June 2011

2011 BUDGET TAX ANNOUNCEMENTS NOW LAW NEW RULES IMPACT ON QUALIFICATION FOR WORKING FOR FAMILIES (WFF) TAX CREDITS KIWISAVER CLAIM FULL GOVERNMENT CONTRIBUTION NEW GST RULES APPLY FOR CHANGE IN USE DEPRECIATION RULES INCOME-SHARING TAX CREDIT NON-RESIDENT SEASONAL WORKERS – TAX RATE CHANGE TAX TREATMENT WHEN CASHING UP ANNUAL HOLIDAYS VEHICLE MILEAGE RATE AMENDED FORESTRY IN ETS KEY DATES FBT RATE FOR LOW INTEREST LOANS ACCIDENT COMPENSATION LEVY THRESHOLDS & EXPERIENCE RATING FOR 2012 GREENPEACE LOSES CHARITY STATUS CLIENT QUERY RECENT TAX CASE TEAMING UP – EXTENDED DISC NEWS ABOUT THE OFFICE

1. 2011 BUDGET TAX ANNOUNCEMENTS NOW LAW

The Taxation (Annual Rates and Budget Measures) Act was enacted on 24 May 2011 and gives effect to tax reforms announced in Budget 2011 to reduce the fiscal costs of the KiwiSaver and Working for Families (WFF) tax credits programmes. The Act also sets the annual rates of income tax for the 2011/12 tax year.

Working for Families
The Working for Families changes are as follows:

• increase in the abatement rate annually from 20¢ in 2011 for each dollar of family scheme income to 25¢ in the dollar over a period of 4 years. The increases commence 1 April 2012:
• lowering of the abatement threshold annually from $36,827 in 2011 until it reaches $35,000 over a similar period. The reductions commence 1 April 2012: and
• removal of the inflation adjustment of Family Tax Credit amounts for children 16 and over.

KiwiSaver
The changes to KiwiSaver are a follows:

• All employer contributions to employees’ KiwiSaver accounts will be subject to Employer Superannuation Contribution Tax (ESCT) from 1 April 2012.
• The member tax credit (MTC) is to be halved from the next MTC year (year ending 30 June 2012) and the rate of payment of the credit will also be halved.
• The minimum employee contribution rate will rise from 2% to 3% for all members from 1 April 2013. The default contribution rate will also be 3%.
• Compulsory employer contributions will rise from 2% to 3% from 1 April 2013.

Annual Rates of Income tax for 2011/12 year
These are summarised as follows:
Personal Tax Rates

Marginal income tax rates

Income range	Tax rate
$0 – $14,000	10.5%
$14,001 – $48,000	17.5%
$48,001 – $70,000	30.0%
$70,001 and over	33.0%

 
Provisional tax

	2011-12
Standard method adjustment -10% uplift method decreases to: - 5% uplift method decreases to:	95% 95%
GST ratio method adjustment - Two years before preceding year RIT decreases to: - Year before preceding year RIT decreases to: - Preceding year’s RIT decreases to:	80% 85% 90%

FBT rates

Income range	Tax rate
$0 – $12,530	11.31%
$12,531 – $40,580	21.21%
$40,581 – $55,980	42.86%
$55,981 and over	49.25%

Other Tax Rates
Company Tax Rate
The company tax rate changes from 30% to 28%

ESCT rates

Income range	Tax rate
$0 – $16,800	10.50%
$16,801 – $57,600	17.50%
$57,601 – $84,000	30.00%
$84,001 and over	33.00%

Withholding tax rates
The RWT rates on interest change from 38% to 33%, 33% to 30%, 21% to 17.5%, and 12.5% to 10.5%.

2. NEW RULES IMPACT ON QUALIFICATION FOR WORKING FOR FAMILIES (WFF) TAX CREDITS

New rules intended to counter people structuring their affairs to inflate their entitlements to WFF tax credits, student allowances and the community services card come into effect on 1 April 2011. The changes ensure the rules achieve their original intention of targeting assistance to people in genuine need rather than providing it to people with sufficient means.

From 1 April 2011, Inland Revenue need to know if taxpayers receive income from the following sources:

• attributable trustee income:
• attributable fringe benefits:
• PIE income:
• passive income of children:
• income of non-resident spouse:
• tax exempt salary or wages:
• pensions and annuities:
• other payments: and
• income equalisation scheme deposits (excludes “adverse events” deposits).

