CURRENT TIPS / Recent Changes
When starting a new business, a fundamental question becomes how should it be structured? Then as the business grows and evolves, its structure evolves along with it, sometimes in a haphazard way. What started as a simple family owned business can turn into a complicated maze of entities.
Whether at inception, periodically or during uncertain times, it is a good idea to consider whether the business structure is fit for purpose, efficient and in alignment with long term goals.
Various types of entities can be ‘created’; trusts, companies, look through companies (LTCs), partnerships and limited partnerships. Each have their own attributes, pros and cons. They should be well understood to enable the right type of entity to be used for the right purpose, and if multiple entities are being created they should work together.
One objective should be the limitation of liability and risk, but pursuit of this objective can give rise to a proliferation of entities, hence there is a cost versus benefit aspect to be considered. The effectiveness of a well thought out structure that does limit risk could be negated if guarantees are given that put wider assets at risk. Particularly the family home. Hence, it is also important to structure debt in such a way that reduces the need for guarantees. One approach is to aim for a balance sheet, by individual entity, that allows it to stand on its own two feet.
Think ahead to how the business might be sold. All at once or in stages? If held within a company will the shares be sold to a third party? Is the company ready for sale? Or will you retain the company and sell its assets. Or will the business be transferred to the next generation and how? Do your kids want it?
Tax legislation invariably needs to be taken into account. For example, tax benefits exist when multiple entities are held under a single point of ownership. But this can be contrary to maintaining separation which reduces risk.
In some cases, splitting a business into different entities occurs so that performance of an individual entity can be tracked. However, this could be achieved through an effective accounting system.
A good place to start is to:
Map each entity (business and personal), whether few or many, including the ultimate owner.
Outline the nature of each entity’s operations, what does it do and what is its purpose?
Outline the types of assets held by each entity and distinguish between business assets and personal assets.
Review existing debt arrangements for each entity and understand the risks associated with any guarantees.
Finally, review how decisions are made for each entity and the group overall.
A material factor to take into account is personal preference and what is important to you. If you stand back and look at your structure after completing the above exercise and it does not appear logical, taking into account how you plan to exit the business, it may be time to make some changes.
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Best Start payments
Best Start (also known as Best Start tax credit) is a government payment of $60 a week for each child born on or after 1 July 2018. If you’re a New Zealand resident you can get Best Start payments until your child turns 1, no matter what you earn.
You can apply for Best Start payments when you register your child’s birth.
Who can get it- collapse this content
You can get Best Start payments for your child if;
they were born on or after 1 July 2018
you’re the principal caregiver, responsible for their day to day care
you’re a New Zealand resident and normally live here.
Best Start payments are not income-tested until your child turns 1, so you’ll be eligible no matter what you earn.
If you’re getting Paid Parental Leave, you won’t begin receiving Best Start payments until your Paid Parental Leave payments end.
You can choose to have your Best Start payments paid:
Weekly - $60 a week
Fortnightly — $120 a fortnight
Yearly (lump sum) — up to $3,120 (paid after the end of the tax year).
If your family's income is:
under $79,000 a year before tax, you will continue to get $60 a week until your child turns 3
between $79,000 and $93,858 a year before tax, you may continue to get payments at a reduced amount until your child turns 3
over $93,858 a year before tax, you will stop getting payments for your child after they turn 1.
Use of Money Interest rates
In a time when business confidence surveys are at a 10 year low, and economists have indicated two further official cash rate reductions are imminent, the Inland Revenue has announced an increase to their “use of money interest” rate. Although the IRD have always stated the use of money interest is not a penalty, clearly most will see these rates as such, given they are vastly different than market interest rates.
In the amendment announced in early July, the key details were:
An increase for taxpayer’s paying rate of interest on unpaid tax from 8.22% to 8.35% per annum, and
A decrease of the Commissioner’s paying rate of interest on overpaid tax from 1.02% to 0.81% per annum.
These changes took effect from 29 August 2019.
Moving on from cheques
Cheque usage continues to decline every year. Last year cheques only accounted for 5% of payments to Inland Revenue and some people who used cheques also used other payment methods.
From 1 March 2020, Inland Revenue will no longer be accepting cheques if customers have an alternative payment option available. This includes post-dated cheques (cheques dated after 1 March 2020).
Around 90% of the cheques they receive come from clients of tax agents. There’s plenty of time before next March for people to explore your options and find a convenient and secure way that works for you.
There are many different ways to pay – electronically or in person.
Ways to pay
• myIR: You can pay by direct debit and make debit card and credit card payments securely through myIR online services. Visit the IRD website (ird.govt.nz) and login or register for myIR.
• Online banking: You may be able to make payments using online banking. Contact your bank for more information.
• Credit or debit card via IRD website: Use your credit or debit card to make online payments through IRD website. Visit ird.govt.nz/pay.
