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NEWSLETTER - JULY 2007
IT IS TIME TO TALK TAX
TAX law is changing rapidly and is becoming complex. Some of these changes are
likely to affect you. You need to know about them.
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Residential rental property IRD is revising the depreciation rules. It proposes having anything which is a part of the house depreciated at the same rate as the house. This will reduce some of the depreciation claims being made. Property investors can expect to pay more tax but the adjustments will probably not be too dramatic. Portfolio Investment Entities (PIEs) Savers, using managed funds, should know about these two varieties of investment available from 1 October 2007. Some investments, complying with rules laid down by the Government, will be called Portfolio Investment Entities (PIEs). This section tells you the difference between the two schemes available to you for direct investment. A third scheme, which we are not discussing, deals with superannuation schemes. Portfolio tax rate entities Portfolio Tax Rate Entities (PTRE), will have their income taxed at the individual investor’s income tax rate. These funds will be attractive to those on low tax rates. They will pay only 19.5% on their share of the fund’s profit. High income earners will pay 33% instead of 39%. Those who tell the fund their tax rate is 19.5% when it should have been 33%, must correct the error through their tax returns. Inland Revenue says these PIEs will become the main type of savings scheme. Portfolio Listed Companies Another scheme will be a Portfolio Listed Company. It will pay tax at 33% on income and allocate dividends to investors, which will not have to be included in their personal tax returns. However, if your income will be taxed at 19.5%, you will be permitted to declare the dividends. This will probably qualify you for a tax refund. Some of the dividends may be a mixture of capital and income, so a refund is not a certainty. Income from both these schemes will not be included when calculating Working for Families tax credits, Student Loans and Child Support. |
Student loans IRD is accessing information from HM Customs to ensure certain students travelling overseas do not get interest free loans. The rules for charging interest to these students are still changing. Tax credits The Government is expected to reintroduce tax credits to encourage research and development. It was also planning to offer incentives for market development and skills training. However the Minister of Finance announced, in a recent speech, that these incentives are not going to proceed. New Partnership Act The Government is considering introducing a new Partnership Act. The old one will celebrate its 100 th birthday next year! The Act will include provision for limited partnerships. These will be partnerships which have the protection of a limited liability company. The limited partners will not normally be involved in management. Losses for these partners will be limited to the amount of money actually lost by the partner. It has been suggested this will lead to the abolition of qualifying companies. Change to tax payment dates GST is now payable on the 28 th of the month instead of the end of the month. If the 28 th falls at a weekend or public holiday, including Anniversary Day, the GST can be paid and the return sent in, on the next working day. From 1 April 2008, income tax dates will be aligned with GST dates. Provisional tax will become payable six times a year. To achieve this, income tax and GST period end dates will have to be aligned. Where they are not, the taxpayer will have to put in an extra GST return to achieve this or change their accounting year end by a month, subject to the Inland Revenue Department approval. |
SETTING YOUR SELLING PRICE
A CLIENT was out shopping for Christmas presents.
“My partner budgeted $100 for each of our grandchildren,” he said, “We found a couple of presents which looked promising, and they were priced at only $40 each. She rejected them because they were too cheap! I told her to buy them and then if she was concerned she could buy something more for the children.”
Christmas Day arrived and her son emailed her a photo of her grandson playing with the $40 Christmas present. He couldn’t put it down. There is a business lesson in this for sellers.
The woman wanted to spend about $100 on a gift. The price was of considerable importance. She felt to pay only $40 would be cheap-skating.
Base your price on the amount you think the customer is willing to pay. Use cost price to cross check you are making a satisfactory profit. Selling price must cover the cost of making or buying the article, or your time in supplying the service, and a fair share of overheads and hopefully a profit.
Satisfy your customer’s wants and do not confuse this with needs. The shopper needed a present but wanted one costing about $100. Customers buy to satisfy the want, not the need.
If you are in the business of providing services and your quality is outstanding, customers will pay more for you than for someone else. Price accordingly.
ASSIGNMENT OF INCOME
TAKING the advice of his financial advisor, a client lent 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 was wrong, because it was an assignment of income, the financial advisor said we were being pedantic. 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.
However, you are allowed to do the following:
- If you have the larger income, always get it paid into a joint account. It then becomes family money. When you come to invest, the income belongs to both partners and can be split equally. Half a cake is better than no cake.
- You can enter into a matrimonial settlement. You agree certain of your assets will, in future, belong to the two of you jointly. You now share the income. This could be useful if you own rental properties and you want the rent to be shared.
- You can sell your investments to a family trust. Your spouse can be a beneficiary of the trust. Trustees, subject to considering the interests of all beneficiaries, may distribute some or all the income to your partner.
- Form a company, in which the shares are allocated unevenly. This may achieve the result you are wanting.
Your decision should not be tax motivated, for example:
Matrimonial settlements create a fairer sharing of wealth.
