The Trustee Act in New Zealand was enacted in 1956 and trust law since that date has evolved considerably as a consequence of numerous decisions by the Courts. There is now a Bill before Parliament that, subject to the Governments schedule, may well be passed into law later this year. There are many changes proposed of which some are quite significant from a practical perspective (quite apart from the legal perspective). The key changes that will affect many of Ecovis clients are summarised below.
The above is a very brief outline of the proposed changes that will inevitably have a significant impact on the administration of the many thousands of family trusts. Some of the proposed changes will likely create difficulties in many family situations and in turn add to administrative complexity. It is almost certain that given the more onerous obligations imposed on trustees that many existing trustees will seek to resign. Additionally there are many trusts settled in New Zealand with just a single asset such as the family home and consideration needs to be given to whether such trusts are worthwhile continuing with. Ecovis KGA does offer a professional trustee service so contact any of the directors if you wish to discuss any aspects of your trust with us.
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Many people are registering on Air BNB and are earning additional income from letting out spare space in their homes, but we doubt that when Brian Chesky and Joe Gebbia came up with the idea that they gave any thought to potential global tax consequences.
If you are receiving income by renting out your home, a room or holiday home, it will be subject to income tax and possibly GST.
Rental income of any sort is taxable under the Income Tax Act and deductions relating to that income are allowed. The deductions are sometimes limited under the apportionment rules or Mixed Use Asset Rules.
Air BNB has taken off worldwide and can be a good additional income earner, but bear in mind that this income is subject to income tax and we recommend that you keep records of all your income and expenditure to provide to your accountant at the end of the year.
The expenses you can claim when renting out your holiday home on Air BNB will be subject to the Mixed Use Assets rules with which most of you will be familiar but if not please get in touch with us to clarify them for you.
The expenses you can claim when renting out a room in your private home or the entire home itself, will be subject to the apportionment rules.
Most people are unaware that the income received from short term rental income qualifies as a commercial undertaking and is considered a taxable activity under the GST legislation. (In most cases a B&B operation is considered a commercial dwelling).
The threshold for GST registration is $60,000 per annum before any deductions of commission or other expenses. In the case of a Trust or Company ownership, this also includes income “derived” from private use at market value.
This means that not only will the income be subject to GST but your home will be caught in the GST net and the property can be subject to GST when sold or when the B&B operation ceases. GST will be calculated on a portion of the sale price or market value but the input adjustment is limited to a portion of the original cost of the house.
When deciding to use your home as a B&B, we recommend that you contact us to discuss the Income tax, GST and ownership implications.
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Some business owners run the risk of jeopardising their family assets and finances because they do not understand their legal obligations as a company director fully.
The benefits of trading through a limited liability company are well documented and we would seldom advise trading under any other structure but just because you have a limited liability company it does not mean that you are invincible.
Limited liability does not mean no liability.
Directors are charged with the stewardship of a company and their actions (or lack thereof) can lead to them being held personally liable for certain debts and losses of the company on the basis of a breach of their stewardship duties.
One of the landmark New Zealand precedents is found in the case of Mason & Anor as liquidators of Global Print Strategies Ltd (in liq) v Lewis & Ors. In that case Mr and Mrs Lewis were minority shareholders and directors in a company that was run by a third party who was not actually a director. When the business failed and liquidators were appointed, it was discovered that Mr and Mrs Lewis had not been as diligent in their stewardship duties as the Court believed they should have been, tending instead to accept explanations from their business manager rather than questioning and drilling down into the information.
They protested to the Court that they were minority shareholders and therefore “sleeping directors” but sadly for them no such concept exists.
A director who allows a company under their stewardship to be run in such a manner as to create or increase the risk of significant loss to its creditors could well be guilty of reckless trading and as such could be held personally liable for the losses suffered as a result of that trading.
We have, over the years, seen people taking on the role of a director to help a family member or because they thought it was the right thing to do at the time, without understanding the onuses upon them. Some common mistakes directors of small and medium sized enterprises make are:
The onus of ensuring that directors’ duties are met falls squarely onto the shoulders of the directors themselves. Good corporate governance is essential, no matter how small the business is. Frequently in the case of small companies the directors allow their roles as directors to become blurred with their operation role as an employee and they should guard against that.
