Macnicol + Co

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It is proposed that the change-of-use provisions are re-written and the principal purpose test is repealed and replaced with a “use” doctrine such that when an asset is acquired for a mixed purpose, a one-off input tax deduction will be made based on its estimated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/

Company Salaries – Cause for Alarm

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Whether a trust or company is required to pay a fair market salary to an associated employee has received considerable attention in recent years. Another case involving the issue was recently heard by the Taxation Review Authority (‘TRA’), but the decision included a statement that may start alarm bells ringing.

The case involved a husband and wife who re-structured their activities to operate through a company. The wife was an anaesthetist working part-time in the public sector and also part-time on a private basis through her family trust. The husband operated a quality assurance business. The pair ceased to be self employed in 2002 and were instead employed by the company. The family trust acquired two orchards in 2002 – one from the husband and wife and the other from a third party. The company operated the orchards by leasing both the orchards and equipment from the family trust.

Prior to the restructure, the wife’s public sector income as an anaesthetist was approximately $120,000 per annum. After the re-structure, the company barely made a profit due to losses incurred by the orchard business. Due to the low profit, salaries attributed to the taxpayer were either very low or non-existent during the years in dispute.

The IRD argued that the rent from the leasing of the orchards and equipment that was paid to the family trust was too high, and that the salary paid to the taxpayer was commercially unrealistic, i.e. too low.

In relation to the rent paid to the family trust, the Judge found that though it seemed a little high, the accountant had taken a fairly sensible approach to fixing the orchard rental, and the Judge could not find evidence that there was anything artificial or contrived about the fixing of the rent.

When looking at the salaries paid to the taxpayer however, the Judge found this case to be straightforward. He was of the opinion that the taxpayer had entered into an artificial, contrived and uncommercial arrangement. The Judge agreed with the IRD that the structure was used to significantly reduce the taxpayers income tax liability from personal exertions, while retaining full control and benefiting from the income. This arrangement therefore amounted to tax avoidance.

In the Judge’s view, 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.

The Judge acknowledged that the same result could have been achieved by paying a fair market salary and electing for the company to be an LAQC or through the use of a partnership. The Judge also commented that a fair market salary could have been payable by the company if it had borrowed against future profits, in effect, causing the company to incur tax losses to be carried forward for future years.

Surprisingly, the High Court decision in the Penny & Hooper case was not discussed, which found in favour of the taxpayer on the market salary issue. The High Court decision was appealed and the Court of Appeal’s decision is currently due to be released. If the Court of Appeal rules in favour of the IRD the TRA decision above is worrying because it is the first time the Authority has taken the view that a company should incur a loss in order to pay a fair market salary and it could be seen as a further movement of the tax avoidance boundary.

Results From the Latest Budget

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What a difference a year makes. The 2010 Budget was announced on 20 May 2010, bringing in far-reaching changes. Outlined below are the more topical changes.

Personal Tax Cuts

The Budget delivered reductions to all personal tax rates, effective from 1 October 2010, with the main surprise being the reduction of the 33% rate to 30%. The reduction to the rates means that someone earning $45,000 p.a. would receive an additional $26 in the pocket each week, while someone earning $70,000 stands to gain $41 a week.

These increases do not take into account the effect of the GST increase.

The top personal tax rate was reduced from 38% to 33% to align with the trustee tax rate. This has effectively removed the tax savings that could be achieved for income earned above $70,000 p.a. by having a trust instead of an individual deriving the income. With the tax changes it may be timely to review structures that are in place. The benefits of a trust, such as asset protection and estate planning, still remain and need consideration.

Working For Families Changes

The Budget has made a number of changes to the qualification criteria for Working For Families (‘WFF’) assistance. The automatic increasing of the Family Tax Credit abatement threshold (to compensate for inflation) has been removed. The abatement threshold will remain at $36,827 unless the Government makes a change to the threshold. One effect of this change is that over time fewer families will qualify for WFF assistance as families’ incomes exceed the qualification threshold.

Government has proposed that from 1 April 2011, investment losses will not be taken into account when determining a family’s income for WFF purposes. This will prevent a person from using losses, for example from a rental property, to increase their WFF entitlement. It is also likely that from 1 April 2011 all distributions from trusts will be taken into account, as well as PIE income and the value of fringe benefits received from employment. This will further reduce the amount of entitlement families are eligible to receive.

