December 2008

IN THIS ISSUE                             

1. New Government Policy

2. KiwiSaver Contribution Holiday

3. Minimum Family Tax Credits

4. New Secondary Tax Rate

5. GST Offsets between GST Registered Persons

6. Breakfast Discussion Group

7. The Credit Crunch

8. News about the Office

1. NEW GOVERNMENT POLICY

With the National led Government decided on election night of 8 November 2008, and Ministers appointed on 17 November 2008, the country is waiting to see what changes will be implemented.

Tax, employment (incl superannuation) and the environment were major issues leading up to the election, and matters that the new Government has undertaken to address immediately after the election.

Those portfolios are held by the following Ministers:
• the Hon Bill English, the Minister of Finance,
• the Hon Peter Dunn the Minister of Revenue (outside cabinet),
• Paula Bennett the Minister of Social Development and Employment,
• the Hon David Carter the Minister of Agriculture and the Minister of Forestry, and
• the Hon Dr Smith the Minister for Climate Change Issues, the Minister for the Environment and the Minister for ACC.

The Ministers will have a high profile over the coming months in dealing with the issues outlined below.

TAX

Tax reform was the major issue of the government's election campaign. The change in personal tax rates will provide some relief during this period of tight liquidity, and an independent earner rebate will be introduced to resolve an inequity in the tax system for low income earners in employment but without children, and R&D incentives will be abolished.

Personal Tax

There is a three-year program of personal tax cuts. Including the recent tax cuts of 1 October 2008, there will be further tax cuts on 1 April 2009, 1 April 2010, and 1 April 2011. There is no change intended to Working for Families entitlements.
The effects of the tax changes on disposable income are summarized in the table below. The table shows the incomes of $45,000, $70,000 and $100,000 pa and the tax calculations and includes an entitlement to Working for families (assuming a family with two children).



The tax savings for each year show as a comparison to the present position. The changes offer significant savings to higher income earners.

Independent Earner Rebate

There will be a tax rebate for people who earn between $24,000-$44,000 pa, and who are not receiving a benefit, Working for Families payments, or New Zealand Superannuation. This rebate will be $10 per week from 1 April 2009 and $15 per week from 1 April 2010.

R&D Tax Credit                                  

The new Government will repeal the current 15% research and development tax credit, with effect from 1 April 2009.

EMPLOYMENT

Employment reforms will provide transitional relief to workers that are made redundant during this period; they will make changes to the KiwiSaver scheme; offer employers in small business a 90 day employment trial period and introduce provisions to limit existing rights of unions. There will be a review of the Holidays Act and the introduction of new provisions to allow employees to elect to be paid the fourth week of their holidays rather than take the leave.

Transitional relief package

A transitional relief package will offer assistance to people who are made redundant and who, as a result, either go on a benefit or have to rely on the income of a relatively low paid partner or spouse.

This assistance will be available for people who are made redundant and have been in the same job for at least six months and will be paid until they get another job and their circumstances improve, or for up to 16 weeks.

The relief package will include:
• A Working for Families top-up equivalent to the in-work tax credit. For families who lose eligibility for the in-work tax credit as a result of redundancy, there will be a top-up to Working for Families payments equivalent to the maximum in-work tax credit.
• An increase of $100 in the maximum weekly accommodation supplement. In effect, that means that families who go on the Unemployment Benefit or rely on one lower-paid spouse will receive up to $100 more per week in their Accommodation Supplement.

2008 KiwiSaver

There will be three changes to KiwiSaver:
• The minimum employee contributions will reduce to 2% of gross salary. Employees and employers will be free to contribute at a higher rate if they choose but only the first 2% of an employer's contributions will be exempt from contribution tax (currently, employer contributions are tax free up to 4% if matched by an employee contribution). The Government will match members' contributions up to $1,043 a year. The minimum employer contribution rate (currently 1% of gross salary or wages) will increase to 2% on 1 April 2009 but will remain at that rate. The KiwiSaver provisions for increases to 3% on 1 April 2010 and to 4% on 1 April 2011 will be repealed.
• Remove the employer tax credit from 1 April 2009. The Government will not match the employer contribution of up to $1,043 per annum per employee from that date.
• Amend the KiwiSaver Act to ensure that when an employee joins KiwiSaver, the compulsory contribution from their employer is a genuine addition to their normal pay.

