Newsletter Winter 2016

More tax changes afoot

The Inland Revenue Department and the Government have recently introduced a multitude of tax changes. We outline some of the important ones below.

More on company cars and FBT

From 1 April 2018, the Government is proposing to let close companies (most small companies) calculate the private use of a company car in the same way as a sole trader.

You will have to keep a log book and apportion the costs. However, you will also need to make an adjustment for GST on the car, as well as its running costs. For many people the log book idea is going to be more hassle than it’s worth.

This option will be available only provided there are no other fringe benefits and no more than two vehicles are involved.

If, when the law is changed, you prefer to keep a log book and avoid fringe benefits tax (FBT), tell us. Remember, however, your compliance costs will increase a little. There’ll be calculations to make and GST adjustments to do.

FBT is a quick, easy and economical method of adjusting for private use of a vehicle. It will often give you a more favourable result, but not always.

Use of home

There is a proposal to change the rules for claiming “use of home”.

For years, Inland Revenue has said that to make a claim for this cost you must set aside a room as an office. This isn’t quite true.

A court case some years ago settled this matter. You can apportion the cost of a room used for business between your business use and family use, based on the time each activity uses the room.

Now, the IRD is planning to get its rule enshrined in the law, so if the law changes, you will need to have a room set aside as an office, if you want to claim for the use of a room for business.

To make claiming this cost simpler, the department plans to set a rate for utilities per square metre ($x for power etc). You will add your adjustment for rents, rates and interest.

You won’t have to use the IRD calculation but it might save you hassles if you do. The bigger the power bill, the more likely you won’t want to use the IRD rate.

Shareholder/employees

Currently, you are either a provisional taxpayer or you get a PAYE salary. A mixture of the two is not strictly permitted unless the provisional income is at least half the PAYE salary.

In practice, it makes very little difference and for this reason, the Inland Revenue Department is proposing to do away with the restrictions and allow shareholder employees to take a PAYE salary and then top up their incomes at the end of the year, once the profit is known. We look forward to this change becoming law.

Andrews Corner

While the year is beginning to run out with less than 3 months to Christmas there are a number of interesting developments in the world of finance and economics.

Perhaps the greatest degree of interest is in the current situation in Europe with Deutch Bank, the largest Bank in Europe struggling to keep afloat amidst a massive amount of debt.  The normal requirements for banks is that the asset to loan ratio must be 10% but in the case of Deutch Bank it is only 1.34%.  They are desperately trying to prevent the collapse of this bank as the effects would be catastrophic.   Across in China we are seeing a major debt bubble beginning to occur with an anticipated loss to lenders of nearly $1 trillion dollars.  

Back home in New Zealand the banks are beginning to tighten up their current lending substantially.  
TSB Bank advised that they will be lending no more than 50% on the purchase of commercial properties with the rather lame excuse that they are only following the Reserve Banks announcement.  This is not correct as the only announcements in terms of lending were in relation to residential properties.  However there is some basis for their concern with interest rates so low and commercial properties increasing in price significantly.   

There are opportunities for those looking to invest money in a first mortgage security at an interest rate of between 7%  and 9%.   The minimum amount to invest would be $50,000.  You can contact me and I can put you in touch with the appropriate people.  

Overall the country has been somewhat insulated from the problems overseas due to the large immigration continuing to flow into the country and the Christchurch earthquake providing a strong level of business activity.  However you need to be aware that it will only take a major problem overseas resulting in a significant increase in interest rates to quickly change the economic climate of New Zealand.  To this end my advice is not to be overgeared in your borrowings and ensure you have a buffer in the event of an interest rate rise. 

Useful tips for the job hunters

Here are a few tips if you have family members looking for a job:

  • Write the CV to make it easy for the employer to read.
  • Provide an index.
  • Start with a summary, which can be read in a flash.
  • Provide supporting details for each point made in the summary, so the reader can quickly flick to the right place to read the detail.
  • Put the most important points first.
  • Sell yourself by explaining the benefits to the employer of choosing you.
  • Leave out anything unlikely to interest the employer.
  • Find out the problem the employer really wants to solve and then explain, in your CV, why you’re the only person who could do the job. Maybe some well-chosen questions to the receptionist or HR department beforehand could help you form an accurate picture.
  • Sending references will usually help to sell you to the company. Choose references which confirm your suitability to do the work.
  • Bone up on the employer before the interview. The internet is a good start. The more you can find out about the interviewer and the company the better, as your knowledge of the business indicates an enthusiasm for the job.
  • The website careers.govt.nz is worth visiting.

Being a trustee carries responsibilities

Every so often we remind clients of the risks involved in being a trustee. It doesn’t matter whether the trust is a family trust or a charitable trust. Trustees are directly responsible to the beneficiaries for their management of the trust assets.

Beneficiaries can sue trustees. In a family trust, it is not necessarily a beneficiary who causes the trouble. It can be the spouse of the beneficiary who makes the bullets.

