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.

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.

Trust Review will happen, just not right now

Justice minister Amy Adams said that the Government had accept the recommendations of the 2013 Law Commission’s review of Trusts and Trust Law in New Zealand.

At the latest Law Society Conference, Ms Adams said that a new act is critical and long overdue.  There has been no major reform to the Trustee Act since it’s formation in 1956, almost 60 years ago.

Although Ms Adams has said that it is one of her core requirements, don’t expect to have an exposure draft (the first step in passing the reform legislation) until the end of next year.

Ms Adams said the delay was necessary to ensure there aren’t any unintended consequences in the new Act.

New Zealand has more Trusts per capita than any other country with a trust for every 18 New Zealanders, nearly double Australia’s one for every 34 people and compared with 148 in Canada and 294 in the UK.  It works out at around a quarter of million Trusts.  It’s estimated that 15% of residential property in New Zealand is owned by Trusts.

What does this mean for us?  Well, most likely using Trusts will become more onerous and costly, as many of the recommendations involve greater transparency (i.e. the need to open up records and information to vested parties), greater Trustee responsibilities (i.e. personal liability), and possible regulatory oversight (i.e. something similar to the Companies Office that Companies must report to).  These changes will no doubt result in a reduction in the number Trusts as people decide that the Trust has become too costly, or risky, to continue with.

It still comes back to making sure you are using a Trust for the right reasons.  Although in the past Kiwis have treated it otherwise, Trusts aren’t for everyone.

Rest Home Subsidies vs. Gifting

The following is content from the CCH Q&A Service around where gifting by couples can fall foul of entitlements to rest home subsidies.  Many people have been merrily gifting to their family trust expecting to be able to tap in to rest home subsidies in the future.  The following will come as news to many.

QUESTION:

Have there been any new developments around the issue of how gifting affects the residential care subsidy?

I know that Work and Income New Zealand (WINZ) takes the view that couples with family trusts who have been part of a gifting programme and have gifted $27,000 each per annum will have breached the threshold to qualify for the subsidy.

Has there been any clarification of this issue by WINZ or Inland Revenue?

ANSWER:

Clarification of this issue has been provided by the High Court in B v Chief Executive of the Ministry of Social Development [2012] NZHC 3165. (WINZ is the service delivery arm of the Ministry of Social Development.) The decision, released in late 2012, concludes that where couples have together gifted $54,000 annually in a gifting programme, the spouse applying for a residential care subsidy will have breached the $27,000 threshold.

The legislation at the heart of the case is the Social Security Act 1964, which has means-testing provisions for both assets and income. Section 147A states that where a person (or the person’s spouse or partner) applies for a means assessment, and that person has “directly or indirectly deprived himself or herself of any income or property”, the chief executive has a discretion to assess the person as if the deprivation has not occurred. The Social Security (Long-term Residential Care) Regulations 2005 state that this definition of deprivation of property includes gifts in a 12-month period that exceed $27,000.

As a result of this decision, most couples with family trusts who have taken part in conventional gifting programmes will not qualify for the residential care subsidy.

REFERENCE:

Social Security Act 1964, s 147A.

Social Security (Long-term Residential Care) Regulations 2005, regs 9, 9B.

B v Chief Executive of the Ministry of Social Development [2012] NZHC 3165.

GD Clews “Over-gifting and Rest Home Subsidies” <www.taxcounsel.co.nz/Resources/NZ+Tax+Case+Notes/Case+Notes+2012/Over-gifting+and+Rest+Home+Subsidies.html>.

V Ammundsen “Residential care subsidy up-date for couples” (5 December 2012) <http://mattersoftrust.wordpress.com/2012/12/05/residential-care-subsidy-up-date-for-couples/>.

(Disclaimer – this is general advice and may not be appropriate to your own unique position.  Always seek specific application to your circumstances from an expert.)

Xero – Beautiful Accounting Software

I love Xero (www.xero.com).  I recommend it to my clients, my firm uses it for our own accounts, and I use it on my personal accounts.  The staff at Campbell Tyson are experts with it, and I swear that it makes your financial life much easier. 

