Numbers magazine spring 2012

No 24 SPRING 2012

A STAPLES RODWAY PUBLICATION

SUPPORTING YOUNG PEOPLE WITH CANCER

HONOUR WHERE IT’S DUE

Staples Rodway partners Canteen

Client receives top international tribute

SALARY TRADE-OFFS

Staples Rodway is an independent member of Baker Tilly International

Income or a perk?

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DIRECTORS AUCKLAND HAMILTON TAURANGA HAWKES BAY TARANAKI CHRISTCHURCH

Roger Thompson Rosanna Baird Chris Downey Stuart Signal Chris Lynch Ross Erskine

(09) 309 0463 (07) 834 6800 (07) 578 2989 (06) 878 7004 (06) 757 3155 (03) 343 0599

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.

IN THIS ISSUE 4

Staples Rodway partners Canteen

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Pursuing the bankrupts

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Salary Trade-Offs

10 Planning your way to business growth and succes 12 Honour where it’s due 16 Boats & Baches 18 Leaky buildings and earthquake strengthening: The thorny tax issues 20 Common tax issues for Not-For-Profits 22 The only constant is change 24 Selling your business. How does the sales process work?

26 Imputation credits management

No 24 SPRING 2012

PICTURED (L-R): Roger T 4 • NUMBERS Spring

Staples Rodway likes to play a role in the local communities in which we operate and also offer our full support to causes that we think share similar views to our organisation, and can benefit from the skills we have to offer.

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Thompson, Amy Popman, David Pearce and Robyn O’Brien www.staplesrodway.co.nz

ur recently announced national partnership with youth cancer support organisation CanTeen is a new national partnership, which we believe is a great example of those shared beliefs and an opportunity for all of our staff to become involved in working with this fantastic charitable organisation.

CanTeen supports young people aged 13 to 24 who have been personally diagnosed with cancer, or affected by the disease through family members. Through its national peer support network, the organisation connects young people living with cancer as a patient, siblings or bereaved siblings, building a strong support base to deal with the uncertainties of living with cancer, as well as a post-cancer focus on recovery, independence, employment and personal identity.

Under the guidance of a youthful Board and a very active CEO in David Pearce, CanTeen has a programme targeted at producing young leaders.

Like Staples Rodway, CanTeen maintains a strong mentoring focus and it may surprise many of our staff and clients to know that half the Board and the Regional Committees in the various CanTeen branches around the country are under the age of 25.

That is where Staples Rodway comes into the partnership offering a mentoring and support relationship with the various regional branches of CanTeen.

“This is an opportunity for our staff in each regional firm to have an active role in the local CanTeen branch, mentoring the local staff member and Treasurer through programmes like managing budgets and financial planning,” said Staples Rodway Auckland Managing Director, Roger Thompson.

“This isn’t the kind of charity partnership where you simply provide your services at no cost or contribute through cash. We are actively involved and there are opportunities for our staff to work on their own client relationship skills by helping mentoring these impressive young people.”

CanTeen CEO David Pearce said the opportunity to work with Staples Rodway and use the skills available was an ideal fit with the goal of CanTeen to develop new leaders.

“Our branch people will pick up financial skills than can only benefit our local organisations and Staples Rodway provides financial mentoring in skills that will be very useful to our people in whatever they go on to achieve in life.

“It’s an active role from Staples Rodway and a partnership CanTeen looks forward to developing.”

Each Staples Rodway office will provide a certain number of hours of mentoring per year to their local CanTeen branches with our offices mentoring two, or in some cases, three regional CanTeen branches.

Our assistance with professional standards will enable the CanTeen branch member committees to gain practical skills that can be transferred to coincide with their own future employment opportunities.

Staples Rodway is also contributing to all fundraising efforts such as the just completed Bandanna Challenge with staff participating in street appeals to fundraise for the organisation.

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PURSUING

THE BANKRUPTS

by Gareth Hoole Staples Rodway Auckland

Why do directors of failed companies seem to get away without financial penalties when the business failure they have overseen may have cost creditors dearly?

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he simple answer is that most businesses trade through limited liability companies and unless the directors are shown to have acted recklessly or have granted creditors personal guarantees, then they enjoy the benefit of that limited liability.

The enforcement of a personal guarantee can be a tricky legal process and proving that directors have acted recklessly and should be held accountable for the company’s losses, is usually even more difficult.

Even if they are found to be liable and lose the benefit of limited liability, they usually simply declare themselves bankrupt and, more often than not, that is where the story ends.

However, there could be a way to further pursue those directors and perhaps recover more funds for despairing creditors.

In New Zealand personal bankruptcies are administered by the Insolvency and Trustee Service, known as the Official Assignee. Private insolvency practitioners cannot carry out such administrations.

The Official Assignee’s office does a sterling job in fulfilling that function despite having access to limited resources and operating under budgetary constraints. But, frequently canny directors of failed companies get away with the hiding of assets in other peoples’ names or in complicated trust structures. Some even get away with continuing to run businesses despite being barred from such acitivity by their bankrupt status.

To unravel such webs of confusion and deceit requires a concerted effort and considerable time and cost,resources in short supply in the Official Assignee’s office.

Partly to overcome this problem in Australia, a small number of experienced insolvency practitioners are granted licenses to administer personal bankruptcies. This results in greater recoveries for creditors who have lost money through a business failure as the insolvency practitioners attack the directors whose poor stewardship caused the losses.

Private practitioners are not necessarily smarter than the Official Assignee, but it is likely they will have greater resources available to

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them, including, having access to funding of finance investigations into the transgressions, and finding the private assets of directors of failed companies.

Perhaps the time has come to extend the Australian experience to our local New Zealand market.

