Winding Up a Company

Recently, there has been an increased level of sophistication on the part of Inland Revenue (IRD) when reviewing company windups. Important points to bear in mind when winding up a company are outlined below.

Before applying to the Companies Office for removal from the companies register, a company should have discharged its liabilities to all creditors and distributed its surplus assets to its shareholders. The distribution of the company’s surplus assets should be recorded by way of the directors’ resolution. The amounts distributed to shareholders on liquidation are taxed depending on the nature of a distribution, as follows:

  1. Available subscribed capital (ASC) – represents a company’s paid up share capital and can be distributed tax free to shareholders on liquidation.
  2. Capital gain amounts – are generally able to be distributed tax-free on liquidation of a company.
  3. Remaining funds – to the extent that the distribution exceeds ASC and capital gain amounts, the balance will comprise a taxable dividend. This is typically a company’s retained earnings.

In order for capital gains to be distributed tax-free, the process to windup the company must have commenced. Ideally, commencement of a liquidation is evidenced by a shareholders’ resolution signalling the intention to commence winding up the company. The IRD accept that in some circumstances, a less formal step may be sufficient to commence the liquidation, provided the step is overt and carried out with the aim of achieving removal from the register.

We have seen an increasing number of cases where IRD has specifically requested documentation to evidence when the liquidation process was commenced. Therefore it is important to ensure the commencement resolution is drafted and dated correctly, or alternatively, a less formal course of action (if applicable) is supplemented by supporting documentation.

The Income Tax Act also prescribes a specific formula that is to be used to calculate the capital gain amount. This will not necessarily equate to the capital gains recorded on the company’s balance sheet. Through its review process IRD are asking for a copy of taxpayers’ capital gain calculations.

During the removal process approval must be obtained from IRD to remove a company from the register. The request to IRD should be made in writing after the liquidation process has commenced and once all tax compliance obligations have been met, e.g. final GST and income tax returns have been filed. If the final distribution is subject to resident withholding tax, this will also need to be filed and paid before IRD approval is given. The IRD have a list of information that must be provided as part of this request, which is available on their website.

If approval is obtained, IRD will issue a letter stating they have no objections to the company being removed from the register. However, this approval provides no defence if a subsequent review, as described above, identifies mistakes when the various elements of the distribution were calculated.

Care must be taken. If IRD take the view that a capital gain was distributed prior to ‘commencement’, the costs could be significant.

Witnessing History

Over the last few months we have witnessed history, with the majority vote in favour of Britain leaving the European Union (EU). This was a surprise to many, and sent shockwaves around the world. In the days following the vote, the value of the pound declined substantially, and this instability may continue into the future as long as uncertainty is prevalent.

Some of the key drivers behind the vote to exit the EU include a general view held that the EU is holding Britain back. The EU is said to be imposing too many rules on business and charging billions of pounds each year in membership fees for little in return (per the Treasury figures, in 2014/2015 Britain’s net contribution was £8.8 billion). Many people are also concerned with immigration levels and want Britain to take back full control of its borders, reducing the number of people moving there to live and/or work.

Under the current EU framework, it is relatively easy for businesses to move resources such as people and products to and from British and European countries. However, businesses that trade in Europe and Britain are finding it difficult to predict how Britain’s exit from the EU will impact their business going forward.

Although it is difficult to predict what will transpire over the next few years, by understanding the process and expected events behind the exit, you can get an idea of the potential outcomes an exit may cause.

In order for Britain to formally exit the EU, Article 50 of the Lisbon Treaty must be invoked. As Article 50 is relatively new and has never been invoked before, both the timing around the exit and application of the Article are uncertain.

The process of Britain exiting the EU is expected to take some time and until Britain ceases to be a member, the EU laws still stand. From a legal and regulatory standpoint, nothing should change for approximately two years. This window, as prescribed by the article, provides for a renegotiation period allowing for a new legal foundation to be built for Britain’s trade relationship with the EU. During this period a number of other factors could also impact the outcome of the exit where key events will take place, such as the French Presidential election and German Federal election.

