Macnicol + Co

Human Capital

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Peopleworkers

In a business, human capital is the sum of all the intangibles that people bring to the business without which the business would be so much the poorer.

It’s the knowledge, skills, experience, the attitudes, creativity, training and judgement that help a business reach its goals, grow and succeed.

Human capital is the total capacity of the people in the business. It is another form of wealth which can be directed to accomplish the goals of the business.

‘Almost everything that can go wrong in a business has a human capital component.’
David Creelman, CEO of Creelman Research

Human capital risk – what is it and what do we do about it?

When you are in the process of assessing your business risk and putting together your risk management plan, make human capital risk one of your focus areas.

Human capital risk is a term which covers whatever arises out of not managing an organisation’s human capital well. This includes:

  • catastrophic workplace events such as disabling illness, injury or death
  • losing staff to rapid turnover
  • a team member committing fraud or misappropriating assets
  • negligent hiring or retention, such as where an employer fails to complete necessary background checks on a new hire and, as a result, employs someone who is dangerous or untrustworthy
  • complacency, where the organisational culture is one of ‘I don’t know’ and ‘I don’t care’ and the business drifts or runs aground because of this

When you review the risk management strategy for your business, assessing risk is not so much about analysing how likely or unlikely it may be for an event to occur. Over the last few years, we’ve certainly witnessed that extreme and unlikely events occur far too often for comfort. It helps to analyse what the cost to the business would be if any of these risks occurred. Could the business take the hit or do you need to have strategies in place either to avoid them altogether or cushion the blow? And what sort of strategies might be appropriate?

health insuranceWhere catastrophic events pose a danger to the business through the loss of key people, an insurance package might cover funds to help cover shortfalls through the transition and replacement costs, as well as funding a shareholder’s share of business debt, and purchase of the deceased or disabled partner’s share of the business. Backup strategies might also include developing a leadership programme, more effective delegation of responsibilities, mentoring and training.

If staff turnover’s an issue, is there something else going on? Are pay points far lower than those of competitors? Is morale an issue? Are the business’ recruitment strategies just not finding the right fit for the firm? You might look at what your competitors are doing but you could retool recruitment and training processes to increase employee retention.

If staff are leaving because for lack of a clear career path, could the organisational structure offer solutions? You might also look at organisational culture and introduce measures to improve morale, engagement and a positive outlook toward the business and customers.

The potential damage a fraudster could do to a business is truly horrifying. It’s hard to come back from the direct costs to management, as well as the damage to the brand, team morale, and vital relationships with partners, suppliers and regulatory bodies.

However, it is possible to create a climate which minimises the possibility. Strategies might include screening employees at pre-employment as well as screening suppliers and third parties, thorough internal controls and audit processes, as well as a clear code of conduct and awareness training for the whole team.

Whatever your assessment of business risk, a risk management strategy that meshes with every aspect of the business is crucial. Regular review and energetic follow through will help to minimise risk and create a stronger organisational culture alert to possibility and adaptive to change.

Working for Families – Changes to Family Scheme Income Definition

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The Working for Families (WFF) Tax Credits Scheme is provided by the Government for families with children aged 18 or younger, to help with day-to-day living costs. To more accurately reflect the amount of income available to meet these costs, the definition of “family scheme income”, which is used to determine family assistance entitlements, was amended from 1 April 2011.

While the previous definition incorporated similar adjustments for calculating the correct level of WFF income, the latest round of changes is designed to go a step further. These changes seek to eliminate perceived loopholes that exist, such as the sheltering of income through the use of family trusts.

The following amounts will now need to be included when calculating a person’s income for family assistance purposes:

  • The income of a trust of which the person is a settlor (certain trusts are excluded, but income of a generic family trust will be caught), and income of a company of which that trust (and an associated person) holds 50% or more of the shares. In this situation the attributed income of the company is calculated based on the trust’s proportionate shareholding in the company. The amounts attributed are reduced if the trust or company has either distributed its income or paid a dividend, respectively. If there is more than one company, the net income of each company is calculated and attributed separately and if one company has incurred a loss, the loss cannot be offset against the profits of other companies,
  • The taxable value of fringe benefits attributable to a person who (including associated persons) holds 50% or more of the shares in a company,
  • Total passive income over $500 derived by dependent children such as interest, dividends, royalties and rent,
  • Portfolio Investment Entity (PIE) income where the income is not locked in until retirement,
  • 50% of certain pensions and annuities that are treated as exempt income,
  • Foreign sourced income of a person’s non-resident spouse,
  • Tax exempt salary and wages such as those from specific international agreements e.g. salaries received from employees of the United Nations.
  • Deposits paid to the main ‘Income Equalisation Scheme’ (for income from farming, fishing or forestry). Deposits captured include those made by the person and companies and trusts that meet the above requirements for family scheme income. Conversely refunds from the scheme are excluded,
  • A further catch-all provision has been introduced to capture additional payments received by a person that are used to replace lost or diminished income or meet the living expenses of the person’s family if the total of the amounts received exceed $5,000. For example, if a person’s parents pay his/her family’s utilities bills each month and the amounts total more than $5,000 per year, then that total amount is included as income.