Following careful scrutiny of suitable candidates who would have to have proven track records and suitable qualifications, the Official Assignee could set up a small panel of trusted practitioners and contract out some of the more complex cases requiring a greater commitment of resource. That way, the taxpayer will not have to fund the investigations into the possible wrongdoings of people adjudicated bankrupt.

Arguably private practitioners will be incentivised to pursue errant bankrupts more rigorously as they will be remunerated from the recoveries they make.

Parties who fund their actions may also enjoy the financial upside of assisting to recover assets which may otherwise have remained hidden, in a similar vein to the preference given to funders in company liquidations under the 7th Schedule of the Companies Act. Litigation funding is quite common overseas and there are one or two such organisations testing the market in New Zealand.

To be successful this proposal would have to rely only on a panel of practitioners who have a proven track record of recoveries. There would also be a need for legislation to ensure that they have extensive powers of investigation, and for the Courts to take a wider view on the use of trust structures. You would also need legislation to allow for the involvement of litigation funders prepared to back the investigation.

The upside, as seen in Australia, is a greater rate of recoveries and the entire process may well act as a deterrent to directors who think a soft bankruptcy administration will be their way out of being held accountable to their creditors.

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SALARY TRADE-OFFS

by Karen Brock Staples Rodway Tauranga

In April 2012 the Inland Revenue Department issued a discussion document titled Recognising salary trade-offs as income. What is a salary trade-off and what are the implications for employers and their employees?

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he IRD’s document looks to address the government’s concern that employees have the ability to trade-off salary for non-cash benefits which are then not taxed. This meets the government’s objective of all individuals paying their share of tax and also enhances the integrity of key social assistance programmes.

Currently two employees on the same salary package may pay different amounts of tax if one receives untaxed non-cash benefits.

Currently most non cash benefits are taxed via the FBT system, but there are a few exemptions being car parks and childcare provided on the employer’s premises and non-cash benefits received by employees of charitable organisations.

WHAT IS A SALARY TRADE-OFF? It involves the sacrifice of a specific amount of one’s salary for a specific benefit. For example an employee is given the choice of a cash salary or trading some of that salary for a non-cash benefit such as a car park. This is called an ‘explicit’ salary trade-off.

An ‘implicit’ salary trade-off occurs when an employee does not actively forgo a portion of their salary in exchange for a benefit – e.g. an employee may have an enforceable right to be allowed to park their car in a designated area with no cash alterative offered to an employee who does not take up the offer of the car parking.

HOW DO IRD PROPOSE TO TAX THESE SALARY TRADE-OFFS? The IRD are suggesting two methods of taxing salary trade-offs, through the FBT or PAYE system.

Under the PAYE approach all salary trade-offs are taxed in the hands of the employee by applying PAYE to the trade-off amounts.

With the FBT approach only certain currently FBT exempt benefits would be brought into the FBT net. The IRD is likely to attach a

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minimum value threshold. The employer would be required to advise each employee the amount of all fringe benefits in order that these amounts can be included in the employee’s ‘family scheme income’ for social assistance programmes such as working for families, student allowances and community services cards.

The main issue with both of these methods and one which the IRD paper does not really address, is how to value these salary trade-offs. There will need to be good guidelines provided in the bill to make this clearer for everyone involved. For example the value of a car park in downtown Auckland would be of a greater benefit to an Auckland employee than an employee in say, Te Puke where a free carpark is more readily available.

Under either method there will be increased compliance costs to employers to account for these salary trade- offs.

CHANGES FOR CHARITIES Some charities are exempt from paying FBT on benefits provided to employees while carrying out the organisation’s charitable activities as the government chooses to give some form of tax assistance to these organisations.

Under this IRD discussion document, charities will become subject to these salary trade-off rules. In particular, vouchers which are provided to staff which are considered a ‘close cash equivalent’ to cover everyday expenses will become taxable under FBT. Submissions have closed on this paper but the changes are proposed to be included in a tax bill later this year with an application date from 1 April 2014 so we will keep you up to date as more information is available. In the meantime if you have any queries about how this may affect your business, please do not hesitate to contact your usual Staples Rodway advisor.

NUMBERS Spring 2012 • 9

PLANNING YOUR WAY TO BUSINESS GROWTH AND SUCCESS

by Gareth Hoole Staples Rodway Auckland American President Abraham Lincoln once said: “In all things, success depends on prior planning” and that adage holds true now, more than ever before.

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ollowing the global financial crisis and the recession in New Zealand, we all face a less certain future. None of us can say what the new norm will look like; but we can be certain it will be different from the business conditions under which we operated before 2008.

The recently issued ANZ Privately Owned Business Barometer again revealed how important planning is. Many of the respondents said that they see strategic planning as being a critical factor in their businesses and have recognised the need to re-address their strategic plans to determine how they will approach the future business environment.

For a strategic plan to be effective it needs to be fundamentally about change and leadership. It needs to be focussed on significant, major change which will have a long term effect on the organisation.

It is not about tweaking variables and tinkering with inputs, nor is it about doing what you are already doing. Committing to a strategy is all about changing mind-sets, values and cultures and committing to a long term view.

A good strategic plan will focus on a small number of big initiatives, three or four at most, rather than a long list of small projects and objectives.

Planning strategy is often a tricky process as it will likely mean undoing beliefs and changing cultures. It will most certainly require a heavy investment in time and commitment.

A common mistake made in strategic planning is to implement widescale change without necessarily thinking about what the organisation is trying to achieve on a holistic basis. Organisations mistakenly select a large number of items they want to change and then go about trying to effect those changes without a systematic process.

They try certain tactics and when they fail they adjust in a reactive manner.

