Advisor BUSINESS
Financial & Business Advisor Journal NZ
July-August 2011 | www.businessadvisor.co.nz
BOOSTING BUSINESS PERFORMANCE A Structured Approach
• New Tips to Save Tax • Onus of Proof? It’s on you! • LinkedIn - Effective Tool or Waste of Time? • 4 Ways to Reduce Your Tax • Debtor Management When Credit is Tight
+ BUSINESS INSPIRATION | + UPDATES | + ADVICE | MORE HELPFUL TIPS >>
Advisor BUSIN E SS
Financial & Business Advisor Journal NZ
July-August 2011 | www.businessadvisor.co.nz
Message from the Editor The government has introduced a productivity initiative to support improvements to business performance, saying: “Workplace productivity is the key to lifting New Zealand’s living standards and wealth. It is about increasing the value of what we produce by working in more effective and efficient ways.” In light of the initiative, we have business performance management as the theme of this issue. Implementing such an exercise requires a carefully planned process. Each business is unique but the basic need for structure is crucial. We introduce the topic by proposing a structured approach based on the experiences of many organisations as published in an IBM book, The Performance Manager. As always, we also cover a wide range of relevant issues, including ways to reduce your taxes, the value of LinkedIn, planning mistakes to avoid, onus of proof, securing your premises, the latest tax and legal updates, and much more.
Take a look at our Questions and Answers section on Pg’s 14 and 15. The questions come from subscribers like you and often relate to current matters of wide interest to businesses like yours. Also, keep an eye out for our short tips and traps that are scattered throughout the journal. Remember, if you have any issues, just send us your queries by email. FBA works with leading organisations to ensure that you have the best professional advice available to you throughout the year and this service is included as part of your subscription at no extra charge. Kind regards,
Stewart Hobbs BE, MBA, FIPENZ EDITOR – FINANCIAL AND BUSINESS ADVISOR
CONTENTS Strategic Thinking 01 COVER STORY: Boosting Business Performance
A Structured Approach
Management & Business 04 MEASURING BUSINESS PERFORMANCE 05 4 Ps FOR DEBT COLLECTION 06 CREDIT CONDITIONS REQUIRE CAREFUL DEBTOR MANAGEMENT 07 LINKEDIN - AN EFFECTIVE NETWORKING TOOL FOR BUSINESS PEOPLE 08 EMPLOYMENT ISSUES ON THE SALE OF A BUSINESS 10 ARE YOUR PREMISES SAFE?
Accounting, Tax, Law & Compliance 03 NEW GST RULES FOR PURCHASE AND SALE OF PROPERTY 11 ONUS OF PROOF IS ON YOU 12 WITHHOLDING INFORMATION 12 MILEAGE RATE FOR MOTOR VEHICLES AMENDED 13 4 WAYS TO REDUCE YOUR TAX
Regular Items 02 HOT Topics 03 SMILE with FBA 14 QUESTIONS & ANSWERS
16 TAX CALENDAR July-August & IRD Updates BACK PAGE GRANDSTAND - Profiling subscribers and contributors
We remind our subscribers that a renewal will be automatically forwarded annually.
CONTRIBUTORS
JOHN ROWE CA Gilligan Rowe & Associates
CHRIS PARKE Partner – Kensington Swan
NAOMI JOHNSON HR Consultant
NATHAN TETZLAFF Solicitor – Gaze Burt
ANEESHA VARGHESEN Director – WHK
John is a Chartered Accountant with in-depth experience in business related matters. He specialises in providing practical and technical expertise to business owners and professional practices. See article Page 4
Chris advises a wide range of clients on corporate and commercial matters, including terms of trade, joint ventures and supply agreements. See article Page 6
Naomi is an experienced New Zealand HR practitioner, thriving on complexity and change. She is a fellow of HRINZ and has an MBA from Henley Business School (UK). See article Page 7
Nathan has broad experience in litigation, dispute resolution and addressing employment problems. He is an Asscociate to Gaze Burt and heads up litigation in its North Shore office. See his article Page 8
Invercargill-based tax director, Aneesha has a decade of experience in the Business Advisory and Tax Consulting areas. See featured profile on Page 17 and article on Page 11.
cover story | boosting business
Boosting Business Performance A Structured Approach
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ate last year, the Government launched a new initiative aimed at enhancing the performance of New Zealand businesses. The Department of Labour High Performance Working Initiative (HPWI) will provide practical support by partially funding specialist business consultants to help firms develop high performance working processes. This makes sense on all fronts. Not only will the participating businesses do better, but this will help the economy as a whole. If we can lift our game, we will also become more competitive internationally at a time when the high New Zealand dollar is making our exports more expensive. “Workplace productivity is the key to lifting New Zealand's living standards and wealth. It is about increasing the value of what we produce by working in more effective and efficient ways.” www.business.govt.nz The government describes high performing working (HPW) as a general approach to improving workplace practices and involves: • • • •
a systematic approach to business improvement enhanced workplace practices to raise productivity a high level of employee engagement, and an approach that becomes part of an organisation’s normal and ongoing way of working.
It is clear that all of the above factors are critical to any initiative that will have a lasting effect on the performance of a business. In short, it comes down to introducing a performance culture and applying an effective approach that will deliver the goods (or services as the case may be). IBM Corporation published a book “The Performance Manager” in which the authors discuss “proven strategies for turning information into higher business performance”. Here is an extract from the book that sets the scene for any performance improvement project, as it helps you to focus on the potential for each business area: “Every decision-making cycle depends on finding the answers to three core questions: • How are we doing? • Why? • What should we be doing?”
It goes on to explain that through measuring, analysis, planning and integrating, you can answer all of these questions and respond to changes happening in your business. The Performance Manager uses a large number of varied company experiences to construct a framework and approach that others can use. It builds on the cornerstone concepts laid down in a previous successful publication The Multidimensional Manager. The keys to that book’s profitability promise were: • sweet spots, • business intelligence and • multidimensional managers Under the chapter “Promise”, the updated book describes how these strike at the heart of business performance today: “These three insights are still fundamental to the promise of The Performance Manager and the need to leverage information assets to make high-value decisions that: • Enable faster revenue growth • Further reduce operational expenses • Maximize long-term asset returns - and therefore deliver sustainable competitive advantage. If anything, these three insights are even more critical to success today.” Sweet spots: Each business area has a relatively small number of indicators that will help identify where improvement will deliver the best return. With today’s information overload it is all the more important to home in on those that are most relevant to help decision-makers. Business Intelligence has matured to support performance management. It is easier today to find and analyse information than it has ever been. What is more, the knowledge of what to look for is accessible to the small business as well as larger players. SMEs are now able to compete on a more level playing field with the biggest and (not necessarily) the best. Multi-dimensional Managers ten years ago were a select few who were talented at finding the sweet spots and adept at analysing information to improve results. Now, everyone should be in a better position to achieve this, with information that is tailored to the needs of the decision-makers.
Financial & Business Advisor :: July-August 2011
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HOT Topics New Minimum Vehicle Licensing Ages From 1 August 2011, the minimum age to apply for a class 1 (car) driver’s licence is now:
So what do we learn from this? Firstly, to improve performance in your business, you need a clear understanding that comes from quality information and analysis. Secondly, we need to find the sweet spots that will deliver the greatest improvement. Thirdly, with the right approach and tools, business improvement is now accessible to all business owners and managers.
