No 42 WINTER 2017
www.staplesrodway.co.nz
www.staplesrodway.co.nz NUMBERS Winter 2017 • 1
DIRECTORS AUCKLAND
David Searle
HAMILTON
Rosanna Baird (07) 834 6800
(09) 373 1128
TAURANGA
Chris Downey (07) 578 2989
HAWKES BAY
Dave Sawers
(06) 878 7004
TARANAKI
Chris Lynch
(06) 757 3155
WELLINGTON
Robert Elms
(04) 472 7919
CHRISTCHURCH Dave McCone (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 2 • NUMBERS 2017 recommended thatWinter you consult your advisor before acting on this information.
No 42 WINTER 2017
2016 Network of the Year BAKER TILLY INTERNATIONAL
IN THIS ISSUE 2 Online accommodation The taxman is waiting at your door
4 Tax Freedom Day Kiwis paying more tax year-on-year
6 3 welcome changes from the IRD Tainted capital gains, provisional tax and the Bright-line test
8 Inland Revenue simplifying life FBT on cars, employee accommodation and labour pains
10 Taxing challenges on cash flow Keep on top of tax payments
12 Your family farm Will it succeed to the next generation?
14 Women in Business Interview with Rachael Carter of SOHO Wines
16 Succeeding in the booming building industry Are you becoming a victim of your own success?
18 Property investment Listed property Trusts vs property syndicates
20 NOW Communications Business growth and getting the basics right
22 Ask an Expert 24 Are you ready for how you account for revenue? Changes to NZ IFRS 15 Revenue from Contracts with Customers
27 A hot topic Planning a robust IT infrastructure
28 A J M (John) Wadams 30 Movers & shakers 31 Staples Rodway snapshot
14 OCTOBER 2017 32KM RUN OR WALK Individual or Relay Team of Three Entries open 1 July at staplesrodwaychallenge.nz
ONLINE ACCOMMODATION
THE TAXMAN IS WAITING AT THE DOOR
2 • NUMBERS Winter 2017
A love of technology and housing have intersected; New Zealanders are using the likes of Airbnb and Bookabach to turn spare rooms, holiday homes and other spaces into extra cash. These online platforms make it easy to find and deal with short-stay tenants. The use of these platforms can, however, result in nasty GST surprises. GOODS & SERVICES TAX
INCOME TAX
Properties used to provide short-term accommodation can potentially become part of the GST system with one of the key consequences being that future capital gains on a property may become subject to GST.
Under New Zealand law, rental income sourced in New Zealand is subject to income tax, regardless of the tax residency of the taxpayer. Rental income, both short and long term, is sourced in New Zealand if the property is located in New Zealand. Expenses incurred in deriving rental income are deductible for tax purposes. However, if the property is used for both rental and private use, the available deductions can be subject to apportionment under the “mixed use asset” rules. Private use includes the use of the property by an associated person such as a family member, even if they pay for it. If expenses are subject to the mixed use asset rules this means a proportion of expenses such as rates, insurance, interest and management fees are non-deductible. This mixed use asset rule applies to most investment vehicles, including partnerships, look-through companies and trusts. Taxpayers who have a tax liability (referred to as Residual Income Tax) of $2,500 or more in the prior year will have a provisional tax liability for the current period. In some cases interest (currently at 8.22%) and penalties apply if income tax is unpaid by the tax instalment due dates. Technology is a double-edged sword. Data relating to short-stay rentals is readily available to Inland Revenue. It pays to ensure those activities are managed professionally in all respects including tax.
GST registration The supply of short-term accommodation is generally treated as a taxable supply for GST purposes. Registration for GST is compulsory where the gross value of taxable supplies exceeds $60,000 in any 12 month period. People with a sought after property or a number of properties appear to be regularly crossing this threshold, without appreciating the implication. Specifically, that 3/23rds of the rental income could be claimed by the tax man whether or not the tenants have paid GST on the accommodation. Once registered, GST must be accounted for on all taxable supplies. However, GST can be claimed (in whole or in part) on costs associated with the supply of short-term accommodation. Second hand goods claim Once in the GST net, a taxpayer can generally recoup (either immediately or over time) the GST implicit in the purchase price of the property. The GST rules provide a specific mechanism for calculating how much GST can be recouped immediately or in each return. Ownership structure and GST Where properties are held in investment vehicles such as companies and trusts and are used for both short term accommodation and private use, there may be requirements to charge a deemed market rental for the private use, with GST on the deemed private rental being paid to Inland Revenue. Restrictions on the ability to recover GST apply to properties owned by individuals that are used for both private and business purposes. Accounting for GST on the property on sale Where the provider of short-term accommodation is registered for GST (or required to be registered for GST), GST consequences will arise on the eventual sale of the property or on GST deregistration. Depending on the facts, the provider of that accommodation is required to account to Inland Revenue for some or all of the sale proceeds from the property. As noted, this can result in GST being paid on amounts including the value of capital gains. www.staplesrodway.co.nz
If you require any assistance or additional information, please contact your local Staples Rodway tax advisor.
Article by Connie Lui & Jules Martinez STAPLES RODWAY AUCKLAND connie.lui@staplesrodway.com jules.martinez@staplesrodway.com NUMBERS Winter 2017 • 3
TAX FREEDOM DAY KIWIS PAYING MORE TAX YEAR-ON-YEAR Welcome changes to tax brackets in the recent Budget announcement.
Article by Mike Rudd STAPLES RODWAY AUCKLAND mike.rudd@staplesrodway.com
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TH MAY 2017 MARKED THE day that New Zealanders collectively paid off their tax bill for the year and could keep the rest of their income for themselves in what has been coined Tax Freedom Day. Each year Staples Rodway calculates when Tax Freedom Day will fall by analysing GDP, tax revenue and current tax brackets, which determine the rate of tax people pay on their income. The measure used is the same methodology that is used internationally, so it is helpful to compare ourselves with other countries and how the date moves year to year. One way of describing Tax Freedom Day is, if the nation as whole had to pay tax (of all kinds) out of the national income (GDP) first, before it could keep any of that money for itself, it would take until 8 May before the national tax bill had been paid. This year Tax Freedom Day fell six days later than last year, meaning people are paying more tax than they did in 2016 both in total and as a proportion of overall income. The total amount Kiwis paid in taxes has increased by 9.5 percent yearon-year, more than double the increase of last year, alongside a 5.1 percent increase in nominal GDP.
By the end of February this year, corporate tax collected was already 25 percent higher than in the year to March 2016. In the absence of any major tax changes in the last year, this can only be a sign of a well performing New Zealand economy, in spite of uncertainty on the global horizon. ‘Bracket creep’ also had an impact as a result of inflation pushing wages and salaries into higher tax brackets, leading to an effective overall increase in tax rates for most workers without the tax rates themselves increasing.
THE EFFECTS OF BRACKET CREEP THE OVERALL TAX RATE ON THE AVERAGE NATIONAL WAGE HAS INCREASED 18.5%
IF MARGINAL TAX BRACKETS HAD MOVED IN LINE WITH WAGE GROWTH, THE AVERAGE WAGE EARNER WOULD HAVE AN EXTRA
$1,700
PER YEAR OR THE EQUIVALENT OF
ES X A
OR
TOTAL TAX BILL
34.8%
ME YOU KEEP
31.2%
65.2%
LOCAL GOVERNMENT
3.6% The higher tax bill is reflective of a number of factors but the highest increases were in company tax and personal tax, with the GST take increasing to a lesser extent. Our methodology shows the true impact of the government on your back pocket each year. Most of the growth in government tax revenue has come from the corporate sector. www.staplesrodway.co.nz
WEEKLY SUNDAY BRUNCH FOR 2 OF SMASHED AVOCADO ON TOAST
CO
CENTRAL GOVERNMENT
IN
INCOME YOU PA YI
N
T
A DAILY FLAT WHITE
In this year’s Budget announcement on May 25 there was finally some relief provided to individual taxpayers, including adjusting tax brackets, partly offsetting inflation over the past nine years since the last adjustment. While this has given the average New Zealand wage earner $1,060 back in their pocket, the removal of the independent earner credit for those earning between $24,000 and $48,000 means that someone on $30,000 is only a net 77c a week better off. There are calls for the government to ensure that tax brackets are adjusted for inflation on a continual basis, but there was no indication this suggestion would be taken up. Australians have higher marginal tax rates and a higher corporate tax rate, although the combination of lower GST (10 percent) and a nil tax threshold for low income, means that the tax burden is lower than that of the New Zealand taxpayer. Australia’s Tax Freedom Day fell on April 13 this year. In the US tax freedom day was April 23. In the UK it falls in early June, and in other highly-taxed European countries it falls even later. NUMBERS Winter 2017 • 5
WELCOME CHANGES FROM THE IRD New Zealand was rated as the easiest country for doing business by the World Bank in October 2016, edging out Singapore for the number one spot. Maintaining this position is likely to be helped by recent long overdue (and welcome) changes made by the IRD to reduce the complexity that has crept into the tax rules for small to medium businesses over time.
