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Key Tax Changes taking effect in 2026 - what you need to know

Thu, 26 Mar 2026 03:02:59 GMT

As we enter the 2026–27 financial year, a number of confirmed tax and compliance changes are set to impact individuals, employers, and businesses across New Zealand. While 2026 is not a year of sweeping tax reform, several important adjustments will influence payroll costs, cash‑flow planning, and personal finances. Here’s a clear breakdown of what clients should be aware of.

ACC Earners’ Levy Increasing

From 1 April 2026 , the ACC earners’ levy will rise to 1.75% , up from the current 1.67%.
This affects all employees and self‑employed earners. Employers should budget for slight increases in payroll costs, while employees will notice slightly higher deductions from their earnings.

Minimum Wage Uplift

The adult minimum wage will increase to $23.95 per hour from 1 April 2026.
This change has flow‑on effects: raising holiday pay, ACC, and KiwiSaver contributions, and often triggering wider wage adjustments to maintain internal pay relativity.

KiwiSaver Default Contribution Rates Increasing

From 1 April 2026 , both employee and employer default KiwiSaver contribution rates will increase from 3% to 3.5% , with a further step‑up to 4% in 2028 .
Businesses should prepare now by adjusting payroll systems and forecasting the increased employer contribution cost.

Income Tax Brackets Staying the Same

Despite speculation, no new income tax bracket changes have been announced for 2026.
Personal tax rates, the company tax rate (28%), and GST (15%) remain unchanged for the 2026 year.

What This Means for You

While these changes are mostly incremental, they still impact payroll, wages, and personal budgeting. Reviewing cash‑flow and payroll processes early will help prevent compliance issues or unexpected cost overruns. If you’re unsure how these updates affect your situation, our team is here to help you plan ahead.

Important information for year end

Thu, 26 Mar 2026 03:02:16 GMT

As we draw close to the end of another financial year, to assist you with your end of year close off we have provided a list of things to do before 31 March , on 31 March , and soon after 31 March .

Before 31 March 2026

Bad Debts

Please review your Debtors Ledger for any bad debts. To claim a deduction for bad debts, the defaulting accounts MUST be written off your Debtors Ledger prior to the 31st of March 2026. It is not enough to actually reduce the amount of the debtors after balance date by the amount of estimated bad debts or unrecoverable amounts owing. In most accounting systems this means creating a credit note to the defaulting debtors account and coding it to the account code Bad Debts. If the original invoice included GST, then you can claim GST on the credit note.

Fixed Assets

Review the fixed asset register for items that have either been sold or scrapped during the year. The Fixed Asset schedule can be found in your previous years Financial Statements. If you need another copy, contact our office for a copy. Please ensure you have narrated the entries coded to fixed assets with enough information for us to determine what has been purchased and have copies of invoices and any related financing readily available for us.

Repairs & Maintenance

It's a good time to review what you have coded to fixed assets and repairs and maintenance. All assets costing less than $1,000 (excl GST) may be claimed as an expense in the year of purchase, amounts greater than $1,000 (excl GST) could potentially be fixed assets. Please ensure you narrate these well in your accounting system for us to reduce queries on the job.

Structures & Financing

It may be time to consider an alternative structure or financing method for your business. Now is the time to consider Companies, LTC's and Trusts. If you are interested please contact us.

Dividends

It may be appropriate to declare a dividend on or before 31 March. This may require top up income tax to be paid by 31 March 20266

On 31 March 2026

Trading Stock

Your stock (including work in progress) must be counted, recorded and valued at 31 March 2026. The trading stock rules require that you value at the lower of cost, net realisable value or market selling value. Remember to exclude GST from your calculations and prepare a written record of your stocktake.

Stock value less than $10,000

- if your total gross income for the year is $1.3 million or less; and

- you can reasonably estimate your stock on hand at 31 March 2026 to be less than $10,000 (excl GST), you can choose not to value your closing stock or to include any change in value.

Holiday Pay & Wage Reports

Some payroll software systems do not allow for printing reports subsequent to 31st March, so ensure you have the reports printed as close to the end of the month as practical. This is particularly important for clients who accrue holiday pay outstanding at balance date.

Shortly after 31 March 2026

Year End Bank Reconciliations

If you have a computerised cashbook (Xero, MYOB etc.) , when you receive your bank statement for 31 March 2026, ensure all transactions are entered for the year, perform a bank reconciliation to this date being 31 March 2026 and print a hard copy for your records.

PAYE Payments Due 5 th /20 th April 2026

If you intend to pay out Directors Fees or additional bonus / top up salaries to either your employees or shareholder employees, you will need to pay to the IRD the PAYE content of the payments by the 5 th or 20 th of April 2026.

Dividend RWT Payments Due 20th April 2026

If you intend to declare dividends on 31 March 2026 you will need to pay relative RWT content by 20 April 2026.

Interest RWT Payments Due 20th April 2026

If you intend to pay interest on loan accounts at 31 March 2026 you will need to pay to the IRD the RWT content of the interest by 20 April 2026.

3rd Provisional Tax Instalment Due 7th May 2026 (for 31 March balance dates)

The final instalment of 2026 Provisional tax is not due till after the end of the year. While this may be good for cash-flow, it could have negative implications if you want to pay a dividend this year. If you think this affects you, and you would like us to review your imputation credit account or have any concerns, please contact us.

PREPARATION OF YOUR 2026 ANNUAL FINANCIAL STATEMENTS & INCOME TAX RETURNS

Our Client Annual Checklists are available on our website at www.mcisaacs.co.nz under the "Financial Resources" tab, "Client Annual Checklists".

To simplify these checklists we have separated them out into the type of entity and provided specific ones if you have a rental property or mixed use assets.

2026 Business Checklist

2026 Personal Checklist

2026 Rental Checklist

2026 Mixed Use Holiday Home, Boat and Plane Checklist

These need to be completed and signed before we process your 2026 information. The accuracy and completeness of this information you provide has a direct influence on the time required to perform your assignment.

When you have compiled your financial records for us please remember to include the completed and signed Checklist(s). If you do not have access to our website and require a copy of the Checklists, please give us a call and we can email a pdf of them to you or we will post them to you, whichever you prefer.

2026 End of year checklists

Thu, 26 Mar 2026 02:47:31 GMT

Our Client Annual Checklists are available on our website at www.mcisaacs.co.nz under the "Financial Resources" tab, "Client Annual Checklists".

To simplify these checklists we have separated them out into the type of entity and provided specific ones if you have a rental property or mixed use assets.

Inland Revenue is taking a tougher stance on debt

Fri, 19 Dec 2025 23:38:46 GMT

Over the last six to twelve months Inland Revenue (IRD) has been taking a firmer stance when it comes to collecting overdue tax. This is in the form of increased liquidation action and enforced withdrawals directly from a taxpayer’s bank account.

Given the potential for IRD to take action it is more important than ever to engage with IRD, rather than put your head in the sand. Ideally, you can negotiate and enter into an instalment arrangement with IRD to clear the debt. The benefit of doing so is that IRD will hold off from taking action while the terms of an instalment arrangement are being met, and there is the potential for penalties to be remitted once the debt is cleared. However, entering into an instalment arrangement can be easier said than done.

Understandably, IRD takes the view that it should not be used as a bank to support a business that is unable to meet its obligations. This would provide an unfair advantage over competitors and would be unfair to those who do comply. Hence, IRD now expects businesses seeking instalment arrangements to demonstrate both their ability to meet proposed repayments and to stay current with ongoing tax obligations.

It is therefore not necessarily a question of whether the business has ‘any’ free cashflow to pay its tax, but whether it has sufficient cashflow to meet its future obligations, plus amounts that are already owed. If a business can enter into an arrangement to pay ‘something’ but will continue to fall further behind, IRD will likely decline the request and the business should therefore ‘fail’ rather than continue to trade without being able to meet its obligations.

A hard line will also be taken on PAYE and GST as these are regarded as Crown funds held in trust by the business until they are paid to IRD. Non-payment of employer deductions is a criminal offence. Penalties can include fines, imprisonment, and shortfall penalties of up to 150 percent. Company directors and officers may also be held personally liable if they are aware of ongoing non-payment.

A proposal to enter into an instalment arrangement will likely require the following information to be submitted:

how much can be paid weekly, fortnightly or monthly,
a statement of assets and liabilities,
forward looking budgets, and
cashflow forecast.

If specific transactions are anticipated that are relevant, such as equity from a new investor, IRD could ask for details of that transaction, such as Term Sheets, Sale and Purchase Agreement and details of the investor. Their purpose being to assess whether the transaction has a real prospect of occurring or not.

The IRD’s tougher stance highlights the growing importance of compliance and proactive engagement. Businesses should act early to manage their tax obligations, seek professional advice when needed and avoid using tax funds as working capital.

Depositor Compensation Scheme

Fri, 19 Dec 2025 23:36:45 GMT

As of 1 July 2025, the Depositor Compensation Scheme (DCS) has come into effect to protect the savings of individuals and businesses if a bank or other "deposit-taker" fails. Managed by the Reserve Bank of New Zealand, the scheme is designed to strengthen public confidence in the country's financial system and promote stability during times of economic stress.

Under the scheme, eligible deposits held with licensed banks, credit unions, and building societies are protected up to a limit of NZD 100,000 per depositor, per institution. This means that if a participating institution is unable to meet its obligations, depositors will be repaid up to the coverage limit.

The DCS covers common deposit products such as savings accounts, transaction accounts, and term deposits. However, it does not extend to investments such as shares, bonds, or managed funds (KiwiSaver and other superannuation schemes), nor does it cover deposits held with unlicensed or overseas institutions. The scheme will be funded by levies on participating financial institutions rather than taxpayers. This ensures that the cost of protection is borne by the industry itself.

By introducing the DCS, New Zealand joins many other developed countries that already have similar safeguards in place, giving people added confidence that their money is secure even in the event of a bank failure.

Are you paid a market salary?

Fri, 19 Dec 2025 23:36:44 GMT

With increased Inland Revenue (IRD) scrutiny, one of the issues on IRD’s radar is whether individuals associated with a company are deriving market salaries or not. The IRD’s concern in these scenarios is whether income is being taxed at a rate less than the top personal marginal rate of 39%.

For this purpose, two aspects are relevant – first, the personal attribution rules and second, the principles from the Penny & Hooper court case law.

The personal services attribution rules are legislated provisions within the anti-avoidance part of the Income Tax Act 2007. If specific tests are met, income derived by a company from personal services physically performed by an individual may be treated as derived by the individual. These rules apply if:

80% or more of the company’s income from personal services is derived from one buyer, and
80% or more of the company’s income from personal services is derived from work physically performed by an individual (or their relative) that is associated with the company, and
the individual’s net income for the income year is more than $78,100, and
substantial business assets are not required to derive the income. (“substantial business assets” are defined and broadly comprises assets with a cost of more than $75k or 25% of the company’s income from personal services).

In 2011, the Supreme Court ruled on the case of Penny & Hooper v IRD. The case involved two orthopaedic surgeons who operated through companies owned by family trusts and paid themselves salaries that were artificially low relative to the companies’ earnings from their own work. The Court accepted that trading through a company was legitimate but held that setting non-commercial salaries to divert personal exertion income was tax avoidance. IRD has expressed its view on how the Supreme Court’s decisions in Penny & Hooper applies in practice in Revenue Alert 21/01.

Although the above provisions are arguably focused on businesses that perform personal services, there is a risk IRD could assert individuals should be properly remunerated for their role regardless of the nature of the business. At the risk of taking it out of context, this view is inferred within the Revenue Alert where it is stated:

“The individual's contribution to the business should be properly reflected in the income returned by that individual - either through an appropriate salary or other taxable distributions to the individual.”

The lesson here is to be aware that there are two sets of provisions, one of which is prescribed in the legislation and the other is an IRD view based on case law. With any person’s view, there is a chance it can change and be applied inconsistently. If a salary looks low it may be worth adjusting it to stay out of the IRD’s firing line or having a reason in case it is queried.

FBT Changes

Fri, 19 Dec 2025 23:36:42 GMT

Earlier this year, Inland Revenue (IRD) released an officials’ issues paper titled “Fringe Benefit Tax – Options for Change”. The paper sought feedback on potential reforms to the FBT regime. The most notable proposals related to the application of FBT to motor vehicles, particularly utes. In the May 2025 Budget, the Government signalled support for the reforms. However, the Government later backed away from some of the proposed changes, most notably, those relating to utes.

Draft legislation has now been introduced to Parliament, and the changes are more in the nature of ‘tweaks’, as opposed to structural reform. The more notable changes are outlined below.

Gift cards: Currently, general practice is to treat gift cards as an unclassified benefit and subject to FBT. FBT applies to unclassified benefits unless a de minimis exclusion applies. That exclusion provides FBT is only payable on an unclassified benefit provided in a quarter if:

the total value of all benefits provided to that particular employee exceeds $300, or
the total value of all benefits provided to all employees over the past four quarters (incl. the current quarter) exceeds $22,500.

However, confusion arose after IRD published the view that PAYE applies to certain ‘open loop’ gift cards, and not FBT. An open-loop card is a general-purpose prepaid gift card, like a Prezzy card, that can be used at a number of different retailers.

From 16 April 2025 employers will be able to choose whether gift cards are subject to FBT or PAYE, and for FBT purposes they will comprise a “classified” fringe benefit and therefore no longer qualify for the de minimis exclusion. This change will mean tax will apply to the provision of gift cards to employees, whether under FBT or PAYE, and the de minimis exemption will no longer apply.

Frustratingly, this change is being backdated and therefore tax may need to be accounted for retrospectively if FBT has not been accounted for on the understanding that the de minimis applied. Hopefully the effective date will be changed or IRD will comment specifically on this point and what it considers an acceptable approach.

Reimbursements: Where an employer reimburses an employee for costs that would have been an unclassified benefit if paid directly by the employer, the employer can choose whether to treat the payment as subject to PAYE or FBT. This change will be effective from 1 April 2026. This option will only apply to unclassified benefits, not to classified benefits such as health insurance.

Global insurance policies: From 1 April 2026, a proposed amendment will give employers more flexibility in how they account for FBT on Global insurance policies.

The Bill clarifies that where companies have insurance policies covering a number of employees with the same or similar entitlements, the cost can be treated as a pooled benefit or allocated to employees by dividing the total contribution across the group.

Taxing the sun

Fri, 19 Dec 2025 23:36:40 GMT

If you or your friends or neighbours have solar panels on the roof of their home it is likely the excess electricity is being sold back to the retailer for a credit on the bill. It is also likely that not much thought has been given to whether that ‘credit’ is actually taxable, however Inland Revenue (IRD) has given some thought to it.

Technically, the credit is likely to comprise taxable income, which then leads down the ‘rabbit hole’ of what costs can be claimed against the income, e.g. depreciation on the solar panels, and a portion of rates, interest, house cleaning costs, etc.

Draft legislation released in August includes a proposed new income tax exemption for electricity generated at the home that is sold back to the grid. The exemption is to apply from the 2026–27 income year and is a pragmatic change to eliminate the need to calculate and return income by the general population, who typically derive income from salary or wages which are subject to automatic assessment by IRD.

The exemption will apply to income derived from the sale of excess electricity generated at a dwelling by a natural person. “Excess electricity” refers to power generated but not consumed at a dwelling, which is then supplied to an electricity retailer. The exemption does not impact payments or discounts provided by retailers for a person’s own electricity use.

A dwelling includes a residence and its associated structures or improvements but excludes commercial accommodation such as hotels or motels. Therefore, income from electricity generated at commercial properties will not qualify for the exemption. However, in most cases, it would be captured as part of the ‘netting’ of the income against the deductible electricity cost.

For farms, only electricity generated at the farmhouse or its immediate surroundings qualifies for the exemption, as this area is considered the dwelling. Income from panels on the wider farmland or other farm structures will remain taxable.

Of note, and somewhat unusually, the exemption only applies to natural persons (including tenants), the definition of which excludes individuals who are trustees. Hence, if an electricity account is in the name of a trustee who is not also a beneficiary, the exemption will not apply. In most cases, the power account will be in the name of the beneficiary / occupier anyway. But this is something worth checking to ensure taxable income is not ‘inadvertently’ being generated.

Don't forget the risk from within

Fri, 19 Dec 2025 23:36:35 GMT

Online scammers and phishing attacks have become extremely sophisticated lately. Hence, it is understandable that we are constantly warned to be vigilant and on the lookout for the next attack. But as focus shifts to looking outside the organisation, an eye needs to be kept on what is going on within the organisation. Internal fraud is often subtler, harder to spot early and may occur on a regular basis.

Smaller family run businesses can be more susceptible compared to large organisations because they operate in a ‘high trust’ manner by:

providing their employees with greater autonomy and authority,
using fewer internal checks and process controls, and
not using third party audit services.

The classic example is where the owner is busy running their business so they let their finance manager set up suppliers, approve payments and reconcile the bank, and plan on ‘checking later’. Red flags worth paying attention to include reluctance to share duties or take leave, unusual supplier or bank-detail changes, round-sum or duplicate invoices, late reconciliations and urgent payment requests that are outside the norm, e.g. during shutdown periods such as Christmas.

