Australian Federal Budget Brief – A NZ perspective of what you need to know about the 2017-18 Federal Budget

Some Important Information for Kiwis from Tuesday’s Australian Federal Budget.

On Tuesday 9th May, the Australian Federal Government released its latest budget. It was an attempt to squeeze more blood out of a stone and to try to balance its books.
Kiwi’s seem to have recently borne the brunt of the Australian Government’s attempts to balance its books with the removal of subsidised Australian university education as an example. The budget yesterday takes this a few more steps further and there are a couple of very important points that our clients need to be aware of:

1. Depreciation restrictions – it is proposed that for properties acquired subsequent to the budget, it will no longer be possible to depreciate plant and equipment apportioned out of the purchase price i.e. chattel split out. Previously there has been an ability to apportion out a part of the purchase price for a commercial property or commercial residential property and claim depreciation on the chattels at higher depreciation rates than building rates. In New Zealand, we continue to be able to depreciate these even though we cannot claim building depreciation.

Existing properties in Australia will be grandfathered. In future where a building is acquired, it will no longer be possible to apportion out the property, plant and equipment. However, where a property owner does spend money on these actual capital items, then they will still be entitled to depreciation.

2. Foreign residents and foreign temporary migrants – individuals who are foreign residents or foreign temporary migrants residing in Australia will no longer be eligible for the principal family home exemption from capital gains tax. When New Zealanders enter Australia, they generally enter as foreign temporary migrants (refer our “Tax Free Sunshine” paper on our Covisory website for the full background).
For foreign residents and temporary migrants moving to Australia from today’s date or acquiring a property after this date, they will no longer be eligible for the exemption. Those already in Australia with existing properties will be grandfathered until June 2019. However, it is not clear whether at June 2019 the properties will then be subject to capital gains tax from that point on subject to a valuation or the whole of the gain up to that point in time will fall to be subject to capital gains tax. More details to follow.

Naturally as Kiwi’s enter Australia as foreign temporary migrants, they are effectively permanently temporary. There is no comment yet from the Australian Government about whether New Zealanders will be specifically excluded from the removal of the principal residence exemption.

We will be arranging to have one of our Australian colleagues come to New Zealand in the next few months to run some specific updates for clients that are affected. In the meanwhile, if you are affected by these changes, please do not hesitate to contact us.

KYC – Know Your Client

The AML Act imposes obligations to ensure NZ businesses, NZ Banks and financial services are not helping facilitate criminal activity. Instead of taking people at face value we now need to know our clients. Are they who they say they are and where did their wealth come from?

  1. All parties to the transaction need to be correctly identified.
  2. This includes verifying identification documents such as a passport, drivers licence or other government-issued identification document.
  3. Other documents that provide proof of the address of the applicant must also be verified.
  4. Identify the source of wealth of the funds being used in the transaction.

 

For our KYC Form please click on this link.

For our Source of Wealth Form please click on this link.

 

 

AML – Are You Ready?

In 2013, the laissez-faire world of New Zealand business as we knew it came to an end with New Zealand playing catch up with the rest of the world.  Phase 1 of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (“the Act”) introduced new laws to tackle money laundering and terrorist financing.

The Ministry of Justice estimates $1.3 billion of proceeds from illegal activities are laundered through New Zealand businesses each year. The new rules have added in an extra level of regulation that has taken some people in New Zealand by surprise.  However, many countries around the world have already adopted these rules and New Zealand was late to the party.  On a positive note, the rules New Zealand adopted are more robust than many other countries.

As you will know by now under the new laws Banks, Casinos and a range of Financial Service Providers had “practical measures” imposed on them to protect New Zealand businesses and reduce the ability of criminals to benefit from illegal activity. It has taken awhile for these organisations to come to grips with the amount of information (read mountains of paperwork) required to comply with these measures.

In short, every customer’s identity needs to be verified and their source of wealth determined to ensure there is no criminal activity involved.

Phase 2 will see the Bill, when it is passed mid-2017, extend this requirement to real estate agents and conveyancers, many lawyers and accountants, businesses that deal in expensive goods and betting on sports and racing.  The law will come into effect in stages between July 2018 and July 2019 allowing these businesses to prepare for the changes.

One result of the introduction of these new rules is that when applying for an Inland Revenue Department (“IRD”) number for a non-resident/off-shore individual is that you either need to supply a New Zealand bank account number or have completed customer due diligence on the applicant.  In our experience, New Zealand banks are not interested in opening bank accounts for non-residents if it does not result in ongoing income for them, which is the case for most non-resident applicants.  This only leaves one option and that is to have a reporting entity as defined by the Act, carry out full know your client (“KYC”) checks on the applicant.  The process of opening a bank account also takes a considerable amount of time and paperwork compared to previously.

Covisory Trust Services is a reporting entity for the purposes of the Act and governed by the Department of Internal Affairs.  In our capacity as a reporting entity we regularly carry out independent KYC checks for non-resident applicants for IRD numbers and provide the appropriate sign-off for the IRD to allow the application to proceed without having to open a New Zealand bank account.  Assuming the KYC checks do not throw up any untoward results they can be completed relatively quickly.  This is a bonus when the IRD application is urgent.