Any organisation seeking to implement more than five strategies at any one time is likely to fall into that trap as the participants become confused and disoriented, resulting in reactive behaviours and continuous re-engineering. That, in turn, leads to “corporate anorexia” a thinning down of resource where the good people vote with their feet, unrealistic demands are made on remaining people and they

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become demotivated, again resulting in a loss of talent.

Given that in any organisation, people are its most valuable asset, such corporate behaviour leads to declining performance and a loss of competitive advantage. The core competencies of the organisation are compromised and more slashing and burning ensues, followed by round after round of restructuring. The ultimate outcome is short term operational and corporate chaos.

The foundation of a good strategic plan is a clear mission statement which is well understood across the organisation and believed and accepted by everyone. Lip service is often paid to this critical process and it needs to be addressed very carefully.

Once the mission is locked in, the values of the organisation must be defined, followed by the expression of the future vision for the company. That defines the organisation’s view of its direction.

Then the planning process gets down to the nitty-gritty. Analysis of the competition and the core competencies of the firm - its strengths and weaknesses, opportunities and threats are assessed - and most importantly, defining what the customers want from the business.

There are numerous tools available to aid this process. The starting point is for the strategic planning team - which should include an external advisor/facilitator as well as the senior management and Board - to work through brainstorming sessions resulting in a definition of the three or four big goals to be achieved over the next five to ten years.

An external facilitator will ensure diversity and balance, delivering a strategic plan more likely to be robust and acceptable to all stakeholders.

Unfortunately, the entire process is often rushed in the interest of saving time and cost, with the result that a less than perfect plan emerges necessitating a revisiting of the process sooner than is desirable.

Staples Rodway is here to help our clients to perfect the strategic planning process and to prepare themselves, with confidence, for the new business environment. To use another old adage, “If you fail to plan, you plan to fail”.

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NUMBERS Spring 2012 • 11

Bev McConnell and fox terrier Bosca in her garden Ayrlies, in Whitford, east Auckland.

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PHOTO: Sally Tagg & Jack Hobbs WORDS: Jack Hobbs Extract reproduced with kind permission by NZ Gardener magazine and Fairfax Media

Long-standing Staples Rodway client Bev McConnell’s immense contribution to gardening in New Zealand has seen her awarded one of the horticultural world’s highest tributes.

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often wonder if we celebrate our best gardeners enough here. There are no flashy award ceremonies for them despite gardening being one of our most popular and creative pursuits. So it is particularly satisfying when one of our best is honoured, especially when the award is from the august Royal Horticultural Society (RHS).

The Veitch Memorial Medal is the highest international honour bestowed by the RHS to “persons of any nationality who have made an outstanding contribution to the advancement of the art, science and practice of horticulture.” Very few Kiwis have previously received this award, and our latest recipient – Bev McConnell of Ayrlies Garden – is the first New Zealand female to do so.

Since the award was established more than 140 years ago it has been bestowed on some of the greatest figures in gardening history.

The list of recipients reads like a who’s who of horticulture. It includes great names such as early plant hunters Ernest Henry Wilson, Frank Kingdon-Ward and George Forrest, with more recent recipients including Irish plantswoman Helen Dillon and American nurseryman and garden writer Dan Hinkley.

When it was announced that Bev would join this prestigious lineup at a recent annual NZ Gardens Trust conference, the audience gave her a standing ovation. Joining in their prolonged applause were many of the leading gardeners and horticulturists from around the country.

Their reaction is not suprising when you consider Bev’s achievements and contribution to horticulture in this country. Her Whitford garden Ayrlies, which is open to the public and is operated by a charitable trust, is designated a Garden of International Significance by the NZ Gardens Trust. But more than that, she has wholeheartedly supported and inspired many who have made horticulture their career.

Bev began an ambitious project for the new millennium in memory of her late husband Malcolm – 14ha of what used to be a horse paddock is now a wetland abundant with native plants and wildlife.

About 15,000 native plants fringe the large expanses of tranquil water

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Ayrlies Garden 1 Gallery 2 Ollie’s Pond 3 New Pond 4 Carpark 5 The Sitooterie 6 China Wall 7 Tennis Court 8 Log Pond 9 Pool 10 Valley of the Giants 11 Rose Walk 12 Rockery 13 House 14 Rose Garden 15 The Temple House 16 Meadow Garden 17 Cypress Pond & Gazebo

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Plan drawn by Renée Davies at Unitec Landscape Architecture Department CLOCKWISE FROM LEFT: Hawthorn berries, cones of Chinese spruce, the Weir pond, a pair of corrugated iron goats graze under a claret Ash.

enjoyed by white swans and various other birds.

Every year a group of volunteers from Auckland Botanic Gardens spend a day with the Ayrlies team, working in the wetland, planting and doing any other chores Bev has lined up. The wetland is a magical place, especially in the evening, radiant in the warm glow of the setting sun and best enjoyed with a good glass of wine in hand.

One of the keys to Ayrlies’ success as a garden is that Bev painstakingly evaluates all the plants over many years, removing non performers and making the most of her stars. Only the best plants for local conditions are on show and they provide colour and interest all year round.

Bev’s contribution to horticulture is much wider than just her garden. She has been a staunch supporter of many causes, from the Ellerslie International Flower Show to the NZ Gardens Trust. Bev and Gordon Collier were the inaugural garden assessors for the trust, which is now widely considered to be the foremost resource for visitors wanting information on the best open gardens to visit.

Bev has also been a great supporter of anyone who shares her passion for plants and gardens, and an inspiration and mentor for many younger gardeners and designers embarking on their careers.

