Here’s where we keep you informed of legislative and economic changes in New Zealand, changes to our business, or anything else which may impact on how we do business. Where relevant, we'll also point out some possibilities you may want to consider that these changes may create. Items older than three months have been archived, and you can see more detail of the relevant changes in a month by clicking on the relevant [arrow] or heading.
February 2010 - Budget, Government Announcement, LAQC's and tax avoidance
The sale of private homes to loss attributing qualifying companies to generate tax deductions - The IRD has issued an Alert in response to their recent tax avoidance win over a taxpayer who sold their own or family home to a LAQC, then rented the property back to themselves (even at a market rate) and claimed tax deductions for the property that would otherwise have been considered to be private expenses. IRD's current view is that this type of LAQC is a tax avoidance arrangement and will fall under section BG 1 of the Income Tax Act 2004, as many of the expenses would not be deductible if the home was personally owned because the Act does not intend that private expenses can be deducted. IRD acknowledge that section BG 1 might not apply to all instances where a home is rented from a LAQC so they will independantly review each case on its own facts before a final decision is made. The Alert can be read in full http://www.ird.govt.nz/technical-tax/revenue-alerts/revenue-alert-ra0701.html
The Government's Priorities for 2010: A growth enhancing tax system – The Government will be introducing measures this year to reform the tax system. These will be announced as part of the Budget in May. Changes will include:
- Changing the way property is taxed, which will result in increased Government revenue and more fairness for taxpayers. There were no detail on how that would happen, but his speech ommitted any reference to the removal of tax depreciation on buildings, nor ending the ability of investors to write off losses on property against other income.
- Carefully considering a modest increase in the rate of GST, to no more than 15 percent. Increases to GST would be accompanied by across-the-board reductions in personal taxes, as well as up-front increases in benefits, NZ Superannuation and working for Families payments.
- Looking at how to make Working for Families fairer to avoid circumstances where people can earn a lot of income but do so in a way that means they are still eligible for Working for Families payments.
The Government will not be developing any proposals for a land tax, nor a comprehensive capital gains tax, or a risk-free return method for taxing residential investment properties.
Beneficiaries will face tough new measures in legislation set to be passed this year:
- The criteria and testing for the sickness benefit would be changed - "to ensure it only goes to those people who are genuinely too sick to work".
- Appointing a working group of experts to recommend ways to reduce long-term welfare dependency.
- Having strict re-application rules for people on the unemployment benefit and an increase in the work and training expectations for people on the Domestic Purposes Benefit.
- Changes to the benefit abatement regime, to improve incentives for beneficiaries to work.
Budget to be delivered on 20 May - Finance Minister Bill English confirmed Budget 2010 will be delivered on May 20 and will set out important policies to lift economic growth and give hard-working New Zealanders incentives to get ahead.
January 2010 - Family Tax Credits, RWT, Associated persons, PAYE, Secondary Tax, FBT, What's Possible (Trusts), Mortgage break fees, Tax Working Group proposals
Minimum Family tax credit rises – From 1 April 2010, the annual amount of the minimum family tax credit that guarantees a family's after tax income rises from $20,540 to $20,800.
Changes to RWT rates and thresholds – From 1 April 2010 RWT rates on interest will be aligned with recent changes to personal tax rates and the company tax rate.
Further change to associated persons definition – from 8 December 2009 a trustee and a beneficiary of a trust are no longer associated if one is a charitable trust and the supply between the trust and the beneficiary enables the charitable trust to carry out its purpose. Further, two trustees of trusts with a common settlor are no longer associated if either trustee is a charitable trust and the supply is made carrying out the charitable purpose.
No more annual PAYE tables – The IRD will no longer be sending out printed PAYE tax tables to employers. Employers will now have to rely on payroll software or alternatively the IRD PAYE calculator at https://interact1.ird.govt.nz/forms/payecalculator/
New secondary tax rates – From 1 April 2010 a new secondary rate tax of 12.5% for individuals who expect their total income from all sources to be less than $14,000 for the year. New calculations for extra pays and lump sum payments will also be introduced.
New FBT rate on low-interest, employment-related loans - From 1 October 2009, the FBT prescribed rate on low interest loans reduces to 6.00%.
What's Possible has been updated - Whether you have a trust or are thinking of using one, you need to read this. You may be wasting thousands of dollars either getting a trust, or in managing it. Worse still, your trust may not hold up under scrutiny and any assets you placed in your trust could be ‘fair game’ to any partner or creditor.