Article by Sybrand van Schalkwyk STAPLES RODWAY TAURANGA sybrand.vanschalkwyk@staplestga.co.nz
6 • NUMBERS Winter 2017
RESTRICTION OF TAINTED CAPITAL GAINS TO LIMITED CASES A tainted capital gain arises when a company sells an asset held on capital account to an associate. Capital gains can usually be passed out tax free on liquidation, but not if the sale was to an associate. The old version of this provision was there to prevent companies from creating artificial capital gains by inflating the value of assets transferred to associates, enabling cash to be distributed tax free in substitution for taxable income. The ambit of the rule was very wide, to the extent that almost all capital gains on sales to associates were captured. These rules made it difficult to restructure SME asset ownership without either unavoidably or inadvertently creating a future tax headache. With these recent changes the scope is now much narrower, only targeting those gains made when the asset sold is retained in substantially the same group at the time of liquidation. If at least 15% of the shares in the company which purchased the asset are held by a third party when the assetselling company is liquidated, then the tainted capital gain rule does not apply. That is, if the 15% threshold is met, the company which sold the asset and derived a capital gain can be liquidated and distribute the capital gain tax free to its shareholders. The thinking is that having 15% third party shareholders in the purchasing company will prevent transactions happening at greater than market value, and therefore inflating “capital gains”. In my view that is sound thinking. A further helpful change is that, where sales of the asset are to non-corporate associates the tainted capital gain rule does not apply. These changes will undoubtedly free up corporate structuring in the SME environment. www.staplesrodway.co.nz
PROVISIONAL TAX BEING MADE FAIRER
The good news is that use of money interest won’t be charged on the first and second instalment of provisional tax, provided that the standard uplift method has been used. The standard uplift method is the one where you pay tax based on an uplift on your prior year income, on the assumption that your profits are always going up. If your profits go up more than last year, but you paid tax based on the uplift, then no use of money interest will arise on the first and second instalment of provisional tax. Use of money interest will still arise on the third instalment, on the basis that this is due on 7 May following the year end, so most taxpayers should know what their taxable income is by then, and be able to pay the “correct” amount of tax by that date. Our system is peculiar in the sense that taxpayers are charged interest on their unpaid tax when they are not in a position to know how much that tax will be. I always find this the hardest thing to explain to clients. The usual answer “it is just how our system works” just doesn’t cut it. With this change this explanation will be needed less frequently in the future.
IRD CHANGES ITS MIND ON STRANGE “BRIGHT-LINE RULE” INTERPRETATION You may have seen Staples Rodway in the media talking about changes to the Bright-line rules, which generally impose tax on the sale of residential land within two years. There is an exemption for your main home. However, an interpretation of the law resulted in a potential tax liability where you signed up for a house and land package, and then later nominated your trust to complete the purchase. The interpretation said that if there was a change in the value of your land from when you signed the contract, to when you nominated your trust, the gain would be taxable. The IRD have backed away from that interpretation, and have come to a very sensible conclusion. Broadly speaking, if you nominate your trust you won’t be paying tax on the gain from the date you first signed to the date you nominate your trust. However, if you are passing the property onto someone else prior to settlement, and instead of selling them the property, all you do is nominate them to complete the purchase and they pay you a nomination fee, then that nomination fee will be taxable. That outcome seems fair to us, and is a welcome change to IRD’s interpretation. These changes are very welcome and we believe result in fairer rules in play.
If you require any assistance or additional information, please contact your local Staples Rodway tax advisor. NUMBERS Winter 2017 • 7
INLAND REVENUE SIMPLIFYING LIFE Article by Roger Shackelford STAPLES RODWAY WELLINGTON roger.shackelford@stapleswellington.co.nz
Some positive tax changes have been enacted which we think will certainly help our clients deal with the ever increasing complexity of the tax system.
8 • NUMBERS Winter 2017
TIME FOR A NEW CAR? We all know that cars and companies don’t mix – if you operate via a company and that company provides a vehicle to an employee (that includes you as a shareholder employee) Fringe Benefit Tax (FBT) is payable. On a typical $50,000 sedan car the rate at which FBT is levied is 20% of the GST inclusive value. FBT is usually calculated at 49.25% of that. Thus FBT comes out at something like $5,000 per annum. Sure you also get a tax deduction for the FBT you pay and that reduces your cash cost by 28%, but then there’s the GST to pay on the "supply" to the shareholder employee. So overall, it still costs you somewhere around that $5,000 mark in FBT to have a $50,000 car in a company. Push the value of the car over the $100,000 mark and the FBT costs certainly get ugly. For this reason we’ve normally kept higher priced vehicles out of companies. If you contrast this with someone who operates exactly the same business as you but as a sole trader or partnership, FBT doesn’t apply. However, you are exposed to unlimited personal liability if you operate on your own or in a partnership, so there is a trade-off. From 1 April this year IRD has decided that if you operate via a company then, as long as the company shares are owned by natural persons (no trust, for instance) and there are 5 or fewer shareholders, the company can purchase up to 2 vehicles and no FBT is payable. Companies with 5 or fewer natural person shareholders (Close Companies) are now treated much like sole traders and partnerships for FBT purposes when it comes to vehicle ownership. The upshot is that after you’ve determined the percentage of business use the company will use the car for, you claim that portion of the GST on acquisition, and that portion of the various running costs, including depreciation. And that’s it. If that business percentage changes from year to year, you adjust the GST claim every balance date, and alter what percentage of business expenses you claim the following year. Your Staples Rodway tax adviser will be all over this, so make contact if you think there might be some opportunities for you to put your existing vehicle into your company or, who knows, you might want to treat yourself to a new car.
HOW MUCH IS YOUR HOUSE WORTH? The Commissioner has issued a statement to help us work out the taxable value where an employer providers accommodation to an employee. As ever, the basic tenet is that the value of accommodation needs to be a market rate as if the employer was providing the accommodation to an arms-length tenant. So, nothing new here. We need to take into consideration location, access to amenities, building value, number of bedrooms, size, parking, condition, and anything that inhibits the tenant from full use. However we cannot take into consideration factors like the employee having to live in and on the employer’s property and thereby be available 24/7. IRD’s view is that those factors are personal to the employee and do not affect the market value of the rent. I’ve always wondered what value IRD attributes to the rented house attached to the local Police Station in which the poor copper and their family are forced to live among the graffiti, the ever-present threats to safety, and general abuse! I could go on – so I will. Where a property’s rental cannot be determined with any accuracy (perhaps because it is a farm and it would never be rented to the general public) you need to use the rate that others are using in your area for general public rental. The Commissioner also states that if you provide a number of houses to your employees (farmers do this all the time), you cannot average the rental and attribute that amount to all employees. The market rent for each property must be determined separately. In future, employers who provide employees with accommodation are going to come under intense scrutiny. This is the point of these new rules. Employers will no longer be able to just roughly estimate the value of the accommodation they provide to employees. Farmers for instance are going to have to get market rental valuations, ask a real estate agent, do some research of comparable properties, go to Trade Me etc. to work out the value of the rent, and document it! Needless to say, any contribution by the employee comes off the taxable value of the accommodation. There has been no change to how free or subsidised accommodation is taxed. It is still considered to be employee remuneration and it is subject to PAYE. This means the employer "grosses" up the value of the accommodation by the employee's effective tax rate and pays PAYE to IRD on a monthly basis in the normal way. Remember because employer subsidised accommodation is dealt with under the PAYE rules, it is added into an employee’s taxable income. This means it could push the employee into a higher tax bracket, and it forms part of the child support, student loan and Working for Families calculation. FBT is not payable on employee accommodation even though it is a non-cash benefit and feels like a fringe benefit.
www.staplesrodway.co.nz
LABOUR PAINS We have recently become aware of a potential problem where a contractor provides an invoice for working to say 31st March, and that invoice is not paid until 20th April when withholding tax (WHT) is deducted by a labour hire firm. That WHT will be reported on the labour hire firm’s April EMS form. The question arises as to whether the contractor accrues income into the March period or operates on a cash basis so their earnings match to their earnings summary. If they accrue their income they cannot request a transfer of the WHT in the April period back to the March accrual period on their own account. This means we are going to have the same mismatch we currently have with interest and RWT. In other words, we will have tax to pay in the current year because the tax credit from April cannot be dragged back to March, and the following year we will receive a refund as we will have paid too much tax. If “the contractor” is a sole trader with no staff and little capital equipment, we should be able to apply the principle established in FCT v Firstenburg (1977) 6 ATR 297 and FCT v Dunn (1989) 89 ATC 4,141 whereby the contractor accounts for income on a cash basis. In those decisions it was held that for professional taxpayers who earn income as a direct result of their personal exertions and do not have high levels of stock or accounts receivable, and do not use employees or assets in a significant way to generate their income, they could prepare accounts on a cash basis. In this case, their earnings for tax purposes would match their IRD earnings summary. However, if the contractor was a company, the normal rules will apply and you are going to have to accrue the income to balance date. And because you cannot accrue the tax credit, you will have tax to pay this year, and overpay tax next year. A less than ideal result. NUMBERS Winter 2017 • 9
TAXING CHALLENGES AROUND CASH FLOW Keeping on top of tax payments can be challenging for some businesses. We look at examples of temporary issues that many businesses encounter and explore ways to overcome them.
