COVID-19 tax proposals

The Minister of Finance today announced a business package containing proposed measures to support businesses affected by the corona virus outbreak. The tax-related measures include:

Reintroducing depreciation on commercial and industrial buildings

Depreciation deductions will be reintroduced for new and existing industrial and commercial buildings, including hotels and motels.

Interestingly, this will enable the capital cost of seismic strengthening of buildings to be depreciated and therefore claimed as a deduction.  This wasn’t possible under the Governments previous approach that saw the seismic strengthening as a non-depreciable improve, not repairs and maintenance.

The law change will allow owners of commercial and industrial buildings to start reducing their provisional tax payments for the 2020-21 income year immediately. There is no application process as the increased deduction will be available as part of normal tax filing processes.

The rate allowed willed to calculated at 2% diminishing value basis.

This change is considered to be a permanent one starting with the 2021 tax year, rather than for a period of time.

Immediate deductions for low value assets

Taxpayers are currently able to claim an immediate deduction for the purchase of assets that cost less than $500. This threshold will be further increased to allow the immediate expensing of assets that cost up to $5,000, for a year (the 2021 tax year). The threshold is being permanently increased to $1,000 (from 2022 tax year onwards). This will reduce compliance costs for businesses and encourage businesses to continue investing.

 Fewer small businesses having to pay provisional tax

The threshold for having to pay provisional tax will moved from residual income tax of $2,500 to $5,000 for the 2021 tax year.  Your 2020 residual income tax will dictate whether you meet the criteria.

This is a permanent change with the $5,000 threshold continuing indefinitely.

Writing off interest on some late payment of tax

The Commissioner of Inland Revenue will be given the power to waive interest on late tax payments for taxpayers who have had their ability to pay their tax on time significantly adversely affected by the COVID-19 outbreak. Use of Money Interest (UOMI) is routinely charged on late tax payments.

Businesses and individuals will need to show an inability to pay tax by the due date as a result of being significantly adversely impacted by COVID-19. Detail on objective tests is yet to be finalised but will be in the coming days.

The relief will apply to interest on all tax payments (including provisional, PAYE, and GST) due on or after 14 February 2020.  This scheme will continue for a period of two years.

What does this mean for me?

The above are the one branch of a number of packages that the Government has announced.  We will be covering the impact of the other packages separately.

If you want to better understand your personal situation and how these changes impact on you, contact your Campbell Tyson Advisor, or drop me a line.

The Taxman won’t take a cheque

From 1 March 2020, the New Zealand IRD will stop accepting tax payments by cheque.  They’ve provided a helpful resource for online payment options (www.ird.govt.nz/cheques) but what do you do if you can’t get online?

Cash or Eftpos at Westpac

You can still pay using cash or Eftpos at Westpac, but be aware of your Bank Limits if not a Westpac customer.  You will also need to generate a bar code from 1 July 2020 to deposit the money with Westpac.  More details on this are at http://www.ird.govt.nz/barcode.

Automatic Payments

If you like to cash flow your tax payments with smaller, regularly amounts, may be automatic payments are for you.  Get an IR586 form from the IRD website, fill it out and send it in.

Or Get Online

My Father-in-law was a technophobe until he discovered the joys of TradeMe .  Once he dipped his toes in to the online World and stretched to online banking, he hasn’t looked back.  Sometimes it can look worse than what it is!  Check with your Bank.  They have Teams dedicated to helping you get online.

Using Contractors not necessarily protection against claims

Photo by Pixabay on Pexels.com

A great article from Dukesons about the dangers of thinking you don’t have employment exposure when using agencies to provide workers.  This is very applicable for the Horticulture Industry, which has a heavy dependency on seasonal workers to plant or harvest crops.

The main effect of the changes for Agencies and Clients is that if an employee of the Agency raises a personal grievance against the Agency when the Employee has been on an assignment with a Client, either the employee or the Agency can join the Client as a party and the Client may have liability if it has caused or contributed to the grievance.