Every director would be well served having a sign on their desk that reads “the buck stops here” and the responsibility for keeping the company on the right track, thereby reducing the risk of loss to the various stakeholders, is that of the directors.
If you have any concerns about your role as a director in your own company or in respect of any other boards on which you serve, we strongly recommend that you have a chat to us about your duties and how you can improve your governance practices.
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Whether you are in business as a construction contractor or you are having or contemplating having construction work carried out for you, you need to be aware of the intricacies of paying or being paid for construction work. Recent first-hand experience in the Court of Appeal has been a timely reminder of the processes that need to be followed.
When the Construction Contracts Act 2002 (the CCA) came into force on 1 April 2003, it reformed the law relating to construction contracts and, in particular, sought to change the way in which cash flows occur in the construction industry by facilitating regular and timely payments between the parties to a construction contract.
Under the CCA, parties to construction contracts may agree to any terms and conditions regarding the number of payments, their frequency, the amount of each payment and the dates when each of those payments becomes due.
Since 1 December 2015, under the Construction Contracts Amendment Act 2015, the statutory right to progress payments and the default payment provisions in the CCA for calculating the amount of a progress claim and the due date for payment apply to all construction contracts entered into or renewed on or after that date.
The way in which parties to a construction contract must work in the context of payments is that the payee must make a payment claim and the party liable for that payment, the payer, responds by way of a payment schedule if they disagree with the claim.
Payment Claims are formal demands for payment but to be valid a payment claim must comply with the following mandatory requirements:
A payment claim must be accompanied by a written notice outlining the process for responding to the claim and explaining the consequences of not responding if payment of the claimed amount in full is not made by the due date for payment.
A payer who receives a payment claim under the CCA and does not agree with the way in which the payee has calculated the payment claim, must respond by providing a payment schedule. A payment schedule must:
A payment schedule is intended to inform the payee as to the amount the payer proposes to pay on the due date for payment and the payer’s reasons for any difference between the scheduled amount and the claimed amount such that the payee can make an informed decision as to whether or not to pursue the unapproved amount in an adjudication.
If the scheduled amount is different from the claimed amount the payment schedule must also indicate:
A payment schedule must be served on the payee within 20 working days of receipt of the payment claim unless the parties have agreed to a different period in their contract. If no payment schedule is provided within the mandatory period, the payer becomes liable to pay the payee the whole of the claimed amount on the due date for payment, whatever the merits of the claim.
This may all appear simple and probably is in the case of dealing with good building contractors who have proper systems and everything is underpinned by a robust contract.
However, sometimes the information provided by both the payee or the payer can be subjective and mediators or even the Courts will be required to determine whether the payment claim or the payment schedule complies with the criteria.
We recently acted as liquidators of a construction company that had engaged with a client to renovate a commercial property. The parties had not concluded a contract so there was doubt around what price was to be charged and on what terms payments were to be made.
Some 6 months into the contract, the builder rendered an invoice for work undertaken and it stated “This is a Payment Claim Under the Construction Contracts Act 2002”. The customer, however, being dissatisfied with the progress had already enlisted a quantity surveyor whose opinion held that the client was being overcharged.
The client responded to the payment claim with a somewhat ambiguous and poorly worded email, making reference to the quantity surveyor’s report and suggesting that the invoice be revisited, but did not necessarily meet the defined criteria to be a payment schedule.
Prior to going into liquidation the construction company issued proceedings and the matter came before the Court. At the heart of the issue was whether the payment claim met the criteria set out in the CCA.
It was found by the Court, probably because of the lack of any contractual background, that the payment claim did not meet the statutory criteria. While the payment schedule equally did not meet the criteria laid down in the CCA, without a valid payment claim, the payer was absolved from his obligations.
