1. Year-End Tax Planning
2. Donations To Christchurch Earthquake Appeals
3. Savings Work Group (SWG) Final Report
4. Budget 2011
5. General Election 26 November 2011
6. Timing Of Transition For Loss Attributing Qualifying Companies (LAQC)
7. Depreciation Implications On Taxation
8. Gift Duty Delay In Change In Rules
9. Student Loan Voluntary Payments
10. Residential Investment Properties In Australia
11. Online Annual Client Questionnaires
12. Anzac Day No Entitlement To Day In Lieu
13. News About The Office
14. Easter Closure
1. YEAR-END TAX PLANNING
The main focus of tax planning this year is deferral of income, minimising tax without crossing the line to tax avoidance, minimising exposure to use of money interest, and or tax penalties.
A significant tax change in 2012 is the reduction in individual tax rates from the composite rates that apply in the 2011 year and the new company tax rate from 1 April 2011. The composite marginal tax rates are the average rates that apply for the whole of the 2011 year with the change in individual tax rates from 1 October 2010. The company tax rate reduces from 30% to 28% on 1 April 2011.
TIMING ISSUES
Deferral of income uses disclosure options that delay recognition of income to later years, and usually requires the implementation of tax planning measures prior to year end. Those include:
• timing of invoices;
• accruing of expenses; and
• using the cash basis method of accounting for tax purposes.
• There will be tax savings for company and individual taxpayers by deferral to 2012 with the company tax rate reducing from 30% to 28%, and individual marginal tax rates reducing at all income levels from 1 April 2011.
PERMANENT TAX SAVINGS
Permanent tax savings use tax planning opportunities to save tax in the current tax year and they usually require implementation of tax planning measures prior to year end. Those include:
• determination of income for the current year and review of tax planning to take best tax advantage of the differences between company tax rate of 30%, the trustee rate of 33% and the top marginal personal composite tax rates of 35.5% for income over $70,000 in the 2011 year:
• voluntary tax payments on or prior to the 2011 third provisional tax date of 7 May 2011 to ensure that there are sufficient credits in the 2011 tax accounts to minimise use of money interest:
• write off of assets and review of depreciation schedule for asset splitting and use of appropriate rates for asset purchases during the year:
• write down of trading stock to the lesser of cost or market value: and
• payment of donations to qualify for donation rebate.
COMPLIANCE ISSUES
Tax compliance matters need to be attended to at year end. They include:
• stocktakes;
• review of debtor’s ledger and write off of bad debts prior to year end;
• attending to RWT disclosures for interest on shareholder current accounts and dividends awarded prior to year end;
• maintenance of imputation credit account (ICA) and resident withholding tax (RWT) on dividends;
• Qualifying Company (QC) elections prior to 31 March 2011;
• planning for Loss Attributing Qualifying Companies (LAQC) transition to other structures from 1 April 2011;
• election to the GST Ratio Method for 2012;
• 2011 provisional tax with change in tax rates and 2012 provisional tax with a further change in tax rates and changes to depreciation allowances for buildings;
• election to six monthly GST periods and two instalments of provisional tax in the 2012 year;
• election to the annual and income year basis for accounting for FBT;
• payment to the KiwiSaver account to top it up to $1042.86 before 30 June 2010;
• Foreign Investment Fund (FIF) valuations;
• Prescribed Investor Rate (PIR) adjustment at year end; and
• RWT rate check.
The matters above are discussed in more detail as follows:
Income Deferral
Income deferral requires the postponement of entitlement to that income until after year end.
The cash basis method of accounting for income and expenses is available to individuals who earn income principally from personal exertion and do not have large amounts of stock, accounts receivable, employees or assets to generate income.
Taxpayers that use the accruals method should consider deferring the issue of invoices, if practical, 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 a significant tax effect on professionals, labour-only contractors and taxpayers in small to medium sized businesses that do not need to account for 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 are found in Determination E12 and provide the means to bring forward deductions to the current year. Those include:
• prepaid rental for land and buildings up to $26,000 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:
• advanced bookings for travel and hotel or motel accommodation can be deducted in the current year where the amount is less than $14,000 and the prepayment is less than six months after balance date (clearly the travel and accommodation would need to be business related): and
• other costs not dealt with in the determination of less than $14,000 and prepayment for less than six months after balance date.
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.
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).
Allocation of Income and Tax Planning
Income from personal service needs to be recognised and disclosed in the return of the taxpayer that earns that income. There is a limit to the extent to which that income can be allocated to relatives or associated parties, and the Commissioner can reallocate where there is an element of avoidance or excesses in that treatment. Tax practitioners are cautious with the present uncertainty in the IRD application of the anti avoidance provisions, and the impact of Penny and Hooper on the issue of market salaries.
