childs-accounting-update

Newsletter March 2022

chris@originalimage.com (Chris McGowan) — Sun, 27 Mar 2022 20:34:47 GMT

Year-end Checklist

Before you say goodbye to the 2022 financial year, make sure you work

through a year-end process to maximise your tax deductions and

minimise your tax bill. Here are the must-do items:

Assets

Assets purchased for less than $1,000 can be expensed.
Depreciation can be claimed from the first day of the month of purchase
Ensure assets traded in are disposed of and the replacement asset is depreciated and recorded at its full cost
Depreciate residential rental property chattels purchased during the year
Depreciation can be claimed on commercial property, provided it has been claimed previously or the property was newly acquired in the 2022 year
Review your fixed asset register. Ensure assets sold, stolen, scrapped or destroyed are removed from the asset register and loss on
disposal calculated
If an asset sale is expected to result in depreciation recovery, consider deferring the sale until after 31 March
Review repairs and maintenance codes to ensure all assets are moved to the asset account where appropriate
Ensure deductible feasibility and R&D costs have been expensed

Trading Stock

Value closing stock at market selling value if this is lower than cost
Carry out a stocktake at 31 March to ensure an accurate closing stock figure
Write-off any obsolete stock
If trading stock is less than $10,000, and turnover is less than $1.3m, you can use the opening stock value as the closing stock figure (even if this is nil) Accruals and Provisions
These are not deductible in the current year unless you are definitively committed to the expense at year end and the amount can be reliably estimated
Keep a record of employment provisions paid out between 1 April and 2 June as that portion of the provision is deductible in the 31 March financial year. This includes holiday pay and bonuses

Repairs and Maintenance

A one-year warranty purchased with a fixed asset can be deducted as

an expense rather than capitalised, providing the cost of the warranty can be separately identified

Review fixed asset registers to ensure genuine R&M has been expensed and not capitalised to fixed assets

Consider carrying out R&M work before year-end

Bad Debts

The debt must be physically written off the debtors’ ledger by 31 March to be deductible
Retain documentation to support the debts as not recoverable
Claim the GST adjustment of any bad debt adjustment if you are on invoice basis

Prepaid Expenses

Some expenses paid in advance (eg, rent, insurance, advertising, service contracts and subscriptions) can be tax deductible in the current year if not treated as a prepayment in the accounts
ACC levies are deductible only when paid

Donations

Cash donations paid to donee organisations or registered Charities are deductible up to the level of net income. If the business is in a tax loss position, consider the owner making the donation and claiming the donation rebate

Cut-off

Follow year-end cut-off procedures to ensure sales, stock, expenses etc are accounted for in the correct year

Shareholder Matters

Consider paying a dividend or shareholder salary if there is an overdrawn shareholder current account
Check the company has sufficient imputation credits; consider bringing forward a tax payment if necessary
Dividends for the 2021-22 year should be paid or credited before 31 March 2022
Dividend withholding tax for any dividends paid in March 2022 is payable on 20 April 2022
Review shareholding changes throughout the year to ensure shareholder continuity has been maintained
If a dividend is being paid to a non-resident, non-resident withholding tax (NRWT) may need to be considered

International Matters

Interest deductibility may be impacted by the thin capitalisation rules if there is control by a non-resident, or offshore investment
Cross-border related party transactions need to be at an arm’s length price or will be at risk of being restated by Inland Revenue under the transfer pricing rules
Ensure NRWT filing obligations are met and payments to Inland Revenue for March 2022 transactions are made before 20 April 2022

Income Tax

The third instalment of 2022 provisional tax is due 7 May 2022 based on actual results to 31 March, therefore it is important to have your records in order to determine this if you are not paying based on standard uplift. Remember, the tax rate for individual’s income over $180,000 is now 39%
If you wish to use the AIM provisional tax method, you must be using the correct accounting software by 1 April 2022
If you have not yet filed your 2021 income tax return, ensure it is filed by 31 March otherwise late filing penalties will be charged, your extension of time to file 2022 may be lost and the 4-year statute bar period extends a further year
A loss offset subvention payment for the 2021 income year must be paid by 31 March 2022

Look-through companies

If you want your company to enter or exit the look-through company regime for the 2022-23 income year, the election notice needs to be filed by 31 March 2022

GST

Where assets are used for both business and private use, make your year-end GST apportionment adjustment in the 31 March GST return
Ensure you have made any GST adjustments required from the preparation of 31 March 2021 financial statements

System Considerations

Ensure bank reconciliations are completed to financial year end and that all bank and loan balances in the accounting system match the bank statements that will be provided to your accountant
Confirm the balances of outstanding creditors and debtors are accurate
Where possible, lock your system at the year end to ensure no changes can be made once the final position has been determined

Putting aside time to consider the above before you race into the new financial year will help ensure you maximise your tax deductions for 31 March 2022 and ultimately lower your tax bill.