It is important that families who are currently receiving WFF payments review all sources of their income and contact Inland Revenue to ensure they are receiving the correct level of benefit.

Business Development Basics

A commonly held marketing statistic reveals that, on average, businesses spend the majority of their marketing dollar prospecting for new customers compared to nurturing and developing relationships with current customers. These statistics also tell us that on average it can cost six to seven times more to sell something to a prospect than to sell that same thing to a current customer, and that repeat customers spend 33% more than new customers. Although these statistics are observing general trends, it is worth taking the time to evaluate whether you are effectively nurturing current customers in a way that develops the opportunities that exist for repeat and new business. This could be a key to unlocking growth that is right in front of you.

Some of the more recent marketing thinking views the value or benefit of a ‘good or service’ as being ‘co-created’ with customers through strong relationships and collaborative business development. To this end, Relationship Marketing focuses on the development of market or industry sector strategies, creating profitable partnerships and long term relationships with both customers and suppliers.

The following provides some basic pointers in developing this area of your marketing thrust:

  • research and intelligence gathering on customers and competitors,
  • the development of more personal or direct networks that lead to referrals or sales,
  • leading/overseeing formal proposal or presentation opportunities,
  • developing plans for winning new work from existing or target customers,
  • developing plans that focus on existing customer satisfaction, retention and growth, and
  • creating a customer-centric culture across the business.

As the name suggests, relationship marketing is more of a customer or market facing role so having strong inter-personal skills in support of the above actions will have a significant influence on the success of your marketing activities.

There are a number of tips listed below that may be useful to you depending on the product or service your business is involved in.

  • Relationship building should be everyone’s responsibility – regardless of role make sure everyone knows about the business so they can confidently communicate this information to others. Share details with colleagues about products and services, strategy, performance, successes and industry trends. Communicate internally on a regular basis and recognise those who excel.
  • Value all business relationships – you never know what the people you meet today will be doing tomorrow, so treat everyone you meet with respect. Today you may not consider someone to be influential but tomorrow they could be your customer, so don’t leave them with a negative first impression.
  • Have a robust process for proposals/tendering – not all formal opportunities are worth investing significant resources on, so ensure you have a tested and robust process around the “do we or don’t we” question. Consider the likelihood of winning, strategic fit, profitability and how well you know the decision makers.
  • Your best customer is the one you already have – never take existing customers for granted. Take the time to get to know them and their business to enhance the relationship. You will increase opportunities to win more business and receive referrals from customers that value your efforts.
  • Meet before you propose – you will increase your chances of success with current or potential customers if you have met them face-to-face. Prepare well for the meeting and you will learn valuable information that your competition may not be aware of. Don’t forget to listen more than you speak.
  • Report card – whether you win or lose a specific piece of business or new customer opportunity always ask for a post-decision debrief. You will learn what you did well and not so well to ensure future success.

Given that you will spend significantly more to find new customers compared to maintaining and obtaining repeat business from current customers, it makes good business sense to grow and enhance the relationships that you have already spent time and money on establishing in the first place.

PAYE vs FBT

PAYE generally applies to cash paid by an employer to an employee, while FBT applies to non-cash benefits provided by the employer to the employee. However, it is not always clear whether PAYE, FBT or neither applies.

The basis upon which an employee receives a benefit will determine how it should be treated. For example, to reward an employee for their efforts an employer pays for an employee to attend an educational course of their choice, and the employee chooses to attend a cooking course for their own personal interest. In doing so, any one of the following scenarios could apply:

  1. The employee organises to attend the course, receives the invoice and pays the cost, but is reimbursed by the employer.
  2. The employee organises to attend the course and receives the invoice, but the employer pays the invoice on the employee’s behalf.
  3. The employer organises the course, receives the invoice and pays for the cost of the course.

The reimbursement payment under the first scenario will be subject to PAYE as it is akin to an additional salary/wages payment. In the second scenario, as the expense has been incurred by the employee (i.e. the invoice is in the employee’s name), upon payment by the employer it is specifically captured as “expenditure on account of an employee” and also subject to PAYE. The third scenario is distinguished from the first two scenarios, on the basis that the employer contracts to procure the right for the employee to attend the course directly and provides that right to the employee, i.e. a non-cash benefit, and is therefore subject to FBT.

However, if instead of a cooking course the employer required the employee to attend a leadership development course, under each scenario above, no FBT or PAYE would be payable.

