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February 2006

Interest-free student loans

  FROM 1 April 2006, former students will be entitled to a write off of all their student loan interest, subject to these conditions:
    1. Initially, they must stay in New Zealand for 183 consecutive days. The write-off is then backdated to the first day.
    2. They may go overseas during this time on condition they are not away for more than 31 days within this period.
    3. Once borrowers have qualified for the write-off, they remain entitled to it unless they become absent from the country (see 4 below). This means your daughter could take five months off and go to Europe and still not lose her entitlement to the write-off. However, when she becomes aware she will be absent form New Zealand for more than three months, she must write and tell Inland Revenue as soon as possible.
    4. If your daughter was away from New Zealand for 184 or more consecutive days, she would become absent and lose her loan write-off from the day she left.
    5. The 184 days rule can't be avoided by popping back here for a few days. She would need to be back for more than 31 days out of the 184 days.
    6. An absentee can re-qualify by complying with condition 1 (above) again. If your daughter went away for two years, she would cease to get the write-off during this time. However, on returning, she could serve her 183 days and get her rights back. She would pay interest on the loan for the two years she was away.
    7. Part days in New Zealand are treated as being present for the whole day. The day your daughter leaves and the day she returns count as being in New Zealand.

Exemptions are available:

  A borrower may apply to IRD for an exemption from the 183 day rule. The following are acceptable reasons for an application:
    1. She is working overseas for the New Zealand Government.
    2. She is working for a "charity" on no pay, or very little, for a maximum of 24 months.
    3. She is an accompanying a life partner on conditions set out in the Act, including proof of the relationship.
    4. She experiences an unexpected delay as specified in the Act.
    5. She has an unplanned personal absence as specified in the Act.
    6. She is employed or is in a business requiring her to be overseas on conditions set out in the Act. These are designed to ensure she is earning income which will be taxed here.
    7. She is absent for post-graduate study on provision of specified information. 

Amnesty for those who have skipped and not made loan payments

  Non resident borrowers, or someone on their behalf, can apply to have penalties cancelled provided:
    • They are non-resident at 31 March 2006.
    • They meet all their obligations under the Act for two years from the date IRD receives their application.
    • Their application is received by IRD by 31 March 2007.

Check before you get to annual accounts

  HERE are some reminders of things to do to minimise tax risks:
    • It is smart to pay company tax due on 7 April by 31 March. The company Imputation balance (company tax available for attaching to dividends) is calculated at 31 March and if too big a dividend has been paid, early payment of tax could save you a penalty.
    • Don't forget to write off bad debts by balance date (not after). Whatever system you use to keep a track of money owing to you, be sure it is clear the debt was written off in time. For example, you keep copies of the invoices and work off these. In this case, write a note on the invoice to show you have written it off. Initial it and date it. Take it out of the pile of invoices awaiting payment and put in a Bad Debts folder. You are still permitted to chase your bad debts. If you get a payment, this becomes income in the year of receipt.
    • If you have stock worth $5000 or more, be sure to count and value it. Keep the evidence to show IRD, if it ever asks for it. If less than $5000 you may use the same figure as the previous year.
    • If your taxable profit is likely to exceed $112,000, you could have to pay interest to IRD. Review your potential tax liability and get in touch with us, NOW, if in doubt. Interest back-dated at 13.08 percent hurts.
    • If you have a family trust owning shares in your company and want to pay some of its income to one or more beneficiaries, you may need to pay a dividend before the individual's balance date.

Tax traps - Do it yourself?

  THE most ruinous do-it-yourself decisions are probably those affecting taxation. Here are some cautionary tales:

Share transfers

  Some people organised their own share transfers. Their company was a Loss Attributing Qualifying Company (LAQC), a company permitted to distribute its losses to its shareholders. They failed to notify IRD within the required 63 days and lost LAQC status and could no longer distribute company losses or capital gains to shareholders. Fortunately, they did not lose imputation credits (tax credits available to attach to company dividends) as well, as the shareholding change was less than 34 percent. This could have cost a fortune in extra tax.

