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March 2009

WHAT YOU’LL FIND IN THIS ISSUE

1. Year-End Tax Planning

2. New Tax Provisions for Small to Medium Businesses

3. FBT Rate Decreased for Low Interest Loans

4. Use of Money Interest Rates Decreased

5. New Taxation Legislation from announcements during election campaign

6. Changes to KiwiSaver

7. National Standard Livestock Costs Determination

8. Holiday Houses – Income Tax Treatment

9. FIF Rules Provided Tax Relief to Unrealised Capital Losses in some investments

10. Ride out the recession and seize new opportunities

11. Credit Card Payments

12. News around the Office

13. Easter Closure

1. YEAR-END TAX PLANNING

The major change in year end tax planning for 2009 is the reduction in personal taxes in each of the 2009, 2010 and 2011 years.

Planning should focus on ways to participate in those tax savings, and that will principally be through timing of disclosure of taxable income.

There are a number of ways to manage timing of disclosure, and those include:
• timing of invoices, and use of cash basis method of accounting for tax purposes; and,
• accruing of expenses.

Planning should also focus on permanent tax savings, and to ensure that all necessary steps are taken in time to qualify for such savings.

Permanent tax saving opportunities include:
• review of remuneration packages to proprietors with the change in company tax rate to 30% in 2009 and reduction in personal taxes from 1 October 2008;
• write off of assets and review of depreciation schedule for asset splitting and use of appropriate rates for asset purchases during the year;
• review of debtor's ledger and write off of bad debts prior to year end;
• write down of trading stock to the lessor cost or market value; and,
• change to donation rebate rules from 1 April 2008.

Finally, planning should include recognition of tax compliance matters that require attention on or prior to year end, and a date scheduled for each activity.

Those include-
• stock takes;
• write offs of bad debts;
• attending to RWT matters relating to interest on shareholder current accounts;
• review of Imputation Credit Account (ICA) to ensure it is in credit at year end;
• Qualifying Company (QC) elections;
• attending to matters relating to the change to employer contributions to Kiwi Saver from 1 April 2009;
• valuation of overseas investments that are caught in the Foreign Investment Fund (FIF) rules;
• election to Ratio Option scheme for 2010 provisional tax payments; and,
• compliance with the proposed changes in the Taxation (Business Tax Measures) Bill that applies from 1 April 2009.

The matters above are discussed in more detail as follows:

INCOME DEFERRAL

Income deferral requires deferral of entitlement to that income, until after year end.

The cash basis method of accounting for income and expenses is available to individuals that earn income principally from personal exertion and do not have large amounts of stock, accounts receivable, employees or assets to generate income. That method may provide deferral of income where the taxpayer has significant debtors at year end, and the deferral of income more than offsets the deferral of expenses for the adjustment for creditors.

Taxpayers that use the accruals method should consider not issuing invoices, if practical for work in progress until after year end. That may not be as tax effective for taxpayers in manufacturing and large construction industries that need to account for work in progress but will have significant tax effect on professionals, labour only contractors and taxpayers in small to medium sized construction industries that don't need to recognise work in progress at year end.

CREDITORS & ACCRUALS

Recognition of expenses in the current year requires the expenses to be incurred or prepaid prior to year end, and the benefit of the expense realised in the year. The deduction must be deferred to the subsequent year where the benefit is realised in the next income year.

There are, however, exceptions to that rule and those provide the means to bring forward deductions to the current year.

Those include;
• prepaid rental for land and buildings up to $23,000 if the rental is due for a period not exceeding six months after balance date;
• payments in respect of service or maintenance of plant and equipment or machinery where the prepaid amount is less than $23,000 and the service and maintenance is actioned less than three months after balance date; and,
• advanced bookings for travel and hotel or motel accommodation can be deducted in the current year where the amount is less than $12,000 and the prepayment is less than six months after balance. (Clearly the travel and accommodation would need to be business related.)

PROPRIETOR'S REMUNERATION PACKAGES

There is a limit to the extent to which remuneration packages can be altered for tax purposes. Packages must be at market value, and deductions will be limited where the packages are awarded by close companies and deemed excessive. Nevertheless, directors do need to consider the new $40,000 threshold cross over for the individual marginal tax rate of 21% to 33%, and $70,000 for the cross over of 33% to 39% from 1 October 2008. Previously the cross over thresholds were $38,000 and $60,000. The 2009 year is also the first year of the new company tax rate of 30% (33% in the 2008 year). There are further movements in the cross over threshold for the 33% tax rate in the 2010 and 2011 years.