In the first scenario, a reimbursement payment is not subject to PAYE if the reimbursement qualifies as a non-taxable reimbursement. To qualify as a non-taxable reimbursement, the course would have to be deemed to have developed the employee’s capacity to perform their job. On this basis, the payment would qualify as a tax-free reimbursement not subject to PAYE.

In the second scenario, the payment for the course is not captured as expenditure on account of an employee as it is for the benefit of the employer’s business and therefore is not subject to PAYE. In the third scenario, because the benefit removes the need for the employer to pay a non-taxable reimbursement, FBT does not apply.

It is important to consider all the facts when determining if PAYE or FBT apply. It must be established whether the employer or the employee is incurring the underlying expense, and whether the employer benefits from the expense or if it is of personal benefit to the employee.

Making the Most of the 90-Day Trial Period

The new Employment Relations Amendment Act 2010, which came into effect on 1 April 2011, extended the 90-day trial period to all employers; prior to the amendment only those with fewer than 20 staff qualified.

The Employment Relations Act legislation requires that in order for a trial period provision in an employment agreement to be valid, the agreement must be in writing and state:

  • that it is for a specific period not exceeding 90 days starting at the beginning of the employment, and
  • that during the period the employer may dismiss the employee, and
  • if the employee is dismissed they are not entitled to bring a personal grievance or other legal proceedings in respect of the dismissal.

If any of these elements are missing the trial period is not valid. In addition, the trial period provision provides that the employee has not previously been employed by the employer.

Since the enactment of the trial period provision, there have been several cases heard through the employment courts that give some clarity of interpretation of this legislation.

In Parkes v Squires Manufacturing Ltd, a recent personal grievance case, the employee received her employment agreement before starting work and signed it at lunchtime on her first day of work. The employer signed it a week later. The Employment Authority found that, as the employee had already started before signing the agreement, the trial period clause was not valid.

In Smith v Stokes Valley Pharmacy (2009) Limited, the Employment Court tested the 90-day trial period and applied a very rigid interpretation, which now provides the ground rules for employers. The court concluded that the employment agreement must include the trial period provisions (as stated above) and must be signed by both parties before the commencement of the employment.

It was also concluded in the Smith v Stokes Valley Pharmacy case that although the employee cannot claim wrongful dismissal, they are still entitled to the protection of the good faith provisions of the Employment Relations Act. These require the employer and employee to be communicative and responsive in their relationship. The employer is not required to give reasons for the dismissal in writing but they are required to give the employee feedback so that they can learn from the unsuccessful trial and hopefully have greater success with their next role.

The Judge also looked at the issue of notice with respect to the trial period and concluded that notice can be given during the 90-day period for the employment to terminate after the 90 days. However, in the event of an unsuccessful trial there is no provision for ‘payment in lieu of notice’ or ‘termination without notice’. Thus the notice period must be worked out, unless the parties agree to it being paid in lieu at the time that the employee is given notice.

In essence, the trial period provides a level of protection if you have sincerely endeavoured to meet the standards expected of a “fair and reasonable” employer.

Snippets

Earthquake Relief – Donation of Trading Stock

Currently, if a business makes a donation of trading stock, it is deemed to be sold for market value and tax is payable accordingly. To support businesses who have or wish to make donations in support of the victims of the Christchurch earthquakes, the Government has introduced draft legislation exempting donations of trading stock from this market value rule.

The draft legislation provides disposals of trading stock will be exempt if it has been disposed of:

  • to an unassociated person,
  • for the purpose of relief from the adverse effects of a Canterbury earthquake, and
  • the donation is made between 4 September 2010 and 31 March 2012.

A similar exclusion from gift duty has also been included in the draft legislation.

Update: Penny & Hooper v CIR

Penny & Hooper is a landmark case involving two orthopaedic surgeons operating through companies and not receiving “commercially realistic salaries”.

The case was originally found in favour of the IRD by the Taxation Review Authority and later overturned by the High Court. In June 2010 the Court of Appeal swung in favour of the IRD. The taxpayers appealed to the Supreme Court.

The hearing by the Supreme Court of the appeal by Penny & Hooper has been delayed until 28 & 29 June 2011. The case was due to be heard by the Supreme Court in early March 2011, but this has been rescheduled due to the Christchurch earthquake.

Evading Student Loan Payments?

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Market Salaries – One for the Taxpayer

The controversy over whether a trust or company is required to pay a fair market salary to an associated employee has taken another turn recently. The High Court has overturned the Taxation Review Authority (‘TRA’) decision, which had determined that a self-employed anaesthetist had avoided significant income tax under a tax avoidance arrangement that included payment of a below market salary.

Background

Dr White is an anaesthetist who, in 2002, worked part-time in the public and private sectors. Additionally, she held interests in two avocado orchards with her husband (through a family trust). The couple also resided on one of the orchards.

