Elevate CA Blog

 

There are new rules for mixed use assets.

A mixed use asset is one used for both private and earning income – and which is also unused for at least 62 days in any tax year.  This includes holiday homes, boats and aircraft.

Although the rules have not yet been enacted by parliament, they will be backdated for most taxpayers to 1 April 2013 for holiday homes – and will come into effect from 1 April 2014 for boats and aircraft.

In general, the new rules work like this:

Let’s say you have a holiday home which is used privately for 100 nights per year and is rented for 50 nights through Book-a-Bach.  It is unused for the remaining 215 days per year.

The income received from the 50 nights of rental is taxable – as it has always been.  But the changes relate to the deductibility of expenses.

Under the old rules, expenses were tax deductible except the portion relating to the 100 nights of private use.  Therefore 265 nights ÷ 365 nights = 72.6% of the expenses were deductible.

Under the new rules, only the proportion of rented nights compared to total nights of use will be tax deductible.  So 50 nights ÷ 150 nights = only 33% of the expenses will now be deductible.

For almost all mixed use assets, this will mean a reduction in tax deductions.  Last year’s budget indicated these changes would increase the tax take by around $109 million over the next four years.

The new rules have many provisos and exceptions.  Some that will be commonly applied are these:

1. The rules don’t apply to long term residential property rentals, business assets where the private use is minor – or to a home office where the expense is claimed on the basis of floor area;

2. Boats and aircraft are excluded from the new rules if their original market value when purchased was less than $50,000.

3. Private use has a rather broad meaning.  It includes use by you, your family or associated people.  Even if you receive market rent from family or associated people, the use is still private.  And if you receive less than 80% of market rent from a non-associated person, that use is also private;

4. If income is less than 2% of the value of the asset, you cannot claim any loss in the current year – it carries forward to the next financial year but is ring-fenced so it can only be used to offset income from that asset;

5. If income is less than $4,000 for the tax year, you can keep the income and the expenses out of your tax return. 

The new rules have many complexities, which are impossible to cover off in under 500 words.  Make sure you get proper advice from your accountant that takes into account your own individual circumstances before taking a tax position in relation to mixed use assets.

One of the more controversial parts of the Employment Relations Act is Part 6A, which is intended to provide continuity of employment for vulnerable employees.  For example, if XYZ Limited loses a contract to ABC Limited, employees may elect to transfer to ABC on the same terms and conditions of employment.  In general, this applies to employees in the catering, cleaning, orderly and laundry industries.

There has been some opposition to Part 6A since it was introduced in 2004.  Business owners argue that it impacts on the tendering process and protects poorly performing businesses by removing any competitive advantage that an up and coming company may offer.  An argument is that Part 6A denies the end customer the ability to determine who enters and for example cleans their premises.

We have seen the sale and purchase of several businesses in these industries, and Part 6A does supress the value the business owner has built up.  All other things being equal, a business is worth less where extra obligations are placed on the purchaser.  Under more normal circumstances the purchaser of a business will choose which staff they want to employ depending on their actual needs.

The opposite view is that these workers are vulnerable because contracts in these industries change hands frequently, and these workers are typically paid the minimum wage with little job security.  As vulnerable workers, they should be protected to some extent from being squeezed by the price sensitive demands of customers.

The Government is considering amendments to Part 6A.  Submissions on the Employment Relations Amendment Bill closed in July and are being considered by the Select Committee – and it seems likely this Bill will then be enacted.

If the amendments are passed by parliament, these changes to Part 6A will apply:

1. Employees will be required to notify the new employer within five working days of their decision to transfer;

2. The outgoing employee will be required to provide certain information relating to the transferring employees;

3. The incoming and outgoing employers will be allowed to negotiate apportionment of liability for employee entitlements.  If unable to agree, a default apportionment formula will apply;

4. The outgoing employer will be deemed to have warranted that they have not engaged in behaviour intended to damage the business of the new employer – such as unreasonably increasing employee entitlements before the employees transfer over;

5. There will be an exemption so businesses with fewer than 20 employees will not be required to take on the vendor’s employees on purchase of a business or winning of a contract.

From where I sit, these changes seem reasonable.  I do agree that the most vulnerable employees should be afforded some extra protection.  But I also believe that many small businesses are equally vulnerable, and Part 6A as it stands is onerous on the small Kiwi businesses in these industries.

The Select Committee is due to report on this Bill on 12 December 2013.  It will be interesting to see where this goes.

 

This event is less serious and more fun!  Who contributes more – lawyers or accountants?

This question will be hotly debated at The ASB Great Debate at Auckland’s SkyCity on Saturday 31st August 2013.  This will be an engaging and entertaining fundraising event with the proceeds going to Starship and Kidney Kids.  Platinum and Gold tables and tickets are sold out, but some Silver tables and seats are still available here >>>. 

A team of Accountants will debate with a team of Lawyers the (obviously incorrect) moot “Lawyers contribute more than Accountants”.  

The Accountant’s corner will be led by outspoken, intelligent and not always politically correct Bruce Sheppard supported by Lyle Irwin from RSM Prince and Mary Jane Daly, formerly of IAG and BNZ.

And he Lawyer’s corner will be led by high-profile Otago university law dean Mark Henaghan supported by public law specialist Mai Chen and Auckland Crown solicitor Simon Moore, QC.

The adjudicator will be broadcaster and comedian Paul Ego, who will ensure maximum entertainment – and who is sure not to allow either side to take themselves too seriously!

See the full team profiles here >>>

No, Elevate CA Limited is not earning a quick commission on these tickets.  We’re promoting this event brought to you by our client International Entertainment Limited because Starfish and Kidney kids are great causes – and because we have a vested interest in seeing the right outcome from the question being debated!

 

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 …