McLEAN AND CO.

 

EMAIL NEWSLETTER  OCTOBER 2002
 

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.

 

INDEX

  1. Family Assistance- Getting It Right

  2. Deductability of Sponsorship Expenditure

  3. Buying a Business- Pitfalls and Planning

  4. GST- Changing your Taxable Period

  5. Employers Liability for Workplace Stress

  6. Money Laundering

  7. Choosing a Domain Name and Protecting It

  8. FBT Filers Prescribed Interest rate for Loans

 

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:

 

FAMILY ASSISTANCE- GETTING IT RIGHT

IRD are introducing a new initiative to assist salary and wages earners who receive fortnightly family assistance payments from them to avoid an end-of-year family assistance bill.   From October 2002, IRD will regularly update the family assistance entitlement for salary and wage earners, based on their family income.   These income updates will be based on salary and wage information that IRD receive each month from employees.  If your income is tracking higher than the orginal estimate on which the fortnightly family assistance payments were calculated, IRD will send a Letter entitled "Family Assistance- Your Income has Changed" advising that the employment information they have received shows the family income will be more than the previous estimate and give a revised family income estimate.   If such taxpayers agree with the new estimate, no action is required and IRD will automatically adjust the family assistance  payments.

 

DEDUCTABILITY OF SPONSORSHIP EXPENDITURE

For the purposes of income tax sponsorship expenditure covers a wide range of situations, between the concept of advertising at one end of the continuum and donations at the other end.   Between these two types of sponsorship. the taxpayer intends to promote his  business in some manner when incurring the expenditure, but the expenditure made may also benefit the recipient  (or some other person) in a manner unrelated to the ordinary receipt of income from his or her income-earning activities and still be allowed to be deducted for income tax purposes.

The usual approach for determining whether  or not expenditure is deductible is the question "whether  the expenditure was necessarily incurred by the taxpayer in the course of carrying on a business for the purpose of deriving the taxpayers gross income".   For expenditure to be deductible there must be a relationship between the expenditure and the taxpayer's business or income earning  capacity.

Thus expenditure of a private or domestic nature, where it cannot be shown  that there is a connection between the expenditure and the taxpayer's business or income earning capacity, is not deductible for income tax.   These may include donations  to a welfare society.   Please note that if there is no such relationship and donations are not deductible for business income tax that these can still be claimed in a taxpayers annual Donation Rebate claim to IRD.    

 
BUYING A BUSINESS- PITFALLS AND PLANNING

When you are considering buying an existing business, you should look carefully through the books, evaluate the assets and liablities and decide which parts of the business are of interest.  A Sale and Purchase agreement will be drawn up and when both parties have agreed to the terms and conditions, the purchase will go ahead.  A question that is often asked  is "Should I buy the shares in the company or buy selected assets and liabilities?"

Your decision as to what to buy  will depend on whether the vendor wants to sell the company lock, stock and barrell or is happy to separate the business from the company.  If you buy the shares of an existing company you are buying not just the situation as you see it today, but the company's history as well.  In the event of an IRD investigation into the company's history, you will be responsible for any past  tax shortfalls uncovered.  A scary thought!!! 

What can you do?    Traditionally indemnity clauses are used to give the purchaser some protection and a means of recouping costs if things come unglued.   In an interesting case, the notion of a tax indemnity was tested.   The judge decided that the indemnity did cover a variety of costs, including the legal costs of dealing with a tax assessment covering transactions before the purschase.   A tax indemnity clause in a Sale and Purchase Agreement would require the vendor to cover the purchaser in the event of a tax investigation.  The cover could include some or all of:   tax payable for prior years, penalties and interest charged, and accounting and legal costs associated with an investigation.

Indemnity clauses are impossible to enforce when the seller disappears or ends up broke.  You will predictably achieve a better overall result by examining the assets and liablities of the business and selecting the parts that you want rather than taking on the company.   Leave the vendor with any problems and liabilities.

 

GST- CHANGING YOUR TAXABLE PERIOD

A taxable period is the length of time covered by a GST return.
You have the option of filing your GST returns on a one, two or six monthly basis, unless your annual turnover or expected annual turnover is:
If you wish to change your taxable period you need to apply to IRD in writing, advising the taxable period you want and the reasons for the change.  If you're applying for a six month taxable period, you need to state in your request that your turnover  has not exceeded $250,000 in the last twelve months, or is unlikely to exceed that amount in the next twelve months.
 
 

EMPLOYERS LIABILITY FOR WORKPLACE STRESS

Recent case law has established that an employer is liable to compensate employess for health breakdowns caused by workplace stress.  In addition , propsed amendments in the Health and Safety in Employment (HSE) Amendment Bill are expected to be quite explicit that physical and mental harm from work place stress is covered by the Act and will impose penalties for employers whose employees suffer from the effects of work place stress.

Even where the major stress in an employee's life is private and not work related there will inevitably be some work related stress and if an employee's health collapses, it is predictable that the work stress will be blamed as the cause.

As an employer what can you do about this?

It will not always be possible to prevent work place stress and even more difficult to counter stress caused by influences outside the work place.   However, if you monitor your employees' state of health you should be able to recognise signs of stress.   A prudent employer should then take an active role in helping emplyees deal with that stress (whether it is caused by work or from some other source)

(Acknwledgement-  this article  has been reproduced from an Article written by Simon Wilton,  of Bannister & von Dadelszen, Barristers  and Solicitors, Hastings)

 

MONEY LAUNDERING

Money Laundering is the process criminals use to make the proceeds of their crimes appear clean.  Once an asset changes from one kind to another, the money has been "laundered".   Money laundering is a criminal offence when funds have been derived from another serious offence.   If a transaction looks suspicious, financial institutions have a legal obligation to report it to the Financial Intelligence Unit of the New Zealand Police.

Section 257A of the Crimes Act 1961 recognises that a money laundering offence is committed when a person enters into a transaction(s) or assists in such transaction(s) knowing or believing that all or part of the property is the proceeds of a serious offence.   Under this section a person also commits a money laundering offence when they have in their possession any "dirty" property , and if they intend to enter into a money laundering transaction(s) with that property.

 

CHOOSING A DOMAIN NAME AND PROTECTING IT

Domain names are our adresses on the internet. For companies they are much more- they are part of a business's identity, branding and marketing.   Business advisors today are strongly urging their clients to be pro-active in securing and maintaining domain names, even if the internet does not figure large in the marketing and sales mix.   This is because once a domain name is taken or lost, it can be very expensive to regain.

Registering a domain name is simple and quick, but there are pitfalls to be aware of.  Here are some tips to consider when choosing your domain name:

  • use a domain name that is relevant to your business.  It is a good idea to use your company's name, but you might want to register a generic industry related name

  • try to keep your domain name as short as possible. Five to 20 characters is best, as shorter names are easier to remember.

  • register domain names for any brands or trade names you own

  • co.nz domain names denote New Zealand businesses.  If your target audience is within New Zealand these are most appropriate.

  • .com  or .biz denote United states or international businesses.  These are good if you are seeking a more global identity or market.

  • Register corresponding domain names and possible similar or competing domain names and keep these registered from year to year.   For a relatively small fee you can protect your brand names from being used by others. 

 

FBT  FILERS PRESCRIBED INTEREST RATES FOR LOANS

For the quarter beginning 1 October 2002 the prescribed rate of interest for calculating the fringe benefit value of low-interest employment related loans is 7.98%.   This is an increase from the previous quarter's rate of 7.5%.

 

If we can assist further, please email McLean and Co as follows:

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