As usual at Elevate CA on budget day it’s all ears on the live stream as Bill English reads Budget 2013.  Here are our first impressions and some initial comment around the tax and business related aspects of Budget 2013 …

2:07pm

Bill English is explaining the theme of his fifth Budget 2013.  We are hearing that our economy grew by 3% last year roughly in line with Australia – and well above most of the developed world. Budget 2013 is being pitched as all about building the momentum that has already been well established.

2:15pm

“Back to surplus by 2014 /2015” has been the mantra since the government returned to power in 2011. We are hearing that the country is still on track to achieve this target – and that it is also on track to reduce government debt to within 20% of GDP by 2020.

No surprises so far.

2:20pm

NZ Super fund contributions will be suspended until government debt is within 20% of GDP.

This seems prudent to me. After all, a business or household probably wouldn’t invest borrowed money into the international share market. Such a strategy seems to make little sense for the government either.

2:21pm

Mr English is telling us he is now satisfied there is scope for significant and sustainable reductions in ACC levies – and that the budget makes allowance for levy reductions of around $300 million in the 2014 / 2015 year.

This seems politically necessary – there has been a groundswell of discontent for the way ACC funds its future claims liabilities from current ACC levies, and this seems to be an area where the government could come under some justified attack between now and the next election.  Addressing this now seems a prudent move.

2:22pm

Mr English is announcing a $100 million-a-year internationally-focused growth package – the largest part of which seems to be a boost in funding for science, innovation and research. Specifically Mr English is explaining this will involve an expansion of business R&D grants, as well as establishing a new repayable grant for start-up businesses to assist them to become investment-ready. There is also new funding for the National Science Challenges and the Marsden Fund.

Thank you Mr English. This is a no brainer. In the USA, federal and state governments bend over backwards to help their entrepreneurs with support and cash. For example, the federal government doles out US$100 million each year to provide funding to early stage ventures too risky for private investors. I know our government’s pockets are not as deep as its American counterparts, but we do rely on our innovators to improve the country’s fortunes over the long term.

2:24pm

Mr English is picking a couple of sectors for specific government assistance including an investment of $158 million over four years to attract more high spending visitors to New Zealand. The growth package also includes additional funding of $40 million over four years to market and promote New Zealand’s international education sector.

Picking winners is not typically part of the modus operandi at our government’s end of the political spectrum.  But for example the international education sector already contributes more than $2 billion to our economy each year, so assisting industries such as this seems to me a no-brainer.

2:25pm

Mr English proposes letting loss-making start-up businesses claim tax losses on R&D expenditure

Thank you Mr English.  The current policy of not allowing a deduction on much R&D expenditure seems counterproductive for a country that needs its businesses to innovate, so this proposal is long overdue in my humble opinion.

2:26pm

Changes are being discussed to the thin capitalisation rules which will in theory increase the tax takes from multinationals doing business in NZ

This is politically prudent – although it remains to be seen how effective it will be. There has been recent outrage amongst Kiwis over the amount of tax multinationals like Google and Facebook pay in New Zealand given the revenue companies such as these generate from their New Zealand activities. Will this significantly increase the tax take from multi-nationals doing business in New Zealand? Maybe not – but the government does need to be seen to be taking some action here.

2:27pm

An additional $7 million funding for the IRD’s property compliance programme. It is expected that this will return $45m pa in additional tax revenue.

So a 645% return on investment? This seems like a no-brainer from the government’s point of view. But these property compliance audits can drag on interminably and create major stress for those under the spotlight. I would implore the IRD to invest some of these funds in completing these investigations in a timely manner to reduce the massive stress and uncertainty on the real Kiwis who are the subject of audit.

2:29pm

Regarding asset sales, Mr English plans to invest the $1.5billion raised from the sale of Mighty River shares on redeveloping Christchurch and Burwood Hospitals, new schools, Christchurch’s justice and emergency services precinct, Canterbury tertiary education institutes, school network upgrades, upgrading KiwiRail – and for irrigation infrastructure. Meridian Energy will be the next company to be prepared for a partial share offer later this year.

Love them or hate them, these partial asset sales are proceeding – and I’m sure Kiwis will be somewhat appeased when we start the see some real tangible fruits of these asset sales.

2:32pm

Re the overheated housing market, Mr English is announcing powers allowing the Reserve Bank to require banks to hold additional capital on their balance sheet as a buffer – and to restrict high loan-to-value ratio lending in the housing sector. We already knew this from an announcement earlier in the week.

I’m fairly sure the rampant housing market is more to do with a lack of housing supply than with aggressive lending by the banks. I predict this will have absolutely no effect – except perhaps to shut some first home buyers with small deposits out of the housing market.

2:40pm

Whilst outside the scope of my comment here, Mr English is announcing new targeted spending including in early childhood education, school operational grants, the healthy homes programme, rent subsidies, aged care and dementia, elective surgery and a proposal to pay family members who care for their disabled adult children.

I applaud this spending. Prevention seems to me to be 90% of the cure for social ills, so any funds invested in early intervention preventing poor outcomes for Kiwis is good by me!

