Blog JDW: Jobs Done Well

How Can Low Value Assets Threshold Save You Tax?

If you are thinking of making improvements to your property or buying business assets, then take advantage of recent changes to the low value asset threshold. The Government has temporarily increased the low value asset threshold to $5,000 for writing off your business assets (see table).

Date of purchase

Low Value Asset Threshold

(excluding GST, if GST registered)

Prior to 17 March 2020

$500

 

17 March 2020 to 16 March 2021

$5,000

17 March 2021 onwards

$1,000

 

For instance, if you bought a computer and desk for less than $5,000 you could claim the cost as an expense straight away instead of gradually depreciating for 3-5 years.

This first example may not seem like a lot of savings, but consider the second example. If you owned a residential rental property, and you installed a heat pump, insulated the floors and installed a skylight on three separate occasions, each costing under $5,000. Before 17 March 2020. the heat pump would be depreciable but not the insulation nor the skylight as they were considered part of the building proper. Between 17 March 2020 and 16 March 2021, you could claim a tax deduction for all three.

Be mindful of these limitations. If you are buying multiple assets at once, keep the whole order under $5,000. If you buy 20 chairs costing $251, the total cost is $5,020 and you have to depreciate the chairs. If multiple invoices contribute to the one asset, then you may not get the deduction. For instance, you add on an extension and pay 3 different tradies $4,900, the cost of the extension is $14,700. Also be aware of residential rental loss ring-fencing.

If you're unsure if you can claim the low value asset deduction, give us a call at JDW to discuss before you undertake the spending.

- Serena Irving

Download a PDF copy here, or contact the author by email.

The information and examples given in this article are general in nature and are not personal investment, financial or tax advice. We recommend that you contact the author or another professional advisor for advice that is specific to your needs. Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.

What would you do with $10,000

What would you do with $10,000? 

Congratulations! You have won $10,000! What would you spend it on? A holiday with the family? A new wardrobe of clothes and shoes? Something nice for the kids, small or big? Tonight, I am going to tell you the story of Little Ted and what he decided to do when he won $10,000 and more.  

Here is Little Ted, owner of a toy store. He has been in business for 5 years and making a modest return. Prior to the lockdown he was working most days himself as his 5 part time staff were mostly retirees and students. He spent most of the lockdown sitting in his window, watching the children walk past the store waving at the toys on display. The solitude was almost unbearable. He didn't have a relaxing 7 weeks break like some of his friends, because he was worrying about how he was going to pay his loyal staff, his landlord and his suppliers. He applied for the wage subsidy to help with the payroll, but even though his shop door is now open under Level 2, he has few customers walking in to browse. Parents don't allow their children to handle the toys as it is too risky, so the cheerful giggles are missing, and the mood is more sombre. He decides to apply for the Small Business Cashflow Loan for his business and four full-time equivalent employees including himself. That day he receives $17,200 which is just a little under the average loan size under the scheme. 

Firstly, this $10,000 is not a prize, but a loan for businesses. A one-off Small Business Cashflow loan for $10,000 plus $1,800 for every full-time equivalent employee. An interest-free loan if you pay it back within 12 months. If you keep the funds for longer, you will pay just 3% interest per annum and repay the principal within 5 years. If you miss an instalment the penalty interest is 3% plus the use of money interest rate. You only have until 12 June 2020 to claim this loan if eligible. 

The IRD has already lent more than $824m to more than 47,000 businesses as at last Friday according to an article on interest.co.nz . Some critics of the article say it is too little to support a business that has employees and bills, but no income. Other critics says that it is corporate welfare in disguise, as the IRD does not ask for any security, guarantees or cashflow reports before releasing the funds. For small or medium business owner, Little Ted, this is a welcome cash injection, on top of the wage subsidies. Little Ted knows the business must be viable and have a plan for it to be viable over the next 18 months. That's a tough ask, when the business has only just re-opened. Little Ted asked his chartered accountant to help him prepare his financial statements for last year and a cashflow forecast for the next 18 months. His chartered accountant questioned him on where his customers were going to come from, and what seasonal patterns he needed to consider for his buying and selling. 

Together they formulate a plan for spending the loan.  Some of the loan money is going to be spent on a website developer. To turn the static website into a true online store, with videos, e-commerce capability. Some of the money is going to pay the most urgent bills and the rest is going into a "rainy day" fund. 