Learner licence: 16 years old. Restricted licence: 16½ years old, having held a learner licence at least 6 months. Full licence: 18 years old, having held a restricted licence at least 18 months; or 17½ years old, having held a restricted licence at least 12 months and having successfully completed an approved advanced driving course.
Structured Approach
The minimum age for obtaining a class 6 (motorcycle) learner licence is also increasing from 15 years to 16 years.
The framework is highly flexible and may be tailored to suit each decision-making area. But the objective and approach is the same in each case: To provide a simple, easy-tounderstand way to drive performance; and to:
Public Transport in Auckland and Wellington Auckland is rolling out its integrated public transport initiative. The HOP Card now allows you to travel on any North Star, WakaPacific, Go West, Metrolink and LINK bus and eventually will be rolled out to Auckland’s rail, ferry and other bus services too. No need for change. Just top up your HOP Card at any retailer displaying the HOP or Snapper sign. As you enter,’Tag On’ by touching your card flat to the reader console and ‘Tag Off’ in the same way before you exit. The system takes care of the rest and ensures that the correct fare is paid every time. You can receive at least 10% off the cash fare by using a HOP Card. If you register your HOP Card and it is ever lost or stolen, your balance is protected from the time you report it to Auckland Transport. Greater Wellington Regional Council has agreed on a 3% increase in fare revenue from 1 September 2011. Some fares on buses and trains will be increased to provide this additional revenue.
Exchange Rates and Short Term Planning The US dollar holds weak to the New Zealand dollar and other currencies. It is likely to be a tough year for New Zealand exporters including our successful wine export industry that has also been affected lately. The situation with the New Zealand economy can only be improved with long-term strategy to build high-paid and interesting jobs that earn foreign exchange revenues. It is imperative that we increase our wealth as a country. What New Zealanders fail to understand is that we keep borrowing and selling assets to support a lifestyle we can't afford. Taxes have to go up or the dollar come down so that imports are lessened and our balance of payments improves. The only way this will happen is when Key hardens up.
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The approach is straightforward. It applies to all areas of the business where improvements can be made, including but not limited to: • • • • •
• • • •
Management and leadership Marketing Customer Service Legal Compliance Human Resources
• • • • •
Finance Sales Products and Services Manufacturing Systems and IT
measure performance; monitor/report on it; plan for it; and deliver it.
The following steps can be taken by all businesses to move you along a path of continuous improvement. The extent of outside help you will need depends on the quality of information, time and resources available to you. Step-by-Step 1. Identify the sweet spots: Take a close look at your business and identify the areas where you are likely to achieve the most gain through improved performance. Aim for quick wins. They are very motivating and will help you to justify further changes. Gains can be achieved through faster revenue growth, reducing operational expenses or maximising long-term asset returns. Where resources are limited, you may wish to choose only one area to focus on. The idea is to get started. 2. Gather the best information you can and analyse it: Make sure that you can answer the questions “how are we doing?” and “why?”. This will be based on historical results. This will help you to understand what further information you need if any, what you need to measure and how. At this stage it may become apparent that the sweet spot is in improving your systems to provide quality information you need to run the business. 3. Establish improvement objectives and put together a plan to achieve them: The plan must include ongoing measuring and monitoring of performance. This must be built into a routine to ensure that it is clear who is accountable and that it is done. 4. Implement the plan: Take action to improve performance in accordance with your plan. This may relate to improved motivation and competencies of staff, revised processes, streamlining of the business area, cost-cutting, marketing strategies and so on. 5. Measure and monitor performance and report on it. See further details in our article on Page 4.
6. Analyse it: This is key to any business improvement exercise. It tells you how well you are doing and gives you an opportunity to assess the effectiveness of your plan so that you can revise it, enhance your information, and continue down the path of continuous improvement. 7. Ongoing Management: Cycle through a loop of improving, measuring, monitoring and reporting. Once this cycle is in place, tackle the next sweet spot. Here are a few tips: • Don’t bite off more than you can chew; • Seek help if and when you need it; • Do not keep following a strategy that is clearly not working; • Tie results back to the financial implications; • You will soon find out whether your systems and information are supporting your decision-making as they should. If not, do something about it. • If you have the luxury of performing an exercise to prioritise areas of the business to identify the sweet spots, great! If not, go with your intuition. This will improve the more the performance culture takes hold in your business. • Reward good performance. This includes rewarding yourself. Finally, make sure that you take an active and visible leadership role to drive the exercise, otherwise it won’t happen. Look out for other articles in this series and remember that we are here to help you. Paul Wilton Subscribers who wish to obtain a copy of The Performance Manager may contact Paul on 0800 829 847
SMILE with FBA
A man walking along a country road comes across a farmer droving a huge mob of sheep. He stops and chats for a while and then says, “Tell you what, I’ll bet you $100 against one of your sheep that I can tell you the exact number in that flock.” The farmer thinks for a moment, it is a big mob and he can’t see how anyone could guess correctly so he says, “OK. You’re on.” "Nine hundred and thirty two,” says the man. The farmer takes off his hat and scratches his head. “I don’t know how you did it but that’s exactly right. A bet’s a bet. Take any sheep.” The man picks up an animal and is about to walk off when the farmer says, “Hang on. Bet you double or nothing that I can guess your occupation.” The man thinks, “How would he know, he’s never met me before” and says “Righto. You’re on”. The farmer says, “You’re an auditor with a Big Four firm.” The man whistles . “How the heck did you know that?” "Well,” says the farmer, “put my dog down and I’ll tell you.”
New GST Rules for Purchase and Sale of Property F rom 1 April 2011, all transactions involving the supply of land between GST-registered parties are to be zero rated with few exceptions. The new regime is being referred to as compulsory zero rating (CZR). A GST-registered person must zero-rate a supply (Charge GST at 0%), if the supply wholly or partly includes land, and: • is made to another registered person and • the purchaser intends to use the land for making supplies that are subject to GST and • it is not intended to be used as a principal place of residence by the purchaser and any person associated with them. To be a zero-rated supply, all the above conditions must be satisfied at the time of settlement of the transaction, otherwise the supply must be taxed at 15%. Leases for dwellings are excluded from this definition when: • the supply is made periodically and • 25% or less of the total amount is payable in advance or all at once. Vendors should obtain a written statement from the purchaser regarding their GST registration status and intentions as to use of the land by the time of settlement. All parties to the transaction should confirm if the sale will be zero-rated under CZR and take care to ensure that the price is appropriate for the GST. It remains prudent for the purchase and sale agreement to include the words “plus GST (if any)” when stating the price, even under CZR. CZR will apply to transactions even if land is only a minor component, but will not apply to transactions that do not include land. Editor
CANTERBURY EARTHQUAKE DONATIONS
Donations to the Red Cross and other approved donee organisations made by companies are tax deductible. The maximum deduction a company can claim is the amount of its net income, calculated before taking into account the deduction.