BAD DEBT DEDUCTIONS (BEFORE 31 MARCH)

There is an allowable deduction for bad debts where:

• the decision to "write off" the debt is a genuine commercial decision. It is not necessary to show that legal or collection action has been taken to recover the debt in circumstances where this action would be futile;
• to support the decision to "write off” the debt there is a director's resolution or an authorisation by a senior employee; and,
• the required accounting/journal entries made to write off the debt in the books must have occurred before balance date.

There may also be an entitlement to a GST benefit for bad debts written off if the business accounts for GST on an invoice basis.

STOCK VALUATION

A stock take needs to be done at 31 March 2009. Stock sheets need to be prepared and should provide sufficient detail to identify items of trading stock and the retail price of each item. Stock must be valued using a cost valuation method, or when market selling value is less than cost, market selling value may be used. The value is recorded exclusive of GST. Sufficient details should be recorded at the time of doing the stock take to determine the value.

There maybe an opportunity this year to reduce the value of trading stock to market selling price. The current economic conditions are very different to previous years and that may provide an opportunity to value some lines of stock at less than cost. If there is a write down then there needs to be reasonable evidence to support the value at year end.

A taxpayer with turnover (in the 12 months leading up to the taxpayer's balance date) of less than $1.3 million need not value trading stock at year-end if it can be reasonably estimated that the taxpayer has less than $5,000 worth of trading stock. The Taxation (Business Tax Measure) Bill increases that value to $10,000 from 1 April 2009.

Consumable Aids

Consumable aids are items used in a manufacture or production process but not a component in the final product. Consumables of less than $58,000 at balance date can be written-off and not added into your trading stock on hand at year-end.

DONATION REBATES

There is no longer a cap on the rebate for gifts to approved charitable organisations other than the tax requirement that the gift be less than total taxable income of the claimant for the year. Furthermore, close companies will be entitled to a deduction for gifts up to the amount of the taxable income for the year. These changes offer considerable tax relief and tax planning opportunities to those with philanthropic interests. The gift needs to be made in cash prior to 31 March 2009.

CURRENT ACCOUNTS & INTER-COMPANY BALANCES

There are fringe benefit tax (FBT) implications where employers provide interest free or concessionary loans to employees (including shareholder employees) or associates of employees.

Interest should be charged at the specified FBT interest rate during the period of the loan. Interest of more than $5,000 needs RWT deducted and that must be remitted to the Inland Revenue Department by 20 April 2009, and an annual reconciliation statement must also be filed with the Inland Revenue Department by 31 May 2009. Interest on overdrawn shareholder current accounts is deductible only if the funds drawn are used by the shareholder to derive taxable income. Otherwise the interest is not tax deductible to the payer.

EMPLOYEE HOLIDAY PAY & BONUSES

There is a tax deduction for accrued holiday pay and bonus payments to employees if they are paid by 2 June (i.e. within 63 days of balance date).

FRINGE BENEFIT TAX (FBT)

Employers that have applied the multi-rate method to calculate FBT liability may significantly reduce the FBT cost in the fourth quarter by using the multi-rate calculation. The election is made in the FBT return in the fourth quarter. The rates start at 17.65% and progressively increase to 63.93%. Those not on the multi-rates use a flat rate of 64%. The 64% rate will reduce to 61% on 1 April 2009 and to 59% with effect from 1 April 2010 with the effective change in personal tax rates from those dates.

IMPUTATION CREDIT ACCOUNT (ICA)

Company ICAs need to be in credit at 31 March otherwise penalties will be imposed. Voluntary tax payments (equal to the debit balance) can be made to put the balance in credit and those need to be made by 20 June 2009.

Credits to the ICA will be at 30% for payments to the 2009 and future tax accounts. The balance of the ICA for taxes paid at 33% need to be distributed by 2011 or otherwise be distributed at 30%.