The government will repeal the recent amendment to the Employment Relations Act that affects KiwiSaver, and effectively rules out some arrangements which have been negotiated between employers and employees, as the KiwiSaver rules themselves permit, whereby:
- the employer makes matching contributions to KiwiSaver accounts, as the scheme requires, and
- in the interests of workplace fairness and harmony, the employer also gives an equivalent pay increment to their non-KiwiSaver employees.

The changes will allow such arrangements to occur, if they are negotiated between employers and employees in good faith, and if employers are fulfilling all their obligations to make KiwiSaver contributions.                      

However, to allay any fears that some KiwiSaver members could appear to be taking a pay cut to join KiwiSaver, the government will amend the KiwiSaver Act to make it clear that no employee can have their gross taxable pay reduced as a consequence of joining KiwiSaver.

Small business protection: 90-day trial period

These changes will provide small business employers stronger protection from claims of personal grievance for unfair dismissal in circumstances where the employment relationship entered in good faith was never going to work.
The scheme will be optional and it will be for a period of 90 days for new employees of businesses that employ fewer than 20 staff. During the trial period, either party may terminate the employment relationship for performance related issues without following the procedures outlined in the existing legislation.

Union/collective bargaining                                                           

The changes to be imposed on unions are not significant but are a challenge to their existing rights. The proposed changes include-
• Union access to workplaces will be subject to the employer's consent (not to be unreasonably withheld).
• Restore workers rights to bargain collectively without having to belong to a union.

Holidays Act                             

The proposed changes to the Holidays Act will be significant and will probably not be addressed early in the term of government. It will involve a complete review of the Holidays Act. There will be an immediate change to allow employees to trade the fourth week of holiday entitlement for a cash payment (this can only be at the employee's request).

SUPERANNUATION

The Government will maintain New Zealand Superannuation (NZS) payments at a minimum of 66% of the after-tax average wage.
The previous Government raised the floor to 66% of the after-tax average wage over the period 1 April 2006 to 31 March 2009, but it reverts to 65% again from 1 April 2009 onwards.
The Government will keep the floor at 66% of the after-tax average wage.

ENVIRONMENT

There will be significant changes to the Emissions Trading Scheme and possibly repeal of the existing legislation. There will also be incentives offered for new technology that benefits the environment.

Emissions Trading Scheme (ETS)

The changes will be directed towards achieving reduction of emissions in accordance with policy-
• to legislate for an achievable emission reduction target for New Zealand – a 50% reduction in New Zealand's carbon-equivalent net emissions, as compared to 1990 levels, by 2050; and
• to honour New Zealand's Kyoto Protocol obligations.

The government has undertaken to implement changes within nine months of taking office. The changes will be led by six key principles-
• The ETS must strike a balance between New Zealand's environmental and economic interests. It should not attempt to make New Zealand a world leader on climate change.
• The ETS should be fiscally neutral rather than providing billions of dollars in windfall gains to the government accounts at the expense of businesses and consumers.
• The ETS should be as closely aligned as possible to the planned Australian Carbon Pollution Reduction Scheme, with, where possible, common compliance regimes and tradability. National wants to closely co-operate with Australia as we develop our respective schemes.
• The ETS should encourage the use of technologies that improve efficiency and reduce emissions intensity, rather than encourage an exodus of industries and their skilled staff to other countries.
• The ETS needs to recognise the importance of small and medium enterprise to New Zealand and not discriminate against them in allocating emissions permits.
• The ETS should have the flexibility to respond to progress in international negotiations rather than setting a rigid schedule. This way, industry obligations can be kept in line with those of foreign competitors.

The Government is working with ACT on legislation as ACT campaigned for the abolition of the ETS. Early press releases indicate the replacement of the ETS with carbon tax.

Incentives to New Technologies                    

There will be incentives offered to move to a low carbon economy and to reduce dependence on fossil fuels. The government campaigned on policy that included removal of disincentives relating to Biofuels and provide incentives for solar heating and electric cars.

Biofuels

• Repeal the Government's Biofuels Bill.
• Apply a consistent tax incentive for sustainable biofuels, exempting ethanol and biodiesel from excise and road user charges in proportion to the blend (i.e. a 10% blend will get a 10% exemption).
• Develop a process for approving sustainable biofuels to gain tax exemption, (that takes into account net greenhouse gas emission reductions and the impacts on biodiversity and the effects on food supply).