Non individuals (including companies and trusts), and individual tax payers that incur residual income tax of $50,000 and more are liable for use of money interest and therefore need to plan to pay tax early to minimise that cost. That can be done by voluntary payment of tax preferably on or before the use of money interest determination dates which are the provisional tax dates. For the 2011 year the last provisional tax date is 7 May 2011 (2011 third provisional tax date). There are options available to reduce the use of money interest liability and those include transfer of tax credits from associated parties on provisional tax payment dates, electing into the ratio scheme for the following year and purchase of provisional tax credits from tax pooling agencies.
Stock Valuation
A stocktake needs to be done at 31 March 2011. 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 stocktake to determine the value.
There may be opportunity this year 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 $10,000 worth of trading stock. In that situation closing stock is valued at the same value as opening stock
Donation Rebates
There is no cap on the rebate for gifts to approved charitable organisations and individuals will be entitled to a rebate of 1/3 on gifts, provided the gifts are less than total taxable income of the donor for the year. Companies are entitled to a deduction for gifts up to the amount of the taxable income for the year but the tax relief of 28% is less attractive than that offered to individuals through the rebate. Trustees can treat income as beneficiary income to approved charitable organisations and qualify effectively for the same tax relief as individuals. The charity must be included in the list of beneficiaries in the trust deed. The gift needs to be a donation of money and made prior to 31 March 2011.
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.
The write off also provides a GST recovery.
Interest on Overdrawn Current Accounts
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. The interest is only deductible to the shareholder if the funds drawn are used by the shareholder to derive taxable income. If the interest is more than $5,000 then RWT needs to be withheld and that must be remitted to the Inland Revenue Department by 20 April 2011, and an annual reconciliation statement must also be filed with the Inland Revenue Department by 31 May 2011.
Imputation Credit Account (ICA) and RWT on Dividends
Company ICAs need to be in credit at 31 March (irrespective of balance date) otherwise penalties will be imposed. Voluntary tax payments (equal to the debit balance) can be made to put the balance in credit. If payment is made prior to 31 March 2011 no penalty will be incurred. The company will incur a penalty of 10% and use of money interest for payments made after 31 March 2011 but before 20 June 2011 (final date for payment) to balance that account.
Fully imputed dividends from 1 April 2011 on retained earnings derived in the 2012 and future years will have an imputation ratio of 28/72, and there is a period to 31 March 2013 to distribute retained earnings prior to the 2012 year at imputation ratio of 30/70. If the earlier retained earnings are not distributed in that period the surplus imputation credits in the ICA will be carried forward in the company.
RWT needs to be paid to the IRD by the 20th of the month following payment of dividends (ie for a dividend declared and paid on 31 March 2011, the RWT needs to be remitted to the IRD by 20 April 2011). The RWT grosses up the tax paid on the dividend to the present dividend RWT rate for companies of 33%. That percentage has not changed through two changes in company tax rates and equates to the top individual marginal tax rate and trustee rate.
Qualifying Company Election
Companies that wish to enter the qualifying company regime (ie QC and LAQC) for the 2012 year need to make the election prior to 31 March 2011. Companies incorporated in the year ending 31 March 2011 have until the date the 2011 tax return is filed to make the election for the 2011 year.
Ordinary companies may elect into the QC regime to participate in the transition provisions to other structures (including look through companies, special partnerships, ordinary partnerships or sole trader) without tax consequence.
Companies that wish to revoke qualifying company status in the 2011 year must do so prior to 31 March 2011. The revocation is effective from 1 April 2010.
LAQC Transition Period
The shareholders of QCs need to make a decision within a transition period of six months from the start of the 2012 or 2013 tax years if they intend to exit the QC regime. That can be done without tax consequence if the election is made during those periods.
This Newsletter further discusses LAQC transition in section 6.
Ratio Method Election for Paying Provisional Tax from 1 April 2010
The Ratio Method is available to GST registered provisional tax payers (except those registered six monthly or with provisional tax of more than $150,000 pa). Election into the scheme commits the taxpayer to provisional tax payments on GST dates. The Inland Revenue Department determines a ratio to calculate the provisional tax based on GST in each period and the provisional tax is paid on the GST date. Those that elect into the method are not liable for use of money interest on underpayment of provisional tax so the method may suit companies and trusts, and individual tax payers liable for use of money interest. It may also suit taxpayers with seasonal or fluctuating income, and assist in the management of cash flow.