This article won’t explain what a Trust is, but it will help you understand how you can increase the likelihood your trust will survive any claim by an aggrieved beneficiary, relative or partner, creditor, or official assignee under bankruptcy. Follow me >
Public rulings on break fee deductibility – On 16 December 2009, the IRD issued public binding rulings, BR Pub 09/09: “Deductibility of break fee paid by a landlord to exit early from a fixed interest rate loan” and BR Pub 09/10: “Deductibility of break fee paid by a landlord to vary the interest rate of an existing fixed interest rate loan”.
Generally speaking, where the loan is repaid early (whether replaced by further borrowing from the same or another financial institution or not), then a base price adjustment will be required which should result in the overall cost being treated as interest. An automatic deduction for the interest will be allowed for a company, and other entity types will need to consider the interest costs in light of the general deductibility rules.
Where the interest rate of the loan is simply renegotiated during the term of the loan and the existing loan continues, then no base price adjustment will be required. Instead, a full deduction in the year will be allowed for 'cash basis' persons (natural person, income from financial arrangements < $70,000 p.a., total value of financial arrangements held during the year < $600,000, and the difference between financial arrangement income calculated using the cash basis method and either the straight line or yield to maturity method is < $20,000), otherwise the cost must be spread over the term of the loan.
Tax Working Group releases final report - The TWG was established by Victoria University of Wellington's Centre for Accounting Governance and Taxation Research, in conjunction with the Treasury and the Inland Revenue Department. On 20 January 2010, the TWG released its final report believing the problems with the current tax system are such that it requires significant change. The main recommendations of the group are as follows:
- The company, top personal and trust tax rates should be aligned to improve the system's integrity.
- New Zealand's company tax rate needs to be competitive with other countries' company tax rates, particularly that in Australia.
- The imputation system should be retained. (This may need to be reviewed if Australia decides to move away from its imputation system).
- The top personal tax rates of 38% and 33% should be reduced as part of an alignment strategy and to better position the tax system for growth. Where possible, personal tax rates should be reduced across-the-board to ensure lower rates of tax on labour more generally.
- Base-broadening is required to address some of the existing biases in the tax system and to improve its efficiency and sustainability.
- The most comprehensive option for base-broadening with respect to the taxation of capital is to introduce a comprehensive capital gains tax (CGT). However, the TWG has significant concerns over the practical challenges arising from a comprehensive CGT and the potential distortions and other efficiency implications that may arise from a partial CGT.
- The other approach to base-broadening is to identify gaps in the current system where income, in the broadest sense, is being derived and systematically under-taxed (such as returns from residential rental properties) and apply a more targeted approach.
- A low-rate land tax should be introduced as a means of funding other tax rate reductions.
- The following targeted options for base-broadening should be considered for introduction relatively quickly: Removing the 20% depreciation loading on new plant and equipment; Removing tax depreciation on buildings (or certain categories of buildings) if empirical evidence shows that they do not depreciate in value; Changing the thin capitalisation rules by lowering the safe harbour threshold to 60% or by reviewing the base for calculating this measure.
- GST should continue to apply broadly. There should be no exemptions.
- Increasing the GST rate to 15% would have merit on efficiency grounds because it would result in reducing the taxation bias against saving and investment. However, any increase in the GST rate would need to be accompanied by compensation to those on lower incomes. This would significantly reduce the net revenue raised from a higher GST.
- There should be a comprehensive review of welfare policy and how it interacts with the tax system, with an objective being to reduce high effective marginal tax rates.
- The Government should introduce institutional arrangements to ensure there is a stronger focus on achieving and sustaining efficiency, fairness, coherence and integrity of the tax system when tax changes are proposed.
The Government has stated that it will carefully consider the report on options for improving New Zealand's tax system as part of Budget decision-making. It is important to note that these are merely recommendations only and nothing has changed. Whether the Government accepts any of these recommendations in full or in part will not be known until the coming Budget this year.
December 2009 - Student Loan bonus, Attribution of Personal Services Income, Extensions of time, Beneficiary income
Student Loan bonus scheme – If you are a student loan borrower, and you make payments on or after 1 April 2009 that are at least $500 more than the minimum amount you are required to pay for that same tax year, the Government will pay an additional bonus for you of 10% of the amount overpaid. Any bonus will be calculated after the end of the tax year and credited against the loan as at the following 1 April. To qualify, your student loan must be up to date with no arrears.
