How to Develop a Workplace Health & Safety Policy for Covid-19

 When you take on employees and contractors, you have a primary responsibility for people's health and safety at work, under the Health and Safety at Work Act 2015. This means you have to manage risk as far as it is practicable, and balance it with the time and cost needed to manage it. Pretty tough to do this at the best of times, let alone during a pandemic.

Here is how we went about developing our health and safety policy around Covid-19 during the Delta outbreak as the Protection Framework was about to be introduced. We have also outlined some basic considerations for how you can develop your own policy.

Steps for developing your own health and safety policy:

1. Identify and Assess the Risks – Identify the hazard and impact on your workforce
2. Consider what Conditions and Behaviours contribute to the Risks
3. Consult with the team, Communicate and provide Training
4. Review regularly 

Identify and Assess the Risks

Every workplace will have its own assessment of risks. Consider the impact and likelihood of injury on your workforce.

We considered the risk of Covid-19 Delta on our workforce. The Delta variant is more infectious than previous variants, and there has been a community outbreak in Auckland since August 2021. Some of our team members have compromised immunity despite vaccination, and many of our families include children under 12 who cannot be vaccinated or others with compromised immunities or other vulnerabilities. Therefore we considered the risks to be high: a community outbreak makes infection more likely and the potential impact on our workforce would be severe.

Conditions and Behaviours

Does the working environment contribute to the risks? Does the way we operate contribute to the risks?

Our office is well-ventilated, and each person sits at a partitioned desk or in a separate office, and uses their own equipment. We have common areas which bring people in closer proximity, in the stairwell, meeting rooms, washrooms, printer areas and lunchrooms. We identified that we had to pay more attention to those common areas.

When Auckland was at Alert Level 1, we would often have clients or prospects walk in without an appointment. This posed greater risk for our receptionist, managers and directors. Our auditors and senior team would also have meetings offsite at client premises or in cafes. Face-to-face meetings put our workers more at risk than phone or video calls.

We adopted public health measures like good hygiene practices, mask wearing, social distancing. When we moved to Alert Level 4, we encouraged workers to work from home where practical, and locked the office door against public access, to protect our workers who did have to work at the office. We shifted all our work meetings to Zoom, Teams or phone. We offered twice weekly Zoom check-ins for maintaining connection and mutual support. We agreed to flexible or reduced work hours to help working parents who needed to care for their children.

Now we are moving from Level 3.2 to the new Protection Framework "the traffic light system", we are taking a cautious approach. Our workers are still largely working from home. Everyone who enters the office must use the Covid tracer app or sign the register.

Eliminate or Control

Depending on the hazard, you can either eliminate the risk, or control the risk to a manageable level.

When there is a community outbreak, we can't eliminate the risk of catching Covid-19 entirely, so we try to manage the risks. We read the information provided by the Government's Covid19 website and the Ministry of Health's website too. You can refer to industry guidance if available from your industry organisation.  For instance, the Restaurant Association has guidance and checklists for opening food outlets under different operation conditions imposed by the different Alert Levels.

In addition to the measures we already had in place, we decided that we needed a high vaccination rate in our team and to limit exposure to unvaccinated people in our office. Other than face masks, we didn't think that full PPE was required for our workers. We will be requiring visitors to be eligible for the vaccination pass or else we will make alternative outdoor arrangements. We are investigating whether a screen can be installed at reception to further protect our workers.

Can you force workers to get vaccinated?

We encouraged all our workers to get vaccinated, and were delighted to discover that our team was 100% fully vaccinated.

Some industries are mandated for vaccination – border and MIQ, health and disability, prison and education sectors for instance. If your organisation is not mandated for vaccination, you need to make a risk assessment to decide whether a vaccination is required for different types of work. If the nature of work puts them at a higher risk of infection and transmission than outside of work, then that work should probably be done by a vaccinated employee. Consider how many people they are in contact with, how easy to identify contacts, proximity to others, length of time in close proximity, regular interaction with people at higher risk of serious illness, and regular interaction with unknown people.

You cannot force employees to disclose their vaccination status, but you have the right to treat them as if they were not vaccinated for health and safety risk management. If certain work can only be done by vaccinated workers, businesses should set a reasonable timeframe for workers to decide if they will be vaccinated. If an employee cannot work during this time, special paid leave should be considered, especially in the short term while employers and employees discuss what happens next. Employers and employees still need to deal with each other in good faith and consider reasonable alternatives if their current role requires vaccination.

Businesses can only ask candidates at job interviews if they are vaccinated if this is justified by the requirements of the role. The information needs to be collected and handled according to the Privacy Act.

Consult, Communicate and Train

A health and safety policy is only workable if it widely adopted by the workers themselves. It is critically important for the workers to be consulted in developing the policy as they will understand the practicalities of implementing the policy better than management.