Financial & Business Advisor :: July-August 2011
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management | & business
Measuring Business Performance
By John Rowe Director - Gilligan Rowe & Associates Ltd
Introduction
I
n our experience you cannot improve a business without constantly measuring the status quo, looking for areas to improve and working on them. At Gilligan Rowe & Associates Ltd (“GRA”) we are constantly confronted by clients that have no timely reporting systems, are not measuring themselves against their competitors, nor critically analysing their businesses for opportunities. We recommend our clients follow the following simple management cycle and strive for constant improvement. A successful business has the following components to their financial planning: 1. Timely and structured financial reporting – we recommend monthly 2. Benchmarking – not only measuring your performance against your competitors, but also highlighting what areas can be improved 3. Planning and Analysis – what are your financial drivers and what can be changed to achieve the greatest result. Timely and Structured Financial Reporting The majority of management financial reports cover only the following three areas: 1. Profit and Loss 2. Balance Sheet 3. GST (because you have to) You have probably heard the saying “if it isn’t measured, it’s not achieved”. In our experience this is very true. For example, sales reps are more likely to achieve sales targets if sales are measured and reported on, sports people set goals and measure their achievements against these goals. The same is true for business. It is therefore important to not only measure financial outcomes, but also trends, key performance indicators, cash generation etc.
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Financial success is built on a foundation of good records. A National Bank survey generated the following statistics: Business survival in relation to accounting records Accounting Records
Survival Rate %
Excellent - Good
63
Average
49.8
Inadequate
20.1
Poor – non existent
2.5
Why would you reduce your odds of survival to only 1 in 2 through “average” records, or only 2.5% through no records at all? Survival related to frequency of accounting reports Frequency
Survival Rate %
At least monthly
79.7
Quarterly
71.5
Half yearly
49.9
Annually
36.0
The message is clear, if you are not good at keeping records then find an accountant who will do this for you. If you wait until you receive your year end tax accounts, your survival odds are only 36%. Measure / Benchmark As in sport, we improve our performance by competing against others. If you run by yourself you will never know if you will win a race. The same applies to business. For example, suppose you operate a Paint and Panel shop. You might think your business is doing well by achieving a gross profit percentage of 30 percent, but what if similar businesses in the industry are achieving a gross profit of 45 percent? That would suggest there is significant room for improvement. Benchmarking gives you the goals to aspire to. Benchmarking is an important component for business development because it allows you to understand what it takes to be the best in your field, and what it means to be a leader in your industry.
Benchmarking allows you to: 1. Search for innovative ideas and highly effective operating practices and then apply these to your business. 2. Look at your own organisation and make the necessary improvements to match or better your competitors. 3. Recognise your business’ shortcomings and develop business strategy to eliminate them. 4. Acknowledge others are doing a better job in some areas, learn how they are doing it and then implement and adapt those practices to your business. PricewaterhouseCoopers “Trendsetter Barometer Survey” noted that “fast growth companies who used benchmarking information to measure business performance against their peers achieved 69% faster growth and 45% greater productivity over those who did not.”
making strategic / key discussions. Good analysis allows you to: 1. Identify key performance measures that drive your business 2. Use information to develop sound financial and business strategies 3. Learn to communicate and measure your business financial performance clearly 4. Clarify the impact of changes to the bottom line 5. Communicate effectively between your business coach, accountant and bank 6. Understand how banks measures business performance 7. Learn the most effective methods to improve your cash flow While analysis is very rewarding it can be very complex and is best left to specialists. About GRA Gilligan Rowe & Associates Limited (“GRA”) is a chartered accounting practice that offers its clients a full range of taxation and compliance accounting services. In particular, the firm specialises in wealth creation and asset protection for property and business clients. We have developed a range of products called the GRA Business Toolbox to assist clients to grow and maintain their business.
This element of business management is poorly understood, largely neglected but can generate huge rewards. Without over-simplifying it, analysis allows you to identify what strategy will generate the largest return, and then quantify the impact of your decisions on cash and profitability prior to implementation. Top managers systematically review and analyse financial results, key performance indicators and benchmarks prior to
4 Ps for Debt Collection Here is a guaranteed way of collecting from all but the most awkward debtors. The 4 P's. 1. Personal Contact - deal directly with your debtor. 2. Patience - be prepared to wait 3. Persistence - but don't ever give up. lead to 4. Payment of bills, quickly, without problems (Courtesy of Paul Hemsley, ex-of Thomson Scientific (formerly Derwent Information) www.marketing-intelligence.co.uk
If you would like to discuss your circumstances with our firm or any of the matters set out above, contact John Rowe on (09) 522 7955, email him at jr@gra.co.nz or look at www.gra.co.nz for interesting insight into business and property related matters. © Gilligan Rowe & Associates Ltd Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
FINANCE IN BUSINESS
Developing a well structured and systemised finance function will help you measure, report, analyse and evaluate your business performance against established benchmarks and will significantly increase your chances of success. Use the appropriate KPIs
START UP BUSINESS TAX
TRAP
Planning / Analysis
If you have recently started up a new business - great! We wish you every success. Don’t forget that you do not have to pay provisional tax in your first year of operation. However, in the second year you will be eligible to pay provisional tax and income tax for your first year of operation (assuming you made a profit)
Financial & Business Advisor :: July-August 2011
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management | & business
Credit Conditions Require Careful Debtor Management O
By Chris Parke Partner - Kensington Swan
f concern to the New Zealand economy, heavily dominated by small to medium sized businesses, is the continued difficulty in raising finance. Many smaller businesses and contractors rely heavily on alternative funding streams to those of the traditional first-tier lenders. These sources continue to be more and more difficult to access.
A direct consequence of this tightening is the ongoing use by debtors of their creditors as a cheap and available source of funding. Our experience, and ongoing media comment, indicates a noticeable increase in payment terms, and defaults from debtors. With this situation unlikely to improve soon, we look at how you can protect yourself against the risk of late, or even non-payment by debtors. Recommendations There are some obvious ways to combat this creep in payment terms to give you the best possible chance of recovering from debtors should they default. The following are some practical steps that can be taken to give your business the best chance of recovering its debtors: • Ensure you have a fully completed and signed account application form for each customer, and a system allowing ready access to those details. • Make sure your terms of trade are in place and up-todate. • Confirm you have registered financing statements on the Personal Property Securities Register (PPSR) to protect your interest in inventory supplied under a retention of title clause, or in respect of plant leased for a period in excess of 12 months. • Make sure your description of goods in any financing statement is wide enough to cover ‘proceeds’ of inventory. • Ask directors of smaller companies to provide a personal guarantee. These are much quicker and cost effective to enforce than an application to wind up a company. • Make sure your terms of trade/contracts include the ability to seek default interest, together with recovery on a solicitor client basis of costs, in the case of enforcement.
