Budget Perspective

The 2016 budget has come and gone and the only people really shouting about it are the Opposition and the tobacco companies.

Perhaps the Government felt they have already given businesses enough to be excited about with their pre-Budget announcements of the proposed tax simplification and business transformation. Beyond the reform of the provisional tax system and other changes announced to be staged over 2017 and 2018 (covered below), there were no dramatic shifts for business.

New spending

Health and education will see most of the new spending, $2.2b and $1.44b respectively over the next four years. However, total annual new spending will be around $1.6b shored up by whatever additional funds can be found in other cuts or underspends. $258m goes to provide more social housing in the epicentre of the nation’s housing crisis, Auckland, with an additional $100m freeing up Crown land for housing. Science and innovation projects will receive an extra $410.5m over the next four years, with increases to support tertiary education and apprenticeships in science, engineering and agriculture as well as regional R&D initiatives.

Debt reduction

While net debt is forecast to peak round 25.6% of GDP in 2017, the plan is for overall reduction, bringing it within the Treasurer’s target of 20% for 2020. Surpluses are forecast for the next few years. Some of the figures, however, seem to rest on the hoped-for dairy price recovery which remains to be seen.

ETS subsidy

From 1 January 2017, the Emissions Trading Scheme subsidy will be removed. This was only ever a temporary measure during the global financial crisis, allowing some businesses to pay one emissions unit for every two tonnes of pollution emitted.

Tax

There is some promise of tax cuts and of lowering tax rates and thresholds, primarily to take some pressure off lower and middle income earners. However, that’s on a “wait and see” basis for next year’s Budget.

Inland Revenue’s new tax administration system has been allocated $503m in new operating funding and $354m in new capital funding. This is closely aligned with giving effect to what the Government has planned for tax simplification and business transformation. A reshaping of Inland Revenue also seems inevitable. Balancing the additional allocations are cuts to Inland Revenue’s existing budget – $284m over the next four years – those savings to be recycled back into business transformation. The overall aim, however, is to generate more tax revenue with a smoother system ensuring better tax compliance.

The Government announced that they will be making further changes targeted at multinational companies, to make it harder for them to avoid paying their fair share of tax. What those changes are, we don’t yet know but it is probable they hinge on sharing tax compliance information internationally as the Government is now party to the OECD multilateral competent authority agreement. This enables automatic sharing of country-by-country reporting and is part of a larger OECD project to reform the international tax framework. Disclosure requirements for foreign trusts will also come under scrutiny.

Tax simplification and Business Transformation

In April, the Government announced proposals to simplify business tax as part of the wider Business Transformation programme, with legislation to be passed in August this year. The earliest of the changes would take effect from April 2017, with more coming online in 2018.

It includes a pay-as-you-go option for provisional tax for small businesses from 2018 onwards and eliminating or reducing use of money interest for a number of taxpayers. This is likely to reduce the ‘guesswork’ for small businesses.

Changes to provisional tax include:

• Increasing the current $50,000 residual income tax ‘safe harbour’ limit for use of money interest (UOMI) to $60,000 and extending this safe harbour to all tax payers.
• Removing UOMI for the first two provisional tax payments for all taxpayers who use the uplift method.
• Allowing businesses with turnover under $5m to use an accounting income basis (AIM) to pay provisional tax on a pay-as-you-go basis through their accounting software with monthly or two-monthly payments linked to the GST return periods (effective from 1 April 2018)
• Allowing companies to pay tax on behalf of shareholders (effective from 1 April 2018).

Changes to withholding tax:

• Allowing contractors to elect their own withholding rate without applying to Inland Revenue (subject to eligibility limits and a minimum rate of 10% for resident contractors and 15% for non-resident contractors).
• Extending withholding tax to labour-hire firms.
• Permitting voluntary withholding agreements

Changes to late payment penalties:

• No longer imposing incremental late payment penalties (LPP) on future GST, provisional tax, income tax and Working for Families Tax Credits debt.