Threshold for attribution of personal services income – From 1 April 2008, the $60,000 income threshold in the personal services attribution rule has been raised to $70,000 bringing it into line with the new personal tax rates introduced in 2008.
Extension of time arrangements for taxpayers without a tax agent – Taxpayers without a tax agent are required to lodge their income tax return(s) for the year ended 31 March with the IRD by 7 July in that same year (i.e. they would have 98 days to prepare and file their return). Tax Agents with an extension of time have until 31 March the following year in which to lodge (i.e. 365 days to prepare and file a taxpayers return). A taxpayer without a tax agent may now request by phone or in writing from the IRD, for an extension of time to file their annual income tax return.
Amended definition of beneficiary income - The definition of beneficiary income has been amended from the 2009/2010 and later income years. The amended definition extends the 6 month period within which a trustee must allocate income to the later of: the end of the 6 month period, OR the period within which the trustee either files or is required to file a return. Just ensure the trust deed provides that income is available to be paid or applied outside the 6 month period, as most trust deeds state that income must be paid or applied within a six month period.
Infinite Possibilities has a new postal address - We've had to change our postal address and you can now send mail to us at PO Box 12274, Chartwell 3248, Hamilton.
November 2009 - FBT, Family tax credits
Minimum family tax credit rises - The Government has announced that the annual amount of the minimum family tax credit that guarantees a family's after-tax income will rise from $20,540 to $20,800 from 1 April 2010. The change to the minimum family tax credit, which takes into account the impact of rises in inflation on benefit rates, was approved by Order in Council on 23 November 2009.
FBT rate for low-interest loans down - On 24 November 2009, the Government announced that the prescribed rate used to calculate fringe benefit tax on low-interest, employment-related loans will fall from 6.41% to 6.00% from the quarter that began on 1 October 2009. The new rate was set by Order in Council on 23 November 2009.
October 2009 - Loss Attributing Qualifying Company and tax avoidance, Associated persons, What's Possible (Webpages)?
Own-home Loss Attributing Qualifying Company ("LAQC") was tax avoidance arrangement - On 23 October 2009 the Taxation Review Authority (“TRA”) held that Mrs B ("the shareholder") entered into a tax avoidance arrangement by renting her residential home from a LAQC in which she was the sole shareholder. The LAQC failed because:
- The rental activity was not carried out on an arm's length basis - There was no third party tenant introducing external funds into the "business". The property was the only asset of the LAQC. The sole shareholder had been the only tenant for the four years in dispute. The purchase of the $290,000 house was funded completely by an interest bearing loan from the shareholder’s trust (which borrowed $160,000 from the Public Trust whom took a mortgage over the LAQC owned house). All funds and expenses were sourced solely from the shareholder as neither the LAQC nor the trust had a bank account. And while there was a tenancy agreement between the taxpayer and the LAQC, Mrs B paid the ‘rent’ directly to the Public Trust; and
- The property was the private residence of the shareholder and the LAQC's tax losses were generated by tax deductions arising from the shareholder's expenditure that would normally be private or domestic to her.
If you are using an LAQC to rent your own home back to you, you need to ensure that your structure can survive the IRD's scrutiny and it isn't perceived as artifical and contrived. Call us if you want help identifying any risk, or reducing the likelihood of your LAQC being seen as a tax avoidance structure by the IRD.
Infinite Possibilities now has its own office space - On 31 October 2009 we moved into our new office premises located at Unit 4, Chartwell Professional Suite, 9 Lynden Court, Chartwell, Hamilton, New Zealand. We invite you to stop by and visit us for a chat about your accounting needs. Our postal address remains unchanged at 42 Winchester Place, Rototuna, Hamilton 3210. Our new office has a library of interesting books you can read if you happen to be waiting for us. And you can choose to have your meetings with us in an indoor room or a private outdoor courtyard (if you'd prefer the fresh air and sunshine) to discuss your needs.
New definitions of associated persons - The main changes include:
- there are new tests focusing on a trust's settlor (that is, the person who provide property to a trust).
- aggregating the interests of associates to prevent the test relating to companies being circumvented by the fragmentation of interests among close associates.