While preparing the cashflow forecast, they identify several cost savings and other revenue sources. The annual toy buyers' expo is cancelled, so there are no travel costs. The landlord agrees to a discount for the period the shop was closed. Their website blogs and videos earn affiliate advertising revenue. 

Each month has a sales target, a cost budget, a loan contribution target. And a bit left over to put into the rainy day fund. By the time the first 12 months are up, Little Ted knows he will have enough to repay most of his loan and be in a stronger position to face any other misfortunes which crop up. 

If you are a business owner, with the Small Business Cashflow Loan, how will you spend it? The loan has favourable conditions but it is still a loan. Invest it wisely and thoughtfully in your business, so that you can maximise the return on the funds you borrowed. Chat with your chartered accountant. Be like Little Ted and have a plan to strengthen and grow your business. 

- Serena Irving 

Download a PDF copy here, or contact the author by email.

 

The information and examples given in this article are general in nature and are not personal investment, financial or tax advice. We recommend that you contact the author or another professional advisor for advice that is specific to your needs. Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.

Update for Coronavirus Affected Business

Update for Coronavirus Affected Business

As at 25 March 2020

Every business in New Zealand has been affected by the move to Level 3 or Level 4. This information is correct at the time of writing, but as we are all coming to realise, things in New Zealand are changing rapidly. Please refer to the links at the end of this Update and news media for regular updates.

Level 4 Lockdown is coming

From 11:59pm tonight (Wednesday) New Zealand will be locked down. Everyone will have to stay except to exercise and visit essential services. Only essential businesses will be allowed to open, for instance: supermarkets; pharmacies; health services; primary industry; and essential fast, moving consumer goods supply and distribution. Please check this weblink if unsure: https://covid19.govt.nz/government-actions/covid-19-alert-level/essential-businesses

If you have an online store, it may be possible for you to work from home depending on the products you sell, as courier services are still operating. If you are a service business it may be possible for you to work from home using phone, internet and video. Think creatively to see what you can do to help your customers.

 

Wage Subsidy and Leave Subsidy

The $150,000 cap on wage subsidies has been lifted and it is also available for high growth businesses. If you're an employer, contractor, sole trader or self-employed, you may qualify to get the COVID-19 wage subsidy. You must have experienced a minimum 30% decline in actual or predicted revenue over the month compared to the same month last year and taken active steps to mitigate the effects.

If you have been operating less than a year, then you can use a recent month for a comparison. Similarly, if you have had high growth in the past year, you can compare against a more recent month of trading which is reflective of the expected pre-coronavirus trading results. Keep your workings for claiming the subsidies.

If you cannot show a 30% decline and you have employees (or yourselves as self-employed / contractors) who cannot work from home, it is our opinion that you can claim the self-isolation leave subsidy for those affected.

Work and Income is prioritising the making of payments right now, and we expect that checks on employers records will follow later.

Some applicants are experiencing delays in lodging the applications, so you may prefer to do this out of normal business hours. Have your employee data saved in a Word or Excel file first, so you can copy and paste into the online form quicker.

Don't apply for the contractors in your labour force, as they are self-employed. Instead, encourage them to apply for themselves.

Both subsidies pay $585.80/week for employees working 20 hours or more a week or $350/week for people working less than 20 hours per week.

For the wage subsidy, you must make best efforts to retain employees and pay them a minimum of 80% of their normal income for the subsidised period. If you cannot give them their usual hours of paid work, you will need to come to an agreement with your employees whether to use leave or pay them an allowance. You cannot force your employees to take annual leave, so you may need to top-up the subsidy as an allowance to push the dollar amount up to the 80%. Payroll software providers will have information on how to do this.

For the isolation leave subsidy, the whole amount of the subsidy must be passed onto the employee minus the usual taxes. Again, you will need to come to an agreement about whether leave is used.

See below for tax treatment of subsidies.

If you have employees, or more than one shareholder salary earner:

https://services.workandincome.govt.nz/ess/employer_applications/new

If you have no employees:

https://services.workandincome.govt.nz/ess/trader_applications/new

If you have more than 100 employees:

https://workandincome.govt.nz/products/a-z-benefits/covid-19-large-employers.html

Tax Treatment of Subsidies and Payments to Employees

We have copied below a Q&A that IR has released so far.