Other changes:

• Inland Revenue can disclose significant tax debts to credit reporting agencies, so that other businesses considering extending credit can make more informed commercial decisions.
• Inland Revenue can share information with the Registrar of Companies to help enforce company law requirements. This will help weed out non-compliant companies continuing to trade with an unfair commercial advantage over compliant businesses.

The outcome of the consultation phase on tax simplification may still change how or whether some aspects are implemented but it seems certain that the broad outline of changes will go through.

For small businesses this should reduce complexity and make it easier to pay tax. You’ll pay tax more frequently based on your business’s actual income. You may end up paying less in tax, penalties and interest. However paying tax more frequently may require you to keep a closer eye on cash flow to keep money coming in to pay the bills. If you fail to stay aware of your tax obligations you may end up paying more tax. It will be important to ensure the accuracy of the data input into your business software, especially if you plan to make use of your accounting software to pay income tax under the proposed changes. We can assist you with regular monitoring and checking your systems are accurate and fit for purpose.

Tax Pooling

Tax pooling is a service designed to reduce interest costs and provide payment options for provisional taxpayers.

How does it work?

For underpaid income tax, you can settle what you owe IRD by paying through a tax pooling intermediary such as Tax Management NZ (TMNZ) at an interest cost lower than the interest IRD charges on underpaid tax.
The payment you make is essentially a purchase of tax that TMNZ paid to IRD on the original date the provisional tax was due.
As this payment is date-stamped, IRD treats the tax as paid on time once it has processed the transfer from the tax pool to your IRD account. Any late payment penalties and interest showing on your account will be reversed once this happens.

When might this be useful?

Tax pooling can be used if you have underpaid income tax for the current tax year (2017) or the one just completed (2016).

Is tax pooling secure?

Tax pooling intermediaries are registered with IRD and operate under legislation set out in Income Tax Act 2007 and Tax Administration Act 1994.
The system was proposed by IRD so private markets could provide ways for provisional taxpayers to manage their income tax obligations and reduce their compliance costs.
The tax pool accounts operated by tax pooling intermediaries are held at IRD and managed by an independent trustee. The independent trustee also oversees the bank accounts in which your payments are made.

Timeframes for using tax pooling

Tax pooling gives you an extra 75 days past your terminal tax date to pay what you owe IRD. So, if you have a 7 April terminal tax date, you have until 15 June to settle underpaid provisional or terminal tax liabilities for the 2015 tax year. For underpaid income tax relating to the 2016 tax year, you have until mid-June 2017.

What to do next

Contact us if you would like to discuss tax pooling as an option to clear up your underpaid provisional tax debt.

Beware: Online Attacks on Your Business

At first there was phishing, a practice whereby scammers would hack into computer systems to obtain passwords, PIN numbers, credit card details and even steal peoples’ identities.
The latest phenomenon, though, is known as whaling and it targets senior management in large organisations – targeting of the ‘big fish’ – with the sole purpose of scamming money from businesses.
Rather than infecting computer systems with malware, the whaling scammers create fake emails to administrative personnel, instructing payments to be made, purportedly being sent from the CEO or CFO of the organisation.
The attacker masquerades as someone in an organisation who has the authority to instruct that payments be made urgently, commonly using the type of language that the purported sender would typically use.
The whaler hacks into the senior corporate officer’s mailbox to determine how emails giving instructions would normally be worded, using typical colloquialisms and tone so as to avoid arousing the suspicions of the recipient.
Upon receipt of an email from the CEO or CFO instructing that an urgent payment be made, frequently the recipient will follow the instructions without question, particularly if the message does not appear out of the ordinary.
Unfortunately anti-virus software and email filtering systems do not necessarily prevent this practice from occurring because it does not involve the installation of malware.
To avoid becoming a victim, it is imperative that finance and administration teams be made aware of the threat and to have instructions in place that emailed payment instructions should always be verified with the purported sender of the message.

