No 41 AUTUMN 2017
THE GOVERNANCE ISSUE GOOD GOVERNANCE A big deal for small businesses
REDEFINING R & R A director's roles and responsibilities
7 GREAT GOVERNANCE SKILLS
BUSINESS IMMIGRATION Why high flyers want to call New Zealand home
EMAIL SCAMS 7 steps to avoid a potential hack
Achieve your goals beyond the boardroom
www.staplesrodway.co.nz NUMBERS Autumn 2017 â€¢ 1
Rosanna Baird (07) 834 6800
(09) 373 1128
Chris Downey (07) 578 2989
(06) 878 7004
(06) 757 3155
(04) 472 7919
CHRISTCHURCH Ross Erskine
(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 â€¢ NUMBERS 2017 recommended thatAutumn you consult your advisor before acting on this information.
No 41 AUTUMN 2017
IN THIS ISSUE 2 Good governance Putting it in practice for small businesses
4 Good business, good governance For any size business
6 Organisational culture The board's vital role
8 Taxpayer friendly changes are about to land What you need to know about the May 2016 Income Tax Bill
10 Governance considerations of new accounting standards Is your board prepared for the imminent changes?
12 Email scams costing business How the building industry was targeted and the measures to take to reduce the risk 14 Directors' roles & responsibilities How have the expectations increased?
16 Business immigration How high profile ultra-high net worth individuals are making New Zealand their home
18 Residential property investment The health and safety considerations and implications 20 Employee vs Contractor Does the distinction matter?
23 Women in Business Interview with Nikki Kaye, MP
26 Bond rates vs interest rates Why are bond rates falling while interest rates are rising?
28 Ask an expert The residential property 'brightline test'
30 7 good governance skills Tracy Hickman puts them into practice to run a marathon in seven continents
32 Movers & Shakers CAANZ fellowship awarded to former Director promotion for Waikato's Gavin Ghuman
33 Round the Bays 2017 A family affair for the Auckland office
New careers launch Welcome to our new grads
2016 Network of the Year BAKER TILLY INTERNATIONAL
GOOD GOVERNANCE IN PRACTICE FOR SMALL BUSINESSES Article by Tracy Hickman STAPLES RODWAY AUCKLAND email@example.com
Much of the theory on good governance for boards has been written with large, listed companies in mind. However, the vast majority of New Zealand companies are small and medium privately owned businesses. We’ll look at some of the governance issues faced by those smaller firms, and how to address them.
FINDING THE TIME
The directors of small and medium sized businesses are likely to have many competing demands on their time, so setting some of that precious resource aside for governance can be a difficult feat to achieve. Ignoring good governance would be a mistake, as it has been demonstrated to have a positive effect on company performance, and is also likely to be looked on favourably by funders, improving access to credit. For example, one of our clients was struggling financially due to high debt levels, so we worked on procedures to improve sales and reduce costs with the directors. As a result, profitability improved, and the bank which had provided funding, agreed to restructure the loans from high interest overdrafts to term loan facilities, which could be serviced at a significantly lower cost. While most of the actions taken were simply common sense, it can be difficult for directors to take a step back and look objectively at what is needed. Setting aside time for regular board meetings for the whole year at the beginning of each year will help to ensure that they are prioritised.
Where a smaller business has family members as shareholders, but who are not active in the day-to-day business, there is significant potential for conflict. Again, good governance principles with regard to the provision of transparent information can help to allay misunderstandings. If those shareholders are also nonexecutive directors, holding regular meetings can be beneficial not only to those shareholders, but also for the directors working in the business by providing them with an outside perspective. Similarly, many directors of smaller businesses may turn to their accountant or lawyer for advice. Formalising this arrangement with regular advisory board meetings ensures that the advice provided is fully informed, as those advisors will have the opportunity to learn more about the business and industry, at the same time as bringing that outside perspective. The ‘outsiders’, be they advisors or family members, may contribute a helpful network of contacts and contribute experience gained in other businesses that is useful when trying to benchmark performance.
MAKING INFORMED DECISIONS
DEALING WITH MINORITY SHAREHOLDERS
Making good decisions as a director often relies upon having reliable, accurate and timely information to support the decision making process. This can be achieved by putting effective systems in place to provide daily or weekly sales data, production reports and cash flow updates (depending on which areas of the business need to be prioritised). Preparing monthly management accounts rather than relying on annual financial statements will enable decisions to be based on up to date data. This is significantly easier to achieve with accounting software that is automatically updated from direct bank feeds. Also, preparing a budget or forecast will enable directors to monitor progress and highlight whether the business is on track to achieve the goals set for the period under consideration.
We’ve looked at the potential conflict that can occur between family members. Similar issues can arise where there are minority shareholders, often employees who have been provided with, or been sold, a small parcel of shares in order to incentivise them. The difficulty faced by the directors is how to involve those minority shareholders (who may not hold board positions) but still maintain control. Again, the provision of information and good communication can help to avoid disputes. Further, a comprehensive Shareholders’ Agreement should ensure clarity with regard to expectations on all sides, covering topics such as financial contributions, levels of authority for decision making and access to information.
NUMBERS Autumn 2017 • 3
IMPORTANCE OF GOOD CONTROLS One of the problems faced by smaller businesses is that there are simply fewer people in the business to undertake all of the roles and responsibilities, and that can make it difficult to ensure adequate separation of duties to safeguard against fraud. Implementing strong internal controls should lower the likelihood of fraud, and the process of identifying potential problem areas and allocating those duties should help to provide clarity around areas of responsibility. It can be as simple as ensuring that the person who opens the mail and does the banking is not also responsible for bookkeeping and having dual signatories on bank accounts (especially for transactions over a certain value). We recently helped one of our clients put these controls in place for their business, providing peace of mind not only for the directors, but also for the employees who could potentially be the object of suspicion.
CRUCIAL TIMES Practising good governance is especially important for smaller businesses when going through a period of intense growth or experiencing a crisis. At those times, operational issues can be all-consuming, yet decisions need to be taken that may have a long term effect upon the future performance and sustainability of the business. This is exactly when directors should be focussing on the business, rather than solely working in the business. Having the discipline of regular reporting, review and strategic discussions should ensure that issues are addressed. We have been working with a couple of clients who are experiencing rapid growth. In one case, we have helped the directors to prepare a three year forecast for the business, so that they can use the predicted growth to help make decisions as to whether to lease larger premises to house inventory at peak periods. Analysing the profitability clarified that choosing to outsource logistics was the better option at that time. The other client was working on a number of opportunities that had arisen, in a scatter gun approach, and simply spreading themselves too thinly. We encouraged the directors to take time out of the business to evaluate each of the options, in terms of potential contribution, resource requirements and the logistics of pursuing overseas opportunities. Once they were in a position to prioritise each potential pathway, it soon became apparent where they should be focussing their energies. In particular, they understood that the far flung overseas opportunities, while potentially lucrative, were also subject to a much higher level of risk and needed to be set aside while the domestic business was bedded down to provide a strong base for further growth. Many of the issues faced by smaller businesses are different to large corporations that have access to greater resources. Understanding how good governance can improve performance, reduce conflict and help with difficult decisions can encourage directors of smaller businesses to set up advisory boards or at least hold regular directors meetings. For further information on how implementing good governance can help your business please contact Tracy Hickman in our Auckland office on 09 373 1133 or contact your usual advisor. 4 • NUMBERS Autumn 2017
RGANISATIONS WITH “GOOD” GOVERNANCE SHOULD avoid all manner of disasters and perform better on a whole range of metrics including financial as well as employee and customer satisfaction. Poorly governed organisations are more likely to be those that fall into insolvency, put their people and others at risk, fail to address key business risks and underinvest in stakeholder management so that when a crisis happens, it seriously harms the business. This really is not about law. It’s about good business. However, when a business fails, a person is injured (or worse, dies), a customer’s information is compromised, or some other business crisis arises – the law can come into play. Business and directors can be found to have breached all manner of laws, have regulators crawling all over them and be faced with multiple law suits. There are free quality governance resources available to any business that wants to understand what good governance practices are. The Financial Markets Authority has information on their website including a handbook (www.fma.govt.nz). MinterEllisonRuddWatts' White Paper on Corporate Governance can be found on www.minterellison.co.nz. The ASX and others also provide quality information that can be readily accessed. The Institute of Directors also provides quality information to its members. At its heart, 'good governance' is about culture. It’s about a culture that cares about its people, its customers and its community. Quite simply it’s about doing the “right” thing. It’s mostly plain old fashioned common sense. For example, why on earth wouldn’t any business regularly assess the risks to its business, how to mitigate them and what to do should a risk actually crystallise? Failure to do so may well breach many laws - it certainly breaches good business sense, yet alone common sense. Companies listed on the NZ Stock Exchange (NZX) are required to comply with certain corporate governance rules of NZX and to explain their approach to certain others. The FMA also encourages issuers of securities to comply with their Principles and Guidelines for corporate governance. Proposed changes to NZX Rules will require issuers to comply with the FMA’s guidance or explain why they are not. Directors of companies are required to act in the company’s best interests. Under health and safety legislation directors are required to exercise due diligence in respect of health and safety. Failure to do so exposes directors to personal liability, as well as personal reputational damage, let alone damage to the business they govern. Smart businesses will embrace the principles of “good” governance as a means of enhancing their business for the long term. They do so because it’s good business not simply to comply with various laws.