Most of all, Bev is a leader. She has led garden design here in new directions, and in doing so, influenced numerous other gardens and gardeners. She thoroughly deserves this honour... and any other accolades that come her way.

Now the garden stars in her book Ayrlies: My story, my garden although, as Bev says, “A gardener’s life is almost as much about people as it is about plants and landscapes”.

Ayrlies: My Story, My Garden is available at www.mags4gifts.co.nz.

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NUMBERS Spring 2012 • 15

& BACHES

BOATS

by Mike Rudd Staples Rodway Auckland

The complexities of the recent tax clampdown on mixed use assets is leaving some in need of a holiday.

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he Government appears to have made the new tax rules clamping down on excessive deductions for the costs of holiday homes, yachts and similar leisure assets unfortunately complex.

The rules, introduced in the September 13 Tax Bill for implementation from 1 April, 2013, apply to assets worth more than $50,000 which are offered for occasional hire and are commonly referred to as “mixed use assets”.

The current rules are basically that there are no rules for deducting expenses relating to mixed use assets – specifically no apportionment rules.

Many taxpayers simply deduct expenses on the basis that they only needed to not deduct the days that they used the asset privately.

For example, if a holiday home was used by the owners for just for one month a year, the owners would deduct 11 months of expenses, even if the house was hired for only a few days or weeks.

The new rules are more complex and apply to assets that are: • used to earn income; • used privately; and • not used for at least 62 days (62 working days if the asset is typically only used on work days) in an income year.

The new rules are further complicated in defining the type of asset and defining its ownership as per the following circumstances: • the asset must be held by an individual, trust, partnership or a close company (a close company has five or fewer natural person shareholders); • must not be land, or cost less than $50,000; • must not be subject to an existing apportionment basis based on space (such as the home office); • must not be a motor vehicle; • must be used privately, which means by the owner, their partner, siblings, parents, children, grandparents and grandchildren; • but the use is excluded if the private use is the type that involves expert or specialist knowledge in order for it to be used, the person uses it in that capacity, and the income derived is at market value, which includes an amount paid for the provision of the person’s services; and • any use below market value will also be regarded as private use.

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The apportionment formula provides for the amount of deductible expenditure, including depreciation, to be calculated as follows: E xpenditure is deducted against Income earning days (Income earning days + private days) For example expenditure deductions for a boat chartered for 30 days and used by its owners for 30 would be calculated at 50% of the general expenditure for the total time of use – in this case 60 days – the combined total of hire and private use days.

In addition, a new rule of interest deductibility is introduced for close companies holding assets subject to the rules. Any interest expenditure incurred in relation to debt within the company, where the debt is equal to or less than the cost (or rateable value, if land) of the asset, will be subject to apportionment. Further rules exist to limit interest deductibility for group companies, corporate shareholders and non-corporate shareholders, if applicable.

Just to further complicate the new rules there is the addition provision for quarantining of expenditure if the gross income derived from the asset is less than 2 percent of the cost of the asset. The quarantined expenditure will be denied as a deduction in the current income year, and can be used in a later year when there are sufficient profits derived from the asset.

The quarantining provisions do not apply to assets predominantly used in business.

OPTION TO TREAT INCOME AS EXEMPT If the above is just too hard, then the draft legislation gives you the option to elect out of the rules by treating the income as exempt (and not getting to claim the deductions). This will only apply where the gross income in a year is less than $1,000, and includes situations where losses are being made.

The GST treatment will reflect the income tax treatment and again the rules are complex. The main point is where you could previously claim an input tax credit proportional to the business use and the amount of time the asset was available for business use, this credit will now be limited in a similar way to the income tax.

Basically in trying to make things fairer, as is often the case, they become much more complex.

NUMBERS Spring 2012 • 17

LEAKY BULDINGS & EARTHQUAKE STRENGTHENING

THE THORNY TAX ISSUES

by Mike Rudd Staples Rodway Auckland

One of the key tax issues relating to building work is the distinction between what is capital expenditure and what is revenue. In most cases the difference is clear, but the boundary between the two is wide and full of traps that can be difficult to navigate.

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he courts have been asked many times to determine whether certain types of expenditure are capital or revenue, most commonly in relation to physical structures including buildings. Given the wide variety of facts that have been considered, some of those decisions are not consistent and the boundary remains somewhat murky.

Up until 2012, the effect of classifying expenditure on a building as capital was that tax depreciation could be claimed, as compared to revenue expenditure where a deduction for the full amount could be claimed as incurred.

However, with the removal of the ability to claim tax depreciation deductions for buildings from the 2012 income year onwards, any building expenditure that is treated as capital now means no deduction would be available at all in most circumstances. This makes identifying the capital/revenue border even more vital for both taxpayers and Inland Revenue.

We have had a number of clients approach us for advice regarding the tax deductibility of work carried out to remedy “leaky buildings”, and we also expect that the tax treatment of earthquake strengthening costs will become a hot topic in the near future.

In both cases there is no simple answer and the position depends on the facts of each case.

Inland Revenue considered the tax deductibility of repair costs on a building with “leaky building syndrome” in Inland Revenue’s Questions we have been asked issued on 19 September 2006. In their view, factors that indicate capital expenditure are: • The damage repaired is fundamental to the structure of the building.

• That the expenditure does more that renew or replace defective parts and renews or replaces substantially the whole asset.

• The work changes the character of the property. The example given is re-cladding the property in a different material as a permanent solution to prevent water access… is likely to be of a capital nature.

• The work results in a significant increase in the value of the asset, although this is not determinative in itself.

Part of the concern of Inland Revenue is if a taxpayer purchases property at a reduced cost with the knowledge that there is a leaky building issue and that major expenditure would be required to remedy the issue. In those cases Inland Revenue would be more likely to assert that the costs of bringing the building up to an acceptable state are capital because the work significantly increases the value of the asset.