There are also obligations to the Inland Revenue Department. Until you advise Inland Revenue you've ceased to be a trustee, you're still personally responsible for its taxes.

Wait for profits

Also from a tax perspective, you should remember if the trust makes losses they can't be passed out to the beneficiaries. You have to wait until the trust makes profits before you can use up the losses. So, if you buy an asset which is expected to generate on-going losses for some time, it might be better to not have it owned by your family trust.

Perhaps it should be owned by someone who can use the losses to save tax. It can be transferred to the trust for asset protection purposes at a later time. This would normally be when it’s making profits (trustees don’t generally want loss making assets) but, of course, this may mean additional costs.

Don't be passive

There is no such thing as a passive trustee. If you choose to be passive, be it on your own head.

Some years ago X and Y were appointed trustees of a family trust. Immediately, they decided they would hold quarterly meetings. At one of these meetings one of them proposed the trust should take out an insurance policy on a factory owned by the trust, for loss of rent in the event of fire or other accident.

Two years later the factory burnt to the ground. This serves as a very good example of how trustees ought to operate. They ought to hold regular meetings and minute decisions made.

Interference

What if the person who set up the trust wants to interfere? Maybe he/she didn’t want to incur the premiums for taking out that loss of rents insurance policy.

The answer is simple. If you're a trustee, it's your job to steer the ship. Your responsibility is to look after the interests of the beneficiaries. You and your co-trustees make the decisions. If anyone starts to bring pressure on you to do as they wish, the correct course of action is to resign. Above all, never be a passive trustee.

Read every word of insurance policies

Strangely, one of the biggest risks in business is our insurance policy.

We're all familiar with the problems Canterbury people have had with their home insurance. If ever there's was a document you need to read very carefully it is your insurance policy.

We've heard of someone buying travel insurance for a six-week period only to find, when a claim was lodged, that the policy was limited to a maximum of one month away from the country.

Read every word of your insurance policy and if there's anything which is not clear or looks as if it's not covered, raise the matter with the insurer or agent.

Make sure you get a response in writing. A telephone conversation is not enough.

Debt forgiveness

It may seem extraordinary but if someone forgives you a debt, from a tax perspective, you have taxable income unless the debt is forgiven for natural love and affection.

In this context the lender can only have natural love and affection for their relatives or a trust where those relatives are beneficiaries.

If you’re structuring a business deal, don’t include debt forgiveness. For example, A says to C: “I’ll sell you my shares for $40,000 and forgive you the debt you owe me of $10,000”. It would be better to sell the shares for $30,000 and insist on the debt being repaid.

Reverse mortgages

Oldies often run out of money and they are sometimes helped by their children.

There’s usually an understanding that when the parents die, the children will be repaid out of the estate. These arrangements should be documented. Otherwise disputes can occur as to who lent money and how much.

A new business has been created to take care of family loan issues. If you’re interested, go to the website www.familyloans.co.nz

Tax on capital gains

Are capital gains taxable? Yes, in some circumstances they are.

For example, if you buy a property with the intention of selling it for a profit, regardless of how long you have had it, that profit is taxable.

We noted an article in a national daily paper dated 13 July concerning interest-only loans. The Reserve Bank says 40% of loans are interest-only and 47% of loans are to investors.

If you buy a rental property and finance it substantially with an interest-only loan and don’t make any effort to reduce the debt, some – including Inland Revenue – might argue your investment was made with the intention of getting a capital gain.   That would mean your gain, when you sell, might be taxable. There may be other valid reasons why the debt is structured this way. Just be careful.

The biggest lies in business

The biggest lie in business used to be: “The cheque is in the mail.”

It's now: “We are experiencing an exceptional volume of calls at the moment”, or “We value your business…”. If you’re a small or medium sized business, don’t copy big brother. Give your customers a fantastic telephone reception. That’s one way to beat the big guys.

Have your say

IRD has asked us to draw your attention to its new website: changingforyou.ird.govt.nz It would appear IRD wants to consult with you about proposed changes. The website outlines the IRD’s vision for the future.

Want to buy a house?

It’s easy to sell a property at the moment, but if you’re a buyer, get sorted before putting in a tender or going to auction. This includes making sure you have builder and LIM reports,  you have been back to the bank within a week of the tender date to confirm your finance is OK, and you’ve taken legal advice, as needed.

Ask yourself, is it better to accept an unconditional offer for, say, $600,000 or a good conditional offer of $610,000? Most people will take the unconditional offer.

Tax Calendar

August 29
1st instalment of 2017 Provisional Tax for those with March balance dates who pay provisional tax three times a year.

September 28
2nd instalment of 2017 Provisional Tax (December balance dates)

October 28
First instalment of 2017 Provisional Tax for those with March balance dates, who pay GST twice a year.

November 28
1st instalment of 2017 Provisional Tax for those with 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