GOOD BUSINESS GOOD GOVERNANCE 'Good' corporate governance matters to all shapes and sizes of organisations. It does not matter whether you are a small start-up or a major global corporate.
Article by Cathy Quinn ONZM PARTNER, MINTERELLISONRUDDWATTS LAWYERS firstname.lastname@example.org
BOARDS HAVE A VITAL ROLE IN SHAPING ORGANISATIONAL CULTURE
In the December 2016 issue of NUMBERS, we considered the role of an organisations leadership in setting the tone and effectiveness of business culture. In this article, we look specifically at the role of the Board.
Article by Julie Rowlands STAPLES RODWAY TARANAKI HR email@example.com
LTHOUGH BOARD BEHAVIOURS HAVE LESS influence on culture than those of the CEO and management team, they do set the tone at the top which in turn has a significant impact on the culture within. The Board sets the organisation’s guiding values and ethical climate. It is important that they model this in everything they do, in the decisions they make and the dialogue they have with their CEO and Executive team. As we know culture is the shared values, beliefs and assumptions that shape the behaviour of the organisation. In fact when we talk about culture, we are talking about ‘how we do things around here, even when there is no one looking’. In reality the culture can make or break the most experienced executives and the best strategy. If the company culture is so important why aren’t Boards more actively engaged in its oversight? We have found working in multiple businesses throughout New Zealand that they are often not involved because it is assumed that the CEO and Executive team have the greatest influence over the culture, so Boards tend to give the issue of culture a wide berth, expecting the CEO to raise the cultural aspects if they believe they need to. Often there is also limited Board visibility into the culture. Directors rely on the Management team to bring information about the culture to the Board. This distance then means it is not easy for Directors to gain a clear perspective on the company’s culture. In our experience also we find that practice areas such as executive compensation or risk oversight are clearly defined, but cultural oversight is not. Finally and just as critical, the Board and CEO do not create a process, with a shared language to enable discussion about the health of the culture. Consulting to numerous CEOs we have found that many Boards do not focus on the culture at all. This means that what gets presented by the CEO to the Board can be a very different picture in reality to what is playing out in the business. In fact some of our clients have at the request of Boards conducted culture and climate reviews only to seriously ‘water down’ the issues or concerns that get raised. Often this culture review process is viewed as an annual event that gets ticked off when completed, rather than an important exercise for both the leadership and the Board to understand their business.
The importance of setting the tone at the top is and does need to be concentrated on much more. To enable this to happen questions that need to be considered include: 1. What role should the Board play? 2. What actions should Boards, together with CEOs, take to set the tone at the top? 3. How healthy is the Board’s relationship with their CEO? 4. What is the Board’s culture and how does that align with expectations of the business? 5. What are the unspoken rules that impact on employees’ decision making and the way they behave in the business? Thankfully, a big shift is beginning to happen in many businesses within NZ today, particularly in the way Board members view their roles. The significant change in Health and Safety in New Zealand and the expectations of Boards has led to far greater interest in the ‘culture’ and what is exactly happening in the businesses they govern. This is a significant and positive change. Research by the Department of Labour shows that the benefits of a positive safety culture include: Fewer accidents, injuries and lost time Safer behaviours among workers Improved wellbeing and job satisfaction Better relationships between management and staff A positive culture led from the Board creates engagement, loyalty and personal value alignment. We hear more and more of our clients talk about the Directors talking to employees, being visible and showing a genuine interest in the business. Why wouldn’t any Board want to ensure that this is happening? Boards can foster long term shareholder value by deepening their understanding of their business culture, placing it on the Board agenda and ensuring management is forging a culture that is aligned with the business strategy. While Boards must establish core values and principles, a CEO’s behaviour tells employees what counts and what will be rewarded and punished. The tone at the top matters. Your local Staples Rodway office can help review your culture and climate or you can contact one of our HR consultancy team: Julie Rowlands, Taranaki; Andrea Stevenson, Hawke’s Bay; or Chris Wright, Auckland. NUMBERS Autumn 2017 • 7
TAXPAYER FRIENDLY CHANGES ARE ABOUT TO LAND To coin a phrase familiar from James May of Top Gear fame – Good News! And no, the Romanian car ‘Dacha’ is not coming to New Zealand, thankfully. What is coming is the May 2016 Income Tax Bill which is expected to be enacted any day now. Included in the Bill are some very helpful and tax friendly changes that will benefit a number of our SME company clients.
Article by Roger Shackelford STAPLES RODWAY WELLINGTON firstname.lastname@example.org
SHAREHOLDER SALARIES AND PAYE One of the most difficult aspects of operating an SME via a company structure is getting your head around shareholder current accounts. If you just remember that the company is a separate and distinct person from you the shareholder, then any transaction you make with the company (cash drawings, private motor vehicle expenses, personal expenses paid for by the company) will be recorded in your personal shareholder's current account. As accountants, all too often we find that when we complete the end of year accounts for an SME company, if the shareholder has drawn more money from the company than they have put in or had credited, their shareholder's current account becomes overdrawn. IRD can tax that overdrawn current account and ‘deem’ it to be a taxable dividend. The easy work around for this is for the shareholder to pay interest on the overdrawn current account to the company, or we can ‘credit’ the shareholder with part of the company profit and call it a ‘shareholder's salary’ to reflect the work done during the year. That shareholder's salary then goes into your personal tax return and tax is paid in the normal way. Currently, if you are a shareholder employee of your own company and you draw a PAYE salary, any further profit made by the company cannot be allocated to you as a shareholder salary without PAYE being deducted. The difficulty here is that if you’ve drawn that profit out of the business in the form of cash drawings, your personal account (current account) can sometimes be overdrawn. However, help is at hand. Once enacted, the 2016 May Bill will allow the more sensible approach to be taken whereby those who receive PAYE salaries can also have a shareholder's salary allocated to them without PAYE being deducted. And it’s about time! A further practical aspect of the proposed change is that when shareholder salaries are credited to a shareholder employee, the credit can go back to the first day of the year. This can then deal with any overdrawn current accounts and thereby reduce mandatory interest charges, or worse, deemed dividends. The proposed rule is an elective one. In other words, your accountant will elect for you to have both PAYE and non-PAYE income during the year. However, if you choose to opt out of paying PAYE on all shareholder salaries (and instead have a salary credited at year end by your accountant) you have to stay out of the full PAYE regime for 3 years. You can opt-in to PAYE at any time, if you are not deducting PAYE from any payments. For those operating via a ‘Look-Through Company’ (LTC), PAYE salaries remain the order of the day. These changes will be effective from 1 April 2017 for most people.
attached to that dividend at 28%, and a further 5% resident withholding tax is paid by the company. This means for a shareholder who receives a dividend and pays income tax at 33%, there is no further tax payable. Unlike shareholder salaries which can be credited back to a shareholder's current account on the first day of the year, dividends are taxable income to the shareholder when they are paid or credited. So if your personal current account in the company is overdrawn (because you’ve been taking drawings), crediting a dividend back to the current account might not correct the balance. However thanks to the tax friendly 2016 May Bill, if you now pay a dividend after 31 March 2017, and it’s all fully loaded with tax credits (imputation credits and RWT), it will credit back to the later of the first day of the tax year, or the day your current account became overdrawn.