- a tripartite test associating two persons if they are each associated with the same third person, thereby making the associated persons tests as a whole more difficult to circumvent.
The general application date for the reforms (excluding those applying for the land provisions) is the 2010/11 and later income years. The changes relating to land transactions generally apply to land acquired on or after 6 October 2009.
What's Possible has been updated - This month we've posted an article about the lessons we learned while building a website. We took everything we learned while building our web site and condensed it down into two and a half pages of information focussed on eight key points relevant to building the web site you want. We guarantee there's something here that will save you time, money and lead to you having a site that works for you. Follow me >
August 2009 - What's Possible (Recession)?
What's Possible has been updated - If you're employed or unemployed and finding things difficult in light of the 'Recession', then you'll want to read this month's article. It's all about evaluating your own personal strength or weakness in light of the current tough times we're facing. We'll even give you some ideas of what you can start doing, what you can stop doing, what things you can continue doing, and some ideas on where you can look to for help.
July 2009 - What's Possible (Recession)?, FBT, Paid Parental Leave
What's Possible has been updated - If you're in business and finding things difficult in light of the 'Recession', then you'll want to read this month's article. It's all about evaluating your business's strength or weakness in light of the current tough times we're facing. We'll even give you some ideas of what you can start doing, what you can stop doing, what things you can continue doing, and some ideas on where you can look to for help.
New FBT rate on low-interest, employment-related loans - From 1 July 2009, the FBT prescribed rate on low interest loans reduces to 6.41%.
Paid parental leave (PPL) maximum entitlement rate increases - The PPL weekly maximum entitlement rate increased to $429.74 (before tax) from 1 July 2009.
June 2009 - Use of Money Interest, What's Possible (Recession)?
Use of money rates changed - From 28 June 2009 the use of money interest payable drops to 8.91% p.a., and receivable reduces to 1.82% p.a. Is it cheaper to pay the IRD interest as opposed to the bank?
What's Possible is now alive - Our newest section of our website is now active. Here you will find FREE information helping you to get what you want ... in business and life. Check it out by clicking on the "What's Possible?" menu bar to the far left or by clicking here. Our first topic is Succeeding during tough times which is all about helping you reach your goals in a recession; identifying the opportunities that exist; explaining why it doesn't matter how long the 'Recession' will last; and identifying four philosophies you'll need to take on board if you want to survive.
May 2009 - 2009 Government Budget, Mileage Rates
NZ Government announced their 2009 Budget - Its 28 May 2009, and the Government today announced that personal income tax cuts planned for 1 April 2010 and 2011 will now be deferred. Automatic contributions to the NZ Superannuation Fund will be suspended and Government spending will be reduced. Refer here for a copy of the Minister's Executive Summary, or the Budget 2009 website for all the 2009 Budget documents.
New mileage rate for employee reimbursement - the mileage rate for when you reimburse staff (including shareholder-employees) who use their own vehicle for work has increased to 70 cents per km (from 62 cents per km), and is effective from 1 April 2008.
April 2009 - Official Cash Rate, Job Support Scheme, Kiwisaver, Rest & Meal Breaks, Minimum Wage, Infant Feeding, Income Tax, PAYE, Provisional Tax
Official Cash Rate reduced to 2.5 percent - The Reserve Bank reduced the Official Cash Rate by 50 basis points to 2.5 percent on 30 April 2009. Can you save cash by reducing your loan repayments to take advantage of the lower interest rates and renegotiate the terms of your loans?
Job support scheme changes - The scheme has been extended to include employers with 50 to 100 employees from 27 April 2009. Refer here for more detail. Can you subsidise your labour costs to help retain staff as opposed to laying them off?
Infinite Possibilities has moved to Hamilton - We are now located at 42 Winchester Place, Rototuna 3210, HAMILTON. Our new phone number and fax number is 07 853 3671. Have you updated our contact details in your filofax, diary, Outlook, or other address book?
Infinite Possibilities is now officially online - Our new web pages were posted online.
Changes to Kiwisaver – From 1 April 2009, the minimum contribution rate reduced to 2%. Compulsory employer contributions set at 2%. Employer tax credits to stop.
Rest and meal breaks for your staff — From 1 April 2009, employees are now entitled to one paid 10 minute break when working between 2 to 4 hours; one paid 10 minute rest break and one unpaid 30 minute meal break when working between 4 and 6 hours; two paid 10 minute rest break and one unpaid 30 minute meal break when working between 6 and 8 hours.