QUALIFYING COMPANY ELECTION

Companies that wish to enter the qualifying company regime for the 2010 year need to make the election prior to 31 March 2009. Companies incorporated in the year ending 31 March 2009 have until the date the tax return is filed to make the election and can elect to be in the qualifying company regime for the 2009 year.

Companies that wish to revoke qualifying company status in the 2009 year must do so prior to 31 March 2009. The revocation is effective from 1 April 2008.

RATIO METHOD FOR PAYING PROVISIONAL TAX FROM 1 APRIL 2009

The election for the 2010 year needs to be made prior to 31 March 2009. The election can be made by telephone, and the Inland Revenue Department will confirm acceptance to the scheme in writing.

The provisional tax payment will be based on 100% uplift of the 2009 year residual income tax for all taxpayers (except companies) less $730 where the tax return for the 2009 year has been filed and $1460 where the return has not been filed. Companies will base the provisional tax payments on 90% of the 2008 year's residual income tax and 100% of the 2009 year when the tax return is filed.

KIWISAVER COMPULSORY CONTRIBUTIONS FROM 1 APRIL 2009

Employers will be required to contribute 2% of gross salary from 1 April 2009 to each employee's KiwiSaver account.

Employers will be liable for Specified Superannuation Contribution Withholding Tax (SSCWT) for contributions in excess of 2% of the employee's gross annual income from 1 April 2009.

FOREIGN INVESTMENT FUNDS (FIF) PORTFOLIO AND VALUATIONS FROM 1 APRIL 2009

Taxpayers that have offshore investments in shares that are caught by the FIF rules will need to value the share portfolio at open market value at 31 March 2009. The value will be used to calculate the fair dividend rate for the portfolio for the 2010 year, and the comparative value method for both the 2009 and 2010 years.

A review of the portfolio prior to 31 March also provides an opportunity to minimise the market value of the offshore portfolio or exempt the taxpayer from the FIF regime for the 2010 year. Individuals with offshore portfolios that do not exceed $NZ50,000 (cost price) at anytime during the year are excluded from the regime. Australian investments listed on an approved index of the ASX (eg All Ords Index which is the 500 largest listed companies) and GPG shares and investments in the NZ Investment Trust are excluded from the portfolio valuation at 1 April 2009.

2. NEW TAX PROVISIONS FOR SMALL TO MEDIUM BUSINESS

The Taxation (Business Tax Measures) Bill was introduced into Parliament on 10 February 2009 and that gives effect to measures recently announced by Government to improve the business environment for small and medium enterprises - particularly in terms of easing the impact of taxes on business cash flows and reducing business tax compliance costs in this period of economic recession.

The main features of the Bill propose to give effect as follows:
• PAYE once a month filing and payment threshold - increases from $100,000 to $500,000 (based on annual PAYE deductions);
• FBT annual return filing threshold - increases from $100,000 to $500,000 (based on annual PAYE deductions);
• FBT annual return filing - allows owner-employees of closely held businesses to file annually, regardless of their annual PAYE deductions, when their FBT liability is limited to up to two vehicles;
• Provisional tax use of money interest (UOMI) safe harbour threshold - increases from $35,000 to $50,000 (based on annual residual income tax);
• GST registration threshold - increases from $40,000 to $60,000 (based on annual GST turnover);
• GST 6-monthly return filing threshold - increases from $250,000 to $500,000 (based on annual turnover);
• Accounting for financial arrangements - allows non-individuals to return income tax for financial arrangements on a cash accounting basis, and increases the threshold for straight line accounting from $1.5 million to $1.85 million (based on the total level of financial arrangements);
• Low value trading stock threshold - increases the exemption for adjustments from $5,000 to $10,000 (based on the value of trading stock);
• Provisional tax uplift rate - reduces the current standard method provisional tax uplift baselines from 105% or 110% to 100% or 105%, or to 90% and 95% for transitional provisional taxpayers (based on residual income tax);
• GST payments basis threshold - increases from $1.3 million to $2 million (based on annual GST turnover);
• FBT on unclassified fringe benefits - increases the de minimis threshold for exempting minor benefits from FBT from $15,000 pa per employer and $200 per quarter per employee to $22,500 and $300, respectively; and,
• Rules for deducting legal expenditure - simplified to allow businesses to immediately deduct business-related legal expenditure, up to $10,000 a year, without having to distinguish between revenue and capital.