Article by Tracy Hickman & Jessica Stewart STAPLES RODWAY AUCKLAND tracy.hickman@staplesrodway.com jessica.stewart@staplesrodway.com
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APIDLY GROWING BUSINESSES USUALLY REQUIRE greater working capital to meet the demands of increased payments to suppliers, wages, taxation and capital expenditure. If additional working capital facilities have not been put in place, we often find that IRD payments are, dangerously, given a lesser priority with business owners focussing instead on maintaining the supply of products or services and paying wages. Similarly, the cash flow for underperforming businesses usually reflects insufficient revenue generated to meet costs. Those business owners who haven’t scaled back production and overheads to match reduced demand are likely to face hard decisions around prioritising payments.
In situations where cash flow has not kept up with tax obligations, it is best to contact your advisor and discuss notifying the IRD before a tax payment is missed. Keep in mind that tax returns still need to be filed as they fall due, even if making payment by the due date is unlikely. By contacting the IRD before the due date and continuing to file on time, the taxpayer may be eligible for reduced penalties, and will be in a good position to work with the IRD to get payments back up to date. It is important to be aware that the IRD ranks as a preferential creditor regarding any overdue PAYE or GST. Any related penalties or interest, and any overdue income tax is not preferential. Like any unpaid creditor, the IRD could force a business into liquidation if debts remain unpaid. PAYE has a special status as this tax type is held on trust and is viewed as collected by the taxpayer on behalf of the IRD. Hence deliberately unpaid PAYE is the only tax where jail time can be imposed if not paid.
CASH FLOW FORECASTING If you are behind with your tax payments, we strongly suggest that your first step is to create a robust cash flow forecast, ideally covering the next 12 months. This should enable you to assess whether the financial position is likely to improve, or whether you need to take further action to address the problem. There are a number of forecasting and budgeting tools that can help. Spotlight Forecasting and Modano are two examples of software that we use when helping clients in this area. The key is to produce an integrated forecast cash flow, balance sheet and profit and loss account. By preparing 3-way financial statements, you are less likely to miss important items. The output should help you decide whether you are likely to need to organise further funding, or scale back operations to address the lack of cash. It also provides a monthly plan for the repayment of any outstanding principal amounts. In meeting the costs of forecasting, it’s worth noting that if you have less than 50 employees, you may be eligible for NZTE Capability Development Vouchers, to use as partial payment towards the cost of training for business planning and managing resources. The co-funding is up to 50% of capability development training, up to a maximum of $5,000 per year per business. Once you have assessed the bigger picture, review whether the forecast cash flow issues appear to be temporary or permanent. If the latter, we suggest talking to business recovery experts to determine what options are available to you, such as restructuring, refinancing, a creditor compromise, receivership or liquidation.
FUNDING CASH FLOW DEFICITS For temporary cash flow deficits, consider negotiating a bank overdraft. The financial forecasts that you have prepared should help to support your application, and show how the overdraft will be repaid over time. Other measures which can provide temporary relief include using tax financing for income tax payments and negotiating payment plans with the IRD for historic GST and income tax. In most circumstances, the IRD would expect PAYE to be paid up to date and for the payment of current taxes to be made on time. www.staplesrodway.co.nz
TAX FINANCING There are several companies offering tax financing services, acting as tax intermediaries between businesses and the IRD. Your advisor can obtain quotes and organise the tax financing for you. Tax financing can be helpful for businesses undergoing change, to assist with upcoming payments which the taxpayer is unable to meet. When tax financing is undertaken, the tax intermediary sets aside an agreed amount in a ‘tax pool’, as at the date of the arrangement. The business pays interest on this amount until cash flows enable full payment, at which point the backdated principal amount (held at the date on which the financing plan was initiated) is transferred to the IRD. This clears any use of money interest and penalties imposed by the IRD, so the only cost to the business is the tax financing rate. There is no security taken by tax financing intermediaries. The IRD use of money interest rate is currently 8.22% on underpayments. Compared to this, the indicative tax financing rate is from 4.4% at the time of writing. In contrast to other borrowing rates, such as a business overdraft, the tax financing rate offers a highly competitive way of smoothing out tax cash flows. Use of money interest is still charged on overdue tax amounts under an arrangement plan. Therefore, given the above interest rates, while a payment plan is beneficial for taxpayers with historical tax liabilities, it would be more beneficial for a taxpayer unable to meet upcoming payments to negotiate tax financing with an intermediary.
PAYMENT ARRANGEMENTS WITH THE IRD It is possible to request payment plans for overdue GST and income tax payments, and the main option available is an instalment arrangement, whereby an agreed amount is repaid over a set period of time. To initiate this, the taxpayer needs to provide the IRD with an instalment arrangement proposal. The aim of this proposal should be to pay off the outstanding tax in the shortest possible time, while keeping current tax obligations up to date (particularly those relating to PAYE and GST). An agreed arrangement plan needs to be adhered to in order to avoid reputational issue with the IRD and increased penalties. This is where a robust cash flow forecast and forecast financial statements could assist in ensuring the arrangement plan is realistic given the taxpayer’s cash flows. Do be aware that, as discussed above, use of money interest is still charged during an arrangement period. The benefits of a payment plan arise from reduced penalties and avoiding any further debt collection action from the IRD. We suggest working with your advisor on negotiating with the IRD, as it may provide more confidence in your ability to deliver. The most valuable advice that we can give is to act promptly when cash flow issues start to arise. If you can quickly assess whether the issues are temporary or look to be longer term, and take action accordingly, you should be in a much better position to ensure a good outcome for you and your stakeholders. Talk to your usual advisors or contact Tracy Hickman in our Corporate Advisory Team for guidance. You can reach Tracy on 09 373 1133 or via email at tracy.hickman@staplesrodway.com. NUMBERS Winter 2017 • 11
YOUR FAMILY FARM
WILL IT SUCCEED TO THE NEXT GENERATION? In New Zealand many dairy farms are currently owned and operated as family businesses, handed down through the generations, but with volatile payouts and ever increasing land values, will this be the case in the future? Will there still be the opportunity for future generations to succeed in the farming business? Or are children going to seek an alternative career in something a little less unpredictable, leaving no option but to sell?
Article by Leigh Buchanan STAPLES RODWAY TARANAKI leigh.buchanan@staplestaranaki.co.nz
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NE OF THE MAIN REASONS for this potential change is that the value and size of farms is increasing. This makes it difficult for family members to purchase the farm and have a sustainable business going forward. If you want to keep your farming business in the family, then you need to have a plan in place to make this happen. To succeed, succession planning for farmers is now more crucial than ever. This involves setting things up for future generations so that everyone is happy and it’s fair for all family members. However, fair does not mean equal. The contribution of the people working on the farm needs to be taken into account when determining what is fair. Too often the issue of succession planning is put in the “too hard basket” and steps are not put in place for family members working on the farm to succeed into farm ownership. The farm is sold, and this causes tension and conflict between family members. Promises made by parents have no meaning unless they are documented correctly, which requires the help of professionals including lawyers and accountants.
Staples Rodway Associate Leigh Buchanan and her husband George own an 84ha farm near Inglewood in Taranaki and milk 265 Friesian cross cows. Their son Rob has come home on the farm this year and is nearing the end of his first season contract milking. George and Leigh have two children, Rob and Sarah. Rob has a Bachelor of Commerce majoring in Agriculture from Lincoln University. He also worked for PGG Wrightson as a Technical Field Rep based in Darfield for 5 years. In this role he worked with dairy, drystock, cropping and seed farmers. He has seen a broad range of farming and is applying some of this knowledge in his role on the family farm. Sarah is a pharmacist, who works in Stratford. Discussions have been held with all the family regarding keeping the farming business in the family and steps have been put in place to achieve this end result. All members of the family have been included in the family succession plan. This means that everyone is on the same page and there are no surprises for the non farming members of the family.
KEY STEPS TO FUTURE PROOFING YOUR FARM 1. Consider what end result you want to achieve, and then put the steps in place to make this happen. Begin with the end in mind. 2. Hold open and honest discussions with the family regarding goals and steps to be taken to achieve these goals. 3. Take into consideration the contribution of the people working on the farm when creating the succession plan. 4. Document your plans correctly and take them to a lawyer and accountant to review. If you wish to keep your farming business in the family for future generations, start planning. Doing nothing isn’t an option and is likely to ultimately cause conflict and disharmony between family members. What is the legacy that you wish to leave for your family? Decide this and put the steps in place to make it happen. Please contact your usual Staples Rodway advisor if you would like help planning for future generations.
