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Im a Contractor How do I manage GST and WHT

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).

Woman standing with laptop, pink trees in background

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

 

Do We Need an Audit?

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.

Red hands forming a heart

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.

 

Portfolio Investor Rates

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.

slice of cherry pie

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.

PIE tax rate table

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

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?

Woman typing on laptop

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.



[i] https://www.theguardian.com/music/2014/feb/16/abba-outfits-tax-deduction-bjorn-ulvaeus

Opening Window on Trusts

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.

Acquisition Date

Acquisition date is the date a binding sale and purchase agreement is entered into.

Hand holding house keys

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.

Gain in Value from Sale

The gain in value from the sale = selling price – purchase price – cost of capital improvements – cost of buying and selling the property

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.

2021 Payroll Update

2021 Payroll Update

Are your employment agreements and payroll systems updated for recent employment and tax law changes? There has been a flurry of changes introduced in the past year, so now is a good time to ensure that you are up to date.

If you do need to update your employment agreements, remember that you will need to act in good faith, communicate the changes, i.e., what is changing and why it is necessary, and give your team time to consult with their advisors and provide feedback before they sign the updated agreement.

Man in yellow overalls processing fish

These are the key employment changes in the past year:

Minimum wage increasing 1 April 2021

Adult minimum wage rates increase from $18.90 to $20 an hour. Starting out and training minimum wage rates increase from $15.12 to $16 an hour. Consider how this will impact other employees in terms of internal wage relativity and external benchmarking in your industry. We expect that wage bands will compress as lower wage bands will be affected more that higher wage bands.

Remember to consider salaried employees and piece rates or commission employees to ensure they will also be earning minimum wage or higher.

Support for businesses due to Covid-19

The Covid-19 Resurgence Support Payment from IRD is for businesses affect by 30% loss of turnover due to the 28 February increase in Alert Levels is open for applications until 12 April 2021. The RSP can be used to cover wages and fixed costs. You can apply for the RSP and the MSD payments below if eligible. You can read our explanation of the RSP here.

Employers cannot make employees take annual leave or sick leave if they can't go to work due to increases in Alert levels. Employers can ask employees to work from home or alternative location, or to carry out reasonable alternative duties.

Covid-19 Short Term Absence Payment can support businesses with a one-off $350 payment from MSD for each worker who can't work from home and need to stay home while waiting for a Covid-19 test result. Leave Support Scheme is a two-week lump sum of $585.80 per full time worker a week ($350 per part time worker) for each worker either sick with covid-19 or required to self-isolate as a close contact or high-risk or a parent/caregiver of the person required to self-isolate.

The Wage Subsidy March 2021 from MSD opened on 4 March and closed on 21 March, for businesses affected by 40% loss of turnover due to alert level changes on 28 February 2021. It paid businesses a two-week lump sum of $585.80 per full time worker a week ($350 per part time worker) for each worker. The scheme can be re-opened in future too if needed. You can only claim one of the Short Term Absence Payment, Leave Support or Wage Subsidy for the same employee at the same time. Employers are required to retain the employees named in the wage subsidy application for the period of the subsidy.

Increase in Top Marginal Tax Rate to 39%

From 1 April 2021, the marginal tax rate for income over $180,000 increases to 39%. This increase has flow on effects for paying bonuses, superannuation contributions and Fringe Benefit Tax. Make sure your payroll system is updated. Read our explanation here.

Sick Leave Entitlement increasing to 10 days

A Bill was introduced in Parliament to expand sick leave entitlements from 5 days to 10 days. The maximum entitlement will stay at 20 days. The additional sick leave days will be added on a date relative to the person's start date. The Bill is expected to pass in mid-2021 with effect two months after Royal Assent. The Government argues that businesses benefit with fewer bugs spreading, leading to fewer absences and more productivity. Some employers I have spoken to are sceptical, as they know of workers who always take their maximum sick leave allowances.