We circulated and discussed a draft policy with the team over a few meetings, and they came up with suggestions of their own. The team expressed a desire to have more precautions than what was originally proposed, and these were adopted in the final policy. We used both written and verbal communication and gave opportunities for questions. We gave workers access to a variety of posters and guides about the public health measures, and demonstrated tools such as the Covid Tracer app.

We repeatedly reminded people about personal hygiene, regular surface cleaning, mask wearing, safety when travelling to work. If you have workers who are not as fluent in English, then you may need to make extra effort to provide them with adequate training and resources for understanding.

Review Regularly

After the policies have been implemented, it is important to review them regularly. The risk itself, the working environment and ways we do work may all change, so we may have to adapt our policy to suit.

We had Covid-19 policies we implemented in March 2020 during the first lockdown. Since then, the Delta strain has increased the risk for our workers. The Government has finessed its Alert Levels and is moving towards a traffic light system with vaccination passes. We reviewed our policies and improved upon them as a result of the review and consultation. We will review them again early in the New Year. It is probable that we will be revisiting and re-writing our Covid-19 health and safety policy for many months to come.

Covid-19 is a workplace health and safety risk that needs to be carefully managed. Collaborate with your workers to identify and assess the risks, create conditions and behaviours to manage the hazards, adopt the plans and regularly review policies to keep your workers safe. There are plenty of resources to help you.

Resources for Employers

https://www.worksafe.govt.nz/managing-health-and-safety/novel-coronavirus-covid/operating-safely-what-you-need-to-think-about/

https://www.worksafe.govt.nz/managing-health-and-safety/novel-coronavirus-covid/how-to-decide-what-work-requires-a-vaccinated-employee/ 

https://covid19.govt.nz/alert-levels-and-updates/traffic-light-system/

https://www.restaurantnz.co.nz/membership-resources/resources/?category=coronavirus-resources&access=

https://www.employment.govt.nz/about/news-and-updates/government-announces-covid-19-workplace-vaccination-legislation/

https://www.health.govt.nz/our-work/diseases-and-conditions/covid-19-novel-coronavirus/covid-19-vaccines/my-covid-record-proof-vaccination-status/nz-pass-verifier#about

-          Serena Irving

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.

A well-written article like this, which is general in nature, is no substitute for specific employment or health and safety advice. If you want more information about the issues in this article, please contact your HR adviser or the author.

Residential Property Investors: Interest Deductibility Update

Interest Limitation for Residential Rentals

The Government has released its draft legislation to remove interest deductions for residential rental property owners, from 1 October 2021. This sets them apart from other property-owning businesses, like builders, property developers and commercial property owners who can continue to claim interest expenses when calculating taxable income.

A residential rental property classified as a "new build" qualifies for a five year bright-line test (instead of ten years) and interest deductibility for 20 years. The definition of "new build" has been extended from the original draft, increasing the number of properties eligible for the new build exemptions.

The Government's intention seems to be to reduce investor demand for existing houses and push them towards new builds, making the older houses more affordable for first-home buyers. IRD's regulatory impact statement casts doubt over whether the new legislation will improve housing affordability.[i] Perhaps then, the decision was made more for appeal to the voter base then an actual belief that the policy would work to improve affordability.

Staged removal of deductibility for existing property

From 1 October, you can continue to claim interest if you acquired the property before 27 March 2021, but the percentage of the interest claimable reduces each year until 31 March 2025.

Covid-19 Alert 4 Support for Businesses

New Zealand is again at Alert Level 4, following a recent Covid-19 Delta outbreak. We have summarised Government Support for businesses and contractors below.

Wage Subsidy Scheme (WSS)

Eligible employers anywhere in the country can apply for the WSS if they expect a loss of 40 percent of revenue as a result of the Alert Level increase announced on 17 August 2021. The WSS rates have been increased to reflect the increase in wage costs since the scheme was first used in March 2020. Businesses will be eligible for $600 per week per full-time equivalent employee, and $359 per week per part-time employee. The WSS will be paid as a two-week lump sum. Applications open on Friday 20 August with the first payments usually available after three days.

Further information will be available on the MSD website shortly https://www.workandincome.govt.nz/covid-19/index.html

Resurgence Support Payment (RSP)

The RSP is available if a business incurs a drop of 30 percent in revenue over 7 days, compared with 7 days in the last 6 weeks as a result of the Alert Level increase. The RSP is worth up to $1,500 plus $400 per full-time equivalent employee, up to a maximum of 50 full-time employees (ie a maximum of $21,500).

For commonly owned groups, the whole group needs to be eligible before each entity can claim the RSP. Further information is available here.

Leave Support Scheme (LSS)

The LSS provides a two-week lump sum payment of either $585.80 per week for full-time workers, or $350 per week for part-time workers, who must self-isolate and cannot work from home. More information is available here.

