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If, at the beginning of 2016 you had said that Great Britain would be staring at an exit from the EU and that America’s President-elect was Donald Trump most people would have asked what you had been ingesting. Yet, here we are in November looking at exactly that scenario.
What does it all mean for New Zealand?
In reading and listening to a great deal of commentary on both surprise election/referendum outcomes, it is clear that the voters were fed-up with the status quo and wanted to see changes happen. Sadly for them though, it is realistic to presume that both the Brexit proponents and Mr Trump are going to find it difficult to deliver on all the pre-election rhetoric and promises.
The markets reacted very quickly and adversely on the back of both outcomes and while the Pound has not bounced back to its pre-Brexit levels, all other markets seemed to settle themselves down equally quickly once the knee-jerk reactions waned.
What a future Trump Presidency and an EU without the UK will actually look like remains to be seen and only time will tell. Notwithstanding some of the pre-election rhetoric Mr Trump is, at heart, a moderate and it is unlikely he will bring about radical change for only change’s sake. Already he is presenting a picture of greater calm and stability than he did during the campaign.
Also, as time passes and both Britain and Europe work out the finer points of Brexit the sting of the initial reaction will fade and it is likely that the ultimate, long term effects will not be as dire as the Stay-faction has predicted.
We are geographically insulated down here in the bottom right-hand corner of the world and New Zealand has created strong trading links within Australasia which, while we are all part of the global economy, could also insulate us economically from any adverse fall out in the UK and the USA.
While the doom merchants are predicting global strife and economic fall-out on both sides of the Atlantic, we cannot really see that happening and, instead, New Zealand business should avoid an attitude of failing to look for opportunities in those markets for fear of the early jitters we have seen. Kiwi businesses should be looking at both events as providing opportunities that did not previously exist.
Clearly President-elect Trump does not like the TPP and it will probably be consigned to scrap heap, but that said, he is not alone in his dislike of it; some demonstrations right here in New Zealand made that quite clear. It is unlikely that there will not be some other trade arrangement negotiated and as part of the trans-Pacific community we will undoubtedly be part of that in the future, quite possibly on better terms than those negotiated in the TPP.
Once, New Zealand was the UK’s pantry until the EU put paid to that situation. Who is to say that a UK exit from the EU will not create greater export opportunities for our primary industries? A comment recently made by someone living in the UK was that they are looking forward to New Zealand lamb and dairy products being more freely available to them again.
In short, we can all get fearful of the results of those two elections or we can look for whatever opportunities present themselves and to take advantage of them.
Only time will tell whether the UK will suffer badly from a Brexit or if Donald Trump will be a bad president who wreaks global havoc but in the meantime we should all be mindful of our strong economy, the fact that we consistently punch above our weight, that we have a stable government and we are well placed to continue to grow our stature internationally, regardless.
We have no realistic control over wither outcome and we should thus embrace whatever opportunities come our way with a positive view of the world.
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Computers and being online are now a part of our every-day existence. Can you imagine a world where there is no ability to whip up a spread-sheet, send an email or perform a search for facts and figures at the touch of a keyboard? Some of us who have been around a while will remember those days when we used snail-mail and had to go to a library to look up facts in Encyclopaedia Britannica.
It is so much easier now, but that convenience comes at a price. When you go online you put yourself out in a big, wide global community and with that comes risk.
In a previous edition of Insight we warned about the practice of “whaling” online and now we further explore the need for you to protect your business and home computers from cyber-risks.
Today’s gangsters are frequently white collar types, or geeks lurking in darkened rooms who would not know one end of a semi-automatic pistol from another but, like their historical counterparts who employed brute force, they are well-resourced, organised, conscience-free and ruthlessly efficient at parting others from their money. Every year global cyber-crime costs businesses around a billion dollars and it is growing exponentially.
Recently our Prime Minister, speaking at a cyber-security conference, pointed out that in the past year there were over 850,000 reported instances of cyber-crime committed against New Zealanders, costing over $250 million. Some examples are whaling, as well as holding a company’s entire data-bank hostage and only releasing access upon payment of a ransom; not to mention industrial espionage that may include theft of your customer database.