RWT AND DIVIDENDS
Probably more for the accountants than for our clients; there are some positive outcomes for those facing debt remission issues. Debt remission is an overly technical term used extensively by tax people to show others how clever they are. In simple terms, if you owe me $100, and I say don’t pay me, I have technically remitted the debt payable by you. You have gained a benefit, and Inland Revenue will tax that at your personal tax rate. The changes proposed in the May 2016 Tax Bill will ensure that if a partner in a partnership or a shareholder in a close company (including an LTC and qualifying company) remits debt to their entity, that will not give rise to income to the partnership or company, respectively. It also means that where you may have old dormant companies hanging around which have balances owing back to shareholders, you can now strike them off without having any concerns about debt remission arising. And don’t worry also about the accounting treatment. If you book the debt remission as income and it flows to retained earnings, IRD has been very concessionary and said that any accounting income arising from a debt remission is going to be treated as available subscribed capital (ASC) on winding up. So you will need to keep a record (put it in the Notes to the Accounts) that a portion of your retained earnings arose from a debt remission and is therefore ASC on winding up. There are also some really good options for dealing with inter-company balances. As long as the overall economic wealth of a group of companies doesn’t change, inter-company loans can now be remitted without creating income to the borrowing company. This will certainly strengthen the balance sheets of the borrowers and make the inter-group debt much cleaner.
Currently, if your company pays a dividend to a shareholder, tax paid by the company previously (an imputation credit) is
Indeed, good news Mr. May – you will agree.
NUMBERS Autumn 2017 • 9
GOVERNANCE CONSIDERATIONS OF NEW ACCOUNTING STANDARDS
For entities that prepare financial statements in compliance with International Financial Reporting Standards, or their New Zealand equivalents, 31 March 2017 could well represent a watershed moment. Will these entities be ready for the impending changes and what can those gathering around the Board table do to manage the transition?
Article by Nigel de Frere STAPLES RODWAY AUCKLAND email@example.com
N THE SECOND HALF OF 2014 and in early 2016, the External Reporting Board issued three standards that represent the culmination of a number of years of work by the international standard setters. These standards, Financial Instruments (IFRS 9), Revenue (IFRS 15) and Leases (IFRS 16), will apply for annual reporting periods beginning on or after 1 January 2018, or 2019 in the case of IFRS 16. What that means is that the transition date for the Revenue and Financial Instruments standards is less than two months away.
IFRS 9 FINANCIAL INSTRUMENTS IFRS 9 deals with all financial instruments and is therefore likely to affect all reporting entities in some way. While some entities will be impacted more than others, there are a couple of fundamental changes that will need to be considered by all reporting entities. The most significant change is the shift back to an “expected loss” model in relation to financial assets, but the standard also includes changes to hedge and fair value accounting. Reporting entities will now need to consider historical loss rates when determining the appropriate impairment provision to record – rather than holding off until a loss event actually occurs, as under the current model. The changes to the hedge accounting rules are designed to make achieving hedge accounting more straightforward, with a clearer link to the individual entity’s internal risk management structures.
IFRS 15 REVENUE This represents a fundamental change in the way we will need to think about the recognition of revenue. It introduces a five step approach to the treatment of revenue, which will affect both timing and amount. Our experience to date suggests that the main outcome of the standard is to defer the recognition of revenue when compared to the current standard. Including the various appendices and other guidance notes, the standard is roughly 280 pages long, and the devil truly is in the detail.
IFRS 16 LEASES This is the new standard dealing with leases. Again, this is a change that will impact some entities more than others, but with leasing being such a common financing tool for businesses we anticipate that this standard will affect almost all reporters. The key change here is that the relatively arbitrary distinction between financing and operating leases has been done away with. This is likely to mean the recognition of a lease liability for most reporting entities, as well as the recognition of a new asset class: a right to use. www.staplesrodway.co.nz
WHAT WILL THESE CHANGES MEAN FOR DIRECTORS? While these three standards are likely to impact entities differently, we anticipate that they will have an impact on all reporting entities. As a result, prioritisation will be important in understanding the impact and managing the outcomes. We recommend that an analysis of the new Revenue standard should be the first priority for most reporters (financial institutions should probably focus their energies into the other two standards first). Existing contracts with customers should be segmented into broad categories, with an impact analysis completed for each category. Directors should then be asking two questions: how will the changes affect our existing arrangements, and what are we planning to change going forward? The leasing standard should be the next area of focus. The new standard has a practical expedient for short term and low value leases so, again, classifying the existing leases by original term and value will allow for a greater focus on those contracts that will have an impact. An impact analysis on the more significant lease contracts will be necessary. We recommend running some scenario analysis on the likely impact on the balance sheet that the new leasing treatment will have. Consideration should also be given to the terms of any lending covenants (particularly any which relate to balance sheet ratios), share based incentives, and other key performance indicators. It may be worth discussing the impacts with the entity’s funding providers sooner rather than later. In the meantime, entities should be tracking historical loss rates in relation to receivables and developing expected loss based impairment models. It may also be timely for entities to reconsider their internal risk management structures with a view to achieving hedge accounting on adoption of IFRS 9.
CONCLUDING COMMENTS If there was ever any doubt that financial reporting is becoming more complex with outcomes driven by a series of rules, this new suite of standards has removed it. These standards represent a paradigm shift – both in terms of their underlying principles and their likely impact. Their transition is now quite literally around the corner, and there is no time like the present to begin to tackle them. For specific advice on the changes, please contact your Staples Rodway advisor.
NUMBERS Autumn 2017 • 11
EMAIL SCAMS COSTING BUSINESSES Article by Rob McEwan STAPLES RODWAY TARANAKI firstname.lastname@example.org
In June 2016 a sophisticated hacking scam was discovered targeting the building industry in New Zealand. Builders’ emails were hacked and bank accounts on invoices to clients were changed, redirecting payment to the fraudster’s bank account. At least 3 firms lost more than $25,000, and were unaware of the scam for days afterwards. The scam email, which informed recipients to change account numbers because of internal issues, was a good example of how smart hackers are becoming and what lengths they will go to exploiting the inherent weaknesses of email.
OW CAN YOU AVOID POTENTIAL damage to your business arising from email scams? Here are some practical steps you can take to limit your chances of being hacked.
AVOID USING EMAILS WHERE POSSIBLE
PROVIDE CLEAR INSTRUCTIONS ON HOW INVOICES AND PAYMENTS ARE PROCESSED
IMPLEMENT DATA LOSS PREVENTION
Explain the process with a face-to-face meeting and if necessary ask the client to call you to confirm making any payments in future. You should also inform the client of what to expect after they make the payment. Do not rely on email communications. Best practice is to agree to pick up the phone and confirm receipt of the payment to ensure your communication channel is not being tampered with.
COVER YOURSELF WITHIN YOUR CONTRACT As well as including the bank account details with your contract, state that if there are any changes to bank account details that the client must call you to confirm these. You can also ask that clients save your bank account number into their internet banking list of long-term payees to avoid any changes taking place through the communication channel.
CONSIDER USING AN ESCROW AGREEMENT You could go even further and use an escrow agreement. An escrow agreement is a legal document that outlines the terms and conditions between parties involved in the arrangement. Under the agreement, one party deposits cash with a third person (an escrow agent), who makes delivery to another party if and when the specific conditions of the contract have been met. You can ask your lawyer or your accountant to act as your escrow agent if they operate a trust account for that purpose. www.staplesrodway.co.nz
Email should be the last resort for communication of financial information.
If you are using a modern email service like office 365, or have your own email server with an email filtering capability, then talk to your IT team about implementing data loss prevention. This can take the form of a simple rule that prevents bank account numbers ever being included in an email message. If the mail filter detects a bank account number then the email is stopped and the sender, or the business owner, is notified of the breach of policy. Taking the time to implement the procedures set out above will reduce the risk of financial loss, reputational damage and the disruption to operations. According to the Information Technology Faculty of The Institute of Chartered Accountants in England and Wales (ICAEW), it is estimated that up to 80% of security breaches could be prevented by implementing basic cyber security practices such as those set out above. Staples Rodway’s IT services department works with many clients to help them maintain safety and security with all aspects of their online channels. We are constantly reviewing and observing IT security in New Zealand and can assist you to formulate a strategy that best meets your business needs. Contact your local Staples Rodway office to find out more about the services we offer, or contact Rob McEwan on 06 757 3155 to discuss implementing of data loss prevention within your email server.
