June 2008

In this Issue...             

1. Year-End Tax Planning

2. Inland Revenue assistance to drought affected farmers

3. Reducing SME tax compliance costs

4. Student scheme repayment thresholds

5. National standard Livestock costs determination

6. Portfolio Investment Entities (PIEs)

7. Tax Effective Philanthropy

8. Maximum Employer Kiwisaver Contributions

9. 'Stapled Securities' and the 'Canadian' Bid for Auckland International Airport Limited

10. Are you entitled to unclaimed money?

11. News around the Office

12. Easter Closure

1. YEAR-END TAX PLANNING

CHANGE IN COMPANY TAX RATES TO 30% FROM 1 APRIL 2008

The focus of company tax planning for those with year ending 31 March 2008 will be to utilise the opportunities to save tax due to the change in rates from 33% to 30% from 1 April 2009. Those will include deferral of income to 2009, bringing forward deductions to 2008 and review of remuneration packages to proprietors in 2009 and future years. Taxpayers will also need to make changes to tax compliance matters that are affected by the change in rate. Those will include 2009 provisional tax payments, movements in imputation credit accounts, changes in portfolio investor rates for investments in PIEs and any other tax account affected by the change in company rate.

The year end planning process and opportunities to save tax by effective implementation is available to all entities not just companies, and the process is principally the same for all entities.

Matters to consider are summarised as follows:

INCOME DEFERRAL

Income can be deferred to the following year if the entitlement to that income can be deferred until after year end. Individuals that earn income principally from personal exertion, and do not have large amounts of stock or accounts receivable or employees or assets to generate income, can use a cash basis to calculate taxable income. Other taxpayers should consider issuing invoices after year end to defer income. The deferral of invoices may not be tax effective for taxpayers that need to account for work in progress at year end.

CREDITORS & ACCRUALS

The tax rules provide that where business expenses are incurred prior to balance date but the benefit of the expenditure will be obtained in the next income year, the deduction must be deferred to the subsequent year for tax purposes.

There are, however, a number of exceptions to that rule. Those include;

• prepaid rental for land and buildings up to $23000 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 $23000 and the service and maintenance is actioned less than three months after balance date;
• advance bookings for travel and hotel or motel accommodation can be deducted in the current year where the amount is less than $12000 and the prepayment is used less than six months after balance date. (Clearly the travel and accommodation would need to be business related.)
• advance payments for insurance in the current year where the amount is less than $12000 and the prepayment is used less than 12 months after the balance date.

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 in closely held companies. Consideration should be given to the $38,000 threshold of cross over from the individual marginal tax rate of 21% to 33%. Previously the focus has been on the $60,000 threshold of cross over from 33% to 39%. There may be capacity to reassess remuneration packages in the 2009 year.

DEPRECIATION RATES              

Taxpayers need to review the business asset register to ensure the list is correct and that depreciation is claimed at the maximum depreciation rate available for each asset.

Writeoff of Assets

Assets that are scrapped or no longer used need to be written off. There may be a tax deduction for the remaining written down book value of those assets if:-

• the assets are no longer used by the taxpayer in business or to produce income;
• neither the taxpayer nor an associated person intends to use the assets in business in the future to derive gross income;
• the cost of disposing of the assets would be more that any proceeds from disposing of the asset; and
• the assets are neither buildings nor assets being depreciated using the pooling method.

Splitting Assets

Assets purchased during the year may contain a number of separately identifiable assets that may be able to be depreciated as individual asset components at substantial increased depreciation rates. Ideally, the breakdown of the purchase price should be contained in the sale and purchase agreement (or purchase invoice). However, if there is no such breakdown, the purchaser can obtain a reputable valuation to break down the purchase price into components.