The election into the Ratio Method for the 2012 year needs to be made prior to 31 March 2011. The election can be made by telephone, and the Inland Revenue Department will confirm acceptance to the scheme in writing.
Provisional Tax Planning
The 2012 provisional tax uplift rate for companies and individuals reduces from 105% to 95% of the 2011 year residual income tax and from 110% or to 95% of the 2010 year residual income tax for the reduction in tax rates from 1 April 2011.
Changes to the depreciation rules from 1 April 2011 may further impact on the provisional tax payments for the 2012 year for owners of residential & commercial rentals.
Companies, Trusts and high earning individuals that are provisional tax payers are liable for use of money interest on under and over payments of income tax irrespective of basis of payment. Care needs to be taken in assessing provisional tax payments for those entities.
Provisional Tax & Six Monthly GST Registration
GST registered provisional taxpayers are able to limit the number of provisional tax payments to two if their taxable supplies in a 12 month period are less than $500,000 (GST excl) and they apply to the Inland Revenue Department to change GST registration to 6 monthly periods. The alignment of GST and tax dates is the cause.
The application needs to be made by 31 March 2011.
Fringe Benefit Tax (FBT)
Employers should consider the possible FBT savings by applying the multi-rate approach in determining the FBT liability for the year. There may be some advantage where:
• benefits provided to employees whose employment remuneration for the year is less than $70,000;
• benefits are provided to former employees; or
• individual recipients cannot be identified.
Possible FBT savings may be less where benefits are provided to major shareholder-employees or their associates.
The election is made in the FBT return in the fourth quarter. The rates start at 12.99% and progressively increase to 55.04% in the 2011 year. Those not on the multi-rates use a flat rate of 49.25% from 1 October 2010.
Companies can elect to account for FBT on an income year basis for benefits provided to shareholder employees and account for FBT on terminal tax date of the company. The election for the 2012 year needs to be made prior to 30 June 2011. The company will then account for FBT for the 2012 year on 7 April 2013.
The amount of unclassified fringe benefits which can be supplied to employees without incurring FBT from 1 April 2010 is $300 per employee per quarter (previously $200) and $22,500 (previously $15,000) in total for all employees.
KiwiSaver Compulsory Contributions
The standard contribution rate for employees to KiwiSaver is 2% of an employee’s gross salary or wages, with an option to contribute at a higher rate of 4% or 8%. Employers are required to contribute 2% of gross salary to each employee’s KiwiSaver account and employer contributions must be paid by the employer to the IRD.
Self-employed people and other people who are not employees may contract directly with a KiwiSaver scheme provider and make contributions directly to a KiwiSaver account.
All member contributions to KiwiSaver will be matched by a corresponding member tax credit of up to $1,042.86 a year ($20 per week). That includes contributions made by members who are employees and any other members provided that:
• the member is aged over 18, and
• the member has not reached the age at which they can make withdrawals from their KiwiSaver account, and
• the member lives in New Zealand (subject to some minor exceptions).
KiwiSaver has a June year end so members need to make sufficient contributions by 30 June 2011 to maximise their entitlement to the available tax credit of $1,042.86 by that date.
Foreign Investment Funds (FIF) Portfolio and Valuations from 1 April 2010
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 2011. The value will be used to calculate the fair dividend rate for the portfolio for the 2012 year, and the comparative value method for both the 2011 and 2012 years. Those taxpayers that have their portfolios managed will receive that information in the year end report.
Taxpayers should review their portfolio prior to 31 March 2011, and if practical trade stock to minimise the market value of the offshore portfolio or restructure investments to exempt the taxpayer from the FIF regime for the 2012 year. Individuals with offshore portfolios with a cost that does not exceed $NZ50,000 at anytime during the year are exempt, and Australian shares that are listed on an approved index of the ASX and some other Australian investments are excluded from the portfolio. GPG shares are also excluded until 1 April 2012.
PIE Investments – Prescribed Investor Rate (PIR)
Investors in a portfolio investment entity (PIE) such as a KiwiSaver scheme need to provide a new Prescribed Investor Rate (PIR) to their provider. The rates for individuals have changed with the change in individual tax rates from the composite rates in 2011 and the providers need to be advised of the change in PIR to tax the investment at the correct rate.
New Residential Withholding Tax (RWT) Rates from October 2010
Investors in interest bearing investments need to check the RWT rate changed in October 2010 for the change in tax rates. If the rate needs to change from 1 April 2011 then the provider should be notified of the change.