NUMBERS Autumn 2017 • 13
& RESPONSIBILITIES Article by Kathy Robb STAPLES RODWAY TAURANGA & DIRECTOR OF FIRST CREDIT UNION email@example.com
For most people, R & R probably means Rest and Relaxation but for those us holding a directorship role it has traditionally meant Roles & Responsibilities. More recently, with constant changes in the economic and regulatory environment it would be fairer to mean Risk & Regulation! Times are changing and the expectation of directors’ responsibilities have increased and changed. This is as a result of the economic and regulatory influences driven by global financial issues and local factors such as the finance company failures and the Pike River tragedy. These issues put the spotlight on directors, resulting in legislative and regulatory compliance becoming more demanding.
IRECTORS ARE THE REPRESENTATIVES OF an organisation with the legal responsibility to act in the best interest of that organisation and are accountable to all stakeholders. These stakeholders can include the shareholders, management, staff, regulators and the community. The Companies Act 1993 imposes “duties” on company directors and these duties align to the more recent Financial Markets Authority publication covering Principles and Guidelines of corporate governance, which include guidance for directors, executives and advisers of a wide range of organisations and entities. When boards clearly define the roles and responsibilities of the directors and management and put them into written documents (such as a policies and procedures manual) not only does this make it easier to hold directors accountable for their actions, it also clarifies responsibilities and priorities of strategic and operational matters. As a director it is important to remember that your role is to make strategic decisions, and management’s role is to implement them. Where possible directors are advised not to get bogged down with, or step into, operational matters, as this is management’s responsibility. It is not always easy to remember this, particularly if you have previously been very hands on operationally in your own businesses.
Competence There is a professional expectation that you have the skill and experience to perform your role, which includes you knowing your organisation, as well as the market, economic and regulatory environment it operates in.
The essential roles and responsibilities as a director are:
Ultimately as a director your role is to govern and lead. Know what’s going on internally and externally, but remember to focus on the big picture and not get caught up in the day to day.
Ethics You should be honest and act with integrity and objectivity. In its simplest interpretation this means “doing the right thing”. In practice this means that all self-interest and conflicts should be disclosed in the conflict of interest register. www.staplesrodway.co.nz
Risk Management Setting and monitoring the organisation’s risk appetite and tolerance levels. These risks include strategic, financial, operational and compliance. Know your organisation’s risks. Commitment Ensure you have and can make the time required and expected. Don’t rely on other directors or management to do the work – you need to “do your homework”. Regular board, self and/or peer review is essential. Ask yourself –“if I am not adding value to the board and the organisation – why am I there?” Communication Good open and honest communication is required with key relationships and stakeholders including the board, management and regulators. This supports the need for directors to be transparent.
Please contact your usual Staples Rodway advisor if you would like help finding a board member. NUMBERS Autumn 2017 • 15
BUSINESS IMMIGRATION Immigration is currently a very hot topic. Globally, President Trumpâ€™s divisive attempted immigration ban created chaos at some airports and resulted in court action, and a successful injunction against the US Government. Closer to home there has been controversy surrounding the granting of New Zealand citizenship to Peter Thiel, a Silicon Valley billionaire, the founder of PayPal and an early investor in Facebook.
Article by Annette Azuma STAPLES RODWAY AUCKLAND firstname.lastname@example.org
FFICIAL DOCUMENTS SHOW PETER THIEL was granted citizenship under 'exceptional circumstances' relating to “his skills as an entrepreneur and his philanthropy”, which were deemed to be of potential benefit to New Zealanders and the country. In the end this controversy appears to be more about the perception of New Zealand immigration policy, as opposed to any wrong-doing by Peter Thiel or the New Zealand government. Other high profile immigrants are James Cameron, Canadian filmmaker and director; and hedge fund billionaire Julian Robertson – both who have made significant contributions to New Zealand in areas of business, recreation and art. Apart from direct investment they are also able to use their network of international contacts and own personal business experience to help grow New Zealand businesses and wider business knowledge. Many of us reading this article are immigrants ourselves or descendants of immigrants. New Zealand has a longstanding openness and reliance on foreign investment, and trying to attract wealth that can be mutually beneficial to both New Zealand and the investors. However many countries are increasingly becoming opposed to globalisation and becoming more insular. Staples Rodway act for a number of ultra-high net worth individuals (UHNWIs) who have immigrated to New Zealand or who have been granted permanent residency through the investor categories. Factors influencing the decision of UHNWIs to choose to move to New Zealand include financial, lifestyle reasons, concern over high, sometimes punitive death duties in their home country, and recognition that New Zealand is a stable democracy in an isolated part of the world. There are two categories: ‘Investor Plus’ requiring NZ$10 million to be invested in New Zealand for three years, and ‘Investor’ which requires NZ$1.5 million to be invested in New Zealand for four years. The table below sets outs the key criteria for both categories. In May 2017 there will be some changes to these criteria, namely:
Investor Plus Those who invest a minimum of 25% of their funds in growthorientated investments (currently acceptable investments except for bonds and philanthropic investment) will be permitted to spread the total amount of time required to be in New Zealand (88 days) over the entire three year investment term, rather than just the last two years. Investor 2 Points are adjusted (mostly increasing) taking into consideration age, business experience and English language proficiency. A minimum investment of NZ$3million is required, and if 25% or more of those funds are invested in growth-orientated investments, bonus points are awarded. Priority is given to investors in this category, with flexibility around the amount of time required to be in New Zealand (total days remains the same). Up to 15% of investment funds can be made in acceptable philanthropic investments. In summary, the changes indicate the New Zealand Government is seeking higher quality applicants who can invest more. Candidates from western jurisdictions where English is spoken have an advantage and there are benefits if 25% or more of the funds are not invested in passive bonds. Further details are available at www.immigration.govt.nz.
NEW ZEALAND VERSUS AUSTRALIA
Comparing New Zealand with Australia, New Zealand offers several advantages. Firstly, processing time is considerably shorter in New Zealand. In some cases the applications can be approved within one week. Once investors obtain permanent residence, it lasts for life. Also there is no requirement to be in New Zealand once granted. In Australia, permanent residents who have Investor visas must apply for a resident return visa every five years. New Zealand requirements are more straightforward, with only a central government, whereas Australian regulations can vary depending on the State the investor invests in. Our former Prime Minister John Key has stated that one of the most rewarding achievements of his term INVESTOR 2 was to reverse the 'brain drain' of New Zealanders to Australia. New Zealand’s generally more favourable Maximum 65 years old taxation system, combined with the IELTS 3 attractive UHNWI-positive policies has seen New Zealand gain some Must meet requirements very talented and well connected immigrants who can positively con3 years tribute to New Zealand. NZ$1.5million
Health & Character
Must meet requirements
NZ$1million (transfer not required)
Minimum Days in NZ Required
44 days per year for each of the last 2 years
146 days per year for each of the last 3 years
Staples Rodway has assisted a number of clients with business immigration in both categories. If you are interested in discussing your own needs or the needs of a colleague, contact Annette Azuma on 09 373 1120 or speak with your local Staples Rodway team.
NUMBERS Autumn 2017 • 17
HEALTH & SAFETY IN RESIDENTIAL PROPERTY INVESTMENT Article by Shanon Aitken CROCKERS PROPERTY email@example.com
Over the past year there have been a lot of changes to rules for owners of residential investment properties. The majority of these changes have been well publicised in the media, being topics of public interest. These include the acceptable level of methamphetamine contamination in a property, increased insulation requirements, the requirement for fire alarms in all properties and, more recently and possibly most controversially, the Osaki case - which has drastically reduced the landlord’s ability to claim for negligent damage of the investment property However some of the biggest changes to the industry over the last year have largely gone unnoticed. These are the changes to Health and Safety at Work Act 2015 (HSW Act).
