No 29 AUTUMN 2014
A STAPLES RODWAY PUBLICATION
FOCUS ON FINANCIAL REPORTING & TAX CHANGES Payroll & student loan changes for 2014 Inland Revenue more accomodating Financial reporting requirements under the spotlight
Kiwi company leading the way
Assessing a candidate's suitability for a role by "trial"
PARALLEL IMPORTING Who wins?
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DISCLAIMER No liability is assumed by Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this document. It is recommended that you consult your advisor before acting on this information.
No 29 AUTUMN 2014
IN THIS ISSUE 2
15 hours, 44 minutes, 42 seconds: Great Lake Taupo Relay
Movers & Shakers: New appointments
Keep on top of tax changes: Payroll and student loans
Going under but moving up: High-tech submersible
8 Parallel importing: Who wins? 10 Inland Revenue more accommodating 12 HR recruitment: Assessing a candidate's suitability by "trial" 14 Under the spotlight: Changing financial reporting requirements
In the last issues of Numbers we wrote about our upcoming business fitness programme. We hope to bring you the questionnaire for this programme in the next issue of Numbers.
That’s the time for 11 runners and 7 walkers from Staples Rodway Waikato to cover 155 kms to finish 7th at the 2014 Great Lake Taupo Relay.
OT BAD FOR A BUNCH of accountants competing in a field of 87 ranging from Auckland to Wellington and also including a team from Cairns, Australia. Teams made up of 10 to 18 people run and walk the entire 155km distance, with each team member completing one or more of the 18 legs ranging from 5.5km to 14.4 km. Composite and walking teams start at 11pm on Friday night, while running teams start at 2am Saturday morning. All teams run and walk through the night, lit up by reflectors, to finish on Saturday between midday and 6pm. “This was our 16th time at Lake Taupo. It’s a fantastic event and a great opportunity to get together with your work mates, have a laugh and try something new!” says Team Manager Richard Williams. “Every year there is always something special or unexpected that happens, the stuff that brings us together as a team on the day and builds firm culture at Staples Rodway”. This year the event organisers raised funds for the New Zealand Breast Cancer Foundation and at prize giving a donation of $21,000 was announced to the crowd. A BIG thank you goes out to the event organisers for the Great Lake Taupo Relay. Thanks also to Lloyd and Trish Lusty at Taupo Top 10 Holiday Park who made our stay over the weekend a pleasure. Bring on 2015!
Richard Williams and Rosanna Baird take a well-earned breather after the relay.
After more than 15 hours, the Staples Rodway team were able to cross the finish line together
NEW ASSOCIATE DIRECTOR TAX (AUCKLAND) Philip has over fifteen years tax experience both in the United Kingdom and New Zealand in both big four and mid tier accounting practices. He is a member of the Institute of Chartered Tax Advisors in the United Kingdom. Philip advises a broad range of clients from individuals and trusts through to multi-national corporations. He likes to understand his clientâ€™s business before providing advice to ensure that it is both practical and meets their needs. He presents regularly on tax matters, included the Tax on Toast breakfast seminar series which he has been running since 2010. Philip is married to Trudy and they have two young children, Ella and Ewan, who take up most of his free time.
NEW ASSOCIATE DIRECTOR BUSINESS ADVISORY (AUCKLAND) Jo-Anne has been with Staples Rodway since April 2004, bringing over twenty years experience in accounting gained at a variety of commercial companies in United Kingdom and New Zealand and chartered accounting firms in New Zealand both large and small. Jo-Anne specialises in the area of business compliance services and tax compliance issues. She gives practical accounting and planning advice to a variety of clients including companies, trusts and high wealth individuals. She has industry experience in investments, property services and development and professional services. Jo-Anne is married to Peter and has two teenage children, James and Sarah. She enjoys gardening, reading and tramping.
NEW ASSOCIATE DIRECTOR BUSINESS ADVISORY (TAURANGA)
Karen joined Staples Rodway Tauranga as a Graduate Accountant and now has 16 years experience in the accounting industry. She manages a varied client base and enjoys working alongside her clients as their businesses grow and diversify. Particular areas of industry interest are kiwifruit & avocado orchards, pharmacies, real estate companies and investments. Karen has also been instrumental within the Staples Rodway National Business Advisory Directors and Mangers Group, as well as the Training group. Outside of work, Karen is leader with Girl Guiding New Zealand and has represented them at two international events. She is also a keen swimmer and baker.
