September 2011

 


Pause before you rush to gift
 
YOU are probably aware the $27,000 limit for gifting is to be removed from 1 October this year. This means, if you won Lotto for example, you would be able to gift the entire prize to whomever you liked, including a family trust, without the risk of gift duty.
 
Some clients are wondering whether they should gift the balance owing to them by their family trusts. Each situation is going to be different. However, we recently had a case of husband and wife who were owed about $80,000 by their family trust. They are retiring, so they will be depending on the family trust savings to boost their income in future years. The amount of debt to them is relatively small. In their case they might be better to forget gifting and get their debt repaid in instalments as they require the money.
 
When gifting might not be the right option.
 
If you have rental property, which was previously in an LAQC and is now in a Look-through Company (LTC), check with us before gifting. Where guarantees are required to justify the claiming of losses from the LTC the guarantee must be backed by assets.
 
If clients hold all their wealth in their family trust, they don't own those assets any more. Their personal guarantees are worthless. However, if the family trust owes them money, this is a personal asset. The personal guarantee is likely to be worth at least the amount of the debt due by the trust, so, if in doubt, don't forgive it.
 
If the trustees have given a joint guarantee with the LTC shareholders, this may not be such a problem, as a portion of the trust assets may count towards the LTC shareholders’ guarantees. However this issue is uncertain at the moment and best avoided if possible.
 
Treat your family trust with respect
 
THE reason you create a family trust is to take care of your loved ones and limit the risks of losing everything you have. When you transfer your wealth to a family trust, you no longer own it. That's the whole idea. What you don't own cannot usually be taken away from you.
If you then treat the family trust as though you do own everything in it, you run a very significant risk it could be considered what we call a sham trust.
 
  • Be sure to bank all the income of your trust into its bank account. That money does not belong to you. Likewise, the payments of the trust should come out of its bank account. If it has not got enough money, you can always make a loan. Don't pay the bills yourself. If you want some money out, assuming you are a beneficiary of the trust, you can do it in one of these ways:
  • Get the trust to repay some of the debt it owes you
  • Make a distribution from the income of the trust to yourself
  • Get the trust to distribute some of its capital back to you
 
The decision to make a payment to you, or any of the beneficiaries, belongs to the trustees, not to you alone. Never take money out for yourself before first getting a minute approving the payment signed by all trustees. All trustees have to agree to financial transactions of the trust, before payments are made. You should also be aware there is appropriate wording for distributions to beneficiaries, which should be followed each time. If you take money before
trustees approve it, it is not a trustee decision and possibly never can be. Getting trustees to ratify your decision later may not put the matter right.
 
A good case for buying locally
 
IF YOU are in the business of selling New Zealand-made products and have to compete with goods from overseas, here is a story from a client for you. "Two small parts on our shower slide broke so I contacted Methven to ask if there were spare parts available. After all, the shower is now four years old. Their customer services technician e-mailed today to say they no longer have parts for my design of shower. However, he had a scratch around the warehouse and found some lying around. He has couriered them to me at no charge. That is why it is worth buying Kiwi-made products."
 
Contrast this with another client who couldn't use her oven for five months because parts had to come from Germany and there's no incentive for the supplier to hurry sending them.
 
Tax-free allowances
 
IF YOU are paying tax-free allowances to your staff, make sure you can substantiate they are reasonable if IRD calls on you to do so. From 1 April 2008, you have been able to include depreciation in your calculation. For example, if your employee uses his own concrete mixer for your business, you can reimburse a share of repairs and depreciation on the mixer.
 
Child support rules to change
 
THE Government is looking at comprehensive rule changes for child support payments. Bearing in mind the extensive changes to the Working for Families (WFF) rules, this should not be a surprise.
 
Revenue Minister Peter Dunne says: "The submissions generally reflect the strongly held views in the community that the scheme can be fairer to all parties and of more direct benefit to the children it is set up to support."
 
Given the ability to look through family trusts for WFF, we wonder if a future government is going to do the same for aged care.
 
KiwiSaver for kids
 
HAVE you enrolled your children or grandchildren into a KiwiSaver scheme? Are they being taxed at the correct rate?
 
