SALARY TRADE-OFFS UNDER REVIEW
The Inland Revenue Department ("IRD") has recently released an Issues Paper on proposals to alter the taxation treatment of "salary trade-offs". When an amount of salary has been traded-off for non-cash benefits that are not currently taxable, the amount traded-off would be made taxable under the proposals. The current FBT exemptions that are a focus are car parks and childcare provided on the employer's premises, and benefits received by employees of charitable organisations. Rather than removing the exemptions from FBT, the IRD is proposing to focus primarily on those situations where salary substitution is more evident, such as when an amount of salary has been traded-off or given up for non-cash benefits. If there is a cash alternative to taking up the benefit, the trade-off will be taxable. It is also proposed to tax implicit trade-offs, when the amount of the salary alternative is not specifically identified, but the employee has an enforceable right to the benefit.
Two options for achieving this are being considered. The first is to tax all salary trade-offs in the hands of the employee through applying PAYE to the trade-off amounts. When the underlying benefit is already subject to FBT, the salary trade-off amount net of PAYE would be treated as an employee contribution when assessing the employer's FBT liability. The second option is to target the currently FBT-exempt benefits referred to above. FBT would be applied to such trade-off amounts.
It is also proposed that salary trade-offs would be included in "family scheme income". Depending on the mechanism chosen, this would be achieved by either including all salary trade-off amounts in the employee's taxable income, or would require an extension of the definition of "family scheme income" to include all salary trade-off amounts attributed to them under the FBT rules. The definition of "family scheme income" would also be extended to include all employer-provided short-term charge facilities and vouchers, not just when those benefits are part of a salary trade-off or received by an employee of a charitable organisation.
The proposed date of the above tax changes is 1 April 2014, with the changes being included in a tax bill later this year.
How it affects you
One of the main difficulties the Government has with the proposals is how to value the provision of on-site car parks so that a salary trade-off can be quantified.
All employers providing currently exempt fringe benefits to staff and all employees receiving such benefits should consider making a submission on the proposals. If you are interested in having a say, contact your advisor. Otherwise, watch this space!
REIMBURSING BUSINESS USE OF A MOTOR VEHICLE
The IRD issued an Operational Statement in May 2009 regarding the options for reimbursing the cost of business use of a private motor vehicle. There are varying options depending on whether you are self-employed, an employee, or a shareholder employee.
Under s DE 3, a self-employed person may use one of three methods to calculate the proportion of business use of a motor vehicle, namely:
- actual records;
- a logbook; or
- a mileage rate.
The IRD sets a mileage rate that taxpayers may use to calculate the expenditure or loss on a motor vehicle that represents the proportion of business use of a motor vehicle.
Self-employed persons with business-related travel of over 5,000 kilometres must use actual records or the logbook method. If using actual records, accurate records must be kept to show the reasons for and the distance of journeys for business purposes in order to determine the proportion of business use. A notional depreciation deduction is allowed as an actual cost. If using a logbook it must be kept for a test period of at least 90 consecutive days to establish the average proportion of travel for business purposes. You may apply that proportion for up to three years to calculate the deduction for the expenditure.
If a self-employed person's business travel is less than 5,000 kilometres, the mileage rate can be used for any motor vehicle irrespective of engine size whether they are powered by petrol or diesel, but not for motor cycles.
If an employee, or a shareholder-employee uses their own vehicle for business purposes, irrespective of engine size and whether powered by petrol or diesel, the employer may reimburse the employee using the mileage rate. The mileage rate is set to cover the cost of repairs and maintenance, purchase prices, and the cost of fuel, and is based on 14,000 kilometres of travel per year.
The IRD reviews the mileage rate at least once a year, but has announced that there is a delay in releasing the mileage rate for the 2012 income year which should now be available in early July.
How it affects you
The 2011 mileage rate of 74 cents can be used to calculate motor vehicle running costs for completion of your 2012 income tax return and to reimburse employees in the interim.
POINTS OF INTEREST…
The IRD has reported that just over $5 million has been donated directly from a growing number of peoples' pay to their favourite charity or donee organisation since payroll giving was introduced in January 2010.
The High Court has refused to remove an estranged wife as a Trustee of a Trust because there was no evidence of misconduct. Her failure to respond to a request that she resign was not dereliction of duty as a Trustee.
The IRD has confirmed that historic depreciation rates continue to apply to grandparented structures acquired before 1 April 2005.
TO THE POINT…
"When employees and employers, even co-workers, have a commitment to one another, everyone benefits... I reward their loyalty to the organization and to me".
