ckfthomasckfthomashttp://www.ckfthomas.co.nz/newslettersNewsletter Nov 2018 - Jan 2019]]>http://www.ckfthomas.co.nz/single-post/2018/11/05/Newsletter-Nov-2018---Jan-2019http://www.ckfthomas.co.nz/single-post/2018/11/05/Newsletter-Nov-2018---Jan-2019Mon, 05 Nov 2018 05:19:00 +0000
INSIDE THIS EDITION
Tax Working Group Interim Report 1
Payday filing 2
Engagement 3
R&D tax incentive - framework
confirmed 3
Snippets 4
Royals in NZ 4
Anti-Money laundering regulations 4
Tax Working Group Interim Report
The Labour Government established the Tax Working Group (“the Group”) in January 2018 to review the existing New Zealand tax framework and to provide recommendations for improvements to the fairness, balance and structure of the tax system over the next 10 years. An Interim Report was released on 20 September 2018, to provide interim conclusions on twelve areas of concern for New Zealanders, based on the thousands of submissions received during their two-month public consultation.
One of the most topical issues is the potential introduction of capital gains tax. The report discusses potential design options for a capital gains tax, but the report makes it clear that the Group is still forming its view on whether to recommend a capital gains tax at all. Broadly, a capital gains tax could apply on a realised basis as assets are sold or on a deemed return basis. Assets captured would include interests in land, intangible property, income-earning assets not already taxed on sale, and shares in companies. The Group confirms that family homes and personal assets such as cars, boats and jewellery should be excluded.
Another key area discussed is the taxation of retirement savings. The Group considers high-income earners are likely to be saving adequately, hence they have suggested a package of modest retirement saving incentives aimed at middle and low-earners. This includes the removal of Employee Superannuation Contribution Tax (ESCT) of 3% for employees earning up to $48,000 per annum, and a five percentage point reduction for each of the lower PIE rates applying to KiwiSaver accounts.
On the topic of international tax, the interim recommendation is to ‘wait and see’ what approaches are adopted by other countries. The Group does not want to suggest a regime that could potentially cause negative retaliatory action from other countries, risking
harm to our export industries.
The Group is also “weighing up their options” for the current rates and thresholds for personal income tax. The focus for personal income tax is ensuring compliance by the rising number of self-employed.
For business, the Group recommend maintaining the current company tax regime and rates, including retention of the imputation system. They have not recommended the introduction of a progressive company tax, or an alternative basis of taxation for smaller business, instead focussing on providing support for smaller businesses through simplification of the tax compliance process. For example, by increasing the provisional tax application threshold and the $10,000 de minimis threshold for automatic deduction of legal fees.
The Group was specifically excluded fromconsidering an increase in the GST rate, however it received many public submissions on a potential reduction. After analysing the effects this would have, the Group does not recommend a reduction, nor removal of GST from certain products such as food and drink, on the basis that such measures would be poorly targeted and that more effective ways are available to provide assistance to low and middle income families.
In addition to these main areas, the Group considered a few more specific topics, including recommending the retention of the 17.5% rate of tax for Maori Authorities, and extending the rate to subsidiaries of Maori Authorities.
The views expressed in the interim report are not final, and the Group are welcoming feedback from all New Zealanders before the final report is released in February 2019.
Payday filing
The way employers report payroll information to Inland Revenue (IRD) is changing. From 1 April 2018, IRD introduced a new electronic reporting system, providing employers the option of filing payroll information every payday. From 1 April 2019, the new system will be compulsory for most employers, so it is imperative business owners get to grips with the new rules to avoid the risk of non-compliance.
Under the new payday filing system, the information must be reported every time employees are paid, which could be complex for businesses with a combination of employees paid weekly, fortnightly and monthly.
From 1 April 2019, the new system will be mandatory for any NZ employer who withholds more than $50,000 of PAYE and Employer Superannuation Contribution Tax (ESCT, e.g. Kiwisaver) per year. Paper filing will remain available for smaller entities who do not exceed this threshold, although they may also opt in.
The details submitted to IRD will remain substantially the same, with additional information required in respect of ESCT payments, the pay cycle frequency, pay period start and end dates, and the payday date. There will also be amendments to the way information is collected for new employees, allowing electronic onboarding for new starters.
IRD’s electronic system supports three ways of collecting the employment information. The most straightforward option is direct filing from compatible payroll software, bypassing the need for files to be uploaded through the ‘myIR’ system. Alternatively, information can be submitted electronically or manually through the employers online ‘myIR’ account.
Generally, payday filing will require employment information to be submitted within two working days of each payday. For a business with a combination of employees paid both monthly and fortnightly, the filing deadline will be within two working days of both the monthly and fortnightly payday. However, for IR56 taxpayers, or employers below the $50,000 threshold, the deadline will be extended to within 10 working days of each pay date, with an option to submit a single monthly report.
Despite the increased reporting frequency required by payday filing, PAYE payment dates and methods of payment will remain the same. This means employers will continue to pay PAYE monthly or twice monthly, as they currently do.
Although the increased reporting frequency may appear burdensome at first glance, there is an opportunity for payday filing to reform payroll processes, becoming an integral part of the general accounting system rather than an additional monthly task. This integration will work best for software systems that can upload directly to IRD. Some employers may need to upgrade their existing payroll systems and procedures to ensure compliance by the mandatory deadline, hence, it is important that employers start considering the impact the changes will have now.
Engagement
Modern HR practice considers people managers to be at the forefront of the employee experience, with employee engagement stemming directly from an employee’s relationship with their manager. It is often said that people don’t leave companies, they leave managers. Hence, the ability for organisations to foster an employee experience leading to loyalty, retention, and business success hinges on the relationship and connection between management and their employees.
Employee engagement is vital in any organisation to preserve the right talent needed to acquire, serve and retain business. However, there is a common misconception that this engagement is determined by financial remuneration and perks alone. Recent trends, supported by research conducted by Gallup, have shown a fault with this model, demonstrated when employees receive employment offers from elsewhere. Commonly, if they believe the other employer will value them more on a personal level, they will leave, even if it is for less financial reward. This suggests that employers are not focussing on areas that employees truly value. It is evident that employee engagement is no longer created by perks, rather is it created through a culture driven by trust and approachable and personable leaders.
Traditional hierarchical management structures can create blockages to engagement, whereby a lack of personal and approachable leaders breeds a fear-based culture. This can make employees feel as though they are treated as a skill set, rather than a person. Similarly, if employees do not feel connected to the outcomes of their work and the strategy of the organisation, they are unlikely to be engaged. This is where it is important that managers help employees to make the connection between their work and the organisation’s mission.
In a time where many of our work functions are becoming increasingly automated, managers are thought to have more time than ever to interact with their employees. The key is to use this time for more meaningful interactions. The transition from traditional management styles, to one focused on stronger relationships and people development, may pose a challenge for managers unequipped to deal with changing expectations. However, it is vital that management adapt to avoid negative effects on employee engagement.
As our workplaces offer increasingly flexible work options, the opportunity to maintain face-to-face communication is also threatened. This will challenge organisations to consider how their workspaces and work practices can be better designed to facilitate interpersonal relationships between managers and employees. However, in order for managers to fulfil these new expectations it is critical that managers are equipped with the skills necessary to be good relationship builders and behavioural leaders. Historically, management development has focused on “hard” skills. Yet, with ongoing advancements in technology and automation, organisations should renew their focus to developmental opportunities for managers.
Organisations that are committed to building deeper personal connections amongst employees are likely to see the benefits of increased commitment, job satisfaction, and productivity.
R&D tax incentive – framework confirmed
The Government has now released draft legislation prescribing how its R&D tax credit will operate. The key incentive is the introduction of a 15% R&D tax credit (increased from 12.5% in the draft proposals) applying to maximum expenditure of $120m, equating to a potential tax credit of $18m. Businesses can apply to exceed this expenditure cap if they can demonstrate NZ will derive a substantial net benefit from the R&D. The minimum R&D expenditure threshold has also been decreased to $50,000 per annum, from the original amount of $100,000, which will help smaller businesses access the regime.
As originally proposed, the new tax credit was to be non-refundable. During the consultation period requests were made for the new scheme to include a refund mechanism for early stage R&D intensive companies that commonly experience tax losses during their early years. The resultant cash flow problems can threaten their existence. The Government recognised that such firms are vital to innovation and the development of a diversified economy. Hence, for the first year of the new regime (1 April 2019 – 31 March 2020) the Government will allow tax credits to be refunded based on the limits prescribed within the existing tax-loss cash-out scheme, i.e. businesses can receive refunds providing at least 20% of their labour cost is R&D related, to a maximum eligible spend of $1.7m. At the new tax credit rate of 15%, this will provide a maximum refund of $255,000. For context, approximately only 350 businesses currently benefit under the current scheme. The Government recognise this is only an interim solution so they will continue to review the new regime, with revised rules for refunds expected from 1 April 2020.
A further welcome change is a widening of the definition of ‘eligible R&D expenditure’. The initial Discussion Paper contained a narrow definition requiring the use of ‘scientific methods’. There was concern that this would preclude tech sector businesses from accessing the regime, as the development of computer software or phone appsis not commonly based on ‘scientific methods’. This has been addressed, with the revised definition based on the use of a ‘systematic approach’.
The tax credit claims will be submitted alongside income tax returns. However, from the 2020/21 year, businesses will be required to attain pre-approval of their eligible R&D expenditure, which will be binding on IRD, providing businesses the ability to confidently forecast their future tax positions.
The changes to the regime reflect the Government’s commitment to raise NZ’s R&D expenditure to 2% of GDP over the next ten years, whilst making the regime accessible to a wider range of businesses.
Snippets
Royals in NZ
There has been no shortage of news about the Royal Family recently, particularly given Harry and Meghan’s visit to NZ. Yet you may not know that in 1970 NZ was the location of the very first "royal walkabouts", designed to enable the Queen to meet the public.
The Queen has actually visited NZ ten times during her lifetime, so NZ could arguably be a favourite destination of the family! Despite their obvious good taste in countries, some of the guidelines and traditions followed by the Royals are quite unusual.
For example, the Royals may happily pose for ‘selfies’, but will never give an autograph due to the risk of potential forgery.
Strict heed is given to royal hierarchy, to the extent that Prince Philip commonly walks two steps behind the Queen to represent their rankings in the royal family. It's also frowned upon for ‘lower’ members of the family to go to bed before the Queen.
There are some equally unusual eating habits – the Queen has a ‘no garlic’ rule, as well as a family ban on shellfish. Also at meal times, guests are not allowed to continue eating after the Queen has finished.
The Royal trips to NZ seem set to continue, so it may be worth keeping these rules in mind in case you meet any of the Royals on their future visits!
Anti-Money laundering regulations
Since 2013, financial institutions, such as banks, have had to comply with Anti-Money Laundering regulations. These rules have now been extended to other businesses providing financial services, such as real estate agents, accountants and lawyers.
The regulations are designed to prevent criminals laundering money through legitimate New Zealand businesses and apply in a number of circumstances, predominantly where financial transactions are involved.
The rules require affected businesses to formally identify their customers and understand the true source of funds for every individual they interact with, before they can undertake certain work. This is likely to incur additional costs for affected businesses, but there is no way around it, and the fines for non-compliance outweigh the cost.
The extension of these regulations seek to ensure New Zealand continues to protect and enhance its reputation as a good place to do business and is meeting international standards. However, they may slow down the time it takes to get professional assistance.
If you have any questions about the newsletter items, please contact us, we are here to help.
]]>Deductibility of bad debts]]>http://www.ckfthomas.co.nz/single-post/2018/11/05/Deductibility-of-bad-debtshttp://www.ckfthomas.co.nz/single-post/2018/11/05/Deductibility-of-bad-debtsMon, 05 Nov 2018 04:56:44 +0000
Many of the costs associated with running a business can be claimed as a tax-deductible expense, but not all. The Income Tax Act dictates that to be deductible, expenses must be incurred in the course of deriving assessable income, or in running a business.
Bad debts are one such example. Bad debts are real losses suffered by a business, arising when credit has been extended to customers who are ultimately unable to pay the amount owed. The timing of a bad debt can be subject to a degree of subjectivity. Hence, although they are commonly recorded as an expense in the financial statements after a certain period of time, there is no automatic right to a tax deduction. The default position in the Income Tax Act is to deny a deduction for a bad debt, except where the debt has been written off during the income year or certain other legal steps have been taken to formally release the debtor from payment.
Whether a bad debt deduction could be claimed was the subject of a recent High Court decision, Boon Gunn Hong v Commissioner of Inland Revenue [2018], where the taxpayer was ultimately unsuccessful.
The taxpayer was a barrister and solicitor working as a sole practitioner. He made loans of $50,000 and $122,280 respectively to two of his legal practice’s clients, both of whom were facing financial difficulties. The court referred to them being made from a “benevolence on the conscience loan fund” intended to help clients facing financial difficulties. When the debtors became unable to pay, the taxpayer claimed a tax deduction for the bad debts in the 2011 year.
The Court denied the deduction on several grounds. Firstly, the Court considered the general principle requiring a connection between an expense and the income derived by the business. The taxpayer was not in the business of lending money nor was there a connection between the taxpayer’s legal services business and the bad debts, hence the loans were not expenses incurred in deriving his assessable income.
Secondly, under the specific bad debt provisions, the taxpayer’s own accounting procedures failed to show that the loans had been written off in the 2011 year. Furthermore, he had failed to establish that the debtors were legally released from making any further repayments. One debtor was only released from bankruptcy in 2013 and the other had not been adjudicated bankrupt at all.
The case had initially been heard in the lower courts, with the taxpayer charged shortfall penalties for taking a lack of reasonable care in forming his tax position. In addition to finding against the taxpayer, the High Court upheld the penalty, with the taxpayer also forced to pay the legal costs involved in taking the case to the High Court.
This case highlights the importance of ensuring the deductions claimed in your tax return are properly allowable under the Income Tax Act 2007. If you have any expenses that could possibly raise red flags it is important to take specialist tax advice to avoid the potentially costly consequences of mistakes.
]]>IMPORTANT ANTI-MONEY LAUNDERING REGULATIONS INFORMATIONCockcroft Thomashttp://www.ckfthomas.co.nz/single-post/2018/08/19/IMPORTANT-ANTI-MONEY-LAUNDERING-REGULATIONS-INFORMATIONhttp://www.ckfthomas.co.nz/single-post/2018/08/19/IMPORTANT-ANTI-MONEY-LAUNDERING-REGULATIONS-INFORMATIONSun, 19 Aug 2018 05:41:24 +0000
You may have heard rumblings around Anti-Money Laundering and Countering Financing of Terrorism and wondered what this has to do with New Zealand. Well, it’s because New Zealand passed a law called the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (“AML” for short). The purpose of AML reflects New Zealand’s commitment to the international initiative to counter the impact that criminal activity has on people and economies within the global community. To date, AML has mainly affected banks and other financial or investment entities. From 1 Oct 2018 accountants must do a number of things to help combat money laundering and terrorist financing and to help police bring the criminals who do it to justice. This is because the services accounting firms offer may be attractive to those involved in criminal activity. The purpose of AML is to deter criminals from using our services and help us detect them if they do. This will help New Zealand to live up to its reputation as one of the least corrupt countries in the world and a good place to do business.
What does this all mean for our existing clients?
AML requires us to collect and verify information to show that we know our client is who they say they are. This is known under AML as customer due diligence (“CDD”). There are transitional provisions for existing clients which mean we may not immediately need any further information from you. We may however need to obtain and verify certain information from our clients to meet the legal requirements introduced by AML. This could occur if there is a material change in the nature or purpose of our relationship with you. If we need to collect information this will include collecting and verifying identity information about: - our clients; - any beneficial owners of our clients; and - any person(s) acting on behalf of our clients. We may also need to ask about the nature and purpose of the proposed work. Information confirming a client’s source of wealth or source of funds for a transaction may also be necessary. For overseas clients, companies and trusts we may need more information and will let you know what we require at the time we request it from you.
What happens if you don’t provide information when required?
If we are not able to obtain the required information, it is likely we will not be able to act for you. We don’t want this to happen as we like working with all of our clients and we are sure you don’t want to find yourself in this situation. At the moment we do not need you to take any action unless we contact you for further information. If we do contact you we will try and make the compliance process as easy as we can. However, if AML obligations apply we will need your co-operation to enable our relationship to work. If you have any questions around how AML might affect our relationship please contact the staff member you regularly work with, or feel free to contact Chloe Nguyen who is our AML Compliance Officer.
We thank you for your patience and understanding as we all adjust to AML.
]]>Newsletter Aug- Oct 2018]]>http://www.ckfthomas.co.nz/single-post/2018/08/07/Newsletter-Aug--Oct-2018http://www.ckfthomas.co.nz/single-post/2018/08/07/Newsletter-Aug--Oct-2018Mon, 06 Aug 2018 21:53:31 +0000
Inside this edition
Four-day working weeks 1
Proposed tax changes 2
Holiday pay 3
Proposed R&D tax credit 3
Snippets 4
Takeaway? 4
Parental leave 4
All information in this newsletter is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.
Four-day working weeks
The idea of a four-day working week might previously have seemed like a dream, but one Kiwi company is looking to make it a reality. Perpetual Guardian recently concluded an eight-week trial of the shortened working week, with managing director Andrew Barnes, claiming it was a “massive success”, adding that he wants it to become a permanent fixture.
The trial began in March, with employees enjoying ongoing three-day weekends with no sacrifice to their salaries or adjustment to their normal daily working hours. To measure the results of the trial, Barnes invited academic researchers to observe the impact on staff productivity. The results found that staff stress levels dropped by 7%, work life balance improved by over 20%, and team engagement levels improved. The results disproved original suspicions that staff may become more stressed as they worked to achieve the same objectives in a shortened timeframe.
Christine Brotherton, head of people and capability for Perpetual Guardian, added that the trial allowed staff to bring a similar level of focus to home life as they did to work. With their extra day off, staff could complete their “life admin” tasks and were able to better engage in hobbies, meaning that they were often more energised upon their return to work.
Despite the idea being novel in New Zealand, similar trials conducted overseas generated comparable results. In Sweden, working hours for nurses were reduced to six-hour days with results showing increased job satisfaction and a drop in sick leave. Amazon is also trialling a reduced working week for a selection of employees. The employees working a 30-hour week are entitled to receive the same benefits as full-time employees, but only earn 75% of their salary.
Alternatively, an increasing number of companieshave looked to introduce “compressed” working weeks. A “compressed” working week still requires employees to work 40 hours per week, but over just four days. Advocates of the “compressed” week argue that productivity is increased, while simultaneously decreasing overhead costs. However, critics consider that increasing the number of hours worked in a day could increase health and safety concerns. With a growing number of cases coming before the courts citing overwork as a cause of adverse health effects, increasing the number of hours worked per day may be met with resistance.
Employers looking to implement any changes will also need to consider the legal ramifications. Current employment law is very much focussed on the number of hours worked, hence for a 4 day week or compressed hours to become common place, legislation would need to change accordingly. Logistical issues are also likely to provide challenges in terms of when staff might choose to take their day off, particularly in manufacturing and service sectors.
While the results of the trial have no doubt got employees excited by the idea that a four-day week could become a reality, it is likely five-day weeks will persist until the legal fish hooks can be addressed. In the meantime, we can all look forward to our next long weekend in October.
Proposed tax changes
The Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill was introduced into Parliament in June 2018.
The Bill seeks to improve tax administration and modernise the revenue system by making tax “simpler and easier” for individuals. However, the majority of the proposed improvements are heavily reliant on the success of the Inland Revenue’s shift toward increased automation.
The key proposals seek to help individuals pay and receive the right amount of tax during the year, for example by:
enabling IRD to help individuals determine their appropriate tax rate or code;using tailored tax codes;automating tax refunds; andstreamlining the administration of donation tax credits.
The proposals aim to minimise the need for tax adjustments at the end of each year. Current year-end processes, such as personal tax summaries and IR3 forms, will be replaced with pre-populated accounts based on information that is provided directly to IRD. Consequently, individuals who only earn “reportable income”, such as employment income and bank interest, should have the right amount of tax deducted throughout the year via a tailored tax code. This will be verified by an automatic tax calculation at year-end, with any refund automatically paid directly to a nominated bank account.
Taxpayers with additional income, such as self-employment or rental income, or those that want to claim deductions, will still need to disclose this to IRD via the existing IR3 process. The proposed changes are expected to come into force on 1 April 2019, and will be adopted for the 31 March 2019 year-end process.
For charitable donation rebates, the planned changes will allow donation receipts to be submitted electronically throughout the year. The current IR526 year-end return will remain in place for those preferring this method. The option to electronically submit receipts will offer individuals greater flexibility and reduces the risk of receipts being lost or forgotten.
In addition to streamlining year-end filing processes, the Bill also aims to make it more straightforward for taxpayers to correct errors in their prior year tax assessments. If a taxpayer discovers that they made a mistake in a previous tax return, they will simply be able to include the amendment in the current year tax return if the amount of the error is equal to, or less than, both $10,000 and two percent of either the taxpayer’s taxable income or GST output tax liability. This will be more practical than the current system where taxpayers are often required to make a separate voluntary disclosure.
A further welcome change is in respect of IRDs process governing private binding rulings. The binding ruling process allows taxpayers to seek confirmation from IRD of the stated tax consequences of specified commercial arrangements. However, the current process is costly and typically only used by large taxpayers. The Bill seeks to simplify the application process, and also reduce IRD’s fees for providing a ruling, with the hope that smaller entities and transactions will be encouraged to use the system. The changes being introduced by the Bill will result in fundamental changes to the way individuals are taxed.
Holiday pay
The MBIE Labour Inspectorate have recently announced that they are going to prioritise employer compliance with the Holiday Pay Act. They expect businesses to calculate leave and holiday pay entitlements accurately. However, a growing number of non-compliance cases suggest that this is easier said than done, with both small and large businesses finding the rules complex to tackle.
Over the past six years, MBIE has investigated 156 employers to measure their compliance with holiday pay rules, and every single employer was found to have some degree of non-compliance. In addition to financial loss, employers making mistakes also risk reputational damage and loss of employee trust.
There are many reasons behind the difficulties faced by employers in this area.
The Holiday Pay Act requires different rates to be used for the various types of payments made to employees. For example, a weekly rate must be applied to annual leave payments, however a daily rate should be applied to other employee entitlements such as sick leave and public holidays. There are also complex rules and methodologies that should be applied in special circumstances, for example when employment ends. The legislation often requires employers to compare two alternative calculation methods, so it is important that these are correctly understood.
Errors often occur in holiday pay calculations when payments other than salaries and wages need to be included. The average weekly and daily rates need to be calculated accurately; in addition to gross earnings the rates also needs to include allowances, overtime and incentives. If these are excluded, there is the risk entitlements are underpaid. However, employers also risk overpaying employees by unnecessarily including other amounts, such as bonuses, in the calculation.
Variability of pay also introduces complexity. For salaried workers, the calculation process is often more straightforward as their ordinary and average pay is likely to be the same. However, for waged employees working variable hours, the average pay may vary over different periods of time. It is therefore crucial for employers to understand their full workforce and apply the rules accordingly.
As payroll functions become increasingly automated, many employers rely on payroll systems to perform holiday pay calculations. Here the flexibility and sophistication of the system becomes important. If the system is able to process multiple types of calculations and comparisons then errors are less likely to occur. However, less sophisticated systems risk calculating underpayments for employees working irregular hours. Most systems are unable to tackle all the various scenarios described under the legislation, running the risk of non-compliance.
To avoid non-compliance and resulting action by employees or regulators, it is vital that employers understand the provisions of the Holiday Pay Act and apply them correctly. Employees can legally request remediation for non-compliant payments up to six years after the payment, and in cases of serious non-compliance, employers may be taken to the Employment Relations Authority. The potential scale of non-compliance varies from organisation to organisation, depending on the mix of employees and the total wage bill, so it is vital that all employers consider their individual circumstances and take advice as appropriate to ensure compliance with the legislation.
Proposed R&D tax credit
The Labour-led Government recently released the Research and Development (R&D) Tax Incentive Discussion Document, which proposes a 12.5% R&D tax credit on eligible expenditure from 1 April 2019.
The Government believes R&D is key to building a better New Zealand through creating a diverse, sustainable and productive economy. R&D expenditure by businesses in New Zealand is currently 0.64% of GPD – compared with the OECD average of 1.65%. The Government aims to increase this to 2% of GDP over the next 10 years.
The proposed tax credit will apply to eligible R&D expenditure between $100,000 and $120 million, equating to a possible $15 million tax credit. All businesses, regardless of legal structure, will be eligible for the credit. So the key determinant for accessing the grant will be the definition of ‘eligible’ expenditure. Two approaches are being considered. The first based on the cost of labour directly incurred on R&D, and a second broader approach intended to capture both direct and indirect R&D costs.
The proposed definition of R&D necessitates the use of “scientific methods” and requires the resolving of “scientific or technological uncertainty”. Although the regime is intended to have a broad reach, the draft definition maybe narrow and could limit the scope of eligible R&D activities. For example, it may not encompass software/app development if it doesn’t involve traditional scientific methods, nor solve uncertainty (i.e. they are more targeted at a specific creation or result) or address a material problem.
There are also some taxpayers benefiting from the existing R&D tax credit regime that will lose out from the proposed change. Under the current regime, loss-making companies can cash-out a portion of their tax losses, providing valuable cash flow to start-up companies incurring losses in the early years of business. However, under the proposed new regime, the tax credit will not initially be refundable and the value of the tax credit will not crystallise until a business is in a tax paying position.
Furthermore, the Callaghan Innovation Growth Grants will be phased out over the next two years, with all grants ceasing on 31 March 2020. This is on the basis that the new tax incentive is funding “a similar type of activity and have a similar purpose”.
The combination of the above could have a detrimental impact on the cash flow of R&D start-ups who may not have access to bank funding or may not want to dilute equity through additional capital investment. However, the Government has indicated that it will introduce changes to support R&D businesses in tax loss positions from April 2020, so we will need to wait and see what these changes bring.
Snippets
Takeaway?
New Zealand may be perceived as clean and green by the rest of the world, but we have a significant and growing problem. As a country we guzzle our way through approximately 295 million cups of takeaway coffee a year.