Loss Attributing Qualifying Companies (LAQCs) & Qualifying Companies (QCs)

The Budget outlined intended changes to both LAQCs and QCs, which will result in them being treated similarly to partnerships. These changes are planned to be effective from 1 April 2011. Any profit or loss derived by the LAQC/QC will flow through to the shareholders in proportion to their shareholding. The shareholders will then be taxed on the income attributed to them at their marginal tax rates. QCs will be required to file an IR7 partnership tax return instead of an IR4 company tax return.

On transition from an ‘old’ LAQC/QC to a ‘new’ QC, the imputation credit balance of the ‘old’ LAQC/QC will be extinguished. The payment of a dividend to utilise the imputation credits before they are extinguished should be considered keeping in mind how much cash is available in the LAQC/QC. A taxable bonus issue could be considered if cash is a problem.

Any losses currently held in a QC will be ‘ring-fenced’ from the date the new rules take effect and will only be able to be used to off-set future profits the QC derives. This is not an issue for LAQCs as losses are always attributed to shareholders on an annual basis. Loss limitation rules will apply to limit the losses attributed to a shareholder to the extent of their investment in the ‘new’ QC.

Once the new rules take effect, any sale of shares in a QC will be a deemed disposition of the underlying property held by the QC. This creates potential tax consequences, such as depreciation recovery for the vendor, as well as having assets at different values for different shareholders.

If an LAQC/QC is expecting to make profits in the future it may be worthwhile exiting the QC regime to prevent the profits flowing directly to the shareholders.

It would also be advisable to exit the regime before 1 April 2011 (the likely date of change) otherwise there could be a deemed disposal of the QC’s underlying assets if the exit is on 1 April 2011 or later.

Company Tax Rate Change

The company tax rate will drop from 30% to 28% at the start of a company’s 2011/2012 income tax year. This could be as early as October 2010 for companies with early balance dates.

The change in the corporate tax rate means the standard uplift rates for provisional tax are on the back-burner once again. If you are basing 2011/2012 provisional tax on last year’s tax return there is no uplift (i.e. use 100% of past year’s RIT). If you are basing 2011/2012 provisional tax on your 2009/2010 tax return then use an uplift of 105%.

There will be a two year transitional period during which dividends can be imputed at 30%. Companies will need to track tax paid at 30% and tax paid at 28% to ensure correct imputation of dividends at 30%. Imputing a dividend at 30% when there are insufficient 30% imputation credits will result in an imputation credit penalty being imposed at the end of the transitional period.

Resident Witholding Tax (RWT) on dividends paid remains unchanged at 33%. A ‘top-up’ of RWT to 33% will still be required. For a dividend imputed at 28%, this will mean an additional RWT cost of 5% on the gross dividend.

Depreciation

Depreciation deductions on buildings with an estimated useful life of 50 years or more will be removed from the 2011/2012 income year. The depreciation rate on these buildings will be reduced to 0%.

Other buildings (with a useful life of less than 50 years) will still be able to be depreciated if they have an IRD prescribed depreciation rate e.g. dairy sheds and hot-houses.

Even though many buildings can no longer be depreciated, depreciation recovery will still apply for those buildings when they are sold for greater than their book values. Any asset purchased from 21 May 2010 onwards is not entitled to the 20% depreciation loading. However, if a contract to purchase the asset was entered into prior to 21 May 2010 then that asset can still be depreciated with the loading.

Any asset being depreciated at a rate with loading before 21 May 2010 can continue to be depreciated at that rate for that asset’s lifetime. However, if there is a capital improvement to the asset, that improvement will need to be depreciated separately from the original asset without the loading.

GST

The increase in GST from 12.5% to 15% requires a range of systems changes and checks. Whether GST on a sale should be at the old or new rate will depend on whether the time of supply is before, or from 1 October 2010. If you are on the invoice basis, the time of supply is triggered by the earlier of receiving a payment or issuing a tax invoice.

This means the old rate can be locked in for a customer purchasing goods to be received after 1 October 2010 by the customer paying a deposit before 1 October 2010.

