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. Family Trusts

3. Australian Property Investments- Interest Paid on Borrowings

4. Travel by Motor Vehicle Between Home and Work

5. Time Frames for Tax Refunds

6. Qualities of Successful Entrepreneurs

7. Business Burnout- Steps to Avoid it

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:

• Goal Setting in Business                           www.mcleanandco.co.nz/Page81.htm

• Personal Budgeting                                   www.mcleanandco.co.nz/Page8.htm

• Depreciation of Fixed Assets                    www.mcleanandco.co.nz/Page72.htm

• Rental Property Income                            www.mcleanandco.co.nz/Page43.htm

• Negative Gearing                                      www.mcleanandco.co.nz/Page126.htm

 

FAMILY TRUSTS

A family trust allows the ownership of some of your valuable assets to be in someone else’s name while you have use of them. 

A family trust is established by drawing up and executing a trust deed.   There are three parties involved:

• Settlor- this is you, the person wishing to establish the trust by settling an asset on it.
• Trustees- these are the people who hold the ownership of the asset and look after it for the beneficiaries
• Beneficiaries-   these are the people who will ultimately get the assets or the benefit of them  

Benefits of Family Trusts

• Ensuring that your estate will be distributed with a minimum of red tape and cost to those whom you wish to benefit.
• Flexibility-  The settlor no longer owns the assets but continues to have the use and benefit of them.   This is necessary because there can be no certainty about future legislation, court decisions, or your own circumstances.
• Reducing your families overall taxation liability if you have beneficiaries to whom you wish to make payments who are on a lower tax rate.
• Protecting your assets from claims under the Matrimonial Property Act if you get married , or remarried, And from creditors in some circumstances.
• A better chance of obtaining residential care subsidies if you need rest home or long term hospital care in future.
• Legally minimising estate duty for both you and your children or other beneficiaries (if estate duty is reintroduced)
• To keep your business running after death, if this is what you want.
• To prevent your capital being spent by any of your children who you believe would “blow” it.
• To prevent your children’s partners benefiting from your capital (particularly if you believe his/her marriage will not last).   Your trust can buy the asset  you might otherwise gifted to your child, and allow your child and his/her partner the use of it.
• Protection for Professional People- to protect assets against financial difficulty and claims  by clients and other parties.  

  Potential Disadvantages of Family Trusts

• Reliance on Trustees.   When you establish a trust in nearly every respect you are alienated from those assets.   You no longer own them- the assets are no longer in your name.   This means that you must rely on the trustees.   Even if you are one of the trustees, perhaps with a right of veto (quite a common form of control over a trust) you will nevertheless require the compliance and goodwill of the other trustees to achieve what you want.
• Cost- the cost involved in establishing and running.  

Setting Up and Running a Trust

• Trusts are usually set up through an inter-vivos (i.e. becomes effective during the lifetime of the settlor) trust deed or a will.
• Property is held for a period, either short or long term, by a trustee or trustees, instead of being held by the original owner.   It involves the transfer of assets, from the settlor to another legal entity without receiving full consideration in money or money’s worth.
• There is an element of gifting present.   The value of the property is usually repaid over a period of time by gifting from the settlor to the trust, although the settlor has the ability to be repaid in cash or kind.
• Accumulations of the property (e.g. rent and capital gains for real estate, interest on investments)  are distributed at a future time for the benefit of pre-defined purposes or beneficiaries.
• Distributions to beneficiaries may be in cash or property.  

  Property Suitable for Trusts

The property most suitable for trusts are items which are most likely to increase in value over time

e.g. real estate, shares, managed fund investments, long term investments (e.g. forestry)  

  Limits on Gifting

• The normal procedure is to set a gifting programme whereby a maximum of $27,000 per year is gifted.   This is due to the fact that under current legislation gifts under $27,000 (or in the case of a married couple $54,000) within a 12 month period are exempt from gift duty.   Gift duty rates are thereafter on a graduating scale-   if gifts exceed $72,000 in a 12 month period the gift duty payable is $5,850 plus 25% of any excess over $72,000.
• There is also Section 74D of the social Security Act to consider.   This implies the Work and Income New Zealand (WINZ) may decline a benefit or subsidy for anyone who has deprived themselves of an asset.   This is really aimed at the gifting of assets and allows WINZ to look back in time to see if any gifting has taken place.   This act does not specify a time limit but WINZ have adopted as a matter of policy a five year period.   The trust therefore needs to be put in place, assets sold into it and the giftinh programme completed at least five years before the settor of the trust can qualify for a rest home subsidy.
• Thus if personal circumstances are appropriate for the formation of a family trust, it is advisable to set this up and initiate a gifting programme earlier in life than later.  