If you sense something is off, start with simple checks. Scan the supplier master list for fictitious vendors or unverified bank account changes. Review one-off payments to new payees. In payroll, look for “ghost” employees, duplicate bank accounts and payments to ex-staff. In expenses, test for inflated or split claims and identical descriptions posted after hours. Keep bank, GST and payroll reconciliations current and have someone independent review them.

Don’t assume ‘John’ or ‘Jane’ would never do it – as it can be the last person you would expect. The inevitable question is ‘why?’. Cressey’s fraud triangle is useful for putting it into context. It describes three factors that give rise to an increased risk of fraud if they exist simultaneously, as follows.

Motivation – this can arise from personal financial stress, medical events or unrealistic targets.
Opportunity - this can be in the form of weak controls, autonomy or minimal oversight.
Rationalisation - this is the self-justification behind the behaviour. A person might rationalise their behaviour to the point they do not consider it wrong. They might tell themselves it’s “only a loan” or they’re “owed” it.

After something ‘unusual’ is identified, it’s common to then realise all three existed.

To reduce the potential for internal fraud, try to do the basics right and implement procedures to balance the risk. Segregate duties so no one person can set up, approve and pay amounts. Where teams are small, use a maker–checker model with an external reviewer. Lock down supplier changes with call-backs to verified numbers and restrict who can edit vendor records. Use dual approval above modest limits and block changes to payee details after approval. Limit access with least-privilege permissions and multi-factor authentication.

Even when business ramps up, it’s important to stick to the clear policies and processes your organisation has in place.

Is your Christmas spirit tax deductible

Fri, 19 Dec 2025 02:21:18 GMT

Christmas is fast approaching and so is the time that businesses may reward customers and staff with Xmas functions and Xmas gifts. This article considers the deductibility of these expenses.

Fully Deductible

Gifts to clients are 100% deductible, provided they do not come within the Entertainment Rules (below). For example, gifts to clients of movie tickets, books or calendars would be fully deductible.

Entertainment Rules

The following is a list of the types of entertainment where deductibility is limited to 50%:

The cost of corporate boxes, corporate marques or tents
The cost of accommodation in a holiday home or time-share apartment
The cost of hiring a pleasure craft
The cost of food and beverages enjoyed in any of the three locations listed above
Food and beverages enjoyed on or off the business premises for a social event

GST on these expenses is also limited to 50%.

So gifts of beer, wine and food to clients will be 50% deductible, as will food and beverages provided at a Xmas social function with clients or staff.

However there is an exception where the benefit is provided to an employee and the employee can choose when and where to enjoy the benefit, or the benefit is enjoyed outside of New Zealand. For example, a meal voucher given to an employee would come within the FBT rules rather than the entertainment rules, as the employee can choose when and were to enjoy the meal.

FBT Rules

Gifts to staff are generally treated as a fringe benefit unless the benefit is covered by the entertainment rules. However, if the value of the gift is less than the FBT exemptions for employees and employers, then FBT will not be payable. These exemptions are:

$300 per quarter per employee (if the employer pays FBT quarterly); or
$1,200 per annum per employee (if the employer pays FBT on an annual basis); and
Total unclassified fringe benefits provided by the employer to all employees is not more than $22,500 per annum

Inland Revenue scrutiny

Sun, 28 Sep 2025 22:14:59 GMT

Imagine you are pulled over by a police officer and asked “were you speeding?”, however, your speedo is broken, so you’re actually not sure. That is how it can feel when Inland Revenue (IRD) notifies you of an audit or investigation. On the one hand you know it is ‘part and parcel’ of doing business, on the other hand it is the last thing you need.

From the outset, it is important to acknowledge that the person from IRD is a human being just doing their job. There shouldn’t be the need to stress or overthink the matter. But the process needs to be handled proactively and deliberately.

If a request for information is received, do not provide the information without first engaging with your accountant.

Typically, an initial information request is from a template that is not tailored to a particular business, industry or taxpayer. Hence, the requests tend to ask for a large volume of information, some of which may be irrelevant or immaterial.

For your accountant, engaging with Inland Revenue is an ordinary part of the job and it happens more often than you would expect. It is quite normal to contact IRD in response to the request to agree on how to approach the process, timeframes, information to be provided and meeting times etc. All of which might not be in line with the first letter received. The purpose is not to be ‘restrictive’ or ‘difficult’, but instead, open and transparent with a view to ensuring the process is as fast and efficient as possible.

In practice, IRD are also very understanding of working around the needs of the business itself. For example, if the business is subject to seasonal activity or ‘month-end’ processes, IRD is typically willing to flex the process to try to minimise any disruption.

If there is an initial meeting with IRD, consider giving a ‘presentation’ on the business. This could cover the legal structure, physical business operations, locations, number of staff, and the accounting function. A clear understanding helps minimise the number of follow-up questions during the review process, enabling a more efficient process.

It is important to be clear and concise. If the answer to a question is not known, state that there is the need to look into the matter further. Allow your accountant to answer items (verbally or in writing) that are more ‘tax technical’ in nature.

All going well, nothing material is identified for adjustment and the process concludes with a ‘tick of approval’ and comfort that you were not ‘speeding’ after all.

Investment Boost

Sun, 28 Sep 2025 22:14:55 GMT

On 22 May 2025, as part of the 2025 Budget, the Government introduced a new tax incentive called the ‘Investment Boost’, aimed at encouraging capital investment. It allows an immediate upfront deduction for 20% of the cost of an eligible asset. The new legislation applies from 22 May 2025.

The Investment Boost applies to a broad range of assets, such as tools, machinery, vehicles, improvements to farmland, aquaculture business, forestry land and the planting of listed horticultural plants.

In relation to depreciable assets, it needs to be new or used in New Zealand for the first time. Eligibility is based on when the asset is first used or available for use, hence if construction of an asset began prior to 22 May 2025, but the asset is not available for use until 22 May 2025 (or after), the investment boost deduction can be claimed.

The 20% deduction is on top of standard depreciation, which is then calculated on the reduced base (i.e. 80% of the asset’s cost).

A surprising aspect of the regime is that it applies to new commercial buildings. This is significant given commercial buildings are ordinarily subject to a 0% depreciation rate.

Improvements to depreciable property may qualify for the Investment Boost in their own right, even if the asset itself is not eligible for the Investment Boost (i.e. the asset was used prior to 22 May 2025).

Where an asset is only used partially for business use, the deduction will need to be apportioned. When an asset is sold, if the sales price is above the assets adjusted tax value, this will trigger depreciation recovery income.

From a practical perspective, businesses will need to determine if their fixed asset systems can:

· account for the immediate upfront deduction,

· apply the standard depreciation rate to the reduced cost base, and

· retain the full asset’s cost to ensure depreciation recovery income is calculated correctly.

Xero have already made allowance in their software for the Investment Boost.

If business systems lack flexibility, then manual adjustments may be required, which increases the risk of errors occurring.

Assets which are not technically “depreciable property” but are currently allowed depreciation-like deductions, such as improvements to farmland, are eligible. However, eligibility is not based on use or availability for use. Instead, the 20% deduction is based on the amount incurred on or after 22 May 2025.

Although, the benefit of the Investment Boost is arguably timing in nature, businesses have reacted favourable and it may ultimately drive the increase in capital investment the Government is looking for.

The Big and Beautiful

Sun, 28 Sep 2025 22:14:52 GMT

Over the past few months President Donald Trump’s “One Big Beautiful Bill Act” received quite a bit of attention before it was passed on 4 July 2025 - but why the fuss.

The key business facing elements included:

100% first-year deduction for U.S. spending on factories, data-centre hardware and other “qualified production property,” plus a 35% credit for domestic semiconductor fabrication.

Permanent R&D expensing and a higher cap that lets smaller firms write off more equipment immediately.

Temporary deductions for tip and overtime income, an enlarged Child Tax Credit, and optional tax-advantaged “Trump Accounts” families may open at a child’s birth.

Before the bill, companies could deduct interest only up to 30% of EBIT; after enactment they may deduct up to 30% of EBITDA, restoring a larger allowance.

Eliminates the end-2025 sunset for the lower individual tax brackets, while leaving the already-permanent 21% corporate rate unchanged.

The legislation also adds roughly US$150 billion for defence modernisation and US$75 billion for border security and immigration enforcement.

The favourable capital related deductions may steer multinational manufacturing, AI infrastructure and chip-fabrication projects toward America, potentially altering supply-chain geography and competition over the next decade.

Financial Conduct Report 1st Edition

Sun, 28 Sep 2025 22:14:50 GMT

The Financial Markets Authority (FMA) has issued its first Financial Conduct Report (FCR). The purpose of the report is to be transparent about the conduct that it sees and the regulatory priorities it will focus on over the coming year. Regardless of size, businesses don’t operate in a vacuum and are increasingly being impacted by micro and macro forces. Highlights from the FCR include the following plans.

Reported investment-scam losses reached NZ $194 million last year. The FMA aims to widen partnerships with the banking and technology sectors to enable faster information sharing so suspect domains and accounts can be frozen sooner. They will continue to publish scam warnings, case studies and information on the evolution of scams on its website.

Recent outages in banking and cloud infrastructure have shown how quickly cash-flow can seize up. The FMA expects all regulated providers to invest in resilient technology and to monitor critical service partners so disruptions don’t spill over to merchants and payrolls. The FMA will continue to focus with the RBNZ on ensuring technology systems critical for the stability and performance of New Zealand’s financial system are resilient.

Only 29 percent of New Zealanders know how to complain to a financial provider; boosting that figure is a priority. The FMA will be looking at how clearly firms signpost the right to and how to complain and how swiftly they remediate systemic problems. Effective complaints processes lead to greater trust and process improvement.

The FMA will publish data on interest rate changes to improve transparency, which could lead to clearer explanations of how overdraft or term-deposit pricing moves with the Official Cash Rate. Under the new Conduct of Financial Institutions regime, banks and non-bank deposit takers must prove that loans and deposits still meet customer needs. Engagements with firms that self-report issues will occur and engagement with firms that do not appear to be self-reporting will be prioritised.

Insurers will be told to revisit legacy policies and to explain cover, exclusions and price changes in plain language across the policy life-cycle. That should reduce “surprises” at renewal or claim time—especially on business-interruption and key-person cover.

A thematic review will check whether financial advisers are upfront about fees, commissions and conflicts to ensure transparency on pricing. Gaps or delays in disclosure will attract enforcement attention.

Wholesale offerors will face action if advertising is misleading, while ethical funds must substantiate “green” or “impact” labels. Better disclosure helps owner-operators compare opportunities without the need for specialist analysts.

After several high-profile frauds, the FMA is pressing for law reform to safeguard client money and property and will scrutinise outsourced custody arrangements.

The FCR makes for an interesting read, if only a ‘skim’ to get a sense of what areas the FMA is focussing on as part of setting higher expectations for banks, insurers, advisers and fund managers.

A good PIE

Sun, 28 Sep 2025 22:14:42 GMT

A Portfolio Investment Entity (PIE) is a type of investment vehicle that is able to pay tax on behalf of its investors, and depending on the 'prescribed investor rate' chosen, the tax liability on the income is able to be capped at 28%. This can be a material benefit to investing in a PIE - depending on the circumstances of a specific investor.

When the top personal marginal tax rate increased to 39% and the income tax rate for trusts subsequently increased to 39%, there was a natural expectation that the income tax rate for PIEs would also increase. It became a common topic of conversation.

To date, there has been no indication that the top tax rate applying to investors in PIEs will change and hence investments into PIEs continue to receive a comparative tax benefit of potentially 11%, being the difference between the capped rate of 28% and the top rates of 39%. That has also given rise to an increase in the number of banks and fund managers that provide PIE investment products.

It is worth bearing this in mind the next time consideration is being given to making a passive investment and comparing the post-tax yields between the various options.

R&M or Capital

Sun, 28 Sep 2025 22:14:36 GMT

In the past year, Inland Revenue has increased its audit activity after a period of subdued activity that stretched from before the Covid-19 pandemic. As their activity has increased, it has been interesting to see what areas they are focusing on.

Observation suggests that one of those areas is the classic capital / revenue boundary. This is an area that is notoriously difficult because of the grey areas that can arise – where two different people could easily reach contrary conclusions. One such example was recently heard by the Taxation and Charities Review Authority which had to consider whether building work qualified as either tax-deductible repairs and maintenance or non-deductible capital expenditure.

For context, repairs and maintenance refer to costs that keep a property in good condition or restore it to its original state, such as repainting walls or replacing a broken window. These costs are usually deductible in the year they are incurred, reducing taxable income. Whereas, capital expenditure improves or upgrades a property, such as adding rooms or installing new heat pumps, for which costs are not immediately deductible but may be depreciated over time.

The case involved a company that owned part of a large commercial building originally leased to a large commercial retail business. The company’s part of the building was worth about $95m. After the main tenant moved out, foot traffic decreased and another seven tenants vacated. The company spent over $13 million on upgrades to accommodate a new tenant that wanted the space to be converted from retail into offices. The upgrades included structural strengthening, improved glazing, a new glass façade, a new atrium, strengthening car park panels and bathroom upgrades. The company and IRD agreed on whether particular items were capital or revenue, but they could not agree on the classification of the glass façade and earthquake work. Hence, the decision focusses on those two items only.

The company asserted the façade was simply replacing existing glass, and that the earthquake strengthening was necessary safety maintenance, not an upgrade. It pointed out that the ground floor already had glass panels and that the seismic work didn’t extend the buildings life, it just ensured it was up to safety standards. But the Authority saw things differently. It ruled that these works weren’t just repairs. They were integral parts of a much larger project. The glass façade wasn’t a like-for-like replacement; it was a modern design that changed the building’s appearance and use, including replacing some solid walls with glass and enclosing previously open spaces. The seismic work also wasn’t just a fix up, it was a significant upgrade to the structure that made the building safer and more marketable.

The judge said that even though these works were only about 1% each of the building’s value, their impact on the overall character of the building meant they had to be treated as capital expenditure. Because they were part of a larger project that changed how the building looked and functioned, they didn’t qualify as routine repairs, and it was deemed a ‘commercial necessity to undertake the work to secure a new anchor tenant’.

In areas of uncertainty, there is the need to do your homework before a position is taken. Consider it akin to ‘insurance’ if Inland Revenue decides to investigate.

Charities Review

Sun, 29 Jun 2025 22:47:30 GMT

Currently, Charities in NZ are broadly exempt from income tax. This is a choice that ‘we’ as a society have made. It is centred on the view that if an organisation is established for a charitable purpose, then ‘we’ should support that organisation and maximise the resources it has available to achieve its purposes.

There are often debates around how wide the tax exemption should apply. The case of Sanitarium, a health food company owned by the Seventh-day Adventist church, is often quoted as the ‘case in point’.

On 24 February 2025, Inland Revenue released an Officials’ Issues Paper titled Taxation and the not-for-profit sector. The release of the Paper represents the first step in a potential fundamental change to the taxation of charities in New Zealand. One of the questions raised by Inland Revenue is whether income from a business that is unrelated to achieving its charitable purpose should be subject to income tax. It asks what are the most compelling reasons to tax or not tax such businesses, what are the most significant practical implications and how to define whether a business is related to a charitable purpose?

A flow on question becomes, if a business owned by a charity is subject to tax and that after tax profit is subsequently applied for a charitable purpose, should the charity receive a tax credit i.e. a tax refund. This would be akin to a charity making an interest free loan to the Government that is repaid when cash is applied for a charitable purpose. At least a bank pays interest.

A further focus from Inland Revenue is donor-controlled charities and whether additional rules are required due to the risk of tax abuse. The key proposed changes appear to be whether to restrict how tax exemptions apply to donor-controlled charities and their business operations and whether to introduce a minimum distribution amount that must be applied for a charitable purpose each year.

To the extent a charity pays tax, it has less cash available to be applied for a charitable purpose. What is missing from the Inland Revenue Paper is how that funding shortfall is to be met to ensure a net drop in charitable services does not arise. Even cash which is reinvested into a business operated by a charity, reduces the need for bank funding which would otherwise reduce the net profit available to be applied to charitable activities. Will the Government make up the difference?

It is also curious that the Paper provides no ideas or consideration to changes that might help or support New Zealand’s charities.

Navigating insurance proceeds and tax

Sun, 29 Jun 2025 22:47:28 GMT

When the unexpected happens — a fire, flood, or major equipment failure — insurance proceeds can provide some welcome relief. However, from a tax perspective, how that payment is treated isn’t always as simple as it first appears. While many businesses instinctively classify insurance proceeds as taxable income, this is not always necessary. Applying the correct tax treatment can potentially reduce your tax liability.

If the insurance proceeds relate to a depreciable asset that’s been lost or destroyed, the key comparison is between the proceeds and the asset’s adjusted tax value (ATV). The ATV of an asset is calculated by subtracting any depreciation claimed from the asset’s original purchase price. It reflects the remaining value of an asset for tax purposes, which may differ from its market value.

To determine the appropriate tax treatment, you should consider the following high-level guidelines:

If the proceeds exceed the ATV but are less than the original cost, the difference should be treated as taxable income.

If the proceeds exceed both the ATV and the original cost, only the amount up to the original cost is taxable income. The additional amount should be treated as a capital gain for tax purposes.