CHANGES TO THE FIF AND CFC RULES PASSED
The Taxation (International Investment and Remedial Matters) Act 2012 received Royal Assent on 7 May 2012.
Some of the key changes introduced by the Act were aimed at providing consistency of tax treatment between similar types of foreign investments. It achieves this by extending the rules that currently apply to controlled foreign companies ("CFCs") to non-portfolio FIFs and extends and rationalises the portfolio FIF reforms so that those investors who are unable to use the active income exemption will generally be taxed on an assumed 5% rate of return (fair dividend rate method).
Under the existing rules, investors in FIFs are able to calculate their income based on how the income would be calculated if the FIF were a branch of a New Zealand company (the branch equivalent method). The branch equivalent method is replaced by the attributable FIF income method. Investors will only be able to use the attributable FIF income method in respect of FIFs in which they have a 10% or greater interest. Such investors will generally calculate their FIF income as though the FIF were a CFC using the active income exemption, although two modifications are made to make the CFC rules more accommodating to FIF investors.
The attributable FIF income method differs from the CFC rules in two key respects. First, the active business test is relaxed. An "active business test" is used to reduce compliance costs in cases where there is a low risk to the tax base. The test is passed and no income is attributed, if less than 5% of the gross income of the foreign company is passive. If the test is failed, then only the passive income (i.e. income such as interest, rent, or royalties) is attributed to the shareholder. Under the CFC rules, New Zealand investors that have more than one majority-owned CFC in a jurisdiction are allowed to use consolidated accounts for all their majority-owned CFCs in that jurisdiction for the purposes of the active business test. The purpose of this measure is to simplify the application of the test when accounting information is available at a consolidated level, such as when a group produces segmental reporting by country. The Act allows a similar consolidation rule for investors in non-portfolio FIFs.
Secondly, the exemption that applies to payments of interest, rent, and royalties from an active CFC to an associated CFC is modified so that a similar exemption applies when a FIF holding company controls an active FIF.
How it affects you
If you hold an interest in a FIF or CFC, contact your advisor to see how, if at all, the changes will affect you.
KIWISAVER AND ESCT
As mentioned in earlier issues, from 1 April employers must deduct employer superannuation contribution tax ("ESCT") from any employer cash contributions they make to their employees' KiwiSaver schemes, complying funds, or other superannuation funds. Depending on each employee's employment agreement, an employer will either need to deduct ESCT from the gross or the net employer cash contributions.
The employment agreement will determine whether the employer can deduct ESCT from their employer cash contributions or whether they need to gross up the employer contributions before deducting ESCT. In most cases employers will probably be able to deduct ESCT from their employer cash contributions.
Employers will calculate ESCT on the:
- gross employer cash contribution if they are deducting ESCT from their employer cash contributions
- net employer cash contribution if they are grossing up their employer cash contributions before deducting ESCT.
The employer will need to calculate the ESCT using the ESCT tax rate unless the employer and the employee have agreed to include the employer cash contributions with their PAYE deducted salary or wages.
How it affects you
If your employment agreement with your employee who is a KiwiSaver member provides that you are to make a gross 2% employer cash contribution to their KiwiSaver scheme, you will be able to deduct the ESCT. Say your employee is paid $660 a week. He uses the M tax code and doesn't have a student loan or pay child support. His annual income is $34,320. This is between $16,801 and $57,600 so his ESCT rate is 17.5%. The gross KiwiSaver employer cash contribution (2% of $660) is $13.20. The amount of ESCT ($13.00 multiplied by 17.5%) is $2.27. The net KiwiSaver employer cash contribution is, therefore, $10.93.
If your employment agreement with your employee who is a KiwiSaver member provides that you are to make a net 2% employer cash contribution to their KiwiSaver scheme, you will need to gross the payment up before deducting the ESCT. Using the above example, the KiwiSaver employer cash contribution (2% of $660) is $13.20. ESCT ((1 minus 17.5%) x $13.00) is $2.75. The gross KiwiSaver employer cash contribution is, therefore, $15.95.
If you are unsure, we suggest you check your deduction obligation with your advisor.
POINTS OF INTEREST…
The Government has announced that student allowances will be limited to four years of study and automatic loan repayments will be increased to 12 % of income over the minimum income threshold.
New Zealand and Canada have, on 3 May 2012, signed a new Double Tax Agreement to replace the 1980 Treaty between the two countries. The key changes are to lower the rate of withholding tax on certain dividends and royalties.
If you take employees, clients, or prospective clients out for a "coffee and muffin" to discuss work-related matters, you can claim 50% of these costs.
