Spring2015

TAX TALK

Tax on lump sum payments

 

There are fewer tricky tax calculations than calculating tax on lump sum payments.

Overtime is not a lump sum. It just adds to the wages for that period.

The steps are:

1                Take gross wages for past four weeks and multiply by 13.

2                Add the lump sum.

3                Determine the annual tax rate. For example, if the total is $49,000 the tax rate is 30% (being over the $48,000 threshold). If the employee is using a secondary tax code, use that + ACC (see 4 below).

4                Add ACC, currently 1.45% for primary income up to salary limit of $120,070.

5                Apply the resulting tax rate. In the example above it is 30% + 1.45% = 31.45%

             6                Calculate student loan and KiwiSaver adjustments.

You may notice, using the example above, if the bonus were say $5000, $4000 of this falls below the $48,000 threshold. This indicates, depending on what else happens during the remainder of the year, tax may have been overpaid and the employee would qualify for a refund.

It pays for employees, who get bonuses, to check their tax situation at the end of each year.

 

 

Surprise for property developer

Spare a thought for Mr X who borrowed a large sum of money for a development project, which came unstuck.

Five houses were built and all of them were sold to pay back the mortgage. Shortly afterwards, the company was put into liquidation. The liquidator argued that the sole company director had to pay GST, personally, to the IRD.

He pointed to the Companies Act. You are not allowed to incur a debt when you know you can't pay it back. In this case, by selling the properties he incurred a debt to the IRD he knew he couldn’t pay.

He was therefore liable to pay it out of his own pocket.

What's the solution? When borrowing money for a development project, you would need an agreement that if there was a mortgagee sale the IRD would be paid first out of the proceeds.

It might be hard to find anyone who would lend you money on this basis, but that's what you need.

 

NZ Super leads to over-taxing

People often continue working after receiving superannuation. By doing so, they make it legally their secondary job.

When they retire there’s no one to advise them it's time to change National Superannuation to a primary tax code. Result – they are over-taxed and never know it has happened because they don’t need to put in a tax return. Typical cost is about $1000 a year.

You might like to mention this risk to anyone you know who might be affected. Incidentally, there’s no law which says you can’t make National Super the primary source of income and switch the primary job to secondary. Do the arithmetic to see if it matters.

Remember, you can go back four years to get refunds (see also article “Keep tax details” at right).

 

TAX BRIEFS

Cash back

Most people get their air points on personal purchases. However, some of us are in business and we like to slip in a business purchase when we can because we know IRD does not tax air points. What about the new “cash back” scheme? It’s great news for those who don’t want to fly. You can use it to repay your mortgage or how you like. However, if you’re in business, we think “cash back” is taxable income where it results from business purchases.

 

 

Losses for R&D

A Bill is proposing “cash out” losses for research and development. The rules are aimed at start-up companies. Claim 28% of tax losses from R&D with upper limits only. IRD provides a tax credit. It operates as an interest-free loan. The company must have a high proportion of wages. The Bill rules out certain activities.

 

Keep tax details

People who don’t have to put in tax returns often overpay their tax. They are not allowed to put in just one tax return when they know they are owed money. They have to put in tax returns for four years. Advise your staff to keep all their tax stuff for a minimum of four years, just in case they need it. They can check online at the IRD website to see if it looks as though they are owed money.

 

Forestry Grant Scheme

A total of $22 million was allocated in this year’s Budget for new forestry planting. If a grant could help you, or someone you know, it might pay to make some enquiries. The Budget didn't indicate who would benefit from the scheme, but it’s worth investigating.

 

 

 

 

Pointers for quoting

There are five basic mistakes you can make when putting in your price for work or products.

Some of the material for this article was found in business.co.nz.  A couple of additional ideas have been added.

1      Spend your time quoting for only those jobs you have a reasonable chance of getting. Many clients of ours look at every job and then don’t bother putting in a price for many of them. Why waste time going there, if you’re not going to price the job?

2      Read the brief carefully. Do exactly what you’re asked, otherwise don’t quote.

3      Study your buyer. Their website is a good start. If you don’t know them, they may be desperate to get your quote because they can’t pay their bills. Check their credit rating.

4      Sell your firm's attributes. What can you do which is so special your firm should be chosen? Don’t forget to send in references from customers who were delighted with your work. Blow your own trumpet. If you’re great at what you do, tell them, but be specific. Generalised statements are useless.

5      Double-check your figures. Then proof read your quote. Is it clear and obvious what you are quoting for? You don’t want an argument later. Make sure your terms and conditions are included. Every time you strike an argument with a customer, go back and rewrite your terms so that particular problem can't arise again. You should probably read through the quote three or four times before letting it go.

You’ll find more hints for successful tendering on the Ministry of Business, Innovation and Employment’s Procurement website. It includes videos of buyers talking about what they look for in tenders.

 

Changes to HomeStart

  There have been some changes

to HomeStart:

·       The HomeStart grant has been doubled for first home buyers purchasing a new home – overall maximum $20,000.

·       House price caps are now 550,000 for Auckland; $450,000 for high-cost areas such as Wellington and Christchurch and some others; and $350,000 for the rest of the country.

·       Welcome Home Loans (underwritten by Housing New Zealand) require 10% deposit. House price caps are the same as above. Withdrawals from KiwiSaver can be used for an initial deposit.