NEW TAX SENIOR MANAGER (CHRISTCHURCH) Mike recently joined the Christchurch office as a senior tax manager in February 2014 following 14 years working in corporate tax within the Big Four. His role will involve working closely with Spencer Smith, the Christchurch Tax Director, in assisting clients with their tax affairs. He has a wide variety of experience in providing tax consulting and compliance advice to a wide range of New Zealand based clients, including large, medium and small sized businesses and individuals. With a straightforward approach to his work, Mike strives to assist clients to arrange their tax affairs in an efficient way while managing tax risks. In weekends, Mike likes to spend time outdoors, in particular helping out on the family farm.
NUMBERS Autumn 2014 â€˘ 3
KEEP ON TOP OF
TAX CHANGES I
F YOU'RE AN EMPLOYER OR have a student loan, there are some significant changes from Inland Revenue for the new financial year to be aware of.
PAYROLL CHANGES 1. As from 1 April 2014 the minimum wage will increase from $13.75 to $14.25 per hour. The starting out and training minimum wages will increase from $11 an hour to $11.40 an hour. 2. O n 1 April 2014 the ACC Earner’ Levy that is deducted along with PAYE has decreased from 1.7% to 1.45% - meaning there will be a small drop to the ACC Levy component of PAYE deducted. You can use the calculator on the IRD website called “PAYE/KiwiSaver deductions calculator” to work this out. 3. S tatutory Holiday changes - the legislation is now in effect for the Mondayisation of Waitangi Day and Anzac Day holidays, meaning that if they fall on the weekend and the weekend day is not the usual day of work, then they are observed on the following Monday. Neither of these days fall on the weekend until 2015. 4. A lso a timely reminder for employers regarding Employer Superannuation Contribution Tax (ESCT) rates, as these are calculated each April based on each employee's earnings (including Employer KiwiSaver before ESCT is deducted) in the last tax year. The new ESCT rates are used from the first Pay Day on or after 1 April 2014. See the table below for working out the ESCT rate. If an employee commences part way through the year, you need to work out what they would earn from their start date through to March 31 and then update it again after 1 April to be what they are expected to earn in the full financial year. Employee's salary or wage income for y/e 31 March 2014 ESCT from 1 April (including gross superannuation employer contributions) $0 to $16,800
$16,801 to $57,600
$57,601 to $84,000
STUDENT LOAN CHANGES Overseas-based borrower repayment obligations Changes to the overseas-based borrower repayment regime include two new annual repayment obligations in addition to the current overseas-based repayment thresholds. Borrowers with a loan balance over $45,000 will also need to repay more per year towards their loan. A borrower's annual repayment obligation will be set at a fixed minimum amount, which will no longer decrease as the borrowers' loan balance decreases.
Stronger measures for those who have defaulted on their overseas-based repayment obligation The IRD can now request an arrest warrant to stop borrowers from leaving New Zealand next time they visit, if they are significantly behind on their overseas-based repayment obligation. Similar provisions already exist under the Child Support Act 1991.
Changes to New Zealand-based borrower obligations From 1 April 2014 onwards, the income the IRD use to calculate student loan repayment obligations for New Zealand-based borrowers will now include a number of new income types and adjustments. Staples Rodway's Tax Facts 2014 guide is now available. Visit www.staplesrodway.co.nz to download a copy.
4 • NUMBERS Autumn 2014
BUT MOVING UP It looks like something out of a movie. It looks slightly menacing and a bit unnerving. It definitely doesnâ€™t look like itâ€™s worth $20 million. And yet, this high-tech submersible is all of the above.