There may be a reasonably arguable position for the tax deductibility of expenditure incurred to repair a leaky building provided the taxpayer was unaware of the leaky nature of the building and did not pay a lower price because of it. A reasonably arguable position (subject to the individual facts of the case) may be supported if the following are met: • the property was acquired with the expectation that this would be a water-tight property entirely suitable to derive assessable income for many years and the price paid reflected this; and • the repair work will not improve the property beyond what it originally appeared to be, and the character of the property will not be changed; and

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• it was always the taxpayer’s intention to derive assessable income from the property after repairs were completed Given the complex issues arising from expenditure of this nature, we recommend specific tax advice is sought before any tax filing position is taken.

EARTHQUAKE STRENGTHENING Following on from the Christchurch earthquakes, local authorities, building owners and their tenants all across New Zealand have become much more conscious of the earthquake rating of commercial property. We are seeing commercial issues arising for clients where properties they hold require work to improve the earthquake rating.

In cases where expenditure needs to be incurred in strengthening the property the costs involved can be significant, and the issue of whether the costs are capital or revenue will be a key concern.

A recent Inland Revenue Interpretation Statement on repairs and maintenance outlines their view that the capital or revenue nature of expenditure does not change even if damage was caused by an event such as an earthquake. The focus is on the work undertaken and if the work is seen to improve the asset, it will be deemed to be of a capital nature.

The Interpretation Statement outlines (by reference to case law) that work undertaken to strengthen a building (whether or not earthquake damaged) is considered to be an improvement to the building and capital in nature. Inland Revenue consider this is likely to be the case even in circumstances when the work was required by law (such as to comply with council consents).

As a general comment, it may be helpful if work undertaken to strengthen a building is clearly separated from expenditure incurred to restore the building to its original condition, or from other work that would ordinarily be classified as repairs and maintenance. We recommend you discuss any work that might be undertaken with your tax advisor before expenditure is incurred so that appropriate advice can be provided.

The potential scale of this issue has already been identified by policymakers and there has been a call by some to change the law to clearly enable a tax deduction to be claimed for earthquake strengthening costs. Watch this space.

INLAND REVENUE PENALTIES Given case law does not provide clear boundaries, it is possible that Inland Revenue could challenge deductions claimed for expenditure of this nature. Given that Inland Revenue is required to consider charging penalties any time they adjust a taxpayer’s return, it is important that the tax filing position taken by the taxpayer can be supported. Provided a reasonably arguable position is taken, which can supported by a written opinion, taxpayers should have a defence against penalties being imposed by Inland Revenue for taking an unacceptable tax position.

Bottom line, we recommend advice be taken at an early stage and definitely before any tax returns are filed taking a position in relation to leaky building or earthquake strengthening costs.

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COMMON TAX ISSUES FOR NOT-FOR-PROFITS

by Spencer Smith & Sybrand van Schalkwyk Staples Rodway Christchurch New Zealand is a society that depends heavily on its Not-For Profits (NFPs) to keep communities functioning. Common examples are Parent Teacher Associations (PTAs), sports clubs and residents’ associations. In this article we will focus principally on PTAs.

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here is a common misconception that PTAs are exempt from income tax and GST. This represents a significant risk to any officers of the PTA if it turns out that this assumption was wrong and the IRD comes after them to make good any tax shortfall. Although IRD audit activity in the sector has historically been limited, there are signs that the IRD will be stepping up their policing of the NFP and charitable sector.

its usual school fundraising role, it is critical that PTAs understand the importance of exercising discretion in the activities it chooses to be involved in. The benefits (if any) to the PTA itself or the parents working in the PTA must be very minor and incidental. Where necessary, the PTA must keep a clear separation between the funds raised for the school and any funds raised from other activities that will not directly benefit the school.

THERE IS NO GENERAL TAX EXEMPTION

MEMBER CONTRIBUTIONS ARE GENERALLY NOT TAXABLE INCOME

There is no general income tax exemption for PTAs as there is for charities.

On the other hand, most PTAs exist to raise funds for their school, and schools are exempt from income tax. Therefore, as long as the school keeps any profits made by the PTA, then no tax should be payable.

However, this position is more easily said than done and the PTA needs to observe certain formalities in its handling of profits made for the school. It also needs to be aware of its GST obligations, as explained further below.

TAX ON PTAS If a PTA is making money which it intends to keep, it is only allowed to receive $1,000 tax free.

For example, a PTA operates a coffee shop at the school during lunch breaks. The coffee shop makes a profit, after deducting expenses, of $10,000. Where the PTA decides it will keep all of those profits, tax will be payable on a profit of $9,000.

The key to undertaking tax-exempt fundraising is to be explicit about the purpose of the fundraising event and to be scrupulous in accounting to the school for the event (including the costs incurred) and the funds raised.

A common example is a quiz night where the parents are asked to bid for donated prizes. The parents usually pay for some tickets and their drinks and nibbles, so any benefit they might personally get from attending has been paid for. In this typical situation, the parents are being entertained, but the entertainment (such as it is) is cheap and cheerful and everyone usually understands that the event is simply the means by which money is being raised.

On the other hand, a PTA risks being taxed on any profits made if it chooses to become involved in a business venture that has no apparent connection with the school, particularly where the PTA does not account to the school for all income derived.

While it would be unusual for any PTA to become distracted from 20 • NUMBERS Spring

The other potential source of problems is where a PTA (or any NFP) raises funds from subscriptions.