The exit implications for businesses will largely depend on the arrangement Britain enters into with the EU following the exit (Britain will likely enter into one single deal with the remaining 27 EU members).

Four scenarios could occur in relation to the different degrees of integration that Britain may have with the EU in the future. These scenarios could take different specific forms, but broadly reflect one of the following:

  • EEA Member – where Britain remains part of the EEA and keeps the four freedoms of labour, capital, goods and services.
  • Free trade agreement.
  • Bilateral agreement (Swiss option).
  • No access agreement, whereby no new trade agreements are established with the EU.

Any businesses trading across the British border will be anxiously waiting to see what happens next. They are likely to be thinking ahead and identifying potential issues and opportunities that may arise following an exit, such as the structure for exporting and importing goods, potential regulation changes, customs procedures and passport controls for business travellers. It could even see NZ businesses being put on a par with UK businesses when trading with counter parties within the EU.

Winter blues tips

With positive thoughts we experience pleasant and happy feelings. Unfortunately, in the midst of winter, it is easy to lose sight of our positive thoughts where the days are short, the temperature low and grey clouds surround us. However, it is important to make the effort to maintain a positive outlook on work, family and life in general.

Positive thoughts can not only bring us positive feelings, but they also change the way we appear, act and react. Take a moment to look at the people around you right now. Are you able to identify those who are thinking happy, positive thoughts? It’s not just the people who are smiling.

People who have a positive mind set have a certain brightness in their eyes. They often walk tall and have elevated energy levels. For some, their whole being broadcasts happiness, health and success. Is it any wonder that we prefer to be around positive people, and avoid the negative ones?

So what can you do to think more positively? Well, it’s not just about putting your head in the sand and ignoring life’s less pleasant situations. Positive thinking is about approaching unpleasant situations with a more positive, productive attitude. It involves focusing on the best outcomes, not the worst.

One reason people struggle to live a positive happy life is due to their minds playing a constant record of negative self-talk. When self-talk, that constant chatter in your mind, is always negative, it can bring down your whole perspective on life and dictates how you relate to yourself and those around you.

A few tips to help elevate your thoughts and reduce negative feelings are to:

  • Recognise negative self-talk – a good place to start is to keep an eye on the things you tell yourself. If you tend to dwell on the negatives or do not feel good about yourself, this is a good indicator that your thoughts need improving.
  • Pause for a moment – when you notice yourself having negative self-thoughts, stop for a moment and think about the scenario. By putting it into perspective we can prevent ourselves from thinking negatively. For example, if you trip and fall, before you berate yourself for being such a ‘clumsy idiot’, stop and think, are you really that clumsy? Or was the ground wet or uneven, were you distracted?
  • Challenge negative thoughts – you can test and challenge your self-talk. Pull yourself up on negative self-talk and ask yourself, “is that really true?”. If you missed that business opportunity, are there any lessons for the future you can take from the situation?
  • Accept yourself -having self-confidence is fundamental to ensuring you are on track to having positive thoughts. The degree to which you value yourself and the belief you have in your skills and abilities impacts the way you think about yourself. Nobody’s perfect, so accept your faults and move on.
  • Get positive – train your mind to conduct positive self-talk. Make an effort to use positive words in your inner dialogues and when talking with others. To reinforce your positive thinking, write three words on a piece of paper and put this in your pocket: “Approachable, Happy, Smart”. Read the note a few times a day and this is what you will project.

No one is immune to negative self-talk, but by making a conscious effort to change the way you think and practice your self-talk, you can work towards removing self-criticism from your life.

One small positive thought in the morning can change your whole day.

Good thoughts. Good feelings. Good life.

Holiday pay mishaps

As seen through the media recently, errors within holiday pay calculations are more common than we’d like to think and not just limited to Government organisations. Due to the complexity of the calculations required to monitor and record holiday pay, errors or deviations from the Holidays Act 2003 (the Act) requirements can occur.

This can result in under or over payments to staff.