ECHNOLOGY DEVELOPED IN NEW ZEALAND by a Kiwi currently living in Australia (let’s not judge him for that just yet), the underwater submersible devised and built here creates so many opportunities and possibilities for research and development in an area which is incredibly hard to get to – the ocean floor. Developed by Shane Corsen, an engineer with big ideas, he imported the shells from overseas and installed all operational machinery in New Zealand to revolutionise the field of oil and gas exploration. A submersible is defined as a “small submersible boat or other craft, especially one designed for research and exploration,” and this is backed up by what Staples Rodway Director Phil Pavis tells me too. He’s very knowledgeable about his client, Hinds Systems Limited, the company building this incredible feat of machinery. Phil has had to get up to speed pretty quickly with this client and its technical terms, but it means that he’s more than capable of explaining how it all works to a novice like me. For Phil’s part, his role was more than just an accountant, going through the motions of setting up a company and administering the books. This company required Phil to set up the structure and ownership, deal with the Inland Revenue, the suppliers, the lawyers, the insurance… the list goes on. He says that “you have to understand the concept so you can explain it at a higher level”. Phil commented that when he initially took the photos of the submersible to the Inland Revenue, they just said “oh wow, what’s that?!”. It’s hard to comprehend that something measuring only 9 metres long with very little
The company owners, Corey Hinds, a young entrepreneur with some big ideas, and his business partner Karen Murphy, approached Staples Rodway last year with the intention of turning this submersible into something immense. The submersible itself (the prototype is currently made out of aircraft metal, but with plans to turn it into a carbon fibre and therefore a fairly undetectable underwater object) is remote controlled. It can live in the ocean for up to 300 days, down to 1000 metres; scanning and photographing its environment. Corey and Karen’s intention was that this would be used by the oil and gas industry, with the ability to revolutionise the industry. It would mean that the usual exploration stage, beholden to weather patterns, human error and general risk, wouldn’t be a problem anymore. The submersible is controlled by a laptop - not by a crew that would have to go out into the water and lower a camera. This product has far more applications and has caught the attention of the US Navy. The world has seen its fair share of lost submersibles – the most famous one might be the DSV Alvin which was sent down to find the RMS Titanic in 1986. The Alvin was lost overboard in 1968 after two steel cables lowering it into the water snapped. The submersible was later rescued in in August 1969, because its location was known. However, in January 2014, the Japanese navy admitted they had lost a $5 million submersible, one being used to survey the underwater terrain, as well as water currents and temperatures. The submersible was three metres long and two metres wide, connected by a
on the outside could possibly be worth $20 million. Naturally the Inland Revenue wasn’t going to take the company at its word and instructed a marine valuer to assess the submersible. I chuckled slightly when Phil mentioned the marine valuer, thinking it sounded almost silly, but as he pointed out, “if you had to get a boat valued, you’d need one. It’s quite relevant to the work we do”. And again, he’s right. One of the most important things Phil said to me was that he recognised this submersible was strange, foreign and unusual to those who had to categorise it. He knew that to build credibility for the company and the product, the company would have to provide evidence of the submersible’s worth – not just in immediate monetary terms, but what is represented for research and development in the long-term. Phil stresses the importance of being able to communicate with the lawyers and bankers involved, and it was his job to make them understand what he and the company were telling them – minus the technological jargon.
cable to a surface ship – and we have no idea where it is now! The engineering and technical know-how behind this project is incredible. The idea that the US Navy is impressed by this piece of machinery proves what Phil said: “You don’t have to be the biggest organisation or country to have the best ideas.” And that’s really important for New Zealanders to remember. When you add limitless US Navy funds to this concept, who knows where it could end up. The submersible could evolve into something far beyond anyone's imagination, and no one wants to limit its potential growth. Staples Rodway has done a fantastic job of setting this company up, backed up by experienced co-director Carmel Douglas, who is helping to achieve the owners’ commercial objectives (a reflection of the confidence in the product as well as Corey and Karen’s knowhow). It will be a pleasure to watch where this company and its product head in the future. I bet we’ll be seeing big things from Corey Hinds and Karen Murphy in the years to come, with Staples Rodway behind them all the way.
NUMBERS Autumn 2014 • 7
It is well understood that the main beneficiaries of parallel imports are the consumers, but retailers and the wider economy can also benefit.
E LIVE IN A GLOBAL marketplace where the growing emphasis is on free trade and the unrestricted movement of goods. Many of the protective mechanisms of the past such as exclusive licences and tariff protections have been removed, allowing consumers to access a wider range of goods more freely and allowing retailers to offer a greater variety of products. Until 1998 when restrictions on parallel imports were largely lifted in New Zealand only licensed importers could bring goods into the country for sale or distribution. When those restrictions were relaxed, parallel importing began and is now common practice. Initially parallel imports had a certain stigma, often being seen as inferior quality, but that perception has changed as there has been an appreciation of the benefits parallel importation brings to the wider economy. What is parallel importing? It is the practice of importing goods that are produced genuinely under copyright protection without the authorisation of the local copyright owner. Copyright, as provided under the Copyright Act 1994 (“the Act”), is generally the intellectual property right most relevant to the issue of parallel importing in New Zealand. The Act allows for the parallel importation of non-infringing
bargain, landed a parallel imported shipment of the jeans, that price premium was lost forever. The availability of such goods also, arguably, has the effect of driving down the prices of competing products in the same market. Distributors of other brands of denim jeans had to take a careful look at their own pricing to match the now-cheaper imports. There is also a non-monetary benefit: the full consumer price of a good is the money price plus the non-money price. The time spent in searching out a particular product and the speed of delivering it to its end-user are important determinants of non-money prices. Retailers and the final consumers themselves may incur those costs. The removal of parallel import restrictions has reduced those non-money costs by making a wider range of goods more freely available. In particular, parallel importation may allow overseas product releases to become available domestically more quickly following their international release. This reduction in delays benefits retailers and consumers alike.. The increase in the variety of available products is a benefit; wider variety stimulates demand and that can lead to greater economic activity
Parallel importing has reduced prices on premium brands like Levi’s for New Zealand shoppers.