The Client would only have liability where it exercises or is entitled to exercise control or direction over the employee in the same way that the employer (Agency) would. Where that occurs, the Client is regarded as a controlling third party.

From the Agency’s point of view, it would be prudent to include a term in its contract with the Client whereby the Client agrees to indemnify the Agency against any liability that the Agency incurs as a result of the Client’s actions.

In some respects, it would be prudent for the Client to treat workers provided through the Agency as though they were the Client’s workers. Examples would include avoiding bullying, harassment, and unlawful discrimination.

Redundancy could also be an issue for the Client to the extent that it wants to terminate any contract with the Agency because the worker is no longer required (before the end of any period agreed with the Agency) and where that may result in termination of the worker’s employment with the Agency. In that case, even though the worker isn’t the Client’s employee, it would be prudent for the Client to consult with the worker in a timely fashion to advise why their services aren’t required.

Some real risk that historically could be avoided by using contractors.

Coming to you from 27 June 2020.

Tax Brackets – Giving the taxman more

Stuff has a good article on the travesty of inflation.  While your real income (adjusted for inflation) may not move, the proportion you hand to the Government grows as you move in to the higher tax brackets.  You pay 10.5% on the first $14,000, 17.5% from 14,001 to $48,000, 30% from $48,001 to $70,000 and 33% on every dollar from $70,001 and over.

The last time the top tax bracket moved was in 2008, when it moved from $60,000 to $70,000.  The previous movement was in 2000.  This means that in 19 years, the threshold has moved $10,000.  A $60,000 salary from 2000 would be worth $90,000 today if adjusted for inflation (only).  $20,000 is being taxed at the top rate verses $0 in 2000, which means you have less after tax buying power than in 2000 solely as a result of bracket creep.

The Tax Working Group’s early documentation has said that adjusting the brackets for inflation “would  increase compliance costs”.  This is the same Tax Working Group who don’t think estimated $7.5 billion of valuation (compliance) costs tax payers will suffer on entry to the Capital Gains Tax regime is too much.

Governments are always reluctant to reduce their tax take.  Sadly, tax brackets and the impact of inflation create a semi-hidden way for the Government to keep collecting increasing amounts.

 

You’ve got to be a Kiwi. Well, almost. The Companies Office says so.

Companies incorporated in New Zealand after 1 May 2015 have needed to:

• Provide dates and places of birth of all directors
• Ensure that one director lives in New Zealand, or is an Australian who is also a director of an Australian Company (details will need to be provided – see below)
• Provide details of a ultimate holding company, if appropriate

From 1 July, companies incorporated prior to 1 May 2015 have needed to file annual returns indicating:

• Provide dates and places of birth of all directors
• Details of a ultimate holding company, if appropriate

28 October 2015 is rapidly approaching, at which point all companies in New Zealand will need to ensure:

• That one director lives in New Zealand, or is an Australian who is also a director of an Australian Company
• They can provide the ACN, name and registered office of Australian Companies of which Australian Directors are also a Director

Limited Partnerships, still only seen as rarely as the Kiwi Bird, have similar provisions for their general partners, but are effective from 27 February 2015.

It’s a good time to review your Board and ensure you have Kiwi’s or “trustworthy” Australians!

TPP – A great outcome for NZ

The Trans-Pacific Partnership Agreement was completed at 2am this morning after a marathon effort from those 12 countries that are party to it.  All the secreacy around the negotiations had people imagining the worst, but it appears that the deal struck will be hugely beneficial for New Zealand.

See a great summary by sector here: TPP Outcomes SectorSummary

Big winners are:

• Meat ($72million in reduced tariffs plus quota reductions/removals)
• Dairy ($102million in reduced tariffs plus quota reductions/removals)
• Fruit and Vegetables ($26.3million)
• Wine ($10million)
• Forestry ($9million)
• Fish ($8million)
• Wool, Leather and Textiles ($4million)
• Manufactured Goods ($10million)
• Other Agricultural Goods ($18million)

Personal favourites (other than the wine!) are $1million reduction in Onion tariffs and $1million reduction in Buttercup squash tariffs.  Kiwifruit Growers will see around $6,000 less each in a $15.3million tariff reduction.