Short-Term Absence Payment (STAP)

The STAP provides a one-off (once per 30 days) $350 payment for workers who must miss work due to a COVID-19 test and cannot work from home. Further information is available on the MSD website.

Are there eligibility checks?

Yes, MSD do run spot checks to ensure that income drops have been calculated correctly and you have listed current employees correctly. If you are in the process of restructuring, don't claim for employees who are being made redundant.

IRD has also been routinely checking 2021 personal income tax returns to verify that the self-employed and contractors have been declaring their wage subsidies and/or resurgence support payments in their income tax returns.

Please contact us at JDW if you require any assistance on calculating eligibility or making applications.

-          Serena Irving

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.

A well-written article like this, which is general in nature, is no substitute for specific tax advice. If you want more information about the issues in this article, please contact the author.

 

 

Growing your Business through Acquisition

Buying another business, in your industry or a related industry, can help you to scale up or grow your business quickly. You can reach a larger audience for your product or service, by tapping into the new customer base. You can take on new team members with experience and skills. You can acquire new technologies or consolidate systems which will make your whole operation more efficient.

My Story

I was made redundant just as I was preparing to work after my second daughter was born. A friend and I set up our own accounting firm, but didn't have many clients. We looked at acquiring other accounting firms or fee bases, but they weren't a good fit to suit our values and our lifestyles. We bought into my current firm, and suddenly I had enough clients to pay myself a salary and time to build my networks for profit growth.

What to Look For

There are a lot of considerations for buying an existing business, some of which may be unfamiliar if you grew your existing business organically. Remember that you are buying the business as it is right now. If you are looking at growth potential, then also look at how long that growth will take and how much extra investment is needed to get there. Consider whether the investment will save you the effort of growing organically.

Take a look at the past three years' profit and loss and balance sheet, ask questions of the owners. Spend time in the business, watch how the team operates, look at the layout and state of equipment and fittings. Review key contracts with customers, landlord, employees and suppliers.

Culture and Synergies

Is the new business compatible with your existing one? Can you run both? Merge them together? Or keep them separate and hire a manager for one of them?

What is the people culture like? Are they like us, with similar values and purpose? If the culture isn't similar, then you may have several employee leaving before you can build a cohesive team.

What are the systems like? If you take the best system of both businesses, can you transition the other business smoothly? Can you make savings on administrative and management roles, without impacting on productivity and the customer experience? Can you provide a better end-to-end experience for your customers because of the business acquisition?

Financials

Businesses are often sold at a valuation, calculated as a numbers of years of expected profit (EBITDA, or earnings before interest, tax, depreciation and amortisation). If your industry uses a multiple of 3, that means that you will usually pay three times the cash profit, excluding finance costs and tax which may vary. Comparing EBITDA can be a bit tricky though, especially for family businesses, so take a closer look at the Profit and Loss report. Is the shareholder salary, a market salary for the work the person does? Are they putting through extra expenses for tax purposes like home office costs? Consider entertainment, travel, vehicle costs, donations which can be discretionary expenses. Are they paying a lower rent because the building belongs to family?

Don't just look at sales as a number, but consider the lifetime value of customers. Are you going to get repeat sales from the customers? Also, look at the sales trend over time. Is the business declining or growing, and why? Are you buying a business or just buying wages for yourself?

Look at the strength of the balance sheet especially the assets. Look at the quality of the stock. Look at the asset depreciation schedule and compare it to the equipment you see. Don't buy any damaged equipment or expired stock. You usually won't be taking over any liabilities of the business except for holiday pay, but make sure that your agreement reflects that.

If you are borrowing for the purchase, your bank will want to see cashflow forecasts. Can you predict what the next years' cashflow is going to be like? What is the cost of funding the investment?

Key contracts

Review the key contracts of the business: with customers, landlord, employees and suppliers and consider your reliance on them. Imagine if you lost a major customer or supplier, your landlord decided not to transfer the lease to you, the store manager decided to move to a competitor. Do you have legal means to deal with this, or can you cope with the loss?

The exiting owner

Often the exiting owner will offer a work-in period, where they work paid or unpaid, to help you transition into the business. Whether you keep them on as an employee after that is your choice, but then you should agree appropriate duties, pay and conditions. Make sure the exiting owner signs a non-competition restraint of trade for a suitable period, set of activities and geographic location.

Conclusion

Buying another business can give your business a quick growth boost. Make sure the numbers stack up, that you have the time, resources and energy to combine your new business with your existing business. You need to take the time and effort to inspect your target business before you buy and evaluate whether it is a good investment. Consult with your accountant, banker and lawyer before you sign up to a business acquisition.

