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.

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.

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!

Are you British? UK Inheritance Tax has very long arms

The new British government’s summer Budget includes two significant items affecting non-domiciled residents from April 2017. Individuals who have been UK-resident for more than 15 of the past 20 years will become liable to UK tax on all overseas assets.  Even if you managed to fly the coup, all non-domiciles’ UK residential property will be liable to UK inheritance tax whether held directly or indirectly via an offshore structure.  So if you have property back in ol’ Blighty, it could still be in the net.

There are also some fish hooks that could result in you still being considered UK-resident.  Something as simple as your will wishing to inter your remains (or not specify otherwise) in the United Kingdom could result in you being considered UK-resident.  It would be timely for you to review your Will.

It is important that if you have originated from the United Kingdom, or have assets in the United Kingdom (that means you too Kiwis!), you familiarise yourself with the tax implications your Estate could have.  Non-payment can carry significant penalties and Her Majesties Custom & Excise don’t accept ignorance as an excuse!

Budget 2015 Explained

The seventh Budget from Finance Minister, Bill English is very much a balancing act with increases in benefits for some citizens offset by the removal of incentives for others.

Family Forecast

Fresh off plenty of political discussion around Child Poverty, the Government has introduced benefit increases for families with children by $25 per week after tax, the first non-inflation adjusted increase since 1972:

• Childcare assistance for low-income families will increase from $4 an hour to $5 an hour for up to a maximum of 50 hours of childcare a week for each child.

• Student Allowances for families with children will increase by $25 a week.

• Both the Working for Families (WFF) in-work tax credit and the WFF tax credit abatement rate will increase from 1 April 2016:

* Low-income working families earning $36,350 or less a year, before tax, will receive an extra $12.50 per week and some very low-income families will receive an extra $24.50.

* Working families earning more than $36,350 will receive more from WFF, but the amount is dependent on each family’s income and it won’t be more than $12.50 a week

* Families earning more than $88,000 a year will see slightly lower WFF payments, with the average reduction being around $3 a week

These increases have been tempered by part-time working beneficiaries needing to work 20 hours per week versus the 15 hours of the past.  Sole parents and partners of beneficiaries are also now expected to seek at least part-time work once the youngest child turns three, as opposed to five years previously.

Travellers Tax

A new Border Clearance Levy will be introduced from 1 January 2016, targeted to assist funding Biosecurity and Customs activity.  The levy is expected to be $16 for arrivals and $6 for departures. Almost half of arrivals and departures in the year to April were New Zealanders travelling for holidays, on business and for family reasons. Those that can afford to travel internationally are basically paying a new tax, raising $100m a year.

Slower out of the blocks

The $1,000 Kiwisaver kick-start incentive payment is no longer available for new sign-ups and will save $175 million in 2015/16.

Motoring ahead

ACC Levies will continue to reduce, In the 2014 levy round reductions were made to the Work and Earners’ Accounts. This year’s focus is on Motorists This includes reductions to the licence fee and a drop of 3 cents per litre off the petrol levy.

No longer flogging the dead horse

From 1 April 2016, the IRD will have more discretion around writing off penalties (not the core payment) for non-payment of child support.  The Government wanted to provide more tools for the IRD to work with parents on controlling and managing their child support debts.

GST tinker

Payments made to social housing providers will be GST exempt once legislation is enacted.

The Tax-man Cometh

The IRD are being given an extra $74 million over the next five years to beef up their investigative and compliance teams.  Historical data has shown that the IRD gets at least $7 extra for each $1 invested in reviewing tax payer compliance.  The Government is directing the IRD’s efforts towards property investment, a very political move given Auckland’s booming house prices.

 

Safe as houses

The focus in this budget is on damping down property speculation rather taking a slice off the family home.  There will be a two-year window for sales of residential property. If residential property is bought and sold within two years, it will be subject to tax. This does not apply for:

• tax payers selling their family home
• inherited property, and
• property that is being transferred as part of a relationship property settlement

The new rules will apply to properties bought on or after 1 October 2015. More detail is expected to come out in July. It’s important to note that if you intend to sell a property outside of the 2 year timeframe, the sale may still be subject to tax, as it may still fall within other rules relating to the taxation of property.

Land ownership

In addition, anyone buying or selling land, both New Zealand residents and non-residents, will have to provide an IRD number as part of the land registration process. All sales of land, other than sales of the main family home, will be subject to this requirement. In addition to providing a New Zealand IRD number, non-residents will also have to:

• provide their country’s equivalent of an IRD number, and
• open a New Zealand bank account

 

Boosting business

$345million has been targeted for business growth, with initiatives of

• $80million for R&D Growth Grants
• $25million to establish Regional Research Institutes for scientific research
• $113million for New Zealand’s higher education system

Unfortunately the balance of business growth initiatives are more around enforcing compliance, such as assisting councils with resource management and water care reforms and  enforcement of employment laws. The main area affected for businesses in New Zealand will be around those involved in Property.

What does this mean for me?

The budget was very much one that focus on social services and support in New Zealand.  $375 million on ACC, $790million on Child Hardship, $939million on Capital Investment (infrastructure), $305million on the Social sector and $122million on Housing.

Bill English said the Government wanted to target the 60-80,000 families who were most vulnerable in society and after looking at various options concluded that raising the benefit levels themselves is the most effective means to achieve this.

Halfway through the standard New Zealand financial year

At Half-Time, What Is Your Score?

We are halfway through the financial year (if you have a standard balance date!) with no time for a half-time break: how is your business stacking up against the key areas below? Are you ahead of the game or slacking behind?

• Your sales forecast
• Your profit forecast
• Your staff turnover rate
• Your customer satisfaction survey result
• Your aged debtors

If you are ahead of the game, keep doing what you are doing, it’s obviously working for you. But if you are behind, what steps are you going to take to remedy the situation?

My Tip:

Decide which of the areas above are causing you the most concern and get together with your management team or business strategist to come up with a plan to work through the issues.

Don’t leave it any longer to act on a problem that may spiral out of control if left unchecked.

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.)

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.

Pay rise time!

New minimum wage rates take effect from 1 April 2012. The new adult minimum wage rates (before tax) that apply for employees aged 16 or over will be:

· $13.50 an hour, which is

· $108.00 for an 8-hour day or

· $540.00 for a 40-hour week.

The new minimum wage rates that apply to new entrants and employees on the training minimum wage (before tax) will increase to:

· $10.80 an hour, which is

· $86.40 for an 8-hour day or

· $432.00 for a 40-hour week.

Record keeping is very important regardless. To cover potential claims, questions and audit, you need to:

1 Keep worked time records. This is a legal requirement and ensures you know how many hours everyone is working.

2 Ensure that in any pay period the salary amount paid to your staff member meets the minimum wage rates above.

Till next time.