Bereavement Leave to cover miscarriage and stillbirth

Passed unanimously into law on 24 March 2021, granting up to three days bereavement leave if they or their partner experience a miscarriage or stillbirth. Also available if a surrogacy or adoption plan ends by miscarriage or stillbirth. Miscarriages occur in 1 in 5 pregnancies and stillbirths occur in 1 in 200 pregnancies, and can be traumatic for those involved. No proof is required and leave does not have to be taken straight away or on consecutive days.

Employees become eligible for bereavement leave after six months of employment at present, but the Holidays Act Taskforce has recommended that bereavement leave and sick leave entitlements start from the first day of employment, so watch for this change in 2022.

Easier application for Paid Parental Leave

Applications for paid parental leave can be made online and IRD will be able to use its current tax records to determine eligibility in most cases. Paid parental leave payments from IRD were extended to 26 weeks from 1 July 2020.

Equal Pay and pay equity

The Equal Pay Amendment Act came into force on 6 November 2020. It allows workers to make a pay equity claim with employers, and provides a process for resolving issues. Pay equity is about women and men receiving the same pay for doing jobs that are different, but of equal value (that is, jobs that require similar degrees of skills, responsibility and effort).

Workplace change process, even in Covid times

This isn't a new law, but the Employment Relations Authority determination against Eastern Bays Hospice Trust reminds us that good faith and an employee's considered agreement is required, before changing the pay or conditions of employment. Even when Covid-19 forces a business to adopt new work patterns, they can't make unilateral changes without consultation.

Similarly, redundancies must follow the same pre-Covid standards of good faith and consultation.

Collective bargaining timeframes were extended during the first Lockdown.

Personal grievances extended to Third Parties

From 28 June 2020, an employee can apply to ERA to add a third party to the personal grievance claim if the third party has caused or contributed to the problem, in a triangular employment situation. Triangular employment involves three parties – the employer, the employee, and a third party. In these situations, the employee is employed by one employer (the agency), but works under another business or organisation that directs or controls the employee's day-to-day work (controlling third party) such as a temp or secondment role.

Matariki public holiday

Friday 24 June 2022 will be the first public holiday to celebrate Matariki, the Maori New Year. Future public holiday dates are yet to be announced, as the exact timing of Matariki changes each year.

Budgetting for Increased Employment Costs

Some of these employment and tax law changes, like the increase in minimum wage rates, are going to have a significant impact on your business budgets. Without adjusting for other factors, the cost of employment will increase between 3-5%. The cost of supplies will also increase. How will you mitigate this increase? Improve employee engagement to increase productivity, work harder yourself, restructure away from labour intensive activities, move offshore?

Please talk with JDW about your options. We can help you by creating multiple budget scenarios to assist your strategic decision making. We can also advise on appropriate payroll systems to adopt if you need to upgrade.

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.

 

 

Key 2021 Business Trends

Key 2021 Business Trends

What are the forces which will impact your business the most this year? We think that these four trends are the ones to watch:

  • Supply chain – right sizing your stock on hand and strengthening your supply lines.
  • Working from home – office workers expect to have work flexibility.
  • Lack of qualified staff – returning NZ citizens may fill some gaps, but not in all industries.
  • Low interest loans – cheap credit, but tighter credit conditions.

Crystal ball on Cocoa Beach

Supply Chain Uncertainty

Covid-19 continues to circle the globe, and it will be several months before the vaccines have a positive impact on international logistics. In New Zealand, we have plenty of food and water for the population, but we will continue to have shortages for imported manufactured parts. The sharp drop of sea freight and air freight deliveries, recent delays unloading at Ports of Auckland, skyrocketing freight charges have made the supply of imported goods less reliable.

Does that mean holding more stock is the answer? Evaluate all your stock items and identify which ones are vital to your current business. What are the lead times? Do you have access to alternatives? Can you lock in a supply agreement on consignment? Make sure you check the supply agreements are water-tight, and you have good relationships with suppliers.