Q         Is the wage subsidy payment subject to GST?

A           No – An Order in Council is being drafted to treat it as exempt (Section 5(6E)(B)(iii GST Act)

Q         Is the wage subsidy paid to the employer taxable?

A          No- It is excluded income (Section CX 47 ITA).

Q         Is the wage subsidy deductible when paid by employer as part of wages to employee?

A          No – it is not deductible  

Q         Is the wage subsidy taxable to employee?

A          Yes – As it is included as part of their normal wages it is subject to the usual PAYE, Student Loan, Kiwisaver deductions, etc.

Q         Is the leave payment for self-isolation subject to GST?

A          No – An Order in Council is being drafted to treat it as exempt (Section 5(6E)(B)(iii GST Act)  

Q         Is the leave payment for self-isolation paid to employees or self-employed persons subject to tax?

A            Yes – It is paid to replace taxable income so is subject to tax.         

Q1 - is the payment taxable? The helpline said yes, but the facts/info online don't say anything in terms of tax/PAYE etc. It just says that the $585.80 'must be passed onto employees in full'. Do I process it through the payroll?

As the wage subsidy is a subsidy to the employer to help them fund an employee's wages it is included as part of the employees normal wages and all deductions of PAYE, Kiwisaver, Student Loans, etc are made as normal. If the employees are paid the same wages as previously their pay and deductions on their payslip should be the same.     

Q2 - is there a limit to top up the payment? The helpline had no idea, and I can't find anything about it in the facts/info online either. Eg an employee may normally get $1000 gross each week...so are they able to use annual leave to top up the $585.80 so they're receiving close to their normal weekly wage?

As MSD are making the payment this enquiry should be made to them, however whether you top it up with cash payments or annual leave is probably between you and your employee. Although to qualify for the subsidy the MSD information states the employer must make the best efforts to pay an employee a minimum of 80% of their normal income for the subsidised period.  

Q3 - if they are an NZ based employee but overseas and are having to self-isolate and cannot work, can the employer access the support for this type of employee?

This is also an enquiry for MSD. Note however that the information on their website states that to be eligible, the employee was legally working for their employer at the time they decide to self-isolate, and they were expected to work for the period of self-isolation.

Banks weighing in to support businesses

Grant Robertson's announcement yesterday should allow banks to be more flexible with lending. The package will include a six month principal and interest payment holiday for mortgage holders and SME customers whose incomes have been affected by the economic disruption from COVID-19. More details will be announced by the banks in the next few days.

Core funding ratios for banks have been reduced and the Government will cover 80% of the credit risk. The scheme will include a limit of $500,000 per loan and will apply to firms with a turnover of between $250,000 and $80 million per annum. The loans will be for a maximum of three years and expected to be provided by the banks at competitive, transparent rates.

If you haven't spoken with the bank this week, we suggest that you contact them again if you need business loans. We have heard from a mortgage broker that bank phone lines are overloaded at times, so the easiest way to contact them is via email or through your broker.

Remember that a six-month mortgage holiday just gets added onto the principal, so if you can keep up with interest payments once the business is operational again, you should.

We're still open, remotely

Please contact us by email or phone as usual. Our direct dial numbers are diverted to our cellphones, so that is the quickest way to call us. We are working hard to support you and your businesses. So please let us know if you need help to set up instalment arrangements, pay staff, prepare cashflow budgets or any other business matters.

-          Serena Irving, JDW Chartered Accountants

 Download a PDF copy here, or contact the author by email.

 

Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.

 

 

Useful links:

Message from Spice HR

https://workandincome.govt.nz/documents/eligibility/emergencies/covid-19/wage-subsidy-and-leave-payment-employer-support-factsheet.pdf

https://covid19.govt.nz/government-actions/covid-19-alert-level/essential-businesses/

https://www.health.govt.nz/our-work/diseases-and-conditions/covid-19-novel-coronavirus

 

 

 

Research and Development Tax Credits

Research & Development Tax Credits

 

Synapse

Would you like a refund of your tax losses? If your business is an innovator, then you may qualify for a refund. Most normal businesses can't get refunds for tax losses, they can only carry tax losses forward, so you need to be able to prove that you qualify for this special tax refund. Each project has to be evaluated on its merits, so some of your activities may qualify while others don't.