    Taxation of Trusts

• The trust is a separate legal entity for taxation purposes, and the trustees must file taxation returns every year.
• Any income distributed to a beneficiary is taxed as beneficiary income at the marginal tax rate of the beneficiary.   
• There is an exception to this in the case of income distributed to a minor as a consequence of legislation introduced in 2000. Certain distributions of beneficiary income to a child under the age of 16 years will be taxed at a final tax rate of 33%, if the beneficiary income is more than $200, if that income is derived from property which was settled on that trust by a relative of guardian of that minor or a person associated with a relative or guardian.   This measure will apply from the start of the 2001-2002 income year.
• Any income not distributed to beneficiaries is taxed as Trustee Income.   The current income tax rate fir this is 33%.   

 

AUSTRALIAN PROPERTY INVESTMENTS- INTEREST PAID ON BORROWINGS  

For the  people who have invested in properties on the Gold Coast, there has been some confusion in relation to their responsibilities for tax deductions when interest is paid on borrowings used to finance the properties. To clarify when non-resident withholding tax “NRWT”) is payable, IRD released an Exposure draft which states that:  

• Where the Australian financial institution to which interest is paid has a branch in New Zealand (e.g.  Westpac), NRWT will not be payable on the interest.
•   If the Australian financial institution does not have a branch in New Zealand , NRWT will be payable on the interest unless the investor has a place of business in Australia .
• If the investor has more than one residential investment property in Australia , they may have a place of business in Australia .  If they do, then  the investor will not have to pay NRWT on the interest.
• Where property managers are involved, NRWT will not be payable if the property manager works as a property manager only for the investor (a dependent agent). If the property manager is able to act independently of the investor in the   normal course of his or her business (an independent agent), NRWT will be payable on the interest paid.

 

TRAVEL BY MOTOR VEHICLE BETWEEN HOME AND WORK- DEDUCTIBILITY OF EXPENDITURE AND FBT IMPLICATIONS  

 In October 2004 the Commissioner of Inland Revenue issued an Interpreaation Statement setting out his new policy on the circumstances in which:

• Expenditure on travel between home and work will be deductible, and

• Travel between home and work will be treated as work related use rather than "private use or enjoyment" for FBT purposes.

For both purposes, the Commissioner considers that for such expenditure to be deductible, and for the travel to be work related:

• the need for the work to be performed partly at the home (and therefore, the need for the travel) arises from the nature of the work, and
• the travel is in the course of performing work.

The fact that work performed at home (whether or not under a contractual obligation) is not sufficient to render the travel deductible or work related.  Travel between home and work is considered private if the work is performed at the home because of the personal circumstances or personal preferences of the taxpayer.

The Commissioner has identified the following broad factual situations as circumstances where travel between home and work is regarded as business or work relate travel:

• where a vehicle is essentail for transporting goods or equipment necessary for the performance of work at the home and elsewhere because of the nature of the income earnin activity and because of the special characteristics of the goods or equipment (e.g. value, sensitivity, bulk)
• where the taxpayer carries on an itinerat occupation such that the taxpayer does not have a fixed place of abode, the home is th taxpayer's base of operations, the travwel is essential to carry out the income earning activities, and work is undertaken at different work places each day.
• the taxpayer is required to perform work duties at home and needs to be accessible at home to undertake travel in response to emergency calls.   Merely being on call and travelling to the place of work in response to a call is not sufficient to make the travel work related.  Also choosing to carry out duties at home would not make thje travel in response to a call received at home work related
• the travel is "on work" between two work places, one of which is also the taxpayer's home.   he travel must arise from the nature of the work and not from the personal choice or circumstances of the taxpayer.  Then travel must also be between two workplaces that relate to the same income earning activity.
• If business or work related travel involves a minor incidental private component, the private travel would be disregarded and the entire journey classified as business or work related travel. 

The new policy is more restrictive than previous policy statements it replaces.     For example, travel between two workplaces, one of which is the home. is no longer considered deductible if the travel is between two different earning activities.   Also travel between two workplaces, one being the home, will not be deductible unles the travel is "on work", that is, in the corse of performing duties, rather than travelling from one workplace to do work in another workplace.