We spoke with Wayne from an Auckland engineering business. He said "Relationships with suppliers and customers are paramount to getting through this.  

"We have raw material (sheet steel) sitting on our shelves as consignment, so we pay for it when we use it, but have some stock on hand. This has reduced the stock holding by our suppliers in their own warehouses and reduces freight costs from them to us.  We forecast (as best we can in current times) to the suppliers and all parties communicate often on where we are. Currently their orders are being short shipped, so they don't know what they are going to get till it arrives. When this happens, those with great relationships go to the front of the line.

 "That said, nothing's perfect, A supplier of ours was keeping stock of a particular material type and size for us, our customer had reduced orders on us which meant we weren't ordering from them. They had a request for the same material and size and sold it from under us without telling us. When we needed it, it was gone and we had to find new supplies from others at increased pricing and limited quantities. We had slipped up with our communication to them.

"Going forward we need to continue the focus on communication for all our suppliers and make sure its two-way, not one-way. It's about being first to know what's changing, so you can act, not react."

Working from Home

The genie is out of the bottle. Now that Covid-19 Alerts have given office workers and their teams a taste of workplace flexibility, they are demanding to be able to work from home at least some of the time. Some corporates continue to have fewer people in the office and more people working remotely. This means that many will be looking for smaller tenancies than before.

An urban pharmacist advised us that foot traffic dropped considerably in the CBD, from a combination of fewer office workers and interminably long roadworks. The current America's Cup will help hospitality, but each Level 3 Alert has a negative impact on all CBD retailers.

Lack of Qualified Staff

When NZ called its citizens home in 2020, we rubbed our hands at the thought of the Brain Gain. Sadly, the returning citizens do not fill all the gaps. Marisa Bidois of the Restaurant Association says 30% of hospitality workers are immigrants on temporary work visas and that its hard finding NZers willing and able to fill vacant roles.

Panel beaters and other trades have also struggled to hire highly skilled workers from within our borders, while immigrants with work visas are unable to enter NZ. They have to be innovative in their recruitment processes and upskill current staff.

Low Interest Rates

Mortgage brokers and lenders are incredibly busy with residential and commercial lending, and borrowers are experiencing long delays getting their paperwork. Commercial lending is applying more structure to the loan book, insisting on up-to-date financials, business plan and cashflow budgets as bare minimums. We are helping many clients prepare more regular reports for lenders.

Even though interest rates are expected to remain low for some time, the banks still want to see that the business can meet repayments.

 

Covid-19 pressures will be with us for some time. Focus on your supply chain, employing and retaining qualified staff, workplace flexibility and keeping lenders happy if you want to succeed in 2021.

Further Reading:

https://www.acuitymag.com/business/desperately-seeking-supply-chain-security

https://www.stuff.co.nz/life-style/food-wine/123238890/covid19-new-zealands-fragile-hospitality-industry-facing-a-nightmare-scenario-without-international-workers         

                                                      - Serena Irving

 Download a PDF copy here or contact the author

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.

 

Applying for the Covid-19 Resurgence Support Payment (RSP)

The NZ Government has made the Resurgence Support Payment (RSP) available to businesses and charities which have a 30% or more drop in revenue as a result of an increase in Covid-19 Alert Levels to Level 2 or higher. There are several differences from previous wage subsidies, especially regarding GST, commonly owned companies and pre-revenue businesses. Applications opened on 23 February 2021 for the 15 February level change, and are available throughout NZ, not just Auckland.

In the article below, we have used the term "business" but it applies equally to pre-revenue businesses, charities, incorporated societies, non-government organisation and some state organisations.

IRD Administers the RSP not MSD

The Resurgence Support Payment is administered by IRD, not MSD. Applications can be made via MyIR, so you will need to have MyIR access to your business IRD number. This should make it easier to apply as you won't need to rekey employee IRD numbers; you will only need to advise which employees are full time vs part time.