Recently we accidentally came across a KiwiSaver report for a two-year-old. He has an income of $56 a year! He was being taxed at 17.5 cents in the dollar on his KiwiSaver income. The correct rate for anyone with an income of less than $14,000 is 10.5% unless they have quite substantial PIE income as well. This certainly did not apply to our two-year-old.
 
Check to see the children are not being over-taxed. If you don't, the Government is going to benefit by quite a significant sum overall, assuming the over-taxation goes on for some years.
 
Flowers reveal missed opportunity
 
AMY is a widow in her early 70s. She lost her husband about a year ago. Four or five months ago a real estate agent contacted her and said she had a client who would very much like to see her house. She wanted to know if the owner would mind showing it to her customer.
It is a beautiful house and would appeal enormously to someone with $1 million or more to spend. As it is on several levels and big, it is likely the owner is going to sell sooner, rather than later. She therefore agreed to allow the real estate agent and her client to view the house. They came back two or three times and each time the owner warned the real estate agent she was not yet ready to sell.
 
Eventually the client gave up but sent a large bunch of flowers and a thank you note to the widow. I asked Amy if the flowers really came from the client or the real estate agent. Surely, a bright real estate agent would realise the time would come when Amy would be ready to sell. If the agent had sent her a present, who would get the call when Amy wanted to put your house on the market?
This is known as WOW. Never miss an opportunity to give your customers or clients a really pleasant surprise – make them say "WOW". After all, it was the agent who had asked for favours, so some form of thank you would surely have been appropriate AND be likely to promote customer loyalty. We think the agent missed a good opportunity.
 
Smart idea with smartphones
 
OUR London correspondent has commented on the number of press advertisements which include a symbol you can scan with your smart phone.
 
The symbol – called a QR (quick response) code – is marketing genius. It can take you to the advertiser's website, to a YouTube video of the product, show the advertiser's phone number or a map of the advertiser's location, prepare an email, provide details for your phone's contact list, and probably a lot more that people haven't yet thought about.
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If you're a real estate agent, you could direct potential buyers to on-line images of the house you're selling. You might consider putting the code on your business card so clients with smart phones can find out how good your service or product really is!
 
The codes are now catching on in New Zealand and are being promoted by business such as Alternate Instinct, a digital marketing company in Sandringham.
 
Take care when selecting Prescribed Investor Rate
 
THE Government has loaded the PIE system in its favour. If you give the firm you are investing with a tax rate (called Prescribed Investor Rate (PIR) which is too low, you will have to pay the balance of the tax due on that income. If you choose a rate too high, you can't get a refund. So be very careful to select the right rate. 
 
There are now several to choose from. The rules are, as usual, a bit complicated. Subject to your PIE income not being very big – say less than $20,000 – look at your income for the years ended 2010 and 2011. Select the smaller income of those two years and calculate your PIR accordingly. If your income hasn't been calculated yet for 2011, you might have to use the 2010 income and adjust later, if needed.
 
We are finding our clients are often using the wrong PIR – hence the reminder in this newsletter. A few still invest jointly in a PIE. This is not ideal if one partner could use a lower PIR than the other. Usually thelow income earner is making a present of extra tax to the Government.
 
Deposits and GST - Some guidelines
 
GST ARISES at the earlier of a payment or an invoice being issued. If you receive a deposit by way of a progress payment, you are required to pay GST on it. Those on a payment basis will not have a problem, but if you are using the invoice or hybrid basis, it will be different. Using these systems, you bring into account the total money owing to you when you do your GST return. If you have received such a deposit and this is showing as a credit in your
debtors’ ledger because an invoice has not been raised, you would need to add this back on to the debtors ledger balance to get the full amount of money owing to you from that progress payment. You will already have paid GST on the deposit, so don’t forget to adjust back again once you have raised an invoice.
 
Tax Calendar August - November 2011
 
August 29th - 1st installment of 2012 Provisional tax if you pay three times a year (March balance dates)
September 28th - 2nd installment of 2012 Provisional tax (December balance dates)
October 28th - 1st installment of 2012 Provisional tax (December balance dates)
November 28th - 1st installment of 2012 Provisional tax (June balance dates)
 

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