The above income types must be included in the “other income” box of the WFF tax credits application form (FS1) along with income from interest, dividends, rents, royalties, estates, trusts and Maori authorities. Taxpayers already receiving WFF tax credits, and who receive any of the above income types will need to inform Inland Revenue about them.

Tax-exempt salary and wages: to provide that tax-exempt salary and wages of people under specific international agreements are to be counted as family income. An example would be salaries received by employees of international organisations such as the United Nations or the OECD.

Unlocked portfolio investment entities: Income from unlocked portfolio investment entities (PIEs), that are easily accessible (such as cash PIEs) is counted as family income.  Unlocked PIEs are defined as all PIEs other than superannuation schemes that are registered with the Government Actuary, such as KiwiSaver schemes or retirement savings schemes. These schemes are excluded on the basis that the income is sufficiently locked-in until a person’s retirement.

Trustee income: Family income for WFF already includes beneficiary income of a trust but does not include distributions of trustee income. Trustee income from trust-owned companies will now be counted in family income.

• A trust-owned company is defined as a company in which the trustees and their associates hold 50% or more of the voting interests (or market value interests).
• Trustee income is the net income of a trust (less income distributed as beneficiary income) and the net income of trust-owned companies (less dividends from such companies).
• If there is more than one settlor for a trust, the trustee income is attributed to the settlors of the trust proportionally. However, if a settlor arranges for friends or relatives to be settlors to artificially dilute the attribution rule, the original settlor will be treated as the sole settlor of the trust. This is a result of the existing settlor definition (including nominee look-through rule) and anti-avoidance rule.
• Some trusts such as charitable trusts will be specifically excluded. Income from these trusts will not be attributed to the settlor for WFF purposes.

Fringe benefits: Currently, fringe benefits are not included as income when determining WFF entitlements. Significant fringe benefits that are easily substitutable for cash, such as motor vehicles or low-interest employee loans, will be counted as family income. This rule applies only to shareholder-employees. A person will be a shareholder-employee of a company if they, together with associates, hold 50% or more of the shares in the company.

Main income equalisation scheme deposits: The main income equalisation scheme is intended to allow persons carrying on an agricultural, fishing or forestry business to smooth their income for tax purposes to address large fluctuations of income over several years. A deposit to a main income equalisation account, which is allowed as a deduction, lowers their taxable income and currently also lowers income for WFF purposes. Deposits entered in a person’s main income equalisation account are now to be counted as family income. To prevent double counting, refunds (excluding interest) from these accounts will not be counted.

Private pensions and annuities: 50% of non-taxable private pensions and annuities are to be included in family income.

Passive income of children: Large amounts of income can be allocated to children via family trusts and companies or by investments being placed directly under their names, artificially lowering parents’ income for WFF purposes. Under the new rules any passive income over $500 per child per year will be counted as family income.
Passive income for WFF purposes will include interest, dividends, royalties, rents, and a taxable Maori Authority distribution other than a retirement scheme contribution. Passive income will also include beneficiary income from a trust. Wages of children will not be counted as family income.

Income of non-resident spouse: A person might live in New Zealand with their child while their spouse lives and works overseas. Because the non-resident spouse’s world-wide income is available to meet the family’s living expenses that is now counted as family income.

Family scheme income from other payments: A family may receive payments other than those already included in the definition of family income and those are used to meet the family’s living expenses. They are now counted, unless otherwise stated, if the total exceeds $5,000 a year. Examples of such other payments include distributions of trustee income from family trusts where the person is not the settlor of the trust and regular cash payments from family members.

3. KIWISAVER CLAIM FULL GOVERNMENT CONTRIBUTION

Members have until 30 June 2011 to ensure they get maximum entitlement from the government KiwiSaver contribution, Member Tax Credit (MTC).  To be eligible for the maximum MTC of $1,043, members need to be aged 18 or over and have contributed at least that amount during the year.  Employers’ contributions and Inland Revenue interest don’t count.

The MTC is based on the equivalent of paying in $20 a week.  So if contributing at 2% for the whole year (from 1 July 2010 to 30 June 2011), a member’s salary needs to be $52,000 to qualify for the maximum MTC.  If less, then members can still receive the maximum MTC by topping up the account.

If a member has been in KiwiSaver for part of the year, then there is a part year entitlement – generally $20 a week for the number of weeks as a member.  Or if turning 18 during the year, then the same applies.

Even if aged 65 or older, members currently still qualify for the MTC for the first five years in KiwiSaver.