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• Ensure you have up-to-date contact details for your customers, including names, addresses and phone numbers of shareholders and directors. • Discuss with your customers any particular invoicing requirements which will assist with speeding up payment. Ensure the invoice contains the right information and is for the correct amount. This seems obvious, but errors in invoicing requiring the re-issue of an invoice simply delay payment from one month to the next. Resist the temptation to continue to supply when the client is well past normal payment terms. Take action quickly when a debt goes ‘bad’. Talk with the client and ascertain whether they ‘won’t’ or ‘can’t’ pay. Try to formulate strategies for receiving payment, even if this is over time, or seek security for the debt. If the client ‘won’t’ pay, and there are no issues with the invoice, consider enforcement and take steps early. Implement a range of internal credit controls and processes to ensure that the first priority is that debtors pay on time, and doubtful or suspect debts are identified early and managed. Tips for Contractors: • If your standard contract/subcontract terms are more favourable than the default provisions of the Construction Contracts Act 2002 (“CCA”), ensure your contracts are completed and signed. • Make sure your invoices comply with the CCA. Failure to do so may slow payment, and provide customers with the perfect reason to delay or even avoid payment. • Ensure payment claims are ‘served’ correctly under your contract and the CCA. • Utilise the right to suspend work under and in strict compliance with the CCA. Many of the suggestions above seem obvious. However, it is surprising how often businesses fail to take the most simple of steps to protect their position. Given the current state of the market, and the likelihood that such conditions will continue for some time to come, it is imperative that a more pro-active and systematic approach is taken to debtor management. This article is not a substitute for legal advice. www.kensingtonswan.com
management | & business
LinkedIn - An Effective Networking Tool for Business People
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hen I received my first invitation to join LinkedIn, I ignored it, fearing that I would receive emails from hundreds of people whom I didn’t know. Some time later I received another invitation to join and this time I investigated it, satisfied myself that I was not going to receive lots of unwanted emails, and then signed up.
Now I look back and laugh at myself for being so cautious. LinkedIn is a well-designed business social networking tool with more benefits than pitfalls. It is a tool that you need to use strategically to reap the benefits. Firstly you need to set up your profile. It pays to do this with some care, as you are setting up your own brand. You are guided through the various stages, quite similar to writing an abridged CV, so it is not hard. You can make a start and come back later on and finetune it. What is more challenging is writing a pithy one-line brand bi line to appear below your name. One of the reasons that your profile is so important is because this becomes the basis for others to search you out by using key words. Maybe an executive recruiter is searching for some specific talent and that might just be you! You have the opportunity to indicate if you are interested in hearing about career opportunities, consulting offers, new ventures and the like or maybe you are just interested in getting back in touch. Whichever boxes you tick is what will show up at the bottom of your profile. So if you wish to be found, then spending time on your profile is time well spent. There is the opportunity for your contacts to post a recommendation for your work giving you greater credibility. Finally don’t overlook posting a photo with your profile as your photo will show up wherever your name comes up, be it when you post a comment in a group discussion, or on the newsfeed page which will tell your other contacts whenever you link in with someone new. Your photo should be a professional photo, not a holiday shot! Your LinkedIn profile also appears as a web page but it will not reveal your email address unless you are specifically allowing this. The standard approach is for your email address to be visible only to your contacts.
So once you have your profile in place, you are ready to start adding connections. LinkedIn offers suggestions of people you may know who are already members of LinkedIn. The beauty of connections is that as your number of LinkedIn contacts builds up, you have everyone’s contact details in one place. No longer do you need to shuffle through business cards looking for the email address of a business contact. Once they are a LinkedIn connection, you have them at your fingertips. You can even sort them into categories, which is a useful tool if you wish to contact a number of people at once at a future date. We are now at the nub of LinkedIn. It is a serious businessnetworking tool. Your connections are your electronic business network. On the surface they are there for keeping in touch but strategically they are there to help you – perhaps it is time to look for a new job so you need to network with as many of your contacts as possible. If you are in a sales and marketing role, your contacts will be of use to you to promote your products and services. By posting an update on a regular basis, all your contacts on their home page will see your update as well as seeing with whom you have just linked in. You will, of course, conversely see on your home page the connections your contacts are making – often you will recognise names of people you know and will then want to invite them to link in too. Most people allow their contacts to view their contacts’ list. So if you have 230 contacts, then you will likely have Financial & Business Advisor :: July-August 2011
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LinkedIn.....cont a further 24,500 people who are two degrees away, these are “friends of friends”, each connected to one of your connections. You can theoretically reach a further 2 million users through requesting an introduction from your contacts. Requesting an introduction is a simple way of making a new acquaintance but the other person retains the right to decline. This explains why you are not besieged with unwanted email. Another feature of LinkedIn is the huge number of groups you can join. These are in essence special interest groups. You can participate or simply read the discussions on these groups. So, for example, there are a number of LinkedIn groups that are NZ based HR groups covering recruitment, talent management, and general human resources topics. Recently with the introduction of the employment law changes from 1 April, there have been a number of postings by HR practitioners asking what other companies intend to do regarding the transferral of public holidays, cashing up of leave, how the 90 day trial period will apply, just to name a few topics. You can set your groups up to give you a daily or weekly digest rather than be disturbed with an email every time someone makes a posting. Members of groups are able to link in with other members of the group, without actually knowing the person. This is the only time you might receive emails from people whom you don’t know. You can choose to ignore invitations if you so wish. One group that I have found very useful is Linked Strategies. This is an American based group that covers ways of using LinkedIn strategically. One of the participants recently offered a free simple beginners’ guide to LinkedIn that is extremely well done. My recommendation is that if you are not in LinkedIn already, sign up and start linking in and building your electronic business network. As you become familiar with LinkedIn, you will soon see how it works best for you. The benefits will vary from person to person based on your own personal needs and interests. Your starting point is:
www.linkedin.com By Naomi Johnson http://nz.linkedin.com/in/naomijohnson77
INSURANCE
As a consequence of the recent earthquakes most insurance companies are now reviewing their premium levels and some are reviewing their terms. Don’t just look for the cheapest insurer. Be careful to check the fine print and determine exactly what you are getting for your money.