Solar and Heat Pump Hot Water Systems

• Provide a $1,000 grant for new and existing households to install solar water systems.
• Removal of price regulations model in the current scheme.
• Require open reporting on the performance of systems and a warranty system from manufacturers to ensure quality.
• Extend the grant scheme to include heat pump hot water systems.
• Remove the requirement to obtain a building consent for installation. Regulate quality by requiring systems to be fitted by accredited installers.

Electric Cars

The Government will exempt electric cars from road user charges.         

2. KIWISAVER-CONTRIBUTION HOLIDAY

KiwiSaver members can take a break from saving after they have been a member for 12 months. This is called a "contributions holiday". It can be for a minimum of three months and up to a maximum of five years. There is no limit to the number of contributions holidays a member can take. To request a contributions holiday, an employee must complete a contributions holiday request (KS6) form and send it to the Inland Revenue Department.

If the Inland Revenue Department approves the employee's request, employers will be asked to stop making deductions for them. Employers can also stop deducting member contributions if they are shown a valid contributions holiday notice from the Inland Revenue Department. Employers will be asked to restart contributions when the contributions holiday finishes.

Employers are not required to pay compulsory employer contributions if an employee is taking a contributions holiday. However, employers can continue to make employer contributions and claim the tax credit for these.

A contributions holiday cannot be cancelled once approved, but members may restart contributions while a contributions holiday is in place. Members do this by giving the employer notice to start or stop making deductions from their salary or wages. Any notice employers receive takes effect from the next payment of salary or wages they calculate for the employee.

Members can apply for a new contributions holiday when an existing contributions holiday has less than six months left to run. Applications received when an existing holiday has more than six months to go will not be granted. The Inland Revenue Department will write to the member one month before their current contributions holiday expires to see if they still want to renew their contributions holiday.

A KiwiSaver member is only eligible for a contributions holiday within the first 12 months if they are suffering, or likely to suffer, from financial hardship. A financial hardship contributions holiday will not be considered, unless the member makes an explicit request to the Inland Revenue Department.

Low-income working families will be entitled to an increased minimum family tax credit from 1 April 2009.

The minimum family tax credit provides a guaranteed minimum family income to families who are in work. It currently guarantees recipients a net income of $18,460 per annum. That will rise to $20,540 from 1 April 2009.

4. NEW SECONDARY TAX RATE

The Government announced on 7 October 2008, a new, bottom secondary tax rate of 12.5%. The new rate comes into effect on 1 April 2010. The announcement ensures that those with second incomes do not have excessive tax deducted at source.

5. GST OFFSETS BETWEEN GST REGISTERED PERSONS

The Goods and Services Tax Act does not provide specific authority to transfer input tax deductions relating to individual transactions. However, where the purchaser of a property wants to have the resulting GST input tax deduction transferred to the vendor's GST account, the purchaser may ask the Inland Revenue Department to offset the vendor's GST liability from the transaction. This is often referred to as a "GST offset" between GST-registered persons. The Department recently set out requirements for a valid GST offset.

• A GST offset request must be in writing by the purchaser (or their agent) and does not require a GST offset clause in the Sale and Purchase Agreement should the parties agree.
• The IRD will confirm the GST offset in principle, however, the Department cannot confirm the actual amount of GST offset in advance.
• Regardless of whether there is a GST offset clause in any Sale and Purchase Agreement, the vendor of the property will always be liable to pay GST (to the extent that a GST offset is actually not possible).

The timing of the actual GST offset will depend on the relationship between a vendor and a purchaser. There are close associates (i.e. a company in the same group of companies, a shareholder employee of the taxpayer, a company in which the taxpayer is a shareholder employee, a partner in the same partnership, a relative, or a Trustee of a Family Trust of which the taxpayer is a beneficiary), and parties which are not close associates. The vendor is deemed to have received the GST offsets in each relationship as follows:
• A vendor who is not a close associate of the purchaser receives the GST credits on or after the date of transfer request and after the date the purchaser files its relevant GST return (whichever is the latter).
• The vendor, therefore, should ensure that the written request identifies the vendor's status as a close associate to ensure that the transfer will take place immediately after expiry of the purchasers' relevant GST period in which the purchaser became entitled to the refund subject to the transfer.
• A vendor who is a close associate receives the GST credits a day after the end of the GST return period in which the purchaser became entitled to the refund.
• The vendor must ensure that the GST offset request and the filing of the purchasers GST return occur at least one day before the vendors GST return and payment (as the case may be) is due.

