Inside this edition
Internet of things. 1
Mixed use assets 2
Mini-Budget – families package 3
Loss offsets and subventions 3
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:
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 di