RACHAEL CARTER SOHO WINES
SOHO Wines’ Havana Pinot Noir 2015 was recently awarded a Gold Medal, the Trophy for Best Marlborough Pinot Noir, and the Trophy for Best New Zealand Pinot Noir at the International Wine Challenge – one of the world’s most prestigious wine competitions. We caught up with Rachael Carter, founder and Managing Director, to hear about her journey to success. Interview by Jo-Anne Randall & Jessica Stewart STAPLES RODWAY WOMEN IN BUSINESS www.staplesrodway.co.nz/wib
Q: Can you tell us more about how you got involved with making wine? A: My father owned a company that produced everything a winemaker needs to make and package wine, such as corks, barrels, and caps. I left my marketing studies early to help him out when a competitor started up, and have been involved in the industry ever since. In 2000 my father sold his company and reinvested in vineyards, including one on Waiheke and two in Marlborough. Around this time screw caps for wine bottles were just becoming popular. I decided to start importing screw caps from Italy and gained a 75% market share in 3 years. Eventually, with the support of my family, I decided to manufacture screw caps in Auckland and entered into a partnership with the Italians I had been importing them from, which grew our market share to 97%. In 2008, the Waiheke vineyard my father had invested in was struggling, and the winery couldn’t afford to buy his grapes. I had always wanted my own wine company, so I sold our share in the screw cap company and started SOHO Wines to take my father’s grapes. It’s all grown from there! Q: Your business model has been referred to as a virtual winery. How did you come up with this concept? A: I think it is better to invest in good quality fruit rather than a winery, and investing in a winery is expensive! Our winemakers either use their own existing wineries to make our wine, or use a contract winery. We source our fruit from three of the best New Zealand wine regions, which means each wine has its own distinctive premium style and regional personality. Combined with the best fruit, I have handpicked three winemakers, who in my opinion are the best winemakers in New Zealand - they are specialists in their realm. Our Marlborough winemaker is Dave Clouston, our Central Otago winemaker is Grant Taylor, and our Waiheke Island winemaker is James Rowan. Q: Is there anything you wish you had known before you started out? A: It has been quite a roller coaster ride, I wish I had planned things better. There are also lots of things I wish I had known before I started, instead of learning the hard way. For example, I have learnt that it is a good idea to get trade insurance on large clients you deal with. It is not uncommon to have a large order cancelled at the last minute in this industry. However, this does open you up to finding other markets and channels for your brand - things happen for a reason! Q: What has been your career highlight to date? A: Our recent success with the Havana Pinot Noir 2015 at the International Wine Challenge is fantastic, it will open up a lot of doors. We’ve had a lot of calls for orders and are already www.staplesrodway.co.nz
having to allocate stock so we don’t run out too quickly. The icing on the cake is that the grapes were sourced from my father’s vineyard. My daughter, Maren, is the highlight ahead of any career though, she is the best thing that’s ever happened to me! Q: Your wines are uniquely named, how do you choose these names? A: I actually come up with the names first - I have an idea of the style of wine that I want our winemakers to produce, and the name captures this. For example, the Havana Pinot Noir is inspired by a city with infectious energy. The wine reflects this with a core of spicy black cherry and sweet dark chocolate, a hint of oak, and a subtle smokiness. The back label on each bottle describes who or what the wine is inspired by, it’s a real point of difference for us in a crowded market. When I came up with this concept, I also wanted to reflect the people drinking the wine - SOHO Wines is a totally unique name in itself because it’s not reflective of mountains, hills or rocks like many other wine brands are. For me, wine reflects our life and the amazing people we share it with. Q: What have your experiences as a woman in business been like? A: It’s been pretty good, aside from my time managing the screw cap plant! My business partners were all Italian men. When we first started out I had to email them from my dad’s account to get a response, because they would ignore anything I sent as myself. They were very surprised when they came out to New Zealand and realised it was me who had been instructing them on how to make good quality screw caps! Q: What sacrifices have you had to make along the way? A: My social life! When I was running the screw cap plant I would work long hours, but party quite hard as I didn’t have a child. Now, I try my best not to sacrifice time with my daughter - I think I balance it okay, and I would rather be at home with her than go out. I have been very busy lately, but I find that as you go through stages, it will change. Q: Do you have any advice for aspiring business women? A: Believe in your passion and don’t lose faith when you face adversity, but don’t let it rule your world either! Enable yourself to have some down time - this is one thing I haven’t done well and have learned from. I think the difference between people who are doing okay and those who are really successful comes down to meeting commitments and being responsive. Successful people don’t miss opportunities because they always get back to you when they say they will - it’s a mark of respect and integrity. It seems so basic, but it astounds me how many people don’t do this! NUMBERS Winter 2017 • 15
SUCCEEDING IN THE BOOMING
BUILDI G INDUSTRY
Article by Richard Williams STAPLES RODWAY WAIKATO richard.williams@srw.co.nz
In the wake of Fletcher Building’s profit downgrade announcement, there has been a lot of talk about the building industry’s ability to cope with the demands of the current construction peak. It can be said that some companies are over-trading and run the risk of becoming victims of their own success.
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S ONE OF NEW ZEALAND’S largest suppliers of professional financial services to businesses in the construction industry, Staples Rodway is in a unique position to understand how to manage the potential pitfalls of a construction boom. Our experience working with a leading Waikato residential home builder provides some reassurance that it is possible to remain on track and benefit from the booming construction industry.
PEOPLE AT THE CENTRE The owners of our client’s business are its key to success. They value establishing long term relationships with suppliers, employees and customers. Their culture is inclusive and teamoriented, with the customer at the centre of everything they do. This customer-centric model includes providing exceptional value, creating a risk-free build experience and making the process as simple as possible.
FOCUS ON RISK MINIMISATION There are risks of over-extending and entering a greater number or larger scale of projects than a business can sustain. Problems can arise from misunderstanding cash flow cycles, or not being able to up-scale activities quickly enough because of the supply constraints on the industry. The risks are significant, whether they apply to your own business or to your customers and suppliers.
WAYS TO MINIMISE RISK Key ways to address these concerns and minimise risk include: understanding construction contract legislation and knowing when and how to enforce your rights stopping work when you are not getting paid getting variations approved in writing having an independent business advisor prepare cash-flow projections engaging a quantity surveyor and accountant to price jobs obtaining retentions advice and exploring alternative options, for example milestone payments taking personal guarantees from customers where possible registering on the Personal Property Securities Register (PPSR) obtaining insolvent transaction advice obtaining terms of trade advice allowing for plenty of margin when providing quotes, bearing in mind that construction inflation is currently running at 9–10% allowing more time to complete projects and avoiding signing up to harsh liquidated damages clauses walking away from accepting projects that don’t stack up in respect of both margin and time www.staplesrodway.co.nz
Our client recognised the importance of managing risk and follows these steps wherever possible. Every job goes through an estimator, terms of trade are well documented, every variation is approved in writing and every job has a budget and projected margin.
GET EXPERTS TO OVERSEE FINANCES Behind the scenes we worked with them reviewing: gross revenue on a segmented basis contract throughput customer deposit traffic slab-down rates work in progress gross profit margin budget-to-actual variance analysis by project land acquisition and settlement cycles cash flow projections and debtor cycles tax opportunities optimal business ownership structure We recommend all businesses in the building trade find experienced advisors who can provide a similar oversight.
WHAT DOES THIS MEAN FOR ME? Success in the building industry isn’t guaranteed, despite the current excess demand within the construction sector. More than ever it requires a disciplined approach across all aspects of a business. If you are in the building sector and experiencing the current pressures of a booming industry, ask yourself these questions: Am I attracting and retaining the best people? Does my customers’ experience make them want to refer me to others? Have I structured my business in a way that best mitigates downside risk? Are my internal controls and processes adequate and are they constantly adapting to change? Can I be sure that my quotes, costs and billing line up? Do I truly understand the key drivers of profitability in my business? Am I performing budget-to-actual variance analysis and do I understand the reasons for project margin variances? Is my business able to identify and realise growth opportunities – now or in the future? Do I have my finger on the pulse – am I in control of my business? If you cannot answer yes to these questions it may be time to take a step back, review your business and speak to your Staples Rodway Advisor.
NUMBERS Winter 2017 • 17
LISTED PROPERTY TRUSTS Listed Property Trusts and Syndicated Property are a common feature of New Zealand's propertydominated investment market. In this article James Scarr of Staples Rodway Asset Management steps through the key differences between the two investments.
A Listed Property Trust is a unitised portfolio of property assets, listed on a stock exchange. A listed property trust (LPT) usually invests in multiple buildings, has multiple tenants and generally owns a portfolio of large properties, which, due to their size and value, cannot be bought by the average private investor. These large investments are broken up into units of smaller value that can be purchased by private investors, who become shareholders. The minimum economic purchase amount is about $5,000.
Returns are linked to movements in the value of the properties and income generated by the property management companies. They potentially earn more than fixed interest and cash over the long term, but less than shares. Value tends to fluctuate more than fixed interest and cash but not shares, over time.