In late 2002, Dr White ceased being self-employed and incorporated a company that employed her to provide services to private patients. The company also began leasing the avocado orchards from the family trust.

The taxpayer’s salary was set at the end of each year when the company’s profit was determined. Due to the avocado orchard making unexpected losses, the company barely made any profit, and no salary was paid from the company to Dr White in the 2003 year and a salary of $4,785 was paid in the 2004 year.

The judge in the TRA decision was of the opinion that:

  • Dr White had entered into an artificial, contrived and noncommercial arrangement. He also agreed with the IRD’s assertion that the structure was used to significantly reduce the taxpayer’s tax liability from personal exertions, while retaining full control and benefiting from the income.
  • The only reason someone would agree to take such a significant reduction in income was that the income was controlled by a related entity and was still available to them or their family in some other way.
  • A fair market salary could have been paid by the company if the company had borrowed against future profits, in effect causing the company to incur tax losses to be carried forward to future years.

High Court Decision

The taxpayer appealed to the High Court. The High Court allowed the appeal, determining that the arrangement did not amount to tax avoidance. In contrast to the decision at the TRA, the judge found that:

At the time the arrangement was entered into, it was not expected that the company would make a loss from its business activities. The company had no money available to pay a salary as the funds had been used to pay real (not contrived) debts.

The closely-held company structure adopted by Dr White was used in a manner that was not inconsistent with the purpose that Parliament intended such companies to be used.

The close-company regime specifically allows small family companies to pay tax on shareholder salaries through the provisional tax regime, and not the PAYE system. Where this is adopted, there may be circumstances where the working shareholder does not get paid for their time due to lack of funds in the company.

The fact that the company made an unexpected loss should not make an acceptable business structure an artificial and contrived arrangement designed to avoid tax. There was no scheme to avoid tax, hence the effect of the structure minimising tax was purely incidental and therefore falls outside of the definition of tax avoidance.

The judge distinguished this case from the Court of Appeal decision in Penny and Hooper v Commissioner of Inland Revenue (2010), in which it was held that two orthopaedic surgeons operating through companies, and not receiving “commercially realistic salaries” had entered into tax avoidance arrangements. The distinguishing factor was that Dr White was not deliberately paid a reduced salary; the company simply did not have the funds to pay one.

The IRD have advised it is appealing the decision. In the meantime, this is a welcome decision as it provides guidance as to the limits in the Penny and Hooper decision. The taxpayers in the Penny and Hooper case have been given leave to appeal to the Supreme Court.

Employment Relations Act: Key Amendments

Amendments to the Employment Relations Act have been passed and come into effect on 1 April 2011. The changes reflect National’s policy of easing the constraints on employers. While some of the changes are only of interest to employment law practitioners, others significantly change the employment landscape.

90-Day Trial Period

The 90-Day Trial Period for new employees, introduced by National in 2008 for employers with fewer than 20 staff, is now available to all employers. During the trial period the employer may dismiss a new employee within the first 90 days without a right to a grievance, but only if the requirements of the legislation have been followed precisely. The trial period must be in writing at the commencement of employment, the employee must not have worked for the employer before and the employer is still obliged to be constructive and communicative in the employment relationship.

Employment Agreements

The other significant change is that the employer is now required to keep a copy of every signed employment agreement or, if the agreement is not signed, the draft agreement. This is due to the high number of personal grievance cases in which the Employment Relations Authority has had to make a decision without a written agreement available because it has been lost. Therefore, the onus has now been placed on the employer to keep a copy. This particular change comes into effect on 1 July 2011. Failure to produce a copy of the agreement can result in a penalty (fine) being imposed on the employer.

Other changes, that will have less impact on day to day employment interactions, are as follows:

Test for Justifiability

In determining whether a personal grievance is upheld or dismissed, the Employment Relations Authority must apply a test as to whether or not the employer’s action(s) or dismissal of the employee was justified. The test has been changed from what “a fair and reasonable employer would have done in all the circumstances” to what the employer “could” have done, thus widening the options of what might be considered a ‘justifiable decision’ for an employer to have made. The test is further extended to include consideration of the resources available to the employer at the time, suggesting that there should be more flexibility for smaller enterprises.

Union Access to Workplace

Before entering a workplace, union organisers must now get consent to do so and the employer has to respond to the request by the end of the next working day. If they have not responded within 2 working days, consent is treated as having been obtained. The employer must provide a reason for withholding consent and it cannot be withheld without good reason. A penalty can be imposed for unreasonably withholding consent.

Labour Inspectors

The functions of Labour Inspectors have changed and create the opportunity for employers to receive free advice from Labour Inspectors. Their role includes supporting employers and employees to comply with the employment laws and providing them with services that will help resolve their employment problems. This means they can be invited by either party to help resolve an issue, which is most likely to be with respect to pay or leave.