On 7 May 2019, the Taxation (Research and Development Tax Credits) Act 2019 received Royal Assent. This means more entities will qualify for refundable tax credits under the new scheme and now there are two tax credits to consider. 

Research & Development Loss Tax Credits (from 1 April 2015)  

"Cash out" (have refunded) up to 28% of any tax losses associated with eligible R&D activity if your company is resident in New Zealand. The maximum claimable value in 2019-2020 is $476,000.

The amount you can claim as a tax credit will be the lesser of the company's:

net loss for the year x 28%, or

total R&D expenditure for the tax year x 28%, or

total R&D labour expenditure for the year x 1.5 x 28%.

Are you eligible for this wonderful windfall? There are three areas to consider:

- Corporate eligibility

- R &D Activities

- Wage intensity

Corporate Eligibility (2015 credits)

Is your entity:

A NZ resident private company

Not foreign resident or dual resident under double tax agreement.

Not a look through company (LTC)

Not listed on a recognised exchange

Not majority owned by public authority, local authority, crown research institute or state enterprise

Not established by or subject to:

- the Education Act 1989, or

- the New Zealand Public Health and Disability Act 2000, or

- the Crown Entities Act 2004

R & D Activities Explained

Research is original, planned investigation with a view to gaining new scientific or technical knowledge and understanding. Development takes place when a project uses research findings to produce new, innovative or substantially improved materials, devices, products, processes, systems or services. 

Innovation is a key part of R&D and so is having a clearly defined project. If you are reverse engineering an existing process or product, replicating a competitor's product, or adapting your product to a new customer's needs, it won't be R&D. 

Data capture & analysis may be R&D only if it requires new technical solutions.

Specific development activities are excluded for the purpose of the R&D Loss Tax Credit, such as pre-production tooling, trial runs, commercial production, debugging and software maintenance.

Wage Intensity Explained

You must spend 20% or more of your total labour expenditure on R&D to be eligible. Total labour expenditure includes salary or wages, shareholder-employee salaries, 66% of contractor payments excluding GST. (The 66% is intended to exclude the profit & overhead portion of the contract price.) This means that you will need to keep good time records of what activities each person does for each project.

How to Apply

There is a one-off registration to complete:

https://www.classic.ird.govt.nz/online-services/service-name/services-r/online-rdltc-registration-form.html

Loss Recovery Events

When your company trades into profit, you gradually repay your tax credit. So there is no increase in imputation credit account balance until you have repaid the R&D loss tax credit. 

If you have cashed out loss tax credits, you will need to repay the credits in full if one or more of these events occur:

- Disposal of intellectual property

- Appointment of a liquidator

- Company migration from NZ or no longer a company

- Sale of shares greater than 90%

Research & Development Tax Credits (from 1 April 2019)  

Eligible entities will receive a 15% tax credit from the beginning of a business's 2020 tax year. Up to $255,000 refundable in 2020. The minimum R&D expenditure is $50,000 per year up to $120m cap. These tax credits replace the Callaghan Growth Grants over time.

The new 15% tax credit can be claimed as well as the R&D Tax loss credit of 28%. The definition of eligible R&D is different for both credits, and the definition of eligible entities is also different.

Core R&D activity must:

be performed and managed on a day to day basis in New Zealand. Up to 10% of R&D can be performed overseas.

have a material purpose of creating new knowledge or a new or improved process, service or goods. The test of "new" is on a worldwide basis.

use a systematic approach, and

have a material purpose of resolving scientific or technological uncertainty (scientific or technological uncertainty exists if knowledge is not publicly available or deducible by a competent professional).

Having a material purpose means that the required objective must be significant or important. This requirement is intended to disqualify new knowledge or applications that are discovered by accident. It is not a requirement that the R&D is successful and results in something new or improved. All R&D increases knowledge and activities that are unsuccessful can qualify. Similarly, a new or improved process, service or good does not necessarily qualify for the tax credit just because science or technology were used in its creation.

The entity must have a fixed establishment in NZ and have control over core R&D directly or within the corporate group. 