A vendor relying on receiving a refund transfer from the purchaser should ensure that the refund gets transferred to its GST account with the IRD in time to offset its own GST liability.


WWCA has hosted breakfast discussion groups in recent months for business owners, and these have been well attended. The theme of these meetings has been RRR for SMEs – Recession, Restructuring and Redundancy for small/medium sized businesses.

Dean Hughes from Westpac spoke at one meeting on the current credit crunch and its impact on the banks and thus their dealings with clients.

Dean's comments included:

Five steps to help recession proof your business:

reassess your strategy to reflect the changing market place,
focus on CASH,
maintain Control – Monitor performance against budget and create incentives around cash, build robust plans and forecasts – with "what if" alternatives, and adopt a no surprises approach with your bank and other stakeholders.

Main reasons for Business Failure

Poor Management – being:

• Domineering executive
• Inadequate management depth
• Uninvolved Board
• Shareholder disputes

Inadequate Financial Reporting Systems

• Monitor your KPI's rigorously and regularly
• Debtor and creditor control are key to managing cashflow

Under Capitalized

Other Interesting Comments from Dean

• Be careful who you do business with in this economy, - young and stupid people usually grow into old and stupid people.
• Don't rely on even quite recent Asset Valuations as they will date very quickly in this environment.
• Over complicated structures can be a warning sign.
• No business plans to fail – but many business fail to plan.          

Following Dean's presentation there was an opportunity for questions and a lively discussion. It was decided that the focus for the next breakfast would be sales and marketing in a tight economy.

We have compiled some additional sage advice with regard to operating and succeeding in a difficult economy below.

If you are interested in participating in a discussion group please contact Sue Garden, email sue@woodwalton.co.nz or phone 578 0174.


The following is checklist of processes and strategies to assist business owners in their planning to manage their business through this period of uncertainty and tight liquidity. The list is not generic nor is it complete. It is a start point for business owners to ready themselves for a downturn in the economy.

The outlook for the economy in the coming months is uncertain and we understand businesses should expect severe disruption for a period of six months and a cycle of rebounds for at least two years.

Owners need to plan and develop their own processes and strategies to see the business through this period. They need to understand what is happening in the market and how it will affect their business, their competitor's business and what parts of the business will need reinforcement or change to respond and survive and even prosper during this period.

Cash position                            

• Restructure borrowings. Consider cash saving measures by restructuring existing loan contracts and explore new structures and new providers of funds to access cash as needs arise that provide savings in costs. The market has moved, the Government has stepped in to assist the banking system and the economy at large (injection of $7bn into the economy over 2 years), and interest rates are coming down. Management needs to respond to the changes, be up to date and use opportunities through the banking system.
• Consider lease v ownership options for fixed assets. Lease and sale and lease back arrangements can be used to free capital locked in the business.
• Prepare and review cash budgets. Those need to reflect a strategy to manage the business through a period of expected low growth in most industries and the effect that will have on the cash position of the business.
• Negotiate better credit terms with customers and suppliers
• Tighten up on debtor management. That may mean review of internal systems or outsource management of debtors to an independent debt management service. Collection of cash during this period will come from tight management of the debtors aged trial balance.
• Manage stock effectively. Change stock management systems to just-in-time replacement and cull slow moving and obsolete stock.
• Consider increasing prices to retain profit in a period of low volume of sales. That will also reduce working capital and business cash requirements.

• Look for opportunities to generate cash. Develop a cash culture. Offer incentives around cash preferably without effect on profit. Consider product incentives.

Cost control

• Review costs and plans for capital expenditure. Review with an eye to cull or cut back on those that are not absolutely necessary during this period or are of no value to the business.
• Take up offers from suppliers to review costs. Insurance brokers and power and telecommunication providers will undertake reviews at no cost.
• Renegotiate lease terms. There will be pressure on landlords to retain tenants and that will favour tenants in the negotiation process. Lessees need also to assess the need of leased equipment in the business. Leases can be renegotiated for early termination.
• Review staff costs and defer those that have no immediate or direct benefit to the business (training, vehicles, end of year and midwinter functions and so on).
• Consider tax opportunities. The rules provide opportunities to defer or minimise tax payments in depressed times and some of these are industry specific.
• Adopt a strategy to retain costs specific to the long term growth of the business at normal or higher than normal levels but look to redirect those to respond to market conditions. Those costs will include marketing and promotion expenditure.