At Campbel Tyson we are so excited about Xero that we are offering a free demonstration to our clients and public-at-large on Wednesday 17 April at 5.30pm.  During light refreshments and over the course of an hour, prepare to be wowed at what Xero could do for you and your business.

Believe you me, you don’t have to be an Accountant to get value out of this session, so speak with Jacqui on 09 238 9219, or at reception@ct.co.nz to book a spot at what will be a very popular event.

See you then!

Keep your records

Hi there

Lovely weekend to be indoors.

There was a recent case through the courts in respect of record keeping (or the absence of it) for IRD purposes.  Here’s a summary:

 Commissioner’s default assessments confirmed, 12 July 2012

In a case where a taxpayer did not keep useful or complete records and failed to file income tax and GST returns, the Taxation Review Authority (TRA) has held that the Commissioner’s revised schedules were the most reliable reconstruction allowed by tax law and confirmed them as the new assessments for the years in dispute.

Background

The dispute concerned the tax liability of the taxpayer for the years ended 31 March 1995 through to 31 March 2000 and GST assessments for GST periods falling between 1 April 1994 and ending on 31 March 2001. During the course of the hearing, the Commissioner accepted some amendments to the assessments based on new evidence produced by the taxpayer in the course of the hearing.

At material times, the taxpayer was a property developer with various other sources of income from dealing in motor vehicles on a part-time basis and taking on residential boarders.

The taxpayer did not keep adequate business records in accordance with s 22 of the Tax Administration Act 1994 or s 75 of the Goods and Services Tax Act 1985. He did not keep a cash book, a note book, journal or balance sheet. In this respect he was operating in breach of his obligations as a business taxpayer under the Tax Administration Act. He also failed to file timely tax returns.

The Taxation Review Authority

The TRA noted that in the absence of business or personal records over material times, it was very difficult for the taxpayer to prove the ingredients of the Commissioner’s assessments to be wrong on the balance of probabilities. The taxpayer’s difficulties were also exacerbated in this challenge by the delays occasioned by him failing to prosecute the case in a timely manner.

The TRA found that apart from specific examples where documentary proof had been provided or where the TRA had particular views, the taxpayer’s evidence was too unreliable to be accepted. The TRA said that there was no room for “reconstructions” and “guess work” in taxation. The taxpayer had failed to comply with the statutory duty placed on business taxpayers by the Tax Administration Act to keep accounts.

The TRA accepted that the assessments represented an honest attempt by the Commissioner to arrive at the amount of taxable income and the amount of tax due by the taxpayer for the income years in question. The taxpayer’s challenge was dismissed.

Case 1/2012 TRA [2012] NZTRA 01, TRA 148/04, 2 July 2012.

Morale of the story, make sure you keep adequate records for the time required, or the IRD has practically  the right to state the facts.

Till next time.

Balancing a Budget

I’m married to a teacher and so have been very close to what has been going on in the media as a result of Budget changes for schools.  I must say, I really feel for the schools.  As Gary Sweeney alluded to at a recent NZAIMS conference, the current issue is not about Teachers wages or contracts, it is about budget cuts affecting their ability to do the job they were charged with – teaching children.  It appears that Intermediate schools will no be doing everything they can to voice their displeasure and bring pressure to bear on the Ministry.  I believe this is a sensible approach to highlight policy decisions that will have a negative impact on what must surely be the most important thing we do as a country – the education of our future generations.

What saddens me is that there is no discussion around what other areas could be cut back.  Balancing a budget as a country is vital.  Just look at Ireland, Greece, Spain and Portugal to see what happens if you throw caution to the wind and borrow to fund a lifestyle beyond our means.  We have short patience for any one who does it personally, let alone a country that should know better.

Fine, campaign to stop the attempted $43million savings the Government are pursuing in a admirable attempt to balance the budget, but rather than whinging with your hand out, say what you are willing to give up to make it possible.  Suggest the areas that the Government could save money to offset the Educational Spending.  To the protesters, contribute more than clever banners and poorly sung Pink Floyd songs.  Start some meaningful dialogue rather than singing rhymes.  Show some of the maturity you are supposed to be passing on to the youth you are seeking to protect.