copies of a work into New Zealand, with an exception relating to films. Parallel imported goods are not pirated or counterfeit goods that are manufactured under infringement of a copyright or similar intellectual property right. They are simply imports of genuine products by someone who doesn’t hold the exclusive importation rights. The consumer wins because if there is no restriction on the supply of something, the price will be lower than in the scenario where supply is limited. Parallel importing creates this situation. For example, prior to parallel importing only licensed importers could bring Levi denim jeans into New Zealand and buyers had to pay a premium price. As soon as a national discounter, the place where everyone gets a
on a macro level. Allowing non-licensed importers to bring goods into the country breaks down monopolistic behaviour and this is of particular relevance in smaller international markets such as New Zealand. The longer someone has exclusivity of supply, the longer the price of the product they sell will remain high. Competition has the effect of breaking down that artificially stimulated pricing activity. While the advent of the parallel import has not been good news for exclusive licence holders of goods, that is outweighed by lower prices caused by the market forces of supply and demand, together with wider product offerings and greater market stimulation. That is of benefit to consumers and retailers and therefore to the overall economy.
NUMBERS Autumn 2014 • 9
INLAND REVENUE MORE ACCOMMODATING Article by Mike Rudd STAPLES RODWAY AUCKLAND firstname.lastname@example.org
The need to accommodate workers on specific projects is common in many industries, whether because the scale of a project requires more workers to be relocated, or the nature of the project requires workers with specialised skills, or the work is temporary. It is common in such circumstances for the employer to provide accommodation to those workers as part of their package.
HE TAX EFFECT OF ACCOMMODATION provided to employees used to be fairly well understood. However, over recent years there has been increased attention focussed on the issue, created by the influx of overseas and non-local builders into Christchurch to work on the earthquake rebuild. Inland Revenue has made a number of statements in different channels that were clearly intended to tighten the rules significantly, and result in more employers paying tax on accommodation being provided. These culminated in an Inland Revenue statement in December 2012 which stated that when accommodation was provided for more than a year on a project, the benefit of that accommodation would be taxable. This was felt by many to be an unreasonable position and, thankfully, Inland Revenue now has backed away from that approach. New changes will be introduced into law which will provide a much more sensible solution, and one that should be easier for payroll staff to comply with. The new rules have been consciously drafted to more closely mirror those in other countries so, if you are attempting to attract overseas workers or specialists to New Zealand, they will be more familiar with the treatment applying to their accommodation, and the New Zealand tax position will be much clearer. The proposed application date for the new rules is 1 April 2015, but employers and employees will have the choice, in some circumstances, of applying these new rules retrospectively to arrangements put in place on or after 1 January 2011. In the case of Canterbury earthquake recovery projects, the proposed application dates is 4 September 2010, the date of the first earthquake. The new rules in respect of accommodation and other allowances are:
Long term projects T he proposed changes apply whether an employer pays for the accommodation directly or provides an employee with an accommodation allowance. The new treatment will be: When there is a reasonable expectation that an employee is expected to work away from their normal workplace for up to two years, employer-provided accommodation will be tax exempt. This exemption will extend to up to three years for employees working on large capital projects (e.g. dam construction, highway construction, ultra-fast broadband). The exemption period is further extended for up to five years for Canterbury earthquake recovery projects. There will no longer be a requirement to determine whether or not the employee has a home available to them at their usual location.
10 • NUMBERS Autumn 2014
T he exemption will not apply if accommodation is provided as part of a specific salary trade-off arrangement, or if there are arrangements to restart the various exemption periods. When an accommodation benefit is taxable, it will generally be valued at its market rental value, less an adjustment for any work use of the property.