Sale of property from company

  Another do-it-yourselfer narrowly escaped a capital gains tax on selling, property from a company to himself. We intervened in time.

Dividends

  Do-it-yourselfers distributed dividends to themselves without complying with the Companies Act solvency test and without even a signed minute. Fortunately, the transaction was invalid. Their imputation credit account would have been overdrawn, resulting in a tax penalty of 10 percent plus accumulating interest.

Preparing accounts for a family trust

  This person prepared his own accounts for a family trust which owned a rental property. He failed to claim the maximum allowable depreciation. If you don't claim depreciation when you should, the shortfall is taxed at the time of sale. This rule does not apply to those who elect not to claim depreciation at all. He could also have distributed some of the profit to a beneficiary, who would have paid tax at 19.5 percent instead of 33 percent.
  IRD has no sympathy for do-it-yourselfers. They are expected to seek professional advice.

New business? 10% risk free!

  NEW businesses, started after 31 March 2005, can pay their income tax early and the Government will pay them 6.7 percent tax free on the early payment. As you would expect, conditions apply. One of them is payment has to be made by the last day of their financial year (for most people this will currently be 31 March 2006). Conditions include:
    1. You must be a sole trader or partnership.
    2. No interest is paid on any amount which is more than 105 percent of the final (known as Residual) Income Tax.
  6.7 percent tax free is equivalent to 10 percent taxable for those paying tax at 33 percent, and nearly 11 percent for those on the 39 percent rate.

Rental properties

  EXPERTS say the most profitable rental properties are usually found in the lowest socio- economic areas. The worst yields are in up-market suburbs, but these often register the highest capital gains. Most people seem to go for the crowded middle where yields are not as exciting and capital growth is slower. 

Wendy wants greater wealth

  WENDY rang, me. "I know you are a tax wizard and I have done well out of your advice, but can you also tell me how I can make my business more profitable?" she asked. I said I could, so Wendy came to see me Some of the points we discussed might also help you.
    1. Make a long-term business plan. Describe your business as you want it to be in, say, five years.
    2. Prepare a plan for the coming, year. The thinking which goes into the plan is the most important part. Many firms take their staff away from the premises to ensure there are no interruptions.
    3. Involve your team in your planning. It is more likely goals will be achieved and the team will contribute ideas.

Business promotion

    • To existing clients. Are you catering, for all their needs? Make a list of all possible products and services you can offer and develop ways to tell customers they are available.
    • To new clients. Work out all the ways to promote the business and choose the best to implement.
    • Make sure you put follow-up procedures in place to ensure potential new clients do not slip through the net. For example, ring a new client to find out their reaction to your service.
    • How can you make your business different from all others? A hairdressing salon facing a price war advertised that it was the salon which fixes up the cheap hair-dos.
    • Ensure all staff make as many add-on sales as possible. Measure and provide rewards for success.
    • Set targets which require a bit of a stretch to achieve.

Cost control

    • Count the cost of materials used in your business. Measure the percentage to sale of services. Set a target to control use.
    • If you employ staff, measure their wages as a percentage of their sales. Set a target. In Wendy's business, those who work for themselves should have a target for their financial contribution to her firm.
    • Look at each category of expense. Can savings be made?

Risk Management

    • Review insurances.
    • How can your firm keep up with industry developments?
    • Analyse risks to the business and implement whatever steps you can to protect the business against them. For example, what if a key person takes parental leave?

Budgets

  When you have completed your plan, prepare budgets to see what the figures should look like as a result of your plans. Tweak as needed.

On the job market research

  ASSISTANTS ringing, up sales have a chance, at that time, to gather information about customers by asking them a question. I recently made two purchases in a departmental store and noticed I was asked, on both occasions, which part of the city I lived in.
  If you are a retailer, you might wish to gather more information about your customers, such as how often they shop at your store. Frame your question carefully. The assistant should use the same words every time to ensure you get the response you want.