Minimum wage on the rise again – what does it mean for businesses

While some were expecting it, confirmation of a 6% increase in the minimum wage only weeks before it takes effect is a concern for many businesses. The increase will no doubt result in upwards movement in other employees’ wages too.

The minimum wage increases by $1.20 per hour to $21.20 from 1 April 2022. The starting-out and training minimum wage will increase from $16 to $16.96. The increase is to ensure those paid the minimum wage are keeping pace with the current rate of inflation (5.9%).

The increase will impact those businesses who have a large percentage of minimum wage earners the most. With hospitality in this classification, this comes at a time when Government relief for Covid is being reduced, and demand is still down due to restrictions in place and people choosing not to socialise as much.

Many businesses are already adjusting their prices for inflation, and it is expected that prices will continue to rise to account for the additional cost the increase in the minimum wage brings. This then leads to flow-on implications with inflation continuing to increase, requiring another increase to wages, and so on and so forth.

So what can you do? Here are some ideas to help you keep

ahead of the game:

Review your pricing (if you haven’t already done so). Consider the market and the ability for you to increase your prices
Identify your unique selling point and highlight any benefits and/or advantages of your product. Communicate this with your customers
Prepare a financial forecast for the year ahead to understand the implications for you
Review the mix of your staff and look for areas where you can make savings
Consider what processes can be automated and/or streamlined. There may be more time savings than you realise.

With the right planning and review of your current position, your business can be ready for this increase, and move into the new financial year with confidence.

Are you a director of an Australian company?

New rules in force for Australian directors

New rules require directors of Australian companies to have a Director Identification Number (DIN), including overseas directors, and t provide that DIN to the company record-holder.

Specifically, a DIN will be required if you are a director, or alternate director, of a Corporations Act entity (i.e., a company, a registered foreign company, or a company responsible for a managed investment scheme).

DINs are intended to prevent the use of false or fraudulent director identities, make it easier for regulators to trace directors’ relationships with companies over time, and identify and eliminate director involvement in unlawful activities.

If you are an existing director of an Australian company, you need to apply for your DIN by 30 November 2022.

If you are appointed as a director between 1 November 2021 and 4th April 202x2 you need to apply for a DIN with 28 days of appointment. From 5th April 2022, and you will need to have a DIN before being appointed as a director of an Australian company.

Applications for DINs are made through the Australian Business Registry Services (ABRS).

Do you pay insurance premiums to an overseas insurer?

If yes, then you may have a New Zealand tax obligation on behalf of the overseas insurer

That is because when a New Zealand insured person pays a premium to an overseas insurer, and the insurer does not have a branch in New Zealand, the insured person is considered to be the insurer’s agent, and is required to file an annual income tax return as agent for the foreign insurer. Ten percent of the premium is treated as taxable income, which is then taxed at the corporate tax rate (28%).

Guarantee fees paid by a New Zealand subsidiary to an overseas parent company are also captured in this “agent for foreign insurer” regime, as are recharged premiums from an overseas related entity.

The responsibility for filing the income tax return, and paying the income tax, lies with the party paying the premium. They will need to apply for an ‘as agent’ IRD number and file an income tax return (IR1215) each year, in line with the usual tax filing deadlines.

If the overseas insurer is resident in Switzerland the ‘agent for foreign insurer’ regime does not apply as Swiss insurers are not subject to tax in New Zealand.

Helping kids onto the property ladder

chris@originalimage.com (Chris McGowan) — Sat, 26 Mar 2022 21:19:12 GMT

With house prices soaring and lending criteria being impacted by the Credit Contracts and Consumer Finance Act 2003, it is increasingly common for parents to find ways to help their adult children into home ownership.

Unfortunately, this can result in the parents having an unexpected income tax bill, especially with the brightline period being extended from 5 years to 10 years.

Gifting the house

If a house is gifted by the parents, or if a trust makes a distribution of a house to a beneficiary, for tax purposes the parent (or trust) is treated as having sold the house for market value at the time of transfer. If this transfer occurs within the brightline period, or if a sale of the house would have otherwise been subject to tax, the parent (or trust) can end up with a rather nasty income tax bill, despite having never received any cash for the transfer of the house.