By Serena Irving, Venus Ellerslie. Download a copy here. This article was first published by Venus Network. Venus Businesswomen Thriving Together. To find out more about Venus, follow this link: https://www.venusclubs.co.nz 

I'm a Contractor: How do I manage GST and WHT?

If you're a contractor or freelancer, there are a few things you should know about GST and withholding tax (WHT).

If you expect to earn $60,000 a year you need to register for GST

That is, if you are invoicing $5,000+ a month, on a regular basis, then you should register through MyIR. If you are GST registered, then you add 15% GST to your service fees, and pay the GST you collect to IRD. You can also claim back the GST you have paid on your business purchases and expenses.

You can lodge GST returns on a 6 monthly, 2 monthly or 1 monthly frequency. You can choose invoice, payments or hybrid basis, which determines if you disclose GST when invoiced or when paid. Most of our freelancers choose to file GST returns 6 monthly on a payments basis, so they don't have to prepare their GST return very often, and they can refer to their bank statements for adding up income and expenses.

What is withholding tax (WHT) and can I choose my own rate?

Contractor income is called schedular payments by IRD, and withholding tax (WHT) is a type of income tax that is deducted from schedular payments and paid directly to IRD by the customer paying the invoice.

The usual rate of WHT is 20% and that is typically a good rate for someone earning up to $100,000 a year after deducting expenses, because it means you have less than $5,000 to pay in terminal tax and you won't have to pay provisional tax. If you earn more than $100,000 a year, then you can opt for a higher WHT rate. If you earn less than $50,000 a year, you may want to select a lower rate of WHT.

If you would rather not have WHT deducted, you can apply to IRD for a certificate of exemption (COE) which you have to show to the customers paying your invoices. This may be because you have lots of expenses that you can claim back, or it may be that you prefer to manage your tax payments yourself, or it may be that the payer doesn't want to register as an employer for a one-off payment. If you are a NZ resident contractor paid by a labour hire customer under a labour hire agreement, then you have to apply for tailored tax rate of 0% instead of a COE. In both of these cases, you have to pay provisional tax directly to IRD instead.

What do I show on my Customer Invoice?

When GST & WHT registered, a typical contractor invoice will look like this:

Tax Invoice
Contractor name, GST number
Invoice date Name and address of recipient
Services description	$1,000.00
Less WHT (20% of the $1k)	(200.00)
Plus GST (15% of the $1k)	$150.00
Total Invoice	$950.00
Payment terms and bank account details

 In the example above, the customer pays $950 to the contractor and $200 to the IRD. The contractor completes a GST return at the end of the filing period, and pays $150 to IRD.

 At the end of the income tax year, usually 31 March, the $1,000 income is included in the contractor's income tax return, and the $200 WHT is treated as a credit (reduction) against the income tax payable.

 Working out your taxes can be the most challenging part of being a contractor. Team up with a chartered accountant to help you navigate the complexities, so you can get on with what you do best.

-          Serena Irving

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.

A well-written article like this, which is general in nature, is no substitute for specific tax advice. If you want more information about the issues in this article, please contact the author.

If you're looking for other useful information for freelancers, like what expenses you can claim, refer to our previous article: https://www.jdw.co.nz/newsletters/blog/jdw/setting-up-as-a-freelancer

 

We are a Not-For-Profit: Do we need an Audit?

Do we need an Audit?

The majority of New Zealand's registered charities (a.k.a not-for-profit or NFP) do not need to be audited according to the Charities Act 2005, but you will need to also check your trust deed, charter or constitution, as some charities may include an audit requirement in its rules. Also, some grants have a condition attached that the financial statements must be audited or reviewed.

If total operating expenditure for the two previous accounting periods exceeded $500,000, your charity is considered medium-sized and your financial statements must be reviewed or audited by a qualified auditor. If total operating expenditure for the two previous accounting periods exceeded $1 million, your charity is considered large and your financial statements must be audited by a qualified auditor.

What's the Difference between an Audit, a Review and a Compilation?

An Audit gives a high or reasonable level of assurance that the financial statements are free from material errors or fraud. It is not an absolute assurance though; auditors cannot guarantee that there is no fraud or error. Auditors are independent and are not involved in the compilation of financial statements, so they can objectively give their expert opinion. Auditors will conduct detailed testing, calculations, analysis and observations to reach their conclusions.

A Review gives a limited assurance that the financial statements are free from material errors or fraud. Reviewers do not go into as much depth as auditors, so they give their conclusions in a negative form. In simplistic terms, it would be saying "Nothing has come to our attention to cause alarm.", instead of saying "Everything looks fine.".

A Compilation is neither an audit nor a review, so the preparer does not give any assurance about detecting material errors or fraud. If the financial statements have been prepared by a chartered accountant, they will bring any issues to your attention if they notice them, but that is not their purpose.

Which Reporting Standards do we follow?

