OFFICE CLOSURE DECEMBER 2011
Murray, Brian, Vijay, Sam and the team at Jolly Duncan & Wells would like to thank our clients for giving us the
opportunity to provide your taxation and accounting services.

We wish you all a happy and relaxing summer holiday season and look forward to working with you in 2012.
The office will be closed from 5.00pm Thursday 22nd December 2011 and reopen on Monday 9th January 2012.

If you require assistance during the holidays please contact:
Murray Wells:  0274 997 901
Brian Sheridan: 027 281 1160
Vijay Goel:  021 854 635

Please Note: If the front office door is locked at any time, please press the intercom on the wall to your left.

TAX CALENDAR: Please refer to our website for important tax dates. Click here for Key Dates

XERO: We have a number of clients using Xero for their accounting needs.  They have found that it works very well for them.  If you think Xero would suit your needs, then give us a call and we can explain and demonstrate how Xero works. www.xero.com

PARENTAL LEAVE AND ANNUAL LEAVE: how it’s calculated
There’s been some recent publicity about some new mums, who have taken parental leave, being surprised that their employer has paid their subsequent annual leave at a lesser rate, rather than at what was their full salary.

The Parental Leave and Employment Protection Act 1987 allows parental leave to the employed and self-employed.
When it comes to taking a holiday, however, an annual leave entitlement over your parental leave period switches to come under the Holidays Act 2003.

Let’s focus on paid maternity leave first: Paid maternity leave is available for up to 14 weeks, up to a maximum of $458.82 per week before tax. It’s paid by the IRD. If your gross weekly pay, when working, was less than $458.82 then you will be paid at the lower rate.

Depending on your circumstances, there is provision for further unpaid leave whilst you’re on maternity leave. Even though you’re not working during your parental leave, you continue to accrue annual leave. If you have an annual leave entitlement you may choose to take your holidays before starting your maternity leave. This means you will be paid for that holiday, under the Holidays Act provisions, at the rate of:

 •     Ordinary weekly pay at the beginning of your holiday, or your
 •     Average weekly earnings for the 12 months prior to your holiday 
        whichever is the higher.

If you have worked overtime during the 12 months before you took maternity leave, this may make your average weekly earnings higher. Likewise if you’re coming back from a period of extended leave and would normally have had regular overtime, you may not want to take any annual leave until you have worked another 12 months to ensure you’re being paid at a higher rate during your holiday.
 
And just so you know: when you’re returning to work from parental leave, that parental leave period counts as part of your continuous employment.

Our comments above relate to the minimum provisions in the Act, individual employment contracts may be more generous.

The Department of Labour’s website, www.dol.govt.nz, provides a comprehensive guide to parental leave, including a paid parental leave calculator and standard forms. It’s a most valuable resource for employers, employees and the self-employed.

[Article by Elizabeth Cotton, consultant at Dunedin law firm, Downie Stewart. This article first appeared in NZ LAW Limited’s client newsletter, Commercial eSpeaking, in October 2011. Downie Stewart is a member of NZ LAW Limited].


CASUAL EMPLOYEES: the law clarified
Two recent Employment Court cases[2] have clarified the law on casual employees. Generally, a casual employee is one who has no expectation of on-going employment and their employment terminates at the end of each engagement.

These recent decisions have held the following:

• The strongest indicator of whether someone is not a casual employee, that is, a permanent employee, is by assessing whether you need to offer your employee  available work and whether your employee is required to do that work.

• While employment can start out as casual, it can change to permanent employment over time.

• Despite the parties having signed a ‘casual employment agreement’, the court can consider the ‘real nature of the relationship’.

• If the employment agreement has any obligations which apply after each engagement, for example if your employee needs to give notice to take leave or to resign, or is restrained from working from other employers, then this will indicate there is a permanent employment relationship.

These developments are of importance if you hire casual employees. If you incorrectly hire employees as casual employees, you could be liable – following a personal grievance claim by your employee – to pay them compensation and/or additional holiday pay.
[2] Jinkinson v Oceana Gold (NZ) Ltd (2009) 9 NZELC 93,341; [2009] ERNZ 225; (2009) 6 NZELR 813 (EMC); Rush Security Services Ltd t/a Darien Rush Security v Samoa [2011] NZEmpC 76

[Article by Siobhan O’Shea, solicitor at Auckland law firm, Lowndes Jordan. This article first appeared in NZ LAW Limited’s client newsletter, Commercial eSpeaking, in October 2011. Lowndes Jordan is a member of NZ LAW Limited]

THE ABOLITION OF GIFT DUTY – Forgiving Trust Debt
1. You may be aware that Parliament has now enacted legislation abolishing gift duties with effect from 1 October 2011. 