But coffee cups are recyclable, I hear you say. Unfortunately not; they’re treated with something called polyacetylene (PE), which makes them coffee-proof, but extremely difficult to recycle. To be recycled the PE lining needs to be separated from the cardboard, which is extremely complex, and not many recycling plants have this capability meaning most cups go to landfill. This is an issue that is set to continue unless we change our habits. How can we fix it? By changing to a cup that is properly recyclable, or by investing in new specialized facilities.
Alternatively you could buy your own reusable cup, however, the energy and resources to manufacture these may outweigh the benefits. It has been said that in order to gain an environmental benefit over a takeaway cup you must reuse your cup until it reaches the end of its life, which could be between 1000-3000 washes. Are you ready to commit to using a single reusable cup for the next 8 years?
Something to be discussed at the water cooler…what type of cups does that have?
Parental leave
Until recently, new parents received paid parental leave for just 18 weeks, one of the lowest allowances in the OCED. Parliament originally voted to increase paid parental leave to 26 weeks back in 2016, however the previous Government vetoed the change. The increase will now take place incrementally, with the first increase from 18 to 22 weeks applicable to babies born or due from 1 July 2018, and a further extension to 26 weeks expected from 1 July 2020. The change also applies to those adopting, or becoming primary carer for a child.
The maximum payment has remained at $538.55 before tax, however it is hoped that the increased leave period will benefit families more than just financially. It is hoped there will be a positive impact on parental bonding with their newborn, and will also assist with the World Health Organisation’s recommendation of breastfeeding up to six months of age.
The policy is set to cost approximately $325 million over four years. The Government believe it will give children the best start, whilst also reducing the level of stress on new parents.
If you have any questions about the newsletter items, please contact us, we are here to help.
]]>Foreign shares]]>http://www.ckfthomas.co.nz/single-post/2018/08/07/Foreign-shareshttp://www.ckfthomas.co.nz/single-post/2018/08/07/Foreign-sharesMon, 06 Aug 2018 21:52:53 +0000
The global economy is seeing New Zealand (NZ) taxpayers invest in overseas companies. However, many people acquire foreign investments without understanding how they will be taxed. Taxpayers that purchase shares in a foreign company should ensure they are familiar with the Foreign Investment Fund (FIF) rules.
The FIF regime was introduced to prevent NZ taxpayers using offshore entities to avoid or defer their NZ tax obligations. The rules apply when less than 10% of the shares in a foreign company are held, or units of less than 10% in an overseas unit trust. Dividends/income received from such investments are not directly taxable. Instead, taxable FIF income is attributed to the taxpayer based on a number of calculation methods. This means that taxable FIF income can arise even if the investment does not generate a real cash return, and this is where uninformed taxpayers can be caught out.
The default calculation method is the fair dividend rate (FDR) method, which deems taxable income to arise based on 5% of the market value of an investment at the start of the financial year. Dividends received during the year are ignored. A quirk of this method means that no taxable income is derived during the tax year an investment is acquired, due to the nil value at the start of the year. Conversely, income is deemed to arise during the year an investment is sold. Complex adjustments apply when an investment is purchased and sold within the same year.
The FDR method provides certainty, and where returns on an investment exceed 5%, the excess return is effectively tax free. However, for a taxpayer with an underperforming investment, which may have fallen in value and paid no dividends, deemed income at 5% adds salt to the wound.
To deal with this scenario an alternative calculation method, the comparative value (CV) method, determines taxable FIF income based on the change in value of the investment during each tax year, with an adjustment for realised dividends and capital gains. This can result in lower taxable income than the FDR method when the return on an investment is below 5%.
In addition to FDR and CV there are other calculation methods available. Furthermore, whilst individuals and some trusts can freely switch between FDR and CV each income year to gain the best tax outcome, there is no such option for companies who are generally required to continue using the FDR method once it has been selected.
Australian listed shares are generally exempt from the FIF rules and are taxed in the same way as NZ investments, such that dividends are taxable when received and capital gains are tax free. However, the devil is in the detail and this exemption does not apply to all Australian shares, hence each investment must be considered separately.
Given the complexity of the regime, if you are evaluating an overseas investment, please do so with full knowledge of the appropriate tax rules, to avoid unexpected tax costs.
]]>Newsletter May- July 2018]]>http://www.ckfthomas.co.nz/single-post/2018/07/21/Newsletter-May--July-2018http://www.ckfthomas.co.nz/single-post/2018/07/21/Newsletter-May--July-2018Fri, 20 Jul 2018 19:54:34 +0000
Inside this edition
Health in the workplace. 1
Ring-fencing rental losses 2
Bright-line breach warning 3
Reimbursing allowances 3
Snippets. 4
Cryptocurrency and tax............................. 4
Commonwealth Games............................. 4
All information in this newsletter is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.
Health in the workplace
How often have you found yourself vowing to improve your health or fitness? If you are anything like the majority, chances are at some point you have embarked on some fad diet or joined the latest fitness craze in an attempt to get healthier, only to find yourself succumb to the temptation of those pesky workplace morning teas or 3pm sugar cravings. However, with workplace well-being programs continuously growing in popularity, could the workplace soon provide more health-help than harm?
A recent survey by AON suggested that promoting good health and wellness should be a goal of all employers in 2018, with 96 percent of respondents recognising a connection between health and work performance. Perhaps one of the most popular trends already seeing widespread adoption is the introduction of standing desks. For office based employees, the majority of the day is spent sitting at a desk, resulting in lengthy periods of sedentary activity. Such high levels of sedentary behaviour allegedly have a major effect on a person’s health, with links to both physical and mental conditions, including obesity and depression. Thus, standing desks should help ease this effect by reducing the amount of time a person is sitting down.
In addition to increasing employees’ activity levels, nutrition is also a key component. It is well established that what we eat has a greater impact on our health than the amount of exercise we do. It has been estimated that we eat approximately a third of our day’s food at work, meaning the workplace is an ideal place to assist employees in making healthy choices. Initiatives such as offering complimentary fruit, ensuring any food provided is as healthy as possible, and limiting the supply of alcohol, are small steps to encouraging employees to make healthier choices. For those interested in more quirky initiatives, perhaps implementing an “on-the-hour flash walk” is something to consider. A “flash walk” has been said to generate collective positive energy, as well as provide a break from sustained periods of sitting or standing. Additional physical and psychological benefits are thought to contribute to decreased healthcare costs for companies in the long run.
Sleeping on the job has been a big no-no in the past, however studies have proven that even a 20-minute power nap can reduce stress and increase productivity. Tech giants like Google and Uber are paving the way for workplace naps, introducing in-company sleep pods and resting rooms. For companies that are not quite sold on the idea of employees napping at work, investing in sleep awareness and education programs could be a beneficial alternative to combatting the decrease in productivity caused by sleep deprivation.
It is apparent that investing in the physical and mental health and wellbeing of employees stands to facilitate a healthy and productive workplace. With growing support and commitment towards promoting good health and wellness, expect to see some more innovative health initiatives develop in 2018.
Ring-fencing rental losses
Labour’s pre-election manifesto proposed to increase the fairness of the tax system and improve housing affordability. In the six months since the Labour-led coalition entered Parliament, we have started to see some changes filtering through. As part of the proposals aimed at house prices, Inland Revenue has recently released an Issues Paper proposing to ring-fence rental losses, with draft legislation likely to follow once Inland Revenue has considered public responses. So how would the rules work?
People derive income from multiple sources, such as salary / wages, business income, interest, dividends and rental income. It is a fundamental feature of NZ’s tax system that a person is taxed on their total income from all sources, whether a profit or loss.
This aggregation allows losses incurred from rental properties to be offset against other income, reducing a taxpayer’s total income and corresponding tax liability. The Government’s concern is that this mechanism allows property investors to take on high levels of debt to finance their property investments, giving rise to tax losses, effectively subsidising the rental portfolio through a reduced tax liability. The high-gearing offers an advantage compared to owner-occupiers because their interest cost is not tax deductible.
The proposed ring-fencing rules contained within the Issues Paper will eliminate this advantage by preventing rental losses from being offset against other income. Instead, rental losses will be ‘ring-fenced’ and offset against future rental income, or any tax incurred on the future sale of the property.
Labour originally indicated losses might be ring-fenced by individual property. Thankfully, the proposed ‘portfolio approach’ is more logical, enabling investors to pool their profits and losses from all residential properties, including overseas properties. If enacted, the rules will apply to all rental properties irrespective of how they are held, i.e. the rules will apply to individuals, companies and trusts. The proposed rules also use the existing definition of ‘residential land’. Thus, the rules will not apply to commercial property or property subject to the mixed-use asset rules.
There is complexity in the new rules because they can impact people that don’t hold rental properties. For example, if a person has borrowed to purchase shares in a company and that company uses the funds to purchase a rental property, the interest incurred by the shareholder is normally tax deductible. In this situation, if 50% or more of the company’s asset value is derived from residential properties the company will be classified as “residential property land-rich”. Amounts paid to the shareholder (e.g. dividends) will be classified as “rental property income” and their interest expense will be classified as “rental property loan interest”. The rental interest can only be deducted against “rental property income” derived from the company, or the individual’s other rental properties, with any excess loss ring-fenced to the person.
The application of the proposed 50% asset test is currently unclear – the issues paper does not indicate whether it will be based on market value or historical cost. This will undoubtedly be addressed during the consultation period. If enacted, the proposed rules may be phased in from the start of the 2019 – 2020 income year. This will allow investors time to adjust to the new rules and provide the opportunity for taxpayers to rearrange their affairs before the rules are adopted in full.
Bright-line breach warning
The bright-line test came into force from October 2015, introducing rules that a profit derived on the sale of a residential property is subject to tax if sold within two years of purchase, albeit subject to some exceptions such as the family home. These rules have recently been revised to extend the bright-line period from two years to five.
Whilst the bright-line provisions appear relatively straightforward, there are some intricacies to the rules, so it is advisable to seek professional advice before selling a residential property. A recent High Court decision highlighted the potential consequences of failing to seek sufficient advice.
The case involved Mrs Blackburn, who personally owned a property on Waiheke Island for a number of years, before selling it to her family trust for $2.85m on 31 March 2016, 6 months after the introduction of the bright-line test. The following year, the Trust sold the property to a third party for just over $5m. Although Mrs Blackburn had owned the property for several years, the trust is a separate taxpayer for the purpose of the bright-line provision, hence the profit derived on sale of the property was taxable. However, the Trustees did not return the sale in their tax return and IRD later assessed them for income tax, resulting in a tax liability of approximately $775,000.
Displeased with this outcome, the Trustees applied for a summary judgement against their accountants, seeking $785,696.09, claiming that if they had known a tax liability would be incurred, they would not have entered into an agreement to sell the property. Since 2013, the Trust had received regular accounting services and tax advice from their accountant. However, the Trust had engaged a lawyer specifically in relation to the sale of the Waiheke property. The lawyer raised the concern with the Trustees that any gain on sale would be subject to income tax under the bright-line test. Hence, the Trustees should have been aware of the tax position.
However, the Trustees alleged that they also sought their accountant’s “thoughts” on the proposed sale, and the accountant did not raise any concern that a tax liability would be incurred. In the absence of any concern, the Trust went ahead with the sale.
In court, the accounting firm argued that the Trust had not sought specific tax advice regarding the sale of the property. It was also asserted that the Trust had already received advice from their lawyer advising them that the sale would be captured under the bright-line test. The judge ultimately dismissed the Trustees summary judgement application on the grounds that the Trust was unable to establish beyond reasonable argument that there was a formal request for advice.
The case acts as a timely reminder that when seeking advice, the scope of services should be clearly agreed between you and your lawyer or accountant, so there is no doubt on either side.
Reimbursing allowances
On 3 April, Inland Revenue issued a draft ‘Questions we’ve been asked’ (QWBA) covering the tax treatment of allowances and benefits paid or provided to farm workers. A key principle covering such payments centres on the tax treatment of ‘reimbursing allowances’ – this is relevant not just to farm workers but all employees.
Reimbursing allowances are paid to employees for expenses incurred, or likely to be incurred, in connection with their employment, e.g., vehicle mileage and tools. Section CW 17 of the Income Tax Act contains the requirements that must be met for such payments to be received tax-free and one of the key tests is that the expense incurred must be a ‘necessary expense’ incurred in performing the employment duties.
Furthermore, if employees were allowed to deduct expenses incurred to derive salary or wages, the expense would need to qualify as tax deductible. For example, if an employee was instead self-employed and the expense was tax deductible because it was incurred to derive their self-employed income, the test would be met.
A self-employed person can’t deduct the cost of a motor vehicle used to derive income because the expense would be capital in nature. Therefore, an employee cannot be paid a tax free reimbursement for the cost of their vehicle. However, vehicle running costs would be tax deductible to a self-employed person, and therefore an employee can be paid a tax-free amount to cover such costs.
The draft QWBA also includes an example of depreciable farm machinery used both in the farm business and privately. In this scenario, an apportionment of the reimbursement would be required, with the business portion of the reimbursement being tax-free, whilst the private portion would be taxable to the employee and subject to PAYE.
In addition to reimbursing specific expenses, allowances can be paid tax free based on a reasonable estimate of the expenditure. The estimation should have some reasonable basis, such as historical data, industry standard, or employee survey information. The employer must also keep sufficient information about the calculation method, and review the amount periodically to ensure the estimate remains reasonable.
Reimbursing allowances can sometimes be paid tax-free to independent contractors, for example where they receive scheduler payments. This is based on the assumption that the contractor would generally be able to deduct the expenses to which the allowance relates.
However, this raises the issue of whether the contractor is entitled to deduct the expenses as well as receive a tax-free reimbursement, effectively creating a ‘double deduction’. The draft QWBA clarifies that this is not the case; if the allowance is treated as exempt income, the contractor is denied a deduction for the attributable expense.
The tax treatment of reimbursing allowances is a ‘standard’ area of focus by Inland Revenue when reviewing a taxpayer’s affairs, hence it is worthwhile checking to make sure they are being treated correctly.
Snippets
Cryptocurrency and tax
Over the last decade, the use of digital or virtual currencies, known as “cryptocurrencies”, has grown dramatically in popularity. A single piece of Bitcoin is currently valued at over $9,000 NZD. Some New Zealand retailers have already begun accepting Bitcoin as a form of payment, which has led to the Inland Revenue releasing a ‘Questions & answers’ considering the tax treatment of cryptocurrency.
For tax purposes, cryptocurrency is treated as property, which means that foreign currency gain or loss provisions do not apply. However, if a New Zealand business accepts cryptocurrency as a form of payment, the amount is treated as taxable business income based on the value of the cryptocurrency at the time it is received.
Any gain on sale of cryptocurrency is assessed by considering the original purpose for acquiring the currency. If the currency was acquired with the purpose of disposal, any proceeds made from selling the currency are taxable. IRD consider the nature of cryptocurrency means it is unlikely that a person would acquire it without the intention to sell or exchange it, meaning the majority of gains made on disposals would give rise to a tax liability.
If you invest or trade in cryptocurrencies, be sure to keep an eye out for further developments from Inland Revenue, as they intend to refine its tax treatment as more information becomes available.
Commonwealth Games
New Zealand recently finished its most successful Commonwealth Games since 1990, generating some interesting statistics. It was our most successful games hosted outside of New Zealand, winning 46 medals, 15 of which were gold. This was enough to see us finish 5th on the medal table, punching well above our weight. We sent our largest Commonwealth Games team ever to the Gold Coast, comprising 251 athletes competing across 18 sports. The Commonwealth consists of 53 countries, of which New Zealand is the 23rd largest based on population, thus finishing 5th on the medal table was an awesome effort.
Many people would agree that based on our size, we are one of the most successful sporting countries in the world. Statistics New Zealand announced that we finished 9th for gold medals and 14th for total medals per capita, beating Australia who finished 17th.
With 79.2% of Kiwis participating in some form of sport each week coupled with our countries competitive sporting culture, it is not surprising we perform well in global competitions. Following our athletes’ success on the Gold Coast, there is now talk of New Zealand hosting a future Commonwealth Games.
If you have any questions about the newsletter items, please contact us, we are here to help.
]]>Dividend stripping]]>http://www.ckfthomas.co.nz/single-post/2018/07/19/Dividend-strippinghttp://www.ckfthomas.co.nz/single-post/2018/07/19/Dividend-strippingThu, 19 Jul 2018 05:36:14 +0000
Dividend stripping
Business structures tend to evolve gradually over time, and many successful commercial operations grow by adding additional companies or trusts on an ad hoc basis, until the resulting structure becomes somewhat unwieldy. There is then a need to streamline the business’s legal structure by inserting a holding company, providing a common point of ownership and simplified management and administration. However, a provision within the Income Tax Act, commonly referred to as ‘dividend stripping’, risks such innocuous restructures being challenged by IRD as a tax avoidance arrangement. A dividend strip occurs when a ‘sale of shares’ occurs in substitution for a dividend, the following is a simple example:  Mr A owns 100% of the shares in OpCo, which has retained earnings of $1m.  Mr A incorporates a new HoldCo, in which he holds 100% of the shares.  Mr A lends $1m to new HoldCo and HoldCo uses the loan to purchase OpCo’s shares off him for $1m.  OpCo pays the retained earnings to Hold Co as a tax free dividend.
 HoldCo repays the $1m loan to Mr A. The above arrangement has allowed Mr A to receive the retained earnings tax free. The dividend strip provision deems the amount received by Mr A on sale of the shares in OpCo to be a taxable dividend. Inland Revenue released Revenue Alert 18/01 in January which sets out the Commissioners current view on dividend strips, and asserts that the provision can apply in a range of circumstances. Although the dividend strip provisions have been around for some time, the ‘tax avoidance’ landscape has changed in recent years and can arguably apply in wider circumstances than previously thought. For businesses seeking to restructure without gaining a tax advantage there is the option of inserting a holding company by way of ‘share for share’ exchange, which should ensure no dividend strip arises. Under a share for share exchange Mr A would swap shares in OpCo for shares in the HoldCo. No cash changes hands and there is no need for debt. Under the ‘share for share’ exchange provisions, the subscribed share capital in HoldCo mirrors that of OpCo, i.e. a neutral result. However, in practice, if OpCo had capital reserves there is a risk a share for share exchange converts these into taxable revenue reserves due to a disconnect with the ‘capital gain’ provisions in the tax act. Therefore, the share for share provisions can create a significant tax disadvantage. Given the dividend strip risk combined with what appears to be a flaw in the share for share provisions, in some cases it is simply not possible to implement commercial restructures. Given the current landscape, anyone considering a restructure of their business holdings needs to be extremely cautious of the dividend strip provisions, not only to avoid a tax avoidance challenge by IRD but also to avoid any adverse tax consequences caused by seeking to counter these provisions.
]]>Newsletter Feb- Apr 2018]]>http://www.ckfthomas.co.nz/single-post/2018/02/09/Newsletter-Feb--Apr-2018http://www.ckfthomas.co.nz/single-post/2018/02/09/Newsletter-Feb--Apr-2018Thu, 08 Feb 2018 19:28:31 +0000
Inside this edition
Internet of things. 1
Mixed use assets 2
Mini-Budget – families package 3
Loss offsets and subventions 3
Snippets. 4
After work drinks....................................... 4
Auckland Transport.................................. 4
All information in this newsletter is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.
Internet of things
You may have heard the term ‘internet of things’ (IoT) bandied about recently, but what exactly is it?
IoT is the name given to interconnected devices that can communicate with each other via the internet, through the sending and receiving of data. The IoT is rapidly changing the world in which we live, albeit somewhat behind the scenes. It affects how we work, communicate, drive, make plans, shop and even how our homes are run.
The IoT works through sensors embedded in various objects that transmit signals to an online platform. Sensors are in almost everything. Location sensors in your smartphone, car, tablet or watch mean someone can locate you with ease and this generates valuable data about how things work and work together. These sensors are taking information from the world and uploading it to the internet, possibly without us noticing or without our permission. For example, after visiting a website, adverts for that same website suddenly pop up on your Facebook news feed. And when you arrive in a new location your smartphone preferences are automatically updated. That’s the IoT.
Although we are aware of this with smartphones and laptops, an increasing number of everyday devices can connect to the internet, such as air conditioning, lighting and even fridges. It is estimated that by 2020 50 billion objects will be connected to the internet. With a global population of 7.6 billion that equates to 6.6 objects connected
to the internet per person. 328 million new devices are being connected each month, so in the time you’ve taken to read this paragraph, an estimated 4,000 new devices will have been connected to the internet.
A common complaint is that we are now inundated with so much data that we don’t know what to do with it or what is important. IoT allows companies to capture data to learn more about customer’s behaviours and model services to fit their needs. Real time data collection takes the guesswork away and allows businesses to tailor their services to deliver customers something of real value.
As an example, the car industry increasingly exploits IoT to their advantage. In many new vehicles, cars can be connected to the manufacturer’s server. Every time the car is turned on, an alert is sent to the server which can perform an analysis of the data and send text alerts to the driver if something is wrong with the engine. This can detail how serious the fault is, the closest dealer to get it fixed, directions to get there, a discount voucher for the service, and an indication of whether the service is under warranty or not.
An additional advantage to the manufacturer is that they can quickly identify any trends with faults. IoT allows them to easily identify cars made at the same factory, or with common parts, and send warnings to drivers of other vehicles that may be affected, much like Subaru and Mazda did last year. This leads to streamlined inventory management for the dealer, a better and safer car, and means the driver can get back on the road faster.
It is clear that IoT will impact all industries, and businesses need to be aware of it to ensure they aren’t left behind.
Mixed use assets
When an asset, such as a bach or a boat, is used both privately and to generate income, prescriptive rules exist within the Income Tax Act that determine the extent to which a tax deduction is available.
Expenses broadly fall into three categories: fully deductible, non-deductible and apportioned.
An expense is fully deductible if it is incurred solely to generate taxable income. Non-deductible expenses arise directly from any private use of the asset. Finally, apportioned expenses arise when an expense relates to both income-earning and private use of the asset, with a tax deduction available based on the number of days the asset is used to derive income, as a proportion of the total number of days the asset is used for either purpose.
Private use is defined as the owner’s personal or family use of the asset, and any other person who pays less than 80% of the market value for the use of the asset.
For example, if a bach is rented to your sister for full market rent and a friend for 70% of the market rent, both instances qualify as private use and the income is exempt from tax. Similarly, expenses incurred relating to this use of the asset are non-deductible.
Keeping a bach in mind, an example of a fully deductible expense would be advertising costs. Conversely, if the owner of the bach purchased a kayak that was unavailable for tenant’s use, the cost would be non-deductible. While general holding costs such as rates, general repairs and insurance are apportioned based on the proportion of days the asset is used to derive income.
If a net loss arises from the asset, that loss is typically ring-fenced and cannot be offset against other income. Instead, the loss must be transferred forward and offset against future profits from the asset.
In addition to Income Tax, there are separate GST rules that apply to mixed-used assets. GST recovery is broadly based on the anticipated split of private / income use. However, unlike the income tax rules summarised above, GST can be recovered on use by the owners and their family, providing market value is paid for use of the asset. Hence, different recovery percentages can arise between income tax versus GST.
Before you consider putting the bach up for rent, it is worth checking whether the mixed use asset rules will apply and what records you need to keep to ensure you can apply the rules correctly.
Mini-budget – families package
The Labour coalition made immediate changes when they were elected into government, starting with repealing National’s planned tax bracket changes. Labours new ‘mini-budget’ is intended to benefit low-income earners, middle-income families with children and lift children out of poverty.
The package entails:
The changes are aimed at bringing many New Zealanders out of hardship. However, higher income earners, especially those without children, will not be seeing any direct financial benefits from the changes.
Other Government commitments are also set to take a big slice of the budget. The KiwiBuild programme, aiming to deliver 100,000 homes for Kiwi families over the next ten years, and the first year of free tertiary education, will leave the Government with a slim margin for fiscal error. Furthermore, they have placed long-term fiscal focus on the reduction of net government debt to between 0 and 20 per cent of GDP, along with keeping government expenses below 30 per cent of GDP.
While current Treasury forecasts are positive, economic outlook can change quickly with budget shocks such as natural disasters. Another large earthquake could spell the end to the Governments current forecasted cost buffer. Only time will tell whether or not the Government has budgeted correctly.
Loss offsets and subventions
The loss offset (and subvention payment) mechanism allows a ‘profit’ company to reduce its taxable income by utilising the tax losses of a ‘loss company’. The mechanism is a great tool that is commonly used.
Before a loss offset can be made, the following key requirements must be satisfied:
The new statement is useful because it clarifies an ambiguous matter that had existed after a previous statement made by Inland Revenue. In previous guidance, Inland Revenue had advised that it is possible to complete a subvention payment by way of journal. However, no detail was provided on what the form of those journals should be to ensure they were technically correct. The problem lies in the fact the legislation requires the profit company to bear the loss of the loss company; this ordinarily occurs through the physical payment of cash. However, it is not possible for a profit company to bear another companies loss, solely by way of journal.
Inland Revenue have now advised that journals can be used if they cause a genuine crediting in a payee’s account or off-set of a pre-existing obligation. For example, if the profit company had previously loaned cash to the loss company and the two companies agreed that the profit company will make a subvention payment to the loss company, that could be completed by journal. The journals would reflect that the loan is eliminated, allowing the loss company to keep the cash.
The SPS also covers a number of other scenarios such as:
Snippets
After work drinks
A recent study found that up to one in five office workers enjoy going for a drink with co-workers at least once a month.
This begs the questions as to whether after-work drinks are good for a person’s career. Although there is clearly no direct link, there can be undeniable benefits to socialising with co-workers outside work hours. Although it may seem like an extension of the work day, do not underestimate the value of staying for a drink, even if just one.
The study found 82% of people relished the chance to bond with teammates, whilst 11% of those questioned stated that their reason for attending was to spend time with and get to know their boss in a not so serious environment.
Not a drinker? Well, that’s fine! There are no rules that say you have to drink alcohol, grab a non-alcoholic drink and enjoy the time spent with co-workers.
A more casual atmosphere can allow colleagues to get to know each other better. But remember to keep it professional, you do not want to be the talk of the office for the wrong reason. Have fun but know your limits. It can be your chance to make an impression on co-workers, but make sure it is a positive one.
Auckland Transport
Filling up the tank in Auckland will soon cost more than the rest of the country.
