Elevate CA Blog

The rate of GST goes up to 15% on 1 October.  Are you ready?  Here is a quick summary of what you need to know.

The IRD will send you the relevant GST 101 form and calculation sheet for your business.  For most businesses, this return is likely to take longer to complete than usual so you should get onto it as early as possible in October.  Just give us a call if you have any queries – or if you’d like us to take care of filing your transitional GST return.

Here is a quick questionnaire to find out what you need to do to correctly file your transitional GST return.

For Invoice Basis Filing

1. Is your return Period to 30 September 2010?

No – go to question 2.

Yes – the good news is that you don’t have to do anything – just file your September GST return as usual using the old 12.5% rate, and your future GST returns using the new 15% rate.  Easy.

2. Is your return Period to 31 October 2010?

Yes – You will need to complete a transitional GST return which identifies your activity to September at the old GST rate of 12.5% – and all activity from 1 October 2010 at the new GST rate of 15%.

For Payments Basis Filing

1. Is your GST Return period to 30 September 2010?

No – go to question 2

Yes – You will need to prepare a debtors and creditors* list as at 30 September 2010 – and adjust for these amounts in your GST return.  This will ensure the transactions that relate to the old GST rate are still taxed at 12.5%.  See below for the calculation.

2. Is your GST Return period to 31 October 2010?

Yes – You will need to prepare a debtors and creditors* list as at 30 September 2010 and adjust for these amounts on the transitional GST return which identifies your activity to September at the old GST rate of 12.5% – and all activity from 1 October 2010 at the new GST rate of 15%.  See below for the calculation.

*Debtors are all amounts still owing to you by your customers for invoices dated up to and including 30 September 2010.

*Creditors are all amounts still owing by you to your suppliers as at 30 September for goods and services with an invoice date on or before 30 September 2010.

Here is the calculation for Debtors and Creditors that you will need to complete if you are on payments basis.  The IRD will send you the calculation sheet, so you just need to work your way through it.  There will be no need to file the calculation sheet with your GST return, but you will need to keep it on file in case of audit.

Once you have completed your debtors and creditors as at 30 September 2010, you will need to complete the following calculation – and then to add or subtract the balance from box 9A.

(Total Creditors $xx Minus Total Debtors $xx) divided by 51.75

ie say Total Creditors at 30 September is $15,000 – and Total Debtors are $8,500

so – $15,000 – $8,500 = $6,500

$6,500 / 51.75 = $125.60.

Add (or subtract if the amount is negative) this amount (in this case $125.60) from box 9A.

For some businesses, this will be very easy – and for others it could take some time.  If you have any problems just give us a call.

 

There has been welcome clarification of the rules regarding the depreciation of commercial building fit-out this week.  The Revenue Minister released a joint Treasury and IRD discussion paper on Wednesday that said a commercial building includes only structural items such as foundations, framing, walls and the roof, rather than the fit-out.

This has become an area of concern for commercial property owners since it was flagged in the 20 May budget that the ability to depreciate commercial and residential property would be axed.  Since the budget it has been unclear whether fit-outs on commercial buildings would be dealt with in a similar manner to residential property. 

 

 

In the case of residential properties, many chattels are considered to be part of the building and therefore not able to be depreciated under the new depreciation rules.

 

The discussion paper states “The law would be changed to clarify that fit-out associated with commercial, industrial, recreational and certain short-term accommodation (for example motels, hotels, rest homes and hospitals) would be able to be separately depreciated.”

 

The rationale for treating chattels differently in commercial versus residential properties appears to be that there are fundamental differences between residential and commercial fit-outs, with the value of commercial fit-outs depreciating more quickly justifying a depreciation regime.

This appears reasonable from the point of view of commercial property owners.  After all, fit-outs have a significant cost and often don’t survive longer than an individual lease contract which may be as short as six years or less.  Whereas much of a residential fit-out can last as long as the building itself.

This removal of depreciation on buildings will heighten the importance of the distinction between capital expenditure and repairs and maintenance – an area which can be rather grey.  With repairs and maintenance typically being 100% tax deductible – and capital expenditure potentially not even depreciable, the stakes have become higher with regards this distinction.

 

 

Hoax emails have been doing the rounds claiming that the recipient is due a tax refund.  Some of these claim to be from a company calling themselves “NZ Tax Refunds” and others claim to be from the IRD.

These emails contain links to a false internet banking login site.

The most recent hoax email claims to be from IRD advising that after the last annual calculation the recipient is due a refund of $988.50 – and requesting the recipient to click on a “Refund me now” link.  The link goes to a false internet banking login page which asks for your personal login details.

 

Here’s an example of the hoax email doing the rounds this week:

 

After the last annual calculations of your fiscal activity, we have determined that you are eligible to receive a tax refund of $988.50.   Please submit the tax refund request and allow us 3-5 days in order to process it.

Click Refund Me Now to submit your tax refund request.

Note:  A refund can be delayed a variety of reasons, for example submitting invalid records or applying after deadline.

Best Regards

Inland Revenue – Te Tari Taake

 

If you have received one of these emails, just delete it without clicking on any of the links.

And if you suspect you have responded to a fraudulent email, please call your bank immediately to alert them.

To be safe, always type your bank’s web address (for example www.bnz.co.nz) directly into your browser rather than following a link – and remember your bank will never send emails with links to internet banking login pages nor to pages that ask for personal information.