It is a crime that is very difficult to combat and, unlike physical criminals whom you can keep out of your premises by beefing up security, the cyber-criminal is constantly evolving to the point where their techniques are outpacing the available customary cyber-security tools.
However, while cyber-crime is a very real risk it is like any other business risk and while it may not be possible to eliminate it completely, careful risk management strategies can help mitigate it to an acceptable level.
Cyber protection will come at a cost and the level of security a business can employ will be driven by the assessment of the risk and their available budget; but it cannot be ignored. Management needs to be aware of the very real risks associated with operating in the ether-world and to develop strategies to deal with attacks when they may occur.
Few New Zealand businesses will have the capacity to build and maintain an impenetrable firewall but having a sound planned response in the event of a cyber-attack is probably the next best thing. Consider what may happen if you are the subject of a cyber-invasion that seeks to hold you to ransom for access to your data. It may be as simple as shutting down the system and restoring the last data back-up once the risk has been removed. That pre-supposes you have a regular back up procedure in place (you may be surprised at how often that is not the case).
You should have an IT disaster recovery plan and cyber-security issues should be incorporated into it.
When your Board next considers risk management strategies, put cyber-security on the agenda and be sure that you have the capability to put cyber-risk mitigation strategies in place or go out and find the necessary resources to do so. The risk of having your data compromised could be as significant as losing your key customers or your star salesperson being poached by a competitor. The message is to recognise and mitigate those risks now before they cause you loss.
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We all cringe at the thought of losing money as a result of a debtor defaulting. Frequently businesses face this risk, particularly in times of economic downturn. As a general rule prevention is better than cure when seeking to reduce loss caused by bad debts.
Some preventative measures include:
There is no obligation to grant credit to anyone but giving credit can help you gain customer loyalty and is frequently an essential feature of doing business, but be careful. Try to make it a habit, if your type of business will permit, to assume you will be paid on the spot.
What to do if debtors do not pay:
What about the big customer who will not pay on time?
Small businesses can find their biggest customer is their worst payer; they feel they can’t afford to be too demanding, in spite of the fact they’re entitled to your money for risk of upsetting the customer. What can be done?
The answer is, again a function of prevention over cure and not to have one major customer that dominates your business. You will always be vulnerable while you let this continue.
Set a maximum percentage of total sales from any customer and do your utmost to see this is not exceeded. If your big customer goes broke it could take your business with it.
Notwithstanding the customer’s relative size and importance to you, you cannot afford to let their tardy account management compromise your cash flow so be prepared to have that difficult conversation with them before the situation gets out of control.
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Many large suppliers seem to be using their terms and conditions in ingenious ways to take advantage of their customers.
It has been reported that TrustPower advertised unlimited broadband for $49 a month. However, customers needed to sign up for a minimum of two years and in the small print it stated that the second 12 months was to be charged at $79 a month.
We understand that the Commerce Commission has filed charges under the Fair Trading Act in this instance.
Magazine publishers sometimes include clauses in their terms and conditions which stipulate that if you do not state, expressly, that you do not wish to renew your subscription, the company will automatically renew it for a further year.
Our recommendation is that you be highly selective in choosing who you are going to allow to direct debit your bank account and under what circumstances. If there is a dispute, you might find it hard to get your money back. Automatic payments are preferable to direct debits as they grant you greater control over the outflow of funds from your bank account.
Another favourite is the burying of a personal guarantee in the terms and conditions of trade. Under new law, that is not sufficient to render the signatory to the document personally liable in the event of a default. For a guarantee to be enforceable it should be contained in a separate section, so be mindful of that if you are ever confronted by a supplier seeking to enforce an irregular guarantee.
Unfortunately, few of us have enough time at our disposal to read all the terms and conditions. About the best we can do is to be aware they can be badly skewed against the customer and when in doubt, seek appropriate advice from your Ecovis KGA consultant or your lawyer.
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When a business that operates through a limited liability company sells, resulting in a capital gain, it is very tempting for the shareholders to simply grab the funds, as they perceive them to be theirs.
This is not technically correct; the funds belong to the company and need to be accounted for properly or there could be some rather severe adverse tax consequences for the company and the shareholders.