Information needs                      

• You manage what you measure. Timely and accurate reporting will be critical during this period and the ability to benchmark figures against budgets and historic reports.
• Invest in good budget software. Budget models need to provide information that is easily understood and in formats that are usable by management and have the flexibility to allow what if testing for a changing economy. Budgeting should be at the very least on a monthly basis.
• Design a simple summary report of Key Performance Indicators (KPIs). KPIs include turnover trends, gross margin percentages, profit volatility, collection of key debtors and payment of creditors targeted for special treatment, and debtors and creditor and cash balances. The report needs to disclose key information that is specific to each business. The report should be reviewed monthly to monitor progress on specific plans and detect early warning signals through this period.
• Take steps to address concerns before they become problems. Consult with advisors where the solution does not come easily.

Staff                                                 

• Manage staff levels to minimise idle time during the work week. Use just in time strategy for employment of casual or seasonal workers to take advantage of employer benefits of the expected surpluses in the labour market. Encourage permanent staff to take holidays over quiet periods and consider reducing the work week to 3 or 4 days.
• Manage the process of staff layoffs with care. The Employment Relations Act 2000 protects the rights of employees in these situation and employers need to be compliant in following procedures laid down by the Act. Control information dissemination to staff and to the public. Consider other options to layoff if there are plans to replace the staff in the future. Recruitment is costly.
• Inform the staff and look for feedback. Annual staff reviews are an opportunity to share business issues with staff and to get feedback from them on measures relating to employment. Ideas sourced from staff may result in better buy in. Staff review time also provides an opportunity to communicate remuneration strategies without de-motivating side effects.

Marketing

• Get close to the top 20% of customers. Communicate with them, and get to know how they are managing this period. Reinforcing relationships will strengthen the business' position and place the business well for when the economy is back to strength.
• Do not discount during the normal busy time of the season.

Banks, Stake-holders and Financial Advisors

• Keep them informed and contact them early if there is need of assistance. Adopt a no surprises approach but do the homework prior to the call. Be aware of commitments and covenants to the bank and the consequences of non compliance.
• Explore other sources of finance but be wary of excessive procurement and service costs. Consider private equity to provide not only funding but also a source of management skills.                                        
• Use financial advisors and financial brokers to prepare and present funding applications and tax advisors to review structure of affairs. There may be opportunities to structure affairs to save costs and tax.
• Use foreign exchange financial instruments to minimise risk exposure to the expected decline in exchange rate. Take early action where the business imports/exports product or service, or relies on plant manufactured overseas.

Change of Management

• Employ outside management. This is a testing time for management, and if there are any concerns about the skill level or perceived ability to drive the business through these times then consider an independent director or executive with experience preferably in the industry.

Profitable Lines and Liquidation of Assets

• Focus on core tried and true business. Play safe. Review profitability of all lines and reassess whole business strategies.
• Sell fixed assets that are surplus to needs or obsolete.

Contrarian Approach to Opportunities

• Buyout competitors or plan for expansion during this period. There are likely to be surpluses in the market and therefore opportunities and bargains for the hunters. Further expected falls in the NZ exchange rate provides an immediate opportunity for businesses that need assets manufactured overseas or assets with imported material content. Those can only increase in price as the $NZ falls in value.
• Search out funding lines for the future. Wary investors have cash in the bank but need growth assets to balance investment portfolios. There is a potential source of funding outside of the banking systems.

Options of last Resort

• Sell the business. Sell it at a time when it may be relatively unaffected by the economic times and let the business successor face up to the uncertainties.
• Put in place a contingency plan. If plan A doesn't work then have a plan B. Plan B is usually the less preferred option but will aim to retain the business through this period and trade again.
• If insolvent suspend trading immediately. Trading while insolvent or in a position knowing that the business cannot pay it's creditors may expose owners and management to personal liability. Seek professional advice.

8. NEWS ABOUT THE OFFICE           

Staff:

Hailey Menzies has joined us for the holiday period. Hailey is a third year accounting student at Otago University.

Christmas Hours:                             

We will be closing for the Christmas break 3.00 pm Friday 19 December 2007 and reopening again 8.30 am Monday 12 January 2008.

Should you require urgent advice during the closure period please email Margaret at margaret@woodwalton.co.nz and she will contact the person you need.