2. This will enable you to make a one off forgiveness of debt for the amount owed to you by your trust. 

3. It will also enable you to make an outright gift of assets to your trust.

4. Whether or not a one-off gift to your trust is in your best interests depends on your individual circumstances. 

5. In some cases we would suggest the debt is completely forgiven in one Deed.  In other cases we may recommend a more cautious approach.

6. We suggest you make a time to see us to review your situation and discuss the issues involved.  If you have an accountant, their involvement in the review will be important and they should attend the proposed meeting.

7. In the meantime, we set out some of the issues that you should consider before such a gift is made. 

No more annual gifting
1. If you decide to make a one-off forgiveness of debt, you will no longer be required to complete annual gifts therefore doing away with the required paperwork each year.  We envisage the documentation involved for a one-off gift will be relatively straightforward.

2. This of course does not apply to future transactions where a debt may arise or an asset is transferred by way of gift. 

Debt back – a way of controlling a Trust
1. The main reason for not forgiving debt is that it is an asset preserved in your name, and may be a significant tool by which you, as lender, can control your trust.

2. The debt owed to you is a means by which you have recourse to a trust without relying on the goodwill, or agreement from the trustees.  The debt may also provide you with the comfort of being able to call up the debt from the trust, should you need to do so for cash flow purposes. 

3. If you forgive the debt completely, you will eliminate this tool and no longer be able to demand repayment of the debt.  You will therefore lose what may be an effective way to control the trust as well as a potential source of funds.

4. For example, if you have loaned money to your child’s trust, to assist your child in purchasing a home, it may not be in your best interests to forgive the debt so you can continue to have a say in the management of your child’s trust.

5. Likewise, if you are one partner to a relationship and have advanced separate property to a trust, for example money you have received by way of inheritance, you may wish to preserve the debt as your separate property. 

Removing the asset from the estate
1. A compelling argument for not wanting to preserve a debt is that the debt, as an asset remaining in your name, becomes vulnerable to attack after you have died. 

2. It is easier for disappointed beneficiaries to make a claim against an estate than against a trust.  If the debt is not forgiven and so remains an asset under your will, people excluded from your will may be able to access the debt if they make a claim. 

3. However if the debt is forgiven before you die, then your estate will own less in the way of assets which may be the subject of a claim by people excluded from your will.

Relationship Property Claims
A debt owed back from a trust is often focused on in claims under the Property (Relationships) Act 1976.  If there is no debt back, relationship property claims against the trust are more difficult.  As an aside, our standard advice is that the best means by which to protect assets from a claim under the Act is to enter into an agreement contracting out of the 50/50 presumption under the Act.

Insolvency – the implications as regards creditors
1. If you are involved in business or are self employed and have obligations to creditors, there are implications in making a one-off gift of any debt. 

2. The abolition of gift duty may see your financial position change dramatically overnight.  As a result, the act of forgiving debt and disposing of possibly a substantial asset may be scrutinised by creditors and the official assignee with a view to clawing back that asset. 

3. We may require you to make a declaration of solvency after you have considered your financial position.  The declaration will be included in the paperwork for the one-off gift.

4. Depending on your circumstances, we may also recommend you obtain a “solvency certificate” from your accountant, at the time the gift is made and/or debt forgiven, to show that you are solvent at that time.  This is an issue which has attracted the attention of the Courts in recent times in relation to claims by creditors of the person forgiving debt.

5. While it is not unlawful to make a gift at a time of possible insolvency, there is a risk that the gift will be clawed back if you are deemed to be insolvent at the time the gift was made.

Residential Care Subsidies
1. Work and Income NZ (“WINZ”) operates by a set of criteria for the purposes of assessing a persons entitlement to a rest home subsidy.  Not everyone qualifies.

2. If Residential Care Subsidies and/or WINZ benefits are relevant to you, it may be appropriate for you to continue with a regular gifting programme. 

3. Your treatment of the debt back, including a one off forgiveness of debt, will be examined in any financial means assessment under an application for Residential Care Subsidies (“RCS”). 

4. The current amount of allowed gifting is $6,000.00 per year for gifts made in the last five years before an application is made, and $27,000.00 for any year outside the five years.

5. So far as WINZ is concerned, gifting over the allowed amounts is “excess gifting” and may be counted back into the financial means assessment at the time an application is made.

6. A one-off gift will therefore be counted in the assessment so depending on your circumstances, it would be advisable not to fully forgive the debt if you are considering making an application for RCS in the foreseeable future. 

7. If your application for RCS is imminent, we would advise you to consider making gifts of $6000.00 per year.

Tax implications
1. Although gift duty has gone, there are other considerations you must take into account when making a gift.

2. Where a gifting programme has been in place by way of reduction of debt, a distribution made from a trust to a beneficiary for whom the creditor does not have natural love and affection, can attract income under the accrual rules of the Income Tax Act (triggering a tax liability).  This would occur for example, where a trust distributes income or capital to a company.