A 10 cent per litre petrol tax is expected to be in place by July 1st. The tax will be added to the price of petrol and is hoped to contribute 10% towards Labour’s $15 billion 10-year Auckland transport programme.
It is intended that the money raised will fund a rail link from Auckland CBD to the airport, West Auckland and along other key Auckland roads, as well as new busways, bike paths and roads. It will also contribute to the cost of a rail network between Hamilton and Auckland. In addition to improving transport, it is hoped that the anticipated traffic decongestion will allow for more intensive housing development around transport hubs, bringing economics benefits to those areas.
Most people agree that change is needed to fix Auckland’s traffic problems and a fuel tax is a straightforward way to raise the much needed funds. The tax might help decrease congestion and make Auckland’s dire public transport move into the 21st century, which is long overdue.
If you have any questions about the newsletter items, please contact us, we are here to help.
]]>Advantages and disadvantages of cloud accounting]]>http://www.ckfthomas.co.nz/single-post/2018/02/09/Advantages-and-disadvantages-of-cloud-accountinghttp://www.ckfthomas.co.nz/single-post/2018/02/09/Advantages-and-disadvantages-of-cloud-accountingThu, 08 Feb 2018 19:22:49 +0000
There is a growing trend for businesses today, whatever their size, to move to the “cloud”. The cloud is an online platform to make data and software accessible, anytime, anywhere and from any device. Gone are the days of being chained to your desk in a small cubicle. Now, with your data in the cloud, you can be fully flexible and enhance collaboration both within your business and with others. When an accounting system is cloud based, all transactions and entries are processed immediately. This however has both its pros and cons.
A primary advantage is that larger volumes of data can be stored compared to traditional in-house servers, and a backup of historic information will always be recoverable. The cloud stores information on multiple servers, so data is saved in more than one place. In an emergency situation when paper records are lost, backups are immediately available. This can make or break a business, especially in situations such as the Christchurch earthquakes: cloud based companies were able to get back to ‘business as usual’ far quicker than those operating traditional in-house server based systems.
Cloud accounting also offers greater accessibility than traditional methods. Users can connect to the internet and access their data from anywhere, any time of day. Business owners and employees can work away from the office, yet still provide input to their teams, enhancing collaboration with their staff. The ability to access real-time information can also enhance efficiency by speeding up the decision-making process.
Cloud based accounting packages are often cheaper than purchasing software, allowing businesses to reduce overheads. They can also be updated in real time so no more waiting around for a new version to be installed. Cloud based programs are constantly developing increased functionality, all available to the end user straight away.
However, there are some disadvantages which are worth considering before adopting a cloud based system. The primary downside of storing your data in the cloud is the risk of hacking. Although cloud providers are continually striving to prevent hackers entering their system, there is no guarantee that your data is 100% safe. This leads to questions around where your data is being stored and ensuring adequate security measures are in place. Greater accessibility to your data increases the risk of outside parties being able to illegally gain access to your sensitive data.
Having your data in a secure environment with limited access points ensures you know who is accessing it and you can control that access. It is common for Inland Revenue for example to require banks to provide information regarding a taxpayer. Imagine, Inland Revenue requiring a cloud based provider to provide all of your data or a log-in to your account to enable direct access. Whether that data is provided or not could be outside your control and you may not even know it has been provided.
Cloud accounting is the way the accounting industry is heading. This is no surprise due to the benefits offered though user accessibility, efficiency and safety. To make the best decision for your business, ensure you evaluate all the options available and ensure your data is sufficiently protected before heading straight to the cloud.
]]>Newsletter November 17 - January 18]]>http://www.ckfthomas.co.nz/single-post/2017/11/07/Newsletter-November-17---January-18http://www.ckfthomas.co.nz/single-post/2017/11/07/Newsletter-November-17---January-18Tue, 07 Nov 2017 01:45:23 +0000
INSIDE THIS EDITION
Technology and R&M 1
Accommodation allowances 2
Team development 3
Voluntary disclosures 3
Snippets 4
Sneezing colleagues 4
Holding gold 4
Technology and R&M
The condition of New Zealand’s housing stock was hotly debated during the lead up to the election. Houses that were acceptable in the 1970’s are now considered outdated and low quality for 21st century living. With the introduction of a new Government we are waiting to see what changes will be implemented for landlords, for example, will a housing Warrant of Fitness be introduced?
Landlords may need to incur significant improvement costs to bring properties up to the required standard, so the inevitable question will arise - are the costs tax deductible, or capital in nature. Because buildings are not depreciable, if expenses are considered to be capital, no tax deduction will be available at all.
The process of determining whether expenditure comprises tax deductible repairs and maintenance work (R&M) has been established by the Courts, but it is inherently a judgement call and is open to interpretation. As a result, it is a common area of review by Inland Revenue during the investigation process.
Generally, where new building materials are used extensively, and perform different functions, then this may be considered a change in the character of the asset and therefore more likely to be capital in nature. However, one accepted means of treating expenditure as deductible R&M is on the basis of technological improvement. The rationale is based on the Privy Council decision in Auckland Gas Co. Limited v CIR in which Lord Nichols stated:
It often happens that, with improvements in technology, a replacement part is better than the original and will last longer or function better. That does not, of itself, change the character of the larger
object or, hence, the appropriate description of the work.
Some objects do not lend themselves so readily to this exercise in characterisation…A house is a simple example of this. Demolition and rebuilding of a dangerous flank wall of a house would normally be regarded as repairing the house. The answer might not be so obvious if an entire derelict wing of a large house were demolished and rebuilt, especially if the new construction were substantially different from the original. Questions of degree may arise in such cases.
Inland Revenue’s Interpretation Statement on R&M issued in 2012 briefly commented on the issue. Inland Revenue referred to the Auckland Gas example. In that case, a significant portion of the asset, being the gas network, was replaced with new pipes that performed differently. It was considered that the character of the gas distribution system had changed, hence the conclusion by the courts that the expenditure was capital in nature.
Let’s take another common example. A landlord may choose to replace all of the windows of a rental property with double glazing. Double glazedwindows can make a substantial improvement to a home’s heat retention, as it is often the windows and frames that are most susceptible to heat loss. However, there is a strong argument for concluding that the character of the house is unchanged. It is visually unchanged and the windows perform the same function. While not explicitly dictated as the only choice of window, they can be considered the new technical ‘standard’.
In principle, the cost of making this type of improvement should be tax deductible. The tax benefit promotes the creation of healthier, greener homes. However, if in this example the landlord had chosen to replace the windows with a better product to improve the character of the house, then arguably a capital improvement has been made. Single glazed windows are available and common sense suggests the landlord would not have paid for the improvement if no advantage was gained.
Instead of replacing all of the windows, replacing the odd broken window from a stray cricket ball might help the landlord dodge Inland Revenue’s capital improvement firing line.
Accommodation allowances
In today’s fast changing commercial environment, it is common for employers to provide board or accommodation to employees, and move staff to new locations based on the needs of the business. This can occur when permanently moving an employee to a new location, or when temporarily seconding an employee to a different location.
The value of board or accommodation provided to an employee generally comprises income of the employee and is subject to PAYE. However, in relocation scenarios, given the business drivers in these situations it is sometimes possible for accommodation to be provided tax free. The rules are prescriptive, so it is a case of working through them to confirm how they apply.
In the case of a permanent relocation, payments for accommodation may be treated as non-taxable to the employee for up to three months from arrival at the new location, providing they have moved to:
take up employment with a new employer, ortake up new duties at a new location with the existing employer, orcontinue in their current position, but at a new location.
If an accommodation allowance continues after this three month period, the payments will become taxable to the employee. Various other costs can also be paid tax free, such as moving and transportation costs. Refer to Inland Revenue’s determination 09/04 for a complete list.
In the context of a temporary change in workplace, such as a secondment, the length of the secondment and its purpose will determine to what extent accommodation will be tax free. If the business intends the temporary relocation to last for a period up to 2 years, then the accommodation for the whole duration of the secondment can be treated as non-taxable. This tax free period can be extended to 3 years if the employee is working on a project to build, restore or demolish a capital asset. If it becomes evident that the employee will need to be seconded for more than 2 or 3 years, respectively, the accommodation will be taxable from the date expectations change.
Real life scenarios can of course be complicated and the rules themselves are complex as they attempt to accommodate (no pun intended) those situations. For example, the rules cater for employees with multiple workplaces, new employees who are placed on immediate secondment and extended periods due to exceptional circumstances, such as natural disasters.
For businesses encountering this scenario, the first priority is to ensure there is a system in place to capture and record the provision of accommodation to employees. It is then a matter of confirming what the correct tax treatment is. There is no distinction between whether the employer pays an accommodation allowance or provides accommodation directly. The rules can be complex depending on the situation, but tax is a business expense (and risk) like any other and should be managed accordingly.
Team development
Business owners and managers are often focused on a company’s financial performance, return on investment and other monetary indicators of business success. Intangible investment in human capital can commonly be overlooked as it can be difficult to measure improvements, or any direct increase in outputs. However, employee effectiveness is critical to the performance of all business processes.
There are numerous approaches that can be used to increase the effectiveness of employees, of these the athlete-centred and employee-centred approaches are summarised below.
Using the sports field as an example, an athlete-centred approach has been proven to develop exceptional gamesmanship and understanding. Although you might not view your colleagues as a sports team, significant improvements can be made by investing time in staff development. Managers have a great opportunity to lead from the front and pave the way for a more effective organisation by creating a learning, rather than telling, work environment. To achieve this, managers need to view themselves more as teachers than autocrats. This allows employees the freedom to make errors and gives managers points to correct and teach from, developing a greater understanding of the problems at hand.
Graham Henry has an active focus on empowering the rugby players he coaches, giving them more responsibility, rather than using a dictatorial decision
making style. An important aspect of this is having a senior leadership team available to help set the tone of the group for situations both on and off the field. By allowing the senior leadership team control of almost all aspects of the team, the athletes have greater buy in and acceptance of team decisions.
Business owners could take a similar approach and create high performing teams to adopt an athlete-centred approach in business decision making processes.
The employee-centred approach relies on managers to empower their staff to take responsibility for their own work outputs, and make their own decisions.
A nurturing environment must be created for this ‘employee-centred’ approach to be successful. A ‘teach, don’t tell’ coaching style is a core principle. Managers who avoid telling employees what to do, and instead test their understanding of topics through the use of leading questions, enable employees to develop their decision making ability and technical skills and still think through the problem themselves. The managers still ‘teach’ the employee in areas where there is a lack of knowledge, but the questioning style helps the employees broaden their knowledge and retain responsibility for their outputs.
Good managers will move between this ‘teach don’t tell’ style of coaching, to a more prescriptive style as required by the situation.
Voluntary disclosures
Traddies have been under the watchful eye of Inland Revenue (IRD) for the last few years since being identified as a cash-dominated industry in 2012. A media campaign has recently been launched to warn tradespeople that doing ‘cash jobs’ may comprise tax evasion, and that every cash job leaves a trail (or lack of a trail) that can be tracked by IRD.
Tradespeople risk substantial financial consequences if they are caught understating taxable income in their tax returns. Fines, penalties, use of money interest, and potential prosecution are all within the IRD’s power.
This begs the question, if a business identifies an error and the correct amount of tax has not been paid, what should be done? Contrary to some views, it does not comprise a windfall gain. If a business has underpaid its tax by more than $1,000 it must be disclosed to IRD. No business owner will take joy in having to pro-actively contact IRD, so here are a few points to keep in mind which will help smooth the process. The best way to proceed is by making a written voluntary disclosure. With any re-assessment to increase a person’s tax liability, IRD will consider whether shortfall penalties should be charged. If charged, the amount is based on a percentage of the tax shortfall and the percentage varies depending on the nature of the error and the taxpayer’s culpability. The taxpayer should therefore use their written disclosure to clearly set out what the error is, how it arose and what actions have been taken to ensure it will not happen again. The disclosure provides an opportunity to explain the facts in the most favourable way possible. It reassures IRD of the taxpayers willingness to comply with the tax rules and demonstrates that the matter is being taken seriously.
The disclosure should also set out how the relevant tax return should be amended, with reference to the actual box numbers in the tax return. Broad statements regarding how the mistake should be fixed run the risk of IRD amending the return incorrectly, which will only give rise to more contact with IRD – the taxpayer should make it extremely easy for the person processing the change to get it right.
In most cases, if a voluntary disclosure is made no shortfall penalty should be charged.
In a small number of cases, the IRD may receive the disclosure and commence an investigation. IRD could potentially take the view that if one error was made, something else might be wrong. This reinforces the need to word the initial disclosure carefully to ensure there is an appearance of ‘there is nothing to see here, move along’.
If a voluntary disclosure is not made, and IRD find the error themselves the situation could be much worse. Shortfall penalties, that may not otherwise have been applied, could be charged and the IRD may undertake a more comprehensive investigation. So we would always recommend full disclosure at the earliest opportunity. Being able to sleep at night is worth some temporary discomfort.
Snippets
Sneezing colleagues
Modern workplaces are increasingly open plan, so sneezing colleagues are hard to miss during the flu and hay fever seasons. Many would be able to name one or two people with particularly loud or interesting sounding sneezes, but funnily enough research has found that the sounds made when people sneeze are all for show.
The usual ‘achoo’ sound so many of us make when sneezing is specific to English speakers. The Japanese sneeze is a “hakashun”, with Filipino’s a “ha-ching”, and the French making a “atchoum”.
You might then wonder what sound a deaf person makes when they sneeze. Interestingly, their common sound is simply one of air escaping from their lungs. No achoo’s, hakashun’s or atchoum’s - just a quick exhalation.
Researchers from University College London found that the sound and volume of a sneeze is modified depending on social acceptability. As deaf people have never heard the sneezing sounds of people around them, they sneeze how nature intended.
So next time the sneezing season comes round, listen in to how your colleagues sneeze – you might learn something interesting about their background.
Holding gold
Can an investment in gold bullion create a tax liability? Inland Revenue (IRD) has recently released a statement on this specific point.
IRD consider that gold bullion purchased as an investment has been acquired with the purpose of eventual disposal, i.e. a purpose or intention of resale exists. Consequently, any gain that arises on its future sale is income and taxable. In IRD’s view, a commodity such as gold does not provide any annual return or income for the period of ownership, so it is hard to argue that the investment was for any purposes other than eventual disposal.
The IRD considers the ‘reason’ for acquiring gold is irrelevant. Whether it has been purchased as an investment, or a hedge, this does not counter the underlying purpose of a future disposal. In comparison with other investments such as shares in a company, which may be held on capital account for the purpose of a deriving a dividend stream, gold has none of these features.
If you have any questions about the newsletter items, please contact us, we are here to help.
]]>Callaghan Innovation]]>http://www.ckfthomas.co.nz/single-post/2017/11/07/Callaghan-Innovationhttp://www.ckfthomas.co.nz/single-post/2017/11/07/Callaghan-InnovationTue, 07 Nov 2017 01:13:36 +0000
Callaghan Innovation
Innovation is often considered by economists as core to a country’s economic prosperity. At the turn of the 20th century, refrigerated exports put New Zealand ahead of many of our European peers and ranked us first against all others in GDP per capita. Whilst the world economy has changed a lot in the last 100 years, the New Zealand Government remains actively focused on stimulating increased innovation within the economy in an effort to increase economic growth and population wealth. The main method for government to support innovation in recent times has been through the formation of Callaghan Innovation. Callaghan is a Crown entity, established in 2013 with the dedicated purpose of increasing innovation in NZ businesses. The entity takes its name from Sir Paul Callaghan, a notable NZ physicist who advocated for increased focus on innovation funding and initiatives to increase population prosperity. The Callaghan strategy includes multiple options to deliver innovation services to qualifying businesses, ranging from the provisio
n of access to experts, to business collaborations and the offer of research and development grants. Many businesses seeking to innovate, or develop their products, can apply for Callaghan resources. In 2016, 229 businesses accessed the programs, with a further 1,068 businesses working towards grant applications. Companies from a broad spectrum of industries have benefitted from help and funding, including Methven, Rocket Lab, and even Archgola, a supplier of awnings and shade solutions. There are three main grants available for R&D - the Growth Grant, the Project Grant and the Student Grant. The application guidelines for each of these grants are substantial, with varying application criteria. Project Grants are available to eligible businesses breaking into new ground, with grants of up 40% R&D project costs available. Growth Grants can benefit businesses who are already spending upwards of $300,000 on R&D, with grants of up to 20% of R&D costs available up to a maximum of $5m per annum. Student Grants are available to support businesses who wish to hire undergraduate and postgraduate students in order to attain specialist technical knowledge to aid in their production process. Although the application process may seem quite daunting, with an array of qualifyingcriteria to be met, Callaghan are on hand to assist.
They recommend that potential innovators call
them directly to discuss their ideas as a business might qualify for many of the options available. Outside of the grants program, Callaghan’s contacts within the business industry are extensive and can help businesses through collaborations and access to industry specialists through their ‘Access to Experts’ program. Callaghan has a database of national and international experts available and can refer businesses through to their partner organisations among the NZ business community. Callaghan also tries to help businesses with their in-house innovation expertise, through a range of accessible training courses, workshops and programs. Courses such as IMProve, Innovate IP and Better By Lean are available to businesses to assist them with benchmarking innovation capabilities, leverage their intellectual property, and review their management systems to improve productivity and reduce waste. To achieve high growth as a country, innovation is needed to bring new exportable technologies into production. Any business that is looking to improve their innovation capabilities should contact Callaghan Innovation to see if one of their many programs could be of help.
]]>Limited Partnerships]]>http://www.ckfthomas.co.nz/single-post/2017/08/08/Limited-Partnershipshttp://www.ckfthomas.co.nz/single-post/2017/08/08/Limited-PartnershipsMon, 07 Aug 2017 21:57:58 +0000
Initially envisioned to be the preferred investment vehicle for foreign venture capital investors, the Limited Partnership (LP) was brought to life in NZ with the enactment of the Limited Partnerships Act 2008. LPs have now evolved into the preferred business vehicle for many, who benefit from the limited liability of a company whilst acquiring a look-through entity for tax purposes. The LP structure requires both a limited partner and a ‘general partner’, with the general partner being responsible for the management of the entity. The regime works by requiring that a limited partner must not take part in the management of the LP; otherwise they lose their limited liability protection. Although the LP itself is a separate legal entity, for tax purposes LPs are treated the same as a ‘standard partnership’. Essentially, the partners are deemed to derive the income, incur the expenditure, carry on the activity, and hold the assets of the partnership, in proportion to their partnership share.
Accordingly, the partners are allocated their share of the partnership income on a pre-tax bases which is then taxed at their respective marginal tax rates. This provides a material advantage to low tax rate entities such as Maori Authorities and charities who might partner up with standard taxpaying entities such as companies that are taxed at 28%. It also allows partners to combine their own expenditure, such as interest deductions, with their allocation of partnership income to have the net result taxed as a single sum. If losses are incurred by the partnership they will also flow out to the respective partners to be offset against other income and carried forward; which is not as easy to accomplish under a standard corporate structure.
On the downside, because the partners in a LP are deemed to own the assets of the partnership in proportion to their partnership share, a percentage change in the ownership of an LP will give rise to a proportionate disposal of the assets. This can give rise to complex calculations and issues when changes in ownership occur. By comparison, a partial change in shareholding in a company is a standard transaction with few tax consequences for the company. Similar advantages can be offered through the Look Through Company (LTC) regime, which share common attributes with LPs – they both offer legal protection in the form of limited liability and are ‘look through’ for tax purposes. However, LTCs need to comply with strict criteria, such as a limit on the number of ‘owners’. The criteria to remain an LTC can be inadvertently breached without realising it, resulting in the loss of LTC status. Limited partnerships are one of the newest entity types for the New Zealand business environment, and they are rising in popularity. In specific situations, they do offer advantages compared to a generic company. However, for the purpose of more vanilla investments and business ventures, a standard company is still likely to be the better option. Before using a LP ensure there is a specific and material advantage in doing so.
]]>NEWSLETTER Aug – Oct 2017]]>http://www.ckfthomas.co.nz/single-post/2017/08/08/NEWSLETTER-Aug-%E2%80%93-Oct-2017http://www.ckfthomas.co.nz/single-post/2017/08/08/NEWSLETTER-Aug-%E2%80%93-Oct-2017Mon, 07 Aug 2017 21:45:38 +0000
Inside this edition
The business of immigration 1
Proof of intention 2
Budget 2017 3
PAYE changes and tax simplification 3
Snippets 4
YouTube receipts 4
Tax innovation 4
All information in this newsletter is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this.
The business of immigration
New Zealand’s immigration system is currently undergoing a significant overhaul, which is sure to impact many local businesses. Following the changes to Investor Category visas announced in December 2016, further changes are also proposed to the Skilled Migrant Category (SMC) visa, for implementation in August. The proposed amendments are set to ensure better outcomes for both New Zealand citizens and those who are seeking to immigrate here.
Investor visas were first introduced in 2009, resulting in over $2.9 billion invested into NZ. Generally, investors may be granted resident status if they make qualifying investments in NZ for 3 or 4 years. There are two categories – Investor 1 applicants must invest at least $10m and Investor 2 applicants must invest at least $1.5m (plus have other funds available to live on).
Currently, around two thirds of these investments are in bonds. The proposed changes, effective from May 2017, seek to change this by encouraging investment in ‘growth-oriented’ industries. The ‘growth-oriented’ list includes industries associated with equities, commercial property, new residential builds or managed funds, with the potential for others to be added in the future, decided by Government need.
If Investor 1 applicants invest upwards of 25% in New Zealand growth-oriented investments they will have more flexibility on how they can meet the minimum ‘days in NZ’ requirement for this visa type. Furthermore, Investor 2 applicants will receive a reduction in the total amount they need to invest if they are willing to invest in growth investments – a $0.5m discount to be exact. To attain this discount, investors will be required to allocate more than 50% of their total investment to growth-oriented business. They will also enjoy less restriction on how they spend their required days in New Zealand over the four year period of application, much like the Investor 1 category. The additional funding is expected to provide a boost to the economy, providing an alternative funding option for businesses that may have been restricted by lack of investment into growth-oriented ventures.
Alongside this, changes to the SMC visas are also making a splash in the business environment. Residence can be granted for skilled workers under a ‘points’ system, with points granted for various criteria including qualifications and job offers. From August, the points system is supplemented by the introduction of remuneration thresholds: jobs will need a minimum salary of $41,538 to be considered ‘mid-skilled’ – being 85% of NZ’s medium income. More points will also be available for skilled work experience and for some post-graduate qualifications. It is hoped that this will help limit the net inflow of immigrants, whilst targeting this visa type to individuals that are skilled in their industries, allowing businesses to bring in the people and skills that are beneficial to NZ as a whole.
The Government is seeking to balance the economic growth that immigration brings along with the additional strain it places on public services and current infrastructure. Getting the right balance is a challenge, but solace can be taken from the fact that it is a sign of a strong economy. It is important that the Government continually reviews immigration policies to ensure they are attaining the correct outcomes for a prosperous New Zealand.
Proof of intention
The sale and purchase of residential property is an area of focus for IRD Investigators as a result of the ongoing investment in the Property Compliance Programme. A Taxation Review Authority (‘TRA’) case heard in May 2017, serves as a timely reminder for all property owners to remain aware of the tax implications that can arise from residential property sales. The case involved the purchase and eventual sale of a family home by a son who had previously been involved with other property investments.
A key criterion for determining the tax status of a property transaction rests on whether the property was purchased with the purpose or intention of resale. The intention of the taxpayer is determined subjectively at the date the property is acquired.
There are instances where taxpayers have tried to satisfy this subjective test by embellishing their future intentions to support a more desirable tax outcome. Hence, it is common to place some weight on any documentation that might also refer to a taxpayer’s future plans for a property.
In this particular case, a substantial amount of weight was placed on a diary note recorded by the taxpayer’s bank officer, accompanying the loan approval request for the property. The note recorded that the taxpayer had committed to the purchase of the property because his parents were no longer financially able to complete renovations themselves, and that he would sell the property once the renovations were completed, in order to release funds needed for his other property developments.
Due to the diary note and the taxpayer’s history of buying and selling property, the IRD sought to tax the sale of the property. But the taxpayer argued that the file note was not a true account of his intentions. He told the TRA that the bank officer was a close friend of his, a friendship that had been built over years of loan applications and property investments. This had resulted in the bank officer recording a note not of a conversation, but of a mistaken assumption about the taxpayer’s intention to resell his parent’s home.
The taxpayer asserted his true intention was to assist his parents while they were experiencing a period of financial difficulty, safeguarding the family home for the long term. This alternate set of facts was further aided by the form of the bank officer’s note – it did not refer to a specific conversation, but was written as part of the loan approval request, containing information determined relevant by the bank officer.
The process for a case to reach the TRA is lengthy and involves a significant number of steps for both IRD and the taxpayer, so IRD often only reach this point if they consider themselves to have a high chance of success. With this in mind, it must have come with considerable relief to the taxpayer when the TRA ruled in his favour, concluding that the evidence showed he did not purchase the property with the intention of resale.
The case is interesting because the taxpayer went through what would have been a difficult and stressful Investigation and then ‘Disputes Process’, due to a statement that he didn’t make and likely
didn’t know existed. The lesson here is that if a property is not being purchased with a purpose or intention of resale, it could be a good idea to state that on the record through the acquisition process, rather than simply relying on that being implicit.
Budget 2017
Budget 2017 presented a broad range of small yet smart changes that target working families and low income earners. From a tax perspective, the key changes are predominantly to the income tax thresholds, working for families’ package and the independent earner tax credit.
All taxpayers will benefit from the tax cuts, and it is hoped that as consumers spending capacity increases, we will see a boost in the consumer economy as a direct consequence of the tax cuts.
Income tax thresholds
The income tax thresholds are set to change from April 2018 for the first time since 2010, with the lowest 10.5% bracket increasing from $14,000 to $22,000, and the next bracket of 17.5% moving from $48,000 to $52,000.
Over time inflation has pushed wages and salaries into higher tax brackets, resulting in the Government benefiting from a higher proportion of income being taxed. These new income tax thresholds seek to rectify this bracket creep and in that sense, simply reverses effective increases in the tax rates arising as a result of inflation.
Taxpayers can expect savings of $11 a week on income earned over $22,000 a year, and up to $20 a week for anyone earning more than $52,000 a year.