4. NEW GST RULES APPLY FOR CHANGE IN USE

New rules replace the old change-in-use rules with an approach that apportions input tax deductions in line with the actual use of the goods and services. In summary, the rules operate as follows:

• When goods or services are acquired, the portion of GST a registered person can claim a deduction for is based on the intended taxable use of the goods or services with some exclusions applying.
• In subsequent periods, when a change to the actual taxable use occurs from what was first intended, a GST adjustment must be made in that period. A number of exemptions may apply.
• Specific periods known as “adjustment periods” are where a GST adjustment must be made for a change in use, if applicable.
• The maximum number of adjustment periods varies according to the asset’s value or estimated useful life.
• Special “wash-up” rules apply when goods and services that have been subject to the apportionment rules are sold or the person deregisters.

GST-registered persons must continue making GST adjustments using the old rules for non-taxable use based on the market or book value of those goods and services before 1 April 2011.
Adjustments under the old rules for goods and services, other than land, will cease on the following dates:
$5,000 or less, no adjustment after 1 April 2011

• more than $5,000 but not more than $10,000, no adjustment after 1 April 2013
• more than $10,000, no adjustment after 1 April 2016.

Once these dates have passed, no further adjustments for change in use can be made, even though an asset may still be held after these dates.

5. DEPRECIATION RULES

The 2010 Budget announced the removal of depreciation deductions for most buildings from the start of the 2011/12 income year. At the same time the Government announced a review of the tax treatment of commercial building fit-outs and new rules have been enacted to ensure that the fit-out of commercial and industrial buildings continues to be depreciable. Budget 2010 also removed depreciation loading for assets purchased after 20 May 2010. Depreciation loading still applies to assets purchased prior to 20 May 2010 and where investment decisions were made before but not completed until some time after that date.

Commercial fit-outs: The new rules only apply to commercial and industrial fit-outs and the law relating to residential fit-outs remains unchanged. Residential fit-out is generally non-depreciable. Items of fit-out that are shared between commercial and residential purposes - for example, lifts, electrical cabling, fire protection, sewerage and water reticulation in a mixed purpose building - are depreciable if the dominant purpose of the building is commercial. Fit-out used only for commercial purposes will be depreciable property.

The new rules recognise that there are commercial buildings that provide residential-type accommodation and that ensures that fit-outs associated with those buildings will continue to be depreciable. The types of buildings that are specifically excluded from the meaning of “dwelling” are: hospitals, hotels, motels, inns, hostels or boarding houses, certain serviced apartments, convalescent homes, nursing homes or hospices, rest homes or retirement villages (from hospital care through to residential care facilities) and camping grounds.

A new rule allows commercial building owners, who did not itemise building fit-out separately from the building at the time of acquisition, to amortise up to 15% of the building’s adjusted tax book value at 2% straight-line per year until the building is disposed of.

Depreciation loading: Depreciation loading continues to apply in respect of assets purchased or constructed before 20 May 2010 or when there was a commitment to purchase or construct an asset on or before 20 May 2010.  For the latter, there needs to be a decision to purchase or construct it and its owner either entered into a binding contract for its purchase or construction on or before 20 May 2010, or incurred expenditure in relation to it on or before 20 May 2010.

6. INCOME-SHARING TAX CREDIT

The Taxation (Income-sharing Tax Credit) Bill 2010 provides an annual tax credit for couples who have responsibility for a dependent child. The Bill proposes that couples with dependent children should be assessed for tax according to household income as opposed to individual income as is currently the case. For example, a couple where one individual is employed earning $100,000 would face the same tax burden as a couple who earn $50,000 each.

There is support for the concept of the Bill but concern with the following issues:

• a tax credit could affect income distribution adversely and there will be further consideration on whether or not a tax credit was the best option for applying this policy:
• the Bill in its current form excludes sole parents from the benefits of the tax credit, discriminating on the grounds of marital status (as those benefiting from the tax credit must be a couple with dependent children): and
• whether the age limit of a dependent child should be revised down from 18 years old, to two years old.

7. NON-RESIDENT SEASONAL WORKERS – TAX RATE CHANGE

The personal tax rate that applies to non-resident seasonal workers changes to 10.5% with application from 1 April 2011. The new rate better reflects the income levels earned by these workers while working in New Zealand, and lower personal tax rates from 1 October 2010. The previous rate was 15%.

8. TAX TREATMENT WHEN CASHING UP ANNUAL HOLIDAYS

Changes to the Holidays Act 2003 now allow employees to “cash in” up to one week of their annual leave entitlement. If an employee and employer agree to cash up a weeks annual leave it should be treated as an extra pay or unexpected bonus.  As its taxable income, PAYE should be calculated using the rates for extra emoluments.

