IRD rulings

Over the past few years there has been a pronounced improvement in the manner in which Inland Revenue selects and conducts its investigations.

There has been an increased focus on data analysis, comparisons to statistical norms, and use of external information such as land transfer data. As a result there is an increasing need to consider how IRD might approach a particular transaction or issue.

In cases where the position is unclear or the dollars involved are material, consideration needs to be given to approaching IRD beforehand to seek their approval or view to treat something in a particular way. This can occur by approaching IRD for a ‘private binding ruling’ or a ‘non-binding indicative view’.

Both processes are positive and collaborative, as IRD generally are focused on determining the correct position under the law. In contrast, if IRD approach the matter ‘after the fact’ through the course of an investigation there may be more focus on proving a tax shortfall exists; and their view of the law can feel as though it is bending to accommodate that outcome. It can become emotional, as each party becomes increasingly entrenched in their view, giving rise to significant cost to defend a position and if the taxpayer is unsuccessful, penalties could apply. Too often the incremental cost will exceed what it would have cost to approach IRD before-hand.

A private binding ruling provides the highest degree of comfort, because if successful, the outcome is binding on IRD. This provides peace of mind that a different individual from IRD won’t take a different view in the future. The binding rulings process is not subject to a legislated timeframe within which one must be provided, however IRD work to a timeframe of 3 months and are very good at meeting that time frame. They are also willing to provide early indications of their expected view if required for the purpose of a particular transaction that may be occurring. IRD do charge a fee to provide a binding ruling, it does so at an hourly rate of approximately $160 per hour. The total IRD cost for a ruling is generally about $15k – $20k. This cost must be considered in light of the tax involved and the comfort otherwise associated with taking a particular position. When this is balanced with the downside risk of IRD disputing the treatment in the future it quickly becomes reasonable.

A further option is to acquire an indicative view. It’s understood IRD will consider issues through this process if it will take 20 hours or less. IRD don’t charge for providing an indicative view, however the outcome is not binding. Irrespective of the fact that the IRD is not bound by the outcome, from a practical point of view it should provide a high degree of comfort. It would be unusual for an alternative view to later be taken by IRD, and if this did occur, the fact that an indicative view was acquired should provide a strong negotiating position when asserting no penalties should be charged.

Labour’s Housing Policy

The Labour party has recently released an overview of its new housing policy designed to tackle New Zealand’s housing “crisis”. Labour are of the view that property “speculators” are driving house prices out of reach of first home buyers and have proposed new measures to resolve the issue. There is currently a lack of detail around how exactly the new measures will apply, but based on the details available, they could have an impact should Labour be successful in next year’s election.

 Extending the Bright Line Test

Currently, gains from residential property sold within two years of purchase are subject to income tax, unless the property is the seller’s main home, inherited, or transferred in a relationship property settlement. Labour plans to extend the period of the bright line test from two years to five years. This policy has come under fire, with some critics arguing that it will place a burden on landlords selling for legitimate reasons.

 Banning foreign buyers

Labour proposes to ban non-residents from buying existing New Zealand homes. Who will be classed as a non-resident for this purpose has not been defined; which is a crucial detail that could have a profound effect on the ambit of the policy.

In proposing this policy, Labour have referenced disproportionate house sales to overseas buyers and the relative success of a similar policy in Australia.  While non-residents would be banned from purchasing existing homes, they would not be prevented from building new houses in New Zealand. The basis for this presumably being that building a new house adds to the supply.

 Altering rules around negative gearing

Labour have pledged to consult on ways to limit the ability for negative gearing to apply to rental properties, which has been described by Andrew Little as a “subsidy for speculation”. Negative gearing allows landlords to return a taxable loss on their rental properties that can be offset against their other income to reduce their overall tax liability.

In the lead up to next year’s election, the National Government is likely to come under increased pressure because of its perceived lack of action on the housing market. Labour looks to be seizing the initiative by releasing its plan to combat rising house prices. It remains to be seen whether National will bring a similar policy to the table, or whether they are happy to rely on other measures, such as the Reserve Bank’s recent increase in the loan to value ratio for investment properties to 40%.

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.