If the proceeds are less than the ATV, the difference should be treated as a loss on disposal.

For damaged assets, where the insurer covers repairs, the proceeds should not be taxable, and no deduction is allowed for the repairs. However, if the proceeds received exceed the actual repair costs, the excess reduces the asset’s ATV. If this reduction results in a negative ATV, that negative amount becomes taxable income, to the extent of depreciation claimed.

Another aspect to consider is the GST impact. Ordinarily, insurance payments made to GST registered businesses or individuals are made on a GST inclusive basis. Therefore, the insurance proceeds should be included in the GST return for the period they are received. Conversely, when the replacement assets are purchased, the GST on these costs should be claimed back.

As we know from natural disasters and significant events across New Zealand in the last few decades, the insurance process can stretch over a number of years. Consideration should be given to whether Inland Revenue has made any specific concessions (as observed with the Canterbury Earthquakes and Cyclone Gabrielle), timing of asset disposals, allocation of insurance proceeds and treatment of split payments.

Remember, not all insurance proceeds are taxable. Assess what the payment was for and how it aligns with the ATV to ensure the correct tax treatment.

Tax Pooling

Sun, 29 Jun 2025 22:47:26 GMT

Most people have heard of “tax pooling”, but it is common for people to say they have heard of it “but, I don’t really get it”. Here is an explanation of tax pooling. For the purposes of provisional tax and tax obligations generally, a fundamental aspect is the “effective date” of a tax credit. This being the date a credit is treated as ‘received’ by Inland Revenue (IRD).

If not received at the right date, interest and penalties could apply. Tax Pooling allows a business that has not paid tax at the right date, to ‘purchase’ tax with a specific effective date.

To illustrate, take the impact of the Covid-19 pandemic on Air New Zealand (Air NZ). For the 30 June 2019 financial year its pre-tax income was $382m. However, for the 30 June 2020 year it made a loss. It went from one extreme to the other.

Air NZ has a 30 June balance date, but for this purpose we’ll treat it as though it has a 31 March balance date, to make this explanation more commonly applicable. Under the standard provisional tax uplift method Air NZ would have been required to make provisional tax payments as it went through the 2020 year. Let’s assume it made the following provisional tax payments:

1. 28 August 2019 $37m

2. 15 January 2020 $37m

3. 7 May 2020 $37m

In total $111m in provisional tax that is ultimately not needed because it ended up making a loss.

Meanwhile, imagine a small local coffee and food delivery company that ‘boomed’ because it was able to go-online and satisfy the caffeine needs of individuals who worked from home. Under the standard uplift method, the business expected to have a tax liability of $150k and therefore made provisional tax payments as follows:

1. 28 August 2019 $50k

2. 15 January 2020 $50k

3. 7 May 2020 $50k

In December 2020 its income tax return was completed and the owners find their final tax liability for the year is $550k, i.e. they need to pay a further $400k. Under the ‘use of money interest’ rules, IRD charge interest on that $400k shortfall from 7 May 2020. In a net sense, as at the 7 May 2020, the coffee company has a tax shortfall of $400k, whilst Air NZ has excess tax credits (at that date) of $37m.

The rationale behind tax pooling is that rather than IRD paying interest to Air NZ and charging interest to the coffee company, Air NZ can ‘sell’ $400k of its excess tax to the coffee company (and others) with the tax credit transferring across at an effective date of 7 May 2020; and therefore, no interest is charged by IRD.

The coffee company pays a fee (interest) to ‘purchase’ the tax credit, but it is less than the interest amount that would have been charged by IRD. Part of that fee is paid to Air NZ, but it is more than what IRD would have paid Air NZ in interest. A tax pooling intermediary acts as a broker to connect the two and ‘clips the ticket’ on the way through.

Trust Review Disclosure

Sun, 29 Jun 2025 22:47:24 GMT

From the 2021-2022 income years onwards, the Inland Revenue (IRD) introduced increased disclosure requirements for trusts. The increased disclosure requirements were aimed at supporting the Commissioner’s ability to evaluate compliance with tax rules, develop tax policy, and assist with understanding and monitoring the use of trust structures and entities.

In effect, it appeared as though the Government of the day was trying to gather intelligence to understand how trusts were being used to ‘minimise’ tax liabilities. A cynical person might also hypothesise the information could be used to estimate the revenue that could be generated from a capital gains tax.

In practice, accountants have found the increased disclosures unnecessarily complex (the 2019 trust tax return guide was 57 pages, the 2024 guide is 88 pages) and confusing, which has given rise to increased cost that invariably is passed onto clients. For example, loans with associated persons are separated from beneficiary current account balances. But the distinction is arbitrary when both amounts represent loans to and from associated persons. The value of shares are to be recorded in one box, but shares held as part of a “wider managed investment portfolio” are to be recorded in a separate box. If a person has a single parcel of Microsoft shares managed by Craigs, which box does it get recorded in?

IRD has now completed a review of the trust disclosure rules to determine whether changes should be made. In its review, IRD acknowledge that certain changes should be made to reduce the compliance costs for taxpayers. Recommendations from the review include reducing granularity by removing unnecessary breakdowns, reducing the number of subjective tests and improving the guidance and forms. IRD also commented that going forward the development of any changes to trust disclosure rules will take into account whether it will result in additional one-off compliance costs.

Two minor changes from the 2025 income tax return onwards include trustees no longer being required to distinguish between whether a non-cash distribution was a distribution of trust assets, the use of trust property for less than market value, or the forgiveness of debt. Trustees are also no longer being required to distinguish between whether a cash distribution was made from trust capital or corpus. A future change should see information being pre-populated from disclosures in prior years.

Alongside their review, the IRD engaged Cantin Consulting to complete an independent review. Interestingly, unlike the IRD report, this commented on the lack of support these disclosure rules have from taxpayers and their advisors.

The compliance costs coupled with the scepticism around the purposes of these rules has led to the view that these rules are not worthwhile. It also highlighted the view that the rules have given IRD a better understanding of trusts and that without these rules the degree of focus and insights on trusts would not have occurred.

Compliance with the trust disclosure framework has been frustrating for practitioners, hence the review that has now occurred, including the opportunity to provide feedback. The resulting changes are welcome.

IRD reassessments without notice

Sun, 29 Jun 2025 22:47:22 GMT

On the 29th March 2025, the Taxation (Annual Rates for 2024−25, Emergency Response, and Remedial Measures) Act received Royal assent.

Of note is that the Act includes an amendment to section 89C of the Tax Administration Act 1994 relating to Inland Revenue’s (IRD) ability to amend an assessment without completing the formal disputes process.

The amendment adds a new provision stating that if a “qualifying individual” provides information to IRD relating to their taxable income and then fails to respond within two months to a request from IRD for additional information, IRD is able to amend their tax position without the need for notice.

The provision is aimed at individuals that need to disclose income that is not otherwise reported to IRD, such as a salary or wage earner who also incurs a rental loss. If that person subsequently discloses the rental income to IRD, but then fails to respond to a request for more information, IRD will have the right to amend the tax position.

The change appears to be as a result of frustration from IRD that certain individuals don’t engage and ignore follow up requests. At this stage, it is unclear how this power will be exercised and how frequently, but it does mean requests for more information from IRD should not be ignored.

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When is a motor vehicle subject to Fringe Benefit Tax

Tue, 25 Mar 2025 00:27:30 GMT

A common complaint about Fringe Benefit Tax (FBT) is that it is too complex, particularly when it comes to motor vehicles, which becomes a point of frustration given it is one of the most commonly provided benefits. This is borne out by how common it is for mistakes to be identified during an Inland Revenue investigation or due diligence process.

One of the most common mistakes arises from not properly understanding the circumstances in which the provision of a vehicle to an employee for private use is subject to FBT.

There are three broad classifications of motor vehicle under the FBT regime.

Private Use Vehicle : As akin to a catch-all, if a motor vehicle is made available to an employee for private use it is likely to be subject to FBT, unless a specific exemption applies, such as the work-related vehicle exemption (discussed below).

Private use includes the use, or availability for use of the vehicle outside of business purposes. It is important to note that home to work travel is specifically defined as private use. Hence, even if private use is prohibited, but an employee uses the vehicle to drive to work, FBT could still apply.

Work-Related Vehicle : Not all vehicles provided to employees attract FBT. A vehicle may qualify as a work-related vehicle if it meets four criteria, being:

sign written,
not be designed principally to carry passengers (e.g. a ute),
required to be stored at an employee’s home as a condition of employment, and
not be available on a particular day for private use, unless it is incidental to business use.

If a vehicle meets the criteria on a particular day, it is not subject to FBT on that day.

The key difference between the private use vehicle and work-related vehicle is that travel between home and work may be treated as exempt if the motor vehicle qualifies as a work-related vehicle. Supporting documentation and spot checks are essential to ensure the work-related vehicle exemption applies.

Pool Vehicle : A pool vehicle is another category that can be exempt from FBT. Pool vehicles are shared among employees for business use and should not be used for private purposes. These vehicles are kept on the business premises when not in use and must be available for multiple employees, i.e., not taken home by an employee.

Understanding the FBT implications of providing motor vehicles to employees is essential for compliance. Complexity can arise in specific situations, such as when an employee’s home ‘might’ qualify as a place of work and therefore travel between home and work itself is ‘on work’ and not subject to FBT.

Given the complexity it is not a surprise that mistakes in this area occur - which begs the question as to whether the rules are fit for purpose.

PAYE and personal grievances

Tue, 25 Mar 2025 00:27:28 GMT

Although not desirable, it is not unusual for an employee to raise a personal grievance with their employer. Section 123 of the Employment Relations Act 2000 (ERA) provides for a number of remedies where an employee has a personal grievance.

If an employee suffers humiliation, loss of dignity, or injury to feelings one remedy is for a compensatory payment to be made, whether as part of a court ordered award or an out of court settlement.

The question often then arises regarding how the payment should be treated from a tax perspective. Depending on the circumstances, such compensation is not considered to be derived "in connection with employment" and is therefore non-taxable, and there is no requirement to withhold PAYE. However, because the treatment is very fact specific it is common for payments that are treated as non-taxable to be reviewed by Inland Revenue or as part of a due diligence process. Because of that potential scrutiny it is important to have key documentation, guidance, and evidence to support the treatment adopted.

In June 2006, Inland Revenue released BR Pub 06/05 providing further commentary on the topic. The key conclusion from the commentary is that payments that are genuinely and entirely for compensation for humiliation, loss of dignity, or injury to feelings, under section 123(1)(c)(i) of the Employment Relations Act 2000, do not meet the definition of income per section CE 1 of the Income Tax Act 2000, and PAYE does not apply.

The IRD’s view in this publication is that there must be sufficient evidence to prove that firstly, there is the presence of a genuine Personal Grievance, secondly, that there is a sufficient nexus between the amount paid and the severity of the claim, and thirdly, that the payment made is entirely tied to the grievance and not another statutory payment obligation.

One of the key areas of this section is determining whether the payment is genuinely and entirely in relation to the Personal Grievance. Payments made under section 123(1)(c)(i) are a benefit in money. An employer would therefore need to demonstrate that the payment was not actually made “in connection with the employment or service” of the recipient. For example, a payment which is in substance based on lost wages, but labelled for ‘humiliation’ would be at risk of being taxable.

In Inland Revenue’s view there needs to be valid and documented proof of the Personal Grievance which would usually require an admission in writing by the employer that they acted in a manner that was unfair or unjust.

However, in a settlement scenario it is common for the employer to not make such an admission and often have asserted otherwise, and therein lies the ‘catch 22’. In the absence of an admission, it becomes very difficult to demonstrate that a payment is for humiliation, loss of dignity, or injury to feelings.

Effective decision making

Tue, 25 Mar 2025 00:27:24 GMT

In today’s business environment, effective decision-making is key to navigating change and achieving sustainable growth.

For small to medium sized enterprises where there can be fewer individuals at a senior decision-making level, there is arguably a greater need to have a strong decision-making process to ensure decisions are not made in a vacuum.

However, how many business owners make decisions, that are ad hoc, ‘on the fly’ and inconsistent.

There are various decision-making frameworks that can be beneficial in ensuring that decisions are clear, well thought out, and have the business’s vision in mind. Some common elements to those frameworks are:

Define the criteria against which a decision will be tested and ensure the criteria is transparent, measurable and where possible assign explicit probabilities to whether the criteria are achievable. For example, rather than aiming to ‘increase profitability’, aim to ‘increase gross margin by 5% over an 18 month period’ and assess the likelihood of achieving that objective.

Discuss the decision with others. Whether discussing a proposition at the dinner table or with a trusted business advisor or ideally an independent Director (whether formal or someone who provides that support informally), valuable feedback will be received. The process of ‘thinking out loud’ will also help crystallise your own thinking and help form a view.

Pro-actively seek out and consider information that might contradict the investment hypothesis.

Consider whether the decision to proceed aligns with the strategic objectives of the business and is in alignment with previous decisions.

Is there an opportunity cost? This could be readily identifiable or something unforeseen, i.e., commitment to a path now may rule out the option of pursuing a different opportunity later.

Is the rationale, expected outcomes, and plan for implementation able to be clearly communicated to others.

Finally, there is the consideration of speed. Sometimes decisions do need to be made quickly. But ideally, pause, and take your time. It’s a bit like the decision to reply to an angry text, email, Facebook message or on-line review as soon as you read it … we all know it is best to not hit reply, but to wait and reply later when you are cool and calm.

The above list is not based on a formal decision making framework, but it does provide a sense of what it takes to ensure good decisions are made.

By employing a structured process business owners can test their ideas at a fact-based level to ensure the best possible outcome.

When errors are made

Tue, 25 Mar 2025 00:27:20 GMT

Tax compliance can be complex, between income tax, GST, PAYE there is often a lot to manage and get right. It is therefore inevitable that from time-to-time mistakes will happen. When these moments occur the question then becomes “what do we do?”.

The Inland Revenue requires taxpayers to make a correct assessment of their tax liability when a tax return is filed. If an error has given rise to an underpayment, taxpayers are obligated to submit a voluntary disclosure to Inland Revenue to have the tax return amended, thereby ensuring the assessment is correct.

To make a disclosure, details of the error need to be provided. Inland Revenue will then review the information and decide if they agree that an adjustment is required.

Where an adjustment is required that gives rise to an increase in the amount of tax payable, Inland Revenue will consider whether a shortfall penalty should be charged. Shortfall penalties also apply if the adjustment reduces the amount of a tax loss.

There are five different categories of penalty which can apply. These penalties range from 20% for taking an unacceptable tax position or exercising a lack of reasonable care, right up to 150% for tax evasion.

The nature of the error and the facts surrounding how it occurred determine what type of penalty should apply. There are various concessionary provisions which can apply to reduce a shortfall penalty. For example, if a voluntary disclosure is made prior to being notified of an audit or investigation a shortfall penalty can be reduced by 75% or even 100% in certain scenarios.

Where the taxpayer has already been notified of an audit or investigation shortfall penalties are only able to be reduced by 40%.

Some taxpayers will choose not to make a disclosure. This comes with the risk that Inland Revenue may themselves identify the error and if it becomes clear the taxpayer knew about the error and chose not to disclose it, the shortfall penalty implications could be worse. In addition, the perception on Inland Revenue’s part that the taxpayer is ‘non-compliant’ could give rise to increased scrutiny in the future.

The reduction in shortfall penalties for making a voluntary disclosure provides a material benefit to do so and should be the default option. Inland Revenue practice in the context of a voluntary disclosure is also typically a positive experience, given the circumstances. Therefore, if a “what do we do” moment does occur, making a disclosure may come with some short-term pain, but be better in the long run.

IRD's Long Term Insights Briefing

Fri, 20 Dec 2024 02:08:10 GMT

Inland Revenue has commenced consultation on what topic should be covered in its next Long-Term Insights Briefing (LTIB). Inland Revenue, like other government departments, is required to produce a LTIB once every three years.

The purpose of an LTIB is to identify and explore long-term issues to help plan for the future. Initial work has noted that New Zealand’s tax revenue is just below the OECD average – 33.3% of GDP compared to the OECD’s 34.2%. The means by which New Zealand’s tax is generated differs from other OECD countries as follows:

no compulsory social security contributions,
no tax on capital gains,
higher comparative tax revenue generated through GST,
higher company tax rate,
high effective tax rates on inbound investments, and
higher than normal revenue from local government rates.

The proposed topic is “Our tax system: Bases and regimes”. This will focus on two key aspects:

1. How to maintain a tax system with a stable core structure that can flex to changing revenue needs (such as due to an aging population).

2. How to address the current tensions within the tax system – integrity versus efficiency versus equity.

Both aspects become important if there is the need to increase revenue. Income tax is New Zealand’s largest revenue source and increasing income tax rates could generate substantial revenue. However, raising income tax, especially for high earners, could discourage investment and economic activity. It may also prompt tax avoidance and reduce foreign investment, as New Zealand’s current corporate tax rate is already higher than the OECD average.

Increasing the GST rate is another possibility. New Zealand’s GST is already broad-based and effective in raising revenue, contributing more to GDP than many other OECD countries. Raising GST further would disproportionately impact lower-income households, as they spend a larger share of income on goods and services. This could exacerbate inequality, making the option an unpopular route unless offsetting measures are introduced to protect vulnerable groups.