There are four Tiers of Reporting Standards for NFPs. Tier 1 is the most complex and Tier 4 is the simplest. The expense thresholds relate to the two previous financial years.

Tier 1 – Over $30m annual expense or public accountability (people give you cash or assets to hold for them as one of your main activities). Accrual basis accounting.

Tier 2 - $2m - $30m annual expenses. Accrual basis accounting.

Tier 3 - $125k - $2m annual expenses. Accrual basis accounting.

Tier 4 – under $125k annual operating payments. Cash basis accounting.

How Can I Prepare for an Audit?

You will be contacted by your auditor to book in a suitable time for the audit. The people involved in managing the finances and preparing the reports should be available to meet with the auditor during this time. You will need to have the following records available:

• Draft financial statements and supporting workpapers.
• Procedures manual outlining the internal controls for all finance activities, especially cash handling, invoicing, payments.
• Leases, grants and other contractual documents.
• Bank authorities.
• Minutes of board meetings, AGM.
• Read-only access to accounting software, including ledgers and payroll.
• Other documents requested by the auditor.

Set aside a space in the office for the auditor to work onsite, with internet wifi, printer/scanner.

What Does the Audit Process Involve?

The auditor will plan the assignment and send your governance team an engagement letter, outlining the scope of the audit.

The auditor will visit you on-site, test the internal control system, gather data for analysis, meet with the finance and governance team. The auditor will follow the flow of source documents to record-keeping and reporting, and back again.

The auditor will also work off-site, analysing data, confirming changes to financial statements and prepare a management report for you, with key finding and detailed recommendations. When the financial statements are approved by the governance team, the auditors will issue their audit report for the members of the NFP. The audit report does not contain details like the management report, but a generalised statement of opinion.

How Do We Keep Costs Down?

Make sure that you are reporting to the correct tier of reporting standards, and only get an audit or review if required. Document your procedures, have tidy systems that easy to follow. Have clear records that are easy to read and locate when the audit starts. Some NFPs have a folder with all the documents sorted systematically, others use cloud-based document management and accounting systems.

Should We be Scared that We Need an Audit?

No, definitely not. Your not-for-profit wins if it is using its funds wisely for the betterment of its members and the wider community. The Auditor's work is to give assurance that this is being done.

Auditors take an educational approach, rather than a judicial approach, so you have a greater chance of getting things right next time.

-          Serena Irving & Pradeep Singh

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

Serena Irving and Pradeep Singh are directors in JDW Audit Limited, the audit wing of JDW. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.

 

IRD's Piece of the PIE

If you have portfolio investor entity (PIE) investments, you should check your investor statement each year to check you have the right portfolio investor rate (PIR). Before this year, if you underpaid you had to pay the extra tax in your income tax return, and if you overpaid tax you had to live with it. There was no mechanism for getting the overpayment back. From the 2021 income tax year, this situation has been rectified so you can get a refund.

What is a PIE and a PIR?

A portfolio investor entity, or PIE, is a special type of managed fund, which invests contributions in various types of passive investments. Kiwisaver funds are an example, but there are lots of other PIE funds which invest in term deposits, shares and insurance products. They were set up to align the tax on managed fund investment returns with the tax on direct investment returns.

The portfolio investor rate, or PIR, for NZ resident individuals is calculated at 10.5%, 17% or 28% depending on your taxable income with and without the PIE income (see Figure 1). Even with the introduction of the 39% top personal tax rate the top PIR is still only 28%.

The PIR is based on the taxpayer's previous two income years immediately before the relevant tax year, so there can sometimes be a lag between the taxpayers' marginal tax rate and the PIR.

Figure 1: PIR Table, source: IRD.govt.nz

Trusts can choose a PIR of 28% as a final tax rate, or can choose 17.5% and include the PIE income and tax paid in the end of year income tax return. This may be attractive if beneficiaries are receiving an income distribution from the trust and earn less than $48,000 income annually. Trusts can also choose a PIR of 0% and include the PIE income or loss and tax credits in the end of year income tax return. This might be attractive if the trust is using up prior year tax losses.

How Do I Receive my PIE Tax Refund?

We don't have to include your PIE income and tax credits in your income tax return, unless the PIR is the wrong rate. If you are due a refund, we will include it in your income tax return and then you can either use it to pay your terminal tax on other income, or get a refund back.

If you don't have to file an income tax return, IRD will automatically review your PIR after you have confirmed your income summary for the year. Make sure that your correct bank account details are loaded in MyIR for Income Tax, so that IRD can deposit the refund directly into your bank account.

Should I Talk to my PIE Advisor?

Yes, if you have had a recent change in your income, it's a good idea to let your advisor know that you need to change your PIR. This way, you won't get any surprises at the end of the tax year.