9. VEHICLE MILEAGE RATE AMENDED 

The mileage rate for expenditure incurred for the business use of a motor vehicle has been amended to 74 c per km for the 2011 income year (70c per km for the 2008/09 and 2009/10 income years). That rate applies to both petrol and diesel fuel vehicles but does not apply to motorcycles.

As the mileage rate may not reflect the true costs, actual costs or the logbook method can be used instead. Employers may use the motor vehicle running cost data published by other reputable sources (eg, the New Zealand Automobile Association Incorporated) as an alternative reasonable estimate for reimbursement to employees.

10. FORESTRY IN ETS KEY DATES

There are key dates for both Pre-1990 forest land owners and Post-1989 forest land participants in Emissions Trading Scheme (ETS) in the next two years that need to be monitored by forest owners that are affected by the scheme.

Pre-1990 forest land owners

• 30 September 2011 is the final date for applications for less than 50 hectare exemptions; and
• 30 November 2011 is the final date for applications for an allocation of NZU under the Forestry Allocation Plan. There is an entitlement to an immediate 23 NZUs and another 37 NZUs after 31 December 2012 (total of 60) for owners of forest land bought before 1 November 2002, and 15 NZUs and 24 NZUs (total of 39) respectively for owners of forest land bought after 1 November 2002. The NZUs are currently trading at about $19.65/unit.

Post-1989 forest land participants in ETS

• 31 December 2012 is final date for applications to join the ETS and become eligible to claim units for 2008-2012 period. Participants that become members after that date will not be able to claim the NZUs for that first commitment period. Post-1989 forest land owners that are undecided on participation should consider electing in prior to 31 December 2012 because they can revert to the position of status quo at any time, and if they don’t elect then they lose the NZUs for the first commitment period. Participants can withdraw from the obligations at any time by forfeiting of the credits previously claimed.

11. FBT RATE FOR LOW INTEREST LOANS

The prescribed rate of interest used to calculate fringe benefit tax on low-interest, employment-related loans is 5.90% for the quarter beginning 1 April 2011. It is down from the previous quarter rate of 6.24%.

12. ACCIDENT COMPENSATION LEVY THRESHOLDS & EXPERIENCE RATING FOR 2012

The following levy thresholds come into force on 1 April 2011:

• the maximum amount of earnings in a tax year of a self-employed person on which the earners’ levy is payable has increased from $106,473 to $110,018:
• the maximum amount of earnings in a tax year of other earners person on which the earners’ levy is payable has increased from $110,018 to $111,669: and,
• the minimum amount of earnings on which an earners’ levy is payable by a self-employed person who works, on average, for more than 30 hours per week (whether as an employee or not) has increased from $26,000 to $26,520.

There are new regulations that provide for experience rating of persons that pay levies. From 1 April 2011, experience rating adjusts the amount of a person’s levy in line with the claims attributable to the person for the three prior tax years and claims relative to the industry. Small employers (annual levies less than $10,000) could receive discounts or loadings of up to 10%, and large employers 50%. Employers and self-employed people will be exempt from either of the programmes if they have liable earnings less than or equal to the minimum liable earnings amount ($26,520 for 2011/12) in each year of the experience period, or are not invoiced for an ACC levy for any year of the experience period.

13. GREENPEACE LOSES CHARITY STATUS

The High Court has upheld a decision of the Charities Commission that Greenpeace New Zealand Inc (Greenpeace) could not be registered as a charity because of its political activities. The High Court found that the Charities Commission was correct in holding that non-violent, but potentially illegal activities (such as trespass), designed to put (in the eyes of Greenpeace) objectionable activities into the public spotlight were an independent object disqualifying it from registration as a charitable entity.

14. CLIENT QUERY

Question:
In the 2011 Budget, the Government stated that the KiwiSaver government contribution will drop to $520 per annum.  When will this take effect?

Answer:
The KiwiSaver member tax credit is to be halved from 1 July 2011. The Government will now contribute 50 cents for each $1 contributed by individual KiwiSaver members, up to a maximum of $521.43 per year.

In addition, all employer contributions to employees’ KiwiSaver accounts (and complying superannuation funds) will be subject to employer superannuation contribution tax (ESCT) from 1 April 2012. ESCT will be applied at a rate equivalent to an employee’s marginal tax rate.