To avoid being a hypocrite, I should say what I would do.  What about:

• Treating prisoners in Prison as though they are there to be punished.  Drop the perks provided (under-floor heating, personal TVs, etc.) that would be denied to our Elderly in their homes
• Get rid of Tertiary Institutions that teach no courses of value (and “steal” funding from those that do)
• Get rid of funding for PC initiatives that bring no value other than promotion of “diversity” in society – if they were so valuable we would be doing it ourselves
• Remove the option of being a beneficiary as a lifestyle choice (I have a wonderful view of the Pukekohe Courts, and I can see where your tax-payer dollar is going)

No I don’t have a perfect answer, and I know there are people who would take exception to my suggestions above, but for us to be a country that is proud of the way we teach our children, we still need to balance our budget.

Till next time.

Impending Year End

For those of you with a standard balance date (31 March), we have the financial/tax year end coming up fast.  The following are a number of ways you can legitimately manage your tax position.

1. Consider prepaying certain expenses – Some expenses can be prepaid in March and claimed as a tax deduction in the year to 31 March 2012, regardless of their amount.  These include stationery, postage and courier charges, vehicle registration and road user charges, rates, subscriptions for papers or journals, and even audit and accounting fees!Other expenses have limits on the extent to which they can be claimed if prepaid.  These include rent, consumables, insurance premiums, professional or trade subscriptions, travel and accommodation, advertising, periodic charges and other services.  The rules surrounding prepayments are quite complex, so if you’re planning this type of expenditure, please contact us.
2. Trading Stock– Trading stock (excluding livestock) must be valued at the lower of cost or realisable value.  General adjustments for obsolete stock are not acceptable to Inland Revenue.  It’s important therefore to perform a physical stock take at year end and actually dispose of any obsolete lines or alternatively write that stock down to its net realisable value.Clients with an annual turnover of less than $1.3m can value their closing stock at the opening stock value, but only where closing stock can be reliably estimated to be less than $10,000.
3. Loss offsets and subvention payments – 2011 loss offset or subvention elections must be filed with IRD on or before 31 March 2012.  Subvention payments relating to the 2011 income year must be paid by 31 March this year.  The IRD changed its practice of requiring an actual physical payment, and now accepts that a subvention payment can also be made by book entries so long as the payment obligation is discharged. 
4. Write off any bad debts – To claim a deduction for a bad debt you need to physically write the debt off in your debtors’ ledger prior to the end of your financial year.  For most clients that’s 31 March 2012.  There should also be evidence that you have taken reasonable steps to recover the debt prior to writing it off.
5. Employee expenses – Any amounts owing to employees at year end (such as holiday pay, bonuses, long service leave, redundancy payments) can be claimed for tax purposes in the current year as long as they are paid within 63 days of balance date.
6. Review last years fixed asset register – The book value of assets can be written off for tax purposes if the asset is no longer in use by the business, the business has no intention of using that asset in the future and the cost of disposing that asset is expected to be greater than the proceeds from its sale.  Actually, it’s simpler than that.  Scan your asset schedule from last year’s accounts and you’ll probably notice assets that no longer exist (the mobile phone that you dropped in the tide at Christmas time), or simply don’t work.
7. Retentions – Retentions on building contracts are generally taxable in the year the contractor becomes legally entitled to receive them.  This can result in significant deferral of income.
8. Discount Reserves – A deduction for a discount reserve, to cover for example prompt payment discounts, is allowable where debtors are entitled to such a discount.  In the first year a deduction of the actual discount percentage is allowed and in subsequent years a calculation is made to maintain the discount reserve at that percentage level.  If the credit period offered to customers exceeds 93 days, different rules apply
9. Repairs and maintenance – General adjustments for repairs and maintenance reserves are not allowed as a tax deduction.  Instead it may be worthwhile to undertake any necessary repairs and maintenance on key assets prior to the end of the financial year to ensure a full deduction.  Deciding whether expenditure on an asset is deductible as repairs or maintenance or should be capitalised is not always cut and dried, so please contact us if you aren’t sure.
10. Imputation credits and dividends– Companies that have imputation credits for tax paid at 30% have until 31 March 2013 to distribute dividends with those imputation credits attached up to the previous maximum of 30:70.  But tax paid at 28% for the 2011-12 income year and onwards can only be attached at the new rate of 28:72.In addition, imputation credit account balances must not be overdrawn as at 31 March each year.  If so, they attract penalties.