12
Residential Property
Returns %
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Article by James Scarr STAPLES RODWAY ASSET MANAGEMENT james.scarr@sraminvest.co.nz
NZ Bonds
8 6
Farms
Listed Property International Shares AUS Bonds Hedged Commercial Property
AUS Shares Hedged AUS Shares Unhedged NZ Shares
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RISK & RETURN OF EACH ASSET CLASS BETWEEN 1989 & 2011
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Standard deviation of returns %
This article does not seek to recommend one form of property investment over another, it is simply written to inform. Before you invest in any property or fund we recommend: 1. You take advice from an experienced Authorised Financial Adviser (AFA). 2. Understand your goals, objectives and do a risk profile. 3. Consider not just property but a fully diversified portfolio. 4. Think about having it managed for you. Staples Rodway Asset Management is a boutique investment advisory service, which deploys client capital in both passive and active strategies consistent with client objectives and risk profile. When adopting active investment management strategies Staples Rodway Asset Management seeks to identify managers that meet the criteria above. For further information on the services provided by Staples Rodway Asset Management, an Authorised Financial Adviser can be contacted on 0508 220 022 or enquiries@sraminvest.co.nz 18 • NUMBERS Winter 2017
You can sell out and get your money in 4 or 5 days for a brokerage rate of 0.75% to 1.5%. As with Property Syndicates you could end up selling for less than you paid however, provided you are properly diversified and hold for a reasonable time frame, that would be unusual.
With listed property trusts you generally get the benefits of diversification - lots of properties and diversified geographically. It is also fair to say that the quality of the buildings and the tenants of listed property is almost always of much higher quality than syndicates and, all things being equal, this means it is lower risk. One of the main benefits of listed property is that it can offer investors a good degree of diversification.
The average gearing of listed property trusts is between 25% and 35%.
To buy a listed property trust on the stockmarket there is an average cost of 0.75% to 1.5% in brokerage.
SYNDICATED PROPERTY Property Syndicates enable you to invest in commercial, residential and industrial property by pooling your money with other investors. They typically offer higher returns but can be riskier than other forms of property investment. It’s also important to note that high returns aren’t guaranteed and your money will usually be locked in. The number of units available depends on the price paid for the property and you can buy more than one unit. The unit cost will vary but is typically about $50,000.
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Based on the property’s rental income, minus the costs the syndicate has to pay. One of these costs will be for a property manager to take care of the management and maintenance of the property. As a part-owner of the property, you share responsibility for its costs and debts. These are divided by the number of units in the syndicate, and investors pay their share based on how many units they own. Investors in property syndicates pay fees to cover specialist services such as property management, legal and financial services. This can result in high fees that may increase even further over time. If there isn’t enough money in the syndicate pool to meet these obligations, you may need to invest more money and in some cases you’ll need to make this payment quite quickly. Your investment returns are not guaranteed and can vary. You should be aware that the return you receive on your investment may be different to the rate advertised by the property syndicate. Reasons for this include: � tenants move out of the property and there is a delay finding new ones � tenants can’t afford to pay their rent and outgoings � the property manager or others involved in the syndicate increase their fees � interest rates change and this affects the syndicate's mortgage payments � the property needs repairs or maintenance work
Unlike a bank term deposit where you can get your money back at the end of a set time period, property syndicates don’t usually have a fixed term. This can make it difficult to get your initial investment back if you need it, as there is no active market available for on-selling your investment when you want to exit. Syndicate managers don’t have to return your money if you need it, but they might help you sell your unit(s) to another investor. If you do this, you may have to pay fees. You may also have to sell them for less than you paid, especially if returns have dropped since you first invested. Otherwise you’ll need to wait until the property is sold, any loans repaid and the syndicate is wound up.
With syndicates you normally buy one property with a few tenants in one town in one sector and diversification may be rather limited.
Gearing on syndicated properties is frequently around 50%. High gearing (borrowing) equals higher risk.
The all-up fees for initial offerings of syndicated properties can be up to 10%.
NUMBERS Winter 2017 • 19
BUSINESS GROWTH & GETTING THE BASICS RIGHT From a telecommunications business that started from humble beginnings, to one that was ranked amongst the best in this country for customer satisfaction in 2016, NOW CEO Hamish White says the company’s success comes down to “a customer-led business model and getting the basics right”.
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OW IS A HAWKE’S BAY-BASED phone and broadband “I saw the opportunity to add real value in this space, and it provider that has really made its mark in the last five years. has been a constant focus ever since,” he says. The company services 12,000 customers and employs just over Hamish describes the last five years as a roller-coaster of 70 staff, with offices in Hawke’s Bay, Rotorua and Wellington. highs, lows, growing pains and learning what not to do, rather “For us, it has been about getting the basics right and prothan what to do. While there was an existing business when he viding good old fashioned customer service. Small things took over as CEO, he says it was stressed on every front with a like answering the phone within 60 seconds, and speaking to poorly structured balance sheet and technical and operational someone in New Zealand, goes a long way,” says Hamish. debt. The company was re-branded to NOW in April 2012 and NOW’s unique service-centric business model boasts its has been growing steadily, starting from 600 customers, ever own field technicians and an in-home techspert service, which since. Hamish recapitalised the business at the time of takeover is part of what sets this company apart from its competitors and formed a board that he also chaired for the first four years. - NOW is New Zealand’s only telco that will come to your Growth has always been beyond what the company could home (for a small fee, which customers are happy to pay, says self-fund so a significant part of Hamish’s role has been dediHamish). This, coupled with unrivaled accessibility and responcated to raising private equity and debt. siveness to customers’ phone and broadband requirements, is NOW in-sourced its accounting function three years ago, a unique proposition the big players can’t compete with. and at the same time appointed Staples Rodway as its external From day one Hamish felt the opportunity to add value and auditor. This was a necessary business decision to strengthen carve out a real point of difference in the industry started with the company’s credibility with banks and for external capital its service and support going beyond customers’ routers/ raising. Hamish says the auditing process also brings with it tremodems. That is the traditional demarmendous business value and he believes cation point for telco’s, who typically tell NOW is a better company for doing this. customers to speak to an IT company, In an interesting twist, NZX listed and “or someone who cares,” Hamish cheekily New Zealand’s largest telco, Spark, took points out. a minority stake in NOW 18 months ago. “We believe customers deserve more Hamish says that Spark has no operational than that. At NOW we continue to base our involvement with NOW and is a very supmodel on our customers. The pace of innoportive shareholder. vation as it relates to Wi-Fi, IT, home enter“Spark’s shareholding has also brought tainment, security, surveillance, and home wider strategic benefits for our business, automation is only exacerbating customas it relates to procurement clout for ers’ frustration with the growing complexexample. Spark is very much invested in ity of a typical home’s digital capability.” who we are, our people and our culture.” Hamish says because of that, NOW is Asked how NOW plans to continue driving to become the opposite of NZ’s consuch success, Hamish says it comes down ventional telco, and sees its future as a DSP to the team - who are driven by a core NOW CEO, Hamish White (Digital Services Provider) and no longer purpose and vision. just an ISP (Internet Service Provider). “At NOW, our purpose unites us. “We are aspiring to help customers digWe believe in pushing the boundaries itally enable their homes – it’s a bonus that because customers deserve more. Our we just happen to offer one of New Zealand’s most reliable vision gives us direction. We will bring the possibilities of your and high performing internet services,” Hamish says. digital world to life.” NOW has also been very successful in the business market, He says because the digital world is changing so fast it can with a commanding presence in the professional services be tough for the team to stay on track. sector. Most recently the company has partnered with inter“As a result, we know we need to adapt quickly, be agile, national giant Mitel, to bring business customers cloud hosted and keep it energetic and fun. PBX, Unified Communication and Video Conferencing services. “With growth, culture gets challenged every day and I take Hamish says the company’s market share with accountants, real personal responsibility for being the guardian of this because estate agencies, law firms and medical practices is dominant. that is ultimately what sets us apart.” Achieving significant growth across multiple markets has In asking Hamish how he has led his team to success, he been a focused drive since 2011 when Hamish became CEO says two key words are at the cornerstone of his leadership and a shareholder of the company. The company was originally empowerment and accountability. founded in 2002 by Hawke's Bay local Sam Deller, as a rural “I ask ‘why’, not ‘how’. Because the moment you do that you wireless internet provider, and Hamish became CEO at a time disempower your team, stifle their innovation and fresh perwhen the industry was going through substantial structural and spective, and absolve accountability. regulatory transformation. The government also announced the “The team at NOW deeply believes in what we are trying nationwide roll-out of next generation fibre technology, which to do, and that is because they are always looking for the represented a natural ‘switching’ wave the company could ride answer to ‘why’. as businesses and homes migrated to fibre. “And the answer always comes back to our customers.” www.staplesrodway.co.nz
NUMBERS Winter 2017 • 21
ASK AN EXPERT In our regular feature we answer readers' questions on any area in the world of finance, accounting, audit, tax, and other business-related areas. This issue’s question is about changes to tax payments for independent contractors. Take advantage of our expertise and send your question to questions@staplesrodway.com and one of our specialists may answer it in a forthcoming issue of NUMBERS.