 

BRIEFLY

Calculating KiwiSaver

KiwiSaver is calculated on all gross wages. This includes taxable allowances, bonuses, commission, extra salary, gratuity, overtime and final pays.

Fishing “goods”

You may not claim GST n fishing quotas, coastal permits and certificates of compliance. They are not considered to be “goods”.

What will they lose?

BNZ economist Tony Alexander recently observed too many small business owners were reluctant to attend courses. He suggested the promoters should focus less on the “how to’s” and more on what they’ll lose by not attending. You can apply that principle to your marketing. Focus on the fear of failure or missing out. Fear is a powerful marketing tool. Don’t hesitate to use it. And, by the way, the colour red denotes danger, so use that, too.

Asking for referrals

Don’t hesitate to ask for referrals for your business. How do you like this ONE from Flight Centre? "The highest compliment you can give us is the referral of a new client. Thank you in advance for your thoughtful recommendation."

Ultra fast broadband

Are you surprised when your ultra fast broadband service is not ultra fast? It might be because you have a low-cost computer. These computers can be slow to process modern programs and operating systems. You might also have insufficient ram. Check processing and ram capacity when you buy.

 

 

Shareholders’ agreements

If you’re working in a company in which you own shares, do you have an agreement with your co- shareholders? These are called shareholders’ agreements.

A and B worked together in a panel-beating business. A died suddenly, leaving everything to his wife, so she became the new shareholder. B didn’t like Mrs A and wanted to buy her out but they couldn’t agree on a price. Mrs A took advice and became difficult to deal with.

Your shareholders’ agreement should provide a way for shareholders to sell their shares if they want to get out of the business. Your solicitor will be able to list other things you should consider.

 

Andrews Corner

 

Spring always brings a lot of wind and rain with unpredictable weather.  On the international stage the unpredictability of the world economy, in particular major problems in China, have bought about a substantial correction in the worlds equity markets.  I have been warning for some time that September 2015 would be the commencement of major corrections in the world’s economy and this has proven to be true.  The correction has not finished yet and I expect to see further major changes in the coming months.  There is a strong feeling in some quarters that once deflation has worked itself through the world economy with the ensuing low interest rates that there will then be a resurgence of inflation and we can expect longer term interest rates to rise significantly.

 

There are major problems in Europe and there are real fears that there may be a Lehman like brothers collapse of a major European bank.  I have received information from international equity investors who express a real concern at this possibility and have taken steps to mitigate any possible losses.  Anyone thinking of entering the equity market at the moment without a full understanding of what is going on would be wise to obtain some advice before they proceed with investments.  I have contacts in this area and can refer you if you so desire.

 

On the local scene the Government has finally moved to try and pour some water on the hot residential property market by bringing in legislation effective from the 1 October 2015.  Under this legislation if the tax payer sells “residential land” within two years of acquisition, it will be taxable.  The only exception to this rule will be where the property was your main home, inherited property or property acquired under a relationship property agreement.  Please note that most life style blocks will not qualify for the main home exclusion where the property is used less than 50% for the main home.

 

Where the vendor of a residential property is a prime investor, defined as an offshore person, the intention is to deduct withholding tax on the proceeds of sale at the time of conveyance.  The amount to be withheld would be the lower of:

 

1.             33% of the vendors gain on the property;

2.             10% of the total purchase price of the property

 

Continuing on with property you may wish to know that I have secured a source of finance on commercial property at a floating rate of approximately 4.2% and a fixed rate up to 5 years of 4.72%.  If you are interested in pursuing this source of finance please do not hesitate to contact me.

 

Network for new business

  Some people don’t like networking, because it can take them out of their comfort zone. But business is all about relationships, and networking is an important way of building those relationships to bring you a regular supply of new business.

It’s not just about attending meetings and exchanging business cards. Cards will most likely end up in a drawer and do no good for your business unless you build a relationship with the card holder.

Here are a few tips for effective networking:

·                Be pro-active and focused. That means seeking out and talking to people who you believe are important for your business.

·                Attend meetings and get to know the people who make things happen. They might not be the ones who directly provide new business, but they most likely know someone who can. Find out if there are meetings of people in your line of business.

·                Offer to join the committees of business groups. Speak at network meetings about your business. You don’t have to be a public speaker, just be passionate about your work.

·                Follow up. If someone says “Give me a call”, make sure you do. Call anyone who shows interest in your business.

·                Learn from the best. Talk to the best people in your line of business. They’ll most likely be flattered if you offer to take them for a coffee to ask them for advice.


Tax Calendar

August 28

1st instalment of 2016 Provisional tax if you pay three times a year (March balance dates)

 

September 28

2nd instalment 2016 Provisional tax (December balance dates)

 

October 28

1st instalment of 2016 Provisional tax for those who pay GST twice a year

 

November 30

1st instalment of 2016 Provisional tax

(June balance dates)

 

All information in this newsletter is, to the best of the author’s knowledge, true and accurate. No liability is assumed by the author or the publisher for any losses suffered by any person relying directly or indirectly upon this newsletter.   You are advised to consult professionals before acting upon this information.

 

About Us

We are a full service Chartered Accountancy firm based in Mt. Eden, Auckland, New Zealand.  We provide full tax accounting, management accounting, trust accounting services.

Member, Institute of Chartered Accountants