Generally speaking subscriptions should not be taxable on the basis that the subs are merely a way for the PTA to obtain funds from its members. It is like shifting money from one pocket to another, and there are usually no tax consequences for doing that (thankfully).

However, on this issue we do have to speak in generalities, because there are some boundaries that can sometimes be a bit blurry.

Usually the subs provide core funding for communications within the association and the costs of representation. It would be unusual for the subs to entitle the members to be supplied with goods or other services. But, if an association is actually trading with its members by providing goods or services for reward, then payment for those goods or services, disguised as subscriptions, could very well give rise to taxable income.

DONATIONS TO NFPS Many people think that only donations to charities entitle the donor to a tax credit. That is not so. The category of entities that can give tax deductible donations receipts are much wider, and include a gift to any entity with charitable, benevolent, philanthropic, or cultural purposes.

PTAs, sports clubs and residents’ associations should fall within this category, depending on their specific purposes.

The IRD maintains a list of donee organisations, and if your organisation is not on the list, then donations will not entitle the donor to a tax credit or deduction. You can check if your organisation is on this list at www.ird.govt.nz/non-profit/np-donee/. If it isn’t, and you were expecting it to be, then you should take immediate advice. We recommend you do so before contacting the IRD as the consequences of not being registered could be damaging.

A reminder for donors - if you make a gift of more than $5 to a donee

organisation then you can claim a refundable tax credit. The maximum credit is limited to the amount of your taxable income for the year. If a company makes a donation, it can claim a deduction up to its taxable income after taking into account any tax losses that have been used.

A reminder for those who make donations to schools - you can claim a donation tax credit on: • school fees or • state run kindergartens The donation needs to go to the school’s general fund and you must have a receipt with the word ‘donation’ written on it.

You can’t claim a donation tax credit on: • attendance due fees • tuition fees, ie where a separate fee is charged for any course of tuition • university, polytech or other tertiary education fees.

• private kindergarten or other early childcare fees (but these can be claimed under the child care/housekeeper tax credit)

GOODS AND SERVICES TAX PTAs (and NFPs generally) are subject to GST in the same way as any other organisation. Therefore, if the PTA’s turnover exceeds, or is likely to exceed $60,000 in a 12 month period, then the PTA will have to register for GST and return GST on its supplies.

GST on subscriptions Subscription fees are subject to GST if the PTA is registered for GST. Therefore, in deciding whether an NFP has to register for GST it has to take into account the subscription fees it receives.

www.staplesrodway.co.nz

GST on gifts An unconditional gift is a gift where there are no direct benefits that flow back to the donor. There is no GST on unconditional gifts to a PTA, although we expect that most large gifts would be made directly to the school.

No GST on the sale of donated goods and services There is no GST where the PTA sells donated goods or services. If your PTA has been returning GST on these sales, then it may be possible to request a refund of the tax so returned.

Liability of Officers PTAs (or any NFP) that are registered for GST need to advise the IRD of the names of their officers (e.g. President, Treasurer etc).

The IRD should be informed of future appointments and the retirement of any officers, otherwise they will remain liable for the GST.

CONCLUSION Hopefully we have helped to dispel the common misconception that NFPs are exempt from income tax or GST. But that should not stop PTAs raising funds for their schools where they exercise appropriate discretion in respect of the type of activity undertaken and the handling of any profits arising.

For their part, the IRD has a dedicated part of their webpage that explains very clearly what is required, so there should be no excuse for getting this wrong.

Staples Rodway’s offices throughout New Zealand are active in their communities and consequently are familiar with the tax obligations of NFPs. Please reach out if you need help and have a chat to one of our friendly client advisors.

NUMBERS Spring 2012 • 21

AT THE MOMENT, THE ONLY CONSTANT IS

CHANGE

by Jackie Russell-Green National Technical Manager

Jackie Russell-Green takes a look at some of the key aspects of New Zealand’s changing financial reporting and audit landscape.

CHANGING REQUIREMENTS FOR CHARITIES The proposed changes to financial reporting requirements for companies have received a lot of recent media attention. Significant changes are also proposed for not-for-profit organisations, but they haven’t yet received the same level of attention.

The first significant change that not-for-profits will face is to financial reporting requirements. At the moment New Zealand’s financial reporting standards are sector neutral, which means that all entities (private sector, public sector and not-for-profits) report under the same financial reporting standards. Thus, with some very limited exceptions, all entities in New Zealand currently apply either New Zealand equivalents to International Financial Reporting Standards (“NZ IFRS”) or New Zealand Financial Reporting Standards and Statements

22 • NUMBERS Spring

of Standard Accounting Practice (often referred to as “old GAAP”).

It has now been decided that New Zealand will adopt a multistandards approach, which means that different types of organisations will apply different financial reporting requirements. The financial reporting requirements for private sector organisations will continue to be based on NZ IFRS. However, in the future, the financial reporting requirements for public sector and not-for-profit organisations will be based on International Public Sector Accounting Standards (“IPSAS”).

In some instances, different requirements will apply to public sector organisations than will apply to not-for profits.

Only the largest not-for-profits, and those that are publicly accountable, will be required to apply the full IPSAS-based standards.

There will be relief from disclosure requirements for the majority of

not-for-profits, and not-for-profits with annual expenditure of less than $2 million that are not publicly accountable will be able to apply simple format reporting.

In addition to changed financial reporting requirements, not-forprofits are likely to face increased assurance requirements in the future. Registered charities are currently required to include financial statements in an annual return that must be lodged with the Charities Commission. However, there is no requirement for the financial statements to be independently audited or reviewed. In April 2012 the Ministry of Economic Development released a Discussion Paper entitled “Auditing and Assurance for Larger Registered Charities” which proposed to require registered charities that are not subject to the Public Audit Act 2001 to be:

AUDITOR LICENSING REGIME NOW IN PLACE Under the Auditor Regulation Act 2011, from 1 July 2012 issuers can only be audited by licensed auditors and registered audit firms. The licensing and registration process requires auditors and audit firms to demonstrate suitable audit experience and quality control systems, among other things.

