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
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.