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My company makes use of independent contractors in New Zealand and we have recently heard about changes to tax payments when we pay them. What do I need to know in order to stay on the right side of the law? Answer from Andrew Dickeson, Tax Director, Staples Rodway Auckland
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HERE ARE FOUR KEY CHANGES to the tax treatment of payments made to independent contractors.
CONTRACTOR VOLUNTARILY SETTING RATE From 1 April 2017, a contractor may request to set the rate of tax withheld on contract payments (minimum 10% for resident contractors; 15% for non-residents). If a contractor does not request a rate, then the default rates (which can be found on Inland Revenue’s IR330C form) continue to apply. Contractors that wish to set their rate of withholding must be provided by your company with an IR330C Form. (Note: a change in withholding rate can only be requested twice per year. Consent from your company would be required for any further adjustments). Contractors who seek a withholding rate that is less than the minimum must apply to Inland Revenue for a special rate using a IR23BS form. From 1 April 2017, the IR330C will need to be provided to new contractors instead of the previous IR330.
LABOUR HIRE ARRANGEMENTS Contractors that work under a labour hire arrangement (and are not an employee working for salary and wages) are now subject to withholding at a default rate of 20%. Additionally, should they require a lower rate of tax to be withheld, they are unable to apply for a certificate of exemption and must instead apply for a 0% special tax rate.
www.staplesrodway.co.nz
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This particular regime is aimed at payments made by a labour hire company to a worker (an independent contractor) on its books. If your company makes payment to a labour hire business, then you do not need to withhold any tax.
VOLUNTARY WITHHOLDING AGREEMENT Contractors who receive payments from your company that are not currently subject to any withholding requirements may now request that your company withhold amounts from these payments (subject to agreement between parties). This agreement would need to be in the form of an email, letter, memorandum or formal contract. The standard rate for these agreements is 20%. This type of arrangement only applies where there is mutual consent between the parties.
PRESCRIBED RATE (ADDITIONAL WITHHOLDING) Where a contractor has not complied with obligations under an Inland Revenue Act, the Commissioner may prescribe an additional rate of withholding (maximum of 50%) to ensure compliance with outstanding tax obligations. In this situation, it is likely that a contractor’s exemption certificate would be revoked, and Inland Revenue would provide notice. One of the requirements for an exemption certificate is a good record of filing returns and making payments. NOTE: The above is general advice only and should not be relied upon as specific circumstances can vary. Please contact your Staples Rodway advisor for specific advice.
NUMBERS Winter 2017 • 23
ARE YOU READY TO CHANGE HOW YOU ACCOUNT FOR REVENUE? Article by Aniela Tkacz NATIONAL TECHNICAL MANAGER aniela.tkacz@staplesrodway.com
NZ IFRS 15 Revenue from Contracts with Customers is the new accounting standard that will replace existing revenue standards and pronouncements in providing guidance on how to account for revenue. The new standard is effective for annual periods from 1 January 2018 and at a minimum one comparative (1 January 2017) period would need to be presented.
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HERE NZ IAS 18 GAVE you flexibility to do so, some companies mirrored the timing of their expenses with revenue recognition. If, “cash is king”, surely revenue is the queen. I have something to tell you – there’s been a royal divorce - forget about the timing of your receipts and how this relates to revenue recognition. The devil is in the detail with NZ IFRS 15. The focus of NZ IFRS 15 is very much on the agreed performance obligations in a contract - “what does the customer expect to receive” and how we satisfy those performance obligations. Whether cash is received upfront, in a pattern that reflects the supplier’s costs of production, or monthly throughout a contract does not impact how we recognise revenue. To illustrate the complexities of NZ IFRS 15, in this article we will work through key considerations for steps 1-3 of the five step framework, using a retailer as an example. Keep in mind, the changes resulting from NZ IFRS 15 are more than financial reporting related. The standard is likely to impact: Changes to reported KPIs; Potential breach of banking covenants; Tax implications; Systems impacts Impact on compensation and bonus plans where targets are driven from revenue KPIs
NZ IFRS 15 FIVE STEP FRAMEWORK STEP 1: Identify the contract with a customer This step appears simple but in reality is likely to be otherwise. A contract may be written, implied or oral. Contracts entered into either at or near the same time, with the same customer with the same commercial objective may be required to be accounted for as one single contract and, when identifying separate performance obligations, the pool of contracts will need to be assessed. A contract must be approved by the parties to the contract with identified payment terms, have commercial substance and be probable that the entity is able to collect the consideration for which it is entitled. www.staplesrodway.co.nz
When is a contract not a contract? – when NZ IFRS 15 applies. This is a key step not to overlook. STEP 2: Identify the performance obligations in a contract. At the inception of a contract, the entity should identify the distinct performance obligations set out within it. This is not reassessed unless a contract is subsequently modified. Hence it is important to get this right the first time. Performance obligations may be explicit in a contract or implied through customary business practice.
A good or service is distinct if both of the following criteria are met: � The customer can benefit from the good or services on its own or in conjunction with other readily available resources; and � The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.
Possible impacts for those in the retail industry: The standard distinguishes between warranties that provide assurance that a product will comply with basic quality requirements; and warranties that provide an additional service. The former continues to be treated as a cost provision, the latter will be treated as a separate service or ‘performance obligation’ and the consideration provided in a contract will be allocated between the product and the service warranty. In the retail industry it is common to have a combination of both types of warranties. This may require some judgement to allocate the transaction price and may result in a different accounting treatment than at present. Shipping of goods. Some entities receive payment when goods are shipped, however, it is generally understood that if there was damage to the goods in transit to the customer, the entity would rectify any damages. Judgement NUMBERS Winter 2017 • 25
THE OPPORTUNITIES � Any planned systems changes or improvement could incorporate changes for NZ IFRS 15, NZ IFRS 9 and NZ IFRS 16. � Greater visibility of the company's operations where performance obligations are disaggregated and more transparent. � Contracts may be renegotiated to achieve particular accounting outcomes and safeguard competitive advantage.
should be applied in considering whether to recognise a separate element of the transaction price that relates to the safe delivery of products that have been ordered. Royalties paid to franchisors for the licence of intellectual property. NZ IFRS 15 includes a specific restriction from recognising the associated revenue from usage based royalties until the usage or onward sale has eventuated, even if past precedent is an accurate estimate of the royalty to be paid. STEP 3: Determine the transaction price The transaction price is the amount to which an entity expects to be entitled in exchange for the transfer of goods and services. Be aware of customary business practises an entity offers that may not be contractual but expected by customers, for example ongoing project management or a return liability outside of the warranty period. The transaction price needs to be allocated to these additional goods and services. Variable consideration should only be recognised if it is highly probable that a significant future reversal will not result when the certainty is re-estimated.
Variable consideration can arise, for example, as a result of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties or other similar items.
A ccounting for volume rebates. Deciding how rebates should be treated in accounts required discretion and NZ IAS 18 lacked any prescriptive guidance. In 2014, Tesco famously revealed it had overstated its profit forecast for the first half of the year by £250 million, and this disclosure wiped £2 billion off its stock market value. Suppliers may make payments to retailers to have their products displayed more prominently or for targeted advertising. The standard explicitly addresses how to account for payments made to a customer. Judgement needs to be applied in considering whether the payment is made for a separate good or service or should be a deduction from revenue. Accounting for non-refundable upfront payments (i.e. gift cards, gift certificates, coffee concession cards). In many cases, not all customers exercise their rights under 26 • NUMBERS Winter 2017
these schemes - known as ‘breakage’. Previously there was limited guidance on customer loyalty programmes with significant diversity in practice. Under NZ IFRS 15, if an entity expects to benefit from breakage, the expected breakage amount should be recognised as revenue in proportion to the pattern of rights exercised by the customer. i.e. compare what has been delivered to what the entity still needs to deliver overall. Alternatively, revenue should be recognised when the likelihood of the customer exercising those rights is remote. Accounting for laybys and any significant financing components. If a component of a contract involves financing which may be significant, it should be accounted for as a separate performance obligation and the consideration apportioned over the multiple obligations.
CURRENT ACCOUNTING IMPLICATIONS “Management are currently assessing the impact of transitioning to NZ IFRS 15” Sound familiar? As we step closer to the transition year, regulatory bodies have indicated their expectation that such statements are replaced with qualitative and quantitative disclosures. Directors and auditors should ensure that notes to the financial statements disclose the impact on future financial position and results of new requirements for recognising revenue, for valuing financial instruments, and accounting for leases. It is reasonable for the market to expect that quantitative information will be available and disclosed for the reporting date that coincides with the start of the first comparative period that will be affected in a future financial report.” ASIC MEDIA RELEASE 2016
The FMA have emphasised this message recently, acknowledging that those charged with governance should have this on the agenda and be considering more extensive disclosures in the year end accounts. We would expect to see at a minimum a summary of the key focus areas of the transition review in the 31 March and 30 June 2017 financial statements for tier 1 entities. Ready to dig a bit deeper about the new standard and its potential impact on your firm? Contact Aniela Tkacz (Aniela.tkacz@ staplesrodway.com) for more information.