N 1 APRIL 2016 THE new HSW Act came into force. The objective of the new law is to provide further protection to employees in the workplace. Although the HSW Act does not specifically define a business, it does define a ‘person conducting a business or undertaking’ (PCBU) in very broad terms, which includes every residential landlord, as owning an investment property is certainly an undertaking, even if there is room to argue whether a single residential property investment can be considered a business. The obligations imposed by the Act are also imposed on company directors, trustees, people holding positions comparable to company directors and anyone else who holds a position that allows them to exercise influence over the management of the PCBU. Simply put this means that not only the Landlord, but family members, solicitors, accountants or anybody else, whether or not they are listed as a director or trustee for the property owner, could be held responsible for breaches of the Act. The fines and penalties for breaches of the Act have been greatly increased. Should a landlord/business fail to meet their obligations under the Act and face prosecution, the maximum fines or penalties are up to $3 million for a PCBU; and $600,000 and/or a five year imprisonment term for an individual or officer of a PCBU. Ignorance of what is happening will be no defence. The Act also prevents PCBUs from insuring against fines, so while indemnity insurance may cover any court costs, the actual fines must be paid by the PCBU or the individual. In practice, a landlord is required to ensure that a property is provided as a safe and healthy environment for tenants and as far as reasonably practicable the health and safety of workers engaged in work on the property. This means that every time a contractor is sent to the property they must be informed of any Health and Safety issues that are present at the property, such as a dangerous dog, or difficult access. It also means that landlords have a duty to ensure that the contractor undertaking any maintenance is competent and appropriately qualified to do that work. They can meet this duty by assuring themselves that they are contracting a bona fide reputable company. The changes and the penalties able to be imposed under the Act, should be a sufficient incentive to end the days of the old number eight wire do-it-yourself Kiwi attitude to carrying out maintenance on a residential rental property. To do so may well be a breach under the Act, unless the landlord or person carrying out the work can demonstrate that they were fully qualified to carry out that job and that their qualifications were current. Another aspect of the law is that once a landlord has become aware of issues at a property they must take all reasonably practicable steps to deal with issues in a competent www.staplesrodway.co.nz
manner. For example, if they notice during a routine inspection, or if a tenant notifies them that some boards on the deck are rotten, they will not be able to simply deal with the issue by putting plywood over the offending boards so that no one stands on the rotten wood. Rather, they will be obliged to determine whether the problem is more widespread and in any event apply a permanent fix rather than merely undertaking a stop-gap measure. Australia has had a similar Health & Safety Act for many years and provides an indication of how the HSW Act might be enforced in New Zealand. Certain aspects of the changes can be illustrated by reference to two cases, the first in New Zealand prior to the HSW Act coming into force; and another in Australia after their equivalent legislation had already come into force. In New Zealand a case in Timaru involved a property management company being fined $50,000 for engaging an unqualified contractor to remove a gas heater. The gas supply was not capped off and when the new tenant moved in and ordered a new gas cylinder, up to 35kg of gas leaked into the house overnight. Fortunately for all concerned, the incident didn’t result in serious injury. In Australia a landlord and property manager were both taken to court and ordered to pay $840,000. The tenant in the property had seriously hurt themselves when they accidentally broke a window pane on the front door of the house. The issue was that a contractor had, over a period of seven years, twice been to the house to repair other windows that had been broken. The contractor was a handyman, rather than a qualified glazier. Had they used a qualified glazier it is likely the glazier would have noticed that the pane in the door was not of the required safety glass and therefore taken steps to replace it, and by doing so preventing the injury from occurring. How WorkSafe New Zealand intends to enforce the HSW Act in relation to residential rental properties remains to be seen. It is likely to take a few test cases to gain a full understanding of the implications. Where a property is professionally managed, we would imagine that WorkSafe will look primarily to the property manager should an incident occur, as the property manager will have responsibility for the day to day management and oversight of the property. However, to be able to rely on this protection, the landlord may need to show that they have contracted the management to a qualified agent or reputable property management company. Therefore the use of experienced professionals is strongly recommended. Please contact Crockers if you own a residential rental property and wish to discuss any aspect of property management or if you have any concerns about these new rules. NUMBERS Autumn 2017 • 19
EMPLOYEE VS CONTRACTOR DOES IT MATTER? Article by Andrea Stevenson & Alice Buchanan STAPLES RODWAY HAWKES BAY firstname.lastname@example.org email@example.com
For some industries it’s often easier to hire contractors rather than employees. But make sure you understand the difference, and its implications, or you may be leaving your business exposed to considerable risk.
MPLOYERS OFTEN GET CONFUSED WHEN deciding whether someone is an employee or a contractor, but getting it wrong can mean serious consequences for your business. It may mean that you are not meeting your legal obligations and your employees may not be getting their full legal entitlements, which could put you at risk.
SOME INDUSTRIES ARE LIKELY TO BREACH Deciding if someone is an employee or contractor is very important in industries where work flow varies, such as the building and construction, or IT consultancy industries. It may seem easier to hire a contractor for a project, rather than bring on a new employee, especially if there is no ongoing work at the end of the project. However, contractors and employees have different rights and responsibilities, so you need to understand the differences between each. In the building and construction industry Labour Inspectors will take action when they see breaches of this, so it pays not to get caught out.
WHAT’S THE DIFFERENCE? There are several factors that can show the difference between a contractor and employee. Firstly, we need to consider how both the Employment Relations Act and the Inland Revenue Department define ‘employee’ and ‘self-employed contractor’. The definition pins on who is in control of the agreement. A further key element is in looking at whether the position forms an integral part of your business. If you are unsure, seek help from your Human Resources Advisor. There are many grey areas and the Courts have developed tests to help you tell the difference. Use the checklist overleaf as a guide. www.staplesrodway.co.nz
WHAT IS THE EFFECT IF YOU GET IT WRONG? So who cares and why does it matter? The minute you hire someone as a contractor, when they are actually an employee, you may have to pay extra costs to the employee and the IRD. These may include unpaid PAYE tax, unpaid minimum wage and leave entitlements. You could also be fined by Inland Revenue and the Employment Relations Authority. And there is no hiding. As part of their investigations they will be allowed to view all of your communication with the individual to assess the true nature of the relationship. The consequences can be expensive, so it pays to take a moment to review what you are doing in your own business.
DEFINITIONS IN BRIEF Employee The employer is in control of how and when the work is done, the number of hours worked, the quality of the work, the rate of pay, the place of work and tools for the job. Contractor The individual is in control of how and when the work is done, what rate is charged and who performs the work. That is, the individual may hire someone else to perform the work.
SEEK HELP IF UNCLEAR Sounds pretty simple, right? Not necessarily… a person can be classed as an employee in one line of work and a self-employed contractor in another.
NUMBERS Autumn 2017 • 21
The individual is hired or rewarded as part of your business and under your control.
The individual agrees to carry out work as an independent contractor not as part of your business or under your total control.
You decide how the work is done and supervise it.
The individual decides how the work is done.
The employee has to do the work themselves.
The contractor can arrange for someone else to do the work.
The employee only does work for you.
The contractor can do work for more than one business.
BUSINESS AS USUAL
The employee’s work is part of your normal business activity.
The contractor’s work is often specialised and not part of your normal business activity.
You pay them by wages or salary.
You pay them in lump sum or by account.
RATE OF PAY
You pay a similar rate of pay to other employees doing the same job or similar jobs.
The rate of pay is the contractor’s charge out rate.
You pay ACC levies and deduct PAYE.
The contractor pays their own ACC levies, GST, overheads and taxes.
You provide the employee with tools and equipment, or give them monetary compensation for using their own tools.
The contractor provides their own tools, equipment and clothes necessary to perform the work.
You have an Employment Agreement with the individual.
The contractor has a Contract for Service.
HOURS OF WORK
You set the hours when the individual works.
The contractor decides when they work.
You pay holiday pay, sick leave, bereavement leave and public holidays.
The contractor has no leave. If they are not at work, they are not paid.
You, as a PCBU are responsible, so far as reasonably practicable, for ensuring the health and safety of your workers/employees.
As a PCBU you are responsible, so far as reasonably practicable, for ensuring the H&S of a contractor while they are carrying out work for you. As the contractor is also a PCBU, you must consult, cooperate and coordinate with each other regarding H&S duties while carrying out the work. You must satisfy yourself that the contractor is doing all that is required under the HSWA
The employee is invited to company social events.