    We realise the subject for imputation credits is complex for many of our clients.  Rest assured we will contact you regarding any necessary dividend and taxation planning before 31 March.

11. Income – Be sure to review any credit notes issued to customers following balance date that can be applied to the previous year, i.e. 31 March 2011.  In doing so, you will be entitled to effectively reduce your current year’s taxable income.

If you are uncertain on any of the above issues, or had a query concerning what you are able to do to plan for the year end, don’t hesitate to drop me a line.

Till next time.

Go the All Blacks!

Hard to believe six weeks of fantastic sport are almost over. The wait for the Rugby World Cup seemed so long and now we have the final being played tonight at Eden Park. I still remember the building excitement and euphoria of the first world cup in 1987, and the subsequent bitterness of defeat in the cups since. I never want to be a “good loser”, but I do feel better equipped to congratulate the competition when they win. I hope this finely honed skill is not required tonight!

A personal gripe of this World Cup is the number of people out there whinging about how bad things are (Canterbury Earthquakes, Rena grounding, PSA, Global Financial Crisis, child poverty, etc.) and how we should be ashamed of being so focused on a sporting event. Without the richness of experience that sport and other pursuits give us we would all be lost in a cycle of continuing misery. I’ve always been a glass half full kind of person and while these events deeply sadden me, I would rather focus on the positives I see everywhere.

I’ve seen incredibly generous people opening their homes and wallets for those in need. I’ve seen friendly, passionate people enjoying sporting events with competitor supporters in a good natured way. I’ve seen gracious tourists who have taken the time to thank us for their experience, and promise to come back soon. And I am looking forward to a great final tonight!

On a business front, I read a report recently by myYardstick that based on surveys completed by over 1000 business owners across Australia and New Zealand, the biggest challenges currently facing small to medium enterprises include:

Issue/Challenge Percentage of Respondents
Funding 45%
Business Strategy 38%
Estate Planning 34%
Legal Affairs 34%
Succession 33%
Source: myYardstick Professional 2011

While I don’t think that the issues raised are new to business, the quantum would suggest that it’s still a struggle to run a business, and that business owners biggest need is to have a succinct plan on what they want to do and how they are going to do it. Not that great volume that is propping up a desk or bookshelf, but a practical document that conveys certainty and clarity for those charged to achieve success in the business.

So, are you developing the plan or implementing it?

Till post-RWC2011.

Lincoln

The Female Touch

Campbell Tyson Cooper White has been a bastion of male-ness for almost 90 years. Although our Team is mainly female (80%), all the Partners/Directors positions have been held by males. This has given the place a decidedly male feel to it. Until this year.

When Sarah Miskell was appointed Director in April this year, something changed. I can also say it changed for the better. Tanya Potter, our General Manager brought a female perspective to our Board Meetings, as well as to the implementation of our strategies at the coal face. However, there had not been the involvement of a female at Directorship level to give it the “full 360”. Sarah coming on board has changed this.

Sarah’s impact may not even always be direct. Having a female on the Board has, in my opinion, emboldened others to speak up. The decor has improved (the feminine touch has brought far more tasteful colours and decor), meetings have a more collaborative feeling, people seem more open in terms of their opinions and are welling to discuss and negotiate. It was not that this was lacking previously, it is more the amplification that has changed. There has also been a conscious effort to empower all staff which I think has also contributed to a great feel around the office. Our Teams are more sharing and collaborative in their approach, with a real ground-swell of concern and desire to help our clients as a Firm.

It really feels as though we are moving beyond being accountants, and becoming more holistic in the way we run our business and care for our clients.

Till next time.

Lincoln