Selling the house at a discount

Similar to gifting a house, when a house is sold at a discount between associated parties (which includes parents selling to their children, or trusts selling to beneficiaries), the seller is treated as having sold the house for market value at the time of transfer. Again, if this sale happens within the brightline period, or if a sale of the house would have otherwise been subject to tax, the seller can end up paying income tax on a gain they didn’t receive.

Becoming a co-owner

When a parent is a co-owner of a house with their children, and the children’s financial circumstances improve such that they wish to buy-out the parent’s share, this can again give rise to income tax for the parent on the share of the property transferred to the children if the transfer occurs within the brightline period. Regardless of the price at which the parent’s share is transferred, the parent is treated as having sold their interest in the house for market value at the time of transfer. The main home exemption will typically not apply to the parents, as the house will not be the parent’s main home, unless the parent and children are living together on the same

property.

Proposed tax changes don’t go far enough

Proposals are underway to correct unintended outcomes which can arise when there is a change in the proportions of ownership in a property, including when parents assist their children with the purchase of house and the house is subsequently transferred to the children. These proposals however do not go far enough to resolve the issues outlined above. The proposals simply clarify that, in a co-ownership situation, the share in the property that is transferred or sold may still be subject to income tax under the bright-line test, but the brightline period does not restart for the remaining ownership interests.

Options

While future changes to the rules may occur, what are your options now if you are looking to help your children into a

home? One option is that instead of becoming a co-owner of the house, parents could gift, or lend, a similar amount to their

child so that the child is the sole owner of the house. Although, if the amount is treated as a loan, parents should check that

the loan was not going to impact on your child’s borrowing ability with the bank. Another option is for the parents to consider being a guarantor of the child’s loan to purchase the house.

If parents do need to be co-owners of the house, it may be possible to document that the parents’ share of the house is held as nominee, or bare trustee, for their child. A subsequent change of ownership from the parent to the child would then not trigger the brightline test, as the full ownership of the property has always been with the child.

There is no ‘one answer’ to this situation as everyone’s circumstances and situations are different. It is however essential that you seek sound advice if you are looking to assist your children onto the property ladder - ideally before the sale and purchase agreement is signed, and definitely before settlement.

Please get in touch if you require any assistance on the above

Newsletter August 2021

chris@originalimage.com (Chris McGowan) — Wed, 18 Aug 2021 01:20:43 GMT

In this newsletter we look at the rei nstatement of depreciation on commercial and industrial buildings, the new purchase price allocation rules, various employment changes and the new trust disclosure rules.

Reinstatement of Depreciation on Commercial and Industrial Buildings

Since the 2012 income year the depreciation rate for commercial and industrial buildings had been reduced to 0%. Following the Government’s raft of Covid-19 support measures, depreciation can now be claimed on commercial and industrial buildings from the beginning of the 2021 income year. The reinstatement will mean commercial and industrial buildings are now depreciated at 2% diminishing value or 1.5% straight-line. Residential buildings continue to have a 0% depreciation rate.

If you had previously depreciated your commercial or industrial building prior to the 2012 income year, you must continue to depreciate the building from the 2021 income year. Alternatively, if you own a commercial or industrial building that you held prior to the 2012 income year and you had previously elected not to depreciate, you must continue not to depreciate.

Purchase Price Allocation Rules

If you are planning to buy or sell a business, you need to be aware of the new purchase price allocation rules that apply to business asset sales as well as commercial property sales. The new rules took effect from 1 July 2021 and impact the way parties allocate the agreed purchase price between tangible and intangible assets.

The new rules overcome the issue of vendors and purchasers allocating different prices to the same asset resulting in a tax mismatch for Inland Revenue. Under the new purchase price allocation rules, the parties either have the option of agreeing an allocation which will be applied for tax purposes by both parties, or if no agreement is made, then a legislative process applies for determining the allocation.

There is a de minimis threshold for transactions where the total consideration is less than $1 million, or if residential land and chattels are involved, the threshold is for consideration of less than $7.5 million.

Employment Matters

SICK LEAVE ENTITLEMENT CHANGES

The recent passing of the Holidays (Increasing Sick Leave) Amendment Act increased the employee sick leave entitlement from 5 to 10 days per year. The change comes into effect on 24 July 2021. The day in which the employee’s sick leave increases is based on their next entitlement date and not automatically from 24 July.