Independent Earners Tax Credit
The Independent Earner Tax Credit (IETC) is to be cancelled at the end of the 2017 income year. However, the loss of the IETC for those earning $24,000 to $44,000 is being incorporated into the increase to the income tax thresholds. With only a third of IETC eligible individuals actually claiming the credit, it is an overall positive change for those in that income range.
Working for Families
There has been a multitude of small changes to Working for Families. The Family Tax Credit rates will change, such that families with a first child under 16 will receive an additional $9 a week, and there will be an increase of between $18 and $27 per week for each subsequent child under 16.
The maximum amounts payable to households entitled to the Accommodation Supplement are also set to rise, as are the weekly payments for the Accommodation Benefit for eligible Student Allowance recipients.
The combined effect of these changes will hopefully provide families with greater disposable income to spend on goods and services. The aim is that the flow-on of income into consumer spending will strongly support economic growth over the coming years. The challenge for businesses then becomes how to make the most of growing consumer spending if they also want to benefit from this year’s budget.
PAYE changes and tax simplification
Inland Revenue (IRD) have recently released a new Taxation Bill and published the eighth discussion document in the Making Tax Simpler series, both of which aim to reduce the cost of tax compliance and administration for NZ businesses and individuals.
Under the current PAYE system, it can be difficult for IRD to collect the correct amount of tax from individuals over the course of a tax year. The nature of the system means that mistakes can be made when selecting PAYE codes, or if a person’s income changes unexpectedly the amount of tax withheld over the course of a year is not likely to be accurate, leading to tax refunds or liabilities at the end of the year.
IRD propose increasing the frequency that employers provide information to IRD from monthly to every payday, which could be weekly or bi-monthly for some employees. This will be facilitated by the integration of accounting software with the IRD system, so that employee income and deduction information can be sent to IRD with a simple ‘push of a button’. PAYE information will be sent as pay checks are processed, so payroll reporting will become an integral part of the taxprocess rather than a separate and additional function for employers. This will reduce the tax administration involved with employing staff and ease the compliance burden for businesses.
The draft Bill also proposes that more detailed information will be collected more regularly on individuals’ investment income, such as interest, dividends, portfolio investment entity (PIE) income, taxable Māori authority distributions and royalties.
The new rules will require the payer to submit information about individuals to IRD on a monthly basis, or whenever payments are made if the payment frequency is less than a month.
Taxpayers will still be responsible for providing any additional information to IRD, such as rental or self- employed income, however it will be possible for this to be provided via the online ‘MyIR’ system.
The IRD estimate that an additional $21 – $27 million of income tax revenue will be collected per annum under the new rules, and an additional 185,000 individuals will have their investment income included when determining their Working for Families entitlements, allowing more accurate calculations.
In summary, the proposals aim to use digital solutions to simplify the tax administration process. Both the PAYE changes and introduction of detailed reporting for investment income will give IRD more real-time information and ultimately give the Government greater insight into a taxpayer’s financial position. This will open up opportunities to redesign social policies and improve the future administration of other systems such as child support, KiwiSaver, Working for Families and student loans.
Snippets
YouTube receipts
With over 400 hours of content uploaded every minute, YouTube comprises a massive entertainment platform. The site has over 1 billion monthly users, with a continual demand for quality online content across a diverse range of subjects.
Armies of users produce and upload videos, aiming to earn the most views, leading to opportunities to make money. Income can be generated from various sources, such as:
Advertising revenue (e.g. Google’s AdSense campaigns);Affiliate and sponsorship income (paid for promotion of products or companies); andPaid content (where a fee is required in order to see the content).
The IRD has recently provided guidance regarding the taxable nature of such income, which is based on ordinary tax concepts. The key considerations are whether the individual is intending to make a profit, or is engaged in a ‘scheme or undertaking to make a profit’.
So, if you receive YouTube income you may need to include this in your income tax return, even if you did not intend to profit. If you are receiving amounts regularly or are relying on the amounts as a form of income, the income is likely to be taxable.
Think ahead to IRD requesting a list of NZ members that have received payments from YouTube.
Tax innovation
With the persistent need for additional Government revenue it could be time to look to history for answers.
In 1535, King Henry VIII of England introduced the first ‘Beard Tax’ on males growing facial hair. The effectiveness of the tax in England was questionable, with records at the time being somewhat ‘short’ on detail.
The second iteration of the beard tax was implemented by the Russians in 1698. Their policy was a little more extensive and enabled the police to forcibly shave anyone refusing to pay the tax. Men were required to pay between 60-100 rubles (a small fortune at the time) depending on their position in society, with ‘wealthy merchants’ charged the full 100 rubles upon entering a city. They were then issued a ‘beard token’ to evidence payment.
A few hundred years later in 1944 the Russians had another great initiative - Tax on Trees. The tax imposed on fruit trees alone became so expensive for farmers that it led to a mass felling of fruit trees, causing a fruit shortage throughout the country. The tax was eventually repealed 10 years later.
If you have any questions about the newsletter items, please contact us, we are here to help.
]]>Opportunities for innovation]]>http://www.ckfthomas.co.nz/single-post/2017/06/19/NEWSLETTER-Issue-2May-%E2%80%93-July-2017http://www.ckfthomas.co.nz/single-post/2017/06/19/NEWSLETTER-Issue-2May-%E2%80%93-July-2017Mon, 19 Jun 2017 10:32:53 +0000
Businesses that heavily invest in R&D commonly experience cash flow problems. This is because it can take years of sustained R&D before they come up with a marketable product or service that derives a profit. To help overcome this problem and encourage innovation in NZ, the government offers a few support mechanisms.
The R&D loss tax credit regime is one such mechanism, introduced in 2016 as part of the government’s Business Growth Agenda. Before the regime was introduced, R&D intensive companies that made a tax loss could only carry the loss forward to future income years to offset against future years’ income. Under the new regime, tax losses arising from eligible R&D expenditure can be refunded in cash to the company each year. There are eligibility criteria that must be satisfied, for example at least 20% of the entities wage bill needs to relate to R&D functions. The regime provides R&D intensive companies with much needed cash during the initial investment stage of projects. The regime has been in place for over a year now, with a number of companies receiving significant cash refunds from Inland Revenue as a direct consequence of their R&D spend.
In addition to this, the Ministry of Business, Innovation and Employment is responsible for encouraging innovation in New Zealand businesses and has a number of grants and funds available.
The Endeavour fund invests in research aimed towards sustainability and integrity of the environment, transforming New Zealand’s economic performance, and strengthening society. Funding is available across a variety of areas, with up to $1 million per applicant available.
For businesses undertaking research in conjunction with other overseas parties, the Catalyst fund (previously known as the International Relationships Fund) is available to support activities that are aimed towards creating multilateral partnerships between New Zealand and other countries, to improve the quality of New Zealand’s science and innovation.
The Government agency, Callaghan Innovation, also offers a range of R&D grants aimed at hi-tech businesses. For example ‘Getting Started Grants’ are aimed at New Zealand businesses who are in the early stages of, or new to R&D, and ‘Project Grants’ are available for businesses who need support in developing specific R&D projects.
The R&D loss tax credit regime together with the funding and grants available provide much needed assistance to the businesses that will drive New Zealand’s future growth and prosperity. Businesses should be taking advantage of these, and any other leg-ups they can get. More information on each of the funds and grants can be found on the MBIE and Callaghan Innovation websites.
]]>Newsletter May - July 2017]]>http://www.ckfthomas.co.nz/single-post/2017/06/19/Newsletter-May---July-2017http://www.ckfthomas.co.nz/single-post/2017/06/19/Newsletter-May---July-2017Mon, 19 Jun 2017 10:28:20 +0000
Inside this edition
Provisional tax improvements 1
The perils of a PPOA 2
Targeted marketing activities 3
Taxation of insurance receipts 3
Snippets 4
Nordic tax records 4
Beware of paying excessive salaries 4
All information in this newsletter is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.
Provisional tax improvements
New legislation enacted in February substantially simplifies obligations under the provisional tax regime.
Most taxpayers pay their provisional tax at three times through the course of their financial year, being the 28th day of the 5th, 9th and 13th months after their balance date.
The ‘standard uplift’ method determines a person’s liability based on a prior year’s tax payable (105% for last year, or 110% for previous). The problem is that if a person’s final liability is more than the estimate, Inland Revenue will charge use-of-money interest (UOMI) on the difference (currently 8.27%).
This is a source of frustration as taxpayers are either rewarded for having a great year by being charged interest by IRD, or they have to scrutinise their own tax position as they trade through the year and make increased payments to IRD when they could be focusing on their business.
In a positive change, the UOMI rules are being amended from the 2017/2018 income year. UOMI will no longer be charged from the first two provisional tax dates on the difference between a person’s ‘standard uplift’ liability and their actual liability based on their completed tax return.
In order to defer the start of the interest charge the taxpayer must meet the minimum payment obligations under the standard uplift method on the first two instalment dates. Where the taxpayer does not make the required payments, UOMI will apply on the first two instalment dates based on the lower of the difference between: the amount due under standard uplift and the actual payment; or one-third of the residual income tax liability for the year and the actual payment.
To be eligible for the concession, companies within
a group will all be required to use either the standard uplift or GST ratio method for calculating provisional tax. This rule is designed to prevent related entities gaming the differences between the standard uplift and estimation methods to reduce exposure to UOMI.
In a similarly positive change, the existing concession, which defers UOMI for individuals with a tax liability of less than $50,000 to their terminal tax date (typically the following 7 February or 7 April), is being increased and widened. From the 2017/2018 income year, the concession is being increased to $60,000 and extended to all types of taxpayers, such as companies.
As with the first change above, there are requirements that need to be met in order for the concession to apply, such as meeting obligations
under the standard uplift method. IRD expects that the change to the safe harbour threshold will eliminate UOMI charges for approximately 67,000 taxpayers, at least 63,000 of these being non-individuals who did not previously qualify for the concession.
Finally, the late penalty regime is also changing. Currently, a 1% late payment penalty is charged the day after tax is due, a further 4% penalty is charged at the end of the first week and a 1% incremental late payment penalty is charged each month thereafter. For most taxpayers the incremental 1% monthly penalty will no longer be charged on GST periods starting from 1 April 2017 or income tax and working for families debts relating to the 2017/2018 or later years.
The perils of a PPOA
It is important for individuals to correctly determine their residency status for tax purposes, as a New Zealand tax resident is taxed on their ‘worldwide income’.
A person is considered to be a New Zealand resident for tax purposes if they have been physically present in New Zealand for more than 183 days in any 12-month period or if they have a ‘permanent place of abode’ (PPOA) in New Zealand. A person ceases to be a tax resident if they are physically absent from New Zealand for 325 days in any 12-month period. However, if a person maintains a PPOA throughout the period they are absent from New Zealand, they are still considered a New Zealand tax resident.
A recent Taxation Review Authority decision has highlighted the importance of these residency rules, and in particular, the breadth of a PPOA.
The taxpayer, a sea captain, had an interest in his employer’s superannuation fund, and in foreign investment unit trusts owned by him, which were all sold by August 2008.
The taxpayer was accused by Inland Revenue (IRD) of maintaining a PPOA in the income tax years ended 31 March 2005 to 31 March 2009 (inclusive), and was therefore liable to pay New Zealand income tax on his interest in the unit trusts and any deemed income under the Foreign Investment Fund (FIF) rules.
The taxpayer had been a mariner all his adult life, and under the terms of his employment, spent approximately eight months a year at sea. The taxpayer’s wife typically accompanied him at sea. In
1998 he became a trustee and beneficiary of a trust which owned a property in New Zealand. The taxpayer returned to this house at least twice a year in the years from 1998 until October 2014, when the property was sold. The TRA found this property to be a PPOA for the taxpayer, supported by the following facts:
The property was not rented when the taxpayer was absent from New Zealand - friends and family were able to stay on occasion but otherwise the property was available for use by the taxpayer and his wife.During the tax years in dispute, the taxpayer, on average, spent three and a half months in New Zealand, with credit card statements for these periods showing daily use in the suburb where the property is situated.The taxpayer’s salary was used to meet the trust’s loan obligations, pay insurances, utilities and other expenses.Vehicles belonging to the taxpayer, his wife, and the trust were registered to the property during the years in dispute.A SKY subscription was maintained for the taxpayer’s use when at the property.The address was used for mail, including mail related to the trust’s rental properties.When not at sea, the taxpayer’s payslips were sent to the property.The taxpayer was registered on the Electoral Roll in 2008 at this address.
As a result, the TRA upheld the Commissioner’s reassessments for each of the 2005-2009 income tax years, to tax the taxpayer’s interest in the unit trusts and any deemed FIF income from the superannuation fund. Adding to the cost, a shortfall penalty for taking an unacceptable tax position was charged, calculated at 10% of the tax shortfall.
Targeted marketing activities
A shared universal goal of all businesses is to maximise sales of products or services. To achieve this, business owners need to implement effective marketing strategies that focus on how to reach potential customers and make their products stand out from the competition.
We are living in an increasingly digitised age so some businesses are having to transform their traditional marketing activities. The range of choices available, from websites to social media, In-app and YouTube advertising to SnapChat, is ever increasing. Because there is more choice than ever, it can be difficult for small businesses to decide where to focus resources to engage target customers effectively and efficiently.
Businesses don’t necessarily need to engage in more marketing, but smarter marketing, with resources prioritised on targeted returns. One study by google found that an astounding 56% of digital ads are never actually seen by a single human. An ad was considered viewable if 50% of the ad’s pixels are in view for at least one second. Digital ads therefore need to be targeted to ensure they reach their potential customers.
To do this, a marketing strategy needs to be integrated with sales and customer service, and about providing an experience for customers. The more knowledge that a business has about existing customer’s habits and preferences, the easier it is to target potential buyers. For example, Facebook allows you to target which users see adverts based on location, demographics, interest and behaviours. And this is more straightforward than you may think to set-up.
Content marketing can be particularly powerful, allowing businesses to respond directly to customer’s signals and respond in relevant ways. Content marketing focusses on creating and distributing relevant and consistent content to a clearly defined audience to drive profitable customer action. Put simply, it’s about providing valuable information to customers to help generate sales. For example, supermarkets are now commonly creating short videos demonstrating easy to make recipes. The videos are shown across a range of social media platforms and are easily shared. The videos allow you to click directly through to the online store and place all of the relevant ingredients into your online basket for purchase, leading to a simple sales experience for the customer.
If you are considering a similar approach as part of your marketing strategy, the most important thing is to seek compelling content that is relevant to your targeted customers. Also remember that online and social media marketing is often more effective if the content is entertaining, informative or shareable.
Going back to basics, remember that marketing needs to have a key role in your business. You need to understand your customers, and decide how to best engage with and target new customers. You don’t need to do everything, as traditional marketing such as simple word of mouth, events or print advertising might work for you. However, given the changing world we live in it is important to change and adapt along with it, but do your homework first and make sure that the path taken leads to your next customer.
Taxation of insurance receipts
New Zealand has taken a battering in recent years from major disasters including earthquakes, fires, cyclones and floods. These have caused business disruptions, devastated lands, and damaged our capital’s infrastructure and homes. Where insurance is received, a question often asked is how these receipts should be treated for tax purposes.
Whether insurance proceeds are taxable will depend on what the proceeds are received for. If proceeds are for items of a revenue nature, such as
loss of profits, rents, or reimbursement of business expenses, the proceeds will generally be taxable. Receipts for income protection will also be taxable because they are typically based on loss of earnings and especially if you have been claiming a tax deduction for the premiums.
Insurance proceeds for capital items such as residential properties and loss of land, will generally not be taxable, unless you are in the business of dealing in property.
Depreciable assets - compensation received for depreciable assets is treated as though the asset has been sold to the insurance company for the amount of the compensation received. If the compensation is less than the asset’s tax book
value (TBV), a loss on disposal can be claimed (for assets other than a building). However, where it is more, tax will need to be paid on any gain made above TBV (i.e. depreciation recovery income is recognised). Any gain above the asset’s original cost is a tax free capital gain.
The Canterbury Earthquake - specific provisions were enacted for buildings that were damaged in the Canterbury earthquake. As a starting point, proceeds will always be taxable to the extent of the cost of repairs. This results in a net nil position for income tax purposes. Where proceeds exceed the cost of repairs (“the excess”), the tax treatment will depend on whether the property is deemed “repairable” or “irreparably damaged”.
For “repairable” property, the excess is deducted from the property’s TBV. If the adjusted TBV is reduced below zero, the negative TBV would ordinarily be taxable depreciable recovery income. This is however, limited to the lesser of the negative TBV and the actual depreciation claimed to date and
is taxable in the income year in which the proceeds are applied to reduce the TBV. Any remaining amount will be treated as a capital gain. Conversely, if the excess does not cause the adjusted TBV to become negative, the depreciation recovery income will be deferred until the property is later sold.
A property will be “irreparably damaged” if it has been rendered useless for deriving income and is demolished or abandoned for later demolition. This should be agreed with the insurer and documented in the settlement agreement. The property is treated as sold for the amount of the insurance proceeds, and re-acquired for nil consideration. Any depreciation recovery income can be deferred and offset against a replacement asset that is purchased by the 2018/2019 income tax year. The remainder will be a capital gain.
The proceeds of a future sale will be all capital gain, assuming no other taxing provision applies as the property’s tax base is nil for depreciation purposes.
Snippets
Nordic tax records
It’s often considered taboo to ask other people how much they earn. So what would you do if you could look up how much your colleagues, neighbours and friends make, all legally, online and for free? Well this is what happens in some Nordic countries!
Norway has had an ‘open salary policy’ since 1863, when they used to publish individual’s tax returns and post them to the walls of the local town hall.
This practice continued, and until recently, Norwegians could anonymously request certain information about other taxpayers. The information is limited to the total income earned, and total tax paid by the taxpayer – there is no breakdown of amounts received from different income categories.
This understandably led to several concerns, so when Norway’s right-wing government took office in 2013, they addressed these worries by tightening the rules. Now, people still have the right to request tax information about other individuals, however the person whose name is targeted is sent an email telling them who has been checking up on them.
This loss of anonymity has had an immediate and dramatic impact on the amount of searches people have been making, falling from 16.5 million per year to 2.15 million.
Donald Trump is likely to be relieved he doesn’t live in Norway….
Beware of paying excessive salaries
It is very common for family owned companies to employ members of the family in the business on a permanent or casual basis. There is no problem with this per se, however income tax rules seek to prevent ‘excessive salaries’ being paid to family members.
Inland Revenue has recently been focusing on this issue and has been scrutinising the type of work completed, the amount paid, the way in which it was calculated, and what a third party might be paid for the same work.
There is no precise measurement as to what constitutes ‘excessive’, as each case is different. What is most important is that business owners determine the value of a relatives remuneration based on the service provided to the business. The relative should be paid the same amount as an unrelated employee performing similar duties.
IR has the ability to intervene and reallocate remuneration, income or losses if it considers the amount is not reflective of the value contributed. If an amount is deemed to be excessive, the excess may be recharacterised as a dividend and therefore non-deductible to the payer. Where salaries to family members are paid it is important to ensure the employment and the amount paid is calculated and documented on an arms-length basis.
If you have any questions about the newsletter items, please contact us, we are here to help.
]]>Newsletter Feb to Apr 2017]]>http://www.ckfthomas.co.nz/single-post/2017/02/09/Newsletter-Feb-to-Apr-2017http://www.ckfthomas.co.nz/single-post/2017/02/09/Newsletter-Feb-to-Apr-2017Wed, 08 Feb 2017 23:04:27 +0000
Inside this edition
Trust reforms. 1
Importance of good record keeping. 2
When is income from professional
services derived? 3
Tax planning before 1 April 2017 3
Snippets. 4
FBT changes on the horizon......................... 4
Unusual tax balance date............................. 4
Trust reforms
Trusts are a popular way of protecting property and managing assets in New Zealand. The number of trusts we have in New Zealand is unknown, but estimates put the figure between 300,000 and 500,000.
The legislation governing NZ trusts has remained unchanged for decades as it has been predominantly governed by the Trustee Act 1956. The Act has been criticised for allowing the mismanagement of trusts with no easy legal redress for beneficiaries, however this is set to change. The legal framework has been subject to an in-depth review by the Law Commission, with the Trusts Act 2017 released in draft late last year, followed by ongoing consultation.
The draft bill seeks to clarify core trust concepts, resulting in a more useful piece of legislation that can be applied to fix practical problems and reduce the costs associated with trust administration. This will effectively impose ‘minimum standards’ for the governance of trusts so that trustees and beneficiaries are clear on their precise obligations, duties and rights.
The draft Bill features seven key proposed reforms that vary in nature from clarifying the key features of a trust, to detailing the duties and powers of trustees.
Under the new Act, trustees will be required to know the terms of the trust and act in accordance with them, act honestly and in good faith, to act for the benefit of the beneficiaries and to exercise their powers for a proper purpose. There are a further eleven default duties that apply, unless they are modified or excluded by the terms of an individual trust deed. The default duties cover areas such as the requirement to invest prudently, avoid conflicts of interest and to act for no reward. The formalisation of Trustee duties will provide protection to beneficiaries that assets will be dealt with in their best interests, and provide legal remedies if
trustees fail to meet these standards. The Act also requires trustees to disclose certain information to beneficiaries who are reasonably likely to receive property under a trust.
It will be important for all trustees to understand the new law and their individual trust deeds, to ensure they discharge their duties with the appropriate standard of skill and care.
No changes to the tax treatment of trusts are proposed. However, there is additional focus on trusts from a tax perspective following the recent “Panama Papers” scandal and the alleged misuse of NZ foreign trusts, which has resulted in a Government led investigation into whether existing disclosure rules are adequate. In response, the Government is beefing up the requirements for foreign trusts in three key areas; registration, disclosure, and annual filing. The proposed changes will require all foreign trusts to formally register with the IRD and be subject to an increased number of disclosure requirements, with sanctions for non-compliance with the new rules.
To some degree, the new Act serves to codify existing case law and current best practice, bringing a degree of consistency to New Zealand’s trust regime. Ideally, this will reduce the frequency with which disputes end up before the courts and benefit all beneficiaries, which is ultimately what a trust is designed for.
Importance of good record keeping
A recent case Taxation Review Authority (TRA) decision has highlighted the importance of good record keeping.
The taxpayer, an accountant, was accused by Inland Revenue (IRD) of using a company as a vehicle to create a tax advantage. He claimed to have sold his sole trade accountancy practice to his own company for $2m in 2002. The company did not have the ‘cash’ to purchase the business, and hence a loan was recognised to the company. Later, in 2007, his family trust purchased a family beach house for $1.3m. To fund the purchase of the beach house, the company borrowed from the bank to repay the debt it owed to him and he lent the funds to the trust.
The IRD did not dispute that the 2002 sale took place, however they argued that the sale price was just $425,000, creating a much smaller loan. On this approach, recognition of the $2m loan to the accountant triggered a taxable dividend for the difference.
Given the facts of the case, it is not surprising IRD were suspicious of the transaction.
Originally, the accountant was unable to produce a sale and purchase agreement evidencing the transaction. When eventually he did, IRD referred the agreement to a document examiner who found a number of irregularities, based on which the IRD concluded the document was a fabrication. The accountant’s explanation for the irregularities were that he had used a client’s sale and purchase agreement, that he had ‘twinked’ out the details and hand written in his own changes.
At the time of the transaction, the company’s 2002 financial statements only recorded a goodwill value for the purchase of the business of $425k. According to the accountant, the original value of $425k was recorded in the financial statements so that his wife did not know the true value of the business (the marriage later broke down). Then In 2003 the goodwill was written off. Over the course of the 2006 and 2007 years, the goodwill and loans were recorded back up to $2m.
The accountant advised the reason for the increase was to improve the standing of the company before a review by the accountant’s professional body. The taxpayer prepared three different sets of financial statements for the 2007 year before arriving at the final version.
The accountant claimed a reversing journal in his accounting software showed an original figure of $2m. IRD contended that this entry had not been made until 2008, after the purchase of the beach house. However, an accounting software expert called by the IRD, confirmed journals cannot be entered into prior years because they are effectively “frozen”.
IRDs final argument was that $2m was a vast overstatement of the value of the accountancy practice in 2002, for which they had the support of an independent valuer. Again, the taxpayer was able to explain in detail how he arrived at his calculation. He accepted the valuation may have been ‘over-enthusiastic’.
Notwithstanding the poor record keeping, unhelpful facts and the arguments put forward by the IRD, the TRA found in favour of the accountant. Accepting the sale was genuine, the price was what was paid by the company and therefore the repayment of the debt was not a taxable dividend. If the accountant had clear and accurate documentation from the outset, the court case and associated costs might have been avoided.
When is income from professional services derived?
The Inland Revenue Department (IRD) recently released a new interpretation statement discussing when income from professional services is considered to be derived, and hence becomes taxable. The statement replaces several older IRD Information Bulletin’s and consolidates their view, giving greater detail and more examples.
There are two main methods of recognising income, the accruals basis, which taxes income when earned and the cash basis, which taxes income when physically received.
Most businesses use the accruals basis, however professional services providers may be able to apply the cash basis. Historically, both doctors and barristers could use the cash basis because doctors could not create a lien over patients’ property, whilst barristers were unable to sue their clients for unpaid fees.
The IRD’s interpretation statement provides that the cash basis is not exclusively for these professions and can be applied in other circumstances. Similarly, there may be occasions where the accruals basis may be more appropriate for doctors and barristers. The statement draws on a vast body of case law and lists the following factors to help determine the most appropriate method:
The type of activity: the cash basis might be appropriate where the level of expenditure does not have a material effect on the income derived or there is a high risk of non-collectable income.
The characteristics of the type of income: the cash basis might be appropriate where there is a low expectation of payment inherent in the type of income, or where the timing of receipts are governed by legislation.
Legal and regulatory environment: standard contractual obligations may require payment at specific times, and hence it might be more appropriate to return the income on a cash basis.
Scale of the business or income earning activity: the larger the number of employees, the turnover and general size of a business will indicate the accruals basis should be adopted.
The level of sophistication or complexity of an activity: if a professional services activity requires fixed or circulating capital and accounts for trade receivables on a balance sheet, the accruals basis may be more appropriate.