For those on the payments basis, debtors and creditors existing at the time of the change are subject to a notional 2.5% conversion at their values on the date of transition, with all payments or receipts thereafter being subject to 15%. The notional conversion has the effect of deeming payments or receipts relating to prior to the rate increase to be at a net 12.5%.

If 1 October 2010 comes part way through your GST period, two GST returns must be completed, i.e. one return for supplies made to 30 September 2010 and a second return for supplies from 1 October 2010. The IRD will provide a special form for the additional GST return.

You will need to ensure your systems can deal with two GST rates for a period of time. Credit notes issued post 1 October for purchases made pre 1 October will need to be issued using the old rate. Systems set-up to automatically code repeat transactions will need to be reviewed or switched to manual coding during the transitional period to ensure the correct GST rate is accounted for.

Where goods and services are paid for by progress payments, e.g. insurance or rates, each payment is deemed to be a separate supply.

Therefore, the GST on a progress payment made after 1 October 2010 will need to have GST charged at 15%.

Changes to Partnerships

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Donations and Rebates

Changes to Partnerships

The Quirks of Family Assistance

Recruitment in a Tight New Zealand Labour Market

Adding Insult to Injury

Recent IRD Alert

 

Donations and Rebates

Limits relating to donations deductions for companies and the donations rebates for individuals have been removed from the 2008 – 2009 income year. As a result of the changes, companies will be able to claim a deduction for donations up to an amount equal to net income. Individuals will be entitled to a tax rebate of one third of their donation, limited to the amount of the person’s tax credits for the year. Previously, both companies and individuals were subject to limits on the amount of deductions and rebates, respectively, that could be claimed.

In the past the IRD were reasonably practical, even relaxed when it came to processing applications for an individual’s donations rebate. However, as these changes are likely to result in an increase of tax being refunded by the IRD, there was uncertainty regarding whether the IRD would increase their scrutiny during the processing of donations rebates. The uncertainty arose because the legislation prescribing who could claim a donation rebate simply refers to a person who makes a gift. There has been concern that where a donation receipt is issued in the name of a non-working spouse who has no tax credits, the donation rebate would be disallowed by the IRD. The issue has recently been clarified by the IRD.

  • Where a donation is made in joint names, both parties are eligible to claim either the whole, or part, of the rebate, provided the combined claimable amount does not exceed the donation, and that the amount either individual is claiming is not greater than their personal taxable income.
  • Where a donation is made solely by one spouse, and that donation exceeds that person’s taxable income, the other spouse can claim the balance of the donation, up to the amount of the other spouse’s taxable income.

Irrespective of which spouse is named on the receipt (or both – jointly), if more than one claim is made relating to a donation, one spouse must attach the receipt to the claim form. The other spouse must attach a note to their claim form giving the name and IRD number of their spouse with whom they intend to share the claim.

For example, if a married couple makes a donation and the receipt is issued in the name of the spouse with no taxable income, that spouse would be unable to claim a donations rebate. However, if the other spouse has taxable income greater than the donation, that other spouse may claim the entire donation amount.

The following situation illustrates the need for companies to be aware of how the new rules work before gifts or donations are made. Consider a motor vehicle dealership that wishes to donate a new vehicle to a worthy charity. The vehicle is donated, and the charity is very appreciative. If the company expects to claim a deduction based on either the cost or market value of the vehicle, it may be surprised to find a deduction will not be available. In order for a company to claim a donation as a deduction it has to be a donation in cash.

It is clear that Government has intended increased tax benefits to come from making charitable gifts and donations. There is however, uncertainty as to whether or not this intention will be achieved in practice.

Changes to Partnerships

It could be said that in the past there has been little legislation regarding the taxation of partnerships. For example, how partnership profits are to be shared and how the entry and exit of partners are treated in a partnership was not covered by legislation. This lack of legislation has been the cause of uncertainty, and at times frustration, resulting in varying treatments being applied. In order to resolve these issues, Government has introduced new legislation, effective from the 2008 – 2009 income year. These changes have far reaching effects from corporate partnerships, such as law firms, to small family partnerships, such as ‘mum and dad’ farming partnerships.

The treatment of partnerships as a ‘look-through’ entity, taxing partners at their individual rate as opposed to at partnership level, has been strengthened under the new legislation. In practice, each partner is considered to conduct the business of the partnership to the extent of their interest in the partnership, rather than the partnership conducting business on its own account. Income streaming, the practice of streaming income to a partner on a lower income, is expressly precluded, with income being allocated to partners based on their interests in the partnership.