The moral of the story here is that if you are a construction contractor, make sure that that your payment claims are sufficiently detailed and can be reconciled to the construction contract. If you are the client of a construction company and you disagree with the claim submitted to you, make sure that you respond properly with an accurate and true payment schedule within 7 working days.
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On 16 February, the Australian government introduced draft legislation to impose GST on low value goods imported by Australian consumers. Currently, imported goods with a customs value of A$1,000 or less (“low value imported goods”) are not subject to collection of Australian GST.
From 1 July 2017, non-resident sellers of low value imported goods will have to register and charge GST to non-GST registered Australian customers, if their total Australian sales are A$75,000 or more annually. In some situations, operators of electronic marketplaces and entities that assist Australian consumers to acquire goods from overseas (so-called “re-deliverers”) will be deemed to make the supply and will thus become liable to account for the GST.
If this sounds like a slice of your business, you will be required to register for Australian GST, charging Australian GST (currently 10%) and remitting it to the Australian tax system. This applies whether your customers purchase goods from you online, over the phone or in person in a retail outlet here where your business ships the goods over to Australia. It applies whether the goods are physically here in New Zealand or sourced elsewhere overseas.
For New Zealand businesses exporting low value goods to Australia, the Australian Taxation Office (ATO) is talking about a GST registration process whereby you elect to be a ‘limited registration entity’ and return GST that way.
Along with registering for GST, you will need to look at how your software and record systems are set up and rethink your pricing and marketing.
The Bill hasn’t been passed yet but it looks as if it will. So, if you sell low value goods to Australia and your GST turnover of low value goods sold into Australia is over or close to $75,000, please contact us to talk about how this might affect your business.
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The Government announced on 24 January 2017 that the minimum wage will increase by 50 cents to $15.75 on 1 April 2017. The starting-out and training minimum wage rates will increase from $12.20 to $12.60 per hour – remaining at 80 per cent of the adult minimum wage.
Employees have to be paid at least the minimum hourly wage rate for every hour worked.
Another part of the package of changes applying from the 2018 income year (i.e. from 1 April 2017 for standard balance date taxpayers) is to remove use of money interest from the first two provisional tax instalments (for those who pay in three instalments) and who continue to use the standard method to calculate and pay provisional tax (commonly referred to as the ‘uplift method’).
Businesses (including companies) and individuals with residual income tax of less than $60,000 and paying provisional tax in three instalments using the standard method will not be subject to use of money interest.
Currently close companies (such as LTCs and QCs) providing a motor vehicle for the private use of shareholder-employees must pay FBT on the value of the benefit provided. This value is based on the availability of the vehicle rather than its actual private use and this means higher FBT compliance costs for close companies.
New option for close companies
The recently introduced legislation changes this for the 2018 tax year (i.e. from 1 April 2017 for standard balance date taxpayers). Under the new rules close companies which provide one or two vehicles to shareholder-employees could elect to use the motor vehicle expenditure rules instead of paying FBT. This would mean that, like sole traders and partnerships, close companies could measure the business use of a motor vehicle and calculate the tax deductions allowable for motor vehicle expenditure based on business use.
New method for calculating business use to claim deductions
Also introduced is a new simplified method of calculating business use for vehicles. The new option would allow you to choose to calculate your business usage and resulting deductible expense differently. The new method does not have a ceiling (currently the ceiling in place is 5,000 kilometres of business use).
What you need to know
If you are self-employed or if you operate through a close company and this applies to you, you would need to know the total mileage travelled each year and be able to work out what proportion of that is business use.
The actual requirement would be for you to keep a vehicle logbook for three months every three years.
When it comes to calculating the tax deductible amount, the calculation is ‘two tier’:
To gear up for the change, at close of business on 31 March, record your odometer reading. Diarise to do the same thing next year. You want to be able to tell us the total number of kilometres travelled in the tax year when you bring in your records. And, sometime during the year starting 1 April 2017, keep a logbook for each vehicle for a three-month period to record mileage, costs and when the vehicle is being used for business or private purposes.
If you’re in any doubt as to whether this affects you, please contact us.