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PLANNING A HOT TOPIC WHEN SETTING UP A ROBUST IT INFRASTRUCTURE
Following the completion of a major client project, I was asked to put together a case study, not only to show how happy our client was with the result of a brand new IT infrastructure that was built within budget and time frame, but also to help guide other organisations to achieve the same. It’s always nice to hear from a happy customer especially when the project didn’t start off as smoothly as they would have liked… Article by Rebecca Maxim STAPLES RODWAY TARANAKI rebecca.maxim@staplestaranaki.co.nz
RIVING TOWARDS THE NEW PURPOSE-BUILT premises of Pioneer Manufacturing Ltd in Waiwhakaiho, New Plymouth, I was starting to get a sense of the extent of their requirements for the build. The beautifully tarmacked car park with oversized parking spaces gave way to a perfectly positioned entrance surrounded by blacked out windows. A perfect place to work on important heating solution projects. Having completed the building and the move, Pioneer’s Finance and Administration Manager, Tracey O’Doherty, contacted Staples Rodway’s IT team to ask for a little help. “We didn’t initially make contact with Staples Rodway as we believed the IT company we were dealing with could take charge of the whole project. As it turned out, their expertise really lay in infrastructure - wiring the building and telecommunications. Creating a top quality IT environment was our next goal. After several delays and with the Christmas deadline fast approaching, we still didn’t have our new server installed. Having worked at Staples Rodway in the past I knew they would be efficient, thorough and extremely knowledgeable, so I contacted them immediately.” Having previously been located in Inglewood, the family-run business has been around for over 20 years, and is well known in the industry for manufacturing and supplying Metro Fires nationwide. The Metro Fires network comprises of over 300 agency partners made up of heating specialists, hardware stores, plumbers, installers and chimney sweeps. The new state-of-the-art building is now the hub of the wood fire manufacturing company and houses the Metro Fires National Office, Research & Development Centre and is the Distribution centre for Metro Fires’ nationwide network. Staples Rodway IT Director, Rob McEwan said: “Pioneer had brought their existing systems up from Inglewood, however those systems were slow, insecure, impeded productivity and were a constant frustration to the team. Much of the IT landscape had changed, so we spent time educating them on what was now possible. We worked with Tracey to define the roadmap for their IT journey, gained their approval and started planning.” Pioneer still wanted to implement over Christmas. So Rob and the team agreed a go-live date early in January to match the return to work from the holiday season. Preparatory work was all done before Christmas so the change-over could happen while the office was closed for the holidays and testing occurred in early January so any issues were sorted before the staff returned. Tracey said: “I was really impressed, even from the initial meeting, they addressed my concerns and provided the best solutions to any queries I had. Expecting a few teething issues on the first day back after the Christmas break, a lot of stress was taken away by their team being on site to respond immediately. To this day, Staples Rodway are on hand when we need them and even supply sound advice on areas outside of their expertise. I know that no matter what the problem, Staples Rodway have the solution and I look forward to a long and trusted relationship with them.” NUMBERS Winter 2017 • 27
I am greatly saddened. John’s wise and practical counsel will be missed by many, many people. ARTHUR LOO
A J M (JOHN) WADAMS FCA, ACA, KStJ
Article by Kevin Pitfield STAPLES RODWAY AUCKLAND kevin.pitfield@staplesrodway.com
Like a number of our senior “Statesmen” he led by example and leaves an impressive if not somewhat daunting legacy for us to keep alive. DAVID CARTER, BECA EXECUTIVE CHAIRMAN
It is with great sadness and respect that our Auckland office mourns the recent passing of its Chairman.
W
HILST THE NAME STAPLES RODWAY provides an ongoing acknowledgement to the very solid foundations of the Chartered Accounting practice put in place by Charles Staples and Frank Rodway, it is probably fair to say that, throughout the firm’s history, there has never been a more industrious “builder” of its fabric and structure than John Wadams. John’s exceptional energy, hard work and rare talent when it came to providing innovative client solutions and exceptional client service, have been major contributors toward him growing such a large and loyal client base. As our firm has become larger and it is more than just one man or woman, however, the character and feel of the practice has certainly taken its lead from John – in the people he chose to become his business partners and the team members that he mentored and encouraged over the 47 years that he has 28 • NUMBERS Winter 2017
I met John in 1996, a man confident in his environment in the boardroom and at the time immersed in a cloud of smoke having a coffee. John shared many experiences, I worked on a few clients with him and he looked out for me. John took no crap but he always had time for the people. PHIL PAVIS
devoted to Staples Rodway. When writing his memoirs “How it all began”, Frank Rodway referred to “the John Wadams era” to describe John's influence over the practice and credits him with transforming the firm from a partnership of “old taxonians”
(individuals who had come directly from the Inland Revenue Department) by creating “a multi-faceted team which has attained for the firm the high standing it enjoys with its clients and the community”.
As one of the original directors and the initial chairman of Staples Rodway Asset Management (SRAM) John was a strong advocate and instrumental in the growth of SRAM. His influence and support will be greatly missed. MICHELLE FORSTER
John was a person who always had time to listen to others and impart valuable knowledge acquired during the course of his successful career. An irreplaceable individual who will be missed by us all. ANDREW DICKESON
Many team members that benefitted from John’s wisdom and guidance over those 47 years have moved on to pursue related or alternative careers within public practice, commerce or as entrepreneurs. Others have taken on the challenge of raising and caring for a family – a skill set which John was also well qualified to offer advice on, notwithstanding the incredible efforts of his wife of 50 years, Barbara. Barbara’s role as stay at home mum and primary care giver allowed John to devote so much time to his work. It is a mark of the man that John was, that many of those people continued to keep in touch with John to avail of his no-nonsense and thought provoking counsel. As any good professional practitioner will tell you, success can be measured by the growth in one’s client base; as it will not take long to lose clients if you render bad advice or become disinterested in your clients’ affairs. Conversely, happy clients are the best form of marketing, and there is no better compliment than the trust shown by a client to put their own reputation on the line through a recommendation or referral. By this measure, John’s effectiveness as an adviser is apparent from the many clients of the Auckland practice who share a “connection” in one way or another.
Many senior leaders at Beca have worked closely with John over a long period of time and his sage advice will be widely missed. The relationship forged between our organisations has long been based on mutual respect and understanding and I know that John was a big part of that. GREG LOWE, BECA GROUP CHIEF EXECUTIVE
An illustration of John’s value to the business community can be seen from the number of directorships and trusteeships that John held. In John's role as a professional trustee for many family-owned enterprises, he demonstrated an ability to bridge the inter-generational gap which, in some cases, has extended over four generations. As well as his service to clients, John’s contribution to the community was recognised by his investiture as a Knight www.staplesrodway.co.nz
of the Order of St John; and his service to the accounting profession by being made a Fellow of the NZ Institute of Chartered Accountants.
I had the pleasure of attending the ICANZ dinner for John’s admission as a Fellow. In John’s acceptance speech he said “it is important to give back to society” and I feel he embodied this throughout his life. ANNETTE AZUMA
For my own part, as a 17 year old “kid” who came to Staples Rodway over 35 years ago, having only one year of full-time study toward my accounting qualification under my belt, John has fulfilled many roles. He was the encouragement that steered me toward my early interest in tax; he was the person that became my greatest mentor after my earliest years as an understudy to Frank Rodway; and he was the person that gave me my biggest opportunities to show the partners and some very valued clients of Staples Rodway, that I was capable of embracing the firm’s culture and commitment to client service that John epitomised so well, thus enabling me to become a very real part of the Staples Rodway history. For all those things and the many other pieces of worldly wisdom and fatherly advice that John bestowed on me, I will be eternally grateful. With John’s passing, although it can truly be said to be “the end of an era” at Staples Rodway, it is incumbent on us, the people that John chose to carry on his legacy, to honour his memory with the same standard of service and insight that was “John’s way”. Whilst the task is somewhat daunting, if when I leave the firm, under whatever circumstances that may be, I can claim to have even come close to the achievements of my mentor and my friend, I will consider it a triumph.
John may have left the office, but his spirit and legacy will remain here forever. SHEREE OMUNDSEN
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&
MOVERS
SHAKERS
STAPLES RODWAY PROMOTIONS It has been a busy quarter, with a number of promotions across the country. Please join us in congratulating our people on their recent advancements. AUCKLAND Kathryn Price to Associate Director Jared Booth to Associate Director TAURANGA Sybrand van Schalkwyk to Associate Keryn Jarvis to Senior Manager Michelle Dyer to Senior Manager
TARANAKI MANAGER WINS CRAIG NORGATE MEMORIAL SCHOLARSHIP Staples Rodway Taranaki BAS Manager and Bookkeeping Coordinator, Kylie Filbee-Cronin (above) was one of two recipients in New Zealand to receive the inaugural Craig Norgate Memorial Scholarships which honour an inspirational business leader and support two young Kiwis continuing on their Chartered Accountant careers. The scholarship was given to Kylie because of her leadership ability and strong commitment to her community, which includes her role as Treasurer of The Network Taranaki Incorporated, a not-forprofit organisation supporting women in business in Taranaki.