If you think you are due a PIE tax refund and haven't received it, please contact us.  

-          Serena Irving

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.

Taxing Content Creation

My husband watches videos of gamers playing his favourite first-person shooter computer game. My children watch other children unboxing toys and hamsters finding their way through mazes on YouTube Kids. I follow my favourite style consultant on Instagram and read her blogs. My younger cousins avidly watch the latest TikTok videos. We love watching these people having fun, so can they really be earning taxable income?

Inland Revenue is trying to clarify the tax rules for content creators, like bloggers, influencers, gamers, online reviewers, video makers and has issued an Exposure Draft with a deadline for comment by 1 June 2021. We have outlined below some examples, to outline some of the difficulties of the proposed rules, as it means that content creators may be liable for more income tax than they previously thought. If you are affected by these proposed rules, do you agree with them?

Is it a Hobby, a Side Hustle or a Business?

This distinction can change over time. There is a low-income exemption for ages 18 and under, so they don't pay tax if they earn less than $2,340 a year. For over 18s, the exemption is only $200 a year.

For instance, an amateur photographer sets up a Facebook page posting images of his LEGO Creator models. A toy store offers to pay him $150 for a one of his photos, to use in their LEGO in-store display. At this stage, the photography is still a hobby, the income is not regular, expenses far outweigh the income, and he is not intending to do photography as a business. He earns less than $200 so he doesn't need to declare any taxable income.

His photography and LEGO creations improve and he sets up Patreon account. Donors get access to exclusive photos which are not on his free Facebook page. He receives lots of small donations during the year, pushing his income up to $250 in a year. The $250 is related to his photography activities and more than $200, so he needs to declare it as taxable income. He can deduct his expenses though, such as new lenses, editing software, internet subscriptions.

He creates a stop motion video from his LEGO which goes viral on Tiktok. He receives commission income from toy stores for the post links, which is taxable income, even though this is still a side hustle for him.

He stops creating photo posts and video posts as he's too busy with his main work, but still is receiving income from his old photo / video content. Even though it's now passive income, it is still taxable, but he can't keep claiming business expenses because he is not actively involved.

Are Gifts of Goods and Contras Taxable?

IRD considers goods and contras to be taxable if they relate to the income-earning activity of the content creator, and can be converted into money. But if you didn't buy it, how would you decide on the taxable value?

For instance, in the LEGO photographer example, if a toy store decided to gift a LEGO set to photographer as well as paying commission, the secondhand value of the LEGO set would be used to determine a reasonable estimate of the taxable value. You could look at what similar sets are selling for in TradeMe or another online marketplace, and deduct the listing fee or commission for the sale.

If a homewares reviewer received a free espresso machine in exchange for a review, that is considered a contra. The espresso machine could be sold second-hand afterwards or kept, but the timing of the income would be receipt of the espresso machine. The value would be either what it was actually sold for, or estimated from looking at an online auction website.

In some cases there may be no resale value, such as used personal items like toothbrushes. If a gamer was required to show and consume some branded ice coffee drinks while gaming as part of a sponsorship deal, then the drinks would not be income as they cannot be sold.

What Expenses to Claim?

If you have an income-earning activity you can claim a deduction for expenses and depreciation (gradual write-down of assets) on items you use in the business. There needs to be a relationship between the expense and the income-earning activity.

A blogger may have home office costs, internet and phone, depreciation on computer, subscriptions to industry relevant material, professional fees. If the blogger has to travel to interview people or do research, then the travel costs can be claimed.

Most clothing expenses makeup and haircuts are not deductible, even though the content creator is the face of their brand and has to be well-presented. Clothing is considered private or domestic expenditure because it is used for warmth and modesty. This applies even if the clothes are worn just for a photoshoot. An exceptional circumstance may be made for a costume used in a skit. I read recently that ABBA had outrageous costumes to get around similar rules in 1970s Sweden[i]. Models can usually claim hairstyling and makeup just before a photoshoot. It appears that IRD are not willing to extend a claim for clothing, hair and makeup to influencers who model for their own social media posts and act in their own videos.

 

Content creators, are a relatively new form of advertisers, and IRD is seeking to provide guidance to them to ensure they know their tax obligations. In doing so, some hobbyists may quickly find themselves with taxable income sooner than they thought, and some influencers may have fewer expenses to claim. The lines between influencer, model, celebrity and actor may be blurry at best, and it may require serious debate to clarify them.

-          Serena Irving

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.

Opening a Window on Trusts

Are you a trustee or settlor of a trust? Who wants to know? Just about everyone it seems. The Trustees Act 2019 requires trustees to keep track of core records and inform beneficiaries. The Taxation (Income Tax Rate and Other Amendments) Act 2020 introduces a far greater level of transparency for IRD to understand the finances of a trust.