GST Refund Delays

The timely release of a GST refund by the IRD can be an important element of a business’s cash flow, especially in today’s economic climate. However, recent court decisions regarding the rules under which the IRD operate has created an unfavourable situation for taxpayers.

Simply put, the GST Act prescribes that the IRD is required to release GST refunds within 15 working days of receiving a GST return. If it is not satisfied with a return, the IRD has 15 working days to either request further information or notify the taxpayer it intends to investigate the return. However, in some situations the legislation is unclear and open to interpretation. This has been highlighted in recent cases heard in the Supreme Court and the High Court.

In Contract Pacific Ltd v Commissioner of Inland Revenue (CIR), which was heard in the Supreme Court, the taxpayer (an inbound tourism operator) claimed a large GST refund due to a law change. The IRD issued a notice to investigate the return within the required timeframe of 15 working days, but a request for further information was issued more than 15 working days after the return was received by the IRD. The taxpayer argued that the information request had to be made within the 15 working days of the IRD receiving the return, regardless of whether or not an investigation had commenced.

In the above case, the Supreme Court held that as the investigation process would naturally include requests for information, the statutory time frame relating to requests for information did not apply. In reaching its decision the Court commented on the poor drafting of the legislation but indicated that it should be interpreted “….so that it can operate without producing perverse results which can never have been within the legislative purpose”.

In Riccarton Construction Ltd v CIR, which was heard in the High Court, the taxpayer filed a GST return claiming a refund for the purchase of two motels. The IRD did not release the refund and requested information within 15 working days of the return being filed. Upon receipt of the information requested from the taxpayer, the IRD issued notification (more than 15 days after the return was filed) that they would be investigating the return.

The taxpayer argued that the IRD could not hold the refund as the decision to investigate was not made within 15 working days of the return being filed.

The Court held that because an information request was made within 15 working days, any decision to investigate could be deferred for another 15 working days after receiving the requested information. Consequently the IRD were entitled to hold the refund.

Practically, these decisions mean that GST refunds can be held indefinitely by the IRD provided the IRD has given the required notice to the taxpayer that it will investigate the return, or issued a notice requesting information to be provided.

Considering the Supreme Court’s own admission in the Contract Pacific case that the legislation is poorly drafted, consideration should be given to re-writing the legislation to make it clearer. In the meantime, the decisions in the Contract Pacific and Riccarton Construction cases clearly leave the IRD with the upper hand.

Building Depreciation Update

Legislation passed as a result of the May 2010 Budget eliminated depreciation for most buildings that had a useful life of over 50 years. After the legislation was passed there was considerable uncertainty in a commercial context regarding what part of a structure would be classified as “building” versus “fit-out” (which can continue to be depreciated). The IRD had previously provided its view on the issue, but in a residential rental context, and commented that the principles could also be applied in a commercial context. The principles would have favoured the classification of some fit-outs as part of a building. Stepping away from those principles, the Government has amended the Income Tax Act 2007 in favour of the taxpayer.

Specifically, the changes enacted include:

  • A new definition of “building” which specifically excludes “commercial fit-out”
  • The insertion of a commercial fit-out definition, which includes an item attached to a “commercial building” that is non-structural and not part of a building’s weather-proofing.
  • The insertion of a commercial building definition that captures buildings that are not primarily used as a person’s residence and specifically includes:
  • hospitals,
  • hotels, motels, inns, hostels and boarding houses,
  • certain serviced apartments,
  • convalescent homes, nursing homes, and hospices,
  • rest homes and retirement villages, from hospital care through to residential care facilities, and
  • camping grounds.

The clarification of these definitions enable items that could otherwise be considered part of a commercial building, such as internal non-load bearing walls, suspended ceilings, plumbing and electrical reticulation to be depreciated as fit-out.

Where items of fit-out are shared between both residential and commercial structures (e.g. lifts, fire protection, sewerage), the principle purpose of the building will determine whether the fit-out is depreciable property. For example, if a building is used principally for commercial purposes, then the fit-out will be depreciable property.

If upon construction or purchase a person has not separately identified and depreciated fit-out, a new provision allows the owner of a commercial building to amortise 15% of the building’s book value at a rate of 2% straight-line per year. The building’s adjusted tax book value is reduced by any fit-out purchased and depreciated separately after the building was purchased.

The question left unanswered by the IRD is whether a person that has not separately identified and depreciated fit-out in the past can perform an analysis to determine what proportion of a building is structural versus fit-out, and start depreciating the fit-out based on the higher fit-out rates.

Snippets

Evading Student Loan Payments?

The IRD have been contacting student loan borrowers who are living in Australia regarding their student loan repayment obligations.