Common payroll mistakes include:

  • Incorrect leave payments for employees returning from paternity/maternity leave.
  • Systems incorrectly calculating the amount of leave paid based on hourly rates instead of daily rates (bereavement, alternate, public holiday and sick leave) or weekly rates (annual leave) as required by the Act.
  • Previous allowances earned are not included in leave payments (i.e. underpayment).
  • Discretionary payments (e.g. bonuses) are included in leave payments (i.e. overpayment).
  • Time-and-a-half earned on public holidays is not included in subsequent leave payments (i.e. under payment).

Employee leave entitlements and payment errors are likely to be miscalculated if the information captured within a system is not adequate. Staff members with fluctuations in their normal hours worked are prone to holiday pay mistakes, with the most commonly affected being waged employees.

Often, the correct information within employment agreements, employee master data, hours and type of work is not captured within holiday pay calculations. For example, additional amounts received on top of normal pay (e.g. allowances, time-and-a-half) are often not correctly captured within holiday pay calculations.

Errors may also arise if the payroll system is not intelligent and flexible enough to determine which Relevant Daily Pay/Average Daily Pay (paid leave) and Ordinary Weekly Pay/Average Weekly Pay (annual leave) formula should be used for each employees’ individual circumstances.

Relevant and Average Daily Pay and Ordinary and Average Weekly Pay are defined within the Act but are often not correctly and consistently implemented across payroll processes, data and systems. In some instances, the problem is due to companies using payroll software from international providers that is not tailored to meet New Zealand Act requirements.

The implications from incorrectly calculating holiday pay can be significant. Not only might an employee have been paid too much or too little, it also has flow on effects to PAYE, KiwiSaver, Working for Families and Student Loans and breaches to individual and collective employment agreements.

It is important to check your payroll complies with Holidays Act requirements and ensure payroll, finance and people managers understand the implications of the Act on pay and leave calculations. There is likely to be increased mobilisation and focus from MBIE Labour Inspectorate and tensions with payroll providers over the accountability for remediation and resulting liabilities.

Pressures from staff, unions and ex-staff over pay accuracy (real or perceived) can create tension within an organisation and challenges may arise when trying to maintain employee trust and goodwill with unions. The cost to remediate errors can be significant both financially and through management efforts, not to mention the impact this may have on a company’s reputation.

Changes to how SMEs pay tax

The Government has recently announced a package of proposed tax changes that intend to reduce compliance costs and make tax simpler for businesses. The package is part of the Inland Revenue’s big picture ‘Making Tax Simpler’ initiative that aims to modernise and simplify the tax system. While the proposals will generally apply to all businesses, the changes are expected to benefit small businesses the most.

Tax compliance costs are relatively high for small businesses who play a crucial role in the New Zealand economy. Approximately 97% of enterprises in New Zealand are small businesses, who employ around 30% of the workforce. For these entities, the question of whether ‘close enough is good enough’ is being raised, whereby simplifying the tax compliance process and reducing compliance costs could have wide-reaching benefits for many New Zealanders. The changes proposed within the Governments tax package are outlined below.

Changes to provisional tax

The changes propose to increase the existing use of money interest (UOMI) safe harbour threshold for individuals from $50,000 to $60,000 and allow it to apply to all taxpayers. This effectively means that all taxpayers who calculate and pay provisional tax using the standard or ‘uplift’ method would only be charged UOMI from their terminal tax date provided their residual income tax is below $60,000. Larger taxpayers, who fall outside the safe harbour threshold and pay tax using the standard option, would instead pay UOMI from their last instalment date.

Small Businesses (turnover of $5m or less) will be able to use an “Accounting Income Method” (AIM) to calculate and pay their provisional tax based on the income to date in their accounting software. Businesses registered for monthly GST returns will pay provisional tax monthly. However, businesses who file their GST returns on a two-monthly, six-monthly basis or who are not registered will pay provisional tax every two months.