 

 

Not so long ago, before the digital era, the printed word was expensive to create.  Back in the day, it may have taken 1,000 journalists, editors, typesetters, printers and the like to publish a daily newspaper.  A dedicated army of newspapermen with life-long careers and ink in their veins.

Every column inch cost big money, so every word was precious.  Cost was a major constraint requiring the writing of concise, clear, tight copy.

Then along came the digital age.  Entire trades became obsolete.  Who has come across a Typesetter recently?  Suddenly it was possible to produce the printed word cheaply.  And by the time the blog came along, the creation of words was instant and inexpensive.  Now there are more published words online than you could possibly read on almost every topic.

Yesterday I heard Bill Bennett present at Word Camp NZ.  Bill is a pre digital-era Fleet Street journalist turned blogger – and he certainly got me thinking.  Bill argues that the new constraint in publishing is no longer cost – but the fact that readers are time poor. 

There is a correlation between the length of a written work and the willingness to read through to the end.  And this is exacerbated by people reading 25% more slowly on-line – and tiring quickly when reading from a screen.

Bill suggests a return to the principles of newspaper writing of old if you’re serious about getting your online words read.  Here are some of his key points for bloggers and on-line writers:

 

Use the skills learned from Twitter to keep things concise.  Twitter requires that you communicate an idea in 140 characters, so transfer this discipline to your general on-line writing;

Unless you are writing for a specialised audience, keep your language and grammar simple;

Stick to easy, simple Anglo Saxon words.  Why use the word “procure” when you could say “get”?

If a sentence is more than 21 words, it’s too long;

Construct your story so a reader “gets it” from the headline and opening paragraph and the detail unfolds as they read on;

If you’re writing on-line, avoid the “long drop”, that is where the big point isn’t made until the very end;

Don’t use passive language – and try to avoid verbs in headlines.  These things just make for crushingly dull reading;

Stick to one idea per piece.  If you can’t say it in 500 words, split it in two or more separate articles.

 

As someone who does an amount of on-line writing, this is interesting stuff for me.  I’m sure if anyone put my blogs, articles or copy to the test they’d find many breaches of Bill’s advice.  But it seems good advice.  So this post contains one idea, it weighs in at 466 words – and this is its longest sentence with 21 words.

 

The 2010 budget signalled an overhaul of the QC regime – and although these changes have not yet been confirmed, they will likely take effect from 1 April 2011. While we have yet to see the proposed legislation, there have been clear signals of what we can expect to see.

By way of background, the QC (Qualifying Company) regime includes the popular LAQC (Loss Attributing Qualifying Company) form of company which allows any losses the company makes to be passed through to the shareholders in proportion to their shareholding. For example, if you hold 40% of the shares in an LAQC which makes a loss of $10,000, you are able to include a loss of $4,000 in your personal tax return thus reducing your own taxable income – and your own tax bill.

This form of structuring has become well known and a popular way of holding loss making business activities such as highly geared property investments or high risk entrepreneurial ventures.  This popularity brought LAQCs to the attention of the Tax Working Group who recommended change in their December 2009 report – largely because they found that during the last housing boom, the number of active LAQCs doubled and the average tax loss claimed by investors increased by almost 50 per cent.

The term LAQC will be dropped, and both QCs and LAQCs will be known simply as QCs.  More significantly than a mere change of terminology, we the following changes are likely to be included in the upcoming legislation – which treasury expects will generate additional revenue of $70 million in the 2012 year:

 

Losses will be limited to the amount that the shareholder has at risk in the LAQC / QC, which would impact on LAQC /QCs which are 100% geared. For example if a shareholder personally contributed say $5,000 to the QC with a much larger amount being borrowed from the bank, then on the face of it that shareholder’s losses will be limited to $5,000 rather than the much larger amount that may have previously been available. However it seems likely that personal guarantees for bank debt may satisfy the “at risk” requirement for claiming losses.  Given that banks lending to QCs almost universally require personal guarantees from shareholders, this proviso would mean no practical impact for most people currently operating LAQC /QCs – unless they genuinely have no money at risk.

Where an LAQC /QC returns a profit, this will be passed through to the shareholders and taxed at their marginal tax rate which is likely to be 33% rather than the company tax rate of 28%. However this will not have an impact on the majority of LAQC /QCs which operate at a loss. There is already a significant incentive to drop out of the QC regime as soon as the venture begins to return a profit as one of the conditions of being in the QC regime is that the shareholders personally guarantee the LAQC /QCs income tax obligations – a requirement that does not apply to companies that are not in the QC regime.

Transferring LAQC /QC shares to existing or new shareholders will potentially trigger depreciation recovery income – as will dropping out of the QC regime.  This depreciation recovery will be the same as if the LAQC /QC had physically sold the depreciated property to a third party – and I suspect this is where treasury expects to derive most of its $70 million additional revenue from these changes.  This will require some careful management – but as the majority of depreciation recovery issues are with buildings, and as buildings can no longer be depreciated after 1 April 2011, this issue will become less pertinent as time goes on.  

 

So in a nutshell, LAQC /QCs will certainly require more careful management – and probably more careful consideration up front as to whether they are indeed the most appropriate vehicle to conduct your business. However there is probably nothing too scary in the wind for most LAQC /QCs.

We will be reviewing all our LAQC /QC clients once we have seen the proposed legislation, but if you have any concerns call us any time.