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Employment Issues on the Sale of a Business By Nathan Tetzlaff
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mployers and employees owe each other duties, imposed by the common law and the Employment Relations Act (“ERA”). Where an employer proposes to sell their business, this will have an impact on the business’ employees. Sale may be the sale of the shares of the company that runs the business, or the sale of its assets. Sale of shares is the less disruptive of the two, and therefore no employment law obligations are imposed on the vendor (unless shedding staff). This article will consider the sale of a business’ assets. There are three major topics in this area of law. The first topic is the requirements of the employment agreement, the second is good faith obligations (including the consultation requirements of a vendor), and the third is the particular requirements and obligations of part 6A of the ERA. However before that, it is necessary to consider one preliminary matter. Even where the purchaser intends to operate the business exactly the same way as the vendor did, the person or entity actually employing the employees has changed. Therefore the employment agreement that the employees had with the vendor has ended and each employee’s employment is therefore also ended. This period of unemployment may be fleeting for employees who are immediately offered employment with the purchaser, and may not even be treated as a termination of employment for administration and legal purposes where a ‘technical redundancy’ clause applies (discussed further below). But regardless of how insignificant the transition may appear to be, it is still a major milestone in employment, and the importance of this must not be overlooked. The Employment Agreement An employment agreement is a contract, just like any other binding contract. The ERA allows a certain amount of flexibility in the employment relationship, and the Employment Relations Authority and Court are the only legal bodies with immediate jurisdiction over employment disputes, but the binding effect of an employment agreement cannot be overlooked. If there is something in
management | & business an employment agreement which is relevant to the sale of the business this needs to be strictly complied with, otherwise there is a risk of a personal grievance. Section 69OJ of the ERA inserts a mandatory requirement for all employment agreements to contain an “Employee Protection Provision”. This provision applies to employees who are not “vulnerable employees” (discussed further below), which is most employees. The requirements of an Employee Protection Provision are usually triggered when an employer proposes to restructure the business (by sale or otherwise), and as a result of this the employee is no longer required by the employer to perform their work, and the type of work the employee performs will be performed by employees of the new employer. In that case the current employer (the vendor) will normally have to: 1. Provide the new employer (the purchaser) with a copy of the employee’s job description and a summary of the employee’s experience, 2. Hold discussions with the employee to discuss the option of the employee transferring to the new employer. Assuming that the employee wishes to transfer to the new employer, the old employer negotiates with the new employer to attempt to bring this about, and matters of negotiation between the old employer and new employer may also be set out specifically. If the employment agreement does set out a detailed procedure for the employer to follow, it is a requirement that they do so. One clause which is extremely helpful in sale and purchase situations is a ‘technical redundancy clause’. This is a clause to the effect that where a business is sold but the employee’s position is not otherwise affected by the sale, their employment will be treated as ongoing and the redundancy clause in their employment agreement will not apply. This is mostly relevant where employees are entitled to redundancy entitlements over and above simple notice. If the employment agreement does not have a clause like this, you could potentially find a situation where a person who is made redundant because the business is sold receives their full redundancy entitlement from the vendor, but is then promptly rehired in exactly the same position by the purchaser. A technical redundancy clause prevents employees from double dipping. If you are the vendor and you haven’t got a technical redundancy clause in the employment agreements it is still possible to get around this problem. In that case you would negotiate with the purchaser to only offer employment to the existing employees if they agree to treat the redundancy as a technical redundancy and waive the right to any additional compensation or benefits they might otherwise have received. Consultation Employers and employees have obligations of good faith to one another, under the ERA. It is wider in scope than the implied mutual obligations of trust and confidence, and specifically requires employers who are proposing to make
a decision that could have an adverse effect on the continuation of employees’ employment to give them access to information about the decision, and an opportunity to comment on this before the decision is made. The employer is not required to provide the employee with confidential information if there is a good reason to maintain the confidentiality of the information. A good reason includes protecting the commercial position of the employer from being unreasonably prejudiced. It is absolutely certain that where an employer proposes to sell their business, this is something they need to consult with their employees about. The real question is how soon the employer needs to conduct the consultation. According to the requirements of employment law the employer/ vendor is required to consult with their employees prior to “making the decision”, i.e. signing the sale and purchase agreement. This means that the employees must be made aware that there is an offer on the table before this offer is accepted. In practice this does not always happen, which sometimes results in an increased risk in personal grievances for lack of proper consultation. A defence to the obligation to consult at an early stage would be that consultation could either prejudice the sale itself, or otherwise cause significant disadvantage to the business. The business would not be able to use simple privacy issues to defend itself, and would have to show the likelihood of actual loss should it comply with its obligation to consult with its employees. Our recommendation to vendor employers should be that they should at the very least: 1. Advise their employees that they are proposing to sell the business prior to finalising the sale, 2. Give the employees information about the sale, including whether it could affect their employment, and 3. Give the employees an opportunity to express their views and comment before making a final decision about the sale, and genuinely consider these views. The overall effect of this process must be to genuinely consult, not just notify. Employer vendors can only legitimately get around these obligations in extraordinary circumstances. Part 6A of the Employment Relations Act This part of the ERA establishes a special category of employees. These are known as ‘vulnerable employees’. Vulnerable employees have additional rights on the sale and purchase of a business they are employed by. The
Financial & Business Advisor :: July-August 2011
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Employment Issues.....cont categories of vulnerable employees are defined in schedule 1A of the ERA, and are those employed in catering and cleaning positions. Employees who are orderlies or provide laundry services for health or age related residential care sections, or caretakers and laundry services in the education sector, are also covered. Put quite broadly, where there is contracting out, contracting in or subsequent contracting of one of these employee’s positions, they have the right to transfer to the company hiring the person who would otherwise have taken over their position. For instance if Company A employs a cleaner, but decides that cleaning costs would be reduced by contracting out the cleaning services to Company B, Company A’s employee has the right to transfer their employment to Company B on the same terms and conditions as with Company A, and Company B has an obligation to employ that person. This has the potential to cause serious ramifications where a business does not fully understand their potential liability
when taking on a contract, and ends up lumbered with one or more additional employees they were not expecting. The rationale of the law is to protect a group of employees who are frequently subject to restructuring, but who have very little bargaining power. A review into the operation and effect of part 6A is currently underway, with results expected shortly. Conclusion Business owners may own their businesses, but if they employ staff, they do not have the right to do what they want with their business when they want. They still owe duties to their employees and failing to comply with these may result in costly personal grievances. Nathan Tetzlaff www.gazeburt.co.nz Gaze Burt's employment law team of Andrew Clemow (Partner) and Nathan Tetzlaff (solicitor) are available to advise and assist in any employment related issues.
Are Your Premises Safe? “The opposite of security is insecurity, and the only way to overcome insecurity is to take risks.” - Theodore Forstmann
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o you have smoke alarms or fire detectors? If your building was vandalised would you want to find the culprits? Are your employees safe from intruders? Are your employees ripping you off? Are your computers hack free?
New Zealanders tend to have a laissez faire approach to security and unfortunately many business owners retain a false sense of security. This sense of being is a part of our embedded culture whereby we used to leave house doors open, not bother what was left in the front or back yards of the house, and not worry about locking cars doors. Times have changed and, “It would never happen to us”, or “Oh, no, we are in a good area” is no longer valid. Sorry, guys, but if you are a crim then the better the area the better the pickings. And a thief will go to many lengths to get what they want: from driving a truck through the wall to holding up a shop keeper with a weapon or even crawling up a stormwater pipe and through a manhole. Unlawful Access Unlawful access may be gained with a view to theft, damage, or other disruption of operations. Or possibly there is a risk of covert theft, damage, or otherwise to disrupt operations. What could I have to circumvent this? • Ensure that the periphery of the area has been secured against unauthorised access. Locked gates, proper
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Financial & Business Advisor :: July-August 2011
fences, secure doors. • Be particularly wary of the danger posed by roof/ceiling access and windows without locked grills. • Install an intruder alarm system. • Even consider panic buttons at key locations throughout the premises. • Consider the potential for access through drains and sewers and under false floors. • Protect ground floor external doors, windows, and possibly walls, against 'ram raiders' or other forced entry. • Consider the use of CCTV cameras with monitored screens and video recorders. These are much more affordable than they used to be and can be used inside and outside your premises • Consider the use of a security guard/external security company to undertake your banking or movements of cash. Risks of Damage • Install a fire alarm/smoke detectors • Consider the use of impact glass • Spend money on some real locks • More often than not, your money is well spent keeping people off the property (fences, gates…) • Erect signs notifying people that the premises have CCTV and are alarmed Editor
SECURITY
Security mark all computer equipment and video all such items for insurance purposes including recording the model and serial numbers. Consider bolting valuable items to desks.