Short business trips or mobile workforce An employer may have a manager responsible for a number of sites who has to travel often and stay in accommodation overnight, or sales reps who need to cover large areas. In cases such as this accommodation provided near the temporary worksites, or on the sales trips, will be tax exempt without an upper time limit. Accommodation provided or paid for at a work-related training course or conference will continue to be tax exempt.
Permanent Relocations The above rules do not apply when an employee makes a permanent relocation to a new workplace or to a new employer. Separate concessionary tax rules can apply in that case, but these are very different to the rules regarding temporary workplace changes.
Meal and other allowances Meal payments linked to work-related travel will be exempt for up to three months at any new work location, including for long term secondments. After the three month period ends, any payments for meals will be taxable, and PAYE should be paid. Meal payments and light refreshments outside of work-related travel (such as conferences) will also be tax-exempt. Clothing and clothes allowances provided by employers will be exempt where employees are paid to acquire distinctive work clothing, with a prominent name or logo displayed or with a pattern or colours associated with a specific employer, and is not normally worn for private purposes. Employers who may have changed the treatment of accommodation and meal allowances because of earlier Inland Revenue announcements should now review their treatment to determine whether the new taxation rules can apply and when they can apply from. The above is intended as general advice only and should not be relied upon. Please contact your usual advisor or Staples Rodway if you have any specific questions about the topics discussed here.
Article by (from left) Melissa Whiting, Judyne Howell, Kearin Pollard & Julie Rowlands HUMAN RESOURCES, STAPLES RODWAY TARANAKI
ASSESSING A CANDIDATE'S SUITABILITY FOR A ROLE BY “TRIAL” A landmark case upheld by the Employment Court may change the way many employers recruit.
N THIS CASE A SMALL Nelson lunch shop was recruiting for a shop worker. As part of the recruitment process, they asked potential candidates to work an unpaid 6 hour shift to assess their competency in the role. There was no paperwork in place to cover this. At the end of the 6 hour shift, the prospective employee was told by text that she was not going to be employed. The prospective employee then lodged a personal grievance arguing that the employment relationship did exist and that she had not been paid wages for her time worked. The ERA found that the employment relationship did exist because the employer received commercial gain from the prospective employee’s work. The Employment Court upheld the ERA decision and the case cost the Nelson lunch shop $6,200 in lost wages and compensation for hurt and humiliation. An expensive lesson!
THE “RIGHT” WAY TO RECRUIT BY TRIAL
If an Employer wants to use this approach to assess suitability then there are two approaches which should be considered:
Unpaid Trial Where there is no commercial or financial gain to be had by the trial – e.g. a Barista making a coffee for the employer (no monetary exchange) or a chef making a dish for the employer as part of the recruitment and selection process.
would have been no legal recourse for the prospective employee. If you want to utilise a paid trial as part of the recruitment process, we recommend a clause along the follow lines:
TRIAL PERIOD (paid) The parties agree that this employment shall be subject to a trial period of 90 days, starting from the commencement of the trial employment. The trial period is specifically to assess your suitability for the position of [position title] you have applied for. During this period, the employer is not required to: a) consult with the employee about any decision to dismiss the employee; or b) comply with a request under section 120 of the Employment Relations Act 2000 to give reasons for the dismissal. If given notice during the trial period, the employee may not bring a personal grievance or other legal proceedings on the grounds of unjustified dismissal. The parties may agree to terminate the employment at any time during the trial period.
Paid Trial Where there is a commercial or financial gain through the recruitment trial, implement paperwork to engage prospective employees under the 90 day trial period. Within that period be very specific as to what the trial is for and that the employee may be dismissed at the end of that period if not suitable without being able to take a personal grievance for unjustified dismissal. So, referring to the landmark case detailed above, had a clause been inserted into a letter issued to the candidate prior to the trial taking place, then there
As is the case with many employment related matters, there are fish hooks to be aware of. Employers need to be aware that if they utilise the trial period within the recruitment process and then go on to employ the individual, the 90 day trial period provisions no longer apply. Employers are advised to seek professional advice when considering using a trial as part of any selection process.