3. Whilst this letter focuses on clients who have trusts, the principle outlined in paragraph 2 applies to anyone who forgives a debt owed by someone (a person, a company etc) for whom the donor cannot have natural love and affection, where a debt forgiveness programme has been in place.

4. You would need to obtain specific tax advice before gifting any company shares or other income producing assets, or if you are GST registered, as there are important tax consequences which must be taken into account before a gift is made.

5. Also, if you are going to transfer assets to your trust, you would still need to obtain a valuation for those assets, for accounting and tax purposes, and for understanding the true financial position of the trust.

Other considerations
1. You should consider whether any implications arise, if, after having gifted your assets, you do not own any assets in your personal name, such as your ability to raise finance, bearing in mind however that the trustees of a trust may be able to give a guarantee in support of your obligations if that is necessary.

2. If you have been making loan repayments in reduction of a mortgage on behalf of the trust, those payments will need to be included when determining the amount of the trusts indebtedness to you and therefore the amount of any gift.

Summary
The abolition of gift duty provides an opportunity to review your, and the trust’s, financial position, and to prepare documentation clarifying that position.
[Article provided by Fleming Foster Solicitors www.flemingfoster.co.nz]


COMPULSORY GST ZERO-RATING OF LAND SALES
The new rules (applying from 1 April 2011) appear to be working smoothly. They require a supply to be zero-rated if between two registered persons and consisting wholly or partly of land as long as the purchaser is not acquiring principally as a private residence. The definition of “land” is extensive and includes options to purchase.

The purchaser must declare their GST status to the seller (standard agreements now include such a declaration). But, beware; if the purchaser declares that they will be registered and they do not in fact register at settlement, they (not the seller) are liable for the GST. The purchaser will then have to convince IRD that they in fact should be registered in order to get a refund of the GST liability.
[Article by BJ Gilchrist Specialist Taxation Advisory]


GIVE US THIS DAY OUR DAILY TAX RESIDENCY
One of the most common misconceptions in tax law is that tax residents can use a calender to determine their tax residency. But the 183 day presence and the 325 day absence tests in virtually all cases mean nothing, as the permanent place of abode test will act to defeat those attempting to escape tax residency.

In most cases the issue comes down to which country taxes the world income and which taxes only the income from that country. While there are always exceptions, tales of people legitimately escaping the tax net of all countries is a bit of an urban myth. IRD NZ is aware of that and is actively targeting Kiwis that have flown the NZ tax residency coup.
[Article by BJ Gilchrist Specialist Taxation Advisory]



IRD WINS FINAL ROUND AGAINST PENNY AND HOOPER
The recent dispute involving Messrs Penny and Hooper has come to an end with the Supreme Court decision finding in favour of the IRD. The Supreme Court upheld the Court of Appeal’s view that the setting of commercially unrealistic salaries constituted tax avoidance.
 
Penny and Hooper were both orthopaedic surgeons trading in their personal capacity, but restructured their businesses to trade through companies, owned by family trusts. The companies employed the surgeons for substantially less than what they had been earning prior to the restructure. However, their work load and the nature of work did not change. The Supreme Court stated that while the structures used were valid business structures, the yearly setting of a non-commercial salary constituted tax avoidance.

In response to the finding the IRD has provided guidance, in the form of Revenue Alert RA 11/02, on circumstances in which it considers tax avoidance would arise.

Based on the Revenue Alert, the IRD will look into all aspects of an arrangement, in order to come to a conclusion on whether or not diversion of personal income through other entities, such as companies and trusts, amounts to tax avoidance. The Alert identifies the following factors as being relevant:

• The commercial reality of the service provider’s business structure,
• How profits have been distributed in substance and whether the employee and their family benefit from all profit distributions,
• Whether the remuneration paid to the individual providing the service adequately reflects their contribution to the business’ profits,
• Whether there are other reasons, apart from tax, for justifying departure from the norm.

The Alert also identifies situations where a below market salary could be justified, as follows:
• To fund planned capital expenditure,
• To retain profits within the business to provide for future financial difficulties,
• Where profits are down, but most of the profits are still distributed to the service providers, or
• The business relates to a charity and the individual receives less to maximise the charity’s return.

The IRD acknowledge other situations may arise in which it would not be possible to pay a market salary. However, if a business cannot afford to pay a market salary, the IRD would equally expect that it could not afford to make significant distributions (such as dividend payments) to associated entities.

Amongst accounting practitioners the heart of the Penny and Hooper case has been the question of whether private companies, which derive income from personal services performed by its employees, need to pay those employees a market salary. However, the Revenue Alert indicates the IRD may not stop at requiring a fair market salary. The IRD has stated that it is:

“more likely to examine arrangements where the total remuneration and profit distributions received by the individual service provider is less than 80% of the total distributions received by the controller, his/her family and associated entities.”