All in all a positive but predictable budget in my humble opinion.  Feel free to comment below …

 

 

There is no sense in paying $1 to save 28 cents, right?  At this time of year, we always get a number of calls from business owners exploring the idea of spending money on expenses their business doesn’t necessarily need in order to get a tax deduction.

But when your business does eventually need to spend some cash, there is a case at this time of year for bringing that expenditure forward to achieve a tax deduction a year earlier.

The general rule is that expenses can only be claimed in the year they are incurred – regardless of whether you might meet the costs earlier.  But there are some exceptions such as stationery, subscriptions to journals or periodicals, postage and courier costs, rates, road user charges and accounting fees.

But a potentially larger opportunity exists for the purchase of consumable aids.

Providing the cost of consumable aids on hand at balance date does not exceed $58,000, the cost of these may be claimed as a tax deduction in the year in which they are purchased – even if they are unused at balance date.   The goods must be in possession of the business at balance date – and the deduction for expenditure must not have been deferred to a subsequent income year for financial reporting purposes.

So it’s easy to see the opportunity here to bring forward some expenditure that your business will have to incur over the next few months anyway – and potentially bring forward a tax deductible expense of up to $58,000.  At the company tax rate of 28%, this effectively defers up to $16,240 of tax until the next year.

So what exactly are consumable aids?

Unhelpfully, the Income Tax Act does not define “consumable aids”, but here’s the IRD’s policy:  The Commissioner considers that consumable aids are goods or materials to which all of the following criteria apply:

• They are used in any way in the manufacture or production of goods or services from which a taxpayer derives assessable income.

• They are wholly or almost wholly consumed in the production process, or become unusable or worthless after being used once in the production process, or are capable of limited repetitive use, or have a very short life.

• They are not component parts of a finished product, or goods acquired for further processing.

Examples of consumable aids are the chemicals used by a plastic manufacturer, the printer ribbons used by an accountant, and the fertiliser used by a farmer.

Generally speaking these are items or materials which will not become part of the goods or services produced by your business – but which are used in the production of these goods or services. 

But be careful with this:  as soon as you breach the $58,000 threshold, the entire concession is lost.

New Zealand tax residents pay tax in this county on their worldwide income.  This is a straightforward rule on the face of it – but what is a New Zealand tax resident?

Kiwis remain tax residents until they have been outside New Zealand for 325 days in any 12 month period – and have stopped having an “enduring relationship” with this country.

The 325 day test is easy – it’s just a question of fact.

But the question of an enduring relationship with New Zealand is more subjective.  One of the key planks of the enduring relationship question has always been the permanent place of abode test.  A person who retains a permanent place of abode is likely to also remain a New Zealand tax resident.  This has historically been considered along with factors such as where your immediate family live, where your children go to school, whether you belong to New Zealand professional bodies or sporting clubs, whether you have bank accounts or investments in this country or employment to return to on your return – and whether you have personal effects like cars, furniture or clothing retained here.

But the IRD have recently issued a draft Interpretation Statement (IS) which sets out the Commissioner’s latest views which have evolved considerably.  If finalised, this IS will result in many more Kiwis who are working offshore for a long period of time remaining as New Zealand tax residents for the duration of their time abroad. 

Under the draft IS, the notion of an “available dwelling” has greater emphasis.  Kiwis who retain a residential property in New Zealand are likely to be deemed to have an “available dwelling” – even if it is rented out to a long term tenant.  In order for the dwelling to be “available”, it will not be required that it is immediately available.  The dwelling may be a long term rental property that will never be personally occupied by the taxpayer or their family.

This is a tough departure from the IRD’s previous thinking in this area.

This draft IS will be of concern to Kiwis who are currently working offshore and who have considered themselves no longer New Zealand tax residents.  And it will be of concern to Kiwis who are considering leaving the country for a long stint abroad.  If you have retained residential property of any sort in this country, the likelihood is now greater that you will remain a New Zealand tax resident and therefore liable to pay tax here on your worldwide income.

Please call us if you are in either of these situations.

Would you pay $1,000 today rather than paying $1,667 later?  That’s a question many companies must answer before 31 March.

We have a window of opportunity until 31 March 2013 to declare dividends with Imputation Credits (ICs) attached at up to 30% depending on how much tax the company has actually paid.  ICs represent tax paid by the company, which can be attached to dividends thus reducing the amount of additional tax payable on the dividend income in the hands of the company’s shareholders.

After 31 March 2013, the maximum ICs that can be attached to dividends will drop to 28% – meaning an additional tax cost of 2% on dividends declared after 1 April 2013.

The downside is that Resident Withholding Tax (RWT) must be paid to the IRD on the 20^th of the month following declaration of a dividend.  This tax is calculated as the difference between the ICs attached to the dividend – and the shareholder’s own tax rate, which is typically 33%.

In a nutshell. RWT on dividends declared before 31 March 2013 could be as low as 3% of the gross dividend – but payable on 20 April 2013.  And RWT on dividends declared after 1 April 2013 will likely be 5% of the gross dividend – but not payable until the 20^th of the month following declaration of the dividend, which may be some time in the future.

A dividend can either be paid in cash if the company has the funds – or credited to the shareholders current accounts for later payment without further tax implications.

Please contact us if you’d like to discuss this in relation to your particular situation.