There is also a new alternative option for calculating home office applying from 1 April 2017 (for standard balance date taxpayers). Under the new option, home office deductions can be determined by using a 2-step calculation. The first step involves taking the ratio of the area of the premises used for business purposes to the total area and multiplying this by a specified rate set by the IRD. The second step then requires the mortgage interest, rates and rent paid for the year to be multiplied by another specified rate set by the IRD and adding this to the amount calculated in the first step. Depending on your circumstances, this new option may be beneficial to you. If you have any questions please contact us.
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Work through the points below to straighten things up for the end of the tax year. Ask us if you would like more information.
|Bad debts||Write bad debts off in your debtor ledger before balance date so you can claim a deduction. Make sure your records show you have taken reasonable steps to recover the debt prior to write-off.|
|Employee expenses||You can claim deductions for holiday pay, bonuses, redundancy payments, long service leave etc., if you commit to them before year end and pay them within 63 days of balance date. Check holiday pay has been calculated correctly.|
|Expenses||Can you pre-pay expenses such as stationery, postage and courier charges before 31 March? You may be able to claim for them. Check with us. There are limits to how far some prepaid expenses are claimable, such as on rent, insurance, plant and equipment maintenance contracts, travel and accommodation.|
|Fixed assets||Are you still using all of them? Can some be written off?|
|Discounts||If you offer prompt payment discounts to debtors and maintain a discount reserve, this may be deductible. Make sure your records are clear. In the first year a deduction of the actual discount percentage is allowed. In subsequent years, the deduction is calculated as an approved percentage. Different rules apply if the credit period offered to customers is more than 93 days.|
|Repairs/maintenance||Complete planned maintenance or repairs before year end for a tax deduction. Ask us if you aren’t sure whether the expenditure is classified as repairs and maintenance (which would be deductible) or as a capital expense (which wouldn’t).|
|Stocktake||Dispose of obsolete stock by year end or write it down to its net realisable value (the lesser of cost or market value). If your stock is worth less than $10,000 and turnover for the year less than $1.3m, you won’t need to include your stock movement for tax purposes.|
|Vehicles||Don’t forget to note your odometer reading at year end. If you keep logbooks noting business and personal use, mileage and costs, ensure these are all in order.|
|Credit notes||Look for credit notes issued to customers after balance date but related to sales made prior to balance date. Note these so you can reduce your taxable income for the current year.|
|Increased income||Is this year’s income a lot higher than last year’s? If so let us know. It might be a good idea to consider buying tax from a tax intermediary to top up your provisional tax.|
|Retentions||Check contracts for the terms on retentions owing. Have you invoiced retentions but they are not payable till work is complete in a subsequent tax year? They won’t count as assessable income for this year. However, If they are payable this year they are assessable income. Note retentions you have invoiced which are not receivable till the next tax year.|
|Dividends||Review planned dividend payments. Your imputation credit account must be in credit at 31 March or penalties arise. Contact us before 31 March so we can help you.|
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Inland Revenue are rolling out other changes to how New Zealanders file and manage their GST as part of ongoing business transformation. More than half New Zealand’s businesses now file their GST through Inland Revenue’s secure online service myIR, or direct from their accounting software. If this includes your business, you may have noticed there’s a new myGST tab on your myIR account. This will provide access to all your GST information.
Taxpayers are now able to use this to register for GST, register as a preparer of tax returns, amend GST returns and accounts, file and pay GST at the same time, set up payment plans, and track GST payments and refunds online.
This is on top of the recent changes for some taxpayers who are now able to prepare and send GST returns to Inland Revenue from their accounting software.
If you would like to talk about how your GST is currently being managed and how the changes might work in practice for you, please contact us.
It is now compulsory for Inland Revenue to provide GST refunds by direct credit to a taxpayer’s identified account, resulting in faster GST refunds. Obviously it’s important that Inland Revenue has your correct banking details. If you would like us to confirm they have your current account details please let us know.
From here on, Inland Revenue will only make GST refunds by cheque if they do not have a customer’s bank details or if there are extenuating circumstances, such as hardship.
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