional Tax (October balance date)
                       1st instalment of Provisional Tax (June balance date)
November 7     2nd instalment of Provisional tax (March balance dates)
                        Terminal tax (October balance dates)

All information in this newsletter is, to the best of the author's knowledge, true and accurate. No liability is assumed by the author or the publisher for any losses suffered by any person relying directly or indirectly upon this newsletter. You are advised to consult professionals before acting upon this information.

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About Us

We are a friendly two partner practice with approximately eleven staff located on Apollo Drive, Mairangi Bay. Our clients are varied and our skills range from business structuring to trusts to Look through companies and tax planning.
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63 Apollo Drive, Mairangi Bay, Auckland
P: 64 9 478-5292
E: jmv@jmv.co.nz
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