In brief

Getting your bill paid

  THIS businessman, who quotes for all his work, never sends out an invoice without first ringing his customers to ask whether they are happy with the job done. This makes it difficult for a customer to complain about the quality of the work after the account arrives. It also provides him with an opportunity to put things right if needed AND helps him to get referrals.

How to sell firewood

  A LOG merchant was having no luck stuffing pamphlets into people's letterboxes. A
marketing expert gave him an idea. He took 500 pamphlets and used a blow torch to singe the edges. He then put those in the letterbox. Sales soared.
  Message: if you want to be noticed, do something different. Thanks to Business Growth Pty Ltd for this story.  

Are you doing anything about it?

  ONCE a quarter we send you a newsletter. We try to pack it full of ideas to increase your wealth. How many of these ideas, which have appealed to you, have you implemented? If your answer is zero, why not go back over the last few issues and pick out something you like. As they say, "just do it".

Looking beautiful

  A HAIRDRESSER had a small stand on the counter offering gift vouchers. It indicated vouchers of $50 and $100 but said you could choose any figure. Is there any easier or more cost-effective way of getting more business?

How to boost consultants' incomes

  HERE is a checklist to help you increase your bottom line. You sell your time. You have only 2000 hours in any one year. Choose the ideas which suit your practice, arrange them in order of your preference and start implementing them.
    • Increase your capacity by using, more staff or contracting work out.
    • Save time by reusing documents already typed for other clients — get a good system for filing, even if it means filing the same document in two or more ways.
    • Look at all the ways to promote your business and select the most effective, for example seminars, newspaper articles, direct mail, newsletters. Brainstorm with your team and make up a list.
    • Increase fees.
    • Make sure you charge for everything by accounting for all your time every day as you go.
    • Count and analyse your non chargeable time and control it. Set a monthly maximum.
    • Set yourself a weekly target of chargeable time. Daily is no good because of unexpected interruptions.
    • Be selective in your choice of clients or choice of work so you get the better paying work. If you have plenty of work, keep culling your worst clients.
    • Become more specialised so you are doing, work others can't. This attracts a premium.
    • Work more hours — undoubtedly the worst option to choose.

Shareholder agreements

  THE value of shareholder agreements lies in providing internal mechanisms to deal with unforeseen circumstances and to avoid costly disputes.
  At a minimum the following matters should be addressed:
    1. A company overview that provides vital background information about the company's purpose and objectives.
    2. Management guidelines that stipulate the power of shareholders to appoint directors, the authority of directors, voting thresholds and reporting requirements.
    3. Share structures and capital funding arrangements, including dividend policies and agreed valuation methods.
    4. Exit strategies, including where appropriate any pre-emptive purchase rights and insurance policy requirements.
    5. Dispute resolution procedures.

Setting your goals for 2006-2007

  FOR most people, a new financial year starts on 1 April. Set some goals for 2006- 07 financial year but be SMART. Goals need to be:
    Specific — not vague. More sales is vague. New corporate clients is specific.
    Measurable — quantified, like get 12 corporates as new clients.
    Attainable — be realistic. You should stretch but it is good for team morale to win.
    Relevant — must relate to the direction you want your business to take.
    Time limited - goal has to be achieved within a defined time.

Donations

  DONATIONS are not a tax deductible cost, as a rule. Big companies, described as not being "close" companies, are the exception. When making donations, be sure they are from you personally and make a claim for a rebate.

Invest wisely

  YOU can make more money, but you won't get more time. Treat your time as expensive because it is limited.
  The fastest capital growth comes from investments you actively manage — usually businesses and real estate.
  Grow your wealth by investing others' money, for example a bank loan, profitably. This is financial leverage.
  Lending your own savings is a slow way to success. It lacks leverage. However, for some, it may be a lot safer.

Tax calendar

March 7   3rd Instalment 2006 Provisional Tax (March balance date)
               1st Instalment 2007 Provisional Tax (November balance date)
April 7     1st Instalment 2007 Provisional Tax (December balance date)
               Terminal Tax 2006 (March, April, May and June 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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