How are Tax Credits Applied

R&D Tax credits are applied firstly against income tax liability for the year the credits relate to, then applied to current income tax or provisional tax liability for a future tax year. You may apply to have the credits applied to a different tax period or tax type. Remaining tax credits may be carried forward subject to continuity rules or cashed out.

How to Apply

An application form will soon be available to complete after Year 1 alongside the 2020 income tax return. An in-year application process is in development for year 2 onwards. 

Record Keeping Requirements

General records of income, expenses, assets and liabilities just like any business.

Records to show you are eligible for the tax credit: structure, the scientific or technological uncertainty you are trying to resolve state of knowledge at the start of the project.

Additionally, to show you have a systematic approach, you require:

R&D project plans, resource allocations, start and end dates

Progress and status reports

Advice or Research documents to show that knowledge sought was not readily deducible by a competent professional

Basis for apportioning expenses

Expenditure on employee time on eligible activities should be recorded either through a time recording system or other project documentation such as log sheets or project reporting.

For the new tax credit, the records used to relate expenditure to the R&D activities and record keeping must be occurring at the same time as the eligible activities and not retrospectively treated, for example at the end of the tax year or at the end of the project.

Conclusion

The new R&D tax credits will be more accessible to a wider range of entities, particularly SMEs, and therefore promote more research and development in New Zealand. The strict interpretation of R&D and the level of record-keeping required to track expenditure may still make it difficult for SMEs to access these tax credits. In the 2019-2020 year, the cashflow effect is less beneficial than a growth grant, as businesses need to pay their expenses and lodge a return before they can apply for the refund. The gradual introduction of in-year approval from Year 2, may help to ease the cashflow burden for innovative businesses. 

UPDATE 5 July 2019: IRD has issued guidance that the R&D supplementary return for 2019/2020 must be filed within 30 days after the income tax return due date (30 April 2021 for standard date taxpayers). For the following year, general approval must be sought by the 7th day of the second month after the balance date (7 May for standard taxpayers).

This information in this article is for general information purposes and should not be relied on. If you require advice is relation to your specific circumstances please contact the author for a consultation or go to: https://govt.loomio.nz/rdtaxcredit/ for IRD discussion on the tax changes.

Download a PDF version here or contact the author by email. Like our Facebook page for regular tips.

Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.


Is It Worth Keeping a Rental Property?

Is It Worth Keeping a Rental Property?

By Serena Irving

Residential property investors were targeted in the latest tax Bill before Parliament in December 2018. The Bill is likely to have the numbers to pass into Law, so if you have rental property or are considering investing, keep reading.

Figure 1: Photo by Alex D'Alessio on Unsplash

The proposal to "ring-fence tax losses" means that investors who previously offset rental losses against other earnings will no longer be able to do so. Rental losses of one property can be offset against other rental profits in the person's portfolio, or against gains from the sale of properties, or carried forward to offset future rental profits/gains.

The change will take effect from the start of the 2020 income year (1 April 2019 for most taxpayers). If you are considering any major repairs, we suggest that you complete them before 31 March 2019. The rule changes do not affect a person's main home or mixed-used properties such as beach houses, but do apply to overseas residential rental properties.

Under the bright-line property rules from 29 March 2018, people who sell a house in New Zealand within five years of buying it must pay income tax on any gains, unless it's their main home or another exception applies.

In addition, there are increased requirements on landlords for giving notice, limiting rent increases and improving living standards. It may be tempting for some landlords to consider selling their investment properties, even though there is a rental property shortage.

Without the tax refund, would you have enough funds available to cover vacancies or major maintenance work? Auckland Property Investors Association board member Amanda Watts said in her June 2018 blog, Removal of Negative Gearing, "My concern is that for some landlords this may mean the difference between doing or not doing maintenance if there is no immediate tax relief. They might have to postpone the repairs until another year, increasing the risk that the property will deteriorate and that vacancies might result." Source: www.apia.org.nz/apia-blog

There are a lot of factors to consider other than the tax. What are your long-term investment objectives? Could you get a better return in other investments? Could you pay down the mortgage to reduce interest costs? Could you increase rents to improve your income?

If you would like to chat about how the ring-fencing of tax losses will affect you, please give us a call.

Download a PDF version here or contact the author by email. Like our Facebook page for regular tips.

Serena Irving is a director in JDW Chartered Accountants Limited, Ellerslie, Auckland. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.

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