NUMBERS Autumn 2014 • 13
CHANGING FINANCIAL REPORTING REQUIREMENTS UNDER THE SPOTLIGHT
Article by Philip Hampson STAPLES RODWAY AUCKLAND email@example.com
& Jackie Russell-Green NATIONAL TECHNICAL MANAGER firstname.lastname@example.org
Recently there has been a lot of discussion about upcoming changes to companies’ financial reporting requirements. Jackie Russell-Green, Staples Rodway’s National Technical Manager, and Philip Hampson, Tax Associate Director, Staples Rodway Auckland, examine the upcoming changes and what they will mean in practice.
OR THE BEST PART OF the last decade, successive New Zealand governments have signalled a desire to reduce the compliance costs faced by smaller companies by reducing the burden of their financial reporting and audit requirements. The achievement of that objective is now within reach, due to the passage of the Financial Reporting Act 2013 and the Financial Reporting (Amendments to Other Enactments) Act 2013 (collectively “the Acts”). However, to ensure that companies have sufficient information for taxation purposes, Inland Revenue has moved to fill the gap left by the Acts by specifying minimum financial information that must be prepared by companies.
CURRENT REQUIREMENTS Currently, all companies are required to prepare general purpose financial statements, which essentially are financial statements prepared under a set of rules referred to as generally accepted accounting practice, or GAAP. There are currently two forms of GAAP for companies in New Zealand – one form is based on New Zealand Financial Reporting Standards and Statements of Standard Accounting Practice and is referred to as old GAAP, and the other is based on New Zealand equivalents to International Financial Reporting Standards (“NZ IFRS”). In addition to the requirement to prepare general purpose financial statements, all companies are currently required to have their financial statements audited. However, most companies are permitted to opt out of this requirement by a unanimous resolution of shareholders. In addition, some companies are required to file their financial statements with the Registrar of Companies.
NUMBERS Autumn 2014 • 15
NEW REQUIREMENTS The requirements that will apply for companies and some other entities after the Acts come into effect are broadly as outlined in the table below: Type of entity
Financial statements requirement
FMC reporting entity (note 1)
Yes, within four months of balance date (note 2)
Large companies (note 3)
Yes, within 5 months of balance date
Yes, but can opt out with 95% shareholder approval (note 5)
Large companies with 25% or more overseas ownership (note 3)
Yes, within five months of balance date (note 4)
Large overseas companies/subsidiaries of overseas companies (note 6)
Yes, within five months of balance date (note 4)
Non-large companies with 10 or more Yes, but can opt out with 95% shareshareholders holder approval (note 5)
Yes, but can opt out with 95% shareholder approval (note 5)
Non-large companies with fewer that 10 shareholders
No, but must opt in if required by 5% or more of shareholders (note 5)
No, but must opt in if required by 5% or more of shareholders (note 5)
Large limited partnerships (note 3)
Yes, within five months of balance date
Yes, but can opt out with 95% partner approval (note 7)
Non-large limited partnerships
No, but must opt in if required by 5% or more of partners (note 7)
No, but must opt in if required by 5% or more of partners (note 7)
Large other partnerships (note 3)
Yes, within five months of balance date
Yes, unless opt out with 95% partner approval (note 7)
Non-large other partnerships
Financial statements must be provided to the statutory supervisor within five months of balance date (note 4)
NOTES: 1. 2. 3. 4. 5. 6. 7.
FMC reporting entities include issuers of regulated products under the Financial Markets Conduct Act 2013, listed issuers, operators of licensed markets, recipients of money from a conduit issuer, registered banks, licensed insurers, credit unions and building societies. FMC reporting entities must prepare financial statements, have those financial statements audited and file those financial statements within four months of balance date. A company is large if it and its subsidiaries have revenue in excess of $30 million or assets in excess of $60 million. A partnership or limited partnership is large if it has revenue in excess of $30 million or assets in excess of $60 million. Companies other than FMC reporting entities that are required to prepare general purpose financial statements must prepare those financial statements, and, if required, have those financial statements audited and file those financial statements, within five months of balance date. A specified shareholder percentage refers to a percentage of voting shares – for example, “95% shareholder approval” means that 95% of voting shares must be cast in favour of the proposal. An overseas company/subsidiary of an overseas company is large if it and its subsidiaries have revenue in excess of $10 million or assets in excess of $20 million. A specified partner percentage refers to a percentage of contributed capital – for example, “95% partner approval” means that partners holding 95% of contributed capital must have cast their vote in favour of the proposal.