Family trusts protect your family assets from:
· Creditors
· The government claiming for your long-term care when you are old
· Children losing their inheritance as a result of a relationship going bad.
DO BAD DEBTS GO WITH GOOD BUSINESS?
MOST bad debt is unnecessary. It arises from being too casual about giving credit.
Occasionally, clients have collection problems because they have too much of their business with one firm. If you are in this situation, plan to get out of it, even if it takes several years. If your customer’s business fails, it may take yours with it.
You can minimise your bad debts by:
· Stating your terms of trade clearly and being tough with your follow-up of those who do not stick to them. Be on to them smartly once the deadline has passed. Most bad debts arise because businesses are too busy with their day-to-day work to get on with collecting their debts or don’t like to insist on payment.
· Giving credit only when you have to. If you can collect payment on completion, why offer credit?
· Getting progress payments.
· Getting a deposit before you start.
The more materials in your product; the more essential it is to get a progress payment. If you don’t get paid, you will still have to pay your supplier. Therefore, the deposit should be at least the cost of materials.
· Better still, get payment in full before you supply.
· If you have to give credit, ask for credit references and follow these through.
· Check credit history through a debt collection company or the Mercantile Gazette.
· When you have a problem, be persistent with your follow-up. Write notes of every call made and get a commitment every time. Confront the bad payer with the broken promises.
· If you get a promise to pay, try asking the customer to keep the payment while you get in your car to go around and collect it.
· If the sum is large, you could try getting two or three cheques making up the total. A smaller cheque might get honoured whereas a larger one might not.
· Cash, even if only for part of the total, is better than a cheque which you expect will bounce.
· People who give you bouncy cheques should be asked to get a bank cheque (one drawn on the bank’s own account).
Debt collection can take a lot of time, which could be better used developing your business. Therefore, be ready to sack your troublesome customers, particularly if the business you get from them is small. You are probably losing money by having them. Recommend they deal with your least favourite competitor and tell them how to get there!
DIRECTOR'S PERSONAL LIABILITY
Thanks to Meltzer Mason Heath, Insolvency Specialists, Auckland for this article.
Many of you will be aware of the recent leaky homes case - Dicks v Hobson Swan Construction Limited (In Liquidation) and Others - where the director of the company which built Mrs Dicks' house was found personally liable in negligence for the loss Mrs Dicks had suffered. (The Court attributed 80% of the responsibility for the defects to the builder, but due to the impecuniosity of the company and its director, the judgment will be met by the Waitakere City Council).
The judgment is noteworthy because it upholds the 1984 High Court judgment in Morton v Douglas Homes Limited, regarding director's liability. Directors should be aware that the Courts will apparently continue to impose personal liability on directors of companies where the director is negligent and has breached his/her duty of care.
The reason the builder in the Dicks case was held to owe a duty of care to Mrs Dicks was because he performed virtually all the construction work and he controlled the operations of the company.
The judge in the Dicks' case stated that the director:
"did not merely direct but actually performed the construction of the home and was personally responsible for the omission of the [window] seals. His carelessness is ... a breach of duty of care owed by him to Mrs Dicks. He is therefore personally a tortfeasor (as well as having his conduct attributed to Hobson Swan as its tort)".
The case shows that a director of a company may be held personally liable where the director exercises a substantial degree of control over work undertaken by the company.
Directors of smaller companies are more likely to be closely involved and to have a greater amount of control over performance of their company's work and therefore may be more likely to be personally liable for breach of duty of care where the director's own actions were causative of the loss.
The Companies Act 1993 detailed director's duties in statutory form for the first time. The duties specified are:-
- to act in good faith and in the best interests of the company (Section 131);
- to exercise powers for a proper purpose (Section 133);
- not to act or allow the company to act in contravention of the Act or the company's constitution (Section 134);
- not to agree to the business of the company being carried on in a manner that is likely to cause a substantial risk of serious loss to the company's creditors (Section 135);
- not to agree to a company incurring obligations in the absence of a belief on reasonable grounds that the company will be able to perform that obligation (Section 136);
- to disclose personal interests (Section 140);
- to disclose company information except in certain circumstances (Section 145);
- to disclose share dealings (Section 148)
The standard of care that applies to a director when carrying out his or her duties is set out in Section 137 of the Companies Act 1993:-
"A director of a company, when exercising powers or performing duties as a director, must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation:
- the nature of the company; and
- the nature of the decision; and
- the position of the director and the nature of the responsibilities undertaken by him or her."
The duties are owed throughout the period a person acts as director of a company.
Section 301 of the Companies Act, where a company is in liquidation, allows a liquidator (and certain other persons) to apply to the Court for an inquiry into the conduct of a present or former director to determine whether that person "... has been guilty of negligence, default, or breach of duty or trust in relation to the company...".