The IRD provide the example of where the Court held that a pathology practice with five partners, 66 nursing staff across 21 collection centres, approximately 92,000 patients annually and gross fees of $2m per annum should apply the accruals basis. The Court held that the scale of the operation and the fact that a substantial amount of the work to derive the income was performed by nurses and not solely the taxpayer made the accruals basis more appropriate.
Conversely, the Courts determined that a solicitor who worked alone with only the assistance of a secretary should account for income on a cash basis. The size of the practice and the majority of the work being undertaken solely by the taxpayer influenced the outcome.
Use of the cash basis is relatively rare in today’s modern environment, it dates back to paper based accounting records, before modern software simplified the accounting process. However, the IRD’s statement does acknowledge that there are still situations where it is appropriate to recognise income on a cash basis.
Tax planning before 1 April 2017
For most taxpayers, 31 March represents the end of the financial year. In the lead up to ‘year-end’ there are a number of actions that business owners may want to take to avoid missing the boat on simple tax planning opportunities.
Trading stock: stock can be valued at the lower of cost and market selling value (“MSV”), and generally it will be beneficial to use a lower MSV where possible. But to use MSV you must have evidence that this represents the market value of the specific stock items at or about balance date. The IRD have indicated that suitable evidence includes independent or internal valuations by suitably qualified persons of the price of goods and actual sales for a reasonable period before and/or after balance date.
Accruals and provisions: a tax deduction should be available if you are definitively committed to an expense at year end and can reliably estimate the amount. Ensure all expenditure is captured and accrued to minimise the amount of taxable income. One exception is employee related accruals that are tax deductible if they are incurred and are paid within 63 days after balance date (so by 6 June); consider paying any staff bonuses by then to gain a current year tax deduction.
Bad debts: to be tax deductible bad debts must be actually written off before year end – it’s no good booking the journals after balance date as part of your year-end accounts preparation. There also needs to be evidence that the debt was considered “bad” (e.g. review of accounts receivable, debt-enforcement notices and other actions taken).
Assets: if you are planning on buying any depreciable assets (e.g. plant and equipment), a full month’s depreciation can be claimed in the month of purchase, so it may be worth buying replacement assets just before 31 March.
Relevant to companies only:
Charitable donations: in order to claim a donation deduction, it needs to be paid in cash before 31 March. The amount of the donation is limited to the amount of a company’s net income in the absence of the donation. Hence, if a company has made a loss it might be beneficial to push the payment into the next year.
Shareholder current accounts: if a company is owed money by shareholders, consider paying commercially justifiable shareholder-employee salaries or paying a dividend to settle the debts. If not done, there may be fringe benefit tax or deemed dividend issues.
Imputation Credit Account (ICA) balance: ensure the imputation credit account does not have a debit balance at 31 March, otherwise penalties will be incurred. If the ICA may be in debit, consider a making a voluntary provisional tax payment before 31 March.
Snippets
FBT changes on the horizon
Currently, companies that provide a motor vehicle for the private use of their employees must register for and pay FBT. Draft legislation has been introduced which will enable some small businesses to avoid having to pay FBT.
The proposed amendment will allow close companies (where 5 or fewer natural persons own 50% or more of the shares) that only provide one or two vehicles to shareholder employees (and no other benefits) to apply the rules currently available to sole traders and partnerships. Using these rules, the company will claim a deduction for the use of a vehicle to the extent it is used in the business and not pay FBT in respect of the private use.
In order to apply the treatment to a particular vehicle, it needs to be adopted from the time a vehicle is acquired, or first used in the business. Hence, the method won’t be available for company vehicles currently held. Once a particular vehicle is subject to the new treatment, it must continue to be applied until the vehicle is either sold or is no longer used in the business.
The Bill introducing the change is currently going through its second reading in Parliament and will apply from the 2017- 2018 year. With the new rules coming into play soon, it may be the right time to think about your current business vehicle usage and whether or not it is a good excuse to splash out on a new vehicle.
Unusual tax balance date
Tax balance dates around the world are often quite straight forward. Most incorporate a full calendar month, like the standard New Zealand balance date of 31 March. However the standard balance date in the UK is the 5th of April – and there’s quite a story behind this.
The British Empire followed the Julian type calendar until 1752 when they changed to the new standard Gregorian. The Julian calendar was slightly different than the Gregorian; longer by about 11.5 minutes each year. The Gregorian calendar was introduced to Europe by Pope Gregory XIII in 1582, and had taken over as the standard throughout most of Europe. The 11.5 minute difference slowly added up resulting in the British Empire being 11 days behind the rest of Europe.
To make sure the British Treasury didn’t lose out on any revenue, they added this 11 day difference onto their existing tax balance date of 25th March (New Year’s Day in the 18th century). These additional days gave a new balance date of April 4th.
Later in the year 1800, the old Julian calendar was due for a leap year day but the current Gregorian calendar was not. The British Treasury made sure to account for this by moving the balance date to April 5th, which remains the date used today.
If you have any questions about the newsletter items, please contact us, we are here to help.
All information in this newsletter is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.
]]>Reduce the interest cost on underpaid 2016 income tax]]>http://www.ckfthomas.co.nz/single-post/2017/02/09/Reduce-the-interest-cost-on-underpaid-2016-income-taxhttp://www.ckfthomas.co.nz/single-post/2017/02/09/Reduce-the-interest-cost-on-underpaid-2016-income-taxWed, 08 Feb 2017 22:54:09 +0000
Reduce the interest cost on underpaid 2016 income tax
Here is an IRD-approved option we recommend if you are set to pay terminal tax on 7 April due to underpaid provisional tax for the 2016 tax year.
Tax Management NZ (TMNZ) is a payment intermediary that allows you to reduce IRD interest costs by up to 30 percent and eliminates any late payment penalties incurred.
You can settle underpaid income tax for the current tax year (2017) or the previous one (2016) in this manner.
TMNZ pays money into its tax pool account at IRD on each provisional tax and this deposit is date-stamped. When you settle your liability through TMNZ, it arranges the provisional tax you require to be transferred from its tax pool to your IRD account. IRD treats the tax as if it was paid on the original date it was due once it processes this transfer, wiping any interest and late payment penalties owing.
TMNZ offers flexibility around how you pay. The amount of tax owed can be paid off in one lump sum or via instalments.
You also have up to 75 days past your terminal tax date to settle any 2016 income tax liabilities through TMNZ. That means your final day to pay is 16 June if you have a 7 April terminal tax date.
If you have a 7 February terminal tax date, you have until 18 April.
About TMNZ
TMNZ is an IRD-registered tax pooling intermediary which operates under legislation set out in the Income Tax Act 2007 and Tax Administration Act 1994.
The bank account into which you make your payments is overseen by an independent trustee, which also administers TMNZ’s tax pool account. At no stage does TMNZ have access to your money.
Feel free to contact us if you wish to discuss the use of TMNZ to settle your 2016 terminal tax.
]]>Changes to combat international tax structuring]]>http://www.ckfthomas.co.nz/single-post/2017/02/09/Changes-to-combat-international-tax-structuringhttp://www.ckfthomas.co.nz/single-post/2017/02/09/Changes-to-combat-international-tax-structuringWed, 08 Feb 2017 22:51:00 +0000
Changes to combat international tax structuring
Perceived tax avoidance by multinational companies has been attracting significant media and public attention. There is widespread concern that corporate structures and financing arrangements are being used to minimise worldwide tax bills.
A common example to illustrate the problem is where a business operates through companies in both New Zealand and Australia, and there is a loan between the two. By using certain type of debt instruments, interest payments can be structured as tax deductible in New Zealand, but non-assessable in Australia. This results in a mismatch between the two companies / countries and a net reduction in their total tax payable.
The Organisation for Economic Cooperation and Development (the ‘OECD’) has released a series of recommendations designed to close such tax loopholes and make tax more equitable across the globe.
The New Zealand Government intend to adopt the recommendations, however they recognise that our domestic policies will only be effective if the OECD recommendations are implemented worldwide. The Government is therefore closely following the changes adopted by the UK, EU and Australia before the new rules are passed into legislation here. However, the US and other Asian countries are currently reluctant to adopt the OECD recommendations, so it will be interesting to see how the international markets react.
The proposed changes to NZ’s tax rules are complex, however they aren’t just relevant for global giants. The rules will need to be understood by all New Zealand businesses that engage in cross-border transactions, even relatively small New Zealand businesses operating outside New Zealand.
Some of the key changes proposed to be implemented in New Zealand include:
Denial of a tax deduction for a payment to an overseas related entity, where the payment is not treated as taxable income in the foreign country.Where foreign dividends received by a NZ company are normally non-taxable, they will become taxable if there has been a tax deduction for the dividend payment in the overseas country.
On a practical level, this is most likely to affect:
NZ businesses with loan or share arrangements with businesses in other countries;NZ branches of foreign companies, or NZ companies with overseas branches;NZ companies, partnerships and trusts with overseas owners or investors, or with foreign investments.
The proposed changes are not simple and have the potential to cause major headaches for New Zealand businesses looking to overcome the technical and practical difficulties of doing business on the international stage.
]]>Attracting and retaining your top talent]]>http://www.ckfthomas.co.nz/single-post/2016/11/08/Attracting-and-retaining-your-top-talenthttp://www.ckfthomas.co.nz/single-post/2016/11/08/Attracting-and-retaining-your-top-talentTue, 08 Nov 2016 07:16:40 +0000
Attracting & retaining your top talent
As we come to the close of 2016, the last 10 months have seen many businesses across New Zealand face
a variety of, sometimes overwhelming, but always unique challenges. Through this, the ability to engage and
retain valuable employee’s remains a critical risk for all, not only for the financial impact; but also as it
adversely affects employee morale.
Renewed hiring confidence in our market place has resulted in a shallow pool of trained staff, particularly in
areas such as construction. This has meant that the balance of power is now in favour of the candidate. As a
result of this shift, the importance is clear that stronger emphasis needs to be put on attraction and retention
efforts in order to hire (and keep) top employees.
The first step, before even going out to market, is understanding what candidates are looking for.
Opportunity for growth and development remains one of the top influencers in an employee’s decision to look
elsewhere, or in accepting a new position. Despite this, many employers rank career growth low when
thinking about what candidates are looking for (instead ranking salary and benefits much higher) creating a
disconnect between potential employees and employers.
Another critical factor for employers to get right is the need for speed and communication throughout the
hiring process. A standard (permanent) recruitment process typically takes 5 weeks, and throughout this time
there are limited updates to individuals. Failing to keep a candidate in the loop, and long lead times until an
offer, can result in frustration and all too often an employer will make an offer only to find the candidate has
accepted another role.
Attracting top talent is only one piece of the puzzle however. If a new starter feels undervalued once they are
an official employee it is likely in today’s market they will take their talent elsewhere. In order to keep prized
employee’s, employers need to start their retention planning as soon as new hires start.
Retention strategies can range from the traditional offering of coaching and mentorship programs, through to
providing rotational programs that give employees exposure to different areas of the business. Further to
this, support (financial or other) for additional training, and fostering opportunities for colleagues to
collaborate on key projects will have a positive impact on engagement and ultimately long term retention.
Remember, actions to retain staff don't have to be time consuming or expensive, see some simple guidelines
below;
1. Create a vision – vision feeds financials and not the other way around.
2. Provide a sense of purpose – create a simple, actionable, and meaningful connection to the company.
3. Genuinely listen – the most inexpensive solution to increase people engagement.
4. Foster effective motivation – encourage intrinsic motivators over the traditional ‘carrot & stick’.
]]>Newsletter November 2016 to Janurary 2017]]>http://www.ckfthomas.co.nz/single-post/2016/11/08/Newsletter-November-2016-to-Janurary-2017http://www.ckfthomas.co.nz/single-post/2016/11/08/Newsletter-November-2016-to-Janurary-2017Tue, 08 Nov 2016 02:31:34 +0000
NEWSLETTER Issue 4Nov 2016 – Jan 2017
© 2016
INSIDE THIS EDITION
Is your business cyber safe? 1
How do we now treat feasibility
expenditure? 2
Employee share schemes 3
IRD rulings 3
Snippets 4
Farmhouse expenses 4
Nothing is certain, except death and taxes 4
Is your business cyber safe?
Technology and change is prevalent across all areas, right through from the supply chain to the customer. Computers are no longer isolated assets; complex
cloud based systems allow all areas of an
organisation to betruly digital.
Although this can have many benefits, an increased digital presence, combined with the expansion of mobile technology, is exposing businesses to risks; particularly where there has been the rapid introduction of new technologies to keep pace with competitors. As a result,businesses can often lack awareness of the true extent of their digital footprint and cyber-crime is unfortunately on the increase. Whilst organisations are often aware of the cyber
security and privacy threat, a recent survey (Global State of Information Security 2016) found that NZ businesses’ investment in cyber security measures are lagging behind that of comparable economies.
Only 17% of NZ digital businesses currently have an internet security policy in place compared to 39% of Australian businesses. Similarly, just 20.5% of NZ businesses surveyed have aligned cyber security spending with business revenue, compared to an overwhelming 63% of global businesses.
There is a further risk that NZ industries may be losing out to global competitors due to a lack of
investment in digital security. The EU, South Korea, Hong Kong and Singapore have all introduced comprehensive new data protection regulations. By comparison, NZ has a lack of mandatory reporting obligations for data breaches, which means our businesses may be unprepared to operate in global markets. Although security measures and policies are not currently compulsory here, companies looking to expand cannot afford to neglect the issue.
As every organisation uses digital technology and the internet to different degrees, context is key and a personalised approach specific to the business needs to be taken.
However it is of paramount importance that thought is given to implementing IT security strategies; as a security failure could result in catastrophic damage
to the business on a reputational level and severely damage customer relationships.
In the event of a data breach, the business is no longer seen as a victim, but as someone who has
not taken sufficient care over data provided to them.
It is therefore recommended that:
 cyber security measures are built into new
digital initiatives as they are being developed,
 businesses increase their investment into more
advanced tools for detection of potential cyber
attacks, and
 policies are put in place to respond swiftly to
any security breach, as reassurance to all
stakeholders and to avoid reputational damage.
In-house IT teams may no longer have the expertise
to keep up with the ever changing cyber-threat –
outsourced expertise may need to be sought to
provide a more cost effective and efficient solution.
How do we now treat feasibility expenditure?
A recent Supreme Court decision, Trustpower Limited v Commissioner of Inland Revenue (IRD), has drastically changed how New Zealand businesses should treat feasibility expenditure for tax purposes.
Feasibility expenditure isa term used to refer to expenses incurred in the course of determining whether to acquire an asset; to some degree, such expenditure is incurred by all businesses. Until now, feasibility expenditure has generally been treated as tax deductible up until the point that a decision is made to acquire a particular asset. This is known as the ‘commitment approach’.
In the Trustpower case, the company had incurred expenditure to acquire resource consents prior to deciding whether to commit to potential power
generation projects. The expenditure was treated as
deductible feasibility expenditure under the
commitment approach, however this was
disregarded by the Court.
Instead, the expenditure was held to be non-deductible on the basis that the underlying projects were capital in nature. The Court reasoned that the projects could not proceed without the resource consents and thus represented tangible progress toward their completion. The Supreme Court conceded that a deduction for feasibility expenditure may still be allowed for early stage work, but only limited guidance was provided regarding when expenses should be deductible. It
was acknowledged that a deduction would be allowed for:
 “feasibility assessments which are so preliminary in nature that they cannot sensibly be seen as directed to the acquisition of an asset of an enduring character”;
 “…early stage feasibility assessments may be deductible. Such assessments can be seen as normal incident of business”;
 “Expenditure which is not directed towards a specific project or which is so preliminary as not
to be directed towards the advancement of such a project …”
The decision of the Supreme Court was contrary to IRD’s own Interpretation Statement on feasibility expenditure, hence IRD is now updating its statement. The draft statement has summarised the IRD’s interpretation of the case: “… in the Commissioner’s view, expenditure is likely to be deductible in accordance with the Supreme Court decision if it is a normal incident of the taxpayer’s business and it satisfies one of the following:
 the expenditure is not directed towards a specific capital project; or
 the expenditure is so preliminary as not to be directed towards materially advancing a specific capital project – or, put another way, the expenditure is not directed towards making tangible progress on a specific capital project.”
Business expansion and growth is good for the economy, the country, employers and employees.
As a result of the Supreme Court decision, expenditure on feasibility expenditure is now more
likely to be non-deductible in most cases. This creates an economic disincentive for businesses to
consider the feasibility of new projects and will represent a significant increase to the cost of
expansion and growth for New Zealand businesses.
From a broader policy perspective, it does beg the question as to whether Government should step in and legislate the treatment of feasibility expenditure
to maintain the status quo.
Employee share schemes
Irrespective of the size of a business,
one of the challenges for any business
owner is to be able to attract and
retain talented staff.
One means to do so is an effective
remuneration package that motivates
staff in a way that aligns their
performance with the owners’
business objectives. Not every
individual is driven by monetary
reward. But it is a key ingredient.
In its most basic form, a remuneration package will comprise payment of a salary or wage and potentially cash bonuses. It is often assumed that the next step is for key staff to be incentivised by having them take a stake in the business. But there is a middle ground that should also be considered. It is relatively straight forward to design a remuneration target that takes into account the performance or value of the business. For example, ‘phantom equity’ involves remunerating an employee based on a set percentage multiplied by an increase in the value of the business. It is akin to providing shares in a business, without actually giving up ownership of the business.
If consideration is being given to providing employees with an ownership share, or such a
scheme is already in place, it is important to be mindful of the tax treatment. Employees will
naturally look to the employer to ensure they are fully informed regarding the implications.
Unfortunately, the tax treatment of employee share schemes (ESSs) are currently under review by IRD.
The IRD’s concern is that there are inconsistencies between ESSs and more vanilla approaches to incentivising employees, such as cash bonuses (and phantom equity).
The IRD have a particular dislike of “conditional” ESSs. Under such schemes, an employee’s continued ownership of shares may be subject to continued employment or performance targets being satisfied. One outcome of such a scheme is that any increase in value after
the initial receipt of the share is typically a tax free capital gain.
IRD are of the view that until the shares are free from restrictions, their increase in value should be taxable. Their apparent rationale is that the share isonly subject to conditions because the individual is an employee, and therefore any benefit due to an increase in value should be employment income.
IRD’s point of comparison is to an ‘ordinary investor’ who might purchase shares on the NZX, who is free from restrictions and whose investment is at risk.
The IRD review commenced in May with the release of an officials’ issues paper setting out their view and was followed in September with an update on their proposals. When designing a reward system, consideration should be given to IRD’s proposals and the uncertainty that currently exists. Depending on the final outcome, there is a risk that either theemployer or employee will find it is the IRD that is being rewarded and not them.
IRD rulings
Over the past few years there has been a pronounced improvement in the manner in which Inland Revenue selects and conducts its investigations.
There has been an increased focus on data analysis, comparisons to statistical norms, and use of external information such as land transfer data. As a result there is an increasing need to consider how IRD might approach a particular transaction or issue.
In cases where the position is unclear or the dollars involved are material, consideration needs to be given to approaching IRD beforehand to seek their approval or view to treat something in a particular way. This can occur by approaching IRD for a ‘private binding ruling’ or a ‘non-binding indicative view’.
Both processes are positive and collaborative, as IRD generally are focused on determining the
correct position under the law. In contrast, if IRD approach the matter ‘after the fact’ through the course of an investigation there may be more focus on proving a tax shortfall exists; and their view of the law can feel as though it is bending to accommodate that outcome. It can become emotional, as each party becomes increasingly entrenched in their view, giving rise to significant cost to defend a position and if the taxpayer is unsuccessful, penalties could apply. Too often the incremental cost will exceed what it would have cost to approach IRD before-hand.
A private binding ruling provides the highest degree of comfort, because if successful, the outcome is binding on IRD. This provides peace of mind that a different individual from IRD won’t take a different view in the future. The binding rulings process is not subject to a legislated time frame within which one must be provided, however IRD work to a timeframe of 3 months and are very good at meeting that time frame. They are also willing to provide early indications of their expected view if required for the purpose of a particular transaction that may be
occurring. IRD do charge a fee to provide a binding ruling, it does so at an hourly rate of approximately $160 per hour. The total IRD cost for a ruling is generally about $15k - $20k. This cost must be considered in light of the tax involved and the comfort otherwise associated with taking a particular position. When this is balanced with the downside risk of IRD disputing the treatment in the future it quickly becomes reasonable.
A further option is to acquire an indicative view. We understand IRD will consider issues through this process if it will take 20 hours or less. IRD don’t charge for providing an indicative view, however the outcome is not binding. Irrespective of the fact that the IRD is not bound by the outcome, from a practical point of view it should provide a high degree of comfort. It would be unusual for an alternative view to later be taken by IRD, and if this did occur, the fact that an indicative view was acquired should provide a strong negotiating position when asserting no penalties should be charged.
Snippets
Farmhouse expenses
The IRD have long permitted a straightforward concession allowing a flat 25% deduction for farmhouse expenses, as well as 100%
deductions for interest and rates. The
concession is not legislated and dates back to the
1960s, when farm ownership and operating
structures were generally less complicated than they are today.
However, IRD recently announced that the
concession is to be withdrawn from the start of the 2017-18 year. It will be replaced by a new approach that is intended to more accurately capture the business versus private costs relating to maintaining the farmhouse.
Under the proposed methodology, farming businesses will generally need to apportion farmhouse expenses between business and private use on a just and reasonable basis – time and space will generally be the appropriate method, consistent with other types of businesses.
Where expenses are incurred on the farm as a whole, the farmhouse expenses will first need to be determined based on the cost of the farmhouse (including curtilage and improvements) relative to
the cost of the farm, before the apportionment between private and business use of the farmhouse
is calculated.
The IRD have however recognised that there will be occasions where this will be impractical to calculate. They have addressed this by proposing that where the cost of the farmhouse is less than 20% of the total cost of the farm, farmers can follow an alternative method by deducting 15% of all farmhouse expenses, as well as continuing to claim 100% of the interest costs relating to the farmhouse. This should make the compliance and record keeping process more straightforward for these entities.
Nothing is certain, except death and taxes…
Benjamin Franklin’s well
known phrase does however appear to come as a surprise to some people.
Although tax returns across the world need to be filed annually, taxpayers come up with a variety of creative and ingenious excuses to try and avoid late filing penalties.
In the US, people have gone to the expense of
arguing in court that ‘Taxation is taking property, thus a violation of the 5th Amendment’ and ‘Taxation is slavery, thus a violation of the 13th Amendment’. Unsurprisingly both arguments were struck down by the courts.
In the UK, the tax authorities report amongst their best excuses, ‘My husband ran over my laptop’, ‘My tax papers were in the shed, and a rat ate them’ and ‘I’ve been busy looking after a flock of escaped parrots and some fox cubs’! Perhaps the parrots can be put to work to generate some income to pay the fines?!
While genuine reasons for late filing may sometimes be accepted, unfortunately passing the blame to hungry pets isn’t going to cut the mustard. Hopefully this serves as a good reminder to get your return ready for filing as the next deadline approaches!
If you have any questions about the newsletter items, please contact us, we are here to help.
All information in this newsletter is to the best of the authors; knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying
directly or indirectly upon this newsletter. It is recommended that clients should consult a senior
representative of the firm before acting upon this information.
Nov 2016 - Jan 2017
© 2016
]]>Taxation Bill changes]]>http://www.ckfthomas.co.nz/single-post/2016/08/08/Taxation-Bill-changeshttp://www.ckfthomas.co.nz/single-post/2016/08/08/Taxation-Bill-changesMon, 08 Aug 2016 04:22:28 +0000
ISSUE 3: AUGUST – OCTOBER 2016
May tax bill
In May 2016, the Government introduced the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Bill (the Bill). Some of the key changes proposed in the Bill are outlined below.
Tainted capital gains
Capital gains derived by a company from the sale of a capital asset are able to be distributed tax free on liquidation. However, under the current legislation a capital gain derived from the sale of a capital asset to an associated person cannot be distributed tax free. Instead, the distribution of ‘tainted capital gains’ comprises a taxable dividend. The current rules date back to before the current imputation regime existed and arguably have no place today. In recognition of this, the Bill proposes to narrow the application of the dividend rules so that a tainted capital gain only arises if:
the transaction is between two companies, andat the time of the transaction both companies have common ownership of at least 85%, andwhen the vendor company is liquidated and the capital gain distributed, the vendor company and the owner of the property have common ownership of 85% or more.
Related party debt remission
Taxable debt remission income can arise to a borrower if they are released from the obligation to repay a debt (i.e. the debt is forgiven). However, in specific circumstances these rules can lead to unusual outcomes. For example, if an insolvent company is propped up with loans from its shareholders and the company is liquidated or the debt is converted to equity, there is a risk of debt remission income arising.
The Bill proposes that debt remission income will not arise where:
the borrower is a company or a partnership (including look-through companies and limited partnerships), andthe lender is an owner of the borrower, andthe debt forgiven is held and forgiven in proportion to ownership.
Accordingly, taxable income will not arise where the forgiveness of debt does not change the net wealth of a group of entities (e.g. in a wholly owned group). Instead the debt (and any unpaid interest) will be treated as being fully repaid on the date the debt is forgiven.
The Bill also proposes a separate amendment to prevent debt remission income arising for an LTC owner when that LTC owner remits a debt owed to them by the LTC.
RWT on dividends
Under current legislation, if a company pays a dividend to another company, resident withholding tax (RWT) applies at the rate of 33%, unless both companies are at least 66% commonly owned. Given companies pay income tax at 28%, payment of the additional 5% is arguably unnecessary. The proposed amendment will allow companies to opt-out of deducting RWT from fully imputed dividends paid to corporate shareholders, thereby eliminating the need to pay the additional 5%.
The above changes reflect common sense solutions to some illogical outcomes and are welcome.
]]>Newsletter August to October 2016]]>http://www.ckfthomas.co.nz/single-post/2016/08/08/Newsletter-August-to-October-2016http://www.ckfthomas.co.nz/single-post/2016/08/08/Newsletter-August-to-October-2016Mon, 08 Aug 2016 04:01:45 +0000
INSIDE THIS EDITION
Winter blues tips 1
Witnessing history 2
Winding up a company 3
Labour’s housing policy 3
Snippets 4
Do you want tax with that? 4
FBT Reminder 4
Winter blues tips
With positive thoughts we experience pleasant and happy feelings. Unfortunately, in the midst of winter, it is easy to lose sight of our positive thoughts where the days are short, the temperature low and grey clouds surround us. However, it is important to make the effort to maintain a positive outlook on work, family and life in general.