 

TIMEFRAMES FOR TAX REFUNDS

Under current law, taxpayers are able to claim refunds up to a period of eight years for excess tax paid.  In proposed legislation, that timeframe reduces to four years except where there has been a “clear mistake” or “simple oversight” on the taxpayer’s part. To date IRD has not been forthcoming about what it considers to be a clear mistake or simple oversight.

 

QUALITIES OF SUCCESSFUL ENTREPRENEURS

What makes a successful business owner or entrepreneur?  

Some say creativity, others say passion, organization, or leadership skills.  In fact, there have been many qualities identified with successful entrepreneurs.  Here ( in no particular order) are some of the most significant. 

How many entrepreneurial traits do you possess?

* Energy
* Passion
* Assertiveness
* Novelty
* Initiative
* Creativity
* Imagination
* Be a self starter
* Time Management
* Follow-through
* Be ready for anything
* Think positively
* Believe in yourself
* Ability to make decisions
* Don’t be afraid or embarrassed to ask for help
* Effectiveness at persuasion
* Problem solving skills
* Ability to be flexible, adaptable, and creative
* Think “out of the box”
* The ability to produce results
* Ability to take risks and do so in a calculated way
* Enjoyment of the ride
* Negotiation and compromise
* Exacting and exhaustive mentality
* Sense of Urgency
* Resilience after Failure
* Alertness
* Leadership
* Stress management
* Persistence
* Confidence
* The ability to reflect and improve
* The ability to think strategically

 

BUSINESS BURNOUT- STEPS TO AVOID IT

Many people experience burnout at some point in their lives.   Business owners and the self-employed are even more likely to fall prey to burnout because the buck stops with them.  If you feel as if you’re starting to burn out here are some things you can do to avoid it. 

1. Take care of #1. If you’re run down, you’ll burn out faster.  Make sure you get enough sleep, eat right, exercise and de-stress on a regular basis.
 
2. Make the time to do nothing! We all need to take time to relax, refresh and replenish.  Don’t keep pushing yourself.  Keep regular business hours and take breaks during your work day.  Make sure to schedule in time off and vacations on a regular basis.  You’ll come back with a fresh outlook and perspective.

3. Get back in touch with the things you value. Is your work fulfilling and meaningful for you?  If not, check in with your values.  What’s missing?  Where are you compromising?  What needs to be eliminated?  What are you merely tolerating?  Re-assess and re-adjust your priorities as needed.  If you work for yourself, you’re in control.  Make the choices you want to make by honoring what’s important for you.

4. Think out of the box and challenge yourself consistently. If work has become a chore or you’re in a rut, try spicing things up a bit!  Find innovative ways to do mundane tasks, create new products or services to add to your offering, improve performance, or tweak what you do best and make it even better. 

5. Establish realistic expectations for what you can and cannot accomplish. If you find that you’re driving yourself or your employees too hard it may be time to let go of unrealistic expectations and readjust.  Shorten your to-do list, give yourself some slack when needed and know when to let up on yourself and others.

6. Learn how to communicate clearly. Resolve conflicts, don’t run from them.  Let people know what you expect from them, and ask them what they expect from you.  Be clear and concise with what you say, and how you say it.  Listen closely to the people around you, it will teach them to listen closely to you.

7. Manage your time. Poor time management is another thing we do that leads to burnout.  Set regular business hours.  Make appointments with yourself to get things done – and keep them!  Being on time counts, show up promptly for appointments and expect others to do the same.

8. Stop blaming yourself or others. If you’re playing the “woulda, coulda, shoulda” game, perhaps it’s time to re-evaluate your attitude.  Blaming yourself or others for things that have gone wrong doesn’t help.  What does?  Learn from your experiences and make changes to ensure that you get the results you want the next time.

9. Value yourself by establishing boundaries and limits. Learn how to do it in a way that clear and consistent.  Don’t give away too much of your time. Let people know your policies and procedures.  Be upfront with what’s acceptable and what’s not.   Learn how to say no.

10. Deal with your emotions. Keeping your feelings inside usually leads to trouble.  If you are feeling any kind of negative emotion, don’t deny it.  Instead, learn how to acknowledge your feelings, be up front with them; and deal with the underlying causes.

11. Laugh, smile and enjoy the ride! Life is too short to worry and be serious all the time.  Find ways to make your work fun and enjoyable.

12. Don’t feel embarrassed to ask for help. Everybody needs a little help once in a while.  You can’t do everything yourself.  Don’t be afraid to ask friends or associates for help, or hire a professional when needed.