Elevate CA Blog

 

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.

 

There are a few payroll changes that will affect almost all employers from 1 April.  You will need to be aware of these when you complete your Employer Monthly Schedules (EMS) for pay periods starting on or after that date.

 

KiwiSaver

The minimum contribution rate for employers and employees will increase from 2% to 3% of gross salary or wages from the first pay period starting on or after 1 April.

Whilst employees under 18 years of age will still not be automatically enrolled to KiwiSaver, you will need to deduct KiwiSaver employee contributions if requested by the employee or by the IRD.  You will still not be required to make employer contributions for KiwiSaver members under 18 years of age.

School children

If you pay salary or wages to schoolchildren, you will now be required to deduct tax and record their details on your EMS.

The end for ML and ML SL tax codes.

Unless your employees give you a new IR330 Tax Code Declaration, any employees using tax code ML will revert to tax code M from 1 April – and any using tax code ML SL will revert to M SL on the same date.

Student Loan Repayments

The repayment rate for standard student loan deductions will increase from 10 cents to 12 cents from 1 April.

 

If you have any questions regarding these changes, please call us before you complete the first EMS after 1 April 2013.

Are New Zealand bricks and mortar retailers becoming show rooms for online retailers?

Who among us hasn’t browsed around a store doing homework and picking the brains of the sales staff – then gone home and searched out the best price online?  And then possibly purchased the product for considerably less from an online store that is unencumbered by the costs of bricks, mortar, display stock, retail rent or sales staff?

I’m not for a moment saying this behaviour is wrong.  But it does pose a major challenge to traditional retailers who work on the theory that a well stoked showroom and knowledgeable sales staff will give them the edge.

Presumably as a result of these very challenges, the owners of the Dick Smith chain of stores last year announced the closure of up to 100 stores across Australia and New Zealand with a spokeswoman adding that “we’ve been closing about 30 stores a year for the last three or four years, so it’s only a bit of an acceleration of that.”

As an example of this challenge, I recently purchased a “Go-Pro” – a waterproof video camera that attaches to kayaks, surfboards, mountain bikes etc.  Every bricks and mortar Go Pro stockist lists this camera for exactly $629.

But you can buy the same GoPro from Amazon for a very cool US$299 with an additional US$30 for courier delivery straight to the door.  That’s NZ$392 all up – and to add to the indignity for our local retailers, you don’t pay GST on imported online goods such as the GoPro because they cost less than $400.

So do I walk into a local camera store to touch and feel a GoPro before buying?  I could spend as much time as I need to with the knowledgeable and helpful sales guy – and then buy from Amazon paying $392 instead of $629.

The fact that so many Kiwis are doing just that raises some tough questions, like these:

Should the GST system be changed to remove the GST advantage that offshore online stores enjoy over their local competitors?

Given that anyone can purchase items costing less than $400 online from offshore retailers free of GST , will this behaviour eventually seriously erode this country’s tax base?

Will the fact that shopping is a major recreational pastime offering instant gratification be enough to ensure the survival of our bricks and mortar retailers?

What can be done? 

A possible solution is to compel the credit card companies to add 15% GST to online offshore purchases – and to return this to the IRD.  That would presumably be easy enough, as there are only a few credit card companies – and I think it would be fair to say that almost all online purchases are completed electronically.

At least that would remove the unfair GST advantage offshore online retailers enjoy over local retailers, leaving the local businesses to reinvent themselves and compete in this new normal if they can.