HAWKES BAY Ashleigh Coley to Manager Logan Philpot to Manager Vipin Thomas to Manager TARANAKI David Goodall to Associate Jordan Hartley-Smith to Manager Alice Goodwin to Assistant Manager CHRISTCHURCH Wendy Skinner to Associate Matthew Shallcross to Associate Stacey Davis to Associate Judi Gosney to Associate Samantha Waugh to Manager Craig Symon to Manager Jasmine Howe to Manager
STAPLES RODWAY AUCKLAND BOOSTS SENIOR RANKS Staples Rodway Auckland has recently appointed Bill Apps as a Director. Bill Apps has more than 20 years’ experience as a corporate finance specialist, including time working both in New Zealand and internationally on a wide range of engagements including telecommunications, primary and construction sectors. He regularly appears as an expert financial witness before the courts and is called upon for his specialist expertise in valuations, due diligence, mergers and acquisitions, economic loss and financial modelling. Bill has considerable technical experience including valuation engagements arising from NZ IFRS requirements and has completed a number of reports under the Takeovers Code. Managing Director David Searle says: “Bill is a valuable asset to our team, with a depth of knowledge in corporate finance and someone our clients regularly look to for advice they know they can trust and rely upon. We’re thrilled to have someone of Bill’s calibre and reputation serve as a director within the business.” Bill’s appointment furthers Auckland’s wide range of specialisations and adds a new service in the form of Litigation Support, while further strengthening their Due Diligence, Valuations, Mergers and Acquisitions, and Financial Modelling service lines. 30 • NUMBERS Winter 2017
STAPLES RODWAY
SNAPSH T At Staples Rodway, it's our people that set us apart. Take a look at what our team has been doing in their communities, in their professions and following their dreams.
STAPLES RODWAY WOMEN INFLUENCING WOMEN PINK RIBBON BREAKFAST Staples Rodway Hawkes Bay has been hosting Women Influencing Women events over the past two years to help support female clients in business. To kick-start and reinvigorate these events for 2017, we decided to host a Pink Ribbon Breakfast and support The New Zealand Breast Cancer Foundation. This event supported some of our firm’s core values of: supporting the community; people are important; having fun; and going the extra mile. Our team provided all of the lovely pink baking, which enabled all of the funds raised to go to The New Zealand Breast Cancer Foundation and fund research projects to improve the survivorship of breast cancer. We had over 60 business and professional women attend our breakfast on 17th May. We have raised over $1,700 so far and are very proud to be part of a fantastic and supportive community and help raise funds for a very important cause. If you are interested in attending future Women Influencing Women events, please contact Michelle Valler mvaller@stapleshb.co.nz or 06 878 7004 Pictured left: Jacqui Gray from Gifford Devine & Shelley Signal from O.So.U.
LISA KING – WOMEN IN BUSINESS Staples Rodway Auckland’s Women in Business group hosted Lisa King in May, where she shared her success story. Staples Rodway’s hosting of the event enabled 100 lunches to be bought for kids in need. If you are interested in subscription lunches or their newly added one-off catering options in Auckland, Hamilton or Wellington, you can visit eatmylunch.co.nz. Lunches start at $12 and for every lunch you buy, they give a lunch to a Kiwi kid in need. Lisa King pictured with Jessica Stewart, Anna McCrory, Emma Dymond, Velvet Ly, Nicola Hoogenboom, Annette J. Azuma, Sachiko Konno, Robyn O'Brien, Allison Ranby, Kris McAinsh, Jo-Anne Randall, Ayumi Sugimoto & Natalie Owen.
www.staplesrodway.co.nz
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PHIL BANKS MEMORIAL PRIZE Congratulations to Jack Elliot & Tiann Nelson who were recipients of the Phil Banks Memorial Prize in Tax Law, established by Staples Rodway in Phil’s memory in 2016. Unfortunately Jack was not available for pictures, but Tiann was a lovely guy and very appreciative of the award. Tiann received several awards during the evening so he seemed very much like a superstar on the rise! A very nice evening and a touching tribute to Phil, particularly when Andrew Stockley presented the award and acknowledged Sandi, Laura, Graham, Fiona, Steve and Trish and the contribution that Phil had made to tax law and to us at Staples Rodway.
THE (DARK) ART OF SUCCESSION PLANNING Staples Rodway and ANZ Bank recently hosted a well-attended succession planning client event. The star performers at the event were panelists Richard Aitken (ONZM) until recently Executive Chairman of New Zealand's largest employee-owned professional services consultancy Beca Group, Malcolm Rands (MNZM) the visionary co-founder and CEO of ecostore and Executive Chair of Fairground Foundation, Wendell Phillips director and co-owner (until a recent sale) of large state-of-the-art manufacturer Sistema and Catherine Atchison (Partner Trusts and Estates) from Martelli McKegg. Richard Aitken focused on the topic of succession planning for senior executives in the corporate environment while Wendell Phillips and his daughter Bailey (contributing from the audience) considered succession planning from the perspective of the third and fourth generations involved in a family business. Richard, Wendell and Bailey commented on just how important parents are in creating a home environment
where business awareness is nurtured and business issues are discussed. Malcolm Rands spoke of a life-long passion for fundraising for charity. He created ecostore to fund his charitable work. Malcolm’s palpable passion for the environment and society has resulted in two event attendees talking with Malcolm and his charity Fairground Foundation (www.fairground.org). Catherine Atchison spoke in arresting terms about the financial and emotional impact on families that occurs when family business owners do not make adequate financial provision for death or incapacity. Conversations about succession planning are never easy. Whether you are contemplating the sale of a business nurtured from an idea; wondering how your legacy will live on in the hands of the next generation; or if you are looking to find the right person to hand the reins of power to. If it is time to take action on succession planning, call your Staples Rodway advisor.
(L-R): Russell Brown, Richard Aitken, Wendell Phillips, Malcolm Rands & Catherine Atchison
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MEETING THE PM Staples Rodway Auckland Tax Director and current NZ President of CPA, Andrew Dickeson (pictured far right) had lunch recently with Prime Minister, The Rt Hon Bill English. Andrew found a kindred spirit in the Prime Minister who impressed with his encyclopedic knowledge of tax legislation and his understanding of complex tax concepts. Annette Azuma recently attended the 2017 ISPS Handa New Zealand Open held in Queenstown. NZTE hosted a VIP breakfast with the Prime Minister, as guest speaker (pictured with Annette below). The Japanese presence was huge – held at Millbrook Resort owned by the Ishii Family; main sponsor ISPS Handa, other Japanese sponsors included Oji, Sumitomo Forestry, Nelson Pine Industries, Asahi and JTB.
CEMARS CERTIFICATION
Aidan Hill presents Annette J. Azuma and David Searle with Staples Rodway Auckland's Enviro-Mark Solutions Limited CEMARS certification.
TRACY HICKMAN COMPLETES MARATHON GOAL Auckland Corporate Advisory Services Director Tracy Hickman recently returned from Antarctica and can now claim to boast to having run at least one marathon on all 7 continents!
WORLD MASTERS GAMES A huge congratulations to Denis Drumm who took out the gold for the B Grade 70+ Mixed Doubles in the Masters Games. Just when we thought he’d be using his semi-retirement to relax and put his feet up!
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AUCKLAND Level 9, 45 Queen St PO Box 3899 Auckland 1140 Phone 64 9 309 0463 Fax 64 9 309 4544 enquiries@staplesrodway.com
WAIKATO 4th Floor, BNZ Building 354 Victoria Street PO Box 9159 Hamilton 3240 Phone 64 7 834 6800 Fax 64 7 838 2881 staples@srw.co.nz
TAURANGA Level 1, 247 Cameron Road PO Box 743 Tauranga 3140 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 Phone 64 6 878 7004 Fax 64 6 876 0078 info@stapleshb.co.nz
NEW PLYMOUTH 109-113 Powderham Street PO Box 146 New Plymouth 4340 Phone 64 6 757 3155 Fax 64 6 757 5081 newp@staplestaranaki.co.nz
STRATFORD 78 Miranda Street PO Box 82 Stratford 4352 Phone 64 6 765 6949 Fax 64 6 765 8342 stfd@staplestaranaki.co.nz
WELLINGTON Level 6, 95 Customhouse Quay PO Box 1208 Wellington 6140 Phone 64 4 472 7919 Fax 64 4 473 4720 info@stapleswellington.co.nz
CHRISTCHURCH
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Level 2, Tavendale Centre 329 Durham Street North PO Box 8039 Christchurch 8440 Phone 64 3 343 0599 Fax 64 3 348 0186 info@srchch.co.nz
www.staplesrodway.co.nz
Published on Jun 26, 2017
THE TAXATION ISSUE Online accommodation | Tax Freedom Day | 3 welcome changes from the IRD | Inland Revenue simplifying life | Taxing challe...
Published on Jun 26, 2017
THE TAXATION ISSUE Online accommodation | Tax Freedom Day | 3 welcome changes from the IRD | Inland Revenue simplifying life | Taxing challe...