Deduct Don't Depreciate

A special concession is available for "low cost assets". Low cost assets are assets that cost less than $500. Those assets can be expensed in the year of purchase provided:

• the total cost of the asset purchased or manufactured is less than $500;
• if the item is purchased along with other items at the same time and from the same supplier and the same depreciation rate would apply to all of those items purchased then the total aggregated cost of those items must not exceed $500; and
• the item purchased must not become part of any other depreciable property. You cannot acquire one asset in a series of component parts costing less than $500 and claim the whole amount as a business operating expense.

Any small asset purchases costing more than $500 must be capitalised and depreciated.

BAD DEBT DEDUCTIONS (BEFORE 31 MARCH)

A bad debt deduction is allowable 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.

CHANGE TO DONATION REBATES FROM 1 APRIL 2008                     

There is no rebate cap for gifts to approved charitable organisations from 1 April 2008 other than the tax requirement that the gift be less than total taxable income 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. Those changes offer considerable tax relief and tax planning opportunities to those with philanthropic interests and wish to gift in the 2009 and future years.

CURRENT ACCOUNTS & INTER-COMPANY BALANCES

Interest free or concessionary loans to employees (including shareholder employees) or associates to employees may give rise to fringe benefit tax (FBT).

Interest should be charged at a market rate of interest during the period the account is overdrawn during the year or the loans unpaid prior to balance date (note FBT applies at any time during the year on overdrawn accounts). Interest of more than $5,000 needs RWT deducted and that should be remitted to the Inland Revenue Department by 20 April 2008. 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.

EMPLOYEE HOLIDAY PAY & BONUSES

Accrued holiday pay and bonus payments to employees if paid by 2 June (i.e. within 63 days of balance date) are deductible for 31 March 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 rates start at 17.65% and progressively increase to 63.93%.

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 by 31 March.

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 the lower rate of 30%.

STOCK VALUATION

Stock sheets need to be kept and those should provide sufficient detail to identify items of trading stock and the retail pricing. 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 GST exclusive. Sufficient details should be recorded at the time of doing the stocktake to determine the value.

If trading stock is valued at market selling value, 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.

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.

QUALIFYING COMPANY ELECTION

Companies that wish to enter the qualifying company regime for the year 2009 need to make the election prior to 31 March 2008. Companies incorporated in the year ending 31 March 2008 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 2008 year.

Companies that wish to revoke qualifying company status in the 2008 year must do so prior to 31 March 2008. The revocation is effective from 1 April 2007.

GST ALIGNMENT TO BUSINESS BALANCE DATES AND GST PAYMENT DATES FROM 1 APRIL 2008

From 1 April 2008, provisional tax dates will change to the 28th of the month of payment except for when the due date is 28 December. In that case the due date is 15 January.

RATIO METHOD FOR PAYING PROVISIONAL TAX FROM 1 APRIL 2008

The election for the 2009 year needs to be made prior to 31 March 2008. 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 the same as the 2008 year residual income tax for all taxpayers except companies. Companies will pay 90% of last years residual income tax to reflect the change in company tax rates.

KIWISAVER COMPULSORY CONTRIBUTIONS FROM 1 APRIL 2008

Employers will be required to contribute to each employee's Kiwisaver account from 1 April 2008. The compulsory contribution will be phased in as follows-

• 1% of gross salary from 1 April 2008
• 2% of gross salary from 1 April 2009
• 3% of gross salary from 1 April 2010
• 4% of gross salary from 1 April 2011

Employers can contribute more than the compulsory contribution and will not be liable for Specified Superannuation Contribution Withholding Tax (SSCWT) for contributions up to the amount that the employee contributes to the scheme (to a maximum of 4% of the employees gross annual income).

FOREIGN INVESTMENT FUNDS (FIF) PORTFOLIO AND VALUATIONS FROM 1 APRIL 2008

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 1 April 2008. The value will be used to calculate the fair dividend rate for the portfolio for 2009 year.

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 2009 year. Individuals with offshore portfolios of less than $NZ50,000 (cost price) at 1 April 2008 are excluded from the regime. Australian investments listed on an approved index of the ASX (eg All Ord 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 2008.