The package of measures also includes reductions in the use of money interest (UOMI) rate for underpayments and overpayments of tax and the FBT prescribed interest rate applying to low-interest, employment-related loans. Those changes were made on 2 February 2009.

3. FBT RATE DECREASED FOR LOW INTEREST LOANS

The prescribed rate used to calculate fringe benefit tax on low-interest, employment-related loans decreases from 10.90% to 8.05% from the quarter commencing 1 January 2009.

4. USE OF MONEY INTEREST RATES DECREASED

The use-of-money interest rates for all revenues and duties decreases from 1 March 2009. The following rates apply for unpaid and overpaid tax:

• the taxpayer's paying rate decreases from 14.24% to 9.73% pa; and,
• the Commissioner's paying rate decreases from 6.66% to 4.23% pa.

5. NEW TAXATION LEGISLATION FROM ANNOUNCEMENTS DURING ELECTION CAMPAIGN

The Taxation (Urgent Measures and Annual Rates) Act was enacted 11 December and gives effect to announcements during the 2008 general election campaign. It makes the following changes to tax rates, independent earner credit, R&D tax credit and KiwiSaver:

• A three-year programme of changes to personal income tax rates and thresholds from 1 April 2009;
• Introduction of an independent earner tax credit of $10 a week from 1 April 2009, increasing to $15 a week from 1 April 2010. The independent earner tax credit is a tax rebate for those that earn between $24,000 and $44,000 that are not receiving a benefit, Working for Families tax credit or New Zealand Superannuation;
• Repeal of the R&D tax credit of 15% from the 2009/10 income year; and,
• Changes to KiwiSaver from 1 April 2009, including a reduced employee contribution rate of 2%, capping of compulsory employer contributions at 2%, and discontinuing the employer tax credit and the fee subsidy.

Three year Programme of Changes to Personal Income Tax rates

The existing tax rates and income thresholds that apply for the period from 1 October 2008 to 31 March 2009 are:

INCOME BRACKET	TAX RATE
$0 - $14,000	12.5%
$14,001 - $40,000	21%
$40,001 - $70,000	33%
Over $70,001	39%

The new tax rates applying for each of the 2009/10, 2010/11 and 2011/12 tax years are shown in the table below:

New tax rates applying for each of the 2009/10, 2010/11 and 2011/12 tax years:

6. CHANGES TO KIWISAVER

The following changes to KiwiSaver will apply from 1 April 2009-
• The minimum member contribution rate will reduce from 4% to 2%, and 2% will be the default contribution rate for new employee members from 1 April 2009;
• The member fee subsidy will be discontinued from 1 April 2009;
• Compulsory employer contributions will be capped at 2% from 1 April 2009;
• The employer tax credit will be discontinued from 1 April 2009;
• The employer superannuation contribution tax exemption will be capped at the compulsory employer contribution of 2% from 1 April 2009. (That is equivalent to 2% of the employee's gross salary or wages);
• The KiwiSaver Act will be amended to make it clear that upon joining KiwiSaver, no employee can have their gross pay reduced as a result of employer contributions. This will ensure that when employees join KiwiSaver, the compulsory contributions from their employer are a genuine addition to their existing pay. The changes will also provide employers and employees with the ability to negotiate their own arrangements in good faith. The Employer Relations Act amendment relating to KiwiSaver will then be obsolete, and will be repealed from the date of assent of the Employment Relations Amendment Bill; and,
• The KiwiSaver Act will also be amended to provide a limited exemption from compliance with securities and other related legislation for a limited period so that providers have time to update prospectuses and investment statements, for example.

7. NATIONAL STANDARD LIVESTOCK COSTS DETERMINATION

On 29 January 2009, the Inland Revenue Department released the national standard costs for specified livestock for the 2009 income year. Those apply to any specified livestock on hand at the end of the 2008/09 income year where the taxpayer has elected to value that livestock under the national standard costs scheme for that income year.

8. HOLIDAY HOUSES – INCOME TAX TREATMENT

The Inland Revenue Department has recently released the Department's position on tax treatment of holiday homes with particular attention to homes which are used privately but also rented out, and that may signal the Department's intentions for its focus for tax audit in 2009.