Both options, raising income tax and GST, could provide immediate revenue boosts, but they can come with challenges.

Another option is to introduce new tax policies, with a comprehensive Capital Gains Tax (CGT) being the most discussed. Currently, New Zealand does not tax capital gains on asset sales, except in specific cases like the bright-line test on property sales. This hints at the renewed possibility of a CGT as a way to diversify New Zealand’s tax base and ensure that wealth accumulation is taxed similarly to wage income.

As fiscal pressures grow, New Zealand needs to decide whether to raise existing tax rates or introduce new tax policies to meet its future needs. Both options come with significant trade-offs, and the decision will shape the country’s economic landscape for decades to come.

The LTIB’s exploration of these issues provides opportunity for public debate, as New Zealand looks to ensure that its tax system is fit for the future while maintaining fairness and economic efficiency.

The Depreciable Asset

Fri, 20 Dec 2024 02:08:08 GMT

The depreciation rate for non-residential buildings has been reduced to 0%, effective from the 2024 / 25 income year. However, commercial fit-out remains depreciable.

This makes the distinction between the two important because it is the difference between not being able to deduct any depreciation at all versus being able to claim a good proportion of a building’s cost as ‘fit-out’.

Inland Revenue has recently issued a draft interpretation statement that provides essential guidance on how to correctly identify what the asset is for depreciation purposes. The guidance can be used for the purpose of identifying components of fit-out and depreciable assets generally. At its core, depreciation is an allowance for the loss in value of a capital asset as it is used to derive income. An asset’s correct depreciation rate is a function of its estimated useful life and the industry in which it is used.

The legislation treats property as depreciable and therefore it is important to isolate separate items of property to depreciate them independently. The following indicators serve to ascertain whether an item is considered separate property or not.

Is it physically distinct - can the item be separated based on its physical characteristics such as location or size?
Is it functionally complete - can the item function on its own? However, this does not necessarily mean that the item must be capable of independent use or be self-contained.

Does the item vary in function from another? The item remains separate where one item varies the function of the other, rather than combining to form a larger unified item.

Items are not required to be applicable to all three indicators as it always comes down to a matter of fact and degree. Identifying the relevant item of property can be straightforward in many cases but challenging in others.

The draft interpretation statement provides the example of a vehicle and a trailer, giving several reasons why they are treated as separate items of property for depreciation purposes.

Firstly, they serve different functions: the primary purpose of a vehicle is to transport people, while a trailer is designed to carry cargo. The trailer is used to transport items that cannot be suitably carried by the vehicle, acting as a supplementary addition, rather than an integral part of the vehicles function. Additionally, the vehicle is functionally complete and can operate independently of the trailer. Although a trailer cannot transport cargo without being towed by a vehicle, it is still considered functionally complete as it contains everything necessary to fulfil its role as a trailer. Therefore, for depreciation purposes, a trailer and a vehicle are regarded as separate items of property.

By understanding and applying these principles, businesses can achieve accurate tax compliance, avoiding the risks of under or overclaiming depreciation. Once finalised, the new interpretation statement will provide comprehensive guidance on the identification process for separate items of property, ensuring that depreciation deductions are correctly claimed.

The LTC Option

Fri, 20 Dec 2024 02:08:06 GMT

If a company sells a capital asset (e.g. commercial land) and derives a non-taxable capital gain, it’s reasonable to expect the shareholders to want access to the cash. However, the problem often arises that in order for a capital gain to be distributed tax-free, the company needs to be wound up. This is a result of the fact that if a capital gain is distributed in the absence of a wind-up, the distribution comprises a taxable dividend.

Winding-up a company is not always desirable or the most practical route because it may own other assets or otherwise serve a purpose that means it needs to stay in existence. This can mean the capital gain becomes ‘trapped’.

Enter the look-through company (LTC) to save the day. An LTC is legally an ordinary company, that elects to be treated as a partnership for tax purposes. As such, the income, expenses, tax credits and losses of the company are attributed to the shareholders based on their ownership percentage.

Just as important in this situation, dividends paid by an LTC to its shareholders are ignored for tax purposes. Hence, electing for a company to be an LTC is an option to enable a capital gain to be extracted tax free. But this gives rise to the question, is this tax avoidance? This exact question was recently covered by Inland Revenue in Technical Decision Summary 24/16 (TDS) issued in August 2024. The TDS notes:

The Applicant’s decision to elect into the LTC regime was to allow the shareholders to retain administrative and financial reporting simplicity, while also allowing tax-free capital gains (e.g., from the sale of assets) to be paid out to the family without requiring the liquidation of the Applicant.

It was acknowledged that the LTC rules clearly provide for a company to be treated as transparent as intended by Parliament. Therefore, Parliament would consider that the tax treatment of the arrangement is consistent with Parliament’s purpose and is therefore not tax avoidance.

It is important to note that the TDS did state that it is a summary only, and does not include various facts or assumptions and hence cannot be relied upon. However, it would be unusual for Inland Revenue to release the TDS without a stronger comment to the contrary if the LTC option was not acceptable for this purpose.

However, the LTC option is not perfect. A tax cost to enter the regime can apply, calculated based on the company’s retained earnings. There are also a number of criteria that need to be satisfied, such as it needing to have five or fewer ‘look-though counted owners’; which itself can be complex to confirm.

That being said, it is an option to have ‘in the back pocket’ if the need arises.

Protect your reputation

Fri, 20 Dec 2024 02:08:03 GMT

Over the last 18 months there have been a number of businesses fall over – which in and of itself has not been surprising given the recent economic climate. However, one element that serves as a warning for us all is the flow on effect of those failures. Not just in a tangible sense, where suppliers or ‘subbies’ are left out of pocket and can’t survive, but where acquaintance businesses can be tarred with the same brush.

We tend to associate the word “brand” with large multi-national companies such as Apple, Microsoft and BMW, and less so with smaller local businesses. Maybe an equivalent description for a local business is “reputation”. It is less tangible, a product of individual perspective, rather than a wider shared view, and can change rapidly. So, what can you do to make sure you are not tarred with the same brush to ensure you protect your reputation?

Review your customer and supplier list with a non-financial lens. Consider whether there are businesses that have a reputation for trading aggressively, unexplained profitability or other warning signs – do the owners share similar values to you? Review their on-line profile to confirm their social media posts, images, and videos are not offensive or misleading. Is your relationship with an at-risk business a matter of public record?

Regularly review your own online presence to stay aware of what people are saying about your business. Whether it’s praise or criticism, showing that you listen and respond in a constructive way may help prevent people from assuming the worst.

Consider whether you have a disproportionate relationship with a single supplier or customer where if something goes wrong, you could be assumed to be involved or complicit.

When employing new staff, consider where the employees are coming from. Is it a business that has a poor reputation? Is the employee the product of that poor reputation? Or are they a good hire because they left due to that poor reputation.Beyond your direct business relationships, think broader. For example, if you are sponsoring the local rowing club ask who else is sponsoring it, and who your logo will be sitting beside. Consider what impression being associated with that business will have on your stakeholders.

Finally, have a plan in place for handling issues if they arise. One of the biggest decisions you might face is whether to cut ties with a customer or supplier early, or risk being dragged down with them.

Trusts - The Big Picture

Fri, 20 Dec 2024 02:08:00 GMT

For some, the increase in the trust tax rate from 33% to 39% has prompted them to ask the question – should we wind up our trust?

Rather than looking at the purpose of having a trust with a narrow tax lens, it may be of benefit to consider your circumstances more broadly and ask whether it is time to actually alter and even increase the role of your trust.

A trust provides a number of benefits such as asset and relationship property protection, succession and a way to manage complex family relationships. So instead, it may be worth asking:

Do you have the right trustees, both now and on your passing?
What happens on your death (is your will up to date), should the trustees change if you pass away?
Who should benefit under the trust, in what proportions and is that recorded?
If you make a distribution to your adult children and their relationship breaks down what happens – are risks mitigated?
In what circumstances should the trust be wound up?

A will sets out how your assets should be dealt with in the event you pass away. A trust can survive beyond your death, hence it is important that they continue to function and operate as you intend - and it is better to sort this while you’re here.

FBT and home to work travel

Fri, 20 Dec 2024 02:07:54 GMT

A common complaint made by employers is that the amount of time it takes to meet their FBT obligations is disproportionate to the amount of tax it actually generates. This frustration is arguably borne out in the number of mistakes that are often made when calculating the amount of FBT payable. A good example is employers taking the view that an employee’s home is a place of work and therefore FBT does not apply to the use of a company car to drive to and from work.

Inland Revenue has been working on a new interpretation statement that provides guidance on the treatment of home to work travel. It covers topics such as whether taking a vehicle home for charging or security reasons is sufficient to conclude that FBT does not apply. For the purpose of these two examples, the conclusion is that FBT would still apply, which hopefully does not come as a surprise.

The guidance is expected to be finalised shortly. Current treatment should be confirmed based on the guidance once released. However, in line with the original complaint, the draft statement is over 50 pages long and is likely to only reinforce the conclusion that maybe Inland Revenue’s resources should have been put into how to simplify the regime instead.

Inland Revenue activity

Tue, 01 Oct 2024 04:31:32 GMT

After a relatively quiet few years through the Covid pandemic, Inland Revenue’s (IR) audit activity has slowly started to increase over the past few years.

In 2021, IR’s campaign had a focus on the real estate sector, where the concern was around real estate agents claiming a disproportionately large amount of expenses relative to their income. As a result, a trend of increasing private expenditure claims, reversed.

In 2023, IR launched a ‘Tax Toolbox’ campaign aimed at engaging and educating construction (‘Tradie’) taxpayers. The Tax Toolbox resources include a detailed web page with information on items such as claimable expenditure, income tax and GST, access to free online Tradies seminars covering tax tips for Tradies, and the option to request a business advisory visit for one-on-one support.

As part of the 2024 budget announcement, IR has confirmed that they will be increasing their enforcement on this sector this year, with unannounced visits to construction sites starting July 2024.

This year’s Budget allocated $29 million to Inland Revenue for compliance, to target taxpayers who are not meeting their tax obligations. Specifically, areas that are expected to be closely scrutinised include the following: the hidden economy, organised crime, retail sector, trust compliance, cryptocurrency, corporate restructures, and electronic sales suppression tools.

Overdue student loan debt, for which those in default are mainly based overseas, will be allocated $4 million of the compliance funding. Individuals who own New Zealand property that are based overseas and are not meeting their student loan repayment obligations will likely be contacted by Inland Revenue.

In terms of the hidden economy work, in June 2024, IR released some insights from their investigation on small liquor stores.

The investigation involved 220 unannounced visits nationwide, where investigators were looking for signs of income suppression, unreported sales and non-registered staff. It was found that over 100 employees had PAYE deducted from their wages which had not been paid to IR. Nine liquor stores have been escalated to the IR audit phase.

An IR campaign that has spanned across a number of years is the Tax Governance campaign. This campaign is aimed at New Zealand significant enterprises (taxpayers with >$30m annual turnover), and using the results of questionnaires issued to these taxpayers, the areas of improvement include the documentation of tax strategy and tax controls framework, regular reporting to the board on key tax matters, and the independent testing of controls.

As IR reviews and investigations increase, there will be the need for both accountants and IR staff to rehone their skills on how to conduct an investigation, given the comparatively lower level of activity that has been seen since the Covid pandemic.

Non - BAU Transactions

Tue, 01 Oct 2024 04:31:31 GMT

BAU is a phrase that is used to describe “business as usual”. It is a good barometer of whether anything strange or unusual has occurred or whether things have been BAU. Invariably, non BAU transactions will occur: an insurance payout, a large asset purchase, a fine or a penalty. This then leads to the question of what the tax treatment is of that non-BAU transaction.

A non-BAU type transaction was the subject of a recent Technical Decision Summary (TDS 24/12) released by Inland Revenue.

Two companies received lump sum compensation payments from a third party for damage to intellectual property (IP). The IP was held in the form of licenses to commercialise certain products. The settlement amount was based on discounting the future income streams that were otherwise expected if the licenses had not been damaged.

New Zealand’s income tax legislation captures specific items as taxable, such as rental income, and then more broadly, amounts that are income under ordinary concepts. In addition, income derived from a business is taxable, unless it is capital in nature.

One principle that has developed through case law is that where an amount is intended to replace lost profits, then the payment takes on the attributes of the amount it was designed to replace and could therefore be taxable. One frustration with this approach is that the value attributable to most capital assets is a function of the income to be derived from them.

In a positive outcome for the taxpayer, the fact that the compensation was calculated based on lost cashflows was not determinative. Instead, the focus was placed on the fact the settlement payment was for the damage to their IP rights which was permanently damaged (but not destroyed) and that damage was significant or substantial. The companies and the third party expressly agreed that the payment was in respect of that damage.

The damage had significantly reduced the companies’ ability to participate in the market in which they would otherwise have been able to participate and the compani es had effectively lost earning capacity from their asset. The nature of the compensatory payment was one-off rather than regular or recurrent.

This case demonstrates that although it is routine to treat amounts derived by a business as taxable, that may not always be the case. If a non-BAU situation has arisen it is worth pausing and asking the question ‘how should this transaction be treated?’. It may also be worth asking your advisor early in the process, particularly if agreements or communications are being put in writing, because those statements may become determinative and therefore crucial that they are correct.

Employee Share Schemes

Tue, 01 Oct 2024 04:31:29 GMT

For businesses that trade through a company, circumstances might arise in which the shareholders consider selling a minority stake in the company to a key employee or group of employees.

This could be to ensure that key talent is ‘locked in’ for the long term, as a means of succession if the existing shareholders are looking to wind-down or simply as a means to link effort to reward.

The pros and cons of transferring shares to key employees through an Employee Share Scheme (ESS) need to be carefully weighed because the devil is in the detail.

From a tax perspective, shares are typically held on capital account and therefore any gains in value are non-taxable. However, complex rules exist which try and delineate between an arrangement that resembles a generic shareholding interest, versus one that is received in connection with a person’s employment.

If the arrangement is tied to a person’s employment, the ‘share scheme taxing date’ (SSTD), being the date when the value of an employee’s shares are taxed, is deferred until:

there is no significant risk that the ownership of the shares could change for other than market value,
the employee is not protected from a fall in value of the shares, and
there is no material risk that the terms of the shares will change in a way that affects their value.

For example, if the rules of an employee share scheme state that an employee who leaves to work for a competitor must sell their shares for the lesser of cost or market value, this would carry a ‘material risk’ of occurring and therefore will defer the SSTD. Hence, the full value of the shares could be taxed on disposal, being the time at which this condition ceases to operate.

On the other hand, if a bad leaver is defined as someone dismissed for serious misconduct (such as fraud or theft), this condition is less likely to occur (immaterial risk) and should not defer the SSTD. It is not uncommon to find income tax applies to shares within an ESS, when the participants have assumed it does not.

Another aspect that can complicate an ESS is the management of minority shareholder rights. When employees are granted shares, they become minority shareholders and are entitled to certain rights (such as voting rights) within the company. Managing these rights can be complex and cumbersome and can detract from the overall appeal of an ESS for some companies. Additionally, setting up such schemes can be costly and time-consuming.

As companies consider their options, the fundamental gating question becomes what the shareholders are trying to achieve and whether there is a better option. An alternative is to implement a phantom equity incentive where an employee is compensated (e.g. with bonuses) based on the value of a business and/or its performance. Phantom equity, can offer similar motivational benefits without the complexities of actual share ownership.

Donating Trading Stock

Tue, 01 Oct 2024 04:31:27 GMT

What was a temporary tax concession relating to donated trading stock has now become a permanent one thanks to the enactment of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 on 1 April 2024.

Prior to March 2020, in most cases, if a business donated trading stock it resulted in deemed income equivalent to its market value. This resulted in a business being taxed on a deemed profit margin, even though no cash was received.

The rule was initially introduced to counter tax avoidance, to address situations where sole traders were using trading stock personally. This provision was temporarily amended in March 2020 to allow trading stock to be donated to donee organisations (such as charities) and public authorities without triggering deemed income.

A deduction for the cost of the trading stock was also allowed (i.e. a net tax deduction for the donated trading stock to these specific parties arose). This was to encourage donations of products like hand sanitiser to hospitals, or consumables to food banks during the Covid pandemic.

Where trading stock was donated to non-associates (that were not either a donee organisation or a public authority), the concession deemed income to arise, but it was equal to the cost of the trading stock (i.e. net nil impact on taxable income). The concession was extended at the start of 2023 as a result of the adverse weather events that occurred in January – March 2023, and was due to expire on 31 March 2024.

The recently enacted legislation has permanently amended the deemed market value provision. From 1 April 2024, deemed income will not arise if the trading stock is donated to a donee organisation. However, if the trading stock is not donated to a donee organisation it becomes more complex. In this context income based on the market value of the trading stock will only be triggered if:

it is disposed of to an associated person, or
a person takes it for their own consumption, or
it has not been disposed of in the course of carrying on a business for the purpose of deriving assessable or excluded income.

The relevance of it ‘not’ being in the ordinary course of business is important and arguably counter intuitive. To illustrate:

If as a result of a weather event a large supermarket chain makes a one-off donation of groceries to specific families in need, then deemed income arises.
If instead a supermarket chain provides groceries to families as part of a marketing or promotional campaign that is part of its ordinary marketing initiatives, income is not deemed to arise.