Woman in swimming pool

RSP Benefits Small and Medium Business

Lower FTE Payment

The RSP gives eligible businesses $1,500 per business plus $400 per FTE up to 50 full time equivalent (FTE) employees, up to a $21,500 maximum. The limit of 50 FTE makes clear that the RSP is aimed mainly at supporting small and medium businesses.

A full-time equivalent worker is an employee who regularly works for 20 or more hours a week. A part-time equivalent worker is an employee who regularly works for less than 20 hours, and is treated as 60% of a full-time equivalent worker for the calculation of FTE.

Sole traders with no employees can receive up to $1,900.

The payment is capped for low revenue businesses at 4x the revenue drop. So if the revenue drop was $500, the RSP payment would be limited to $2,000 even if they had 2 or more FTEs.

Use of Funds Received

The payment must be used to pay business expenses such as wages and fixed costs.

GST Applies

GST registered businesses must include the RSP as revenue in their GST return. This is consistent with other Government grants. A special legislative amendment was passed for the previous wage subsidies, but that hasn't happened in this case. One of the distinctions is that the RSP can also be used towards fixed costs.

If the RSP has been applied against fixed costs, then businesses can claim the GST input tax deduction on the expenses paid.

Income Tax exempt

The RSP is exempt income for income tax. On the flip side, the wages and fixed costs that are covered by the RSP are non-deductible for income tax. Net tax effect is neutral.

Eligibility for RSP

Time in Business Clarified

Businesses must have been in operation for 6 months before 15 February 2021. Applicants (including sole traders and trustees) must be 18 or over. Business must have been viable immediately prior to the start of the increase in Alert Levels.

Revenue Drop of 30% not 40%

The revenue drop of 30% will follow the taxpayers method of income recognition – cash sales for restaurants, activities which would lead to invoices for others. You cannot delay invoicing to make a business qualify for the RSP. Passive income such as rent, interest and dividends are excluded from the revenue calculation.

7-Day Period not 14-Day

Period is any continuous 7-day period within the increased Alert level period. The Government has the ability to open the RSP application process multiple times.

Comparison Periods

The comparison period is a continuous 7-day period in the past 6 weeks. If you operate a seasonal business, then you can use a similar week in the cycle in the past year. For instance, an events business recognises the income from stall holders and ticket sales when the event takes place. If the event is cancelled due to the increase in Alert Levels, the previous 6 weeks is not a good indicator of a revenue drop, so we have to use other comparisons.

Common Ownership

Companies with common ownership will only be able to apply as a group. Common ownership is not defined in the RSP legislation, but we believe it will be the same as for the Small Business Cashflow Loan. A commonly owned group for the Small Business Cashflow Loan is considered to be one where each business has the same combination owners, even of the proportion of ownership is different.

A commonly owned group may occur if there is a dominating shareholder or group of shareholders, and the businesses operate together as one. If there is a complex ownership structure where overall control is centralised and the businesses are one enterprise in substance.  An example may be a retail business which has separate company for online, brick-and-mortar store, wholesale, but all the management and logistics is in one place. 

Capital Raising Entities can apply

Pre-revenue businesses can apply too, if capital raising ability has been affected by a more than 30% reduction.  A pre-revenue business or organisation is one that has taken active steps towards being market-ready but has not yet begun trading. They will need to keep records of how their ability to raise capital or begin trading was affected by the raised alert level.

What should I do now?

Make sure that you have a MyIR login which allows you to access your business. Advise IRD of the business bank account for the RSP.

Keep a copy of all calculations, including records of sales data showing dates and dollar amounts, employee records showing average hours worked.

Contact us if you think you are eligible for the RSP. We are happy to assist with calculations and applications on your behalf. We have access to MyIR for all of our tax clients, so this can simplify matters for you if you don't have MyIR access yet.

