STUDENT LOAN SCHEME CHANGES PROPOSED
The student loan scheme is an income-contingent scheme, meaning that the amount that a borrower has to repay in any year is dependent on their "net income". Currently income includes salary and wages, income-tested benefits, New Zealand superannuation, interest, dividends, and IR3 income such as business profits. The Student Loan Scheme Amendment Bill (No. 2) proposes to broaden the definition of "income" for student loan repayment purposes to broadly align with the definition of income used for determining entitlement to Working for Families tax credits.
A New Zealand-based borrower's non-salary and wage income repayment obligation is based on their adjusted net income. The amendments to net income for student loan repayment purposes will capture:
- income from a trust and companies owned by trusts when the borrower is the settlor;
- tax-exempt salary and wages, and certain overseas pensions that are exempt from New Zealand tax;
- distributions from superannuation schemes that relate to contributions made by a person's employer within the last two years, when the person has not retired (excluding KiwiSaver and locked-in superannuation schemes);
- distributions from a retirement savings scheme when the person has retired early;
- income kept in a closely-held company;
- fringe benefits received by shareholder-employees who control the company;
- PIE income that is not "locked in";
- 50 percent of non-taxable private pensions and annuities;
- main income equalisation scheme deposits; and
- payments from trusts, not being beneficiary income, when the borrower is not the settlor.
The Government believes that broadening the definition is important in terms of meeting the policy objective of ensuring a borrower's repayment obligation accurately reflects their ability to repay.
How it affects you
These changes will mean that student loan repayment obligations will become more onerous. If you or your staff have a student loan, we recommend you familiarise yourself with the proposals, and what the change will mean for you.
COMPANY TAX RATE IN THE SPOTLIGHT
There has been a suggestion recently that in light of Australia's suggestion that it intends to cut the company tax rate to 25% that New Zealand could be forced to consider following Australia's lead.
The Australian Treasury's Business Tax Working Group has issued a discussion paper which proposes cutting the rate from 30% to 25% - three points below New Zealand's current company tax rate of 28%.
Finance Minister Bill English said he would not rule out a rate cut, but would not jeopardise the Government's target of reaching a surplus in 2014/2015.
"We think we've got the balance about right now. We wouldn't necessarily chase Australia," English said.
The company tax rate in New Zealand was reduced to 28% to encourage domestic commercial activity rather than have funds to be taken out of companies. The lower rate was also considered to be an important factor in making New Zealand attractive as a country to foreign investors.
An Australian company tax rate undercutting New Zealand's present level would logically get Australia an even bigger share of any foreign investment coming into Australasia.
The Australian Government has directed that any rate cuts would have to be "revenue neutral", meaning the proposed A$26 billion cost of lost revenue would need to be offset by reducing tax loopholes and incentives.
Options proposed include reducing depreciation allowances and research & development incentives as well as toughening up "thin capitalisation" rules, although such measures are being resisted by the powerful natural resources industry in Australia.
The New Zealand Government has already taken those steps, including increasing GST, in order to fund its own company tax cuts - from 33% to 30% in 2008 and from 30% to 28% in 2010. Further, steps have been taken to simplify the Foreign Investment Fund and Controlled Foreign Company rules.
The difficulty is in getting the balance right so that domestic business owners continue to reinvest in the business, and foreign investors do not start to look elsewhere.
How it affects you
It will be interesting to follow any change in the Australian company tax rate and see how New Zealand responds.
For now however, reliance should not be placed on a future lower company tax rate when making business decisions.
POINTS OF INTEREST…
IRD continues its plans for E-GST, which aims to simplify compliance for businesses.
The Income Tax (Universalisation of In-Work Tax Credit) Amendment Bill (51-1) was introduced to enhance the fairness of the Working For Families tax credit scheme by removing the discriminatory aspect of the in-work tax credit and extending the payment of an in-work tax credit to a parent who is in receipt of an income-tested benefit, a veteran's pension or a parent's allowance.
In a case involving Blue Chip investors, the Supreme Court has taken a broad approach to what it constitutes "securities".