• In person at Westpac: Pay by EFTPOS or cash at a Westpac branch or Smart ATM.
• Money transfer: If you are overseas you can pay IRD using a money transfer service. Search for “make a payment” on IRD website for more information. Charges may apply for some payment options.
IRD are soon going to start contacting cheque payers (and their tax agents) to let them know about this change and alternative ways to pay.
In the meantime, if you would like more information visit the IRD website at ird.govt.nz/pay.
Recently New Zealand passed legislation which we are finding is affecting many clients, especially individuals, trusts and companies. For this reason, it’s important you are aware of the new law and how it will affect you.
Purpose and objective of new legislation
The law recently enacted is called the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, commonly referred to as “AML”. The primary objectives of this law are to help combat money laundering and terrorist financing.
To ensure compliance with the new legislation, certain parties such as bankers, solicitors, accountants and professional trustees must obtain and verify particular information and complete certain checks on their clients when acting for them. All suspicious activities must then be reported by these advisers to the relevant authority.
How this affects you
Common scenarios which will be caught by the new legislation are:
• opening of bank accounts
• purchasing or selling an interest in land (e.g. houses, farms, commercial buildings)
• purchasing or selling an interest in a business
• purchasing or selling shares
• obtaining finance
• forming new entities, including companies, trusts etc.
If you’re undertaking any of the above activities, greater time is going to be needed in order to complete the documentation now required to satisfy the requirements imposed under the legislation.
Accordingly, ensure you give all your professional advisers, especially your lawyers and professional trustees, adequate time to complete the work that is necessary. At GRA we need at least two clear working days from receipt of documentation. In some cases, this time may need to be extended, depending upon the nature of the transaction and the work that is necessary to undertake in order to comply with the statutory requirements.
Failure to be given sufficient time may mean the transaction you wish to undertake is not completed in time. If this occurs, you could be charged penalty interest by a party you are contracting with.
On a personal note, I appreciate the aims of AML. That said, it appears to me to contravene the ethos of our government, which is to decrease the time, effort and costs businesses and individuals currently incur in carrying out everyday transactions.
The above aside, we must comply with the law. This means when we act for you as your professional trustee, we will need to complete more documentation than we previously have.
To ensure your transactions proceed smoothly, help your advisers by communicating with them. In particular, tell your bankers, solicitors and professional trustees of what you are planning. When planning activities, be mindful that adequate time needs to be given to advisers to satisfy all of the new legislative requirements.
Specifically, when opening bank accounts, be mindful that the process can now take a week or more.
When raising finance, appreciate it can take lenders four days or more to issue documentation. Sufficient time must then be given for all parties, including your professional trustee, to sign loan documentation.
Having Problems Meeting Provisional Tax Payments?
There are three ways to calculate provisional tax. You'll need to choose the best option for you:
Ratio option (for GST registered customers only)
See more at IRD here:
If you estimate it, for instance if you expect your income to drop significantly during the ensuing year, be warned that you could be charged a penalty if your provisional tax estimation ends up being unreasonably low compared with your actual end-of-year tax to pay.
Avoid a penalty by keeping an eye on your income during the year. You should make a new estimate if it it looks like your estimation will be too low. You can re-estimate as often as you like, right up to the date of the final instalment (7th May for most taxpayers).
If you underestimate, you will be charged interest on the underpaid amount from the due date of each payment (28/8/16, 15/1/17, 7/5/17).
Current IRD Interest-rates are:
Underpayment rate: (What they charge you) 8.27% (previously 9.21%)
Overpayment rate: (What they pay you) 1.62% (previously 2.63%)
Also if you are late in your payments (whatever they happen to be) you will get a 1% penalty on the overdue amount.
7 days later you get a 4% penalty, then 1% each month on the accumulated balance.
There is a solution –
This is where you sign up with a tax management company set up to share taxpayers’ funds and approved by IRD.
You pay a lower rate of interest on underpaid tax (about half by their current estimate) and can “sell” overpaid tax to other taxpayers and get higher interest return than IRD pays you. All money is secure, administered by Guardian Trust or Public Trust, for instance.
You can “purchase” the tax payment or finance it (effectively a pre-approved overdraft at lower rates than IRD charge).
Tax Management NZ is one option, using their “Flexitax” service.
For your next payment, register here:
Tax Pooling Solutions are another option. Register here:
How good is your record keeping?
Inland Revenue have signalled they will be looking at businesses’ record keeping systems.
Key targets will be that all jobs and all income are being recorded and that GST is being handled properly. Recent prosecutions indicate that PAYE records are another hot topic, along with the corresponding employment records. Inadequate records are a quick way to set off the IRD alarm bells, so this could be a great time to check your records and systems.