PORTFOLIO INVESTOR RATES (PIR)

Investors in Portfolio Investment Entities (PIEs) have until 30 June 2008 to elect to change the rate of tax at which the PIE taxes the investor's share of PIE income for the 2009 year. The election is for 0%, 19.5% or 30% (change from 33% with the change in company tax rates). Investors can elect to use the rate that applies to the lowest annual income in the prior two years.

2. INLAND REVENUE ASSISTANCE TO DROUGHT AFFECTED FARMERS

The Inland Revenue Departments recently announced assistance measures available to drought affected farmers.

The Department will accept late deposits to the Income Equalisation Scheme. Late deposits for the 2008 year can be made up to 30 April 2009, regardless of when the return is filed, or the due date for filing the tax return.

The rules will apply where:

• The person is a pastoral farmer who has been adversely affected by the current drought.
• Evidence of the adverse event is submitted with the deposit – a statement to the effect that the farmer has been adversely affected signed by the farmer or farmer's tax agent is the minimum criteria.
• The deposit is received by 30 April 2009.
• The notice with the deposit must indicate that:
  • the deposit is for the main income equalisation deposit scheme,
  • it is to apply for the 2008 tax year, and
  • the criteria in this notice are to apply.                                       
    

The Department will allow those farmers who qualify as above to make early withdrawals from the Income Equalisation Scheme. That will also apply to amounts that have been deposited previously but have been in the scheme for less than a year.

All applications for an early refund must be in writing and will take approximately 20 days to be processed. The refund will be treated as income in the year the application is made unless the taxpayer elects to treat the refund as income in the prior income year (where the application for refund is made in the specified period).

Adverse event income equalisation deposits may also be used by some farmers who sell livestock and do not replace it because of a self-assessed adverse event. This mechanism has no time restrictions for requesting refunds, but after one year the deposit is transferred to the main scheme. It requires the farmer to make a statutory declaration to the Commissioner that the event materially affects their business.

3. REDUCING SME TAX COMPLIANCE COSTS

The Government released a discussion document in late December 2007 entitled “Reducing tax compliance costs for small and medium-sized enterprises".

The document outlines proposals to reduce SMEs' tax compliance costs and those are summarised as follows.

THRESHOLD-RELATED PROPOSALS

These include:

• increasing the threshold for paying PAYE deductions once a month from $100,000 to $250,000,
• increasing the PAYE threshold for filing FBT returns annually from $100,000 to $250,000,
• increasing the provisional tax use-of-money interest safe harbour threshold from $35,000 to $50,000 residual income tax,
• increasing the registration threshold for GST from $40,000 to $50,000,
• increasing the threshold for filing GST returns six-monthly from $250,000 to $500,000,
• increasing the threshold for making GST output tax change-in-use adjustments from $90,000 to $100,000,
• changing the thresholds relevant to accounting for financial arrangements, and
• increasing the threshold for low-value trading stock valuation rules from $5,000 to $10,000.

OTHER PROPOSALS

Simplified rules for certain expenses

Simplification of rules for deducting legal and entertainment expenditure. It is proposed to allow all businesses to deduct the first $10,000 of business-related legal expenses in an income year without having to distinguish between those incurred for capital or revenue purposes and to build a minimum threshold into non-deductible entertainment expenditure rules.

Fringe Benefit Tax –motor vehicles

A new, single category of restricted private-use vehicles for employers with a turnover of less than $1.3 million. Motor vehicles (including those currently within the definition of "Work-related vehicle") that are considered to be restricted-use vehicles would be valued for FBT purposes based on a rate of 10 percent of the vehicle' cost price (or 18 percent of their tax value).