Legislative Changes

Employment law changes

• Zero hour contracts: From 1 April 2016 all employment agreements must now clearly set out any hours you and your employee have agreed upon. If you prefer flexibility you don’t have to agree to set hours, but you must give them at least some guaranteed hours of work.
• Compensation rules for cancelled shifts: From 1 April 2016 employment law changes introduce compensation for workers whose shifts get cancelled without reasonable notice. Details of the period of notice and compensation rate must go into their written employment agreements. What is reasonable in regards to notice and compensation may vary depending on the nature of your industry, the impact on the worker and their working arrangements. From 1 April, you have 12 months to update your existing employment agreements to include details of the notice you’ll give and the compensation you’ll pay if you cancel a shift.
• Minimum Wage: From 1 April 2016 the adult minimum wage is increasing to $15.25 an hour, with the starting-out and training rates also rising to $12.20 an hour. You and your staff can agree to any wage above the minimum rate, and you will need to update your employment agreements to reflect any wage changes.
• Paid Parental Leave: From 1 April 2016 paid parental leave increased from 16 to 18 weeks and more people are now eligible.
• Record keeping: From 1 April 2016 new employment standards legislation requires employers to be able to produce a record of the number of hours worked by employees each day in a pay period, and the pay for those hours. This should be in an easily accessible format on request from an employee or from a labour inspector. Labour inspectors will now have the power to issue infringement notices for clear-cut breaches of the obligations to keep required records.

Health and safety act

The Health and Safety Act 2015 came into effect on 4 April 2016. The new law says everyone must play a part in working in a safe and healthy way. You must also do what is ‘reasonably practicable’ to manage health and safety risks at work – this means doing what a reasonable person would do in your situation to find workable ways to eliminate or minimise risks. The Act also introduces new penalties for infringements of the act, so it’s important to get it right.

Points to Note

Changes to land sales could affect you

Are you selling residential land? From 1 July 2016, a new withholding tax – residential land withholding tax (RLWT) – may need to be deducted from a property sale/disposal where the property being sold/disposed of is in New Zealand and meets the definition of ‘residential land’, and the vendor:

• acquired the property on or after 1 October 2015, and
• has owned it for less than two years before selling or disposing of the property, and
• is an offshore RLWT person

Obviously, this affects non-residents. Less obviously, an ‘offshore RLWT person’ includes New Zealand resident companies who have shareholdings of 25% or greater held by foreign persons, and trusts where more than 25% of the trustees are foreign persons. Just because your business is New Zealand company, it doesn’t mean that you will not be caught by these new rules. It is possible for certificates of exemption to be applied for affected taxpayers. Please contact us if you think this may affect you.

Use-of-money interest rate change

Effective 8 May 2016, the use-of-money interest (UOMI) rates on underpayments and overpayments of tax changed:

• Underpayments are now 8.27% down from 9.21%
• Overpayments are now 1.62% down from 2.63%

Rates are reviewed regularly to make sure they are aligned with market interest rates.

Non-resident businesses and GST

From 1 October 2016, non-resident businesses that meet certain GST requirements will be required to charge and return GST on any services they supply to customers in New Zealand. This includes businesses providing online services such as online gaming, gambling, video streaming and music streaming services.

Due to GST being charged New Zealand customers may find an increase in the cost of the online supplies purchased from 1 October 2016. Examples of supplies/services can include supplies of digital content such as e-books, movies, TV shows, music and online subscriptions as well as online supplies of software such as apps, games and word processing software.

New Zealand GST-registered businesses will not be subject to GST if you are buying supplies from non-resident business as long as the supplies are part of your taxable activity. Non-resident businesses will treat the recipient as not being a GST-registered business unless the recipient notifies the supplier that they are registered for GST, or provides the supplier with their GST number or New Zealand business number.

If you have any questions surrounding non-resident businesses and GST please contact us.