Accounting, Tax | Law & Compliance
Onus of Proof is on You N The onus of proving a correct tax position is taken is on the taxpayer. If you file your tax return with a deduction for repairs and maintenance incurred on your rental property and IRD queries this expenditure then the onus of proving that the expenditure is deductible (and not capital expenditure) will be on you. The standard of proof is the balance of probabilities. This can become especially critical in situations where the 'intention' at the time of purchase of land is scrutinised (the intention at the time of purchase of land is one of the factors determining whether any gain made on sale of that land is taxable). The onus of proving your intention at the time of purchase lies with you as taxpayer. Note that the surrounding circumstances, your actions after purchase, all contribute towards understanding your intentions at the time of purchase. If your returns are queried by the IRD and found to be incorrect, it is possible you will be exposed to shortfall penalties, late payment penalties, and use of money interest on the unpaid tax. However, if you discover an error in a return filed, ie you have under-returned income, you have the ability to make a voluntary disclosure to the IRD.
In certain circumstances, a voluntary disclosure will result in a 100 per cent reduction in shortfall penalties (though you will still be liable for use of money interest and late payment penalties from the date that the tax would have been due). However, it's not all doom and gloom for the taxpayer. Income tax returns filed are time-barred after four years from the end of the income year in which the return was filed. This means that the IRD cannot increase the assessment of tax after the four-year period unless the return omitted a source of income or was fraudulent or misleading. Aneesha Varghesen is a tax director heading the tax specialist team at WHK South, covering Invercargill, Queenstown and Wanaka. She can be contacted at Aneesha.Varghese@whk.co.nz
ASSET REPAYMENTS AND PROFIT
TRAP
ew Zealand operates on a selfassessment system for tax. This means that the taxpayer determines how much income is assessable for tax and takes that position by filing a return with the IRD.
Borrowing money to purchase a sizeable asset is essential for most businesses. However, don’t forget that your loan repayments include principal and interest. The interest portion is a deductible before tax but principal repayments are not deductible - they are simply a loan repayment and the “deductions” are reflected through depreciation. You will pay tax on income inclusive pre-principal payments (hard on cash flow!).
Financial & Business Advisor :: July-August 2011
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Accounting, Tax | Law & Compliance
Withholding Information “Principle 6 of the Privacy Act provides an individual with the right to access personal information that is readily retrievable. That can include information held in someone's mind. Whether information is readily retrievable may depend on factors such as how long ago a conversation took place.” - privacy.org.nz (Site of the Privacy Commissioner)
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his seems straightforward, but what if you have good reason to withhold access to information? Consider a reference for a job applicant. Can you promise previous employers in good faith that if they tell you the whole story (good and bad), you will keep the information and source confidential? Surprisingly, the answer is Yes. The Privacy Act allows you to withhold personal information from the individual concerned in certain circumstances set out in a long list under Section 29. Section 29(1)(b) applies to evaluative or opinion material compiled solely for a limited number of purposes, including the purpose of determining whether a person should be employed, promoted or dismissed. Other purposes are set out in 29(3). In brief, such information may be withheld if the disclosure of the information or of the identity of the person who supplied it would breach an express or implied promise which:
• was made to the person who supplied the information; and • was to the effect that the information or the identity of the person who supplied it or both would be held in confidence; Before information can be withheld under section 29(1)(b), four conditions must be met: • The information must be evaluative or opinion material compiled solely for one of a limited number of purposes set out in Section 29(3); and • The information must be supplied to the agency seeking to withhold it; and • There must have been an express or implied promise made to the person providing the information that their identity or the information (or both) would be held in confidence; and • Releasing the information to the requester would breach that promise. If you have a legitimate requirement to seek evaluative material or an opinion about someone and you would like that information to remain confidential, check out Section 29 of the Privacy Act. It may solve your dilemma. The Act can be found online at www.legislation.govt.nz or simply use our Question and Answer Service. Editor
Mileage Rate for Motor Vehicles Amended
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nland Revenue monitors fuel prices and publishes a motor vehicle mileage rate at least once a year. The mileage rate is for expenditure incurred for the business use of a motor vehicle. It doesn't apply to motorcycles.
The current mileage rate has been amended to 74 cents per kilometre for the 2011 income year. This rate applies to both petrol and diesel fuel vehicles. (You can use this rate for up to a maximum of 5,000 km of work-related
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Financial & Business Advisor :: July-August 2011
travel per year. For distances greater than 5,000 km, you must keep a record of actual vehicle expenses.) As the Commissioner's mileage rate may not reflect their true costs, self-employed persons aren't restricted to using these rates - they can use actual costs or the logbook method. It's accepted that employers may use the motor vehicle running cost data published by other reputable sources, eg, the New Zealand Automobile Association Incorporated, as an alternative reasonable estimate for reimbursement of employees. Inland Revenue
Accounting, Tax | Law & Compliance
4 Ways to Reduce your Tax
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or some time now, there has been a tendency toward triple bottom line reporting. This refers to the three pillars of people, planet and profit and more specifically to measuring social, environmental and economic performance. Over the years, several additional measures have been put forward towards quadruple bottom line reporting. For most in business, however, it is the bottom line profit that is all important. After all, it is the after tax profits that really help your business to grow and fund any social and environmental initiatives. Effective tax planning is essential to enhance your after tax profits and here are four ways to reduce your tax: Editor’s Tip #1: Invest in your business Advertising, training, branding and other business building activities are deductible and therefore reduce your tax. This strategy also has the potential to improve profits in future years. Accordingly, you need to invest wisely and usually to a significant extent in earlier years to bring in better turnover in future years. Funnily enough, if you do this wisely then your business will grow until it reaches a threshold point whereby it is self sustaining and has enough momentum to grow with (proportionally) lesser levels of investment. This growth and momentum can be attributed to your name getting well known, brand recognition, a reputation for quality and so on.
equity ratio). However, it is important to remember that borrowed debt must be put to good use whereby it will increase the returns for the business. Editor’s Tip #3: Maintain good bookkeeping records Keeping receipts and records to substantiate expenses is essential for maximising deductions. A simple way to ensure nothing is missed is to use the businesses bank and credit card accounts for all deductible expenditure. There are also some useful bookkeeping software packages out there and reconciling your accounts on a monthly basis is essential to good cash management. There is no shortage of useful tools such as Xero, Banklink, MYOB, etc. Editor’s Tip #4: Improve Your Business Resell Value New Zealand is almost unique amongst OECD countries in that we do not as yet have a capital gains tax. How much longer this will last is anyone’s guess. However, in the meantime this means that you can increase your bottom line and potentially the value of the business in proportion to the increase in your bottom line. This can provide massive leverage for tax free capital gain upon the sale of your business. Editor
Editor’s Tip #2: Maximise good debt and minimise bad debt Good debt is deductible business debt and bad debt is personal non-deductible debt. Small businesses are typically funded by the savings and assets of their owners. Often this presents an opportunity to swap bad debt for good which leads to a reduction in tax. In most cases borrowed money that is invested in your business is tax deductible but some business owners get caught out by not structuring this properly. The net effect of this is that some debt is a good thing in a business and in fact with the right levels of debt you can minimise your tax bill and provide the best yield (an example of this is when Auckland International Airport Limited borrowed considerably last year to pay out its shareholders and increase the debt to
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QUESTION & ANSWER SECTION Take advantage of our question and answer service which is designed as an open invitation for our subscribers. You can email, fax or post your questions through to us: EMAIL: queries@businessadvisor.co.nz FAX: 09 836 7148 PO Box: 69253, Glendene, Auckland 0645
Q
I subscribe to FBA and I have just been reading your May/June Business Advisor. I am very interested in the article "A New Take on Setting up a Company". I own and operate a fairly small servicebased company. I have now sourced a new product that has great market potential and sourced from a communication provider that clients will be locked into a contract for 1 or 2 years. I am just in the throes of marketing this new product and I am in talks with a very big New Zealand company to use our services and this new product. I am wondering if I should set up a new company to supply the new system to clients and then contract the services side of it onto my existing company. I would be really interested in your thoughts on this.