Positive thoughts can not only bring us positive feelings, but they also change the way we appear, act and react. Take a moment to look at the people around you right now. Are you able to identify those who are thinking happy, positive thoughts? It’s not just the people who are smiling.
People who have a positive mind set have a certain brightness in their eyes. They often walk tall and have elevated energy levels. For some, their whole being broadcasts happiness, health and success. Is it any wonder that we prefer to be around positive people, and avoid the negative ones?
So what can you do to think more positively? Well, it’s not just about putting your head in the sand and ignoring life's less pleasant situations. Positive thinking is about approaching unpleasant situations with a more positive, productive attitude. It involves focusing on the best outcomes, not the worst.
One reason people struggle to live a positive happy life is due to their minds playing a constant record of negative self-talk. When self-talk, that constant chatter in your mind, is always negative, it can bring down your whole perspective on life and dictates how you relate to yourself and those around you.
A few tips to help elevate your thoughts and reduce negative feelings are to:
Recognise negative self-talk - a good place to start is to keep an eye on the things you tell yourself. If you tend to dwell on the negatives or do not feel good about yourself, this is a good indicator that your thoughts need improving.
Pause for a moment - when you notice yourself having negative self-thoughts, stop for a moment and think about the scenario. By putting it into perspective we can prevent ourselves from thinking negatively. For example, if you trip and fall, before you berate yourself for being such a ‘clumsy idiot’, stop and think, are you really that clumsy? Or was the ground wet or uneven, were you distracted?
Challenge negative thoughts - you can test and challenge your self-talk. Pull yourself up on negative self-talk and ask yourself, "is that really true?". If you missed that business opportunity, are there any lessons for the future you can take from the situation?
Accept yourself - having self-confidence is fundamental to ensuring you are on track to having positive thoughts. The degree to which you value yourself and the belief you have in your skills and abilities impacts the way you think about yourself. Nobody’s perfect, so accept your faults and move on.
Get positive - train your mind to conduct positive self-talk. Make an effort to use positive words in your inner dialogues and when talking with others. To reinforce your positive thinking, write three words on a piece of paper and put this in your pocket: "Approachable, Happy, Smart". Read the note a few times a day and this is what you will project.
No one is immune to negative self-talk, but by making a conscious effort to change the way you think and practice your self-talk, you can work towards removing self-criticism from your life.
One small positive thought in the morning can change your whole day. Good thoughts. Good feelings. Good life.
Witnessing history
Over the last few months we have witnessed history, with the majority vote in favour of Britain leaving the European Union (EU). This was a surprise to many, and sent shockwaves around the world. In the days following the vote, the value of the pound declined substantially, and this instability may continue into the future as long as uncertainty is prevalent.
Some of the key drivers behind the vote to exit the EU include a general view held that the EU is holding Britain back. The EU is said to be imposing too many rules on business and charging billions of pounds each year in membership fees for little in return (per the Treasury figures, in 2014/2015 Britain’s net contribution was £8.8 billion). Many people are also concerned with immigration levels and want Britain to take back full control of its borders, reducing the number of people moving there to live and/or work.
Under the current EU framework, it is relatively easy for businesses to move resources such as people and products to and from British and European countries. However, businesses that trade in Europe and Britain are finding it difficult to predict how Britain’s exit from the EU will impact their business going forward. Although it is difficult to predict what will transpire over the next few years, by understanding the process and expected events behind the exit, you can get an idea of the potential outcomes an exit may cause.
In order for Britain to formally exit the EU, Article 50 of the Lisbon Treaty must be invoked. As Article 50 is relatively new and has never been invoked before, both the timing around the exit and application of the Article are uncertain. The process of Britain exiting the EU is expected to take some time and until Britain ceases to be a member, the EU laws still stand. From a legal and regulatory standpoint, nothing should change for approximately two years. This window, as prescribed by the article, provides for a renegotiation period allowing for a new legal foundation to be built for Britain’s trade relationship with the EU. During this period a number of other factors could also impact the outcome of the exit where key events will take place, such as the French Presidential election and German Federal election.
The exit implications for businesses will largely depend on the arrangement Britain enters into with the EU following the exit (Britain will likely enter into one single deal with the remaining 27 EU members). Four scenarios could occur in relation to the different degrees of integration that Britain may have with the EU in the future. These scenarios could take different specific forms, but broadly reflect one of the following:
EEA Member - where Britain remains part of the EEA and keeps the four freedoms of labour, capital, goods and services.Free trade agreement.Bilateral agreement (Swiss option).No access agreement, whereby no new trade agreements are established with the EU.
Any businesses trading across the British border will be anxiously waiting to see what happens next. They are likely to be thinking ahead and identifying potential issues and opportunities that may arise following an exit, such as the structure for exporting and importing goods, potential regulation changes, customs procedures and passport controls for business travellers. It could even see NZ businesses being put on a par with UK businesses when trading with counter parties within the EU.
Winding up a company
Recently, there has been an increased level of sophistication on the part of Inland Revenue (IRD) when reviewing company windups. Important points to bear in mind when winding up a company are outlined below.
Before applying to the Companies Office for removal from the companies register, a company should have discharged its liabilities to all creditors and distributed its surplus assets to its shareholders. The distribution of the company’s surplus assets should be recorded by way of the directors’ resolution. The amounts distributed to shareholders on liquidation are taxed depending on the nature of a distribution, as follows:
Available subscribed capital (ASC) - represents a company’s paid up share capital and can be distributed tax free to shareholders on liquidation.Capital gain amounts - are generally able to be distributed tax-free on liquidation of a company.Remaining funds - to the extent that the distribution exceeds ASC and capital gain amounts, the balance will comprise a taxable dividend. This is typically a company’s retained earnings.
In order for capital gains to be distributed tax-free, the process to windup the company must have commenced. Ideally, commencement of a liquidation is evidenced by a shareholders’ resolution signalling the intention to commence winding up the company. The IRD accept that in some circumstances, a less formal step may be sufficient to commence the liquidation, provided the step is overt and carried out with the aim of achieving removal from the register.
We have seen an increasing number of cases where IRD has specifically requested documentation to evidence when the liquidation process was commenced. Therefore it is important to ensure the commencement resolution is drafted and dated correctly, or alternatively, a less formal course of action (if applicable) is supplemented by supporting documentation.
The Income Tax Act also prescribes a specific formula that is to be used to calculate the capital gain amount. This will not necessarily equate to the capital gains recorded on the company’s balance sheet. Through its review process IRD are asking for a copy of taxpayers’ capital gain calculations.
During the removal process approval must be obtained from IRD to remove a company from the register. The request to IRD should be made in writing after the liquidation process has commenced and once all tax compliance obligations have been met, e.g. final GST and income tax returns have been filed.
If the final distribution is subject to resident withholding tax, this will also need to be filed and paid before IRD approval is given. The IRD have a list of information that must be provided as part of this request, which is available on their website.
If approval is obtained, IRD will issue a letter stating they have no objections to the company being removed from the register. However, this approval provides no defence if a subsequent review, as described above, identifies mistakes when the various elements of the distribution were calculated.
Care must be taken. If IRD take the view that a capital gain was distributed prior to ‘commencement’, the costs could be significant.
Labour’s housing policy
The Labour party has recently released an overview of its new housing policy designed to tackle New Zealand’s housing “crisis”.
Labour are of the view that property “speculators” are driving house prices out of reach of first home buyers and have proposed new measures to resolve the issue. There is currently a lack of detail around how exactly the new measures will apply, but based on the details available, they could have an impact should Labour be successful in next year’s election.
Extending the bright line test
Currently, gains from residential property sold within two years of purchase are subject to income tax, unless the property is the seller’s main home, inherited, or transferred in a relationship property settlement. Labour plans to extend the period of the bright line test from two years to five years. This policy has come under fire, with some critics arguing that it will place a burden on landlords selling for legitimate reasons.
Banning foreign buyers
Labour proposes to ban non-residents from buying existing New Zealand homes. Who will be classed as a non-resident for this purpose has not been defined; which is a crucial detail that could have a profound effect on the ambit of the policy.
In proposing this policy, Labour have referenced disproportionate house sales to overseas buyers and the relative success of a similar policy in Australia. While non-residents would be banned from purchasing existing homes, they would not be prevented from building new houses in New Zealand. The basis for this presumably being that building a new house adds to the supply.
Altering rules around negative gearing
Labour have pledged to consult on ways to limit the ability for negative gearing to apply to rental properties, which has been described by Andrew Little as a “subsidy for speculation”. Negative gearing allows landlords to return a taxable loss on their rental properties that can be offset against their other income to reduce their overall tax liability.
In the lead up to next year’s election, the National Government is likely to come under increased pressure because of its perceived lack of action on the housing market. Labour looks to be seizing the initiative by releasing its plan to combat rising house prices.
It remains to be seen whether National will bring a similar policy to the table, or whether they are happy to rely on other measures, such as the Reserve Bank’s recent increase in the loan to value ratio for investment properties to 40%.
Snippets
Do you want tax with that?
In today’s global economy a country’s tax regime is an important determinant when businesses are deciding where and how much to invest. Recent research ranked New Zealand’s tax system number two in the world for tax competitiveness. This isn’t surprising given NZ’s broad based low rate regime and the fact we don’t have estate duty, stamp duty or a comprehensive capital gains tax.
By comparison, the United States ranked number 32 of 34. An examination of some their rules around food could reveal why.
In New York uncut bagels are tax exempt, but an 8% sales tax is added to any altered bagels… our suggestion is to cut your own. Illinois has a candy tax, but not if the candy contains flour. Colorado charges tax on ‘nonessential packaging’, and as a result, you’re paying a 2.9% tax for a takeaway coffee lid.
If you thought these were absurd, prepare to have your mind blown.
In California, and 30 other like-minded states, food is subject to tax if eaten on the premises or in a heated condition. Seems relatively straightforward right? Wrong. It means a hot sandwich to takeaway would be taxable, while a cold takeaway sandwich would not be. Furthermore, if a cold sandwich has hot gravy poured onto it, it becomes taxable, even if said gravy has cooled to room temperature. If a store clerk warms a customer’s cold sandwich in the store’s microwave, it becomes taxable. However, if the customer warms the sandwich using the store’s microwave, no sales tax is due.
In summary, for anyone visiting the states, remember: iced coffee, and fresh, not toasted, to go.
FBT reminder
In the vast majority of cases fringe benefit tax (FBT) on vehicles is paid based on the GST inclusive cost price of a vehicle. But it is worth considering application of the depreciated tax value (TV) method if you have older vehicles on which FBT is being paid.
Under the TV method, the value of the benefit for FBT purposes is calculated based on the depreciated value of a vehicle. It is typically not used from acquisition because it front loads the FBT cost into the first years of ownership and the benefit of its use doesn’t come until later.
The method chosen in the first FBT return for a specific vehicle, must continue to be used for that vehicle for five years. Hence, use of the TV method can only be considered after that initial five year period has finished. However, if FBT is being paid on vehicles that have been owned for more than five years, a comparison to the TV method should be made – it is likely to give rise to a lower FBT cost.
The fringe benefit value is calculated based on 9% of a vehicle’s TV value (at the beginning of the year). The 9% rate is based on a GST inclusive value. If GST was deducted on the cost of a vehicle and you wish to use your fixed asset register, the rate of 10.35% applies. The minimum TV value that can be used for a vehicle is $8,333.
It is worth checking your vehicle register and if the TV method is an option, run the numbers, the greater the original cost of the vehicle, the greater the potential saving.
If you have any questions about the newsletter items, please contact us, we are here to help.
]]>Scam warning from IRD]]>http://www.ckfthomas.co.nz/single-post/2016/06/24/Scam-warning-from-IRDhttp://www.ckfthomas.co.nz/single-post/2016/06/24/Scam-warning-from-IRDFri, 24 Jun 2016 00:13:53 +0000
We wanted to warn you of a scam that is going around. Please read the letter below from the Inland Revenue with information regarding the scam. If you receive a phone call or email from someone saying they are from the IRD, please do not give them any details as this is likely to be a scam. If this happens to you please do not give them any information. We ask that you please call us to let us know or call the Inland Revenue as instructed below.
If you have any concerns please do not hesitate to contact us.
Warm regards from the team at Cockcroft Thomas
June | 2016 Issue no: 12
Phishing Scam Over the past two weeks
Inland Revenue has received reports of a telephone phishing scam from several hundred customers around New Zealand. The scam calls have been made to landlines and mobile phones, with messages being left on voicemail if the calls haven’t been answered. The callers state that they are from the Inland Revenue Department and the following scenarios have been reported, that the customer:  is wanted for historic tax evasion or tax avoidance  has a red flag on their file  is in debt and they or their lawyer must return the call as soon as possible. Some customers have been told to make a payment via Western Union within 30 minutes, or risk arrest. They are often told to ring a Wellington number – (04) 830 2441 – and recommended to speak to a “Kenneth Matthews”, “James Matthews” or “Kevin Sousa” to arrange an immediate payment so as to avoid serious repercussions. Customers have reported the callers as having “foreign sounding” accents, with many different accents reported. Sometimes the caller is female. The callers are very confident and convincing, and we have received anecdotal reports that some customers have been taken in and paid significant sums of money to the scammers. Some customers have called the number referred to above and reported the background as sounding like a Contact Centre environment with multiple accents. These customers have also reported the callers as becoming angry and aggressive when challenged. We would like to remind all Tax Agents that Inland Revenue staff would not leave messages like these for your clients. If your clients receive a suspicious email, SMS scam message or a fraudulent call, please email phishing@ird.govt.nz and include:
 the email received, or
 the number that the text message or phone number (CallerID) originated from (if not blocked)
 any names and call-back numbers given by the text sender or phone caller
 details about the scam including:
o the amount of tax refund quoted
o the reference number
o the information requested, and
o any other relevant information.
Inland Revenue sent out a media release last week warning customers about the scam and this has been reported in several local publications.
Michael Maclean Interactional, Customer Services
]]>Newsletter May 2016 - July 2016]]>http://www.ckfthomas.co.nz/single-post/2016/05/07/Newsletter-May-2016-July-2016http://www.ckfthomas.co.nz/single-post/2016/05/07/Newsletter-May-2016-July-2016Sat, 07 May 2016 01:28:42 +0000
INSIDE THIS EDITION
Changes to how SMEs pay tax.................1
Holiday pay mishaps.................................2
Compulsory zero-rating of land ...............3
Slammed for gross carelessness ............3
Snippets......................................................4
Review of New Zealand foreign trusts.........4
Creative tax deductions ...............................4
Changes to how SMEs pay tax
The Government has recently announced a package of proposed tax changes that intend to reduce compliance costs and make tax simpler for businesses. The package is part of the Inland Revenue’s big picture ‘Making Tax Simpler’ initiative that aims to modernise and simplify the tax system. While the proposals will generally apply to all businesses, the changes are expected to benefit small businesses the most. Tax compliance costs are relatively high for small businesses who play a crucial role in the New Zealand economy. Approximately 97% of enterprises in New Zealand are small businesses, who employ around 30% of the workforce. For these entities, the question of whether ‘close enough is good enough’ is being raised, whereby simplifying the tax compliance process and reducing compliance costs could have wide-reaching benefits for many New Zealanders.
The changes proposed within the Governments tax package are outlined below. Changes to provisional tax The changes propose to increase the existing use of money interest (UOMI) safe harbour threshold for individuals from $50,000 to $60,000 and allow it to apply to all taxpayers. This effectively means that all taxpayers who calculate and pay provisional tax using the standard or ‘uplift’ method would only be charged UOMI from their terminal tax date provided their residual income tax is below $60,000. Larger taxpayers, who fall outside the safe harbour threshold and pay tax using the standard option, would instead pay UOMI from their last instalment date. Small Businesses (turnover of $5m or less) will be able to use an "Accounting Income Method" (AIM) to calculate and pay their provisional tax based on the income to date in their accounting software. Businesses registered for monthly GST returns will pay provisional tax monthly. However, businesses who file their GST returns on a twomonthly, six-monthly basis or who are not registered will pay provisional tax every two months.
Self-management and integrity
The changes propose to let businesses:
 Allow contractors to elect their own withholding tax rate (minimum 10% for resident contractors, 15% for non-resident contractors),
 Extend withholding tax to labour-hire firms, and
 Introduce voluntary withholding agreements where contractors can agree to withhold tax as income is earned to manage provisional tax obligations.
Other proposed changes include:
 Removal of the monthly incremental 1% late payment penalty for new debt;
 Increase the threshold for taxpayers to correct errors in returns from $500 to $1,000;
 Remove the requirement to renew resident withholding tax exemption certificates annually;
 Increase the threshold for annual fringe benefit tax returns from $500k to $1m;
 Modify the 63 day rule on employee remuneration to reduce compliance costs; and
 Allow small companies providing motor vehicles to shareholder-employees to make a private use adjustment instead of paying fringe benefit tax.
There are also a number of information sharing arrangements proposed in the changes, i.e. reporting of tax debts to credit reporting agencies and information sharing with the Companies Office.
Most measures are intended to apply from 1 April 2017, with the exception for provisional tax payment changes, which have a proposed implementation date of 1 April 2018. IRD is currently seeking feedback from the public, with submissions due by 30 May 2016.
Holiday pay mishaps
As seen through the media recently, errors within holiday pay calculations are more common than we’d like to think and not just limited to Government organisations. Due to the complexity of the calculations required to monitor and record holiday pay, errors or deviations from the Holidays Act 2003 (the Act) requirements can occur. This can result in under or over payments to staff.
Common payroll mistakes include:
 Incorrect leave payments for employees returning from paternity/maternity leave.
 Systems incorrectly calculating the amount of leave paid based on hourly rates instead of daily rates (bereavement, alternate, public holiday and sick leave) or weekly rates (annual leave) as required by the Act.  Previous allowances earned are not included in leave payments (i.e. underpayment).
 Discretionary payments (e.g. bonuses) are included in leave payments (i.e. overpayment).
 Time-and-a-half earned on public holidays is not included in subsequent leave payments (i.e. under payment).
Employee leave entitlements and payment errors are likely to be miscalculated if the information captured within a system is not adequate. Staff members with fluctuations in their normal hours worked are prone to holiday pay mistakes, with the most commonly affected being waged employees.
Often, the correct information within employment agreements, employee master data, hours and type of work is not captured within holiday pay calculations.
For example, additional amounts received on top of normal pay (e.g. allowances, time-and-a-half) are often not correctly captured within holiday pay calculations.
Errors may also arise if the payroll system is not intelligent and flexible enough to determine which Relevant Daily Pay/Average Daily Pay (paid leave) and Ordinary Weekly Pay/Average Weekly Pay (annual leave) formula should be used for each employees' individual circumstances.
Relevant and Average Daily Pay and Ordinary and Average Weekly Pay are defined within the Act but are often not correctly and consistently implemented across payroll processes, data and systems. In some instances, the problem is due to companies using payroll software from international providers that is not tailored to meet New Zealand Act requirements.
The implications from incorrectly calculating holiday pay can be significant. Not only might an employee have been paid too much or too little, it also has flow on effects to PAYE, KiwiSaver, Working for Families and Student Loans and breaches to individual and collective employment agreements.
It is important to check your payroll complies with Holidays Act requirements and ensure payroll, finance and people managers understand the implications of the Act on pay and leave calculations. There is likely to be increased mobilisation and focus from MBIE Labour Inspectorate and tensions with payroll providers over the accountability for remediation and resulting liabilities.
Pressures from staff, unions and ex-staff over pay accuracy (real or perceived) can create tension within an organisation and challenges may arise when trying to maintain employee trust and goodwill with unions. The cost to remediate errors can be significant both financially and through management efforts, not to mention the impact this may have on a company’s reputation.
Compulsory zero-rating of land
The compulsory zero-rating (CZR) of land rules have applied since 1 April 2011. The rules were introduced to combat a pattern of transactions where Inland Revenue (IRD) was paying GST refunds to land purchasers, but there was no corresponding GST returned by the vendor. Although simple in principle, mistakes are being made.
To recap, the rules require a transaction that wholly or partly consists of land to be zero-rated if:
 The vendor and purchaser are both GST registered; and
 The purchaser intends to use the land for the purpose of making taxable supplies; and
 The purchaser or a person associated with the purchaser does not intend to use the land as a principal place of residence.
The reduced rate applies not to just the land component of a transaction, but to the entire supply. For example, if zero-rating applies to the sale of land and assets, the assets are also zero-rated. Also, the supply of “land” is not limited to the transfer of freehold title, but also includes an assignment of an interest in land. For example, if a business sells assets and an assignment of a lease (of land), zero-rating is likely to apply. In practice, the standard form Auckland District Law Society (ADLS) agreement includes a statement that the purchaser completes for GST purposes and is used by the vendor to determine whether the sale should be zero-rated. The agreement also includes a question on the front page of the contract asking whether the vendor is registered for the purpose of the supply.
A common error is for the question to be answered “no” because the transaction is the sale of a residential home irrespective of the vendor’s circumstances. If however, a property developer has built the house in the course of their taxable activity, GST will apply to the sale and the question should be answered “yes”. A fundamental element of the contract is whether to express the price as “Plus GST (if any)” or “Inclusive of GST (if any)”. Disputes have arisen because a GST registered vendor understands the buyer is GST registered and the price is agreed as GST Inclusive. The rationale being that the transaction will be zero-rated and the price stated will be received ‘in the hand’ by the vendor. However, seeing an opportunity a purchaser might at the last minute, nominate a nonregistered purchaser. The transaction does not then qualify for zero-rating and the vendor is required to pay GST at 15% to IRD, leaving the vendor ‘out of pocket’.
In practice, it is recommended the agreement includes warranties regarding the GST status of the parties and that vendors execute agreements on a plus GST basis. Contracting ‘plus GST’ provides the right to increase the cash price to fund an unforeseen GST liability, thereby preserving the net amount receivable. A further pricing misconception is that a “GST inclusive” price means that GST is included at 15% and can be deducted for GST purposes. However, if the transaction is zero-rated, a GST inclusive price simply means there is GST, but the amount of GST is zero. A GST registered purchaser might contract on a zero-rated basis, because they have failed to understand that they are not purchasing the land to make taxable supplies. For example, the purchase of a residential property by a GST registered purchaser is unlikely to qualify for zero-rating. In this situation, the purchaser would be liable for the GST that would have otherwise been payable by the vendor. It is normal for a contract to be subject to ‘Solicitor’s approval’. Having a contract reviewed by your accountant is also worthwhile.
Slammed for gross carelessness
A self-proclaimed tax agent has been found by the Taxation Review Authority (TRA) to have taken an unacceptable tax position and demonstrated a high level of disregard for the consequences of claiming GST refunds over a two and a half year period. The taxpayer claimed a GST refund for five consecutive six month periods from March 2009 – March 2011, accumulating refunds of almost $10,000.
The taxpayer argued he was eligible for the refunds as he was carrying on a taxable activity of “services to finance and investment” by
(1) acting as a registered tax agent,
(2) holding patent rights as a patentee,
(3) devising inventions and patenting them, and
(4) supplying services to two trusts.
The Commissioner denied the input tax deductions and deregistered the taxpayer on the basis that he was not conducting a taxable activity and was therefore not eligible to claim GST. The Commissioner argued that the conduct amounted to gross carelessness and therefore sought to impose shortfall penalties. May 2016 to July 2016 Page 4 of 4 © 2016 It is a fundamental rule that in order to claim GST you must engage in a taxable activity that satisfies the following four criteria:
I. There is an activity;
II. The activity is carried on continuously or regularly by a person;
III. The activity involves, or is intended to involve, the supply of goods and services to another person; and IV. The supply or intended supply of goods and services is for consideration.
On review of the facts, the TRA was highly critical of the taxpayers’ alleged taxable activities. In regard to (1) acting as a tax agent, the taxpayer asserted that he provided accounting services to many clients during the disputed GST periods. His evidence however, consisted of six invoices for two clients of small sums that could not be supported by bank statements. The TRA stated that even if they accepted that the taxpayer was acting as a tax agent, the taxpayer did not prove that the activity was being carried on “continuously” or “regularly”. The TRA described the activity as spasmodic at best and therefore dismissed the claim that this was a taxable activity. Regarding (2) holding patent rights as a patentee, the patents the taxpayer referred to expired in 1994 and 2006 respectively, which is before the start of the first disputed GST period. The taxpayer saw his taxable activity as being a “continuous attempt to enforce the equities in the patents” and his position was not affected by the expiry of the two patents. The TRA had difficulty in following this assertion and so found that this activity did not meet the required threshold for taxable activity. The taxpayer also failed to produce evidence to support his claim that (3) devising inventions or (4) supplying services to two trusts satisfied the criteria of a taxable activity. He produced no evidence of design work or time expended on inventing, no invoices or payment evidence nor any trust deeds or engagement agreements. The TRA found it unclear whether such a trust was even in existence and dismissed both of these claims. The TRA consequently found that there was no nexus between a taxable activity and the input tax deductions. The taxpayer had taken an unacceptable tax position and demonstrated a high level of disregard for the consequences when he filed GST returns and claimed refunds for each of the periods in dispute. The taxpayers conduct was described as a “flagrant breach of the GST regime”. All input tax deductions claimed were denied and shortfall penalties for gross carelessness were imposed in each of the GST periods in dispute.
Snippets
Review of New Zealand foreign trusts
The Mossack Fonseca document leak and the major media backlash that followed has been well publicised. However, it remains unclear what role New Zealand plays in the international tax avoidance scandal and how the Government might legislate to tighten up the current rules. An independent enquiry of our foreign trust rules has been commissioned by the Government. The enquiry will review the foreign trusts' disclosure rules on recordkeeping, enforcement and the exchange of information with other tax jurisdictions, to determine whether the rules are fit for purpose or if there are any improvements that can be made. The report will be headed by Mr John Shewan and is due by June 30 of this year. A separate review of the privacy protection provided under tax legislation is also underway with the Government looking to scale back New Zealand’s privacy protections to allow more sharing of taxpayers information. Tax secrecy has traditionally been considered necessary to encourage the compliance of taxpayers, however, the Government is exploring the possibility of allowing the IRD to share more information to improve their internal processes and to prevent tax evasion.