2. DONATIONS TO CHRISTCHURCH EARTHQUAKE APPEALS
Donations over $5 by individuals through approved donee organisations can gain a tax credit, and will be tax deductible when made by companies. The donation must be made in cash and to an approved donee organisation and needs to be supported by receipt. The Christchurch Earthquake Appeal, the Red Cross and the Salvation Army are eligible for a tax credit.
3. SAVINGS WORK GROUP (SWG) FINAL REPORT
On 1 February 2011, the Savings Working Group (SWG) released its final report, “Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity”. The SWG, set up in 2010 to address New Zealand’s savings and debt problems, considers decisive steps are required to increase national savings, both in the State and public sector, above current levels and also to increase net exports to allow New Zealand to better pay its way in the world. The SWG’s final report contains stern warnings that New Zealand’s indebtedness to the rest of the world — currently at 85% of gross domestic product (GDP) — is at a similar level to the troubled countries of Europe.
The report recommends a more integrated and strategic approach to economic policy, an urgent increase in national savings of some 2% to 3% GDP (amounting to some $3 billion to $5 billion annually) and a return to a fiscal surplus of not less than 2% of GDP earlier than the projected date of 2016, and to maintain that surplus for the medium term. It encourages Government to set a target for public sector productivity and performance improvements of the order of 2% a year for the next five years and 1% thereafter, with a clearly defined measurement basis and significant incentives/penalties relating to those targets. The Crown’s balance sheet needs to improve and the Government give an overview of its investment intentions to remedy the current position.
The report recommends change to major drivers in tax and KiwiSaver to encourage saving. Those include adjustment to taxation of investment income and deductions for inflation, special concessionary tax rates for PIEs, refund of surplus imputation credits on dividends and continued broadening of the tax base by increasing the GST rate from 15% to 17.5%, the KiwiSaver $1,000 kick start to be spread over 5 years to retain members and the membership age to be reduced to 16 years; an employer’s superannuation tax (ESCT) on employer contributions, review of costs and fees of providers, clear reporting to members, removal of Government matching for those on higher income levels and self management of funds.
The report recommends the continuation of the NZ Superannuation Fund and consideration be given to changing the funding method of the Fund, for instance, through the introduction of a dedicated social security tax (with an offset to ordinary income tax).
It recommends giving investors receiving lump-sum retirement payments the option of converting some of their payout into an income stream. The Government should consider helping to develop an annuities market, providing annuities, or providing the ability to buy an increased entitlement to NZ Superannuation.
It recommends extending KiwiSaver-style incentives to other saving schemes where contributions are locked-in for reasonably long periods; say a minimum of 10 years. The SWG also recommends the Government consider facilitating long-term investment by issuing inflation-indexed bonds.
4. BUDGET 2011
The Minister of Finance, Bill English, confirmed that Budget 2011 will be delivered on Thursday, 19 May 2011. The Budget will focus on taking further measures to build New Zealand’s national savings and reducing vulnerability to foreign debt and return the budget to surplus in 2014/15.
The Government has also signaled a review of the Crown balance sheet by investigating the merits and viability of extending a mixed ownership model — where the Government retains a controlling shareholding but offers a minority stake to New Zealand investors — to Mighty River Power, Meridian, Genesis and Solid Energy. It has also sought advice from Treasury on the merits of reducing the Crown’s shareholding in Air New Zealand, while still maintaining a majority stake. No other SOEs are being considered and no decisions had been made.
5. GENERAL ELECTION 26 NOVEMBER 2011
Prime Minister John Key announced that the 2011 General Election will take place on Saturday 26 November 2011.
6. TIMING OF TRANSITION FOR LOSS ATTRIBUTING QUALIFYING COMPANIES (LAQC)
Existing LAQCs can remain without the flow through of losses from 1 April 2011 or can transition to look through companies (LTCs), sole traders, partnerships or limited liability partnerships without tax consequence for a 6 month period from 1 April in each of the 2012 and 2013 tax years. The election is deemed to have effect for the full year of election, and any conveyance of property must occur prior to the end of the transition year. The decision on transition entity and timing of transition will be a case by case decision and should be undertaken in consultation with a taxation advisor.
7. DEPRECIATION IMPLICATIONS ON TAXATION
The amendment rules relating to depreciation of buildings which have an estimated life of 50 years or more take effect on 1 April 2011. Those buildings will have an annual depreciation rate of 0% for tax purposes with the exception of the cost to fit out of commercial buildings, and those costs can be depreciated at the scheduled rates if previously separated from the building for tax purposes, or otherwise 2% of the start pool value of the building (start pool value is 15% of the cost of the building after certain adjustments) on a straight line basis.