In the context of donations of trading stock to donee organisations the amendment is positive. However, based on the weather event example above, it falls short.

Changes in Marginal Tax Thresholds

Tue, 01 Oct 2024 04:31:25 GMT

For the first time since 2010, personal tax rate thresholds have changed from 31 July 2024. The change was announced as part of the 2024 budget.

When personal tax thresholds are not regularly adjusted to take into account inflation or wage growth, individuals end up paying a higher percentage of their income in taxes over time. As such, adjusting these thresholds arguably reverses past tax increases.

The new personal tax rates for individuals are:

Current brackets New Brackets Rate

$0 - $14,000 $0 - $15,600 10.5%

$14,001 - $48,000 $15,601 - $53,500 17.5%

$48,001 - $70,000 $53,501 - $78,100 30.0%

$70,001 - $180,000 $78,101 - $180,000 33.0%

$180,001 + No Change 39.0%

Employers are responsible for handling these pay adjustments on behalf of employees from 31 July 2024 in pay cycles going forward.

Payroll software users should have received updates from providers (if they haven’t already) once the new thresholds are ready. For those managing payroll manually or without software, it's essential to use updated tax tables for precise calculations.

Most NZ individuals have a balance date of 31 March. As the changes are effective part-way through the 31 March 2025 year, if an employer’s payroll system wasn't updated by 31 July 2024, any owed amounts should be included in subsequent payments or settled during an end-of-year reconciliation.

New Product Lines

Tue, 01 Oct 2024 04:31:23 GMT

It is important to regularly ask whether you are providing the products your customers want and whether there are any new products you could provide to ensure you are evolving with changing times as you look for the next income stream.

There are plenty of examples of new products meeting an unexpected demand or creating a whole new market - the first Cronut, streaming service, putting coffee in a martini. But how do you know whether your latest idea is going too far, such as the following examples:

Similar to DNA kits to confirm ancestry, DNA kits can be purchased for your dog to confirm its genetic makeup.
Adults in some U.S. states can now buy gun ammunition from vending machines at their local grocery store.
Fresh Icelandic Mountain Air can be purchased by the can.
Bacon scented Mustache wax – “the bacon scent will make you the envy of all your friends”.
A remote-controlled crocodile head, to keep people out of the pool.

A brain storming session with the team is a good idea to test whether you are delivering for your customers and to identify gaps you could be filling. But remember to test any ideas with trusted customers before they are implemented.

GenAI - a leap forward

Thu, 27 Jun 2024 00:40:30 GMT

Artificial intelligence (AI) is the new buzzword at the moment, with business leaders touting its importance and the significant impact it will have on the way we conduct business. The reality is that AI has been around for a while, but in the past few years has taken a great leap in terms of its usefulness and accessibility for the general public.

AI is a blanket phrase for computers performing tasks that would usually require human intelligence to perform. It is exceptionally good at recognising patterns and making predictions and is being widely used already. For example, the facial recognition on your phone or the personalised ads you see pop up on the web are all a result of AI.

Generative AI (GenAI) is an evolution of this, whereby it can use existing data and patterns to create completely new content. GenAI is what is causing such a stir recently, due to the broadness of its potential applications and how disruptive it could be for many industries.

According to PwC’s 2023 Emerging Technology Survey, 73% of US companies have already adopted AI into their business, with 54% using GenAI. With many firms creating their own GenAI chatbots, employees can use these to research legislation, summarise spoken meetings using speech to text, or craft an email from scratch. Broader use cases see programmers using GenAI to help them write code, product designers using it to evaluate new designs, or marketers to identify leads and develop marketing strategies. In the creative industry GenAI has been even more disruptive, with unique videos, pictures or songs being crafted from a simple chat prompt.

Every so often a new technology comes along that completely changes the way in which the world operates. In recent times, this has been things like the internet, or smartphones. Many are now claiming that GenAI will be the next big shift, and that its impact on the future will be unprecedented.

The first ever global summit on artificial intelligence was hosted in November last year, where 28 nations declared the need to work together to manage the risks associated with such powerful technology. Public figures like Elon Musk even described it as a ‘threat to humanity’, given the potential for AI to become more intelligent than its human creators.

While the threat of world domination is hopefully something on the far horizon, when it comes to AI, no one can really say how fast the technology will evolve, particularly when it is able to learn and teach itself. With access to GenAI available to everyone through platforms like ChatGPT, now is the time to consider whether it can be helpful to you or your business.

Changes to GST for the platform economy

Thu, 27 Jun 2024 00:40:28 GMT

In March 2023, legislation in relation to the platform economy was passed, affecting the GST treatment of services made through an electronic marketplace from 1 April 2024. We saw something similar back in 2019, where the GST rules on imported goods were amended to treat operators of online marketplaces as liable for returning GST, as opposed to individual sellers. Now the rules are being expanded to include listed services, such as accommodation, ride-sharing services and food delivery services.

Previously, large market operators like Airbnb or Uber were not liable for returning GST on services that were supplied through their platform. Instead, the underlying supplier of the services (the home owner or driver) would only have to register for and return GST if their taxable supplies exceeded $60k per annum.

In order to ensure fairness with other operators in the economy, from 1 April 2024, the rules have changed to treat the market operators of these listed services as the supplier for GST purposes. For example, when someone books a holiday home through one of these suppliers, the market operator (the one facilitating the supply of the service) is liable to account for GST on the rental price to Inland Revenue. This applies regardless of whether the underlying supplier (the person that owns the accommodation) is registered for GST or not.

Essentially, the market operator will now be left with less cash from each transaction. It is likely that these market operators will either look to increase the listing price to the end consumer or reduce the net proceeds paid to the underlying supplier.

One of the fundamental aspects of the GST system is that GST can be claimed on goods and services acquired for use in making supplies. An underlying supplier that is not GST registered would not be able to do so. To achieve a similar economic outcome, a flat-rate credit of 8.5% applies. This percentage was determined to be the average value of GST input tax deducted by taxi drivers and holiday home owners and must be taken as a deduction by market operators where the underlying supplier has not notified Inland Revenue that they are GST registered. The market operator must then pass on the credit to the underlying supplier. This has the effect of allowing underlying suppliers a standardised input tax deduction against the GST output tax liability.

There is further devil in the detail that should be worked through on a case-by-case basis, such as how the flat rate credit is treated for income tax purposes and to what extent should income tax deductions be claimed for costs that have a mixed purpose.

These rules are now in effect and might explain why the price of some holiday accommodation has just gone up.

Automation and accounting

Thu, 27 Jun 2024 00:40:26 GMT

All too often we get into a routine without stepping back and considering why we are doing things. The same goes with our accounting systems and processes. Your finance team is probably busy keeping on top of their day-to-day workloads but has consideration been given to how productivity can be improved through the use of readily available software? Automation in your accounting system through software could transform your finance function. Not only will it create efficiencies and improve productivity, but the team will appreciate some of the more mundane tasks being removed from their monthly to do lists.

There is a multitude of accounting apps and add-ons to your existing accounting systems on the market and these continue to evolve and improve.

Determining what is appropriate for your business involves consideration of each element in the accounting process to identify options for improvement.

For example, software solutions could be used to streamline and simplify the following aspects of accounting:

Accounts receivable – automation can optimise your cashflow through debtor management and acceleration of the accounts receivable collection process. For example, automated invoice reminders can be sent to customers for overdue payments and customers can pay electronically via payment gateways (e.g. Stripe) adding convenience to the payment collection process.

Accounts payable – repetitive, manual and time-consuming data entry could be minimised through the use of software such as Dext, Hubdoc or the Xero bills function – all of which extract key data from invoices and input it into the accounting system. Further, e-Invoicing functionality allows supplier invoices to be received directly into your accounting system.

Inventory management – depending on the industry in which you operate, inventory management software can streamline recording, tracking, and re-ordering of inventory.

Cashflow management, forecasting and reporting – automated tools which allow real time data analysis and planning to enable timely decision making. The likes of Spotlight Reporting, Figured or Fathom allow businesses to budget, forecast and monitor progress in a timely manner.

Payroll – cloud-based payroll systems such as PaySauce, iPayroll or Smartly allow employees to record hours, view rosters, request leave and view payslips all via their phones. The payday filing process is also seamlessly managed.

Industry specific automation – there is a range of sector specific software that may also be relevant to your business.

Each business is unique so factors such as, pricing, features, ease of use, integration into your current accounting system and availability of customer support should be considered to determine the best fit for your business. Investing in automation and technology will empower your business, your finance team and save time.

Government reverses interest deductibility limitations

Thu, 27 Jun 2024 00:40:24 GMT

With the new Government now firmly settled in, legislation has been passed which reverses the interest deductibility limitation rules that were introduced by the previous government in 2021.

As previously introduced, the rules phased out the ability to deduct interest on loans drawn down before 27 March 2021 to purchase residential property over a period of five years. For loans drawn down after 27 March 2021, no interest deductions were allowed unless the property qualified as a ‘new build’.

Under National’s tax policy released as part of the election process the deductibility percentage was to increase to 50% for the 31 March 2025 year (as opposed to 25% under the then-current legislation), then phase it back in over the following two years. As detailed in the legislation, the restoration is being sped up, with the new rates as follows:

Date interest incurred - % of interest claimable

1/04/24 to 31/03/25 - 80%
1/04/25 onwards - 100%

This phasing applies to all taxpayers, regardless of whether their lending was drawn down prior to 27 March 2021 or not. This means those who are not currently entitled to deduct any interest will go from 100% non-deductible for the year ended 31 March 2024, to 80% deductible for the year ended 31 March 2025.

Under the old rules, there were various exemptions which meant the rules did not apply to some taxpayers, the most common being a property falling under the definition of a ‘new build’. These exemptions continue to apply, with the rules being completely repealed from 1 April 2025 once all taxpayers are entitled to the same 100% deductibility.

Also under the old rules was a provision that would allow taxpayers to claim a deduction for any previously denied interest amounts, if the eventual sale of their property was subject to tax. Importantly, this provision still applies. This means that any taxpayers with denied interest amounts should continue to keep track of these if there is a chance the future sale of their property will be subject to tax.

The phasing back in under this regime should be relatively simple, with only a small amount of complexity existing for those with non-standard balance dates. For example, for someone with a 30 June balance date who has a pre-27 March 2021 loan, when preparing their 2024 income tax return, they would claim 50% of their interest from July 2023 – March 2024, then 80% of their interest for the remaining 3 months.

These changes see the treatment of residential property become more aligned with normal tax principles, reducing complexity and compliance costs for ‘Mum and Dad’ investors.

Changes to bright-line rules

Thu, 27 Jun 2024 00:40:22 GMT

Along with changes to the interest deductibility rules, legislation has been passed which repeals the current bright-line tests, replacing them with a new (or old) 2 year test.

There were previously three separate bright-line tests which applied to the sale of residential land:

Land acquired on or after 27 March 2021 that is not a ‘new build’: 10-year test.
Land acquired on or after 27 March 2021 that is a ‘new build’: 5-year test.
Land acquired on or after 29 March 2018 but before 27 March 2021: 5-year test.

The changes repeal all of these tests and replaces them with a 2-year test applying to all residential land equally (no longer a different treatment between a new build and a non-new build). It applies to disposals that occur after 1 July 2024, i.e. a property settled before 1 July 2022 and sold after 1 July 2024 will not be subject to the bright-line test.

The main home exclusion that required an apportionment between the time and area that the property was used as a main home is also repealed. Under the two-year regime, to qualify for the main home exemption the home must be predominately (more than 50%) used as such, both from a time and land area perspective.

Rollover relief rules are also extended to capture more types of transfers, allowing the transferee in some situations to obtain the original purchase date and cost of the transferor. For example, transfers can now be made between relatives within two degrees of blood relationship without triggering a bright-line disposal.

Each of these changes revert the rules closer to their original intended purpose, which was to bring gains made by property speculators into the tax net.

2024 Budget

Thu, 27 Jun 2024 00:40:18 GMT

Below is a summary of the main tax changes from the 2024 Budget.

Increasing personal income tax thresholds reduced income tax for people earning more than $14,000 per annum. This reduction in personal income tax is the first since 2010.

Current Brackets $ New Brackets $ Rate

0 - 14,000 0 - 15,000 10.5%

14,001 - 48,000 15,601 - 53,500 17.5%

48,001 - 70,000 53,501 - 78,100 30.0%

70,001 -180,000 78,101 - 180,000 33.0%

180,000+ no change 39.0%

Extending the income limit for the independent earner tax credit to $70,000 per annum means an additional 420,000 additional people (not receiving Working for Families, main benefits or Superannuation) are eligible for up to $20 per fortnight.

Increasing the in-work tax credit means an estimated 160,000 low to middle income working families will get up to $50 extra per fortnight

The new Family Boost payment will help an estimated 100,000 families with the costs of early childhood education, by up to $150 per fortnight.

For information on how the tax package will benefit you, visit the tax calculator at www.budget.govt.nz/taxcalculator

Assessing your business's viability

Fri, 22 Mar 2024 02:23:20 GMT

Sitting back at your desk after a month of busy family time or relaxing beach days, business owners and executive teams should start to think about not only the year ahead, but the long-term viability of their businesses.

With rapid changes and multiple existential threats impacting different businesses in different ways, it might be an opportune time to ask yourself:

Do you expect your market and/or customers to be subject to fundamental change?

Will your business be viable in ten years’ time if it continues on its current trajectory?

Do you have the option of carrying on as you are and hoping for the best, or do you need to make some proactive (and potentially risky) changes to give your business the best chance of continuing into the future?

With pressure from consumers for reinvention intensifying, it’s no surprise that we are seeing businesses adopting new technology. Air New Zealand, aware of its reliance on fossil fuels, is looking at new ways to power their aircraft fleet. They have just purchased their first all-electric aircraft which will operate cargo routes starting in 2026. They also plan to begin replacing their regional domestic fleet with more sustainable aircraft, with goals to use either green hydrogen or battery hybrid systems from 2030.

Other companies are pivoting into new areas to meet changing consumer demands. For example, consider the amount of ‘plant-based alternatives’ available today, with fast food restaurants like Burger King offering an entire range of plant-based meat.

It's no secret that climate change and sustainability are hot topics at the moment, and while much of the change is driven by Government, the reality is that consumers are forcing these changes with their wallet. It is becoming more and more common for a business to accept a lower return on climate-friendly investments, showing a willingness to accept a trade-off of financial return for sustainability outcomes.

Electric vehicle sales are rising across the country, and while it might not have been a consideration 20 years ago, consumers now consider whether the products they purchase have been ethically and sustainably produced. Companies even need to be mindful of sustainability if they want access to capital, with banks, investors and equity funds refusing to invest or adopting a sinking lid approach depending on the industry a company operates in.

The changes happening now are not just something that the big companies need to worry about. Small companies are more likely than their larger company counterparts to feel their company’s viability threatened, and for good reason. The shifts over the coming decades will have flow on effects to all facets of business. Think electric cars – what is a mechanic doing 20 years from now, or a petrol station operator, or the person that leases the land to the petrol station?

By taking the time to reflect, you place yourself in a much better position to not only survive the next few decades but also capitalise.

Beware of deemed dividends

Fri, 22 Mar 2024 02:23:19 GMT

The concept of what is a “dividend” is very broad and starts with the default proposition that any transfer of value from a company to a shareholder is a dividend. That concept includes the simple scenario of an interest free loan to a shareholder or a person associated to a shareholder; which can also include loans between companies.

This matters because a dividend is taxable to the recipient, but not deductible to the payer, i.e. it gives rise to a net tax cost. The standard solution to eliminate the dividend is to charge interest on the loan at either a market rate or the prescribed FBT rate (depending on the parties to the loan).

But not all interest free loans made by a company will give rise to a deemed dividend, some do, some don’t and this is an area where mistakes are often made resulting in either no interest being charged when required, or interest being charged when it is not required.

When determining whether loans between related companies can be interest-free or not, two key sections of the Act should be considered – sections CD 27 and CW 10.

If section CD 27 applies, a transfer of value is specifically excluded from being a dividend and then can be ignored for this purpose. The section applies to ‘downstream’ dividends, e.g. a loan from a parent company to a subsidiary. The provision itself is complex and needs to be worked through on a case by case basis, but it is helpful.

If the exemptions in section CD 27 do not apply and a dividend has arisen, then section CW 10 may help. The section is a broader provision that deems a dividend between wholly owned companies (i.e. companies that have identical shareholders) to be exempt income of the recipient.

This is an area Inland Revenue has and will continue to scrutinize, as seen in a recent Technical Decision Summary (TDS), TDS 24/01.

The TDS concerned an interest-free loan made from a parent company (Company C) to a subsidiary (Company A) and whether the interest-free loan gave rise to a dividend to Company C (yes, the lender).

Importantly, the Tax Counsel Office (TCO) initially points out that Company A is the recipient of the value (being the interest-free loan), hence no dividend has arisen to Company C. The TCO then concluded that the exclusion under section CD 27 applied such that the interest-free loan did not give rise to a dividend.