Most borrowers they have contacted have been happy to enter into arrangements to repay their loans, but several people have told Inland Revenue in no uncertain terms where to go. As a consequence, the IRD is taking around 10 test cases to court in order to recover the money.

These borrowers could face civil and/or criminal charges. Civil charges would involve a claim for the amount owed, whereas criminal charges could be up to three times this amount if they are tried for evasion of a repayment obligation.

Australia is the first country in which the IRD has sought to locate repayment evaders as it is the easiest place for the IRD to get information from. Similar action could take place in other countries in the future.

Gift Duty

Following a review of gift duty by the Government, legislation has now been enacted which abolishes this regime.

This decision was made because the results of the review showed the compliance costs of gift duty far outweigh the revenue it collects, the protection it provides to creditors and the ‘social assistance integrity’ derived.

Gifts made after 1 October 2011 will be excluded from the definition of “gift” under the Estate and Gift Duties Act 1968.

If a person makes a gift or gifts in a 12 month period totalling more than $27,000, and those gifts are made before 1 October 2011, gift duty will still apply.

The Costs of Relationship Breakdowns

Each year in New Zealand a large number of relationships end as couples decide to separate. Many of these relationships will have lasted long enough for the couple to have accumulated significant wealth in the form of property, business and investment interests, and let’s not forget the ‘big boys’ toys’. These assets are sometimes held in a complex structure of companies and trusts.

Whatever the reason for the breakdown in the relationship there will often be a high degree of acrimony and this unfortunately impacts any children of the relationship, who inevitably end up caught in the middle.

  • The consequences of unravelling a long relationship can be both a traumatic and expensive exercise, and may include the following:
  • The effect on children and the wider family – children need to be protected so that they maintain a healthy relationship with both parents.
  • The impact on friendships – whilst friends are generally supportive there is no guarantee that these friendships will survive intact
  • The financial cost of legal and other advisors – a simple business valuation may cost $4,000 and property valuations start at $1,000 – in addition the legal bills will keep rolling in
  • The trauma and uncertainty of the court processes – no matter what your view of your legal position there is no certainty that the court will agree, and consequently the court process will often seem to go on forever.
  • The financial implications of separation – both parties will be financially worse off post settlement, however the bread winner is likely to recover more quickly.

 

While there are no easy fixes for this life changing event, once the decision to separate is final there are some simple guidelines that will help all concerned to navigate this process:

  • Engage a suitably qualified lawyer to advise you of your relationship property rights.
  • Avoid a litigious approach – focus on the future rather than the past.
  • Be prepared to compromise regardless of where the blame may lie.
  • Agree to an independent advisor valuing the assets, and if possible mediating a settlement.
  • Make sure that your advisors are appropriately qualified, with relationship property experience – ask for references.
  • Avoid the court process if at all possible.

 

Providing Credit and Managing Your Debtors

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 More GST Changes Ahead

Providing Credit and Managing Your Debtors

What is Employment Disputes Insurance?

Changes to the QC / LAQC Regime

Provisional Tax

IRD Work Programme

 

More GST Changes Ahead

Recently the focus has been squarely on GST due to the increase from 12.5% to 15%. That focus is set to continue with the release in August 2010 of draft legislation to amend the GST Act with effect from 1 April 2011.

Change-in-use adjustments

A central principle of the current GST Act is the need for a good or service to be principally acquired for the purpose of making taxable supplies (e.g. sales) before GST can be wholly claimed up-front. If a good or service is not acquired for a wholly taxable purpose a change-of-use adjustment may be required. Depending on the situation, the change-of-use provisions can be complicated and expensive to administer.

It is proposed that the change-of-use provisions are re-written and the principal purpose test is repealed and replaced with a “use” doctrine such that when an asset is acquired for a mixed purpose, a one-off input tax deduction will be made based on its estimated use. This deduction is subject to adjustment at a later date if the actual use varies from the estimate.

Zero-rating of land transactions

Schemes designed to acquire GST refunds from IRD on the purchase of land where the vendor is unable to meet its GST output liability, have caused the Government to propose zero-rating transactions that include land. Zero-rating will apply to the taxable sale of land by a GST registered vendor to a GST registered purchaser who intends to use the land for the purpose of making taxable supplies. Where land is only a component of a transaction, i.e. the sale of land and buildings, the entire transaction will be zero-rated.

As the purchaser’s use of the land will determine whether zero-rating will apply, a vendor will be required to confirm the purchaser’s intentions, and that they are GST registered. If the vendor fails to meet its obligations to gather the required information, it may be liable to pay the applicable GST. If the vendor is unable to gather the required information because of the actions of the purchaser, the purchaser may be held liable for that GST. If an unregistered purchaser provides false information to avoid paying GST and that is subsequently found out, the purchaser will be deemed to be registered and will be required to pay the applicable GST.