Read more here:

https://www.ird.govt.nz/covid-19/business-and-organisations/resurgence-support-payment/eligibility-for-the-resurgence-support-payment

                                                      - Serena Irving

Download a PDF copy here or contact the author

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.

Introducing the 39% Tax Rate

Introducing the 39% Tax Rate

Pizza slice

From 1 April 2021, the top personal tax rate is increasing to 39%. This has repercussions for taxpayers, even those who aren't earning over $180,000.

  • Extra employment payments, like bonuses, redundancy, backpay taxed at 39%
  • Top ESCT rate for superannuation contributions like Kiwisaver increase to 39%.
  • FBT rates increase from 49.25% to 63.93%
  • Dividend withholding tax rate increase to 11% instead of 5%.
  • Residential land withholding tax increase to 39%
  • Top Interest RWT rate increase to 39% from 1 October 2021.

Below are some suggestions for tax planning, but we suggest that you call us to discuss any changes you wish to make. We will need to consider anti-avoidance provisions in tax law as well as a desire to save taxes.

Sole traders employing family members

If you want to employ a spouse to reduce your income from self-employment, you will need to seek IRD permission. You will need to describe the hours and duties of the spouse. If you employ your child, you don't need to seek permission from IRD, but be careful to be reasonable in what you pay. You will usually have to register as an employer and deduct PAYE on the family member's behalf, unless they are a contractor.

Shareholder salaries from companies

If you have discretion over salaries to shareholders, it's time to review them. Make sure that your salary decisions have a basis in market salary trends for the industry, hours and conditions of work, not just the profit of the company. If you are dropping shareholder salaries, are there valid commercial reasons for the reduction? Make sure you document your reasons at the time of review.

Service company

You can set up a company to provide services, but you can't deliberately structure your transactions with a more than incidental tax advantage. If the profit of the company is derived mainly from personal effort, rather than use of assets or effort of other employees, then you would normally expect more than 80% of the profit to be paid out as shareholder salary.

Income attribution rules apply when the working person performs services through an associated entity which invoices 80% or more of its income to one customer, and taxable profit is over $70,000. In these cases, IRD will treat the net income from personal services as taxable to the working person, regardless of salary agreements, usual partnership rules or Look Through Company allocation rules.

Fringe Benefit Tax alternate rates

Using the alternate rate calculation for FBT will be vital, as the majority of employees will be earning under $180,000. This means keeping better records, matching taxable benefits to the employees who benefitted from vehicles, low interest loans, insurance policies and discounted goods and services.

PIE Investments

Investments in portfolio investment entities have a maximum tax rate at 28%. You will still need to weigh up the risks, liquidity and expected returns of your intended investments, so talk with your financial adviser first.

Trust ownership of shares

As long as the working person is drawing a reasonable salary then the remaining profit can be retained by the company with tax paid at 28%. If the shares are owned by a trust, dividends are taxed at 33% so DWT is payable at 5% by the company. 

Before you make any changes to shareholding, you should talk with us about whether to declare a dividend first, to utilise existing imputation credits. We would also need to consider the new trust disclosure rules.

Dividends before 31 March 2021

Even if you are not changing shareholding you should consider whether the company can declare a dividend to shareholders before 31 March 2021. From 1 April 2021, if the shareholder pays tax at 39% and dividend tax credits (imputation credits and DWT) are only at 33%, the increase in tax liability may push the taxpayer into provisional tax territory for the following year.

If the company needs working capital to maintain solvency in a time of uncertainty, then paying out a dividend may not be possible. You will need to consider what is best for the company.

Seek Advice

The increase in the top personal tax rate to 39% will widen the tax gap between individual, companies and trusts. The opportunities for making tax savings are easier for people in business than for salary and wage earners. Tax structures need to be workable and have a sound basis in commercial common sense. Consult with your chartered accountant before the tax changes on 1 April 2021.

                                                      - Serena Irving

Download a PDF copy here or contact the author

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.


 

 

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