This is a follow-on article from our previous article, An Inconvenient Trust, and enlarges on the new disclosure requirements.

Core Documents to Keep

Every trustee is required to keep a copy of the trust deed and any amendments, at minimum. At least one trustee should also have records:

• To identify trust property, income, expenses, assets and liabilities, accounting records, financial statements.
• Of decisions and contracts made during their trusteeship.
• Documenting appointment, removal, and discharge of trustees.
• Any letter or memorandum of wishes from the settlor, and other administration documents.
• Including those documents passed to them from former trustees.

 Trustees cannot rely on leaving the trust records with a trusted professional such as a lawyer or accountant. The new Act firmly establishes that it is the trustees' responsibility to hold and maintain these records.

Information for Beneficiaries

Every adult beneficiary (18 years and over) now has the right be informed that they are beneficiaries of a trustee and some basic trust information so they can hold trustees responsible for good trust management.

The basic trust information is the fact they are a beneficiary, name and contact details of the trustees, the right to request a copy of the terms of the trust or trust information. When a trustee is appointed, removed or retired, the beneficiaries should be informed the details as they occur.

Other trust information must be supplied within a reasonable period of time after the request, but the trustees must decide if it is appropriate to disclose the information and may refuse the request.

As a trustee you would need to consider the degree and extent of the beneficiary's interest in the trust and their likelihood of receiving trust property via distribution in the future. Look at the nature and context of the information request, and what are the settlor's wishes. Relative ages and circumstances of the beneficiaries must be considered and the effect on all beneficiaries, trustees and third parties of giving the information.

This is particularly relevant in regard to family relationships. For instance, the settlor may have stated in her Memorandum of Wishes that she doesn't want her youngest son to get more than $10,000 a year as "he will only spend it all on drugs and booze". This disclosure may cause jealousy or resentment amongst the sibling beneficiaries, so the trustees may choose to withhold disclosure of the Memorandum of Wishes. On the other hand, a degree of transparency may actually help to deal with a particularly difficult beneficiary, who thinks that he is getting left out of the loop.

If the information is personally or commercially confidential, then the trustees can refuse to disclose. For instance, if a beneficiary is an employee of a competing business, then the trustees could refuse to disclose financial data, like gross margins, due to confidentiality. The trustees can also ask beneficiaries to pay reasonable costs for providing the trust information requested.

If you would like a copy of JDW's beneficiary letter template, please email the author.

Information for IRD

The new Trust Disclosure rules for IRD were passed under urgency and without robust consultation in December 2020. In Bill Patterson's view[i], "it seems to reflect a view of officials that trusts are somehow "bad" and are often misused." The Government did not increase the trust income tax rate from 33% when it introduced the top individual marginal tax rate of 39% on 1 April 2021, but IRD has been tasked to brief Government if they notice odd patterns of behaviour around the use of trusts.

For the 2021-2022 income year, trustees will be required to disclose financial accounting information, additional information about loans and related parties, distributions and settlements made during the year.

The format for disclosures has not been finalised yet. We expect the financial accounting information to be similar to the current IR10 return which is used for other entities, a compressed profit and loss statement and balance sheet report. But it could also include transfers to the trust from related persons.

For distributions, trustees will be expected to disclose name, IRD number and date of birth of beneficiaries, for capital distributions as well as revenue distributions. This could have wider tax consequences for non-resident beneficiaries who receive distributions which are taxable in their country or tax residency, as IR will be able to pass on details through tax information exchange agreements.

For settlements on the trust, trustees will be expected to disclose name, IRD number and date of birth of settlors and the amount and nature of the settlement. For the 2021-2022 year, IRD will be looking for details of settlors from prior years.

How are you maintaining your records?

At JDW, we have a document portal in the cloud which holds trust information. Other trustees, keep their information in a shared folder in Google Drive, Dropbox or Sharepoint. If you are using a cloud storage folder, you need to be able to manage security, to give trustees full access, but beneficiaries only get access to files that trustees have allowed them to see. Other trustees keep only paper copies of documents, which helps with controlling who sees the information, but this can make it difficult for sharing across multiple people.

Who to ask for guidance?

Talk with your fellow trustees and your trust's lawyer for dealing with requests for information from beneficiaries. If you can't come to a clear decision, you can apply to the court for a ruling.

Discuss the IRD disclosure requirements with your accountant, and be prepared for them to ask you for more detailed information in next year's tax return questionnaire.

 

The Trustees Act 2019 and Taxation (Income Tax Rate and Other Amendments) Act 2020 have opened the window on trusts, making it easier for beneficiaries and IRD to see what is going on inside trusts. This can place a larger administrative burden on trustees, but it will also encourage them to look after trust property in their beneficiaries' best interests.