With respect to disposals of partnership interests, when a partner exits the partnership, difficulties have arisen because technically a change of partners results in the dissolution of a partnership and the formation of a new partnership (with new partners). The existing partners effectively dispose and reacquire their share of the assets. Practitioners have generally ignored the technical aspects, choosing to take a more practical approach.

A general rule has been introduced which provides that partners own their respective shares in the underlying assets and liabilities of the partnership. This means that when a partner exits the partnership, that partner disposes of that particular interest and the other partners and their interests are not affected. This limits tax outcomes, such as depreciation recovery income, to the exiting partner. However, if the profit received by the exiting partner is $50,000 or less, a ‘step-in’ approach is adopted. The new partner is treated as assuming the position of the exiting partner and no tax effect will arise to the exiting partner. Under the ‘step-in’ approach, the new partner is treated as having acquired the exiting partner’s interest at the date the exiting partner’s interest was first acquired. Any income or losses the exiting partner derives in connection with the particular partnership share in the income year are treated as being derived by the new partner for tax purposes.

Where the $50,000 threshold is exceeded, the exiting partner must account for the disposal of the particular partnership interest. There are exemptions which apply to exclude specific items from being recognised for tax purposes. These exemptions relate to:

  • trading stock
  • depreciable tangible property
  • livestock
  • financial arrangements

If a partnership comprises less than 5 partners these exemptions may be ignored.

It will be important to be aware of these provisions when dealing with partnerships. For example, when negotiating the purchase of a partnership interest, the price that is paid should take into account whether or not the purchaser is assuming any tax consequences on entering the partnership.

The Quirks of Family Assistance

Family Assistance legislation is renowned for being subject to change, including its name, which has recently been changed to “Working for Families Tax Credits”. The legislation, as written, creates the impression that it applies to a person employed by a third party on a salary or wage. There are provisions that apply to the self employed and those employed by a related entity, such as a company or trust. However, in some cases, the provisions do not lend themselves to easy interpretation for the purposes of the self employed person. The result is what can be considered as ‘gaps’ in the legislation.

It is generally well known that the income thresholds that enable a person to receive assistance have increased. As a result, the provisions around the legislation are receiving more and more attention. The following may prove interesting.

Close Companies

A ‘close company’ is a company where more than half its shares are held by five or fewer shareholders that are ‘natural persons.’ Where a person has 10% or more of the shares in a close company the income of the company must be apportioned to the person based on their shareholding, to determine their income for family assistance purposes. The obvious example would be a company with all its shares held equally by the parents of three children. However, if the same shares were held by a family trust, it would no longer meet the definition of a ‘close company’ (i.e., a trust is not a ‘natural person’) and the income of the company is ignored for family assistance purposes.

In-Work Tax Credit

One of the ‘gaps’ in the current legislation relates to the ‘In-Work Tax Credit’ component. One of the requirements to receive the payment is that a person (or their spouse) must be a “full-time earner receiving income from a work activity”. In some cases people who work for their own company may not actually receive any income from their company, for example where no shareholder salary is paid. It is understood that in these cases the IRD is not allowing payment of the ‘In-Work Tax Credit’ as no income has been received by the person from their employment. It is unclear from the legislation what amount of income would be required. It would seem unreasonable to pay a market salary to a shareholder in order to receive the tax credit, whilst the company makes a loss as a result of the salary.

Loss Attributing Qualifying Company

If a person is attributed a tax loss from a ‘loss attributing qualifying company’ (LAQC) that loss is excluded for the purpose of determining their income for family assistance purposes. A common example would be a rental property held by an LAQC, where any attributed losses from the rental company would be excluded. If however, that rental property were held personally and the rental activity does not amount to a ‘business’ (which is likely in the case of only 1 or 2 rentals), then that rental loss can be included for family assistance purposes. This has arisen as a result of the legislation requiring that a loss derived from a ‘business’ operated by a person be excluded. This rule can therefore be applied to any activity entered into by a person, for the purpose of deriving taxable income that results in a loss, as long as the activity does not amount to a ‘business.’ What constitutes a ‘business’ is determined by a number of factors such as the commitment of time, money and effort.