The TDS also commented on whether the arrangement comprised ‘tax avoidance’ and stated that it did not raise any tax avoidance concerns because the legislation was working as intended because the Act contemplated capital could be provided by way of interest free loan.

Reading between the lines, it appears an over eager person at Inland Revenue was trying to find something that wasn’t there.

As an aside, trusts legally do not pay dividends, hence the deemed dividend risk and therefore the need to charge interest (from a tax perspective) should not apply to a trust

De Facto relationship or not?

Fri, 22 Mar 2024 02:23:17 GMT

The Working for Families Tax Credit (WFFTC) is a notoriously complex scheme when it comes to determining eligibility and quantifying entitlement. This leads you to wonder how well the scheme is policed by Inland Revenue, and whether fraud is able to ‘fly under the radar’.

Accordingly, it was heartening to see a case brought before the Taxation Review Authority in October of last year regarding a taxpayer making false claims about their de facto relationship.

The taxpayer claimed $39,740 of WFFTC’s for the years 2015 to 2018 on the basis that they were a single parent. However, at the time they were living with a Mr X, with whom the Commissioner considered the taxpayer to be in a de facto relationship.

Support was given by the taxpayer, their sister, and Mr X claiming that no de facto relationship existed. However, the evidence to the contrary was extensive. They lived together, went on holidays together, had social media profiles that indicated they were a couple, attended work functions as a ‘couple’ and were financially interdependent. As a result, the income of Mr X was deemed to be included in the WFFTC calculation and the taxpayer’s actual entitlement for the four years was reduced to nil.

If the taxpayer was not satisfied with this, the Commissioner went further to say that regardless of whether a de facto relationship existed or not, their entitlement would have been reduced anyway due to the taxpayer stealing from her place of employment. Because they had stolen money, it would count as income towards the calculation of their WFFTC and their entitlements should have been reduced in 2016 and 2018, and no entitlement would have existed in 2017.

The taxpayer claimed that the Commissioner should exercise their discretion to not collect tax given that the stolen money was used to fund their gambling addiction. Unsurprisingly, the Commissioner held that the taxpayer’s circumstances were ‘far from justifying the exercise of such a discretion’.

Although this case demonstrates some absurd circumstances, it provides comfort that Inland Revenue does apply resources to ensure schemes such as WFFTC are policed and that their exploitation is met with appropriate action. It also demonstrates the variety of investigation skills within Inland Revenue and provides a warning for those who are considering stretching the truth when it comes to their WFFTC claims.

Brief summary of tax changes

Fri, 22 Mar 2024 02:23:16 GMT

You would have seen a lot of this in the news recently about these changes, so we thought a brief summary would be useful. If you have any queries about how these changes might impact you, please contact us and we can help evaluate your situation.

Interest Deductibility

The ability to claim interest deductions will be phased back in with 80% of deductions allowed from 1 April 2024 to 31 March 2025 and 100% allowed from 1 April 2025 onwards.

Phasing back in of interest deductibility will be allowed for all taxpayers, whether they acquired the property, or drew down lending, before or after 27 March 2021.

Brightline Changes

The current 10 year and 5 year new build bright-line tests in section CB6A will be repealed and relaced with a new 2 year bright line test.

The main home exclusion in section CB16A will be returned to its original form. The exclusion will apply if the land has been used predominantly ( i.e. more than 50% of the land area), for most of the time the person owned the land (i.e. more than 50% of the period) for a dwelling that was the person's main home.

Removal of Depreciation on Commercial Buildings

The depreciation rate for all buildings with an estimated useful life of 50 years or more will be set at 0%. The 0% means buildings will remain depreciable property and historical depreciation deductions will remain recoverable when calculating depreciation recovery income. The 0% rate will apply to buildings regardless of when the building was acquired. The estimated useful life is determined on a whole of life rather than remaining life basis.

Trust tax rate increase

The trust tax rate will increase from 33% to 39% from 1 April 2024. If a trust has net income of $10,000 or less the tax rate will remain 33%.

If you have a company with retained earnings with a trust shareholder, you may wish to consider declaring a dividend before 31 March 2024 - please contact us as soon as possible if you think you might be in this situation.

Is your Christmas spirit tax deductible

Sun, 17 Dec 2023 20:15:47 GMT

Christmas is fast approaching and so is the time that businesses may reward customers and staff with Xmas functions and Xmas gifts. This article considers the deductibility of these expenses.

Fully Deductible

Gifts to clients are 100% deductible, provided they do not come within the Entertainment Rules (below). For example, gifts to clients of movie tickets, books or calendars would be fully deductible.

Entertainment Rules

The following is a list of the types of entertainment where deductibility is limited to 50%:

The cost of corporate boxes, corporate marques or tents
The cost of accommodation in a holiday home or time-share apartment
The cost of hiring a pleasure craft
The cost of food and beverages enjoyed in any of the three locations listed above
Food and beverages enjoyed on or off the business premises for a social event

GST on these expenses is also limited to 5 0%.

So gifts of beer, wine and food to clients will be 50% deductible, as will food and beverages provided at a Xmas social function with clients or staff.

FBT Rules

$300 per quarter per employee (if the employer pays FBT quarterly); or
$1,200 per annum per employee (if the employer pays FBT on an annual basis); and
Total unclassified fringe benefits provided by the employer to all employees is not more than $22,500 per annum

Dividends - get the basics right

Sun, 17 Dec 2023 20:15:45 GMT

When the top personal tax rate for individuals increased to 39% from 1 April 2021, it was not surprising to see an increase in the number and quantum of dividends declared by companies (owned by individuals) in the lead up to the change.

With the anticipated increase in the Trust tax rate from 33% to 39% from 1 April 2024 next year (for trusts with a 31 March balance date) it is likely a similar increase will occur. Given the expected 6% difference in tax payable it is reasonable to assume Inland Revenue will review any dividend payments it happens to encounter as part of their audit activity. Worst case, Inland Revenue could assert a dividend was not ‘properly’ documented and therefore not legally effective or the process followed meant that it was “derived” by the trust after the 39% rate came into effect. It is therefore important to get the basics right.

A company is generally able to attach imputation credits (comprising previous tax paid) to a dividend, and where it is being paid to a trust that does not hold a certificate of exemption from resident withholding tax (RWT), RWT will need to be withheld and paid to Inland Revenue by the 20th of the month following payment. A late payment of RWT would comprise a potential ‘flag’ that a dividend was not properly executed ‘on-time’.

Dividends are not always paid in cash. It is common for a company to declare a dividend and credit the amount to its shareholders’ current accounts. The process of journaling the dividend can comprise “payment” as it provides the mechanism or entitlement for a shareholder to extract cash from the company in the future or is often used to clear an ‘overdrawn’ shareholder current account. A potential risk is that if the journalling is completed late, say after 1 April next year, the dividend income could in fact be derived at that time and therefore taxable at 39%. If a dividend is to be paid in cash, it should be paid prior to 1 April 2024.

Some may try to argue the date of the dividend resolution is sufficient. However, rather than rely on a ‘view’, paying the cash or entering the journal should put the matter beyond doubt.

Care and attention need to be taken, to ensure getting the basics wrong does not cause a problem.

Business Payment Practices Act

Sun, 17 Dec 2023 20:15:42 GMT

The Business Payment Practices Act 2023 (‘the Act’) was enacted on 26 July 2023. It will require certain entities (‘reporting entities’) to publicly disclose specific information about their payment practices.

Making up over 97% of all businesses in New Zealand, small businesses often do not have the financial resources or market influence to cope with late or long payment times. Payment delays from customers can create significant cashflow problems. The purpose of the Act is to provide greater transparency in business-to-business payments and enable members of the public and other entities to access information about those payment practices, so that they can make informed decisions about who they want to do business with.

An entity will be a reporting entity and subject to the disclosure requirements under the Act if, at each of its two preceding accounting periods, it had (together with its subsidiaries):

total revenue of more than NZ$33m, and
total third party expenditure (excluding salaries and wages) of at least NZ$10m.

A reporting entity will be required to make disclosures every six months on a publicly searchable register. The first disclosure period runs from 1 July 2024 – 31 December 2024, with the second disclosure period running from 1 January 2025 – 30 June 2025. However, only reporting entities which had (together with its subsidiaries) total revenue exceeding NZ$100m at each of its two preceding accounting periods are required to disclose from the first disclosure period commencing 1 July 2024. This phased approach provides additional time for smaller reporting entities to transition to the new rules, for example, to change or put in place new processes and systems to be able to comply.

Reporting entities will have up to three months after the end of a disclosure period to file their disclosures.

The points below summarise the different types of information that will be required to be disclosed by a reporting entity every six months:

The average payment time for invoices (from when invoices are received to when paid in full).
The percentage of the total number of invoices paid in full within specified day periods.
The percentage of the total value of invoices paid in full within specified day periods.
Whether the reporting entity allows other entities to use e-Invoicing.
Whether the reporting entity uses standard payment terms and what those terms are.

There are a number of exclusions (i.e. information not required to be disclosed) from the disclosed information for items such as: salary/wages, tax, rent or lease, utilities charges, transactions not in NZD and intra-group transactions.

Penalties will apply for non-compliance, including up to $9,000 for failing to make a disclosure, and up to $50,000 for an individual or $500,000 for an entity for filing false or misleading information.

If your business meets the definition of a reporting entity, it is time to start considering what internal processes will need to be implemented to ensure compliance with the Act. For small businesses, it won’t be too long before you’ll be able to search the payment performance of some of your suppliers.

Covid fraud

Sun, 17 Dec 2023 20:15:40 GMT

Given the necessity of providing fast relief, the wage subsidy scheme provided during COVID in NZ was largely based on trust.

Today, MSD operates a Wage Subsidy Integrity and Fraud Programme aimed at ensuring the integrity of the payments and who received them. So far, 38 people have been brought before the courts in relation to wage subsidy misuse, 37 businesses have civil recovery action underway to recover payments and 11 cases of significant and complex alleged wage subsidy fraud have been referred to the Serious Fraud Office. By and large, businesses in NZ were sincere in their wage subsidy claims, but overseas there are some more extreme examples where this was not the case.

Each year, the Association of Certified Fraud Examiners selects the five most scandalous fraud stories of the year. One of those stories was the arrest of 47 people affiliated with a Minnesota based non-profit ‘Feeding our Future’, which defrauded USD$250 million in COVID relief funds through claiming to feed children during the pandemic. The elaborate scheme used various fake documents, invoices and shell companies to give the appearance of providing meals to children, while using the money to purchase luxury cars, jewellery and coastal property abroad.

Research and development regimes

Sun, 17 Dec 2023 20:15:39 GMT

New Zealand currently has two different tax concessions aimed at encouraging research and development (R&D). Namely, the Research and Development Loss Tax Credit (RDLTC) and the Research and Development Tax Incentive (RDTI).

The RDTI has been in effect for eligible R&D activities from the 2019/2020 income year and was introduced to support the then Labour Government’s target of raising the total amount of R&D performed in New Zealand to 2% of GDP by 2028.

If an entity qualifies for the RDTI regime, it is able to claim a tax credit calculated as 15% of its total eligible R&D expenditure. This tax credit can be refunded when the taxpayer is in a tax loss position.

The RDLTC has been around for longer than the RDTI – it applies to income years that commenced on or after 1 April 2015.

The RDLTC acknowledges that companies engaged in intensive R&D tend to have significant up-front costs, and as a result, tax losses in their early years. Hence, the aim of this regime is to assist with cashflow by allowing an eligible company to ‘cash-out’ (and forfeit) its tax losses in an income year, in exchange for a payment; RDTLC payment = eligible tax loss x corporate tax rate (28%).

The way the regime is intended to work, is that the payment is subsequently repaid as the company derives taxable income – as the company has forfeited its tax losses, it will repay the RDLTC through paying income tax on its taxable income.

Subject to meeting the eligibility criteria of both regimes, a business can claim both the RDTI and RDLTC under the same R&D activity. However, a few notable differences exist between the regimes:

Only New Zealand Companies can be eligible for the RDLTC, whereas partners, owners of look-through companies and members of joint ventures can also be eligible for the RDTI if certain conditions are met.
There are differing definitions of R&D - the RDLTC uses the accounting definition NZ IAS38 whereas the RDTI definition of eligible R&D is set out in the legislation.
The RDLTC expenditure can only be claimed for R&D expenditure incurred in New Zealand, · whereas the RDTI can include foreign expenditure, up to 10% of the eligible spend.
To qualify for the RDTI, a business must have spent at least $50,000 on eligible R&D expenditure, whereas the RDLTC does not have a minimum expenditure requirement.
The RDTI is not required to be repaid, while certain events will trigger the repayment of the RDLTC (if it hasn’t already been repaid through the mechanism outlined above).
The RDTI requires that activities are approved before claiming the expenditure with strict deadlines applying. For the RDLTC the activities and expenditure are submitted together at the end of the financial year.

The type of activities that can qualify under the regimes are broad, hence if your business has or is looking at incurring expenditure on creating or improving processes, services or goods, even for internal purposes, it may be worth finding out if the regimes could apply.

Tax Pooling & Provisional Tax

Sun, 17 Dec 2023 20:15:37 GMT

For a standard 12-month year, provisional tax is due in three instalments. The instalments generally fall on the 28th day of the fifth, ninth and thirteenth months. However, this is varied in certain situations. For example, for a business with a 31 March balance date the instalments are due on 28 August, 15 January and 7 May. The second and third instalments being pushed out due to the Summer and Easter holidays, respectively.

Most taxpayers use the ‘standard uplift’ method where instalments are calculated based on the previous year’s (“year-1”) residual income tax (RIT) +5%, or the RIT from two years ago (“year-2”) +10% if the prior year tax return has not been filed.

Understanding the way provisional tax works is complicated by the fact there are different rules for the purpose of late payment penalties versus interest. This means it is possible to pay the required amount on-time, as calculated under the standard uplift method, and not be subject to late payment penalties. But then incur interest from that same point because the final liability for the year exceeds the provisional tax amounts paid.

Whilst the rules can be complex, concessionary changes over the past few years have made the regime less onerous and costly. For example, provisional tax use to be calculated as at a particular instalment date based on the most recently filed income tax return, whether year-1 or year-2. If profits declined across the two prior tax return periods, the provisional tax payable would not be reduced until the most recent return was filed and only for subsequent provisional tax payments.

Under current rules, the amount due at a past instalment is re-calculated based on the lesser of year-2 or year-1. This ‘lesser of’ approach means there is less risk in choosing to pay a lower amount of provisional tax based on the prior year’s estimated taxable income, even though the income tax return for that period has not been filed.

Finally, the practical effect of tax pooling means late payment penalties and interest based on punitive Inland Revenue rates should be a thing of the past.

To illustrate the way tax pooling works is to imagine a large company like Air NZ at the start of Covid. Things were looking up, then Covid hits and profit plummets. Any provisional tax previously paid would likely be spare and otherwise refunded by Inland Revenue at a low interest rate. Alternatively, if Air NZ paid its provisional tax to a tax pooling intermediary, that tax can be sold to other businesses ‘effective’ as at the date Air NZ paid it. Then let’s say another business has outperformed expectations and therefore has a large tax bill, but under the provisional tax rules, interest is being charged from its third provisional tax date of 7 May. It can go to Air NZ and purchase some of its excess tax that it paid on 7 May.

There is a cost to tax pooling, but it is less than what Inland Revenue charges and Air NZ would receive a margin that is more than what Inland Revenue would have paid. Everyone wins, well almost everyone…

At the extreme, if a business has a borrowing rate similar to the tax pooling cost, it could choose not to pay any provisional tax during the year and instead use tax pooling to purchase the exact amount required at each instalment date once their tax return has been filed. With the current interest rate on underpayments of 10.91%, tax pooling should be front of mind when the provisional tax dates roll around.

McIsaacs Ltd have a partnership program with Tax Traders Ltd, our tax intermediary. If we calculate you have additional tax payable we always consider a tax purchase and will discuss the various options available to you.

Xero - Tip du Jour

Tue, 05 Sep 2023 05:23:17 GMT

Below are some useful tip to save time using Xero.....

Multiple pages

To view multiple pages in your Xero organisation at the same time using tabs:

To open a link in a new tab on a PC, right click on a link and select Open a new tab .
To open a link in a new tab on a Mac, hold down the Command key and clink on the link

Don't use tabs to view multiple Xero organisations.

Xero's Inbuilt Calculator

Xero has an inbuilt calculator that allows you to calculate amounts as you create transactions.

When you enter a calculation in a field, then press Enter or Tab on your keyboard, Xero calculates the result.

The calculator is available in the Quantity , Unit Price and Disc % fields in transactions, and the Debit and Credit fields in manual journals. In new invoicing, discount percentages are calculated automatically, so the calculator isn’t available.

The basic arithmetic functions you can use are:

Function Key Example

Add + 495.12+56.89

Subtract - 153.45-26.23

Multiply * 50*7

Divide / 670.25/.33

Group () (26.45*.75)+10

Note is is unlike excel and you don't need to put the equals = sign in front of the transaction.

Advisory Boards - Factsheet

Tue, 05 Sep 2023 05:23:15 GMT

Advisory Boards valuable because most business owners lack accountability and lose focus owing to competing pressures, complacency or lethargy. Advisory Boards bring focus and accountability.