We don't yet know what IRD plans to use all this additional trust information for, but given the wide scope of the disclosures, we can imagine that it may lead to different ways of taxing trust distributions and data matching for related parties. Watch this space.

-          Serena Irving

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.

Residential Property Investors: Bright-Line Test and Interest Deductibility

March 2021 brought big, sudden news for residential property investors. The Bright Line Property Test has been extended to 10 years for residential property from 27 March 2021. Interest expenses are non-deductible for residential rental property bought from 27 March 2021 and gradual elimination of interest deductibility for current residential rental property owners. Is this capital gains tax in disguise?

The Government's efforts to slow down the house price escalation has caught even our tax commentators on the hop, with the rapidity that the measures have been introduced. The Bill to make these changes has not been passed yet, so there may further clarification or changes when we get the final legislation before 1 October 2021.

Bright-Line Test Extended to 10 Years

The bright-line test makes the sale of residential property taxable if it is sold within a set period of acquiring it. Properties bought on 27 March 2021 or later, will be subject to a 10-year bright-line test, instead of the previous 5-year bright-line test. Simply put, if you sell the property within ten years, you will pay tax on the gain in value from the sale.

The taxable income from the sale is included in the income tax return of the property owner(s) relating to the period the property was sold, and tax calculated at their applicable income tax rate. Companies 28%, trusts 33%, individuals 10.5% - 39%.

Exceptions

If you inherited the property or it was your main home for the entire period of ownership, then the property is exempt from the bright-line test. If the property qualifies as a "new build" then the 5-year bright-line test applies.

What is a "New Build"?

There is be further consultation on the definition of "new build" but it is intended to include properties that are acquired within a year of receiving their code compliance certificate under the Building Act 2004.

Short Stay Accommodation

Properties used solely for short-stay accommodation will not qualify for the business exemption and will be subject to the 10-year bright-line test.

Changes in Use During the 10-Year Period

If the period that the property is not your main home is 12 months or less, then this is NOT a change in use. For instance, if it takes you several months to move in or it takes several months to sell after moving out.

If the change in use is for greater than 12 months, then you multiply the profit on sale across
 the percentage of time it was not a main home. E.g. If the gain in value was $50,000 and it was not a main home for two of the eight years you owned it, then $50,000 x 2/8 = $12,500 taxable income.

This differs from the previous all-or-nothing approach taken for the 5-year bright-line test.

If bright-line test doesn't apply it might still be taxable

If you are a builder, speculator, developer or dealer in land, then the old land sale rules still apply.
Similarly, if you purchase property with the intention of selling, you must pay tax on the gain anyway.

Interest Not Deductible for Residential Rental

Government proposes to take away the ability for residential rental property owners to claim interest on loans as an expense against rental income, from 1 October 2021. This sets them apart from other property-owning businesses, like builders, property developers and commercial property owners who can continue to claim interest expenses when calculating taxable income.

If you bought the property from 27 March 2021 onwards, you can claim interest until 30 September 2021, then no further interest claim from 1 October. You'll still be able to claim other rental costs for calculating taxable income, just not the interest.

Staged removal of deductibility for existing property

From 1 October, you can continue to claim interest if you acquired the property before 27 March 2021, but the percentage of the interest claimable reduces each year until 31 March 2025.

Figure 1 IRD table: Rental interest deductibility

Refinancing for rental property bought before 27 March 2021

If your initial loan drawdown for settlement was after 27 March 2021, but the acquisition date was before 27 March, you can follow the staged removal as if the loan was drawn before 27 March 2021. But if you borrow further, such as to make improvements, the interest on the new debt is not deductible from 1 October 2021.

Uncertainty for some sectors

We're still trying to get clarification on how the interest non-deductibility will apply in some cases.  Changing lenders; operating a retirement village; borrowing for mixed commercial/residential properties; borrowing in a company (which currently has an automatic interest deduction. We encourage those of you who are affected to make a submission.

Effect on tenants and first home buyers

Initially, at least, landlords will be looking at increasing their rent incomes from tenants. But rents can only rise so far, before you run out of tenants who can afford rents.

The Government may be hoping that investors exiting the residential property market and an increase in infrastructure funding will help increase the housing stock for first home buyers. Perhaps it would have been better to have more housing available, before attacking property investors, because it is going to backfire on tenants.

The removal of interest deductibility is directly targeted at residential property investors over other forms of investment. While interest rates are low, it may still be an investment option for some, but it will be another story when interest rates increase.

We have a calculator to help you estimate the cashflow requirements for your rental property with the interest deductibility changes. If you would like a copy, please email the author.

For a Government vehemently opposed to capital gains tax, the extension of the bright-line test does look like a capital gains tax in disguise. The Government has its sights set on villainous landlords, but in the short term at least, it may be the tenants who have the most to lose.

-          Serena Irving

Download a PDF copy here or contact the author

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.