The Department states that any rental income received is taxable under s CC 1 of the Income Tax Act 2007 and should be returned in the owner's tax return in the income year in which it is derived. That provision taxes any rental income derived from the leasing or licensing of land (and land includes any house on that land), regardless of whether the activity amounts to a business or whether market rates are charged. However, the extent to which any expenses incurred in owning the holiday house are deductible will depend on their connection with the income earned.

The Department will focus on regular deductions where there is no genuine rental activity, and disallow those where the rental income is not for a reasonable period or the rental arrangement is not arms length. The Department considers that if the home is only available for limited times of the year or at below market rates then the regular costs are not incurred in the course of deriving assessable income. A deduction can be claimed for a portion of the costs. The basis of apportionment will be time available for rental and portion of premises available for rent.

9. FIF RULES PROVIDE TAX RELIEF TO UNREALISED CAPITAL LOSSES IN SOME INVESTMENTS

Certain investments in foreign shares are treated as debt rather than equity for the purposes of the FIF rules, and therefore the accruals rules apply to allow unrealized losses to be offset against other income.

The FIF rules require taxpayers to use the comparative value method where shares are treated as debt to determine income or loss for tax purposes for the year. The following investments are caught by those rules.
• Macquarie Cash Management Trust
• ING Diversified Yield Fund
• ING Regular Income Fund
• Global Guardian Management Limited Cash Plus Fund
• Global Investment Services Limited High Yield Cash Fund
• Global Investment Services Limited Super Yield Cash Fund

The ING Diversified Yield Fund and ING Regular Income Fund have faired poorly in the current financial market. The funds froze redemptions in March 2008 and the unit prices have fallen from 80c to 28c and 70c to 20.5c respectively during the year. If those are the assumed values at 31 March 2009, an investment of $80,000 in ING Diversified Yield Fund would provide tax losses of $52,000 for the year and that would equate to $20,000 of tax relief (at a marginal tax rate of 39%). Any dividend income derived from that investment during the year is not disclosed for tax purposes. If the unit prices of the funds rise in future years, tax will be levied on the unrealized gains.

10. RIDE OUT THE RECESSION AND SEIZE NEW OPPORTUNITIES

Most businesses are facing huge challenges in the current economic climate. It is survival for many, and new opportunities for others.

The checklist below provides 10 pieces of advice that fit most, if not all businesses and opportunists in this market-
• Cash is King. Explore options to turn your debtors into cash in the bank - reduce inventory;
• Review your pricing strategy - do not sell using credit as an inducement;
• Laser-like focus on your core business;
• Identify your best customers and your most profitable products - focus your energy here!;
• Dispose of under-utilised or unused assets;
• Improve monthly management reporting - include cash reporting and projections in your monthly reports;
• Groom or Broom staff - this is a great opportunity to cull poor performers and improve the skills of your top staff;
• Don't ignore the Elephant in the room! Your staff is aware of the economic situation - keep them informed with regard to the business strategy, current conditions and how they can help; and,
• Keep discretionary spending to a minimum.
Now is the time to be budgeting and preparing your strategic plans for 2009/10. It is not going to be an easy year for most but you can emerge surer, stronger and primed to take advantage of the next upswing when it comes.

11. CREDIT CARD PAYMENTS

As from 1 April 2009 we will be accepting Visa, MasterCard and American Express in payment of our fees and we invite those that find this method more convenient than cheque or direct debit to use this facility. The details will be included on future invoices.

12. NEWS AROUND THE OFFICE

After the Christmas/New Year break all staff are back on board rested and ready for the new financial year.

Hailey Menzies who was our summer intern for the university break has returned to Otago to resume her studies. We wish her the best for her final year.

Cynthia Gounder has announced that she is expecting her first child in May and will take maternity leave at the end of April.

We welcome Julie Parkyn to the team. She commenced employment 11 February 2009. Julie has worked for a number of years in chartered accounting and recently relocated from Auckland to Mount Maunganui. She is starting on two days a week but will increase to at least three as we enter our busy season.

13. EASTER CLOSURE

The office will close at the end of business Thursday 9 April 2009 for the Easter break:-

• Good Friday 10 April, Easter Monday 13 April and Easter Tuesday 14 April

We reopen Wednesday 15 April.