Self-management and integrity

The changes propose to let businesses:

  • Allow contractors to elect their own withholding tax rate (minimum 10% for resident contractors, 15% for non-resident contractors),
  • Extend withholding tax to labour-hire firms, and
  • Introduce voluntary withholding agreements where contractors can agree to withhold tax as income is earned to manage provisional tax obligations.

Other changes

Other proposed changes include:

  • Removal of the monthly incremental 1% late payment penalty for new debt;
  • Increase the threshold for taxpayers to correct errors in returns from $500 to $1,000;
  • Remove the requirement to renew resident withholding tax exemption certificates annually;
  • Increase the threshold for annual fringe benefit tax returns from $500k to $1m;
  • Modify the 63 day rule on employee remuneration to reduce compliance costs; and
  • Allow small companies providing motor vehicles to shareholder-employees to make a private use adjustment instead of paying fringe benefit tax.

There are also a number of information sharing arrangements proposed in the changes, i.e. reporting of tax debts to credit reporting agencies and information sharing with the Companies Office.

Most measures are intended to apply from 1 April 2017, with the exception for provisional tax payment changes, which have a proposed implementation date of 1 April 2018. IRD is currently seeking feedback from the public, with submissions due by 30 May 2016.

Slammed for Gross Carelessness

A self-proclaimed tax agent has been found by the Taxation Review Authority (TRA) to have taken an unacceptable tax position and demonstrated a high level of disregard for the consequences of claiming GST refunds over a two and a half year period.

The taxpayer claimed a GST refund for five consecutive six month periods from March 2009 – March 2011, accumulating refunds of almost $10,000. The taxpayer argued he was eligible for the refunds as he was carrying on a taxable activity of “services to finance and investment” by (1) acting as a registered tax agent, (2) holding patent rights as a patentee, (3) devising inventions and patenting them, and (4) supplying services to two trusts.

The Commissioner denied the input tax deductions and deregistered the taxpayer on the basis that he was not conducting a taxable activity and was therefore not eligible to claim GST. The Commissioner argued that the conduct amounted to gross carelessness and therefore sought to impose shortfall penalties.

It is a fundamental rule that in order to claim GST you must engage in a taxable activity that satisfies the following four criteria:

  1. There is an activity;
  2. The activity is carried on continuously or regularly by a person;
  • The activity involves, or is intended to involve, the supply of goods and services to another person; and
  1. The supply or intended supply of goods and services is for consideration.

On review of the facts, the TRA was highly critical of the taxpayers’ alleged taxable activities. In regard to (1) acting as a tax agent, the taxpayer asserted that he provided accounting services to many clients during the disputed GST periods. His evidence however, consisted of six invoices for two clients of small sums that could not be supported by bank statements. The TRA stated that even if they accepted that the taxpayer was acting as a tax agent, the taxpayer did not prove that the activity was being carried on “continuously” or “regularly”. The TRA described the activity as spasmodic at best and therefore dismissed the claim that this was a taxable activity.

Regarding (2) holding patent rights as a patentee, the patents the taxpayer referred to expired in 1994 and 2006 respectively, which is before the start of the first disputed GST period. The taxpayer saw his taxable activity as being a “continuous attempt to enforce the equities in the patents” and his position was not affected by the expiry of the two patents. The TRA had difficulty in following this assertion and so found that this activity did not meet the required threshold for taxable activity.

The taxpayer also failed to produce evidence to support his claim that (3) devising inventions or (4) supplying services to two trusts satisfied the criteria of a taxable activity. He produced no evidence of design work or time expended on inventing, no invoices or payment evidence nor any trust deeds or engagement agreements. The TRA found it unclear whether such a trust was even in existence and dismissed both of these claims.

The TRA consequently found that there was no nexus between a taxable activity and the input tax deductions. The taxpayer had taken an unacceptable tax position and demonstrated a high level of disregard for the consequences when he filed GST returns and claimed refunds for each of the periods in dispute. The taxpayers conduct was described as a “flagrant breach of the GST regime”.

All input tax deductions claimed were denied and shortfall penalties for gross carelessness were imposed in each of the GST periods in dispute.