MEDIAN WAGE INCREASE

The median wage increased from $25.50 to $27 gross per hour from 19 July 2021. This has implications for employers who may be intending to employ staff on an essential skills visa or residence visa.

COVID-19 TRAVEL POLICY

The current pause in the trans-Tasman bubble and Wellington’s recent alert level change serves as a timely reminder that businesses need to plan for on-going travel uncertainty. Make sure you have an updated travel policy in place that covers what to do when an employee’s work or personal trip is extended, and the steps that employees should take when travelling in the bubble.

COVID-19 VACCINATIONS AND EMPLOYEES

As the vaccination programme rolls out across New Zealand, you might be wondering what your obligations are as an employer. Make sure you are clear on what you can and cannot do when it comes to Covid-19 vaccinations and your workers. Employment New Zealand has released some guidelines to help employers understand their role in the vaccination process. The guidelines can be found on their website together with a one-page PDF for your workplace.

New Trust Disclosures

With the introduction of the 39% tax rate for individuals from 1 April 2021, the Inland Revenue is increasing the information it collects from trusts to assess compliance with the new tax rate and to monitor how trusts are being used.

TRUST DISCLOSURE OBLIGATIONS

The additional information that needs to be included in a trust’s tax return (from the 2022 tax year) includes:

name, IRD number and date of birth of beneficiaries, settlors and those with power of appointment and removal of trustees
financial statements
details of settlements
details of distributions to beneficiaries

Non-active trusts, charitable trusts, Maori authority trusts, and New Zealand trustees of foreign trusts do not need to provide this additional information.

INCREASED DISCLOSURE OBLIGATIONS TO BENEFICIARIES

In addition to the above, from January 2021, trustees need to disclose the following trust information to all beneficiaries, including parents/guardians where the beneficiary is under 18:

that they are a beneficiary
name and contact details of all trustees
that they can request a copy of the trust deed and the financial statements

Trustees can choose not to provide requested information to beneficiaries provided the request has been reasonably considered.

The beneficiary does not need to be told the reason for not providing the information.

CHANGE TO DEFINITION OF SETTLOR

There has also been a change to the definition of a settlor. A beneficiary with a current account greater than $25,000 will now be deemed to be a settlor if a market interest rate or Inland Revenue’s prescribed interest rate is not charged. This can have implications for the beneficiary such as student loan repayments and social assistance.

Please get in touch if you require any assistance on the above.

Residential rental property tax changes

chris@originalimage.com (Chris McGowan) — Thu, 06 May 2021 00:54:35 GMT

On 23rd of March 2021, the Governmen t introduced two significant changes to the taxation of residential rental properties to ease investor demand and slow runaway house prices.

Extension of the brightline test to 10 years

The first significant change was the extension of the 5-year brightline test to 10-years for residential land acquired on or after 27 March 2021. ‘Acquired’ is generally the date the sale and purchase agreement is signed. In some circumstances the current 5-year brightline test will continue to apply instead of the new 10-year rule. Those circumstances are:

where the property is a ‘new build’, or
where residential land was acquired on or after 29 March 2018 and before 27 March 2021, or
where residential land was acquired on or after 27 March 2021 following an offer made by the purchaser on 23 March 2021 or earlier, and the offer could not be revoked before 27 March 2021.

At this stage little detail is available on exactly what a ‘new build’ is, other than it is likely to include properties acquired within a year of receiving their Code of Compliance Certificate. The Government is consulting with various parties on this matter and detail is expected before October 2021.

As well as extending the brightline test to 10-years, the Government has also changed the exemptions for main homes and business premises. The previous main home exemption will continue to apply for properties which are subject to the 5-year brightline test. That is, the brightline test will not apply if the property is the person’s main home for more than 50 per cent of the brightline period, and the person has not previously used the main home exemption twice in the 2 years prior to sale.

For a property subject to the 10-year brightline test, the exemption will now only apply for the period the property is actually used as the person’s main home. There is a change of use buffer that allows for the property to be used for a continuous period of up to 12 months for other than as a main home, however, that period must be immediately before or after the person has used the property as their main home.

The business premises exemption has also been changed for short-stay accommodation properties subject to the 10-year brightline test. This change will mean properties used solely for short-stay accommodation, or properties used as the family bach and for short-stay accommodation, will not qualify for the business exemption.