If you are interested in using this service or just want to talk about anti-money laundering and its possible impact on your business please contact either Marcus Diprose or Nigel Smith (www.covisory.com)

RETENTION OF TRUST RECORDS

We have seen a few cases recently where trust records such as trustee resolutions, financial statements etc have been disposed of. It appears these records have been destroyed along with the tax records for the trust after the 7 year retention period under the Tax Administration Act has finished. We want to remind everyone that apart from tax records all trust documents need to be retained for the trust, including all financial statements for the trust.

This is necessary especially if there are any queries about decisions taken by trustees in the past. Under the new anti-money laundering rules we are also seeing banks and other financial institutions request information about the original source of wealth transferred into the trust and this is hard to supply if all of the trust records have been destroyed.

Please contact Marcus Diprose if you need to discuss this further.

Insight | Cash for Dividends or Growth?

In the last year we have received several question from families debating whether they should have a policy around the amount of dividends that are paid.
There is often a conflict between family members working in the business who can see the growth opportunities for it, and therefore want to see cash retained, and on the opposing side, family members who are typically not working in the business, want more dividends because they then can use that cash to support their lifestyle or personal investments outside of the family dynasty.
Sadly, there are no right answers to these questions but it is good for the family to have a discussion and more importantly for there to be an agreed minimum level of dividends set as a percentage of profits.

Insight | New two year bright line tests for land

Just a quick reminder that the new land rules are in effect. These will tax the sale of a residential property within 2 years unless it was a personal residence, subject also to a few other exceptions.

 
The more problematic parts of this have been that:
1. All land owning trusts must be registered with the IRD and obtain an IRD number.
2. In the case of a trust that is an offshore person, the trust must have a bank account in New Zealand.

 
There have been some problems at a practical level obtaining both IRD numbers and opening bank accounts. There have been significant delays in these and consequentially it is important not to leave these to the last minute.

 
If you don’t comply with the new rules and provide IRD numbers or bank accounts, then land transfers cannot be registered. Also, they will effectively become self-policing for the IRD. Sales and purchases will basically be able to be electronically trawled to give the IRD lists of transactions to look at. The problem is that the banks may not actually want these clients as in excuse the IRD is simply forcing them to do its anti-money laundering checks.

 
The final step will be the withholding regime that will apply to offshore persons who dispose of properties within the two years. The proposed amount of withholding tax will be the lesser of:
1. 33% (or 28% in the case of a company) x (the difference between the sale price and the purchase price of the property); and
2. 10% of the purchase price;
3. The net land proceeds after secured creditors are repaid.

 
The purchaser will be required to hold these funds through their lawyer and to remit the money to the New Zealand Inland Revenue Department.

Insight | Taxable! New Zealand Inland Revenue considers proceeds from the sale of gold and silver bullion

The IRD recently released a statement on its view on whether proceeds from the sale of gold and silver are taxable. The Commissioner’s view is that gold bullion bought as an investment will necessarily be acquired for the purposes of disposal. Consequently, any amounts derived on its disposal will be income. The Commissioner considers that the very nature of the asset leads to the conclusion that it was acquired for the purposes of ultimately disposing of it.
Central to the IRD’s view is that gold and silver as a commodity do not provide annual returns of income while being held. They have no use or value in other terms like for instance art where they have an aesthetic value. Such investments are therefore considered to have been acquired for the purpose of disposal, so the proceeds are considered by the IRD to be taxable under section CP 4 of the Income Tax Act 2007.
While there is logic to the IRD’s view, in a world of negative interest rates, it could be argued that perhaps gold does offer a return because it holds its capital value.

If you would like to discuss the possible impact for you – please contact Nigel Smith

Insight | What a Year! Business is Definitely Booming.

Well, sorry for the delay in getting this latest newsletter out but 2015 has certainly been frenetic. Covisory has probably been the busiest it has been in many years. Despite the economic doom and gloom that may exist in New Zealand, especially in the rural sector given the demise of dairy payouts, our clients have seen a lot of activity and it has not been limited to any one particular area.
While the Fonterra payout may have come down and it is certainly affecting rural New Zealand, there are some positive signs in tourism, with meat prices firming, forestry showing strong improvement and the Bay of Plenty on a high with the massive rebound that kiwi fruit has seen.
While interest rates remain low, who only knows how long that will be the case. The new norm means that people are more likely to borrow money and invest in productive capacity and we welcome these opportunities for our clients. Many are grasping the opportunity to do things with their business that in the past, higher interest rates or productive constraints, had seen them reluctant to embark upon.

What we have been working on

To start with, it is probably been the busiest 5 months that Covisory has seen in many years.  We have seen a wide range of activities and has continued strong economic interest in terms of New Zealander’s doing business outside New Zealand, New Zealander’s doing business within New Zealand and particularly overseas parties coming to New Zealand to do business for the first time.