TO THE POINT…
"Go back a little to leap further. "
CONTRACT OR EMPLOYEE
The issue of whether someone is an employee or a contractor is often a difficult one to resolve. There may be many reasons why it is important to clarify whether someone is an employee or contractor, but in our view, nothing is more important than to know the tax consequences which can be significant.
These include obligations in respect of deducting withholding tax, PAYE, whether you may register for GST, and whether any benefits being provided will incur FBT.
The "employment limitation" means that employees cannot deduct expenses incurred in deriving income, though contractors can. Likewise, contractors must account to the Inland Revenue Department (IRD) and ACC for premiums, whereas employees will have these taken care of by their employer.
Even though this is a taxation question, the courts have made it clear that to reach a conclusion, reference must be had to the Employment Relations Act 2000. The Employment Relations Act requires that the "real nature of the relationship" be the focus, rather than the sole wording of any contract. In other words, an individual's employment status is not determined merely by their title.
Several tests of employment now exist, largely stemmed from employment law's distinguishing of contracts of service (employee) from contracts for service (contractor).
The first test is intention, generally determined by the wording of the contractual arrangement. However, although intention of the parties is important in determining a worker's status, it is not decisive.
The control test assesses the level of autonomy held by the individual, or control exercised by the person the work is being performed for. When assessing independence, a high level of independence is often indicative of a contractor. The fundamental test assesses whether the person is operating in their own account, in terms of whether they are making a profit or a loss in their own right. If the person suffers the consequences of the financial outcome of the work, this is also indicative of contractor work. Finally, the integration test assesses the level of involvement the individual has in the business. If they are merely an accessory to the business, they are likely to be a contractor. If they are highly integrated, knowledgeable of all staff members, and attend all staff events, they are likely to be considered an employee
How it affects you
If in doubt regarding the status of a worker, it will pay to speak to your Tax Advisor, as the flow on consequences can be costly
We have previously discussed the Government's plan to introduce tax on salary trade-offs (such as employee car-parks and on-site childcare) in an earlier issue, but these changes will become important when you are looking at your contractual relationships with workers, whether they are employees or contractors, and what options you have for negotiating remuneration packages.
The decision to include both or either explicit or implicit trade-offs may have a significant impact for your work or business.
An explicit trade-off occurs where a specified amount of wage has been exchanged for a non cash benefit. These trade-offs are generally specifically included in an employment contract. Implicit trade-offs are more problematic, due to the wide interpretation that has been taken as to what they include. It is proposed that these benefits will cover situations where an employee receives a benefit, with no cash alternative offered, so long as the employee has a documented right to that benefit.
Not only will the inclusion of these items as salary or fringe benefits limit a business owner's abilities to negotiate cost effective remuneration packages, it will most likely become practically difficult to manage.
For example, if no monetary value has been specified, the employer must determine the value of the benefit. If the employer provides car parks to both day-shift and night-shift workers, would the car park have greater value
during the day-shift, as car parks are generally cheaper at night? Or should car parks have the same value irrespective of the time that they are provided? Such issues will increase compliance costs and may cause headaches for many employers.
A car park available to an employee at work (as opposed to one that is provided), if undocumented, may not qualify as an implicit salary trade-off at this stage.
Currently however, the boundaries between implicit salary trade-off and incidental "perk" are unclear. These proposed reforms have the potential to reach as far as the daily staff room fruit bowl.
How it affects you
Although these proposed changes may seem harmless enough, the potential cost to a business, and perhaps even loss of benefit to an employee could be great and could be far-reaching. Watch this space.
We will keep you updated as more clarification from the Government's proposals is provided.
POINTS OF INTEREST…
Currently, taxpayers who have interests in controlled foreign companies (CFCs) can use general purpose financial statements to make various tax calculations which must comply with International Financial Reporting Standards (IFRS) or the "old GAAP" rules. Amendments are being made to the financial reporting framework which makes these references obsolete. Feedback is being sought from taxpayers who use these old reporting standards to measure the actual level of use.
KiwiSaver has hit two million members. More than $12.5 billion has been passed to scheme providers since KiwiSaver was launched in July 2007.
TO THE POINT…
"His men would follow him anywhere, but only out of morbid curiosity."