Many business owners have specific skills and experience, but are faced with situations that require other skills and experience. Advisory Boards will either have that skill and experience or know where to find it.

Achieving the businesses vision is the ultimate goal. Advisory Boards help provide the leadership that will keep every day actions aligned with the Vision and Strategic objectives of the business so that the business serves its Purpose in the lives of its owners.

The purpose of an advisory board is to:

Establish effective Governance;
Develop and hold a strategic view;
Have an alignment of actions and implementation with goals;
Develop and implement a succession framework;
Provide a sounding board / shared load

This is achieved by:

Complementing the mix of skills and experience of the owner(s) / management team;
Providing an outsiders viewpoint;
Focusing on strategically important priorities, not the day to day management of the business.
Holding Leaders accountable for Strategic Roadmap implementation.
Distinguishing between roles of owner, director and employee.

Ideal composition of an advisory will vary for each entity depending upon, the field of business, the internal skills styles and personalities of the owners and management.

1. Experience across a broad range of business in Governance and Business Improvement;

2. Strengths in one or more of the following fields:

a. Governance;

b. Accounting, Finance, Business negotiation;

c. Business Leadership management;

d. Personnel selection and management;

e. Marketing and Sales;

f. Organisational development;

g. Product & Technology development;

h. Operations;

i. Legislative environment.

3. Compatibility with Owners & Empathy with their business values.

4. One lead person to keep meetings on track (usually appointed chairman) and one lateral thinker to challenge the norm.

How to choose an Advisory Board member?

The composition will be internal Leaders and External Advisors.

Internal Members

Internal members will be Leaders of functional teams who exhibit an ability to, not only lead their functional area but, contribute significantly to the increasing performance & value of the business.

External Members

The Chair needs to command the respect of all Advisory Board members but in particular the Directors. This requires a combination of organisation, structure, process, empathy and experience. Industry knowledge is not a pre-requisite. A bonus is a skill set different and complimentary to the internal Advisory Board members.

Specialists in areas the business has greatest need should be considered for the second external spot on the Advisory Board. Where the Chair is an internal member a second specialist may be of value.

Duration of AB members

Advisory Board members are appointed by the owners (or their representatives for specific purposes.)

To ensure the purpose, relevance and value are being maintained the role of external Advisory Board members should be reviewed periodically:

a. Specialist, every 3 to 6 months

b. Chair, every 6 months to year

c. In the event of major changes to the Strategic Plan

We have found some SME's think having an advisory board is over the top for them, but the information above for Advisory Boards can be modified to suit a smaller business. It can be as simple as having an accountant or lawyer on board to provide that external sounding board on a regular basis, to hold you to account and keep you on track with your vision. If you would like to find out more, just give one of our directors a call.

Tax ourselves out of recession?

Tue, 05 Sep 2023 05:23:06 GMT

The buoyant covid subsidy funded days are behind us, New Zealand has entered a ‘technical’ recession. This was reinforced by the recent announcement that New Zealand’s corporate tax paid was almost 11% down in the 11 months to May relative to Government expectations. A drop in the corporate tax take reflects the declining profits of businesses, coinciding with a decline in output. While profits have declined, there is little to ease the tax burden for businesses with no relief measures in place in a volatile market.

From all the industries feeling the pinch of economic downturn, the construction sector has arguably been hit hardest. As property prices decline, construction costs continue to rise sharply, impacting margins and the ability of property focused businesses to service debt.

Many builders and property developers will be holding land that has dropped in value within months of acquisition. By valuing closing stock at “market selling value” most businesses are able to claim a tax deduction for the drop in the value of their inventory prior to sale, as long as the value is supported by market data. However, as land is specifically excluded from the trading stock rules, businesses that derive income from the sale of land cannot deduct losses in value until the land is sold. The misalignment in treatment is arguably a kick to an industry that is already down.

One of the temporary tax measures introduced in response to Covid-19 enabled tax losses to be carried back to the prior year to recoup previously paid tax. A strong 2022 financial year followed by a volatile 2023 raises the question whether a similar loss carry back scheme could be implemented now to cash out current year losses when businesses need it most. With the next 12 months showing little signs of an economic boom, it could be a few years before some businesses can claim current period losses under the current tax rules.

With operating costs growing, investment in capital is being reconsidered and potentially delayed. The ability to claim an immediate tax deduction for small capital items could incentivise businesses to proceed with projects. The reintroduction of a higher threshold for low value assets at $5,000 or more is another option for the government to encourage investment in productive assets that create more opportunities. This could be further extended similar to the relief measures Australia provided where small businesses had the potential to temporarily write-off assets to the value of $150,000 encouraging investment at a greater scale.

While the timeframe for such write-off’s has ended in Australia, similar to New Zealand, these relief measures during the pandemic illustrated how tax can be used to drive business investment and reduce the tax burden on businesses during an economic downturn.

Taxation Principles Reporting Act

Tue, 05 Sep 2023 05:23:04 GMT

The Taxation Principles Reporting Act was enacted on 25 August 2023. It requires the Commissioner of Inland Revenue to report on New Zealand’s current tax settings based on specific principles.

A hybrid reporting model will be used where a full comprehensive report will be produced three-yearly, with interim reports produced annually. The first full report is proposed in 2025. There are seven universally accepted’ tax principles to be reported on, these are horizontal equity, efficiency, vertical equity, revenue integrity, compliance and administrative costs, certainty and predictability, and flexibility and adaptability.

Two of the principles, horizontal and vertical equity, are often central to discussions regarding fairness in the tax system. Horizontal equity refers to the idea that individuals with similar economic income and circumstances should pay similar tax amounts. Vertical equity aims to ensure the tax system is progressive, with the amount of tax an individual pays aligning with their ability to pay.

Therefore, those with higher economic income, should contribute a higher proportion of their income to pay tax.

Instead of imposing clear-cut methods and measures for the principles, the Bill focuses on specific categories (measurements) of information which relate to the principles. These measurements are:

income distribution and income tax paid
distribution of exemptions from tax, and of lower rates of taxation
perceptions of integrity of the tax system
compliance with the law by taxpayers

The intentional focus on categories of information is to avoid restricting the Commissioner’s reporting, empowering them to judge which are the most appropriate analysis techniques. It intends to help to future-proof the reporting framework, allowing for flexibility for new developments and best practices in economic research and data analysis to be used.

The Act is intended to promote fairness within the tax system throughout changes in Government over time. However, a problem lies in who decides what is fair. It is inherently subjective and a matter of opinion. For example, when referencing horizontal and vertical equity the Act refers to economic income rather than taxable income. In New Zealand, not all economic income is taxable, such as capital gains and the value of the family home.

The legislation states “wealthy people should pay no lower an average rate of tax relative to their economic income than middle New Zealanders”. Given all economic income is not currently taxed, it would not be possible to satisfy this statement. Whether that is fair or not is open to debate and is ultimately decided by the public when voting at the General Election.

Leaky home repairs concluded as not tax deductible

Tue, 05 Sep 2023 05:23:01 GMT

The leaky homes crisis represents one of the most severe problems faced by New Zealand’s property sector and continues to cause stress and anxiety for those affected.

Adding to the uncertainty for rental property owners has been the question of whether repair costs are immediately deductible as ’repairs and maintenance’ (R&M).

Inland Revenue has assisted by providing guidance on determining whether repairs are deductible. The 2012 Interpretation Statement ‘IS 12/03 Income - deductibility of repairs and maintenance expenditure - general principles’ includes specific examples, but the issue is very fact specific and a matter of judgement.

Illustrating the continued uncertainty, Inland Revenue recently released Technical Decision Summary 23/07: Whether expenditure to resolve weathertightness issues is deductible. The TDS covers a dispute regarding leaky home expenditure deducted by a taxpayer and the decision by the Tax Counsel Office (TCO).

The dispute concerned a taxpayer who owned a rental unit within a block of six units, which were all connected by inter-tenancy walls. The block was also a part of a wider complex, consisting of other similar blocks. The unit in question required remediation work to resolve weathertightness issues.

While the property was untenanted, the remediation work was carried out by the body corporate and paid for by the taxpayer via a special levy. Simultaneously, the taxpayer also incurred expenditure for their unit to be painted.

The question was whether the capital limitation applied to deny the deductions claimed by the taxpayer in relation to the remediation and the painting. Inland Revenue asserted that the entire cost (including the painting) was capital, as the remediation work involved a reconstruction of the whole asset, or at the least, changed the character of the asset.

Conversely, the taxpayer argued that the expenditure incurred was deductible R&M as the remediation work was mostly limited to certain portions of the inter-tenancy walls and decks, while the painting comprised ordinary repairs and maintenance expenditure.

The TCO considered three relevant elements:

· Whether the work resulted in the reconstruction, replacement, or renewal of the asset, or substantially the whole of the asset?

· Whether the work done had the effect of changing the character of the asset?

· Whether the work was part of one overall project or was a series of projects that merely happened to be undertaken at the same time?

The TCO concluded that in the context of the remediation, the relevant asset was the block, given that the work was undertaken by the body corporate on a block-by-block basis and was not carried out solely within the boundaries of the unit. The work changed the character of the block due to the proportionally high costs, and the structurally significant improvements to the affected areas, which were important to the operation of the asset.

Hence, the capital limitation applied to deny a deduction for the remediation work. Conversely, the painting work was undertaken separately from the remediation work and considered deductible R&M.

GST registration checks

Tue, 05 Sep 2023 05:22:58 GMT

A standard data policing check completed by Inland Revenue is to review taxpayer GST filing patterns to identify taxpayers that are GST registered, but perhaps shouldn’t be.

In order to qualify for GST registration, a taxpayer needs to be conducting a “taxable activity”. This comprises a continuous or regular activity that involves making a supply of goods or services for consideration. This is a different test to whether a person is operating a “business” for income tax purposes, as it does not require an intention to make a profit.

A person is required to register for GST when the value of their sales exceed or are expected to exceed $60,000 in a 12 month period. But this issue is not about sales volume, because a taxpayer can voluntarily register for GST if sales are below this threshold.

The issue is whether the activity has stagnated to the point there is either no or very low activity levels, or sales have declined to the point where it suggests the activity has stagnated.

On deregistration, assets retained are deemed to be sold, which can give rise to a cash cost. But if reviewed by Inland Revenue there is a risk they may determine the GST registration should be cancelled at a past date or that the entity never qualified for GST registration – thereby requiring past GST refunds to be paid back.

Knowing that a ‘knock on the door’ might be coming, it is worthwhile to pre-emptively consider whether an entity you are responsible for should not be GST registered

Flooding events tax concessions

Fri, 09 Jun 2023 02:45:09 GMT

In response to the adverse weather events that hit in January and February this year, a number of tax concessions were released on 14 March 2023 in an attempt to provide some relief to those who were impacted.

The events have been collectively given the legislated name “North Island flooding events”, which has been defined as including the following events, dates and Districts/Regions.

Cyclone Hale: 8/01/23 – 12/01/23, Coromandel, Gisborne, Northland, Wairarapa, Wairoa.
Heavy rainfall: 26/01/23 – 3/02/23, Auckland, Bay of Plenty, Northland, Waikato.
Cyclone Gabrielle: 12/02/23 – 16/02/23, Auckland, Bay of Plenty, Gisborne, Hawke’s Bay, Northland, Tararua, Waikato.

Included in the March 2023 tax concessions are:

Where employees are required to relocate to work on a project of limited duration relating to the rebuild or recovery of an area impacted by a North Island flooding event, an employer can provide the employee with tax-free accommodation or an accommodation allowance, for up to five years provided the employee starts the project within six months of the flooding event. Normally this tax-free accommodation period for out-of-town projects is three years.

An exemption from PAYE and FBT for ex-gratia payments or benefits from an employer to an employee impacted by a North Island flooding event of up to $5,000, provided the payment or provision of the benefit is within eight weeks of the first date of the relevant event. Where the payment or benefit comprises accommodation, there is no $5,000 cap, however the eight-week time frame still applies.

Another response to the North Island flooding events was the extension of the temporary tax concessions relating to donated trading stock that were first introduced in response to Covid-19. They were due to expire on 31 March 2023, but will be extended to 31 March 2024.

For context, prior to March 2020, where a business disposed of its trading stock for less than market value, the business was treated as disposing of it for market value. As a result, a deemed taxable profit margin arose, creating a tax disincentive for businesses to donate their trading stock

As part of the COVID-19 related tax concessions, temporary amendments were made to this provision in March 2020 to allow businesses to make trading stock donations; for example, to hospitals or food banks, without incurring a tax liability on the donation.

There are two different treatments that apply:

Where donations of trading stock are made to a donee organisation (e.g. a registered charity) or a public authority, the deemed market value provision does not apply. As a result, in this scenario, a business would be allowed a deduction for the cost of the trading stock, with no deemed gross income arising.
Where donations of trading stock are made to non-associates that are neither a donee organisation or public authority, the business is treated as deriving an amount of income equal to the cost of the trading stock. As a result, in this scenario, the impact on the business’ taxable income is nil.

The deemed market value provision was originally introduced in the 90s as a tax avoidance measure, to address situations where sole traders were using their trading stock for private purposes. However, the disincentive for businesses who are genuinely trying to help their community does raise the question of whether the provision was too harsh – an obvious and easy solution would be to make these temporary amendments permanent.

Deductibility of holding costs for land

Fri, 09 Jun 2023 02:42:24 GMT

On 31 March 2023, Inland Revenue released a draft interpretation statement (PUB00417) addressing the deductibility of land holding costs - namely, interest, rates and insurance - and the relevance of whether the land is taxed on disposal. This had been an area of uncertainty since the introduction of the residential bright-line provisions in 2015, which can result in a disposal of land being taxable even if it was held on capital account or used privately.

Inland Revenue previously released a consultation document in October 2019, which considered three options in relation to a taxable disposal of land, where the land had been used wholly for private purposes (for example, a holiday home subject to the bright-line test):

1. Apportion the holding costs between the taxable gain and private use of the land.

2. Allow deductions for all holding costs, despite private use.

3. Deny deductions for all holding costs for periods of private use.

While Inland Revenue conceded that apportionment would provide the most accuracy, they concluded that due to complexity, the preferred option was to deny deductions for holding costs for periods of private use.

Inland Revenue’s view on this issue remains unchanged from the initial 2019 consultation document. The draft interpretation statement reaffirms that land held on capital account will not give rise to deductible holding costs, even if the disposal is taxable. It was emphasised that there must be a sufficient nexus between the expenditure and the derivation of income from the taxpayer’s income-earning process, and that taxpayers must look at what the land was used for in the period that the expenditure is incurred. Consequently, holding costs will only be treated as deductible to the extent that there is income-earning use of the land. It is further noted that income-earning use can comprise holding the land for the purpose of resale or deriving rental income, but specifically excludes holding the land on capital account, even if it is taxable under the bright-line provisions.

The statement also clarifies that if there is both private use and income-earning use of the land, then holding costs will need to be apportioned. In the first instance, attention should be given to whether the mixed-use asset regime applies, in which case specific rules must be followed. Otherwise, general principles should apply, such as a time-based or space-based apportionment. To complicate things further, the interest limitation rules and the residential ring-fencing rules may also need to be considered.

Given the increasing scrutiny and tightening of legislation on residential property in recent years, Inland Revenue’s stance is somewhat unsurprising.

Environmental correctness

Fri, 09 Jun 2023 02:42:23 GMT

The call for action regarding climate change and mitigating man’s negative impact on the planet is not new. However, there has been a shift in the last few years. It has moved from being a focus of ‘greenies’ and the ‘young’ to being accepted by the mainstream population as something that can no longer be ignored. It has evolved into a broader attitude encompassing Environmental, Social and Governance (ESG) issues. With it has come an expectation and pressure from all stakeholders - customers/clients, shareholders and employees alike – for businesses to prove they are taking ESG seriously and what actions they are taking.

It’s no secret that businesses have a large impact on the world's environmental state. Reports have found that 100 companies are responsible for 71% of the world's greenhouse gas emissions. To reduce this negative perception, global companies are betting big with sustainability investments. For example, international oil company BP have reformed their business by forming an ‘integrated energy company’ with a goal to reach net zero carbon emissions by 2050. They have created actional steps including developing offshore wind projects with capacity to power 5 million homes.

Realistic sustainable processes will vary depending on the nature and size of a business’ operations. Focus could start on the four low-hanging fruit of a company's operation - energy, water, material, and waste. Implementing change to reduce these elements not only addresses ESG expectations but can lower operational costs, as well as yield potential increases in revenue. For example, remote working has grown in popularity since COVID-19, and it has become an employee’s expectation that an employer will provide some form of flexible working. This offering is great for the environment, as fewer cars on the road equates to less carbon dioxide being emitted into the air. For paper items commonly used in the business place, look for materials made from post and pre consumer waste such as recycled products, which maintain a circular economy. There will be a portion of a business' carbon footprint that cannot be reduced through sustainable practices. For this portion, purchasing carbon offsets from carbon marketplaces can shift the needle to becoming carbon neutral.

Consumers are voting green with their wallets as they become educated about sustainability and ethical employment practices, causing buyers to reassess their purchasing habits. “Fast fashion” has become a well-known term – those who are lucky enough to afford it are doing their research about suppliers, to enable informed decisions when it comes to buying items such as clothes and shoes. People have become more willing to spend a bit extra for the peace of mind that they are not supporting unethical employment practices. In the same vein, existing and potential shareholders are increasingly scrutinizing a business’ non-financial results when making investment decisions.