Creative tax deductions
An Australian man has been unsuccessful in his attempt to claim AUD$5,388 in relation to a salary that he paid his son for secretarial services. The deduction was denied on the grounds that his son was seven and a half years old and did not in fact provide secretarial services to his father. The judgement found that the man’s son: “did virtually nothing for his father by way of secretarial assistance or anything of that nature. Indeed, the evidence established no more than that the son sometimes ran upstairs to the study when the phone was ringing, answered the phone and then handed it to his father.”
The Judge also made the comment that it was quite likely the son was paid some modest amounts of pocket money, however, those amounts would have been completely unconnected with the “minimal” work that he did for his father.
If you have any questions about the newsletter items, please contact us, we are here to help
All information in this newsletter is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.
]]>Newsletter Feb 16 to Apr 16]]>http://www.ckfthomas.co.nz/single-post/2016/02/10/Newsletter-Feb-16-to-Apr-16http://www.ckfthomas.co.nz/single-post/2016/02/10/Newsletter-Feb-16-to-Apr-16Wed, 10 Feb 2016 02:43:52 +0000
Inside this edition
Employer provided carparks. 1
Changes to the IRD’s administration system.. 2
Structuring – to put your eggs in different baskets or not? 2
Student loans – sharing with Australia. 3
Snippets. 4
Australia shames non-tax paying firms................... 4
We are jealous of the Norwegians.......................... 4
All information in this newsletter is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.
Employer provided carparks
Employers are required to pay FBT on non-cash benefits provided to staff. However, like most taxes, there are exemptions. It is important to be aware of the exemptions to ensure FBT is not overpaid. One such exemption provides that benefits (other than travel, accommodation or clothing) provided and used on the employer’s premises will not be subject to FBT. The provision of carparks fits within this exemption category.
Historically, what qualifies as “premises of the employer” has been uncertain. For example, if an employer is located next door to a carpark building and arranges and pays for six employees to have access to carparks in the building, do these carparks qualify as being provided on the employer’s premises?
The IRD has recently finalised two Public Rulings that include a change to its position on what qualifies as “premises of the employer” in this situation. Previously, the legal form of the car parking arrangement was the determining factor. For instance, carparks were required to be owned or leased by the employer to qualify for the exemption. Licence agreements did not satisfy the exemption requirements, even if the substance of the agreement was more akin to a lease.
In its Ruling, the IRD has softened its view and allowed a ‘substance over form’ approach. This will increase the number of situations that fall within the exemption by allowing license agreements to be regarded as being “on premises”, provided that the employer has a “substantially exclusive” right to use the carpark.
IRD has defined the phrase “substantially exclusive right” to mean that no one, including the carpark operator or any other third party, can use or control the carpark in a manner inconsistent with the employer’s substantially exclusive right.
The IRD provide a list of practical considerations which help to determine whether the employer has a ‘substantially exclusive right’. Although not definitive, the FBT exclusion is likely to apply if the employer has unrestricted access to the carpark, the carpark remains vacant when the employer is not using it, the employer may permit others to use the car parking space, if an unauthorised person parks in
the space the employer has the right to tow the unauthorised vehicle and, the employer can decide how the car parking space is used.
What this effectively means is that the nature of the agreement, rather than the label on the document will determine whether the exclusion applies. In recognition of the change in position, IRD are allowing employers to request refunds of previously paid FBT where employers have relied on the old approach.
Changes to the IRD’s administration system
The manner in which we interact with Inland Revenue (IRD) is likely to change dramatically over the next two years as the upgrade of IRD’s IT system and associated legislation comes on-line. IRD’s broad objective is to reduce the amount of time and cost it and private business spends on tax administration by modernising its software platform.
At present, both GST and PAYE processing costs are higher than necessary and there are problems with the quality and timeliness of information submitted. These issues not only impose costs on employers and the IRD, but also limit the Government’s ability to provide effective social services.
IRD is currently working with third party software providers to design digital solutions that will integrate tax obligations into everyday business practices. To ensure the changes are well designed and beneficial to all parties, feedback is being sought on potential changes via discussion documents.
One of the most recent discussion documents outlines potential changes to GST and PAYE. The IRD is currently requesting feedback on proposed changes and poses several questions that are designed to challenge our thinking on the current approach. For example, whether changes should be made to the calculation of PAYE on extra pays, holiday pay and years that include an extra pay period?
GST related changes include the ability to allow GST return filing and payment processes to be integrated with digital accounting platforms. This would allow GST-registered persons to submit their GST returns through their chosen accounting software programme as they fall due, effectively eliminating the requirement to file a separate GST return as a separate process. Such changes would remove the need to double-enter information, and reduce the potential for error. IRD’s proposals also include making GST refunds via direct credit to a customer’s bank account compulsory, unless it would cause undue hardship or is not practicable.
PAYE could shift to a semi-automated process. Similar to the GST proposal above, businesses would be able to submit payroll information to the IRD direct from their accounting system and make necessary payments to the IRD at that time. For example, PAYE information could be submitted to IRD at the same time that a ‘pay run’ occurs. Under this design, employers’ PAYE obligations would be integrated with their current business procedures, eliminating certain processes such as the need to file nil employer monthly returns. PAYE payments to IRD might be due at the same time the employee is paid.
By increasing the quality and timeliness of the information provided, IRD should have greater capability to improve individual’s access to social entitlements and identify and prevent errors; such as overpayments of family assistance.
The changes represent a shift to a framework in which IRD’s system would no longer work on a stand-alone basis. Instead, IRD would ‘talk’ to software providers, ensure their system worked in accordance with its view of applicable legislation and would then accept what it was sent. Such changes would provide the business and IRD with greater confidence regarding the accuracy and correctness of a tax return.
Structuring – to put your eggs in different baskets or not?
When establishing a business, there are a number of considerations to take into account to determine the ideal structure to adopt. One such consideration is protection of assets, not just the assets of individuals who invest in the business, but also protection of the business’s assets. This objective typically means a company structure is chosen. It is also common to use multiple companies to separate a business’s assets from its trading operations to ensure the assets are not at risk if the business fails. For example, the structure below splits a single business across two companies.
Trust 1
Taking it a step further, the structure below reflects the shareholding has also been split to increase the separation between the two companies. The argument being that it provides greater protection from third party claims by adding a further layer of independence.
Trust 2
The question becomes whether this separation is needed and at what cost? A High Court decision delivered early last year allowed liquidators to make a parent company pay for the subsidiaries outstanding debts due to an apparent lack of independence between the parent and subsidiary. This action then captures the value within the parent company, including other corporate subsidiaries. This risk increases the desirability of the second structure above.
The problem is that multiple entities and complexity drive administration, compliance costs and are not tax efficient. Between the two structures above, the first offers the following advantages:
< >If one company makes a profit and the other company makes a loss, that loss can be offset against that profit. The two companies can form a GST group. This simplifies the GST treatment of transactions between the two companies as they are able to be ignored for GST purposes and a single GST return is filed for both companies.There is greater discretion to choose the effective date at which tax credits resting with Inland Revenue (IRD) are able to be transferred between the companies. Below market value transfers of assets or services by a company will ordinarily give rise to a deemed dividend. However, transfers of this nature between the two companies are able to be ignored. Resident Withholding Tax does not need to be withheld and paid to IRD on payments of interest between the two companies.The turnover of the two companies is able to be added together for the purpose of applying the $2m threshold when applying for a certificate of exemption from resident withholding tax.The companies can elect to be treated as a single company for income tax purposes by electing to form a consolidated tax group. This allows ‘the group’ to file a single income tax return for both companies.If in the future the companies decide to amalgamate, this can easily be completed by a short form amalgamation.
Student loans – sharing with Australia
Compliance with student loan repayment obligations remains a continued focus for IRD and the Government. IRD currently estimates that $3.2billion is owed by student loan borrowers who are currently living overseas, the majority of whom reside in Australia.
In November 2015 a new Bill was introduced to Parliament which, once enacted, will enable IRD to track down student loan defaulters living in Australia. The new legislation is part of a broader IRD focus on compliance and will allow IRD to obtain up-to-date information including taxpayer’s addresses from the Australian Taxation Office (ATO). This information will then be matched against the IRD’s records and where appropriate, IRD will act to recover outstanding loan amounts.
The Bill will also enable the IRD to demand the entire balance of an outstanding student loan debt from ‘serious non-compliers’ (rather than only being able to demand the outstanding loan repayments). The serious non-compliers who would be targeted by IRD are those with large amounts of outstanding debt, who have been in default for a long time, or who have missed multiple repayments.
In the IRD media statement Tertiary Education, Skills and Employment Minister Steven Joyce commented: “We are making steady progress in tracking down student loan defaulters and getting them to pay up. However, there is still too many who have spent a long time in Australia refusing to meet their obligations. This new initiative will give IRD up to date contact details to track down those deliberately avoiding their payments and being unfair to other taxpayers."
Information sharing with the Australia has also seen substantial success as the IRD has already used data from Australian customs officials to track defaulters and send letters out that explain how to repay loans. The IRD also offer facilities that make it easier for borrowers to comply with their obligations, with options such as fee-free payments for borrowers living anywhere in the world.
It is expected that the new rules will come into effect in mid-2016.
The above changes add to existing initiatives, such as the ability to arrest student loan defaulters, with the first arrest made on 18 January 2016. The arrest was made as a “last resort” after Inland Revenue had not managed to get hold of the borrower since he had left NZ, meanwhile his loan had increased from $40,000 to $120,000 (including interest and penalties). In other cases people have chosen to meet their obligations before an arrest was needed.
The overall message from the IRD is that just because someone leaves New Zealand that does not mean that they can forget their student loan debt. The New Zealand taxpayer funded their education and expects to be repaid so that the next generation of students can receive the same funding.
Snippets
Australia shames non-tax paying firms
The Australian Taxation Office (ATO) has shamed large corporates by publishing revenue and tax information of more than 1,500 companies with reported total earnings over A$100 million (US$72.11 million) for the 2014 tax year. Of these companies more than a third paid no tax according to the ATO, with the highest level of non-payment coming from the energy and resources sector.
Companies listed include familiar names such as Boeing, Hilton Worldwide Holdings, and US oil services firm Halliburton (for list see https://data.gov.au/dataset/corporate-transparency). Based on the information provided by the ATO the Australian unit of Boeing, Hilton and Halliburton paid no tax on taxable earnings of A$53m, A$2m and A$1.3m, respectively.
Australia’s Tax Commissioner blames aggressive tax structuring for the lack of tax paid and vows to continue to work to tackle base erosion and profit-sharing methods, which large corporations use to manoeuvre profits to lower-tax jurisdictions.
In contrast, despite Apple Inc and Microsoft Corp receiving negative media attention for their world-wide tax arrangements this year, their tax payments are more reasonable, having paid more tax than most of their tech peers.
It is unlikely IRD could do something similar given the secrecy provisions that it has to comply with, but a similar analysis of NZ companies would likely tell a similar story.
We are jealous of the Norwegians
Whether it is our waistlines or our bank balance, we tend to find ourselves in recovery mode after Christmas. However, for those living in Norway they don’t find this to be as much of a problem as we do.
In November each year, the Norwegian government halves the income tax rate it charges individuals.
The result is that employee’s pay checks are a little bigger in December which helps the Norwegian’s prepare for the Christmas season and gives them more money to spend on Christmas presents for their kids and family. The result - happier people and a more stimulated economy.
Maybe the National Government should take a leaf out of the Norwegians book.
If you have any questions about the newsletter items, please contact us, we are here to help.
]]>Relief for 'non-residents']]>http://www.ckfthomas.co.nz/single-post/2016/02/10/Relief-for-nonresidentshttp://www.ckfthomas.co.nz/single-post/2016/02/10/Relief-for-nonresidentsWed, 10 Feb 2016 01:41:05 +0000
Relief for ‘non-residents’
Inland Revenue (IRD) is likely to soften its position on how it determines if a taxpayer is a New Zealand resident as a result of a recent Court of Appeal decision.
Broadly, a person is a NZ tax resident if they are either in NZ for more than 183 days in a 12 month period or if they have a ‘permanent place of abode’ (PPoA) in NZ. In 2013 the Taxation Review Authority (TRA) issued a decision that resulted in an individual, Mr Diamond, being deemed to be NZ tax resident.
Mr Diamond had worked for the NZ Army for 25 years, retired in 2003 and left NZ with no intention of returning to live. He then worked in Papua New Guinea on a 12 month contract providing personal security; subsequently he spent approximately four months living in Queensland, before he began working in Iraq. In Iraq he also provided security services, completing a number of contracts up until April 2012, when he moved back to Australia.
Mr Diamond maintained close family and financial ties to his ex-wife and his four children who remained in NZ. He provided financial assistance to them, regularly visited and owned rental properties in NZ with his ex-wife (personally and then through a company).
Despite such a lengthy absence, the TRA found Mr Diamond to be a NZ resident (and liable for tax on his worldwide income) because, in brief, he had an investment property that was ‘available’ to him in New Zealand and an on-going ‘enduring relationship’ with his family and ex-wife. This was enough for the IRD to believe he had a PPoA in NZ.
The TRA decision appeared to lower the threshold for individuals to be classed as NZ tax residents and had a flow on effect generally for individuals who own property in NZ, as they could potentially be captured as tax residents of NZ.
Following the TRA decision an Interpretation Statement (IS 14/01) was issued that came into effect from 1 April 2014. The statement took into account the TRA case, stating that if a person is able to use a property as a place to live on an enduring basis, then it can still be their permanent place of abode irrespective of whether the property is rented to someone else. This approach is complex to apply and would have resulted in substantial uncertainty.
The case was appealed to the High Court and the TRA decision was overturned in favour of the taxpayer. IRD was quick to appeal that decision to the Court of Appeal (CoA) and again the decision was decided in favour of the taxpayer. The CoA ruled that the mere availability of a dwelling is not sufficient to deem a PPoA to exist. Whether an individual has a PPoA is a question of fact and requires an overall assessment having regard to a range of factors.
The CoA considered the Commissioners approach to determining whether Mr Diamond had a PPoA, to be in error. The key issue with the Commissioner’s interpretation was that, once a dwelling that is merely available is identified, extraneous factors establishing a connection or remote ties to NZ could then be invoked to artificially assign to that dwelling the status of a permanent place of abode.
IRD is expected to update its Interpretation Statement to take into account the decision or comment on how the case will apply to residency determinations going forward.
© 2016
]]>Newsletter Nov 2015- Jan 2016]]>http://www.ckfthomas.co.nz/single-post/2015/11/10/Newsletter-Nov-2015-Jan-2016http://www.ckfthomas.co.nz/single-post/2015/11/10/Newsletter-Nov-2015-Jan-2016Tue, 10 Nov 2015 08:37:26 +0000
Inside this edition
GST on foreign supplies..................................... 1
Changes to closely held company tax rules......... 2
Doing your own Due Diligence............................ 3
Fit staff / Fit business.......................................... 3
Snippets. 4
Further cuts to ACC levies..................................... 4
The Jedi Society Incorporated................................ 4
All information in this newsletter is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.
GST on foreign supplies
Imposing Goods and Services Tax (GST) on the digital economy has been a hot topic this year as New Zealand retailers push for equal GST treatment between local and foreign suppliers.
At present, foreign providers of cross-border services and intangibles (including music, e-books, videos and software purchased from offshore websites) do not have to pay GST on sales to New Zealand based consumers. This puts local based providers at a substantial disadvantage because they have to charge GST, which will, at a minimum, increase their prices by 15% when compared to foreign competitors.
Currently, whether or not GST applies to a particular transaction depends on a number of factors, such as the location of the supplier or where the services are performed. Because most e-tailers are not based in New Zealand, and their services are not performed from New Zealand, GST does not apply.
This issue is not isolated to New Zealand with many countries facing similar GST/VAT non-collection issues. Given the significant revenue at stake, governments worldwide have a vested interest in reform. The Organisation for Economic Co-operation and Development (OECD) has released guidelines on GST/VAT treatment, which countries are considering adopting.
The New Zealand Government has now released its own discussion document titled ‘GST: Cross-border services, intangibles and goods’ which broadly proposes to align New Zealand with the general direction of reforms undertaken by a number of countries. The key suggestions include:
< >Introducing a new ‘place of supply’ rule so that services and intangibles supplied remotely by an offshore supplier to New Zealand-resident consumers will be treated as performed in New Zealand and therefore subject to GST.The new rules to apply to a wide range of ‘services’, which capture both digital and traditional services.A requirement for offshore suppliers to register and return GST when they supply services and intangibles to New Zealanders if their services exceed a given threshold in a 12 month period.In situations where offshore suppliers do not directly supply services to their customers, and instead use electronic market places to market and sell their services or intangibles, the electronic marketplace may be required to register for GST instead of the principal offshore provider.
Changes to closely held company tax rules
In New Zealand, companies are often the preferred vehicle when setting up a new business. They are well understood, underpinned by well-functioning legislation, flexible, and liability is generally limited to the amount of a shareholder’s investment.
However, the tax rules surrounding companies can be complex and not well suited to small businesses. In acknowledgement of this, the Look Through Company (LTC) regime exists to provide the corporate benefits described above, while ignoring the corporate form for tax purposes. Instead, an LTC is treated as a partnership for tax purposes and profits or losses ‘flow through’ to the shareholders.
Unfortunately, the devil has been in the detail, as the LTC rules themselves are also complex resulting in few companies electing into the regime. The IRD have recognised this and released an Official Issues Paper that proposes to make the LTC rules more user-friendly. The paper also considers changes to the treatment of capital gains and dividends.
Proposed changes to the LTC rules
The major changes proposed to the LTC rules include:
< >Eliminating the requirement for most LTCs to complete the loss limitation calculation because it has limited practical application.Changes to the eligibility requirements to allow more than one class of shares (provided all shares have uniform entitlements to income and deductions).Tightening the entry requirements for LTCs with trust shareholders. For example, a beneficiary that has received a distribution in the last six years will be a ‘counted owner’.Excluding charities and Maori authorities from being shareholders in LTCs.Restricting the amount of foreign income earned to the greater of $10,000 or 20% of its gross income when more than 50% of the LTC’s shares are held by non-residents.Clarification of the debt remission income rules, including a change that should mean no debt remission income arises when an amount owed to a shareholder by an LTC is remitted.
Doing your own Due Diligence
When purchasing a business it is important to understand its value. The value of a business will ultimately determine whether to purchase it and if so, how much to pay. A number of factors need to be considered when determining the value of a business, including; it’s financial position, future forecasts, existing customer relationships, staff structure and relationships, why the current owner is selling, your future exit strategy, and the list goes on.
Ideally, advisors who specialise in completing due diligence and financial analysis should be used. However, if that isn’t possible or if a ‘starting point’ is required before a specialist team is brought in, here are four key areas to focus on:
< >the reoccurring nature of revenue,the quality of earnings,what drives business growth, andthe business’s cash flow.
Understanding business revenue is integral to understanding the value of a business. A key question is therefore how is revenue secured going forward, i.e. how does the company retain their customer base? If business sales are generated by long-term contracts this will greatly increase the value of the business when compared to unsecured business sales that are retained by customer loyalty alone.
Further, if customer loyalty is attached directly to the existing business owner this can decrease the value of the business. Understanding what drives the business revenue provides a more in-depth understanding of the reoccurring nature of the revenue and what a new business owner will need to do to retain the same level of revenue.
Secondly, the quality of earnings must be examined. The earnings you use to value a business should be earnings that are maintainable into the future. Often within company accounts there are entries that distort a business’s true earnings. These can be one-off events that will not occur again in subsequent years such as a large cost or sale that is attributable to unusual circumstances. Staff and rent costs are often worth examining as it is common for these costs to not truly reflect their market price. All costs must be adjusted to market value to provide a fair reflection of profit.
Often, earnings will be forecast to grow into the future. If this is the case understanding what drives that growth is paramount. In order to analyse this it is useful to compare the historic accounts with the forecast accounts and analyse the key assumptions and key risks to achieve the growth. Assumptions should be realistic and the risks shouldn’t be understated.
Finally, the working capital requirements of a business should be examined. Every business has different cash flow requirements due to seasonal changes or supplier and customer relationships. Can future capital requirements be funded? Moreover, if the business is forecast to grow, what working capital is required to fund that growth?
Answers to the above questions will help determine whether the business is worth purchasing and might save some money when negotiating the price with the vendor.
Fit staff / Fit business
Productivity, budgets, utilisation, cash flow and market penetration are all areas that most businesses focus on as they strive for improved performance and growth. However, many organisations are also exploring and implementing ‘healthy’ initiatives that provide the dual benefit of improving the health of their employees, and the business.
Sick days and staff turnover
There are many benefits to regular exercise. One in particular, is the effect that exercise has on the brain. Exercise stimulates various brain chemicals that can leave you feeling happier and more relaxed, which can lead to improvements in diet and mental health. Take for example, an employee who has been for a run during their lunch hour. They are less likely to reach for an afternoon pick-me up, such as a chocolate bar at 3 o’clock, than an employee who has sat at their computer all day.
Regular physical exercise can help to prevent or control a wide range of health problems and concerns, which benefits not only the individual, but the organisation they work for as well. Healthy workers naturally take less sick days, and they are also more likely to remain in their job longer. According to a study by Towers Watson and the National Business Group on Health, voluntary resignations are lower at organisations with a highly effective wellness program (9%), compared to those whose programs are not as effective (14%).
Greater productivity and increased quality of work
Exercise has been proven to increase employee productivity at work and enhance the quality of their work because it increases employee stamina, concentration span and vitality. Researchers at Stockholm University demonstrated that devoting work time to physical activity can in fact lead to higher productivity. In a study that observed 180 dental staff over a 12 month period, they found that workers who spent 2.5 hours per week exercising had higher productivity compared to employees that did no exercise. The increase in productively was largely attributed to the increased stamina and less absenteeism caused by the increase in exercise.
Healthy workplace culture
It is also important to create a healthy workplace culture that complements any healthy workplace initiative. This culture should work to create a sense of core beliefs that promotes workplace health throughout the organisation. A healthy culture often starts at the top, when a good strong leader can inspire commitment and motivate their staff. Such a culture often attracts and retains motivated people that are committed to the business and its beliefs. By creating a sense of core beliefs that everyone in the organisation lives by and supports, a good leader can set expectations around how people treat each other, manage their work and deal with customers.
Investigating healthy initiatives for your business can be extremely worthwhile for both employees and the business. Employees usually feel happier and healthier meaning the business can benefit from greater productivity and increased employee engagement and retention. The potential gains a business can achieve from implementing healthy initiatives are worth exploring. Ideas to get started include team-building exercises, leadership training for senior managers, subsidised gym memberships or sports equipment, work based team sports, a “biggest loser” contest, encouraging lunchtime runs and arranging for external speakers, such as nutritionists, to speak on the premises.
Snippets
Further cuts to ACC levies
ACC must collect sufficient funds to cover the costs of all current and past claims. In 1999 the Government realised funding was insufficient to cover on-going costs of pre-1999 claims and therefore, introduced a ‘residual levy’ to build up adequate funds.
The residual levy has been incorporated into the work levy whereby, at present it comprises two components; (1) a current portion and (2) a residual portion. Each year, the current portion of the work levy is adjusted to reflect the most recent injury experience within the business’s specific industry. The residual portion however, has been fixed since 2005 and is based on the remaining cost of pre-1999 claims.
Following a recent valuation of ongoing claims costs, the Government has proposed to remove residual levies in 2016/2017, which could result in 75% of businesses paying a reduced levy.
Once the residual levy is removed, work levies will be fully calculated on more recent injury trends and industries with increased injury rates will pay higher levies (and vice versa), i.e. those who operate in industries with higher injury costs.
The Jedi Society Incorporated
The Jedi Society failed. Its mission was to register with Charities Services and qualify for tax exempt status. But the dark side of the force conspired against it and its application was denied.
The Jedi Society promotes ‘Jediism’, which is defined in the Society’s purposes as the advancement and promotion of the Jedi, to be Guardians of the Peace and to enable understanding and knowledge of the Force. The Society explained to Charities Services that the universal belief of Jediism is a belief in the ‘Force’ and that it “exists in every living thing, and binds everything together.”
The Charities Registration Board declined the application as they did not satisfy the requirement that it was established and maintained exclusively for charitable purposes. Specifically, Jediism was found to be insufficiently structured and not serious enough to advance religion. There was also insufficient evidence supporting the advancement of moral or spiritual improvement in a charitable manner.
Hence the Force, but not Charities Services, will be with them.
If you have any questions about the newsletter items, please contact us, we are here to help.
]]>Inland Revenue scrutiny]]>http://www.ckfthomas.co.nz/single-post/2015/11/10/Inland-Revenue-scrutinyhttp://www.ckfthomas.co.nz/single-post/2015/11/10/Inland-Revenue-scrutinyTue, 10 Nov 2015 08:35:48 +0000
ISSUE 4: NOVEMBER 2015 – JANUARY 2016
In the past, an IRD audit could be commenced for no other reason than the business had not been audited in recent years. Audits would start with the stereotypical interview comprising a series of broad questions that may or may not apply to the business, before the investigator would commence trawling through invoices looking to see if everything is in order.
More recently, the IRD have started using a variety of techniques to identify who to audit (such as data analysis). Once identified, a detailed background analysis (industry and the business itself) is usually completed before the audit commences. In some cases, contentious transactions or industry specific risks are identified before the IRD makes contact.
A noticeable increase in the sophistication and technical ability of the IRD Investigations staff has also been seen. This has its benefits and disadvantages. Time won’t be wasted on small issues as a result of technical inexperience. However, when an issue is identified it is more likely that the IRD Investigator will be able to establish non-compliance, or will have good reason to investigate further.
If you do receive a risk review or audit letter from the IRD it is important to take it seriously and adequately prepare for the process. An internal review could be completed first, as a form of risk assessment, but note a standard request from the IRD is to provide a copy of any internal or external review results – so care needs to be taken regarding how results are documented.
A professional and collaborative relationship with the IRD should be built from the first point of contact. During the initial meeting with the IRD a short overview of the organisation including its business and financial operations should be presented. Be prepared to discuss areas of risk within the organisation and the processes already in place to address those risks – such as the review process for GST returns. It should be clearly established how further information requests are made, e.g. in writing to a nominated point of contact who will be responsible for managing the audit on behalf of the business.