These are the benefits based on current production and volumes.  Tariff pricing can affect real demand, so the benefits could be significantly larger than those identified.

New Zealand already has a very open economy and won’t have to adjust much in response.  Sovereignty is not being given up and we are not being locked in to a deal that we can’t get out of.  The patent issue around pharmaceuticals is not too far beyond what we currently have.  Tobacco has been specifically excluded, so we won’t be sued for items such as restricted branding and advertising, or taxes on the product itself.  The labour requirements being placed on countries are less than what we currently have, so will in effect be putting us on a more level playing field.

As with all deals, the true outcome will be more clear over time.  But on the face of it, a great outcome for New Zealand.

2 Year Selling Rule – Will I be taxed on the Property?

The Government announced in its last budget that they intend tax sales of residential land that has been owned two years or less.

The use of the term “Bright-line” refers to a clear connection between an event and a tax outcome, something they are seeking to do with the legislation that is currently only at Bill stage.  This means that Parliament still has to clean it up before it becomes law.  What is unsettling is we will all be caught by it in a matter of weeks, with 1 October 2015 being the magical date.

I should point out that the test is in addition to the existing laws around purpose and intent.  If you were acquiring the property for the primary purpose of resale, or undertake significant work to improve value for resale, you will be required to pay tax anyway.

I will also emphasize that the test only applies to residential property.  Commercial and industrial property need not be concerned.  There are many variations within these three categories, so the bill currently has rules to cover:

• A buy and sell that doesn’t get registered on the title,
• Asset rich companies and trusts,
• Determining whether the main home exclusion applies,
• What is residential land,
• Farmland and business premises,
• Serviced apartments,
• Inherited land and relationship property transfers ,
• Anti-avoidance,
• Company amalgamations,
• Deductions for expenses,
• Treatment of losses.

There are no rules around associated person transactions currently, which means sales within a Group for a restructure will currently be caught.  Not a good omission by the Government!

The test applies to residential land acquired on or after 1 October 2015.  The date that a sale and purchase agreement is entered into is the critical date.

For agreements entered into on or after 1 October 2015, the date of acquisition (or start of the two year period) will be the date of registration of the change of ownership on the title.  The date of sale is set as the date the sale and purchase agreement is entered in to.

Less than two years?  Gains will be taxed as income.  Ouch.

Bounce – a little relief for Dairy Farmers

The Global Dairy trade auction overnight saw prices of Fonterra’s products lift by 10.9% to $US2,226 a tonne.  While volumes were down slightly (1,039 to 35,865 tonnes), this is a ray of light for struggling Dairy Farmers.

A NZ Dollar buys only $US0.6334.  This compares to a peak of $US0.8822 in July 2014.  How does this help?

The Dairy Farmers have received some assistance from the weaking NZ Dollar against the US Dollar as well. To put it in absolute terms, 1 tonne at current prices and the current exchange rate equates to $NZ3,514.37.  To obtain the same return back in July 2014, the tonnage rate would have needed to be, on average, $US3,100.38.

Dairy Futures are also showing an expected value of $US2,500 by April 2016.  At the current exchange rate (and most economists expect the NZ Dollar to continue to weaken against the US Dollar), this would equate to $NZ3,946.95.

So, a little recovery in prices and a drop in our exchange rate are certainly a step in the right direction for our Dairy Farmers.

How big is that paddock? What am I leasing?

Land leasing for market gardening is a tricky proposition.  You are leasing someone elses land, endeavouring to improve it beyond the condition you took it over in by adding fertiliser and treating it with sprays to drive out pests and disease.  You are paying for the privilege of doing this, on the intention to turn a profit from the crop you will hopefully extract at some stage (weather and crop dependent) in the future.

