Blog JDW: Jobs Done Well

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.


 

 

Grab a Lifeline

Grab a Lifeline!

"Resurgence": an increase or revival after a period of little activity, popularity, or occurrence. It could be used to describe the return of community transmission of the deadly virus. Or it could describe the hoped-for bounce back when the virus recedes, with the help of this lifeline.

When Auckland returned to COVID Alert Level 3 in August, the Government quickly moved to offer a further wages subsidy extension nationally. The 2-week COVID-19 Resurgence Wage Subsidy payment is for NZ employers and self-employed who have had a revenue drop of at least 40% because of COVID-19 for a 14-day period between 12 August and 10 September, compared to a similar period last year. New businesses or high-growth businesses must compare against a 14-day period that best estimates the revenue decline.

Knotted Rope

The subsidy is $585.80 per week per full-time employee (20 hours or more per week) and $350 per week per part-time employee. You can apply between 21 August and 3 September 2020. If you are already getting other COVID-19 payments for that employee, you must wait until those pay periods have run out. You must retain the employees for the period of the subsidy and try your hardest to pay at least 80% of their usual wages. If that isn't possible then pay at least the wages subsidy amount.

If you claim the subsidy you must mitigate the financial impact as appropriate, such as using cash reserves, activating your business continuity plan, claiming insurance, engaging with your bank, seeking advice or support from advisers. The Regional Business Partner programme has received a financial boost so more businesses can apply for COVID-19 support.

If you haven't claimed the 8-week Wage Subsidy Extension already, it's worth working out if you're now eligible for that subsidy rather than the Resurgence Wage Subsidy (see table).

Comparison between Subsidies

 

Wage Subsidy Extension

Resurgence Wage Subsidy

Application Period

10 June 2020 to 1 September 2020

21 August – 3 September 2020

Period affected

Any 30-day period in the 40 days before you apply

Any 14-day period between 12 August to 10 September

Decline in Revenue vs last year / comparison period

40%

40%

Weeks of subsidy

8 weeks

2 weeks

Total per full time (20+hours)

@ $585.80 per week

$4,686.40

$1,171.60

Total per part-time (<20 hrs)

@$350 per week

$2,800.00

$700.00


Calculating the Decline in Revenue

Revenue is your gross sales before deducting expenses. For many businesses you can look at your bank data or invoice history to work this out. For example, if you invoiced $15,200 between 12 August and 25 August 2020 inclusive and you invoiced $24,800 between 12 August and 25 August 2019.

Decline in sales = $24,800 - $14,200 = $10,600.

Percentage decline = $10,600/24,800 *100 = 42.7%. The decline is greater than 40%, so you are eligible if you meet the rest of the criteria.

If you collect deposits for work to be carried out later, or if your comparison period is not indicative of lost earnings, discuss it with us. We can help you with the calculations.

 Find out more about the Resurgence Wage Subsidy, and make your application here:

https://workandincome.govt.nz/covid-19/resurgence-wage-subsidy/index.html#null

Other Help for Businesses

Talk to us about whether these other lifelines can help you:

·         The Small Business Cashflow loan scheme has been extended until 31 December 2020.

·         Tax loss carry-back, tax instalment arrangements, penalty and interest waiver.

·         Tax deductions for low-value assets, depreciation on commercial and industrial buildings.

·         Regional Business Partner network for HR, health and wellbeing, business continuity, cashflow and finance management, strategy and digital capability.

·         Business debt hibernation.

·         Business finance guarantee scheme.

·         Business Mentors NZ.

We are here to help, so please reach out to us at JDW.

- 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.

How Can Low Value Assets Threshold Save You Tax?

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

Date of purchase

Low Value Asset Threshold

(excluding GST, if GST registered)

Prior to 17 March 2020

$500

 

17 March 2020 to 16 March 2021

$5,000

17 March 2021 onwards

$1,000

 

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

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

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

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

- Serena Irving

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

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

What would you do with $10,000

What would you do with $10,000? 

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

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

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

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

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

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

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

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

- Serena Irving 

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

 

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

Update for Coronavirus Affected Business

Update for Coronavirus Affected Business

As at 25 March 2020

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

Level 4 Lockdown is coming

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

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

 

Wage Subsidy and Leave Subsidy

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

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

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

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

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

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

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

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

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

See below for tax treatment of subsidies.

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

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

If you have no employees:

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

If you have more than 100 employees:

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

Tax Treatment of Subsidies and Payments to Employees

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

Q         Is the wage subsidy payment subject to GST?

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

Q         Is the wage subsidy paid to the employer taxable?

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

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

A          No – it is not deductible  

Q         Is the wage subsidy taxable to employee?

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

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

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

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

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

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

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

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

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

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

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

Banks weighing in to support businesses

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

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

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

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

We're still open, remotely

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

-          Serena Irving, JDW Chartered Accountants

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

 

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

 

 

Useful links:

Message from Spice HR

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

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

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

 

 

 

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