Tax advice previously provided by your advisors, which may include your accountant, is subject to “Privilege”. In some cases requests for information may be received, but the information does not need to be provided, or only extracts of it need to be provided.
It is important to make evident that your organisation meets its tax obligations with the appropriate level of rigour and management oversight. It is also important not to stress and let the process consume you. Utilise the skills of your professional advisors throughout. It won’t be their first time. It is a process, it just needs to run its course.
© 2015
]]>Newsletter Cockcroft Thomas August/ Oct 2015]]>http://www.ckfthomas.co.nz/single-post/2015/08/11/Newsletter-Cockcroft-Thomas-August-Oct-2015http://www.ckfthomas.co.nz/single-post/2015/08/11/Newsletter-Cockcroft-Thomas-August-Oct-2015Tue, 11 Aug 2015 02:24:50 +0000
NEWSLETTER
INSIDE THIS EDITION
What is the cost of your fixed term debt? 1The impact of ‘dairy’ 2Land – themes of change 2Trusts and shareholder continuity 3Snippets 4Tax inspectors without borders 4Trustpower case 4
All information in this newsletter is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.
What is the cost of your fixed term debt?
The Reserve Bank of New Zealand uses theOfficial Cash Rate (OCR) to maintain price stability, i.e. to keep inflation between 1% and 3% over the medium term. Given the recent drop in the OCR (from 3.5% to 3.25%) and the potential for
future reductions, it is timely to consider the benefits of changing the terms of your fixed term debt. For example, Bob fixed the mortgage on his rental property at 6.25% for three years. One year later, Bob’s bank is offering a 4.95% two year fixed interest rate. Bob is eager to change his mortgage tthe lower rate, so he sets up a meeting with his bank manager. At the meeting Bob is told that he can change interest rates but will be charged a $10,000 Break Fee.
Why is Bob charged this fee?
A break fee is generally charged as compensation for the loss the bank will suffer if the interest derived from an existing loan reduces as a result of a switch to a lower rate. It is generally calculated on the difference in the bank’s margin on the interest rates the borrower is moving between. For example, Bob borrowed $550,000 on a five year fixed term at 6.75% p.a. After three years Bob has $500,000 remaining on his home loan balance and wants to change interest rates to the better 4.95% on offer. Changing over to this interest rate would result in Bob’s bank losing about $18,000 of interest income. As a consequence, the bank may look to negotiate a fee of say $10,000 with Bob if he remains with the bank as an ongoing customer.As break fees can be significant, it is also important for Bob to know whether it can be deducted for tax purposes.
Tax deductibility of break fees
In 2012 Inland Revenue issued three public binding rulings relating to the deductibility of break fees incurred by landlords:
 BR Pub 12/01 - break fee paid by a landlord to
exit early from a fixed interest rate loan.
 BR Pub 12/02 - break fee paid by a landlord to
vary the interest rate of an existing fixed interest
rate loan (Bob’s situation).
 BR Pub 12/03 - break fee paid by a landlord to
exit early from a fixed interest rate loan on sale
of rental property.
Inland Revenue broadly concludes that break fees on borrowings are deductible where a landlord has borrowed to buy a property from which rental income is derived (or to refinance another loan for that purpose). However the timing of the tax deduction will depend on the situation in which the break fees are incurred.
If the break fee is incurred to repay the loan early, then the break fee will be deductible when it is incurred. In Bob’s situation, where the break fee is
paid to vary the interest rate under the loan, it willdepend on whether he is a cash basis person or not. Whether someone is a cash basis person is determined by the levels of debt and deposit arrangements to which they are a party. Cash basis Bob is able to deduct the amount of the break fee when it is incurred, unless he has chosen to adopt a spreading method, in which case it will be required to be spread over the term of the loan. Non-cash basis Bob will have to spread the fee over the term of the loan.
Whether or not to switch should be decided based on the cash flow cost to do so, the final negotiated fee with the Bank, whether interest rates are expected to increase or decrease and when the benefit of the tax deduction will be claimed.
The impact of ‘dairy’
Fonterra's latest estimate of the dairy payout for the 2015/16 season is $3.85/kg milk solids. This comes off a record $8.40/kg for the
2013/2014 season. It is estimated the average dairy farmer needs $5.60/kg of milk solids to breakeven, so it goes without saying that financial upheaval is
coming, but how significant and wide reaching will it be?
The extent of the impact is likely to go beyond discretionary commercial spending, on items such as infrastructure and new equipment, and extend to personal spending on items such as entertainment, transport and clothing. Rural communities across the country will feel the economic pressure. Banks will focus on highly indebted farmers, and some are likely to be forced to sell their farms. As the risk factor across the agricultural sector worsens, banks
will adjust their margins across their wider lending portfolio (a means banks use to spread their risk) which could drive an increase in the cost of debt for all borrowers.
The New Zealand exchange rate
With the United States dollar has been consistently dropping over the past 18 months, in part being exacerbated by the drop in the diary pay-out, and this will cause the price of all imports to rise – private and commercial.
Despite the milk price dropping, it was a positive sign to see 126,063 people attend the 2015 National Agricultural Fieldays. That is over 6,000 more than last year. However, the true test will be what the revenue numbers will be for spending at
the event. Last year, equipment sales of $369m occurred.
On the bright side, ‘dairy’ comprises 20 per cent of New Zealand’s exports, so although it is material, it is not the only egg in New Zealand’s basket. The remaining 80 per cent of exporters will enjoy the benefit of the lower New Zealand dollar. The tourism sector is also expected to grow as a result of the change in the exchange rate.To survive, it is essential that all businesses that
are reliant on the dairy industry ensure they are resilient and well prepared. Being proactive and talking to your banker and accountant early is key.
Forecast cash flow and budgets should be reviewed and revised to ensure they are realistic. Further, methods for creating cost efficiencies should be implemented to ensure your business remains competitive…and survives.
Land – themes of change
There is currently significant public interest in the New Zealand housing market, whether it be issues relating to the Auckland ‘bubble’, property speculation, non-resident buyers, banking restrictions or a combination of these. In response, the Government is introducing a number of changes designed to either directly influence the market, or assist with decision making when deciding whether further changes are required.
The key changes are summarised below.
Bright-line test
In the 2015 Budget the Government announced a new bright-line test that will apply to residential property acquired from 1 October 2015. The test will require income tax to be paid on any gains from the sale of residential property bought and sold within two years, with the exception of the ‘family home’, inherited property and property transferred in a relationship property settlement.Inland Revenue has now released an issues paper setting out how the test might work and to ask for feedback on the finer details.
It is proposed that the two-year period will run from the date a purchase is registered on Landonline (Land Information New Zealand’s online centre), and end on the date the person enters into a sale and purchase agreement.
Because of the risk (from the Government’s perspective) that the new rules could apply at the height of Auckland’s property bubble, the issues paper recommends that losses incurred on the sale of land should be ring-fenced and only able to be offset against profits from other land sales.
IRD numbers for purchase and sale of property Buyers and sellers of residential property will be required to provide their IRD numbers at the time a property is transferred.
Information New Zealand as part of the transaction process. There is an exclusion for New Zealand individuals purchasing or selling their main home (only one main home is allowed). But the exclusion doesn’t apply to:
 someone selling their third main home in two
years,
 trusts, or
 non-residents.
Where a person is currently a tax resident of a nother jurisdiction, they will also be required to provide their country of residence and their overseas equivalent of an IRD number.
This initiative is designed to provide the Government with better information regarding the volume of overseas buyers purchasing in New Zealand and improve Inland Revenue’s ability to enforce income tax obligations and prevent tax evasion. Whilst the need for the change has merit, it will mean a large number of private Trusts that don’t derive income will have to register with Inland Revenue and face annual compliance costs going forward.
Reserve Bank of NZ (RBNZ) Deposit changes The RBNZ’s deposit rules will change from 1 October 2015. Banks will be required to limit lending for residential property investment in Auckland at LVRs greater than 70% (i.e. a 30% deposit) to 2% of new lending. This initiative aims to promote financial stability by slowing down investor activity in the Auckland region.
For those outside Auckland, the minimum deposit requirement will remain at 20%, but instead of lending below this threshold being capped at 10%, it will be relaxed to allow 15% of new lending to have a deposit below 20%.
Trusts and shareholder continuity
New Zealand has one of the highest number of Trusts per capita in the world. One of their common uses is to act as shareholder of family operated companies.
Despite this wide use of Trusts in corporate structures, it is surprising how often the tax consequences of changes to the Trust are not properly considered, such as a result of a divorce.
In order for a company to carry forward tax losses and imputation credits, certain levels of shareholder continuity must be maintained. The risk for a company with a Trust as its shareholder is that changes to the terms of a Trust Deed can result in a ‘resettlement’ of the Trust (akin to the termination of the old Trust and formation of a new Trust). The change could give rise to the transfer of shares to a new shareholder leading to the forfeiture of a company’s losses and/or imputation credits.
There are no formal guidelines in New Zealand and a lack of commentary for determining whether a variation to a Trust Deed will lead to a resettlement, however guidance can be derived from Australian law.
The Australian Taxation Office (ATO) has released a Decision Impact Statement, which considers the Full Federal Court decision of Commission of Taxation v Clark & Anor (Clark), and sets out the ATO’s view on when changes to the terms of a Trust Deed will result in a resettlement.
A previous Australian High Court decision had established the three main criteria for determining the continuity of a Trust were: the constitution of the Trust under which it operates, the Trust property, and the membership of the Trust. In Clark the following changes had been made:
• A change of trustee,
• A material change in who would benefit under
the Trust,
• A change in Trust property,
• A number of changes associated with rights of
indemnification between the old trustee and
beneficiaries, and the new trustee,
• A discharge of liabilities, and
• A transition from a dormant Trust to an active
Trust.
The Full Federal Court rejected the ATO’s contention that the changes to the Trust resulted in ‘substantial discontinuity’ with respect to each of the criteria. The Court held that provided the Trust was amended under a power of amendment as set out in the Trust Deed, and the continuity of property of the Trust is established, then regardless of the changes there is no resettlement of the Trust.
Although the outcomes in Clark and the ATO’s Decision Impact Statement are favourable, it is unclear how much weight Inland Revenue would place on them. Irrespective, it is important to consider the impact of any changes to a Trust’s Deed, whether they will give rise to a resettlement of a Trust and the implications of a resettlement.
Snippets
Trustpower case
Inland Revenue has won an appeal against Trustpower involving the deductibility of feasibility expenditure. The Court of Appeal has ruled that $17.7m of costs incurred to investigate and apply for resource consents are non-deductible, even though the costs were incurred before any decision was made to proceed with the project for which they were being acquired.
The Court of Appeal concluded expenditure incurred on possible projects was for the purpose of extending, expanding, or altering Trustpower’s business, and is not part of carrying on its ordinary business activities. On this basis, the expenditure is on capital account and not deductible.
The decision is of concern because it appears to result in all feasibility expenditure incurred to investigate potential capital projects being on capital account (and thus potentially ‘black hole expenditure’ if the project does not proceed). It is contrary to existing case law and Inland Revenue’s own interpretation statement on the matter, which leaves the law in a state of confusion.
Trustpower is to appeal the decision to the Supreme Court, though it is unlikely the outcome will be known until the latter half of 2016. Given the current uncertainty it is hoped that Inland Revenue will issue its view and advice on the decision.
Tax inspectors without borders
A new initiative, dubbed "tax inspectors without borders" has been launched to help poor countries August 2015 to October 2015 Page 6 of 4 crack down on tax avoidance and fund their own development.
According to policy research group, Global Financial Integrity, nearly US$1 trillion is estimated to leave poor countries each year in illicit finance, stemming from tax evasion, crime and corruption.
To help developing countries stop these outflows, the "tax inspectors without borders" initiative will see experts from well-functioning states lend a hand to officials in poorer countries with carrying out audits to detect tax dodging; mainly by multinationals (a number of multinationals are using aggressive tax planning to reduce their tax bills, or avoid paying taxes altogether).It is hard to imagine how such an initiative will play out given the dangers that exist in some developing countries around the globe – do we picture paramilitary types carrying calculators.If you have any questions about the newsletter items, please contact us, we are here to help.
ACCOUNTANTS CLIENT NEWSLETTER 2
AUGUST 2015 – OCTOBER 2015
Deduction disallowed for management fee
The days of trading in your personal name are long gone. Whether trading occurs through a company or multiple companies, held by a Trust with a corporate trustee or multiple Trusts with multiple corporate trustees, either way, the utilisation of special purpose entities is common. Because of the common control that exists in these situations, it is all too easy for transactions between entities to be poorly documented. A recent Taxation Review Authority (TRA) decision reminds us all of the need to do better.
The TRA decision related to whether a taxpayer was entitled to a tax deduction for a management fee that had been charged by a related entity. The problem was that there was no evidence that management services had actually been provided and the deduction was disallowed.
The case, TRA 013/10, involved a dispute between Inland Revenue and Q Land Trustees Ltd (Trustee), the corporate trustee of the Q Land Trust (the Trust). During the 2005 income year, the Trust claimed a $1,116,000 deduction for management fees paid to Q Land Ltd (a company it indirectly owned). The management fee reduced the Trust’s income to zero and was absorbed by the company’s tax losses. Inland Revenue disallowed the deduction on the basis that it was not incurred in the derivation of gross income or, it was part of a tax avoidance arrangement.
The Trustee relied on the decision in Lockwood Buildings Ltd V C of IR (1996) 17 NZTC 12,483 (Lockwood), which made it clear that an arbitrary allocation of management expenses is acceptable. In Lockwood a holding company took over the management services for its multiple subsidiary companies and received a combined management fee of $1,901,821. The High Court upheld the deduction for management services.
However, the TRA found the facts in Lockwood were distinguishable from the present case as the costs were clear and properly documented. This was in contrast to the Trustee’s case where the fee was not fixed by reference to its costs but simply by reference to the Trust’s total income and the charge could not be supported by any written management agreement, invoices or company resolutions.
The TRA ruled in favour of Inland Revenue, denying a deduction on the grounds that there was no sufficient connection between the fees and the carrying on of Q Land Ltd’s business and there was no record that any management services were in fact supplied. This was despite the TRA acknowledging that the Trust required management services.
Not only was the $1,116,000 deduction denied, but the Court also ruled that it was a tax avoidance arrangement, lacking commercial reality. This decision was reached once the TRA had concluded it was not Parliament’s intention for a company’s loss to be transferred to a Trust, which was the effect of the management fee. The TRA stated that the management fee served no commercial purpose. A shortfall penalty of $184,000 was imposed for taking an abusive tax position (reduced by 50% for previous behaviour).
This case brings about a strong reminder – transactions between commonly controlled entities should be approached no differently than if it was a transaction between third parties.
© 2015
]]>Cockcroft Thomas Newsletter May- July 2015 Modernising New Zealands Tax System]]>http://www.ckfthomas.co.nz/single-post/2015/05/25/Cockcroft-Thomas-Newsletter-May-July-2015-Modernising-New-Zealands-Tax-Systemhttp://www.ckfthomas.co.nz/single-post/2015/05/25/Cockcroft-Thomas-Newsletter-May-July-2015-Modernising-New-Zealands-Tax-SystemMon, 25 May 2015 07:16:23 +0000
The Government has released two discussion papers to engage in public consultation on options for simplifying and modernising New Zealand’s tax system. The documents introduce taxpayers to the general direction the Government intends to take to improve administration of the tax system.
Basically, the Government wants to simplify tax for individuals and businesses by reducing compliance costs, and making interactions with the IRD faster, more accurate and convenient with a greater use of electronic and online processes. As the IRD puts it, “tax obligations should be easy to comply with and hard to get wrong”.
The first discussion paper ‘Making tax simpler – A Government green paper on tax administration’ outlines the overall direction of the tax administration modernisation programme. Key elements of potential change include:
Simplifying tax for businesses, for example by streamlining the collection of PAYE, GST and other withholding taxes and integrating these obligations into business processes. Options will be investigated for simplifying the calculation of provisional tax – with more emphasis on real time information, together with payment options that better reflect taxpayer’s cash flows.Simplifying tax for individuals by providing online income tax statements for individuals pre-populated with income details, so that all that would be required is to ‘check and confirm’. Technology will be used more effectively to better manage both overpayments and underpayments of tax.Social policy objectives would be met by using information that the IRD or the Government already holds, providing for timely payments on a more real-time basis, resulting in certainty for individuals and families. With faster, more accurate information, there should be less chance of people receiving too much and going into debt.
The IRD wants to make tax obligations part of the normal day-to-day business processes, making it quick, easy and harder to get things wrong.Consultation closes on 29 May 2015.The second discussion document ‘Making tax simpler - Better digital services’ outlines proposals for greater use of electronic and online processes. In particular the discussion document considers whether secure digital services can be delivered using the current policy and legislative framework and discusses options to move people to digital services, these include:
The IRD working with third parties such as banks and business software developers so that tax interactions are built into a customer’s regular transactions rather than managing tax separately at specific times of the year.Non-digital services will need to be provided for those who still cannot use digital services.A process would be developed for moving to a digital format those who could potentially use digital systems for some services - in circumstances where there would be wider benefits accrued.
Consultation closes on 15 May 2015.These are the first two releases in a series of public consultations designed to modernise and simplify the tax system. Further discussion documents will be released over the next two years and public feedback is requested.The significance of this process can’t be overstated. In an age where changes in lifestyle as a result of technology have moved at an explosive rate, the design, administration and technology associated with our tax system have not kept up.Holding a parent company liable for the debts of its subsidiaryA recent High Court decision, Lewis Holdings Ltd v Steel & Tube Holdings Ltd (2014), demonstrates that structuring a business or entering into new business ventures through separate companies to ring fence risk may not always be as effective as people think.The case involved a property that had been leased by Lewis Holding Limited (Lewis) to Stube Industries Limited (Stube). Stube is a subsidiary of Steel & Tube Holding Limited (STH). In 2013, Stube was placed into liquidation and Lewis filed a claim against Stube for debts owed under the lease agreement. However, under a rarely utilised provision of the Companies Act, the liquidator sought an order requiring STH to pay Stube’s debts. The provision looks at to what extent a company took part in the management of, and is responsible for the company being placed in liquidation.The High Court decided in favour of Lewis, requiring STH to pay the full amount claimed by Lewis, i.e. a parent company was held liable for the debts of its subsidiary. The Court based its decision on the following key findings:
The CEO and CFO of STH were directors of Stube and did not approach their duties as directors in a way that recognised Stube as a separate legal entity.The STH group of companies acted as a single unit. Stube was more akin to a division of that unit, for example, their financial affairs were intertwined and Stube had no separate bank account.STH treated the lease as their own and made lease payments to Lewis. This provided Lewis with the impression that Stube was not treated as a separate legal entity by STH.Stube had no employees, but used STH’s employees to conduct business. This supply of services was not reflected in a written agreement, and no intercompany charge occurred.Stube did not obtain independent advice when entering major transactions.Stube’s fate was sealed when STH stopped financially supporting it.
The decision flags the need to take a best practice approach when operating what is essentially a single business across multiple companies, which is extremely common in New Zealand.The decision is to be appealed and the final outcome might change. But regardless of the outcome, it won’t change the need to take a best practice approach.New Tax BillOn 26 February 2015, the Government introduced the Taxation (Annual Rates for 2015 – 16, Research and Development, and Remedial Matters) Bill (the Bill). It is the first sizeable bill to introduce amendments to the tax rules since November 2013. The Bill contains changes intended to address tax impediments to research and development (R&D) and innovation, and to clarify goods and services tax (GST) rules for body corporates.This article provides a brief summary of the key changes proposed by the Bill.R&D tax lossesThe Bill includes legislation to allow tax loss-making R&D companies to "cash out" their tax losses from R&D expenditure. The main eligibility requirements are that the company must be a loss-making company resident in New Zealand, with a sufficient proportion of expenditure on R&D. Companies that qualify will be able to receive 28% (the current company tax rate) of their qualifying expenditure as a cash refund from IRD, capped at $140,000 for the 2015 – 16 year. The threshold increases by $84,000 per year, over the next five years to $560,000.Black hole expenditure and intangible assetsThe Bill amends the rules relating to "black hole expenditure" (business expenditure that is not immediately deductible for income tax purposes and cannot be deducted over time as depreciation). The proposals are targeted primarily at black hole R&D expenditure.
There are a number of anomalies under the current rules which are to be fixed. Intangible assets are generally able to be amortised if they have a defined useful life (such as a patent). If costs are incurred to develop an asset with no defined life (such as a trademark) and that asset is written off, no tax deduction is available. In this situation a tax deduction is to be allowed.
Also, there is some uncertainty around what costs can be included when amortising intangible assets, e.g. a patent versus the underlying knowledge covered by the patent. The rules will be amended to extend an asset’s “cost” to include the underlying item of depreciable intangible property.The list of intangible property that is able to be amortised will be amended to include a design registration, a design registration application and a copyright in an artistic work that has been applied industrially.GST and bodies corporateThere has been considerable uncertainty and media coverage in recent years regarding the GST position of bodies corporate. The Bill proposes to clarify the situation by amending the GST rules to reflect that a service provided by a body corporate to a member is a supply that is subject to GST. However, those supplies are excluded when determining whether the total value of the supplies made by a body corporate exceeds the compulsory GST registration threshold. This effectively gives bodies corporate the option of registering for GST. There are a number of rules being introduced to ensure the rules aren’t ‘gamed’ or taken advantage of – these should be examined in detail before a position is taken.Health & Safety reformEach year on average, 75 people die on the job and 1 in 10 people are injured at work. With statistics this high, it’s not surprising the Government is reforming New Zealand’s health and safety landscape.A new Health and Safety Reform Bill (the Bill) is currently before Parliament and is expected to pass later this year. The Bill will create the new Health and Safety at Work Act, replacing the Health and Safety in Employment Act 1992 and aims to reduce workplace injury and death tolls by 25 per cent by 2020. The Bill introduces changes to the allocation of health and safety duties in the workplace and increases the compliance and enforcement tools available to inspectors.Under the current legislation, there is a primary focus on the employer and employee roles and duties are carefully placed on defined participants (such as employers, principals, the self-employed etc).The new Bill introduces the concept of a ‘Person Conducting a Business or Undertaking’ (PCBU), which replaces the previous duty holders. The PCBU will be allocated primary duties of care with regards to health and safety at work where they are in the best position to control risks to work health and safety.The primary duty of care requires all PCBUs to ensure, so far as is reasonably practicable:
the health and safety of workers employed or engaged or caused to be employed or engaged, by the PCBU or those workers who are influenced or directed by the PCBU (for example, workers and contractors), andthat the health and safety of other people is not put at risk from work carried out as part of the conduct of the business or undertaking (for example visitors and customers).
The problem is that sport clubs have limited cash flow and are struggling to meet their liability. According to media reports, the pan tax is often one of the biggest expenses incurred by clubs, and members believe it is not a fair expense. "People already pay pan tax at home. It doesn't matter if you are going at home or at the club, you've already paid for it" said a local club member.Club calls to flush this tax down the drain have resulted in the Council reviewing the tax in their latest public consultation document.If you have any questions about the newsletter items, please contact us, we are here to help.This means that PCBUs will need to think broadly about who they affect through the conduct of their business or undertaking, rather than just direct employees or contractors. Where there are overlapping health and safety duties (such as multiple contractors on a building site), each PCBU has a duty to consult and co-operate with the other PCBUs to ensure health and safety matters are managed.A new duty proposed under the Bill is that an ‘officer’ of a PCBU (such as a company director or partner), must exercise due diligence to ensure that the PCBU complies with its duties. This places a responsibility on people at the governance level of an organisation to actively engage in health and safety matters, reinforcing that health and safety is everyone’s responsibility.Workers also have specific health and safety duties at work and the Bill defines the duties they owe and are owed (for example, a duty to take reasonable care of their own health and safety). The Bill will also apply to volunteers in certain circumstances.The Bill provides a wider range of enforcement tools for inspectors and for increased penalties for infringements. There will be three types of offences for a breach of a health and safety duty and a breach will be graded based on the conduct of the duty holders and the outcome of the breach. For example, a person may be jailed for up to five years if they have a health and safety duty and, without reasonable excuse, are reckless and engage in conduct that exposes a person to a risk of death or serious injury or illness. A body corporate in a similar position may be fined up to $3 million.There will be several months between when the Bill is passed and when it comes into force to give people time to prepare for the new regime.SnippetsSummary of IRD ratesUse-of-money interest - the rates on underpaid and overpaid tax rose on 8 May 2015. The interest rate charged on underpaid tax went from 8.40% to 9.21%, and the rate for overpaid tax rose from 1.75% to 2.63%. This movement aims to align the rates with the market interest rates and were last updated in May 2012.ACC earners levy rate - the ACC earners levy rate for the 31 March 2016 year is 1.45%, the same rate as last year. For employees, the maximum earnings on which the levy is payable is $120,070.FBT rate for low interest loans - the last notified prescribed rate of interest used to calculate fringe benefit tax on low-interest employment-related loans was 6.70% for the period 1 October 2014 to 31 December 2014. This was up from the previous rate of 6.13%.Personal marginal tax rates - no changes are proposed to the income tax rates for individuals for the 2016 tax year. The lowest marginal tax rate is 10.5% for taxable income up to $14,000, then 17.5% up to $48,000, 30% to $70,000 and the top rate is 33% on income over $70,000.Pan taxOf all the weird and wonderful taxes imposed around the world, it was surprising to find one in our own back yard. New Plymouth sports clubs pay tax on the number of toilets they have. This ‘pan tax’ is imposed by the council and is effectively a sewer charge.
All information in this newsletter is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.
]]>Feature of the month : Top tips from Aegis Life's Marjan Keirk !http://www.ckfthomas.co.nz/single-post/2015/03/02/Feature-of-the-month-Top-tips-from-Aegis-Lifes-Marjan-Keirk-http://www.ckfthomas.co.nz/single-post/2015/03/02/Feature-of-the-month-Top-tips-from-Aegis-Lifes-Marjan-Keirk-Mon, 02 Mar 2015 23:54:49 +0000Newsletter Feb - April 2015]]>http://www.ckfthomas.co.nz/single-post/2015/02/14/Newsletter-Feb-April-2015http://www.ckfthomas.co.nz/single-post/2015/02/14/Newsletter-Feb-April-2015Sat, 14 Feb 2015 00:00:00 +0000