Rotation and rest mean the appropriate properties to lease can be difficult to come by, and some of us may jump in before doing a full due diligence on the property in question.  As an Accountant I can’t give you the detailed critique around soil acidity, nitrogen levels, disease presence.  But something I can talk about is the average spend per effective acre.

True Acreage

Typical lease agreements specify an acreage for the calculation of the total lease to pay.  What I sometimes see with my clients is that the acres leased can differ to the acres planted.  While we always expect parking bays, sheds and access tracks to reduce the plantable area somewhat, if the unplanted area includes banks, gullies or bush that are not feasible we should be negotiating around these areas.  If you are paying $1,000 an acre for a 100 acre block ($100,000), but are hampered by a stand of trees that diminish the planting area by 10 acres, you are in fact paying $1,111 an acre.

Use

The use of land can have a drastic impact on the rate you will pay to lease a block.  Dairy/Stock Farmers will pay anywhere from $300 to $400 an acre for grazing (locally).  Growers will pay $600 to $800 an acre, depending on existing soil quality and locality.  This often pits Dairy/Stock Farmers against Growers in obtaining additional acreage, as landlords seek to maximise the return on their investment.

Break-in Costs

If you are leasing new acreage that is a bit run down and needs clearing, spraying and fertilising beyond a normal seasons requirement, this should be spread over the initial lease period to ascertain to the true acreage cost.  An extra 3 tonnes of lime an acre is potentially another $150 an acre that could see a good deal become a so-so one.

Water

Access to water can be the decider between a quality crop being delivered to customers and a financial disaster.  For this reason, Growers will often pay the higher side of $1,000 an acre for favourable land with access to water.  This is especially relevant in places like Canterbury where water restrictions and rights are becoming increasingly more common.  Ensuring the water you are paying the premium for will remain available for the whole season (the water table dropped below some bores in 2013 – leaving the bores sucking air) is part of the due diligence you will need to undertake.

Additionally, you will need to plan contingencies around maintaining or replacing the existing pump and irrigation system on the land you are leasing, in the event of emergencies.

Due Diligence

Doing the calculations and planning is vital when considering your leased acreage.  It is important to understand the true cost, to better help you ensure you build value for you, not just the landlord.

Growers Beware! Contractors can cost you twice.

Contractors can be great help around agricultural, horticultural and viticultural businesses.  Labour can be switched on and switched off as required, you don’t need to worry about their ACC, Kiwisaver, Sick and Annual Leave, and you normally only pay for the work they do.

BUT.  You still need to deduct withholding tax from what you pay them.

Say what?  

Yes, you heard right.  The IRD require businesses in the agricultural, horticultural and viticultural industries to deduct withholding tax from payments to contractors and pay it directly to the IRD, much in the same way as PAYE for employees.  There is an exclusion for Post-Harvest Facilities contractors, although you use this at your risk.

Why my risk?

As you are obligated to deduct the withholding tax before paying it to the contractor, it is you the IRD will come to for payment. The IRD can demand it even if you paid the gross amount to your contractor.  Its then up to you to recover the withholding tax element you incorrectly paid across to your contractor.  This can be problematic if the contractors change regularly, are seasonal, or may simply not have the funds to repay the amount.

How much?

If you have a IR330 tax code declaration the rate is 15% of pre-GST charges.  If you don’t have a IR330 tax code declaration form, the rate is 30% of pre-GST charges.

The contractor may have a withholding tax exemption certificate (they use an IR332 to apply for this), which means you don’t have to deduct anything.

You don’t want to have to end up paying 15% more for your contractors.  The IRD can go back a number of years, with late payment penalties and interest, which can make this really expensive.

What’s the likelihood of this affecting me?

We have noticed increased activity in this area from the IRD.  Most of the activity has come about as the IRD chase contractors dodging their tax requirements, which can naturally lead back to their customers – you.

Even if you believe you are low risk, I strongly recommend you assess your exposure and change your business processes to reduce the financial impact of any possible audit.

Speak with your Accountant now!