Unless the shareholders are owned money, the balance of which equates to or is greater than the net proceeds from the sale of the business, care must be exercised in paying out the funds.
Where a capital gain has been recorded, represented by excess cash, unless the company is a Look-through company (or one of the old qualifying companies) the cash must remain in the company until it is wound up.
If the shareholders simply take the excess cash it must be treated as a loan, which is likely to create an overdrawn shareholder current account and if interest is not charged on such debit balance a deemed dividend will be created, thus turning a capital profit into a taxable receipt.
The solution is for the shareholders to execute a special resolution upon settlement of the sale, resolving that the company should be wound up. Even if it takes some time to see through the actual winding up formalities and the filing of final tax returns, the excess cash (after meeting all liabilities) can be paid out without adverse tax consequences. The reason is that once the special resolution has been passed, all actions taken are deemed to have been taken as if the company is in liquidation.
The actual winding up can be done in the form of the so-called short-form liquidation or by following the formal process of appointing a liquidator. The former involves informing the Registrar of Companies that the company has ceased trading, that the shareholders have resolved to wind it up and providing the Registrar with a clearance from the IRD that stipulates all tax obligations have been honoured.
Where you are contemplating a business sale discuss these options with your Ecovis KGA advisor and make sure that you don’t end up paying tax where you don’t have to.
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From the beginning of December all New Zealand banks will be changing the way they process domestic payments. Instead of electronic payments being batched and processed overnight, they will be paid from the payer account to the payee in real time.
The obvious advantage for recipients of payments is that they will have access to their cleared funds on the same day of payment; probably within the hour in fact and for payers they will have immediate confirmation that their funds transfer has gone through.
However, it also means that greater care needs to be exercised by payers as it will be more difficult to recall incorrect transfers than it is at present. Presently, a submitted payment batch can be cancelled or amended right up until the time it is processed but because future processing will happen in real time such cancellation or amendment will not be possible.
Another point to remember is that for a payment to be processed there will need to be sufficient funds in the account or an adequate overdraft facility to cover the payment. Presently funds will be transferred and it is only the next day that the bank assesses whether there are sufficient funds to meet the payment. Thus, if a deposit were to be made overnight, the payment will go ahead even if there were insufficient funds available at the time of instruction.
Under the new system payers will not be able to rely on deposits happening overnight to clear their payments; if there are insufficient funds available at the time of the payment it will fail and a dishonour fee may be charged.
The same applies to automatic payments which are presently processed only at 10:00 pm on the date of the payment. Going forward they will be made much earlier in the day on the date of payment.
What this means for businesses is that they will have to manage their cash proactively, ensuring that there are available funds to meet outgoings to avoid embarrassing dishonours that will incur a fee.
Also, you may want to consider what time of the day you want to process large and important payments such as payroll. If you are expecting cash inflows on the day of the payment, you may want to delay the processing until those incoming funds have cleared. In addition remember that direct debts and automatic payments will go out much earlier on the payment date.
When you’re entertaining clients or colleagues, some entertainment expenses are tax deductible while others aren’t. It can be tricky working out what’s deductible as a business expense and what isn’t.
The basic idea is that an expense is business-related if you spend the money to help your business earn income. Most business-related expenses are fully deductible. If the expense doesn’t help your business earn gross income, it’s private and you can’t claim it as a tax deduction.
It becomes a little trickier when there’s an element of private enjoyment. You might think that the firm’s Christmas party for clients is a business related expense and should be fully deductible because it’s promoting your business, products or services. However:
Generally speaking, if there’s an element of private enjoyment, the expenses (in addition to the food and drink) associated with events where you entertain clients and/or staff will only be 50% deductible. For instance, this would include the hire of crockery, glasses, waiting staff and music.
There are exceptions. Entertainment supplied for charity is 100% deductible. For instance if you throw a Christmas party for the children’s ward at the local hospital, this is fully deductible. Entertainment enjoyed outside New Zealand is 100% deductible. If you take the team to the Gold Coast for Christmas (lucky them) it will be fully deductible. However, if they contribute towards the cost of their airfares (or anything else), you will need to reduce your expense claim by the amount of the contribution.
Functions and events
Some entertainment expenses are fully deductible but some are not. Use these examples as a guide.