Paying a commercially realistic salary may not necessarily satisfy the IRD, as the IRD’s focus appears to be on the amount of income received by the service provider as a proportion of the total distributed. It is generally understood that disclosures to IRD are being handled centrally to ensure taxpayers are treated consistently.


TEST CASE FOR JUSTIFIABLE DISMISSAL
Last year the Government amended the Employment Relations Act (‘the Act’), which included significant changes to Section 103A, the test of justification of a dismissal or action of an employer.

The test changed from what “would” a fair and reasonable employer have done in all the circumstances, to what “could” they have done, thus shifting the test from a specific action to a range of possible actions.

In addition, the test was required to take into consideration the resources available to the employer, whether the employer had raised the concerns with the employee and given them an opportunity to respond, and whether they had genuinely considered the response.

The amendment came into effect in April this year and has now been tested in the Employment Relations Authority (‘the Authority’) in the case of Sigglekow v Waikato District Health Board. This is an important case as it sets the benchmark for subsequent cases (that is until one is referred to the Employment Court for a judgement that carries higher legal authority).

Mr Sigglekow was a psychiatric nurse with the DHB working in a secure ward with patients who have histories of criminal and mental health issues. He suffered a heart attack and after some weeks off started returning to work with progressively more shifts.

There were some incidents where Mr Sigglekow was allegedly sleeping during his afternoon shifts (which run to 11pm). He was spoken to about some of these incidents but not formally warned. He was dismissed in April for serious misconduct, of sleeping on the job. Mr Sigglekow took a personal grievance for unjustified dismissal.

The Authority examined the new test for justification and then stepped back to consider the other pertinent sections of the Act, relevant case law, and organisational contracts and policies. This process brought another 35 points into consideration in determining whether or not the action was justified.

In particular the Authority explored the duty of good faith from Section 4 of the Act and the requirement, when considering termination of employment, to give the employee access to, and an opportunity to comment on, information relevant to the decision.

It found that the dismissal was unjustified because the employer had been inconsistent in not dealing with the earlier incidents more severely, had failed to conduct a full and fair inquiry into the incidents and had failed to put before Mr Sigglekow (and therefore seek his response to) all the information that was relevant to the decision.

The first test case to go to the Employment Court about the 90 Day Trial Period (Smith v Stokes Valley Pharmacy 2009) was also assessed against the good faith section and was found to be unjustified because the employee had not had all the relevant information put before her nor been given an opportunity to respond. Similarly, the recent judgement in Massey University v Wrigley and Kelly, on redundancy processes was based on the good faith provisions and the need to provide all information relevant to the decision to the employee. Clearly, the good faith requirements are still a very important part of the process and cannot be circumvented when termination is being considered, irrespective of the reason.



EAT DRINK AND BE MERRY, FOR TOMORROW WE PAY MORE TAX
As the country looks forward to over-indulging at Christmas and through the summer, it is worth sparing a thought for the Danish who, from 1 October, have been forking out more to buy food with more than 2.3% saturated fat, such as dairy and meat products.
Said to be the first tax of its type in the world, the Danish Government is reported to have introduced the tax in order to reduce cardiovascular disease, obesity, and diabetes.
The tax was approved by 90% of the Danish Parliament, but consumers are not happy with the price increase to items such as butter and cheese.
The tax is charged at 16 DKK (approximately NZ$3.70) per kilogram of saturated fat on foods with more than 2.3% saturated fat. The tax will increase a pack of butter by the equivalent of about 55 cents and a burger by 20 cents. The week leading up to the increase saw consumers stocking up on food that will be subject to the tax.


TEAM NEWS

Ellerslie Township supported Fiji during the Rugby World Cup.
The Village came alive with flags and the sounds of drums, dancers and performances by the Fijian Police Band. The local retailers got into the atmosphere with their artistic window displays.



Golfing with Murray?
Any golfing clients interested in 9 holes of twilight golf late on Friday afternoons, please give Murray a call.  He will be very happy to arrange a tee time for you.

Murray's daughter Natalie is getting married in February.  Natalie spent many a happy hour filing at JDW when she was still a student.  She also worked as an accountant at JDW for six months in 2009 when she returned from 3 years in Banff.

New team member
We are very pleased to welcome Simon Jun to the JDW team.  Simon joined us in August to work in business services with Vijay.  Simon has very good Korean business contacts and he has already added a number of Korean clients to the JDW list.  Simon qualified with a Bachelor of Commerce from Auckland University after completing his accounting studies and three years university in Korea.  Simon is married to Kate and they have an infant daughter Olivia who is keeping them on their toes now that she's learning to walk! 

All information in this newsletter is to the best of the authors' knowledge true and accurate.  No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter.
It is recommended that clients should consult a senior representative of the firm before acting upon this information.