These requirements come into effect for financial years beginning on or after 1 April 2014 (i.e. for financial years ending on or after 31 March 2015). Until then, the current financial reporting, audit and filing requirements continue to apply. Once the requirements introduced by the Acts come into effect, the majority of New Zealand companies will no longer have a statutory requirement to prepare general purpose financial statements. Companies that still have a requirement to prepare general purpose financial statements will be required to: If they are FMC reporting entities, comply with full NZ IFRS. If they are not FMC reporting entities, comply with the NZ IFRS Reduced Disclosure Regime (“NZ IFRS RDR”). NZ IFRS RDR has the same recognition and measurement requirements as full NZ IFRS, but provides considerably reduced disclosure requirements. To simplify the financial reporting requirements for companies, the legislative changes are being accompanied by the removal of old GAAP and NZ IFRS differential reporting. For those companies currently reporting under old GAAP or NZ IFRS differential reporting:
16 • NUMBERS Autumn 2014
If they will not have a requirement to prepare general purpose financial statements in the future, they can cease preparing general purpose financial statements from their financial year beginning on or after 1 April 2014. If they will have a requirement to prepare general purpose financial statements in the future, they must start preparing financial statements under NZ IFRS RDR from their financial year beginning on or after 1 April 2015.
INLAND REVENUE HAS ESTABLISHED MINIMUM FINANCIAL INFORMATION REQUIREMENTS The requirements of the Acts mean that the majority of New Zealand companies will no longer be required to prepare general purpose financial statements. This has led Inland Revenue, as the largest user of financial statements in New Zealand, to establish a minimum set of requirements for ‘non-large’ companies. These minimum requirements set out the information that ‘non-large’ companies must include in their special purpose financial statements. The Tax Administration Act 1994 has been amended to reflect this, with the only exemption being for companies whose income and expenses are both less than $30,000. Inland Revenue has also signalled that minimum requirements may be introduced for non-corporate businesses in the future. The minimum requirements are as follows: Balance sheet, profit and loss account and supporting notes and schedules These should normally be prepared using the double-entry method of recording financial transactions and on an accruals basis. However, tax values can be used when those values are consistent with double entry and accrual accounting. Interest and dividends received must be shown grossed up for resident withholding tax and dividends should also be shown grossed up for imputation credits to the extent that the dividend is taxable and the credits can be used to satisfy the company’s income tax liability for the income year. Statement of accounting policies These must set out the policies and assumptions that have been used in the preparation of the financial statements and provide a description of any
changes made to the policies since the previous income year. In addition, the financial statements should disclose whether they have been prepared on a GST inclusive or exclusive basis. A financial statement to tax reconciliation This must also include a taxation based schedule of the company’s fixed assets and depreciable property. Movements in shareholders’ funds Items from prescribed forms Initially this will mean the information that is included in the IR10 (financial statements summary). A schedule of specified associated persons transactions For the purpose of this schedule associated persons are as defined in the Income Tax Act 2007, with the limitation that it only applies to non-corporates or non-residents. The following transactions need to be disclosed on this schedule: Interest expense incurred by the company in respect of loans made by the associated person Loans or advances made by the company to the associated person Expenses incurred by the company for services provided by the associated person Rental or lease payments made by the company to the associated person Expenses incurred by the company in relation to payments to the associated person for the acquisition or use of intangible property. Details of movements in shareholders’ equity, loan and current accounts between the shareholders or owners of the company and any associated persons. The above information does not need to be prepared in one single document but can be a compilation of different documents. The application date for these new requirements is income or accounting years commencing 1 April 2014, except for the disclosure of transactions with associated persons, which applies for tax years commencing 1 April 2015. The majority of these requirements do not appear overly onerous and most businesses should have the required information readily available. The exception to this is the associated persons disclosure. This disclosure will provide valuable information to Inland Revenue and could lead to further enquiries. It will need careful preparation and taxpayers will need to ensure that they can justify the amounts charged in any transactions that are disclosed.
NOT JUST FOR TAX The amendments to the Tax Administration Act 1994 mean that companies that will no longer be required to prepare general purpose financial statements will still be required to prepare financial statements in accordance with Inland Revenue’s specifications. For many such companies, it will be tempting to prepare financial statements that provide the minimum information that Inland Revenue requires and no more. However, good financial information has so many benefits that the advantages gained by continuing to prepare high quality financial statements outweigh the costs of doing so. Some of the key benefits of high quality financial statements are: They enable accurate measurement of financial results, which allows an evidence-based assessment of business performance. Financial statements that are prepared on a consistent basis from year to year enable you to track performance over time, which allows you to answer fundamental business questions, such as why profitability has changed, whether key assets are approaching the end of their useful lives and whether further capital investment is affordable. They measure financial performance and position according to pre-established, objective, criteria, which is important for shareholders who aren’t involved in the business and employees with remuneration linked to financial performance, among others.