As a business owner you’re required by law to keep certain records. Poor record keeping lets you down just in terms of the penalties that apply for record keeping failures (up to $12,000). Inadequate systems also make it harder for you to keep track of what you owe, how much you have already paid, to whom and what for and who owes what to you. You lose track of things, miss key deadlines and your costs increase in proportion to how much of a nightmare it is to straighten it out.
With the advances in online systems of recent years, many businesses have overhauled their systems and are in good shape to pull out regular management reports that detail their position clearly. However, there may still be areas where things fall through the cracks.
This applies particularly in industries such as construction where large amounts stay on the table as retentions until the job is completed and it is difficult to keep track potentially across several tax years. At the other end of the scale, the high volume of cash transactions of the hospitality sector can lead to badly-kept records.
If you are still making do with the basic systems you started out with, it is possible that your business has outgrown them and they now constitute a business risk. We can help you to look at this and do something about it, if necessary.
ACC and Rental Income
Do you have income from rental? You may be wondering about why ACC collects levies from rental income.
It comes down to whether your rental income is classified as ‘active’ or ‘passive’. ACC levies active rental income but not passive rental income.
The difference? Rental income is classified as active when you put in some effort for it. For example, that might be mental and/or physical work collecting rents, inspecting the property, arranging for maintenance, finding tenants and so on. Where there’s not this degree of effort – for instance, where you have a property manager in place – the income is classified as passive.
If you’re running the rental property through a company, and distribute the income as shareholder salary, this would also be levied as active income. Where income from ‘passive’ rental has been distributed to the shareholder as dividends, these are not subjected to ACC levies.
If you have income from rental properties but you’re unsure whether it’s considered active or passive, please contact us and we can look at your situation.
Five lessons through the eyes of an Insolvency Practitioner:
1. Be wary of companies wanting deposits.
Most companies have sufficient working capital without the need for large deposits from customers prior to the commencement of works. However, some companies experiencing cashflow difficulties utilise customer deposits as working capital and are continually playing catch-up.
Customers should be wary of companies wanting deposits, particularly large ones. We always suggest that customers engage a solicitor when making large deposits and to utilise their trust account to provide a safeguard.
Example: A cutomer had paid a deposit of $100,000 for a new house. Only months after making the deposit, the building company was placed into liquidation and no work had been completed on the house. The builder was later adjudged bankrupt and it is unlikely that the customer will see any of the deposit returned.
2. Be aware of all personal guarantees that you have given.
Businesses often require personal guarantees from directors/shareholders before providing credit. Before signing a personal guarantee, it is important to understand what it means and the result if called upon.
We recommend that directors/shareholders keep a schedule of personal guarantees that they have provided. They should also seriously consider the implications of signing these when opening credit accounts. The only personal guarantee that you cannot avoid is to the bank.
Example: Two directors/shareholders who had given a personal guarantee to a trade supplier over ten years’ ago. Upon liquidation, they believed that their business debts would sit with their limited liability company. However, they had forgotten about this personal guarantee and are facing bankruptcy proceedings as a result.
3. Cash-up unused and surplus assets.
Directors/shareholders of financially distressed companies need to think about asset utilisation. All too often, they are holding out for a better deal or more money before selling surplus assets.
Assets generally do not appreciate in value when they are sitting in a yard or a shed in a disused state. If a business is distressed and has surplus assets, these should be realised. If the directors/shareholders have an attachment to the assets or are not comfortable undertaking the sale, a valuer/auctioneer should be engaged to act on their behalf.
4. Registering a security interest on the Personal Property Securities Register is essential.
The Personal Property Securities Act 1999 has been part of the business landscape for a number of years. Yet a number of businesses still provide inventory, consignment stock and items on lease but do not register their interest.
Registering a security interest provides creditors with a level of protection in the event of a formal insolvency process. However, this has to be registered in the appropriate fashion and supporting documentation must exist.
Example: A creditor has a security interest in some computer equipment that he had sold to a company on credit. He had perfectly drafted terms of trade which granted a security interest in the equipment supplied. However, his interest had not been registered and in the presence of a perfected general security agreement held by another creditor he lost priority and his equipment.
5. Buildings are secure.
Receivers and liquidators are concerned with taking custody of, and securing assets. Businesses should review the security (and insurance) of their assets at regular intervals.
Example: A large three bay workshop shed was removed from a family home by an upset party in a matrimonial dispute. The shed was not an asset of the company, but rather of a related entity. It was a permanent shed of steel/concrete construction and the disgruntled party had engaged labourers and hiab trucks to remove the shed and relocate it to a secure location.
Needless to say, the removal of such a large structure did not go unnoticed and the offending party was swiftly directed to return the shed by the solicitors for the interested party. Such a structure is not generally an asset that is moveable and is difficult to remove and hide.