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The benefits identified in the article will certainly apply in your situation. Whether you go down the route of establishing a new entity will depend on the circumstances. For example, are you considering bringing in new investors around the new product, do you anticipate building sales of the new product to a level where the sale of the business is the desired outcome. It maybe that the new product dovetails in nicely with the services you provide. Is there a reason to separate out in a new entity? Remember there are more compliance costs with another entity, tax returns (income, PAYE, FBT, GST) and another set of accounts to prepare.
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Q
FBT: One of our staff members needs to travel due to his work duties and he needs to hire a nanny to look after his children. The company pays the childcare costs to nanny on behalf of this employee. Does the company need to pay FBT on the childcare expense?
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• Where an employer pays or has a liability to pay for the child care provided to an employee’s children, the employer must pay FBT on that benefit. • Where the cost of the child care is paid to the employee by way of reimbursement, the amount of the reimbursement will be taxable in the hands of the employee, so the employer must deduct PAYE from the reimbursement. [Source: CCH Master tax Guide 21-531]
permanent resident but it is possible that she may be able to apply for an emergency benefit. Her eligibility for this may depend on whether or not she has a partner who is working.
Q
We have expenses that were incurred overseas (so no GST has been charged or claimed by us). I am on-charging these costs to another company in NZ – do I charge GST on top of the amount incurred?
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Under section 11 of the GST Act if the goods are not situated in New Zealand at the time of supply or the service physically performed outside New Zealand then GST should be zero rated. So GST should be at zero percent on the on-charged expenses that are incurred overseas.
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Q
A
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As gift duty is abolished from 1 October 2011:
Is there any claw back if I decide to gift the rest of my loan to a trust?
From October 2011 you will be able to gift the rest of your loan without incurring gift duty. Depending on individual circumstances other legislation may come into play for example, the Social Security (Longterm Residential Care) Regulations 2005 in that the means assessment looks at gifts provided five years before the assessment in assessing the benefit that applies.
Q
I have a question regarding an employee who has just finished their maternity leave but had some ongoing complications regarding the birth and is unable to come back to work for a while. Is she able to claim ACC even though she is not a permanent NZ resident?
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If the injury is covered by ACC then the employee will be eligible to claim even if she is not a permanent resident. Not all birth-related injuries are covered by ACC. If the injuries in this case are not covered, she may approach Work and Income. For a sickness benefit you normally need to be a citizen or
Financial & Business Advisor :: July-August 2011
I have a client with an Australian rental property. She has paid A$20,721 land tax. In her NZ tax return do I treat land tax like rates and claim it as an expense?
Land value tax is a levy on the unimproved value of land and in essence is similar to rates therefore we believe is able to be treated as an expense.
Q
We have a client who is a builder (GST Registered) and has purchased a section to build a dwelling on then sell off as a spec home. The contract to purchase the section was entered into in Jan 2011 but title has just come in May this year. From the 1 April we are aware there is a zero GST between registered persons. The Developer who is registered for GST has confirmed the original contract is inclusive of GST and requiring the full amount to settle. Could you please confirm it is acceptable in this situation to claim the GST back for the builder?
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If the time of supply was prior to 1 April 2011 and GST was paid by the builder (who is registered) then the builder is able to claim the GST back. We would recommend you obtain an invoice from the developer.
Q
Under the New GST rules. A client wishes to purchase lifestyle block of land with residence )curtilage and house $400k, 6 hectares of land for small farming valued at $95k. Profit has been estimated on farming block. Purchaser registered for GST. Vendor is not registered. Can client inpute for GST claim?
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The IRD's practice is to accept that land can be regarded as secondhand goods for GST purposes. In King v Bennetts (1994)16 NZTC 11,370 (CA), the Court of Appeal held that "goods" includes land for the purposes of the provisions of the GST Act relating to second-hand goods and that a GST refund was available on a purchase of land from an unregistered vendor. (Note from Ed: See article Pg3 for new GST rules that apply when both parties are GST registered).
Q
Can you please confirm whether the premium payment for income protection insurance is deductible or not?
A
Income protection insurance is deductible. The IRD's policy, is that income protection insurance is a loss of earnings policy. Benefits are calculated at the time of claim with reference to earnings. The employee is assessable on the benefits received and can deduct the premiums paid.
Q
Our client is a provisional tax payer and paid his provisional tax in the usual three installments for the 2011 tax year. Now on completing his accounts for the 2011 year we have discovered that his terminal tax in the 2011 year is more than what was calculated when we asked him to pay his provisional tax. That is the installments that he paid fall short by a little bit. Our question is will he be charged penalties/interest on the amount that was paid short. His provisional tax was calculated on the 2010 RIT less 5%. divided by three.
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We do not believe there should be any late payment penalties as the assessed provisional tax was paid on the due dates. However, as the amounts were not sufficient to cover the tax liability there will be Use
of Money Interest (UOMI). To reduce the UOMI cost you may consider acquiring provisional tax through a tax intermediary eg Tax Management NZ. (http://www.tmnz.co.nz/). This should reduce the interest cost but not eliminate it.
Q
A client has a rental property that has required major repairs due to water damage in the floors from a hidden leak. The repairs have taken 6 months to be completed for which time they were unable to have tenants due to the state of the property. Insurance did not cover any of the costs. Are they able to claim the deductibility of the expenses while there were no tenants?
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The repairs to the damaged floor are only reinstating the property to its original condition and are not improvements, therefore the costs should be expensed and not capitalised. Even though the property was unoccupied because of the maintenance the costs should still be deductible.
Q
I am completing end of year adjustments for our company. We have paid Interest & penalties to IRD during 2010-2011 tax year. I have put these in the accounts as an expense which shows on the company's Profit & Loss Statement. You cannot claim these as an expense as I have been informed by IRD. So I now have to do a journal entry but I am not sure as to which account I would now allocate these to?
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Use of money interest (UOMI) charged by the IRD is tax deductible. However, any penalties are not. We would suggest you transfer the non-deductible expenses to another expense code titled "non-deductible expenses".
Q
Our business has a small loan owing to my father & we are looking at converting this into shares in lieu of paying this out. Could you advise how we go about this.
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It's a simple process really. Your father is acquiring a percentage of the company by converting the
debt to equity, with the company issuing new shares to your father. The directors need to assess and pass a resolution on the number of shares to be issued and the consideration received. The Companies Act 1993 section 42 states "subject to this Act and the constitution of the company, the board of a company may issue shares at any time, to any person, and in any number it thinks fit". Section 43(1) of the Act states "the board of a company must deliver to the Registrar for registration, within 10 working days of the issue of shares under section 41(b) or section 42 or section 107(2), a notice in the prescribed form of the issue of the shares by the company." This section essentially requires you to inform the Companies Office of the updated number of shares on issue and this can be done through their website.