All Staples Rodway firms have obtained transitional audit firm registration, which means that we are able to continue auditing issuers.

• Reviewed or audited if they have annual operating expenditure of $200,000 or more; and • Audited if they have annual operating expenditure of $300,000 or more.

As with any impending change to financial reporting or assurance requirements, the key to successful management of the change is preparation. We encourage all not-for-profits to begin their assessment of likely impacts of adoption of new financial reporting requirements and to start preparing for increased assurance requirements now. Your Staples Rodway contact will be able to help you prepare effectively for these upcoming changes.

www.staplesrodway.co.nz

NUMBERS Spring 2012 • 23

SELLING YOUR BUSINESS

HOW DOES THE SALES PROCESS WORK?

by Dean Vincent & Cameron White Baker Tilly Transaction Services

At the risk of stating the obvious, and despite what some advisors will tell you, selling a business is not like selling a house. The process of selling a business involves a number of complex stages and at each stage the business owner encounters a number of risks.

24 • NUMBERS Spring

D

espite the complexities and risks in the process of selling your business, there are opportunities to maximise the sale price of the business. Preparation and adopting a highly-structured sale process are crucial. Ensuring you sell on the best possible terms, while not damaging relationships with clients, staff and suppliers, requires vigorous planning and structure. The usual stages are: 1.

2.

3.

4.

5.

6.

7.

8.

Set the timetable and other details of the transaction Understanding the value of your business Preparation of an Information Memorandum Identifying and approaching potential purchasers Evaluation of offers Managing Due Diligence Final offers & Sale Agreement Enter into an agreement with preferred purchaser.

Setting clear timelines for the various milestones in the sale process provides a transparent and equitable process for all potential purchasers while limiting the time commitments of owners and managers and minimising disruption to business.

You must understand the value of what you are selling, so gathering evidence of recent sale transactions in your industry and evaluating the unique attributes of your business are critical to providing an objective to rebut inappropriately low offers.

PREPARATION OF AN INFORMATION MEMORANDUM The Information Memorandum (IM) is your sales pitch document. It provides potential purchasers with a summary of your company, its strategic position in the market, relationships with customers and suppliers and intellectual property. It is usually confidential and should only be given to approved parties on a confidential basis. The IM is prepared with the needs of potential purchasers in mind and it contains: • • • • • •

Company history and background Summarised historic and forecast financial information Industry and competitor analysis Employee service longevity Details about what is for sale (assets or equity) Purchase price and payment terms (unless the method of sale is via tender, in which closing date for tenders will be set) • Any other information that may affect the value of the Company To maximise the sale of your business your advisor should identify ‘strategic’ purchasers versus ‘value’ buyers. Strategic purchasers can see the benefits of incorporating your business into their operations, and are generally prepared to pay more for the business than those just looking for the greatest economic return from the business.

It may be appropriate for your advisor to discreetly approach the list of ‘strategic’ potential purchasers and gauge their appetite for acquisitions. Your advisor should know the extent that your business will complement their business, without divulging the identity of your business.

If the criteria are satisfied, then add the purchaser to a shortlist for distribution of the IM.

EVALUATION OF OFFERS Your advisor should seek indicative bids from potential purchasers www.staplesrodway.co.nz

to qualify their participation in the sale process. The release of information is under strict confidentiality to minimise: • the public knowledge of your intentions; and • the impact on your customer base.

It is always preferable to receive more than one offer for your business. If the sale timetable has been managed successfully, offers will be received contemporaneously.

It is at this stage that the business owner must evaluate the offers on a like-for-like basis, taking into account any differences in: 1.

2.

3.

4.

5.

The price The timing of payment (payment today versus earn-outs) Vendor handover time Vendor warranties Any other relevant factors important to the vendor, such as employee job security, terms of lease (should you own the business premises) and customer and supplier relationships.

Larger businesses are more complex and the complexity of offers can vary with the type of buyer. For example private equity investors often structure more complex deals than industry incumbents.

Following evaluation a small number of buyers will be invited to undertake due–diligence.

MANAGING DUE DILIGENCE Vendors should compile a detailed due diligence file and, having anticipated and dealt with all potential issues, the purchasers should encounter few surprises in due diligence.

It is sensible for due diligence to be managed by an external advisor, who can; 1.

2.

3.

4.

Collate due diligence information in a structured manner Control access to information Manage the process in a location away from the business premises Deal with the majority of purchaser queries as they arise, allowing the owners to retain their focus on managing the business.

FINAL OFFERS AND SALE AGREEMENT After completing its time for final offers, again use your advisors to assist with negotiation of the Sale & Purchase Agreement.

Use your solicitor to work with your financial advisors to focus on the following areas : 1. What warranties has the purchaser proposed?

2. Does the purchaser have the financial substance to complete the transaction, or is it a new company formed for the purposes of acquisition?

3. What taxation events will be triggered by the sale?

4. How are any purchase price adjustments to be determined?

5. How is the purchase price allocated (between tangible and intangible assets)?

Baker Tilly Transaction Services Ltd is a specialist mergers and acquisition division of Staples Rodway Auckland. If you are interested in selling your business, talk to us to find out more about how we can assist by finding the strategic buyer for your business.