While sustainability initiatives may not always deliver immediate benefits to the bottom line, a business that promotes environmental practices on the forefront of its business model may attract or retain clients and customers; while also connecting with its employees who value environmental sustainability at a personal level.

Trusts - 39% tax rate increase

Fri, 09 Jun 2023 02:42:22 GMT

Using a trust to manage and protect a family’s business and personal assets is common practice in New Zealand. However, the tax rules applicable to trusts also differ to that applicable to individuals and companies. With the top personal tax rate increasing to 39% from 1 April 2021 while the trust tax rate has remained at 33%, the differential provides a benefit in retaining income in a Trust to be taxed at 33%.

However, the nature of the trust’s activity, the assets held, the beneficiaries involved, and the costs incurred by the trust on behalf of its beneficiaries still need to be carefully managed. A common scenario is a trust being the sole shareholder of a company. A beneficiary of the Trust operates the company and pays themselves a salary. If the salary is intentionally set lower than market rates, with the remaining income of the company distributed to the trust in the form of a dividend, it could be deemed that a taxpayer has fixed the salary in an artificial manner to obtain a tax advantage and thereby is party to a tax avoidance arrangement.

Where taxable income derived by a trust is subsequently used to fund the lifestyle of beneficiaries there is a risk that IRD could take the view that the funds paid to the beneficiaries should be treated as taxable beneficiary distributions. When the top personal marginal tax rate and the trust rate was the same at 33%, there was no difference from a tax perspective and transactions were not subject to a high degree of review or scrutiny. Through this time, both trustees and their advisors may have taken a relaxed approach to how transactions were accounted for and documented. With income tax returns for the 31 March 2022 year now filed (by 31 March 2023), scrutiny by Inland Revenue is expected to increase, particularly if a beneficiary is subject to the top 39% tax rate.

Issues like this have not been the subject of material scrutiny in recent years because the tax rates were aligned at 33%. But with the rates no longer aligned, care and due consideration must be applied to ensure tax outcomes are as expected and not open to challenge.

One positive thing is we have time to wait and see whether the increase in trust tax rate is enacted and whether it would be reversed if there is a change of Government in October. If it is enacted there is time between the election result and 31 March 2024 to plan any income distributions and dividends prior to 31 March 2024.

If the trust tax rate does increase to 39%, there are still legitimate ways for trustees to mitigate their exposure to this tax rate including:

Retaining/ reinvesting income within companies that the trust is a shareholder in, so the income is taxed at 28%
Using PIE investments so the income is taxed at 28%
Distributing income to beneficiaries who are on lower tax rates than 39%

If you have concerns regarding the trust rate change, please contact us and we would be happy to review your personal circumstances.

FBT on motor vehicles refresher

Fri, 09 Jun 2023 02:42:20 GMT

Calculating Fringe Benefit Tax (FBT) on motor vehicles can be complex, due to the various permutations that can exist depending on the use of the vehicle, its type and the approach adopted by the employer. As a result, it is very common for businesses to get the calculation wrong.

As a refresher, a fringe benefit will arise when an employer makes a motor vehicle available to an employee for their private use, in connection with their employment relationship.

The amount of FBT payable depends on the value of the motor vehicle benefit. This is calculated based on either the cost price or depreciated value of the motor vehicle, multiplied by the applicable FBT valuation rate. The rate varies depending on whether the GST inclusive or exclusive cost or tax value is used - with the tax value method applying a higher percentage than the cost price method. As a result, the cost price method is typically used from ‘day 1’, while the tax value method becomes more favourable for vehicles that are held for more than five years.

The value of the fringe benefit is also apportioned by the number of days the vehicle is “available” for private use. It should be noted that the employee does not actually have to be using the vehicle for a fringe benefit to arise, it only has to be available for them to use. For example, if a vehicle is being repaired and is unavailable to the employee, this is generally considered an excluded day and would reduce the value of the benefit. Other examples of exemptions from days counted as available for private are where the employee is away on a business trip with the car for longer than 24 hours, or they are required to attend an emergency call. However, if an employee goes on a private holiday and uses their work vehicle to get to the airport, parking it there for the duration of their holiday will likely to be subject to FBT unless the employer and employee have specifically agreed otherwise.

If a vehicle qualifies as a work related vehicle, travel between home and work and other incidental travel on work days is not subject to FBT. To qualify as a work related vehicle:

· it must be sign-written,

· cannot be designed to mainly carry passengers, and

· employees must be notified in writing that the vehicle is not available for private use except for travel between home and work and travel incidental to business travel.

Close companies may also choose to not apply the FBT rules to motor vehicles. This is allowed where the only fringe benefit provided is the provision of up to two motor vehicles to shareholder-employees for their private use. In this case, they may choose to apply the rules in subpart DE, where expenses can be claimed based on the proportion of business use of the motor vehicle.

Proposed amendment to directors' duty

Fri, 09 Jun 2023 02:42:18 GMT

One of the fundamental director's duties within the NZ Companies Act 1993 (the Act’) is to act in good faith and in what the director believes to be the best interest of the company. This has traditionally been interpreted to mean decisions should be aimed at maximising shareholder returns. In September 2021, an amendment was proposed to make it clear that directors of companies can consider a wide variety of factors, such as:

recognising the principles of the Treaty of Waitangi (Te Tiriti o Waitangi),
reducing adverse environmental impacts,
upholding high standards of ethical behaviour,
following fair and equitable employment practices, and
recognising the interests of the wider community.

On 8 May 2023 the Select Committee recommended that the list above is not enacted, but instead replaced with the following:

“To avoid doubt, in considering the best interest of a company or a holding company for the purpose of this section, a director may consider matters other than the maximisation of profit”

This addresses submitters’ concerns that the original drafting of the bill may create inconsistencies within the Act, as well as confuse directors about their responsibilities. Further, some submitters felt that the law already allows a director to consider non-financial factors when deciding the best interest of a company.

We will wait to see what is ultimately enacted.

Rollover relief - Does it go far enough?

Mon, 14 Nov 2022 04:17:56 GMT

Residential property acquired after 27 March 2021 is subject to a 10-year bright-line period, or 5 years if the property qualifies as a ‘new build’. The extension to 10 years has increased the likelihood that a property transfer will be caught.

In an attempt to alleviate the risk that related party transfers would be unfairly taxed, some rollover relief was enacted on 30 March 2022 as part of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 and applies to disposals of land occurring on or after 1 April 2022.

The legislation is complex and attempts to cater for numerous factual situations, but at a high level, the rollover relief provisions allow residential property to be transferred at cost, rather than deemed market value, resulting in no taxable gain on the transfer.

Further, such a transfer does not restart the “bright-line clock” – the acquisition date under the bright-line provisions for the recipient would be the original acquisition date of the related transferor.

Where residential property is transferred to a family trust, rollover relief will apply in the following circumstances: each transferor of the land is also a beneficiary of the trust and at least one of the transferors of the land is also a principal settlor of the trust, and each beneficiary who is not a principal settlor is one of the following:

within four degrees of blood relationship with, or married to, or in a civil union or de facto relationship with, a beneficiary who is a principal settlor,
a company where a 50% voting interest is owned by a family member beneficiary,
a trustee of another trust that has a beneficiary who is also a family member beneficiary of the test trust, or
a charity.

Rollover relief will likely only apply to transfers of residential property from a family trust (where the beneficiaries are as outlined above) to a principal settlor of the trust. Given that the rollover relief is intended to apply where the economic ownership of the property has not materially changed, transfers of residential land to or from LTC’s and partnerships may also qualify for rollover relief.

However, this only applies where each person transferring the land has the same economic interest before and after the transfer.

Rollover relief will also apply where transfers of residential land take place within a wholly-owned tax consolidated group of companies.

Given that the ‘Bank of Mum and Dad’ is now NZ’s 5th largest home loan lender, these concessions do not go far to help the many who have their property partly or wholly held by their parents or a family Trust. Where a family trust wishes to transfer ownership of its property to a ‘child’ beneficiary, rollover relief will only apply if the child is also a principal settlor of the Trust – a scenario which would be few and far between.

For parents who own a house directly 50/50 with a child, the parent’s transfer of their 50% to the child would not be eligible for rollover relief at all, and hence it would be a case of waiting out the bright-line period to avoid any inadvertent and potentially material tax bills.

Are Technical Decision Summaries the key to information transparency?

Mon, 14 Nov 2022 04:17:53 GMT

Inland Revenue has started publishing Technical Decision Summaries (TDS’) from mid-2021. A TDS is an abridgment of either an adjudication or private ruling decision made by Inland Revenue’s Tax Counsel Office (TCO).

TDS’ will be published within three months of a technical decision being finalised. They are not binding and are for information use only, and will be archived after five years of publication. A TDS contains four sections: facts, issues, decisions, and reasons for decisions.

Not all private rulings and adjudication decisions will be published, but the aim is to make Inland Revenue decisions and processes clearer and more transparent, to aid taxpayer compliance and support the integrity of the tax system.

With Inland Revenue’s apparent heightened activity on the GST treatment of land sales and purchases, a recent topical TDS is 22/10 GST: Whether property sale is zero-rated. Time bar. In this TDS, the taxpayer was a GST-registered company whose taxable activity involved building residential properties for sale. The taxpayer entered into an agreement for the sale of a dwelling – the purchase price was stated to be “inclusive of GST (if any)”, the going concern clause had not been deleted, and the purchaser stated they were also GST-registered. The GST clauses were not fully completed by settlement – the purchaser had not indicated whether they would use the property to make taxable supplies. However, the property was settled as a zero-rated supply for GST purposes.

Weeks after settlement, the purchaser’s solicitors amended the GST schedule, confirming GST registration and signalling they did intend at settlement to use the property for making taxable supplies. Further, the purchaser applied for holiday home registration in respect of the property.

The TCO decision was that the sale should not have been zero-rated as a supply of a going concern, nor under the compulsory zero-rating provisions. The latter decision was on the basis that, at the time of settlement, there was insufficient evidence to prove the purchaser intended to carry on a taxable activity of supplying short-stay accommodation, and the onus was on the taxpayer, as the vendor, to correctly determine the amount of GST payable.

Four years had passed from the GST return assessment period, hence the Commissioner had applied to amend the assessment under the time-bar exception on the basis the taxpayer knowingly or fraudulently failed to disclose all the material facts that were necessary for determining the amount of GST payable. This was rejected by the TCO, who considered that the available evidence suggested the taxpayer filed its GST return believing its position to be correct. As a result, time-bar applied to the transaction and the proposed amendment to re-assess the return was rejected.

This TDS provides useful insight into how Inland Revenue apply both the GST zero-rating and time-bar provisions and is written in a simple language for all readers.

It also highlights, once again, the need to take care when completing sale & purchase agreements – even though a transaction factually qualifies for compulsory zero-rating, if the GST clauses have not been correctly completed by settlement, the TDS implies Inland Revenue are unlikely to be sympathetic.

Depreciation on buildings

Mon, 14 Nov 2022 04:17:50 GMT

On 20th July 2022 Inland Revenue released a 51-page interpretation statement 22/04 – Claiming depreciation on buildings.

In light of the re-introduction of depreciation on non-residential buildings from the 2021 income year, the interpretation statement is intended to give guidance to building owners on when they can claim depreciation on buildings.

Specifically, the statement emphasises the importance of understanding the difference between a residential building – where the depreciation rate remains at 0% – and non-residential buildings.

The basis of the interpretation statement appears logical enough, however, it includes the following surprising statement:

“where a building is used for both residential and non-residential purposes, it will only have a depreciation rate of greater than 0% if it is predominantly or mainly used for non-residential purposes: it is effectively an all-or-nothing test”

This is relevant, for example, where a building that has retail shops on the ground floor and residential apartments on the first floor, or in a rest-home context where there may be independent living apartments within a building that also provides hospital or assisted care.

The statement provides that the “predominant use” of the building must be established to determine whether the applicable depreciation rate for the entire building is more than 0%. This suggests (but not specifically commented on) that the owner of a unit titled residential apartment in a predominantly commercial building, is able to depreciate it at the commercial building rate.

Building owners who own all or part of a mixed-use building should read the interpretation statement carefully to determine their depreciation obligations.

Shares held in foreign companies 101

Mon, 07 Nov 2022 08:05:27 GMT

There are common misconceptions in relation to how portfolio shareholdings in foreign companies are treated for tax purposes.

One misconception is that if either the profits of the foreign company or the dividends it pays have been subject to tax overseas then New Zealand (NZ) tax does not apply. Another is that if the foreign company does not pay a dividend at all, then there should be no income to disclose, and hence no tax to pay.

However, unless a specific exemption applies, income might be deemed to arise under the foreign investment fund (“FIF”) regime – this regime gives rise to annual New Zealand income tax obligations, regardless of whether a cash return is received.

The FIF regime was originally introduced in 1993 alongside other international tax regimes to prevent New Zealand tax residents from avoiding or deferring New Zealand income tax by establishing foreign entities in jurisdictions with lower tax rates.

Under the regime, a person is required to determine their annual FIF income using one of the prescribed methods. For foreign companies which are traded on a recognised stock exchange and an annual market value is readily available, the applicable FIF methods are the Fair Dividend Rate (FDR) method, and the Comparative Value (CV) method.

The FDR method deems a shareholder to derive income equal to 5% of the opening market value of the shares (irrespective of the amount of dividends received), with an adjustment for any purchases and sales made within the same year. The CV method calculates income based on the change in the value of the shares plus dividends received. Where the CV method results in a loss for the year, in most circumstances the loss is not claimable and hence would be limited to $0. A person subject to the FIF regime is required to apply the FDR or CV method to their entire portfolio – i.e. they cannot choose FDR for one investment and CV for another.

Where the market value of a foreign company is only obtainable by way of independent valuation, the cost method is commonly used – this deems 5% of the opening cost base to be taxable FIF income, and the cost base itself is increased by 5% each year.

Generally, once chosen, a calculation method must continue to be applied in later income years, unless a change of method is permitted – for example, a natural person or family trust is able to change between the FDR and CV method on an annual basis. Further, the cost base under the cost method can be “reset” every five years by an independent valuation – this is useful if the investment has appreciated by less than 5% each year. Usually, any foreign tax withheld is available as a foreign tax credit to offset the tax liability on the FIF income.

There are exclusions from having to apply the FIF rules, for example, where the investment is in an ASX-listed company or for specific investors, where the cost of the interest is less than $50k. Although, if the FIF regime does not apply, dividends received will still be taxable under ‘ordinary rules’.

Due to the kiwi love affair with land, investing in rental properties is often favoured over share investments. However, with the increase of the bright-line period for some residential property to 10 years, disallowing interest deductions and ring-fencing residential rental losses, investing in shares has become comparatively more attractive than it used to be. But don’t get tripped up by not understanding the rules that apply to foreign share investments.

Attribution vs Market Salary rules

Thu, 20 Oct 2022 22:55:46 GMT

The introduction of the 39% tax rate for individuals who earn over $180,000 from 1 April 2021 has reignited Inland Revenue’s interest in the income attribution and market salary regimes. These rules currently prevent a person from having income earnt from individual efforts or “personal services” taxed through an associated entity at a lower tax rate. With an 11% difference between the top individual tax rate and the NZ company tax rate, the application of these rules is likely to be closely scrutinised in upcoming years.

The attribution rules will generally apply when a taxpayer who earns income of more than $70,000 from personal services inserts an associated entity between themselves and the party acquiring their services. These rules do not strictly apply if the associated entity derives income from numerous, unrelated parties, provided one party does not make up 80% or more of the entity’s income.

For example, compare the two scenarios:

1. Paul contracts Sarah Limited for $200,000 – all the services are performed by Sarah, and Paul is Sarah Limited’s only client.

2. Four non-associated individuals: Paul, Eugene, Rebecca and John, each contract Sarah Limited for $50,000 each – all the services are performed by Sarah.

The income attribution rules would only apply to scenario 1 above, forcing Sarah to return all of Sarah Limited’s net income in her personal tax return.

However, in the second scenario, although the income attribution rules do not apply, the market salary principles still need to be considered to determine the amount of income to return in Sarah’s personal tax return.

The Supreme Court established the leading precedent in the case of Penny & Hooper v Commissioner of Inland Revenue (2009) that a failure to pay a “commercially realistic salary” for services rendered is an important consideration in determining whether an arrangement amounts to tax avoidance.

Revenue Alert 21/01, released on 29 March 2021 ahead of the increase in the top marginal tax rate, also provides further guidance, and states that Inland Revenue is more likely to examine arrangements where the salary paid from an entity to an associated working individual is less than 80% of the entity’s net income. While this is not a legislated de minimis rule, it suggests it is unlikely Inland Revenue will challenge the amount of an individual’s salary if the 80% threshold is met. On the other hand, not meeting the threshold should not automatically amount to tax avoidance.

Both the attribution and market salary regimes should be kept in mind when determining salary levels. People don’t often appreciate that there is both a specific set of income attribution provisions to consider and a separate market salary principle as per ‘Penny & Hooper’.