The contractor is unlikely to be invited to company social events.
RESPONSIBILITY UNDER THE HEALTH & SAFETY AT WORK ACT
This is intended as general advice only. Contact your Staples Rodway HR advisor with your specific queries. 22 • NUMBERS Autumn 2017
NIKKI KAYE MP Nikki Kaye has been the Member of Parliament for Auckland Central since 2008 and is the Minister for Youth and Associate Minister of Education. We spoke to her about her career and her experiences as a woman in politics.
Interview by Nicola Hoogenboom & Annette Azuma STAPLES RODWAY WOMEN IN BUSINESS www.staplesrodway.co.nz/wib
Q: What made you decide to enter politics? A: From a pretty young age I worked out that I really want to help people. While working in the private sector in London (and earning more than I do now as a Cabinet Minister) I worked out that wasn’t where my heart lay. Having worked for Bill English before going overseas I realised there is no better place to help people than politics, so that is what I wanted to do. Q: How did you get into politics? A: I was elected very young. I came back from the UK at 27 to stand and was elected in 2008, winning the Auckland Central seat for the first time in history for National. People gave me 5% chance of being selected because I was up against two people, and at the time no one had ever won this seat for National. So it took a lot of effort! Q: What characteristics do you think are important for women in business or politics? A: Meeting so many people in communities and business I think I have found a common recipe. The first is integrity. It is very difficult at a leadership level for people to follow you if they can’t trust and know who you are, so one of the things I often say to people who are considering standing for politics or want a promotion in business is that it is really important to spend a bit of time becoming confident in who you are and what you stand for. At a leadership level it is very difficult to get people to work with you if they don’t know what you stand for. The second thing is that there is no substitute for hard work. I meet a lot of people who are very talented but don’t succeed because they don’t put in the hard yards. Everything I www.staplesrodway.co.nz
have seen from successful senior business people and politicians is really about work ethic. The third thing is that those who are successful are also courageous. What makes up those who go that bit further is having courage of conviction and accepting the consequences when you need to make a hard decision. My overall experience in business and politics at a leadership level is that success is about character. Q: Are there any issues you see as important for women to succeed in business? A: I think we have a couple of current issues specific to women. Obviously the pay equity issue is top of mind for us at the moment and the Government has announced principles around pay equity that we have agreed on for a range of stakeholders. I think what you will see in the next 18 months is that working itself through based around legislation and how that works in practice in certain sectors. In terms of other issues we know we still have a low representation of women on boards and there is a lot going on both in the public sector and with the Ministry for Women to see how can we get more women on boards. I think we had some success in the last year in increasing the number of women on public sector boards. Often they don’t get on private sector boards because they haven’t had any experience so we are actively trying to get women onto public sector boards so that then they can get a foot in the door of the private sector. The other thing is that you may be aware of the changes we have announced to provide more flexible working hours for women as well.
NUMBERS Autumn 2017 • 23
Q: Do you feel that men using flexible working hours is just as important because it makes it for everyone? A: I agree with that totally. I don’t think that people have realised the dramatic change that has occurred. Q: How do you think you personally can help women in business? A: As the MP for Auckland Central I have a large number of businesses in my electorate so I deal with up to 2,000 constituents a year. That means I actively help women who come to see me in a practical way, either by putting them forward for boards or if they have got issues with their business in terms of interface with Government. As the MP of Auckland Central and as a Cabinet Minister, I think I have been a very strong advocate in areas such as paid parental leave and also with pay equity and flexible working hours. Q: What are your proudest moments? A: I have a few for different reasons. As a new MP I was tested pretty early on my position on mining. As I had campaigned on being very strong on environmental issues I actually stood against the party and said that I don’t agree with mining Great Barrier Island. It was a very proud moment for me when we ended up changing our policy. As a result of that and I was able to come full circle for the Barrier and get through a conservation park covering a massive amount of the island. Nationally I have been proud of the work I have done around upgrading schools across New Zealand, both fixing leaky buildings, and creating modern learning environments involving investment in the billions. I think that people will look back and say this period of history has been a time of great investment in our schools, so I am very proud of that as Associate Minister. My work in youth development is very rewarding as Government agencies can end up spending millions of dollars cleaning up the mess of someone’s life because they have ended up in the prison system, reliant on drugs. The power of one opportunity to have a mentor can literally change the course of someone’s life, so I have been very focused on delivering hundreds of mentoring opportunities across New Zealand. I have people who come up to me and talk to me about that, but I know that in 20 years’ time that for those young people mentoring would have been the difference between them going off the rails and not. Q: What have been your biggest challenges? A: I think in Civil Defence. It’s an incredibly challenging role because you are dealing with difficult situations from earthquakes to floods to tsunami alerts and I fought very hard to get the public alert project through and funded. The PM mentioned it when we had the tsunami alert last year and that has been a very challenging portfolio. There have been other moments that have been personally very challenging in terms of particular constituency cases like having a husband and wife come to me because the husband had cancer and they have wanted a drug to be funded but I cannot interfere with Pharmac, for pretty good reason, but you really feel the weight of responsibility and I have had a number of moments like that which have been pretty heart breaking. 24 • NUMBERS Autumn 2017
When I was Associate Minister of Immigration I felt that weight of responsibility very acutely because I was literally holding the pen on whether someone would be able to stay in New Zealand or not. Then obviously there have been tough times personally and with the health stuff it has been a pretty challenging year. Q: Are there any challenges specifically for women in politics? A: When I first started my first political meeting was a Young Nat’s AGM and I was elected Women’s Vice Chair because I was the only woman in the room. Since then the party has changed dramatically and John Key was very progressive. I have been very fortunate as the youngest National woman to be at the cabinet table and it is great to see the increasing number of women in cabinet. That doesn’t mean that you don’t get people who write to me about physical appearance and you get trolls, but the whole “battle of the babes” thing that Jacinda and I had is much more a rarity now. To be blunt, I think particularly in the last 5 years people have a lot less tolerance for that kind of b.s. Q: Who do you look up to? A: I look up to my Mum and my grandmother. They have always been there and Mum, particularly with the health stuff, has been incredible. My grandmother is 96 and she has lived and seen a lot, from the war, to my grandfather dying and the loss of a son. She is just someone who always has an amazing attitude around not worrying about the small stuff. I am also constantly in admiration of people who I meet, particularly young people. I always say to people to never believe what you read on the front page of the paper, or else you would think the future of New Zealand is in dire straits. It’s not. In fact a classic example was The Young New Zealander of the Year Awards where one of the best speeches was by Rez Gardi, a young woman who started life off as a refugee in New Zealand. She is doing some incredible stuff and I constantly meet young women who are doing phenomenal things and I find them a real source of inspiration. Q: Do you have any tips for women who are looking to succeed in politics? A: I always say to people I don’t think it matters at what age you stand. I was very young but what is important is that you know who you are because it would be very difficult to be in this job and be successful if you didn’t have a strong sense of your own identity and your belief system, because you are constantly tested. I have met people who know that at 20 and then I have met people who don’t know it at 50. At the second point is that you have got to get involved with a political party, because I have also met people for which they have put themselves forward or they have come in to Parliament and they realise that it is nothing like they imagined and that you do start out often at the bottom and work your way up. So you might have been the head of a business or community organisation and you have got to be prepared to come in as a back bencher. That is how the majority of people come in to Cabinet. So you have got to have that attitude of getting stuck in.