Q
I have a client who has helped her daughter out in getting her into her own home. The daughter had $60K deposit but the banks would not loan her any money for a home since her income is low. The mother has bought the house in her name and the mortgage is also in the mother's name. The mother has also had to top up the deposit by another $60K. The daughter lives in the home alone and pays all of the mortgage and other outgoings. Does the mother have to include this income as rental income since she has no intention of selling the home and receives no money from the daughter personally as it all goes to the expenses?
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We see the situation as one where the mother has assisted the daughter to acquire a personal home with equitable ownership being with the daughter. Therefore we do see the house as a rental property and subject to income tax. There should probably be an agreement in the background (mother/daughter) stipulating that the mother just provided assistance and that in essence it is the daughter’s house.
Financial & Business Advisor :: July-August 2011
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From IRD In Brief Act provides more tax relief for people affected by the Canterbury earthquakes The Taxation (Canterbury Earthquake Measures) Act 2011, enacted on 23 May, is intended to provide practical help to the people of Canterbury. The measures deal with taxation issues arising from the earthquakes that occurred on 4 September 2010 and 22 February 2011 and affected the Canterbury region. The Act considered the effect of contributions to a family's income for Working for Families Tax Credits entitlements as well as the tax treatment of donations of trading stock and welfare contributions by businesses. It also extended the redundancy tax credit. The legislation: • provides an exemption from tax and gift duty on trading stock businesses have donated for earthquake relief;
• makes certain welfare contributions made by employers to their employees tax-free; • extends the redundancy tax credit to 30 September 2011; • ensures that certain payments do not count as family income where people receive Working for Families tax credits. Some aspects of the new legislation are retrospective and businesses should confirm the details in the new legislation before finalising their tax position. Also Orders in Council have been promulgated, the most important of which gives the Commissioner of Inland Revenue significant flexibility with regard to deadlines for tax obligations. Details are available on the Inland Revenue Department website.
TAX calendar 5 July 2011
Following due for large employers for month end June 2011: - Employer deductions (EDF/IR345) return and payment; and - Employer monthly schedule (EMS/IR348)
7 July 2011
2011 income tax return due for people and organisations with a March balance date, who don't have an agent or extension of time.
20 July 2011
Following due for large employers for 1-15 July 2011 and for small employers for month end June 2011: - Employer deductions (EDF/IR345) return and payment; and - Employer monthly schedule (EMS/IR348)
20 July 2011
Quarterly FBT return and payment due if paying on a quarterly basis
28 July 2011
GST return and payment due for month end June 2011
5 August 2011
Following due for large employers for month end July 2011: - Employer deductions (EDF/IR345) return and payment; and - Employer monthly schedule (EMS/IR348)
22 August 2011
Following due for large employers for 1-15 August 2011 and for small employers for month end July 2011: - Employer deductions (EDF/IR345) return and payment; and - Employer monthly schedule (EMS/IR348)
29 August 2011
GST return and payment due for month end July 2011
29 August 2011
First 2012 provisional tax instalment due for taxpayers with a March balance date who pay GST monthly, two monthly or who are not GST registered
FBT prescribed Interest Rates Prescribed Rate (%)
Quarter
6.24%
1 April 2011 to 30 June 2011
Once the prescribed interest rate is set, it applies to all future quarters until it is altered. If no new rate is set for the current quarter then the previous quarter's rate applies.
Use of Money Interest Rates (UOMI) Current Rate (%)
Since 16 January 2011 Charged by Inland Revenue on underpaid tax (Previously 8.91%)
8.89%
Paid by Inland Revenue on overpaid tax (Previously 1.82%)
2.18%
INCOME TAX payments Balance Date
31 Dec 2010
31 March 2011
30 June 2011
1st Instalment
28 May 2010
28 Aug 2010
28 Nov 2010
2nd Instalment
28 Sept 2010
15 Jan 2011
28 Mar 2011
3rd Instalment
28 Jan 2011
7 May 2011
28 July 2011
Terminal Tax*
15 Jan 2012
7 Apr 2012
7 Apr 2012
* The terminal tax dates apply to taxpayers linked to a tax agent. If you are GST registered on a six monthly basis, you will only have 2 provisional tax dates. A GST ratio method is also available for certain taxpayers who elect before the beginning of the tax year: provisional tax is paid as a percentage of the GST return.
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Financial & Business Advisor :: July-August 2011
subscribers back page grandstand Ochre Business Solutions “The recession left a lot of people struggling, but it also gave a spur to others to start their own business”.
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hat’s a trend that continues to rise as shown in the number of businesses seeking business training and mentoring services. Ochre Business Solutions, established in 2003 to cater primarily to small to medium enterprises, has worked with over 2500 individuals and businesses from a wide range of industries. The biggest challenge facing many businesses is identifying where and how growth will occur in this uncertain market. “Many of our client’s who were established pre-recession, have been challenged by the current economic period purely because they were experiencing such prosperous times and suddenly there was a major drop in the market”. Hence, our primary role is providing business ownership education - from planning and analysis through to growth strategies that incorporate marketing, sales, finance and operations. “Sometimes the solution is the one under your nose”.
Five top business tips from Business Manager Andrea Anderson: 1. Have an action plan that is robust yet flexible 2. Clearly identify your time and financial capacity, so you can be organised 3. Surround yourself with the right support people, who actually see beyond what you currently see 4. Continue to read and research – Never stop doing this. Publications such as Financial Business Advisor which we have been receiving for 5 years, has been brilliant in providing different perspectives as well as valuable information 5. Enjoy the process – You determine what goes in and the outcome! For more information about what is available contact Ochre Business Solutions on www.ochrebusiness.com Finalist for the 2010 Vero Excellence Business Support Awards - Best Education Provider Finalist for the 2009 People’s Choice Awards - Nationwide Trainers and Coaches
If you want to understand the commercial viability of your business idea or expansion plan, business needs a kick start, or you are looking for sound growth strategies to turn your business around, with a team of over 20 facilitators and mentors as part of the team, Ochre Business Solutions is confident that they can assist your business. Ochre Business Solutions has access to government funded business programmes that could benefit you short term and long term.
Ochre Team with Prime Minister John Key at Business Awards
contributors profile
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ith a Masters in Taxation Studies (First Class Honours) from the University of Auckland, Aneesha leads a team that is able to provide advice in all areas of taxation, ranging from international tax, IRD audits, FBT, GST and general income tax issues. She is a Chartered Accountant and has also qualified for the CPA (Australia) program. Aneesha is also the President of the recently formed Invercargill Young Professionals Inc. Aneesha has a decade of experience in the Business Advisory and Tax Consulting areas. She has been with WHK since 2006,
and has dealt with a wide range of tax issues across many industries focusing on providing clients with commercial, workable tax solutions. She regularly presents on tax topics to accountants, lawyers and the public and has also written various tax related articles for WHK and external publications.
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Aneesha Varghesen
Aneesha Varghesen - Director, WHK