NUMBERS Spring 2012 • 25

IMPUTATION CREDITS

MANAGEMENT

by Aman Chand Staples Rodway Auckland

Recent reductions in the corporate tax rate, while generally welcomed by those operating under a company structure and investors, have created issues with respect to the imputation regime that need to be managed.

WHAT IS IMPUTATION?

WHAT IS THE ISSUE?

For the past 23 years, New Zealand has had an imputation system which eliminates the double taxation that can arise when profits earned by a company are taxed at company level, then again when a shareholder receives a distribution of the profits in the form of dividends.

The amount of imputation credits that a company can attach to any dividend distribution is capped to the corporate income tax rate which was reduced from 33% to 30% from the beginning of the 2009 income year and from 30% to 28% from the beginning of the 2012 income year (1 April 2011 for companies with a March balance date).

Notwithstanding these reductions, dividends continue to be subject to resident withholding tax (RWT) at the rate of 33% less the imputation credit percentage attached to the dividend.

This can be illustrated by the following table:

HOW DOES IT WORK? The mechanism is relatively simple. A company is allowed a credit to its imputation credit account (ICA) for income tax paid on its profits (among other types of credits).

When a company pays a dividend, these credits can be attached to the dividend which allows shareholders to use these credits against the income tax payable on the dividend, thereby eliminating double taxation. Without this regime, the combined corporate and individual tax could be up to almost 52%.

Dividens imputed at Net dividend PLUS: Imputations credits LESS: Resident withholding tax Tax to shareholder

26 • NUMBERS Spring

28%

30%

$10,000.00

$10,000.00

$3,888.89

$4,285.71

$694.44

$428.57

$9,305.56

$9,571.43

Thus, a cash disadvantage arises through the imputation credit reduction.

WHAT CAN YOU DO? Although dividends payable from 1 April 2011 generally have a maximum of 28% imputation credits attached, there is a transitional period which allows a company to impute dividends at 30%, thereby not disadvantaging shareholders. The transitional period will, however, cease on 31 March 2013, regardless of the company’s balance date, and all 30% imputation credits held will revert to 28% imputation credits.

WARNING To take full advantage of the transitional period, a company must have imputation credits generated at the corporate tax rate of 30% (or at the earlier 33% rate). These must be very carefully calculated, taking into account refunds due, transfers to other tax types, etc, which will reduce the amount of 30% imputation credits available. If an over-

allocation of 30% imputation credits occurs, a 10% penalty arises on the amount of the over-allocation, which cannot be reversed. Inland Revenue is showing increasing interest in the accuracy of ICA’s in their risk reviews and audits. They can check back a number of years as the four year statute bar rule does not apply to the ICA return.

If you wish to maximise the use of the available 30% imputation credits, we suggest that a careful review of the balance available be made before a dividend is declared.

The review should include the following: • Checking any changes in the ultimate individual or trust shareholders A company can only carry forward its imputation credits if it maintains a shareholding continuity of 66% or more for the period from when the imputation credits arose to when they are used.

Any change in excess of this forfeits the credits.

• Tracking imputation credits Although only one combined imputation credit account is filed with Inland Revenue, it is necessary to track the 30% imputation www.staplesrodway.co.nz

credits carefully to avoid over-allocation. As mentioned above, the available 30% imputation credit balance would be reduced by a tax refund from a 30% income year, any transfers to other tax types such as GST and PAYE, and transfers to meet provisional tax liabilities for a 28% income year.

• Corporate shareholder fish-hook A corporate shareholder receiving a taxable dividend imputed at 30% will only be able to claim a 28% tax credit (of the net dividend plus credits). This effectively limits the tax credit to the corporate tax rate. The corporate shareholder will however receive the full 30% credit to its 30% imputation credit account. This effectively allows the company to pass on the 30% imputation credits to its ultimate individual or trust shareholders prior to 31 March 2013.

WHAT IF THE COMPANY CANNOT AFFORD TO PAY A DIVIDEND? It may not be possible for some companies to utilise all available 30%

imputation credits if cash flow requirements do not allow a dividend payment. There may however be other options available in these situations. For example, the company can make a Taxable Bonus Issue to the shareholders. This does not involve any cash outlay on the part of the company other than the payment of resident withholding tax (effectively at 3%) but for tax purposes, this will be taxable to the shareholders as a dividend, with 30% imputation credits attached.

With careful management, the benefits of imputation credits can be maximised with ‘minimal’ risk.

NUMBERS Spring 2012 • 27

AUCKLAND Level 9, Tower Centre 45 Queen St, PO Box 3899 Auckland 1140, New Zealand Phone 64 9 309 0463 Fax 64 9 309 4544 enquiries@staplesrodway.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 staples@staplesham.co.nz

TAURANGA Level 1, 247 Cameron Road PO Box 743 Tauranga 3140, New Zealand Phone 64 7 578 2989 Fax 64 7 577 6030 info@staplestga.co.nz

HAWKES BAY Cnr. Hastings and Eastbourne Streets PO Box 46 Hastings 4156, New Zealand Phone 64 6 878 7004 Fax 64 6 878 0078 postmaster@stapleshb.co.nz

NEW PLYMOUTH 109-113 Powderham Street PO Box 146 New Plymouth 4340, New Zealand Phone 64 6 757 3155 Fax 64 6 757 5081 newp@staplestaranaki.co.nz

STRATFORD 78 Miranda Street PO Box 82 Stratford 4352, New Zealand Phone 64 6 765 6019 Fax 64 6 765 8342 stfd@staplestaranaki.co.nz

CHRISTCHURCH AMI House 116 Riccarton Road, PO Box 8039 Christchurch 8440, New Zealand Phone 64 3 343 0599 Fax 64 3 348 0186 chc@staplesrodway.com www.staplesrodway.co.nz