Vehicle usage and value of the vehicle would be limited for this category to the following:

• Only private travel between home and work, and other incidental travel that was necessarily undertaken in the course of, and as a condition of, employment.
• The work use of the vehicle would need to account for at least 75 percent of its total use. This could be measured by a representative three-month test period in which the kilometres travelled would be recorded and allocated between business and private use. Results from the three-month test period could be relied on for a three-year application period. Alternatively, if the number of kilometres travelled on business could be reasonably estimated to exceed 21,000kms during the income year, the 75 percent test would be assumed to have been met.
• A restriction on the value or type of vehicle, to ensure that inappropriate vehicles (such as expensive sports cars) could not qualify as a restricted private-use vehicle. This could be linked, for example, to twice the average value of motor cars.

Goods and Services Tax

• Removal of the requirement to display the words "tax invoice" and the quantity or volume of the goods and services supplied.
• Suppliers to outsource the responsibility of creating tax invoices to a billing agent and the requirement to seek Inland Revenue's approval for a recipient of a taxable supply to be able to create a buyer-created tax invoice if:
  • The supplier and the recipient agree that the recipient should issue a tax invoice
  • The document is provided to the supplier and a copy is retained by the recipient, and
  • The words "buyer-created tax invoice"are contained in a prominent place on that document.

Tax administration

• Tax payers to correct minor errors (below a threshold of $500 of tax) in subsequent returns
• GST ratio method for provisional tax to cover shareholder-employees, partners in partnerships and beneficiaries of trusts
• Reducing record-keeping period from the current years
• Allowing businesses employing contractors to assume that the contractor has a certificate of exemption, and not deduct withholding tax, if the contractor is registered for GST and gives the business a tax invoice for its services, and
• reviewing the application of the PAYE intermediary' subsidy

Submissions are being sought on the proposals and it is intended that the increases in threshold commence 1 April 2009, and the other proposals on 1 April 2010.

4. STUDENT LOAN SCHEME REPAYMENT THRESHOLDS

The prescribed repayment threshold that is to apply from the tax year commencing on 1 April 2008 is $18,148. Borrowers that earn an excess of that prescribed amount will be required to contribute to repayment of the loan.

5. NATIONAL STANDARD LIVESTOCK COSTS DETERMINATION                            

In 31 January 2008, the Inland Revenue Department released the national standard costs for specified livestock for the 2008 income year. Those apply to any specified livestock on hand at the end of the 2007/08 income year where the taxpayer has elected to value that livestock under the national standard costs scheme for that income year, and can be accessed on the Inland Revenue website or by contacting our offices.

6. PORTFOLIO INVESTMENT ENTITIES (PIEs)

The PIE rules came into effect on 1 October 2007 and have proven popular for those that invest in managed funds. They effectively align the tax consequences of investments with direct investment by individuals (who are not "traders"). The PIE rules, therefore, eliminate disadvantages of savings through intermediaries (e.g. managed funds). These rules also ensure that individual investors with a lower income are not overtaxed by having PIEs pay tax on their behalf at higher marginal tax rates. With the change in the company tax rates the top rate of tax for PIE' changes from 33% to 30% from 1 April 2008.

7. TAX EFFECTIVE PHILANTHROPY       

The following rules will apply to the rebates for individuals and tax deductibility for companies of charitable donations. The change will apply from 1 April 2008.

• Individuals will be able to claim a rebate of 33.3% on total donations up to their taxable income (previously limited to $1890).
• Companies will be entitled to a deduction for donations made to charitable organisations, limited only by the company' net income (previously limited to 5% of net income unless a public company).

The effect of the change of rules should be a significant increase in donations to charities. Furthermore, donations can potentially be of large amounts (with no gift duty limitations for gifts to registered charities).

With the change in the company tax rate to 30% there may be tax advantages to owners of closely held companies in realising the rebate in the individual shareholder returns of income at 33.3%. The rebate will in effect provide a margin of 3.3 %.

8. MAXIMUM EMPLOYER KIWISAVER CONTRIBUTIONS

From 1 April 2008 employers will be required to contribute to the scheme and will have the cost of that contribution offset by way of tax credit against the monthly payments up to a maximum of $20/ employee/week ($1043pa).