Minimum wage increase - From 1 April 2009, the minimum wage will increase to $12.50 and the new entrants wage will increase to $10.00. Have you revisited your margins, budgets, payroll for the changes to your staff on the minimum wage?
Infant feeding in the workplace - From 1 April 2009, employers are now required to provide employees who breastfeed during work hours with appropriate facilities and unpaid breaks. Have you made a space for breastfeeding mothers who work for you?
Income Tax changes - From 1 April 2009, the highest income tax rate drops to 38% for incomes over $70,000; Introduction of an independent earner credit for middle income taxpayers who do not receive core assistance from the Government earning over $24,000 from non-benefit sources; Research and development tax credits have been removed. If you employ staff, are you using the new PAYE tables from 1 April 2009? If you are earning wages, then have you decided what you will do with the extra wages you'll be getting in your hand? If you earn between $24,000 and $48,000 and don't receive any other benefits, then have you updated your PAYE code with your employer so you get the new independent tax credit?
Twice-monthly PAYE threshold goes up - From 1 April 2009, the threshold for paying PAYE twice monthly increased from $100,000 to $500,000 PAYE and employer superannuation contribution tax per annum. For those of you with PAYE between $100,000 and $500,000 p.a. you'll now only file PAYE returns once a month due by the 20th.
Provisional Tax changes - From 1 April 2009, the uplifts for the 2008/2009 and 2009/2010 provisional taxes have been reduced saving at least $730 and 5%, and $1,460 and 5% respectively. If you are paying provisional tax, have you checked to see how much less you'll be paying now?
GST changes - From 1 April 2009, the threshold for compulsory GST registration increases to $60,000 per annum (from $40,000 p.a.). The GST payments basis threshold increases to $2m (from $1.3m).
March 2009 - Job Support Scheme, Official Cash Rate, 90-day Trial Period, Use of Money Interest
Job support scheme commences - Starting on 27 March 2009, the Job Support Scheme is for large employers (more than 100 staff) and is designed to help employees keep their jobs in this challenging economic climate. It provides a minimum wage allowance to supplement the income of employees who have agreed to reduced hours at work. The allowance is available for up to six months. Employers need to negotiate an agreement with their employees, and unions where appropriate, which reduces their hours by up to 10 hours per fortnight. This encourages businesses to keep employees on reduced hours rather than make them redundant. It also provides job security to employees while they take part in the scheme. Rather than making staff redundant, can you take advantage of this scheme?
Official Cash Rate reduced to 3 percent - The Reserve Bank reduced the Official Cash Rate by 50 basis points to 3 percent as of 12 March 2009. Can you take advantage of the lower interest rates by renegotiating your loans?
Employing staff on a 90-day trial period - From 1 March 2009, employers with less than 20 employees can now engage workers on a 90 day trial period without the risk of an unjustified dismissal claim. Have you updated your employment contracts for the probationary periods for any new staff you may employ in the future?
Use of money rates changed - Use of money interest payable drops to 9.73% p.a., and receivable reduces to 4.23% p.a. as of 1 March 2009. Is it cheaper to pay the IRD interest as opposed to the bank?
February 2009 - Government Announcement
Government announces tax changes to give businesses a helping hand – It's 4 February 2009, and the Government announced it would make reductions to the provisional tax uplift rates; use of money interest to now apply from residual tax figures of $50,000; use of money interest payable drops to 9.73% p.a., and receivable reduces to 4.23% p.a.; GST payments threshold increases to $2m; GST registration threshold increases to $60,000; Business related legal expenses totalling under $10,000 will be deductible regardless whether they are capital or revenue; fortnightly PAYE threshold increased to $500,000; annual FBT filing threshold increased to $500,000; minor FBT thresholds increased to $300 per quarter per employee and $22,500 a year per employer; FBT prescribed rate on low interest loans reduces to 8.05%. Generally these will apply from 1 April 2009.
January 2009 - Official Cash Rate, FBT
Official Cash Rate reduced to 3.5 percent - The Reserve Bank reduced the Official Cash Rate by 150 basis points to 3.5 percent from 29 January 2009. Can you take advantage of the lower interest rates by renegotiating your loans?
New FBT rate on low-interest, employment-related loans - The FBT prescribed rate on low interest loans reduced to 8.05% from 1 January 2009.