T hey provide a very useful basis for budgeting and business planning – a sales budget based on past results is likely to be far more realistic and achievable than a budget based on best estimates and information on prior expenses is likely to be useful when looking to the future. In addition, accurate financial statements enable you to compare budgeted performance with actual performance and develop an understanding of the cause of any problems. In combination, these factors mean that the production of high quality annual financial statements assists business owners and management to effectively perform their financial management responsibilities. High quality financial statements are also useful outside the business. For example, lenders want accurate information on financial performance to enable them to make lending decisions and evaluate your compliance with loan conditions. This means that, if you’re looking to borrow for the first time, or to have an existing borrowing facility continued or extended, having well prepared annual financial statements is essential. Similarly, if you’re planning to bring a new investor into the business, or even to sell it one day, it’s important to have annual financial statements. No sensible person will invest in a business, or buy it, if they aren’t able to get an accurate picture of that business’ financial performance over time and its current financial position. The price you pay for poorly put together financial information might be a missed opportunity to bring in another investor or make a sale, or the receipt of an offer significantly below your expectations. For all of those reasons, it’s important to carefully consider your future financial information and business requirements before deciding what form your financial statements will take in the future.
WHAT DOES IT ALL MEAN FOR ME? Although there is currently a lot of discussion about upcoming changes to financial reporting requirements, those changes do not come into effect until balance dates falling on or after 31 March 2015. In the meantime, current requirements continue to apply. Companies that will have changed financial reporting requirements should start preparing for upcoming changes as soon as possible, so that any changes required can be implemented in sufficient time to enable a smooth transition to the new requirements. Companies that will not be required to prepare general purpose financial statements in the future should carefully consider what form their financial statements will take, to ensure that they meet Inland Revenue’s new minimum information requirements and produce financial information that meets the needs of investors and lenders and enables competent management of business finances. In addition, all companies will need to ensure that they meet Inland Revenue’s associated persons disclosure requirements and that they can justify the amounts charged in any transactions that are disclosed.
After a long wait, new financial reporting requirements have been introduced for New Zealand companies. These new requirements will not come into effect until financial years ending on or after 31 March 2015. In the meantime, current requirements continue to apply. When the new requirements come into effect, many New Zealand companies will not be required to prepare general purpose financial statements. Instead, such companies will be required to meet Inland Revenue’s new minimum information requirements. In addition, such companies will need to ensure that they provide financial information that meets the needs of investors and lenders and enables competent management of business finances.
NUMBERS Autumn 2014 • 17
AUCKLAND Level 9, 45 Queen St PO Box 3899 Auckland 1140, New Zealand Phone 64 9 309 0463 Fax 64 9 309 4544 email@example.com
HAMILTON 4th Floor, BNZ Building 354 Victoria Street PO Box 9159 Hamilton 3240, New Zealand Phone 64 7 834 6800 Fax 64 7 838 2881 firstname.lastname@example.org
TAURANGA Level 1, 247 Cameron Road PO Box 743 Tauranga 3140, New Zealand Phone 64 7 578 2989 Fax 64 7 577 6030 email@example.com
HAWKES BAY Cnr. Hastings and Eastbourne Streets PO Box 46 Hastings 4156, New Zealand Phone 64 6 878 7004 Fax 64 6 878 0078 firstname.lastname@example.org
NEW PLYMOUTH 109-113 Powderham Street PO Box 146 New Plymouth 4340, New Zealand Phone 64 6 757 3155 Fax 64 6 757 5081 email@example.com
STRATFORD 78 Miranda Street PO Box 82 Stratford 4352, New Zealand Phone 64 6 765 6949 Fax 64 6 765 8342 firstname.lastname@example.org
WELLINGTON Level 6, 95 Customhouse Quay PO Box 1208 Wellington 6140, New Zealand Phone 64 4 472 7919 Fax 64 4 473 4720 email@example.com
CHRISTCHURCH 314 Riccarton Road, PO Box 8039 Christchurch 8440, New Zealand Phone 64 3 343 0599 Fax 64 3 348 0186 firstname.lastname@example.org www.staplesrodway.co.nz