Some of the examples of things we have been doing include the following:

  1. Court appointed trusteeship of a major investment trust, meeting with beneficiaries and reviewing investment strategy.
  2. Negotiating for the sale of an agency business to the principal on behalf of the owners of the agency business.
  3. Structuring a significant acquisition of Australian commercial property by New Zealand tax resident individuals including the use of look through company structures to eliminate double taxation.
  4. Reviewing and restructuring international trust and business structures for ex-pat Kiwi now living in Australia.
  5. Assistance regarding winding up international trust structures for New Zealand and Australian resident beneficiaries under UK inheritance tax structures.
  6. Managing a number of IRD audits in relation to property transactions, privately owned companies and the IRD cash economy audits.

 

Family Businesses:

We continue to work with several families to help them through their succession process.  Some of these will see businesses sold to third parties, and the wealth retained within the family and used to grow current and future generations, investments and business activities.  In these cases Mum and Dad will help children enter into businesses that may have been different to what Mum and Dad have historically done.

Similarly, we also have several assignments at the moment where we are working with the family and existing management to determine the interest of the children and being involved, their ability and capacity to do so.  Through a series of interviews and testing we can determine and predict the likelihood of children to be successful within businesses in the future.  From this we can then work with them to grow their ability for both technical (eg engineering, accounting etc) skills or soft skills around people management, leadership and the like.  Given sufficient time, they can be “reprogrammed” to become the leader that their parents wanted them to be.

The key to this is to work with the family through the process and to gain an understanding of the individuals and families aspirations, together with the capacity of both the family and existing management within the business.  At an extreme, this can involve bringing in a CEO for a period of a few years with a specific view to mind the business between a handover from a parent to a child and to mentor the child into that role.  To often it is difficult for Mum or Dad to mentor a child to replace them, whereas the interposition of a interim CEO can often put a very capable third party into that role and give a far more successful outcome.

All family businesses are different so it is always a matter of working out what is the best way to achieve the desired result.

Trust Work:

With our move to formalise our trust work under Covisory Trust Services we have had the opportunity to be involved in many areas covering such assignments as:

  1.  Reviewing clients existing trust structures, updating trusts and reviewing clients overall affairs to optimise their trust and creditor protection.
  2. A court appointment as trustees in a disputes situation.
  3. Forming trusts for clients.
  4. International tax planning for clients using New Zealand foreign trusts.

 

All we need now is another good Christmas break with good weather, a relaxing time with friends and family and everyone will come back in 2016 with more confidence and excitement for what 2016 will deliver personally and for business.

As always, we have welcomed the opportunity to work with you this year, and look forward to doing so again in the future.

Insight | New Zealand Tax Focus – IRD Continues high level of Audit Activity

We have continued to see a high level of audit activity from the IRD, in relation to property transactions and more recently with a continuation of audits of the cash economy (cafes, restaurants, takeaways and bars) and medium to large sized privately owned companies.  There has been a project run in Auckland by the Manukau and Takapuna offices looking specifically at large privately owned companies and their taxation obligations.

These audits tend to be fairly surgical in that the IRD will do a risk review and then focus on maybe one or two points that are significant to the company that the IRD feels could not only warrant some further investigation, but which would likely bear some cash collection for them.

A senior IRD official recently explained to me that they now view the disputes process as a failed audit, ie the IRD has an expectation when it does an audit that it is picking up on points that it considers to be correct and has a high likelihood of winning without having to go through the disputes process.  Whether that is on a negotiated settlement or by virtue of the taxpayer accepting the IRD’s position will often vary from case to case.

Insight | New Zealand Tax Focus – Review of Closely Held Companies and Look Through Companies

The IRD has also released a discussion document in September 2015 on the taxation of look through companies and closely held companies. Broadly the proposals include recommendations that:

1. There are some minor amendments to the count test for look through companies and trust shareholders to remove some loop holes.
2. It should be possible to have more than 1 class of share for look through companies provided they all carry the same voting rights.
3. Look through companies cannot be used by non-residents to derive foreign income. We have a problem with this as New Zealand has a foreign trust regime which encourages this as well as the limited partnership regime which can be used for the same purpose. We cannot see why from a policy perspective they are suddenly seeking to prevent look through companies being used for these reasons.
4. The IRD has confirmed that it intends to continue to allow residents to derive foreign sourced income through look through companies without limitations. We use these extensively for structuring purposes for holding both active and passive investments in foreign countries.
5. The loss limitation rule will be removed for look through companies unless they are in a partnership of LTCs.
6. There should be no remission income for a shareholder when an amount owed to them by an LTC is subsequently remitted because the LTC cannot repay the loan. While this may seem logical, the tax community has been turning itself inside out trying to work out whether the shareholder is actually that same person or some sort of alter ego.
7. When a company enters into the LTC regime, there is a deemed wind up with shareholders taxed at their marginal rate rather than the existing 28% company rate. This has provided an ongoing opportunity to avoid 5% tax on entry into the LTC regime with many advisors using it as an alternative to liquidation.
8. There is proposed to be some liberalisation of the restrictions around tainted capital gains whereby closely held companies enter into transactions with associated non-corporates, eg trusts. These gains should be able to be distributed tax free on winding up and not simply in situations where the gain is derived in the course of a winding up as is currently the case.