To clarify the boundaries as to what transactions will be zero-rated, a definition of “land” will be inserted into the proposed legislation. As currently drafted, the definition includes an option to acquire land, an estate or interest in land, and rights that give rise to an interest in land. Based on the definition as drafted the commercial leasing of land will be zero-rated. However, it is understood this application to commercial leases is currently being re-considered by Government and is unlikely to be included in the final form of the legislation.

Taking the zero-rating of land and the change-of-use adjustment changes together, if a registered person buys land for a mixed use, the transaction will qualify for zero-rating, however, the purchaser will be required to pay GST based on its estimated non-taxable use.

“Dwelling” definition clarified

The distinction between what is a “commercial dwelling” versus a “dwelling” is important for GST purposes as the supply of accommodation in the former is subject to GST, but supplying accommodation in the latter is not. The current definitions have been the source of uncertainty in the past as activities such as homestays, farmstays and serviced apartments have not fit neatly into either definition. In 2006 the IRD issued a draft interpretation statement that broadly concluded these types of activities would not qualify as the supply of accommodation in a commercial dwelling and therefore are not subject to GST.

The proposed changes will expand the commercial dwelling definition to specifically include homestays, farmstays and serviced apartments. Furthermore, the proposed changes will clarify the law by requiring a dwelling to be a person’s principal place of residence and be subject to their exclusive possession.

Providing Credit and Managing your Debtors

Cash flow management is fundamental for helping build and maintain a successful business and debtor management plays a key role. It may be beneficial for some businesses to supply goods and services without immediate cash payment by offering credit.

Credit can provide customers with the ability to purchase more expensive items than they would otherwise be able to purchase with cash. It provides flexibility in financing options and can demonstrate a level of trust between the customer and the business. Further, it suggests the business is in a healthy cash position as it can offer credit. This may be an important indicator for trade customers seeking security through reliable suppliers.

Key points for debtor management include:

  • deciding who will be offered credit,
  • how much credit will be offered, and
  • drafting the documentation for enforcement of credit terms.

Before you agree to perform any work for a client or supply goods to a customer, ensure you have policies in place to protect your cash flows. A well-drafted and succinct set of credit terms that are signed, dated and understood by your debtors is invaluable. Before goods or services are supplied, communicate the terms clearly to customers, ensure the terms are signed and dated by both parties and that each have a copy for their records.

Before accepting a customer as a substantial debtor, carry out a credit check and ask for two referrals. Credit checks can provide useful information regarding the person’s credit application and payment history, including whether any debts have been referred to debt collection agents. A blank record may show no signs of non-payment but may also mean the person has not chosen, or been able, to apply for credit in the past 7 years. In this situation, the referrals may provide valuable information on the customer’s payment history.

Most first-time creditors should have a low credit limit until a pattern of repayment is established. All credit limits should be enforced through systems that are able to detect the first breach and effect an immediate, albeit temporary, stop to the line of credit. All non-payments should be promptly pursued and always in a friendly manner. There may be a rational explanation for non-payment, but remember, every dollar matters!

Credit terms should be clear, concise and robust. At a bare minimum, they should contain the following:

The clients contact details: including full names, street and postal addresses, phone and email details,

  • A customer authority for signing, and whether the signatory has the appropriate authority, should be confirmed. Preferably, a company’s directors should sign the credit terms and personally guarantee the company’s debts,
  • A description of what is to be supplied,
  • A retention of title clause (ensure the security interest is registered on the Personal Property Securities Register),
  • Details of how the fees/charges will be calculated and details of the credit terms,
  • Who is liable for the work performed, limitations of that liability and who is liable for legal costs and debt enforcement, and
  • Procedures for mediation and arbitration to resolve disputes.

What is Employment Disputes Insurance?

With the level of media coverage of seemingly irrational and sometimes expensive personal grievance cases, most employers have a fear of personal grievances being taken against them. When the Employment Relations Act was introduced in 2000, there was a significant growth in organisations taking out Employment Disputes Insurance but it rarely gets mentioned these days.

So what is Employment Disputes Insurance and how does it work? As with all insurance products, it varies according to the different providers; so this is a general explanation rather than a detailed summary of all products.

Employment Disputes Insurance is designed to give employers the peace of mind that they will have some support in the event that a personal grievance is taken against them by an employee. The vast majority of grievances relate to claims for unjustified dismissal or unjustified action by the employer, causing disadvantage to the employee.

The insurance generally covers the legal costs of defending a grievance and any compensation, fines and penalties. The insurance does not always cover the wages settlement that the Employment Authority might order the employer to pay, or the legal costs up to the point of dismissal, but will generally cover the legal costs of going to mediation.