The Government also announced changes to employee and employer contribution rates which will be included in a Bill to be introduced later this year. The minimum employee contribution rate will rise from 2% to 3% for all members, new and existing, from 1 April 2013. The default contribution rate for new employees who do not select a rate will also be 3% from that date. Compulsory employer contributions will rise from 2% to 3% from 1 April 2013.

15. RECENT TAX CASE

Receivers liable for GST on property sales

The High Court has held that the receivers were personally liable to account for GST on the sale of six properties.

Background
The dispute was whether the receivers were personally liable to account for GST on the sale of six properties.
The company in receivership was formed to acquire all the assets and financed the acquisition by borrowings from Fortress Credit Corporation (Australia) II Pty Limited (Fortress). To secure those advances, Fortress took a general security agreement over all the assets which included properties and the subsequent sale of those properties was a taxable supply giving rise to the GST liabilities.

The submissions
The essence of the argument for the receivers was that the provisions of the Goods and Services Tax Act attributed the liability to pay the GST to the mortgagee, that the Commissioner was an unsecured creditor of the mortgagee, and that there were no grounds for attributing personal liability to the receivers to pay the amounts of GST included in the sales.  That analysis would leave the receivers free to account to Fortress for the net proceeds of sale, plus the amount recovered from the purchasers as the GST payable on the sales.

The contrary stance for the IRD was that the Goods and Services Tax Act imposed a tax on supplies, levied upon those effecting taxable supplies so that liability was imposed on those through whose hands the consideration for the taxable supplies had to pass. In this case, the relevant provisions were to be interpreted as attributing the liability to the receivers as the persons in effective control of the taxable supplies of property.

The High Court said that the issue of purpose rendered the receivers liable, but if that approach was not valid, then it was a liability that they could not avoid in any event.

^{Simpson and Downes v C of IR HC Wellington CIV-2010-485-1860, 17 May 2011.}

16. TEAMING UP – EXTENDED DISC

Wood Walton is offering a new service to the business community.  The service is offered in association with Teaming Up.  It is a unique professional service dedicated to supporting employers develop the best human resource structures possible and optimise their employees’ performance and ultimately the productivity of the organisation.  It includes using Extended DISC to conduct psychometric testing of employees.

Psychometric literally means measurement of the mind (psycho = mind, metric = measurement).

The Extended DISC psychometric tests were designed by psychologists to determine a person’s sub conscious (natural) and conscious (adjusted) behavioural styles.  Sub conscious behaviour is what we do naturally – conscious behaviour is how we adjust our behaviour to meet different circumstances.

A person whose role is most suited to their natural behaviour style will be more productive in that role.

Also, understanding what does not come naturally to a person allows employers to support that person and reasonably predict issues before they arise.

As one Teaming Up client recently commented – “with psychometric testing we are able to learn more about a person in 30 minutes than we might otherwise learn in three months of working with them”.

Teaming Up can help you:
• make better hiring decisions:
• better utilise individual strengths (ensuring the right people are in the right roles):
• enhance communication between team members (especially supervisors and subordinates):
• with effective performance reviews:
• with creating more efficient team work: and
• a more effective organisation.
For more information on how you can get the best out of your workforce contact Ant Lagan at the offices of Wood Walton.

17. NEWS ABOUT THE OFFICE

We are pleased to announce Tracy Rea’s recent appointment to the Board of the Bay Trust.  The Bay Trust currently oversees an investment portfolio of $144 million and distributes grants to community groups and activities throughout the Bay of Plenty including Taupo and Rotorua.  The role of trustee comes with significant responsibilities and time commitments and we wish Tracy well with her new duties.

The Practice held a very successful event at Mills Reef on 26 May 2011 to celebrate the launch of our new alliance with Teaming Up and Ant Lagan.  We enjoyed the excellent company of our clients and key business advisers throughout Tauranga, an entertaining presentation and good food and wine supplied by the team at Mills Reef. We refer you to the previous article on Teaming Up and encourage those who want more information or are in need of assistance to contact us.

There will be a few changes around the office with Aimee Randolph on maternity leave from 20 May 2011 and now a proud parent of Jorja Annmarie Donaldson,  Emma McLennan on maternity leave from 3 June 2011, and Cynthia Grounder on maternity leave in late-August.  There has been a reallocation of work and those affected will be contacted by letter or personal telephone call advising them of the change.

Adrian Burton joined the accounting team on 30 May 2011.  Adrian is a Chartered Accountant with extensive experience in commercial and farm accounting.  Alicia Ahern has been with us part-time over the past three months while continuing her accounting studies and will become fulltime towards the end of June 2011.