Removal of interest deductibility

The second significant change is the proposal to phase out interest deductions for residential rental properties from 1 October 2021. Limited information is currently available however at this stage the proposals are:

interest deductions on properties acquired on or after 27 March 2021 can no longer be claimed from 1 October 2021
interest on loans for properties acquired before 27 March 2021 can still be deducted but will reduce by 25 percent each income year such that by the 2026 income year no interest can be claimed
no interest deductions can be claimed from 1 October 2021 for new loans taken out for improvements to property acquired before 27 March 2021
taxpayers holding property on revenue account, such as developers, can continue to claim interest deductions
interest deductions can continue to be claimed on properties that qualify as a ‘new build’.

In summary, the extension of the brightline test to 10 years and the removal of interest deductibility are significant changes in the tax landscape of residential rental properties and will impact on the majority of landlords.

Window for low-value assets about to close

chris@originalimage.com (Chris McGowan) — Sun, 14 Mar 2021 23:45:33 GMT

The opportunity for business owners and landlords to take a full tax deduction for new assets costing $5,000 or less is rapidly disappearing.

The temporary increase in the low-value asset threshold from $500 to $5,000 will end on 16 March 2021, at which time the threshold will reduce to $1,000.

The Government introduced the temporary increase as part of their Covid support measures back in March 2020. The increase resulted in taxpayers being able to claim a tax deduction for asset purchases of $5,000 or less. Previously purchases over $500 had to be capitalised, and if depreciable, expensed over the life of the asset. In the case of non-depreciable items, such as building improvements to a residential rental property, no tax deduction was allowed.

While the low-value asset threshold applies to all taxpayers, it is particularly relevant for residential property landlords considering undertaking improvements to bring their property in line with the Healthy Homes Standards. If this is you, look to undertake the improvements before 17 March 2021 as the purchase of items to meet the new Healthy Homes Standards, such as new insulation, heat pumps, opening windows, and extractor fans that cost $5,000 or less are now able to be fully expensed if paid for on or before 16 March 2021.

Don’t leave the improvements until after 16 March 2021 when the deduction threshold drops down to a meagre $1,000.

Reintroduction of the 39% top personal tax rate

chris@originalimage.com (Chris McGowan) — Sun, 28 Feb 2021 23:29:05 GMT

From 1 April 2021, individuals earni ng over $180,000pa will be paying 39% tax on income in excess of $180,000.

It is good practice to review your business and investment structure regularly to ensure that it is still fit-for-purpose. Changes in legislation are often a prompt to review your current structure and reflect on any changes in circumstances that may deem some future proofing is required.

At the very least, closely-held companies should be considering the level and timing of their year-end dividend to ensure it is completed before 31 March 2021, bearing in mind available imputation credits and the cashflow impact of the RWT.

IRD 2020 Kilometre Rates

chris@originalimage.com (Chris McGowan) — Sun, 14 Feb 2021 23:07:31 GMT

In December IRD released the kilometre rates for the 2019/20 income year.

If the 2020 tax return has already been filed, a request can be made to amend the tax return for the new rates however the cost benefit of doing so should be considered first.

Kilometre rates for employee reimbursement

When an employee uses their private vehicle in their employer’s business, the employer is able to pay the employee a tax-free reimbursement for the actual costs of the business use of the vehicle. As this can be difficult to quantify, employers typically base the reimbursement on the IRD’s kilometre rates. If the employee keeps a logbook, the Tier One rate applies to the first 14,000 km of business use in an income year. For business use in excess of 14,000 kms, the Tier Two rate applies based on the type of vehicle. If the employee doesn’t keep a logbook, the Tier One rate is limited to the first 3,500 kms of business use, with the Tier Two rates used for kilometres in excess of 3,500. Given these thresholds need to be determined, a logbook should be maintained anyway.

Kilometre rates for self-employed and close companies

When a person uses a motor vehicle for both business and private purposes, they can be reimbursed for the cost of the business use. Business use can be determined by either using actual costs, or keeping a log book and using the IRD’s kilometre rates. The method chosen needs to continued to be applied to the vehicle while it is used for business use. When the kilometre rate is used, no additional deduction for depreciation can be claimed as it has already been factored into the kilometre rates. As for employee reimbursements, when a log book is kept, the Tier One rate applies to the first 14,000 km of business use, and the Tier Two rates apply for business use in excess of 14,000 kms. When a log book is not kept, again the Tier One rate is limited to the first 3,500 kms of business use, with the Tier Two rates used for kilometres in excess of 3,500 kms.