TO THE POINT…
"Today I settled all family business so don't tell me that you're innocent. Admit what you did".
Michael Corleone - The Godfather
IS THE IRD'S VIEW BINDING ON THE DEPARTMENT?
The Inland Revenue Department ("IRD") has released a draft statement on when it considers it will be bound by a view given to a taxpayer. This can be important in deciding whether a taxpayer has a tax liability and if so whether there should be a shortfall penalty imposed and/or interest charged. Generally, even in cases where some form of debt relief is sort, interest will not be remitted unless the taxpayer has relied on advice from the IRD. The draft statement gives an indication as to when, in the IRD's view, such advice can be relied upon and to what extent.
Generally, the IRD notes, the IRD is under an obligation to apply the law correctly and the law is not changed merely by the IRD giving a different view (whether published or otherwise). An exception to this is the binding rulings regime. Where a binding ruling has been issued that applies to a taxpayer, that taxpayer, by following the binding ruling, can be certain about how the IRD will apply the law.
It is also noted that from time to time the IRD may give incorrect advice. Where the IRD has given incorrect advice (other than as above), this does not change the tax legally payable, however, where a taxpayer has entered into a formal settlement with the IRD, this settlement will not be reversed.
In relation to published views of the IRD, where a change in view is more favourable for taxpayers, the IRD will consider allowing the favourable position to be applied under s 113 (the IRD's power to amend assessments). Where a new position is less favourable, the IRD will generally apply the new position going forward.
In relation to taxpayer specific advice where the IRD has a different view of the law than was previously communicated to a particular taxpayer in specific advice to them, if the new position is more favourable the IRD will amend a past assessment to reflect the more favourable position. Where taxpayer specific advice replaces earlier advice that is less favourable, the IRD will consider whether, in the circumstances, to reassess a taxpayer who has relied on that earlier advice.
In relation to interest and shortfall penalties, in order for the taxpayer to be relieved of the obligation to pay interest or penalties, they must have relied on an official opinion of the IRD. That opinion could be written or oral.
How it affects you
If you have been given advice by the IRD in a letter or by phone, make sure you keep a full record of that advice so that you can either rely on the advice given in terms of the above, or to ensure you do not have to pay penalties and interest if that advice was wrong.
PENNY AND HOOPER LETTERS ARE OUT
In Issue 12, we noted that the IRD was intending to issue letters to a number of professionals that have been identified as having structures or transactions that are or were similar to those in the Penny and Hooper case.
The first round of letters has recently been issued and the letters have gone to professional persons outside the medical profession.
The letters have included a number of questions to which answers are being sought, including details of the high value assets of the company; the type of work performed by directors, shareholders and their family members; income that is earned other than from professional services; and other staff employed, amongst other things.
The letters are classified as a risk review rather than an audit, and any voluntary disclosures made would therefore be treated as pre-notification of audit disclosures and would therefore be subject to 100% shortfall penalty remission.
The IRD has also indicated that anyone that meets certain criteria so as to qualify as a "Penny and Hooper" disclosure will be limited to reassessment for two years only (rather than four or more years as the IRD is able to do under the legislation. In our experience, there have been some issues in exactly how these reviews have been conducted and the years in which adjustments are being proposed, however we are continuing to work with the New Zealand Institute of Chartered Accountants and the IRD to address these issues.
Essentially, the reviews are designed to ascertain how close, if at all, the structure of the business and the salary levels being paid to "professional owners" are to the Penny and Hooper scenarios.
How it affects you
Although the letters are a risk review only at this stage, we recommend caution when providing the responses, and careful consideration should be given to whether or not a voluntary disclosure should be made.
This is certainly not a one solution fits all scenario, and we urge any taxpayer receiving a risk review letter to seek specialist taxation advice as to how to respond. We discourage anyone from simply responding to the questions that have been asked with a view to obtaining advice if it goes any further. The information that is supplied at this stage will have direct and clear consequences as to whether the IRD investigates further, and you may then have lost the opportunity to mitigate any tax cost that may result.
POINTS OF INTEREST…
The Child Support Bill had its first reading on 8 May 2012. The main change provided by the Bill is the introduction of a comprehensive new child support formula that takes into account estimated average expenditures for raising children in New Zealand with the aim of providing "a more equitable system of financial support in a variety of circumstances" and to "increase incentives for parents to meet their child support obligations".
The Government tax take was $1.57 billion less than expected in the first nine months of the year to March 31.
The IRD extends its focus on the cash economy to farmer's markets.
TO THE POINT…
"There can be no keener revelation of a society's soul than the way in which it treats its children."