If that’s not enough to think about, you will need to make a GST adjustment for entertainment expenses which are 50% deductible. This adjustment will be required to be made at the time your income tax return is filed. Of course, we can help and advise you on this.
The rule of thumb with gifts is that if they consist of food or drink, you can only claim 50% of the expense as a tax deduction. If you are giving out gift baskets or hampers and some of the contents are food or drink, but not all, the food or drink items are 50% deductible but the other gift items are 100% deductible. When you come to claim the tax deduction, you will need to apportion the expense between the 100% deductible items and the 50% deductible items.
If your Christmas giving includes gifts to clients, remember that some gifts will be fully deductible while others will be only 50% deductible. Use these examples as a guide.
FBT on gifts and entertainment
If you are giving gifts to your team you may also be liable for fringe benefits tax. There’s a $300 exemption from paying FBT per employee per quarter so if the value of the gift is less than $300 you may be exempt. However, if the value of total benefits for an employee goes over $300 for the quarter year (and provided the total value of all benefits doesn’t exceed $22,500 for the year), the full value of the benefits is subject to FBT.
As for entertainment events, if you invite your team to an event that qualifies as a business-related entertainment expense which is only 50% deductible, you are not liable for FBT as well. So if you are entertaining employees at a party or you’ve hired a launch or holiday accommodation and the expenses for that are only 50% deductible, it isn’t subject to FBT. (On the other hand, if the event is being held outside New Zealand, it will be subject to FBT.)
There are exceptions to this that make it a tricky area so if you’d like more information on whether a specific event you’re hosting is 50% deductible but may also be liable for FBT, please contact us.
We’ve talked before about how changes to tax law around buying and selling property might affect you. Now that the changes are in operation and the bright line test is being applied to determine tax liability, an issue highlighted only recently might leave you exposed.
As we’ve discussed before, people who buy or sell a property within two years of acquiring it must pay tax on the gain. The main home is exempt and there are some other exceptions such as inheritance and relationship break-ups.
However, what happens when you have bought a house and land package off the plan but titles haven’t been issued yet and settlement is still 12 months off or more? Do you intend to move the asset into your family trust on settlement? If you have signed the purchase agreement in your own name but want to have the family trust settle the deal, it looks like you may be caught under the bright line test. Inland Revenue may deem your interest to have been disposed of within two years, in which case if there is a gain it will be taxable.
A spokesperson for Inland Revenue has commented that ‘in the case of a purchase off the plans, the house has never been used as the main home and therefore cannot qualify for the main home exemption.’ Inland Revenue have no plans at this time to review their position on this. If you think this might affect you, please contact us to discuss your tax position.
On 1 October 2016 changes to the Residential Tenancies Regulations came into force to reflect new standards on insulation. Standards New Zealand’s ‘Energy efficiency – Installing bulk thermal insulation in residential buildings’ provide extended guidelines for insulation installers and building owners.
This follows up on changes which took effect on 1 July 2016 requiring all rental properties to have ceiling and underfloor insulation by 1 July 2019. Landlords must now provide a statement in the tenancy agreement for any new tenancy commencing on or after 1 July 2016 about the location, type and condition of insulation in the rental home.
Landlords must now have working smoke alarms installed in all their residential rental homes. Replacement alarms that are subsequently installed need to have long life batteries and a photoelectric sensor. Hardwired smoke alarms are also permitted.
Expedited abandonment process
There is a new process for landlords to regain possession of their rental property if the tenant has abandoned the property. This enables a Tenancy Adjudicator to decide the case based on evidence landlords provide in their application. The process doesn’t allow for landlords to claim the bond, or costs such as rent arrears and damages. This would need to be done by further application.
It is now unlawful for a landlord to end a tenancy in retaliation where a tenant exercises a right under the tenancy agreement, relevant law, or by making a complaint relating to the tenancy. Tenants who take direct action against landlords will now be able to challenge an alleged retaliatory notice up to 28 working days after it has been issued.
A bill is currently before Parliament which has a section dealing with tax deductions based on mileage.
The calculation at present is easy. The rate is 72c a kilometre and the maximum number of kilometres you can claim for is 5000. The self-employed, only, will be allowed to continue to use this basis for calculating their business mileage.