The third thing that I say to people looking to get involved with a political party is to really understand the process of selection. I do a lot of talking people through the process, younger people in particular, but also women who are interested in politics and want to talk to me about standing one day. I have also seen people who are outstanding and would make great MPs but they haven’t done the work to understand the process. Q: What happens when you do change what you stand for over time? A: My main thing that I say to people is if you are going to change your opinions then you have just got to very clearly explain why. If you are able to stand up and say I “got that wrong I didn’t have the evidence at the time”, or “the evidence has changed”, or “I was a lot less liberal then because I didn’t realise how many people have been through this”. People will respect you for that, but it is going to be challenging. Q: What political issues do you think are important right now? A: At the moment we are one of the most successful nations in the world and one of few developed nations in surplus. That has been a real hard slog at the government level but when it comes down to it, it is all the small businesses out there that have made this happen. I think we are pretty world leading in the social investment model. This is about recognising that we have made progress in major social indicators with educational achievement up, particularly among Maori and Pacific students, and overall crime down, plus we were the first government in a long time to raise the benefit. However there are still some long term issues, and the housing sector is one of them. I see international business as a key area. Where business is concerned we are seen as one of the best countries in the world to do business with and in, with relatively low corruption and relatively low regulation. A major challenge is continuing
to attract some of the best talent. If you look around the world you can see a fair amount of protectionism happening, whether through Brexit or what is happening in the United States. I think our challenge is to continue to have reasonable immigration settings and allow highly skilled and talented people to come to New Zealand and looking at those settings to see whether we have got them right. Ultimately we can’t succeed in certain areas unless we have not just people who are born here but also an amount of immigration. The second issue that I think is relevant is around the ability to constantly look at both labour law and issues around employees to make sure that we are fair and get the balance right. At present on the left wing side there are political parties that want to raise the minimum wage by several dollars an hour. We have consistently raised the minimum wage every year since we have been in office and it is going up to $15.75 in April. Comparatively, our increases have been higher than other nations and I would argue that we need to keep increasing it, but at a pace that businesses can understand and handle. If increases are too high and too quick then there would be jobs lost, particularly with hundreds and thousands of self employed in small businesses, so again I think maintaining that balance is really important. Housing is relevant to business because if we can’t ensure that we get greater gains around the cost of housing, then people’s income gets eaten up. In a city like Auckland it is more difficult to attract the talent that we need, but it is very important that Auckland is an affordable place to live. So whether it is through releasing Crown land, or the recent unit titles reform, of which I chaperoned some of those issues, or the increase in first time buyers subsidies that have been announced, or the changes that have been made by the Reserve Bank in terms of LVR, it’s not going to be a straightforward thing to resolve.
IF NOT YOU, THEN WHO? ANZ and Staples Rodway invite you to a breakfast seminar – The ART OF SUCCESSION PLANNING passing the baton to the next generation of owners. TOPIC: How to prepare the next generation of employees, family or owners for their role in the business. WHEN: 7:15am, Thursday 6th April 2017. Conclusion at 9am. WHERE: ANZ Centre, 23-29 Albert Street, Auckland PANELISTS & SPEAKERS: Malcolm Rands, MNZM - The visionary co-founder and CEO of ecostore and Executive Chair of Fairground Foundation Wendell Phillips - Director and co-owner of a large state-of-the-art manufacturer Richard Aitken, ONZM - Executive Chairman of New Zealand's largest employee-owned professional services consultancy Beca Carter Spaces are limited and filling fast - contact your Staples Rodway client service director to secure your seminar place. www.staplesrodway.co.nz
THE (DARK) ART OF SUCCESSION PLANNING
WHY ARE BOND VALUATIONS FALLING WHILE INTEREST RATES ARE RISING? This is a frequent question that is asked of investment advisers, as it may seem counterintuitive for bond valuations to fall as interest rates rise. Most investors are familiar with bank term deposits and, when interest rates rise, the rates offered for term deposits also rise. So why is it different for bonds?
Article by Wayne Powell STAPLES RODWAY ASSET MANAGEMENT firstname.lastname@example.org
OTH TERM DEPOSITS AND BONDS have a fixed term, i.e. a maturity date set some time in the future when any outstanding interest and the principal will be returned to the investor. However, one very big difference between term deposits and bonds, is that bonds are tradeable and can be bought and sold any time up to maturity, whereas term deposits are not transferrable or tradeable. The investor who owns a term deposit retains ownership up to maturity date. The ability to trade bonds means that there must be a mechanism for valuing bonds any time after they are first issued and right up to maturity. Investors buy bonds for varied reasons, the most common being to hedge the risk associated with holding other assets such as shares and to provide a known income stream. The interest rate or coupon rate that a bond will pay is set upon issue and remains for the life of the bond. The dates at which the interest or coupon payments are made is also set. The two other features of a bond that are fixed for its life are the face value and the maturity date. For an investor who buys a bond with the objective of holding the bond to maturity and puts it away in a safe place, they will receive the regular interest or coupon payments but most probably won’t be aware of the changing market valuation of their bond over its life time. However, if you hold the bond in a portfolio that is valued daily, you will be aware of the fluctuations in the bond price as it is reported on a mark to market basis. The difference between the original face value and the market valuation on any given day is the mark to market valuation.
existing bonds less attractive as they are offering lower coupon rates, so the seller would need to discount the face value so that the yield from the existing bond equals that of the new bonds on offer. Conversely, when interest rates fall, an existing bond’s coupon rate becomes more appealing to investors, driving the price up. So, what sets off the rise in interest rates, which impacts on bond pricing? Inflation is the main driver of interest rates, along with Central Bank intervention, but let’s just deal with inflation in this example. Investors will require the interest payable by the bond to be sufficient to stay ahead of inflation otherwise the investors are losing purchasing power. The other factor that comes into play is the duration or length of time to maturity of the bond. The longer a bond’s maturity, the more chance that inflation will rise rapidly at some stage and lower the price of the bond. In New Zealand and most OECD countries, the benchmark is the 10-year bond rate and the US 10-year bond rate is used to set the rates in other countries, depending on their relative financial strength with the USA. Therefore, we are now seeing 10-year bond rates increase in New Zealand. The US Federal Reserve has been holding rates artificially low but in recent months they have started to lift rates.
US 10-YEAR BOND RATE 3.0000 2.5000 2.0000
BOND PRICES 1.5000 1.0000 May 2016
Now we know what happens, but why does it happen? We know that the face value of the bond remains constant so at maturity we will receive the face value plus interest, regardless of what price we paid for the bond. If we purchased the bond on the secondary market and paid a premium for it or purchased it at a discount, we only receive the face value at maturity. When prevailing interest rates rise, new bonds being issued will typically be issued with a higher interest or coupon rate than existing bonds already in the market. This makes the www.staplesrodway.co.nz
As shown in the graph above, the US 10-year bond rate has risen from 1.76% in February 2016 to 2.42% in February 2017. For long-term investors, the change in the mark to market pricing of bonds shouldn’t be an issue as they are being held in your portfolio as a hedge against equity risk and to provide regular and known income. The bonds will normally be held to maturity, at which time the face value and any outstanding interest will be repaid. In addition, your adviser should be shortening the maturity duration of your bond holdings to lessen the impact of rising interest rates. Staples Rodway Asset Management is a boutique investment advisory service that specializes in providing personalised and impartial investment solutions for individuals and trusts. To contact an adviser, email email@example.com or call 0508 220 022. NUMBERS Autumn 2017 • 27
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 issueâ€™s question is in relation to the 'Brightline Test' for residential property. Take advantage of our expertise and send your question to firstname.lastname@example.org and one of our specialists may answer it in a forthcoming issue of NUMBERS.
A pensioner currently living with her sister entered into a sale and purchase agreement in August 2016 to have a house built for her to live in for her retirement. Now that the house is nearly complete she does not like the finish or the build quality and wants to sell it before living in it and buy a home with the proceeds. Her sister asked if she would have to pay tax on the possible $40,000 profit. Answer from Mike Rudd, Tax Director, Staples Rodway Auckland
NDER THE 2 YEAR 'BRIGHTLINE Test' introduced in 2015, proceeds from a sale of any residential property will be taxable if it has been owned for less than two years. The rule applies to any property that is zoned as residential land, whether or not a house is built on it. The 2 year test period starts on the date the title in land is registered or, if this has not happened when the contract to sell the land is entered into, then the start date is the date the sale and purchase agreement to buy the property was entered into. In this case, the house is still being built and the pensioner is not yet registered as the owner with Land Information New Zealand (LINZ). Therefore, if she enters into a contract to sell the land before she has title, she is treated as acquiring the land in August 2016. Entering into a contract now to sell the newly-built home would therefore be a sale within 2 years of acquisition and any proceeds would be taxable, subject to any exemptions. She would be able to claim a deduction for the cost of the property. The next question is whether there is an exemption because the pensioner was going to purchase the property
to use as her home. If a person sells their main residence within the 2 year period then the proceeds are not taxed under the 'Brightline Test'. The specific exemption requires the land to have been used â€œpredominantly (for most of the time the person owns the land), for a dwelling that was their main home. In this case the pensioner has not lived in the new home and therefore it canâ€™t be said that she used the home as her main residence, regardless of her intended use. If she sells the home without ever living in it she would therefore be taxed on the sale. However, if she was to go through with the purchase, settle ownership of the home, and then live in it for even a brief period, she would be treated as owning the property from the date title is registered with LINZ, and also having used the home for most of the time from that date as her main home. Therefore if she sold the home after living in it for even a brief period (and the property was not left empty or rented after she lived in it) the sale would be exempt from income tax.