As with most insurance policies, it is important to advise the insurer at the first sign of trouble (before the employee is dismissed) and follow their instructions carefully. The insurer will normally direct the employer to use an employment law advisor of the insurer’s choosing, or will want to approve your adviser.

You should be aware that if a grievance is lodged, the insurer will generally want to minimise the cost of the claim and will call the shots on how the matter is to be resolved. This is not always a comfortable position for the employer, especially as the legal fees often exceed the cost of any settlement, so the employer might end up feeling forced into a settlement by the insurer so that the legal fees are contained.

Employment Disputes Insurance can be useful in some circumstances, but only if the employer has signalled the claim early enough and has followed the advice from their legal advisors every step of the way. For most employers personal grievances are very unpleasant emotional experiences that can be expensive, but generally do not break the bank. Given the recent changes in employment law, which can be challenging for even the most careful employers, whether insurance cover is appropriate will depend on how much peace of mind the employer wants and their specific circumstances.

Changes to the QC / LAQC Regime

In the 2010 Budget the Government announced that changes will be made to the qualifying company (‘QC’) and loss attributing qualifying company (‘LAQC’) regimes. The draft legislation outlining these changes has been released, which effectively proposes to eliminate LAQC’s, while retaining QC’s, and introduces a new vehicle called a look-through company (‘LTC’).

Similar to a partnership, the shareholders in an LTC are treated as personally deriving the income, incurring the expenses and owning the underlying assets and liabilities of the LTC. When a shareholder disposes of shares in an LTC it is deemed to be a disposal of the underlying assets. For example, if a shareholder in an LTC disposes of shares in an LTC that holds depreciated assets, the shareholder may derive depreciation recovery income.

The look-though aspect applies for income tax purposes only – the company still retains its capacity as a separate legal entity for company law purposes, including limited liability status.

One of the benefits of the QC regime is the ability to distribute capital gains tax-free. By comparison an ordinary company can only distribute capital gains tax-free by liquidating the company. An LTC will provide this same benefit because dividends paid by an LTC will be ignored for tax purposes, as the income is taxed directly in the shareholder’s hands when initially derived.

To cater for situations in an LTC where the profits are generated through the disproportionate efforts of its shareholders, that extra effort can be recognised by a pre-tax payment to a “working owner”, i.e. a salary or wage. A working owner is a shareholder who is employed by the LTC under a written contract, and who personally and actively performs the duties of their employment under that contract.

Similar to the existing QC regime, in order to be eligible to be an LTC a company must be a New Zealand tax resident and have 5 or fewer “look-through counted owners”. Broadly, the definition of look-through owners includes both individuals and trusts, with individuals who are related to the second-degree of blood relationship being counted as a single owner, as are trustees in a trust.

Existing QC’s and LAQC’s may transition into the LTC regime by making an election within 6 months of the start of the income year commencing on or after 1 April 2011. If a QC or LAQC does not elect to enter into the new regime, a QC will continue unchanged, while an LAQC will effectively become a QC, i.e. losses will not be able to be attributed to shareholders. When exiting the LTC regime, shareholders are deemed to have sold and re-purchased the underlying assets of the company at market value. The deemed sale could result in a tax cost, such as depreciation recovery.

This change is a chance for shareholders in existing QC’s and LAQC’s to review their current structure, and look at what would work best for them. Electing the LTC regime is not the only option – a partnership, limited partnership, sole trader or regular company structure may be a better fit.

Snippets

Provisional Tax

Due to the reduction in the company tax rate from 30% to 28%, the standard provisional tax uplift rates have been amended. The reduction applies to the calculation of a company’s provisional tax liability for the 2011-12 and 2012-13 income years.

Provisional tax year  Based on year’s RIT (Residual Income Tax)  Uplift rate
2012 2010
2011		 RIT + 5%
RIT (no adjustments)
2013 2011
2012		 RIT + 5%
RIT + 5%
2014 and onwards 2 years previous
previous year		 RIT + 5%
RIT + 10%

IRD Work Programme

Apart from acting as an agent of the crown in the collection of tax revenue, one of the IRD’s functions is to provide guidance and assistance in the interpretation of tax legislation. This is in the form of publications such as Tax Information Bulletins, Interpretation Statements and Standard Practice Statements. The IRD also discloses projects it has on its radar through publication of the Public Rulings Work Programme

The current programme includes items such as whether farmers are required to apportion mortgage interest between farm land and a residence located on the land. Ideally, for farmers, this will not result in a change to the long standing concession whereby farmers are able to claim 100% of their mortgage interest and 25% of the expenses relating to their home.

Further items include the income tax and GST implications of barter transactions and the income tax and FBT implications arising from trade bonus/reward schemes.

The Public Rulings Work Programme can be found at http://www.ird.govt.nz/public-consultation/work-prog/

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