The new system proposed will be a two-tiered system. You’ll have to use a logbook and keep it for three months once every three years. Those who have relatively high business mileage should take advantage of this change.
It’s probably easiest to explain the system with an example. X travels 30,000km for both business and personal running in one year. His tier 1 calculation applies to the first 10,000km. Fifty-five percent of his running costs are for business. This means he can base his claim for tier 1 on 5500km. If the rate were 75c a kilometre his claim would be $4125.
He’s still got 20,000km of mileage left. Supposing the tier 2 rate is 25c per kilometre, his claim is based on 11,000km which entitles him to another $2750. That makes a total claim of $6875, which is much better than the maximum available under the old rules of $3600.
The Government plans to bring in these new rules from 1 April 2017. The actual mileage rates are likely to be announced sometime after 31 March 2018.
This new system provides a more accurate way of calculating mileage, but it is going to add to the amount of record-keeping. You’re going to need to keep a record of the total number of kilometres you travel in each year. Make a diary note to record your odometer reading when you finish work on 31 March 2017. Then make another diary note to do the same on 31 March 2018 and so on. If you change vehicles, you’ll need to get your odometer reading before you trade in your old vehicle and then make a note of the reading on the new vehicle. We hope you’ve got a good memory for this.
If you have any questions about the new mileage rates please contact your Ecovis KGA consultant.
From 1 April 2017, the Government is proposing to allow contractors whose income is subject to withholding tax deductions, to choose their own tax rates.
Those who have typically been over-taxed might want to choose a lower rate. The minimum for New Zealand residents has been set at 10%. Others, who have a lot of year-end tax, might be more comfortable having higher deductions.
The maximum number of times you will be entitled to change your rate during the year is twice. After that, the payer will have to agree to your request to make the change. If you haven’t been complying with your tax obligations, you might not be allowed to choose your own tax rate.
Contractors to labour-hire firms
If you contract to a firm hiring labour, from 1 April 2017, the withholding tax deducted from your income will be at the rate of 20%. This will mess up your provisional tax payments from 28 August 2017 and the next two payments. Even if you are trading as a company, you will still have withholding tax deductions from income. You will be allowed to choose your own rate so long as it’s not less than 10%.
Voluntary withholding agreements
Some contractors don’t have to have withholding tax deducted from their income. As a consequence, they have substantial provisional tax liabilities. Some people prefer to have some tax deducted as they go. It’s proposed that from 1 April 2017 they will be entitled to require the payer to deduct withholding tax at a rate they choose, so long as it’s at least 10%.
If you have any questions about tax rates for contractors please contact your Ecovis KGA consultant.
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If you have a family trust, be fussy about recording trustees’ decisions. One problem that arises is taking money out of the trust for your own use. This can be:
It’s important to clarify these withdrawals. This is done by means of a trustee minute. If there could be any doubt about the reason for a transaction, be sure to prepare a trustee minute and make sure all trustees sign it before it is actioned.
Your ACC account could easily be wrong. Always check it. Typical areas where the wrong premium can be charged include:
Currently, you should not be paying ACC on earnings of more than about $120,000. Sometimes, people receive a PAYE salary and then a non-taxed salary on top of this. These are the type of people who can be overcharged.
Some activities are what is known as passive. However, the income from them sometimes sneaks into ACC files and is treated like earnings.
Rental income from a partnership is an example. If it is recorded in the tax return as partnership income, it can get through to ACC and be levied by mistake.
We read in a recent publication by another accounting practice that 30% of clients in a sample were paying too much ACC.
When it comes to claiming GST on expenses, tax law does not say anything about the need for a receipt. Claiming expenditure is perfectly simple. Generally speaking you can claim any expense which relates directly to deriving income.
If the IRD ever asks you to prove you spent the money, you need to be ready to do so. So it’s always advisable to get some form of written acknowledgement, such as an invoice, to support your expenditure. It’s a convenient way to provide proof to satisfy the IRD.
Incidentally, if you are in business and are registered for GST then you do have to have a “Tax invoice” for any payment you make of $50 or more, to claim the GST.
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