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 Autumn 2017 â€˘ 29
GOOD GOVERNANCE SKILLS TO HELP RUN A MARATHON ON SEVEN CONTINENTS
Article by Tracy Hickman STAPLES RODWAY AUCKLAND email@example.com
Tracy Hickman, Corporate Advisory Director in our Auckland office, tells us how some of the skills that she has gathered as a Director are helping her to achieve her running goals.
Having a vision or a large long term goal helps provide direction for the board, and indeed the entire company. Setting a goal of running a marathon on all seven continents has given purpose to my training and taking part in the individual events. It has definitely provided added motivation on tough days, such as at the start line in Mongolia after a night suffering the effects of food poisoning.
Taking a long term perspective is important when evaluating decisions as a director, for example ensuring that short-term cost reductions do not derail investment required to achieve longer term growth. For many businesses, it can take a while to achieve the return on your investment of time, energy and funds. It has taken me eight years to run a marathon on each continent, requiring a significant commitment of time and effort in training and preparation, and sometime forgoing opportunities (e.g. not becoming a triathlete) in order to save effort and dollars for the bigger goal.
Eating an elephant one chunk at a time. Boards need to break down that big overarching goal into smaller, achievable targets and identify the strategies that need to be implemented for success. Not every short term goal may be directly related to the bigger purpose, but may add additional depth of skills, create a stronger balance sheet, develop experience or help with staff retention. While the seven continents goal has always been in the back of my mind, I have taken it one race at a time to make it manageable on my body and finances. Also, where an opportunity has arisen to undertake longer or shorter races that have appealed, on continents already ticked off the list, I have enjoyed the chance to work on my running speed, endurance and technical skills. Despite having already run the Paris Marathon, I loved the experience of running the Midnight Sun Marathon in Norway, running at night in the Arctic Circle.
When the going gets tough, boards need to work together to resolve problems, recognising the ideas and contributions that all directors can make. Most of my training runs and races are with a good friend, who is also working towards the shared goal of running a marathon on seven continents. When one of us is having a tough race (Mongolia!), we encourage each other (“only 35km to go….”), share ideas (“I think that’s where we missed the turnoff”)
and contributions (“who’s idea was this… and why?”), even if not always helpful!
Taking advice is important for boards, recognising that as directors we may be experts in our field but lack the requisite knowledge for some decisions. For example, cyber security is an area where many of us are upskilling ourselves but also listening to IT experts to understand how to address the issues, and understanding how other companies are tackling problems. As an endurance athlete, I rely on support from my coach, massage therapist, physio and osteopath. I listen to running and nutrition tips from my friends, online running groups, read books and articles…. and my travel agent also plays a key role!
Monitoring and control are aspects of implementing a strategy where directors can ensure that execution is going to plan, be it a sales strategy, budgetary control or other areas of the business. On a regular basis over the years I have thought about which continents remained on the list, found a race, worked out when it would suit to run it and how the training would fit in around work and family commitments. In 2016, knowing that I would be running Antarctica in 2017 and having already entered to run in Mongolia (Asia) in August 2016, I wanted to travel somewhere special to celebrate turning 50 in September. Making that destination South America, and running a marathon there, meant that I could feasibly achieve my seven continents goal in March 2017 in Antarctica.
Corporate social responsibility is another important facet of good governance, looking after the needs of employees, the communities in which we operate and other stakeholders. It’s not just about giving money, but also sharing knowledge and donating resources no longer required (office furniture can be a helpful one for community organisations). In my running life, I try to look after the interests of others by offering advice to those new to the sport, and using key races as fundraising opportunities (check out givealittle.co.nz/fundraiser/antarcticamarathon2017). I also tend to discard shoes as soon as they show signs of wear, to avoid injury, so ‘old’ shoes go out on our berm to find a new home with local runners. Whether your interests are endurance running, or something a little more sedentary, the skills that you develop in your role on a board can help in all sorts of surprising areas. NUMBERS Autumn 2017 • 31
RETIRED TARANAKI DIRECTOR HONOURED WITH CAANZ FELLOWSHIP Robin Brockie, recently retired Director of Staples Rodway Taranaki, is part of the small group of 144 worldwide professionals to be awarded a Chartered Accountants Australia and New Zealand Fellowship. The fellowships are awarded annually to members of Charted Accountants Australia and New Zealand (CAANZ) as a recognition of the contribution they have made to their community through the profession, including voluntary work done for organisations they are involved in. Over the years Robin has been involved with many voluntary committees and although 'retired' still sits across the boards of the Western Institute of Technology (WITT), Venture Taranaki, the Dame Malvina Major Foundation, Tui Ora, as the Lay Canon of the Taranaki Cathedral Church of St Mary’s and chair of the Management Resources Committee of the Diocese of Waikato and Taranaki.
NEW AUDIT DIRECTOR FOR WAIKATO OFFICE We are pleased to announce that Gavin Ghuman was promoted to Audit Director in November. This follows his appointment to Associate Director earlier in 2016. Gavin has proven his ability to meet his clients’ needs and ensure the Hamilton audit team continues to offer a high quality and ‘best fit’ audit service to our clients. Gavin has brought to Staples Rodway several years of varied and comprehensive experience in the fields of audit, financial accounting, and taxation. Gavin Gavin Ghuman gained this experience in a 'Big Four' CA firm and a commercial financial accounting and reporting role in a large New Zealand corporate. He is professionally qualified as a Chartered Accountant with CAANZ and is also a Qualified Auditor. With extensive experience performing external audits for organisations of all sizes Gavin has worked with several industries such as energy, manufacturing, property syndicates, not-for-profit, sports, public health and local Government. Gavin also provides other consulting services including technical advice on international financial reporting standards (IFRS) and international public sector accounting standards (IPSAS), due diligence, complete system reviews, designing internal controls, IFRS conversions, and project work. Gavin is passionate about meeting the needs of his clients and is considered a trusted advisor in addition to offering a high quality audit service.
Staples Rodway had plenty of reasons to celebrate International Women’s Day on Wednesday 8th March. 66% of our people are women, including 64% managers and 37% associate directors and directors. 32 • NUMBERS Autumn 2017
ROUND THE BAYS 2017 A FAMILY AFFAIR FOR STAPLES RODWAY It was a fun family day for the Staples Rodway Auckland team on the 5th of March when our people and their families got out and participated in the Ports of Auckland Round the Bays. It was a fantastic day and almost people 20,000 made it to the finish line. With a mix of runners, joggers and walkers the Staples Rodway team made good time, coming 38th overall, with our fastest runner in the top 100 overall and 5th in his division! This year the Staples Rodway team supported CanTeen and raised over $400 to help support young people aged 13-24 who are living with cancer as patients and their siblings.
NEW CAREERS LAUNCH AT STAPLES RODWAY We are pleased to welcome our 22 new graduates to our offices around the country.
Audit Crystal Liang, Scott Patterson, Jeremiah Slade, Fleur Berkett & Kinjal Patel Business Advisory Services Janelle Anderson, Michael Black, Steven O'Callaghan & Cameron London Corporate Advisory Services Sebastian Xu Tax Tom Keefe
Audit Dina Kubala Business Advisory Services Chas Andrews & Rebecca Reside
WELLINGTON Business Advisory Services Connor Hill
TARANAKI Business Advisory Services Lauren Walker
HAWKES BAY Audit Andrew Vercoe & Tane Huata Business Advisory Services Renee O'Sullivan, Katie Somerton & Graham Gant
TAURANGA Audit Janine Joyce Business Advisory Services Hayley Potts
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34 â€¢ NUMBERS Autumn 2017
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Published on Mar 14, 2017
THE GOVERNANCE ISSUE Good governance in practice for small businesses | Boards vital role in shaping organisational culture | Taxpayer frie...