There may be opportunity for employers to contribute more than the compulsory contributions (1% of employees' gross income in 2009, 2% in 2010, 3% in 2011 and 4% after 2011) to maximise the deposit to the employee's fund at no additional cost to the employer. Employers should be able to contribute $20 each week and be fully reimbursed for the contribution (subject to the SSCWT cap of 4% of the employees' gross income or the employee' contribution whichever is the lesser) for employees that earn less that $104,300pa in the 2009 year, $52,150pa in 2010, $37,767 in 2011 and $26,075 in 2012. The arrangement between the employer and employee for additional employer contributions should be flexible enough to change with the annual change in employer compulsory contributions and employee circumstances each year. The additional contribution should be voluntary and totally at the discretion of the employer.

9. ‘STAPLED SECURITIES' AND THE 'CANADIAN' BID FOR AUCKLAND INTERNATIONAL AIRPORT LIMITED

The New Zealand Government announced on 25 February 2008 its intention to alter tax legislation in this country effective from this date in relation to 'Stapled Securities'. Stapled Securities issued in New Zealand prior to this date will not be affected.

This intended alteration will effectively make any ‘return' paid to a 'Stapled Security Holder' by virtue of their 'Stapled Security' holding a dividend and taxed as such. This change would protect the Government's tax revenues by denying issuers of 'Stapled Securities' the ability to pay interest to their security holders as opposed to dividends.

Interest payments by an organisation of this type without this intended amendment would have been tax deductible as opposed to dividends which are distributed (usually with imputation credits attached) out of 'after tax' profits. The gross reduction in tax revenue resulting from the interest deduction by the organisation would be greater than the gross tax received (in New Zealand) on the interest received by the security holders. An extreme example of this is where an issuer of stapled securities pays interest to non residents (as NRWT collected on this payment would be much less than the tax reduction to the company of claiming the interest).

CPPIB (Canadian Pension Plan Investment Board) intended to use an issue of 'Stapled Securities' had its bid for a holding in Auckland International Airport Limited been successful. This is most likely the catalyst for the Government's announcement regarding 'Stapled Securities' at this time. This has reduced the 'attractiveness' of the bid to CPPIB but at this time it appears that they are continuing with their partial takeover offer.

10. ARE YOU ENTITLED TO UNCLAIMED MONEY?

The Inland Revenue Department has published a list of owners of $11 million of unclaimed money on its website.

Most of the unclaimed money comes from deposits left in banks and other financial institutions, and includes insurance proceeds, cheques or wages. Under the Unclaimed Monies Act 1971, funds left untouched for more than six years are required to be paid to the Inland Revenue Department. Unclaimed money does not include tax refunds.

The Inland Revenue Department has records detailing more than 100,000 cases of unclaimed money, totalling more than $40 million, dating back to 1973. The online records are for the period 2005/07. The online list of 12,000 names of owners of unclaimed money can be found at http://www.ird.govt.nz/unclaimed-money.

Anyone who believes they may be entitled to unclaimed money should email unclaimed.monies@ird.govt.nz or write to: Unclaimed Monies, Inland Revenue, P O Box 38222, Wellington Mail Centre.

People who wish to claim the money must forward their name, address, IRD number, and proof of identity (such as a copy of a birth certificate, drivers' licence or passport) to the Inland Revenue Department postal address as above.

11. NEWS AROUND THE OFFICE

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

Dawn Roberts, who has been contracting to us since June 2007 will be heading overseas Easter weekend. We wish her all the best.

12. EASTER CLOSURE                 

The office will close at the end of business Thursday 20 March 2008 for the Easter break:-

• Good Friday 21 March
• Easter Monday 24 March and
• Easter Tuesday 25 March

We reopen Wednesday 26 March.

We wish all our clients a safe and enjoyable Easter