The changes to the depreciation allowances may affect the tax position of building owners in the 2012 and future years. Those taxpayers should seek taxation advice on the implications and should plan for additional tax or voluntary tax payments for the 2012 year.
8. GIFT DUTY DELAY IN CHANGE IN RULES
The Taxation (Tax Administration and Remedial) Bill 2010 was referred to Finance Committee after introduction in Parliament in November 2010 and a report on the Bill is not expected until 7 June 2011. The Bill abolishes gift duty and although intended to take effect from 1 October 2011, it cannot be applied until enacted. There is anticipation and a sense of urgency for the changes with the General Election date set for 26 November 2011.
9. STUDENT LOAN VOLUNTARY PAYMENTS
The Government has introduced a 10% student loan voluntary repayment bonus for voluntary repayments that total $500 or more in the tax year ended 31 March 2011. Voluntary repayments are payments made on top of what need to be repaid for tax year and will apply to students that receive a student loan prior to the 2010 tertiary year (students that commenced studies in the 2010 tertiary year will not be eligible for the bonus). If the loan is not paid in full, the bonus is 10% of the total voluntary repayments during the year to 31 March 2011. For example if those came to $800, this would be a voluntary repayment bonus of $80 and the loan balance would be reduced by $880. If the loan is repaid in full the amount of the bonus is limited to 1/11th of the loan balance, and not 10% of any payments made. That ensures there is no bonus for payments that were not required to pay the loan in full.
CLIENT QUERIES
10. RESIDENTIAL INVESTMENT PROPERTIES IN AUSTRALIA
Question
If you own one or more residential investment properties in Australia and you have borrowed money from an Australian financial institution to purchase the property or properties, do you have to pay NRWT on the interest paid to the Australian financial institution?
Where,
• you manage the property or properties yourself (situation A);
• a property manager in Australia manages the property or properties for you (situation B).
Answer
If the Australian financial institution to which you pay interest has a branch in New Zealand, in both situations A and B the NRWT rules will not apply to the interest because the financial institution has a fixed establishment in New Zealand. The following financial institutions operate as branches in New Zealand
• Australian & New Zealand Banking Group Limited
• Citibank NA
• Commonwealth Bank of Australia
• Deutsche Bank A G
• JPMorgan Chase Bank NA
• KooKmin Bank
• Rabobank Nederland
• The Bank of Tokyo-Mitsubishi UFJ
• Westpac Banking Corporation
If the Australian financial institution to which you pay interest does not have a branch in New Zealand, the outcomes between situations A and B may differ.
• Under situation A, if you manage the property or properties in Australia from New Zealand, you will not have a fixed establishment or permanent establishment in Australia and you will have to pay NRWT on the interest.
• Under situation B, if a property manager manages the property or properties in Australia then likewise you do not have a fixed establishment in Australia, and you will have to pay NRWT on the interest. However if the property manager is a dependent agent, you are deemed to have a permanent establishment in Australia and you will not have to pay NRWT on the interest.
11. ONLINE ANNUAL CLIENT QUESTIONNAIRES
We will be issuing the year end questionnaires electronically this year. The questionnaires are web-based, simple and secure; questions are automatically modified as answers are given meaning it is customised and relevant to suit your business.
We will send an email to those clients for whom we hold an email address that will provide instructions to complete the questionnaire. We ask that you retain the email until you are in a position to respond to it. We will send reminders to those who have not completed the questionnaire and if we don’t get a response we will issue the questionnaire in paper form.
It is important you advise us of any email address changes or if you would like communication from us to be sent to your business or home email addresses. If we don’t hold a current email address, we will issue the questionnaires in paper form.
We hope we are simplifying the task of completing the questionnaires for you and welcome any feedback and/or suggestions.
12. ANZAC DAY NO ENTITLEMENT TO DAY IN LIEU
With ANZAC day (25 April) falling on Easter Monday this year one statutory holiday will be “lost” due to timing. Only employees who work on this public holiday are entitled to be paid time and a half for the hours worked and are also entitled to a day in lieu (alternative day). For employees that don’t work on that day there is no entitlement to a day in lieu or any other type of compensation.
13. NEWS ABOUT THE OFFICE
After the year end break all staff are back at work well rested and ready for the new financial year.
The year will not be without disruption with Aimee expecting her first child in June, Emma expecting her first child in August 2011 and Cynthia her second at about the same time.
14. EASTER CLOSURE
The office will close at 5 pm Thursday 21 April 2011 and reopen on Wednesday 27 April 2011.
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