These points should be kept in mind by anyone currently receiving or expecting to receive ‘Working for Families Tax Credits’.

Recruitment in a Tight New Zealand Labour Market

With unemployment currently sitting at 3.4%, finding new (and suitable) employees in order to grow is becoming more and more difficult for businesses across a range of sectors. Fifty percent of New Zealand firms have indicated that a lack of skilled workers was their most significant barrier to expansion. This contrasts with 44% of Australian firms, 34% of Canadian and UK firms and 26% of enterprises in the United States.

How to attract them in first place

Building a strong employer brand will be increasingly important for organisations to attract and retain staff as pressure on the labour market continues. A brand needs to be uniform across all mediums of communication that a business uses. For example, a sharp and professional print advertisement needs to be backed up by a sharp and professional website, especially if a potential candidate is referred to the website for further information. This type of branding is key for ‘Generation Y’ job seekers who base their impression of a prospective employer on the ‘look and feel’ by their website and the information provided within. A boring website can indicate a boring business or at the very least one that does not bother to keep up with current technologies.

Businesses also need to be more open to employing diverse types of staff to counter staff shortages. A significant proportion of businesses are employing people with a disability, people who have English as a second language or mature aged people.

Lastly, it is important for businesses to keep in mind that a bad hire is worse than no hire as ineffective and potentially destructive employees will cause greater stress than having no-one at all.

Retaining staff

Attracting new employees is only half the problem, employers also need to keep those they already have by offering an appealing mix of work, salary, benefits and culture that is unique to their business. This is not easy, and one package will not fit all employees, from new recruits to star performers. The trick in this tough and competitive labour market is to be proactively offering market rates around salary and benefits and then provide an edge by promoting the aspects of the company that make it unique and special. The new flexible working hours legislation will also be of key importance to many groups of employees. For some, their employer’s adoption of such principles may determine whether or not they stay or look for a role offering greater flexibility to suit their lifestyles. Furthermore, if an employer is hiring new staff on higher rates than existing staff every effort should be made to keep existing staff happy and feeling that they are paid fairly.

Getting them back in the future

Businesses that lose employees to the big ‘OE’, family commitments and the like can also apply strategies to get those employees back when their circumstances change. A business that can create and leave a good impression is much more likely to regain these employees, albeit five years later. Such factors as offering long term leave without pay, sabbaticals and an alumni programme could all play a part in this.

The labour market that businesses have to operate in is changing rapidly and has new and perhaps even bigger challenges ahead than the current skill shortage. So by being proactive and constantly analysing how to better meet the changing demands of both the current and potential workforce, businesses can obtain and keep the employees they want and need.

Snippets

Adding Insult to Injury

After the share market collapse of 1987 there were ‘co-incidentally’ a number of disputes with the IRD as taxpayers claimed the cost of their shares for tax purposes. This was on the basis that they had purchased the shares on revenue account. These disputes were generally decided in the taxpayers favour.

With the recent spate of finance company collapses the IRD has made the first move by issuing a press release stating that “most investors in failed finance companies will not qualify for a tax write-off”. In some cases this will also apply to interest income previously taxed but not physically received. This could occur if a person re-invested accrued interest. As the interest will have been applied for the investor’s benefit they will technically have received it and not be able to claim a deduction for a bad debt.

The press release can be viewed under the 2008 media releases on the IRD website at www.ird.govt.nz.

Recent IRD Alert

The IRD uses a ‘Revenue Alert’ system to notify the public of issues of concern. The IRD has recently issued its second ‘Revenue Alert’, outlining its view that tax avoidance may exist where taxpayers operate a business of providing personal services through a company or trading trust. Personal services income is income that arises from personal exertion, for example, services provided by doctors, lawyers and electricians etc. The use of such a structure can enable income to be directed to recipients on comparatively lower marginal tax rates. This issue has been around for some time now, most famously covered in the Taxation Review Authority Case W33 involving a trading trust.

The question of whether or not tax avoidance exists can be very complicated to answer and cannot be covered in detail in the context of a ‘Revenue Alert.’ The issue that may arise going forward is that officers of the Department may take a simplistic approach to the issue and deem a structure to be tax avoidance (simply because it ‘fits’ with the situation in Case W33) when it is in fact a completely legitimate structure.

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