Family Business ~ Insight | Sales of Businesses

While the general economic sentiment may not be great out there, we continue to see strong interest in buying businesses. Recently we have assisted several clients prepare their businesses for sale, and offers they have received have been very favourable. There is a lot of buyer interest out there, both from NZ and overseas, for good quality NZ businesses. We have seen PEs ranging from 4 to 10 being negotiated. While the 10 was an exceptional one, it shows that there are good prices being paid for businesses, particularly where a buyer perceives the ability to grow profits in the future.

If you are contemplating selling all or a part of your business please feel free to contact us as we are able to both help you through the process,  and more importantly prepare it for sale so as to maximise your return!

Family Business ~ Insight | The Date of Acquisition of the Land

The IRD have recently released a consultation document around the sale and purchase of land. Taxpayers are often faced with having to determine the date of acquisition of the land for the purposes of land disposal provisions, in particular s CB6. Section CB6 deals with land acquired for the purpose of or with intention of disposal. Any gains derived from the disposal of the land are taxable.

The date of acquisition becomes more important for the purposes of the 10 year rule. The uncertainty arises from the timing of when the taxpayer’s intention or purpose should be determined.  Various interests and estates in land are acquired at different times throughout the acquisition process with final registration at the time of settlement.  The case law is not particularly helpful in this regard.

Incorrect determination of the time of acquisition at which point intention or purpose is determined can have serious consequences for the taxpayer.

The IRD has released a consultation document in which the following options are considered:

  • When the agreement for sale and purchase is entered into
  • When the agreement for sale and purchase becomes unconditional  and legal action for non-performance can be taken

 

This consultation is very welcome as it will provide greater certainty for the tax payers. We are of the opinion that more logical would be the second option  when the agreement becomes unconditional, as this is the true time at which point  each party can enforce its rights and obligations for non-performance.

Family Business ~ Insight | The 2013 Australian Budget

The Australian treasurer, Wayne Swann, has stated that “Australia is facing the largest write down since the Great Depression”; as a result of which Swann has introduced a series of tax measures in the 2013 Budget. In addition to tax measures the Government will intensify its tax compliance program by allocating AUD$109M over the next 4 years. Some tax measures that may have relevance to New Zealand individuals and entities include the following:

Thin Capitalisation Rules

Thin capitalisation rules will be amended to set new safe harbour thresholds. The limit for debt to equity will be reduced from 5:1 to 3:1, debt to total asset ratio will be reduced from 75% to 60%. Different rules will apply to financial institutions and banks. For outbound investment, the gearing ratio will drop from 120% to 100%., It is proposed that the worldwide gearing test be extended to inbound investors and that the de-minimis threshold of debt reduction will rise from AUD$250,000 to AUD$2,000,000.

If you have business interests in Australia which are debt funded you may be affected by this proposal.

Capital Gains Tax (CGT)

Changes are also proposed to the foreign resident CGT regime. This is to ensure that gains from disposals of Australian real property are appropriately taxed. The “principal asset test” that is used to determine whether an indirect interest in Australian Real Property exists will be amended. This will ensure that the asset cannot be counted more than once in order to dilute the group’s true asset value.

A withholding regime will also be introduced to support the foreign CGT regime. This will be effective from 01 July 2016. A withholding under this regime does not represent a final tax. A withholding of 10% by the purchaser will be required from the disposal of certain Australian taxable property. The purchaser will be required to remit the amount withheld to the ATO.  The same withholding procedure will apply if the asset is held on revenue account. It is proposed that this withholding be applied to assets over AUD$2.5 Mil

If you have taxable Australian property that is subject to Australian CGT you will be affected by this proposal.

Consolidation regime

It is proposed that the existing loophole in the consolidation regime be closed. Consolidated groups will no longer be able to access double deductions by shifting the value of the assets between the various members of the group. Likewise non-residents will not be allowed to “churn” assets between the consolidated groups.

Dividend washing

A loophole that allows “dividend washing” will be closed. This enables shareholders to claim two sets of franking credits on the same parcel of shares. This happens when the shareholder sells the shares ex-dividend and immediately acquires equivalent shares that carry a right to a dividend.  It is proposed that the shareholder will be able to claim franking credits only once.

If you feel that these rules changes are going to have some impact on your business or personal situation please contact Nigel Smith discuss how he can help you respond to these changes.

Family Business ~ Insight | The 2013 NZ Budget

Most of you have had the opportunity to read about the budget measures. The measures announced in the budget confirmed that the government’s priorities have not changed. The Governments’ desire to return to surplus is through cutting back government spending and collecting more revenue.  The IRD and Treasury have clearly signalled the need to get more blood out of the stone so to speak, and why a full capital gains tax is apparently not on the list, the budget was interesting in that it announced no other similar measures and was more of a tinkering nature than featuring radical new taxes.

The Government will allocate an additional $6.65M in annual funding, beginning in the 2014/2015 tax year for audit activity in relation to property investment tax compliance. In the past such endeavours have proved very successful for the IRD hence why they are high on the priority list.  In addition to tax measures, which are detailed below the Budget also focuses on helping low income families and the areas of health, education, social welfare and houses.

ACC Levies

There are no real surprises from a tax perspective other than the reduction in ACC levies of about $300M in 2014 increased to $1B in subsequent years. Details in relation to these changes will be released later on in the year, so watch this space. None the less this measure will be welcomed by businesses

R&D Expenditure & Tax Losses

Small start-up companies that invest in R&D will be allowed a tax refund if they generate tax losses as a result of their R&D expenditure. This is welcome news for small start-up businesses who are more often than not strapped for cash.

A public consultation will be issued in June 2013 which will provide details in relation to qualifying expenditure, the ceiling for refunds and how the system will operate.

Tax relief for “Black Hole Expenditure”

Certain business expenditure is not deductible or depreciable. This is often referred to as “Blackhole expenditure”. The budget proposes that these be made deductible as follows from 2014/2015 tax year:

  Depreciable Immediately deductible
Patents or plant variety rights Legal & administrative fees
Resource consents under Resource Management Act Expenditure incurred on certain fixed life resource consents Expenditure incurred on consents that are abandoned
Company administration costs All costs associated with payment of dividends to shareholders
Annual Fees Annual fees for listing on stock exchange
Shareholder meetings Annual shareholder meeting costs

These measures will provide additional savings to the tax payers. Whether you will be able to benefit from these savings will depend on the nature of your business activities; a large proportion of taxpayers will however not benefit from these measures at all.

Thin Capitalisation Rules – Non-residents

The rationale of these measures is to ensure that non-residents investing in NZ pay their fair share of tax; the proposed rules eliminate the ability of non-residents to introduce an excessive amount of debt into NZ and claim a deduction.  Legislation is planned to be introduced later on during the 2013 year with the proposed date of application starting at the beginning of the 2015/2016 tax year. Currently the rules apply where a single non-resident controls a company in NZ. What is proposed is that these rules will be extended to where 2 or more businesses control a NZ company in certain circumstances.

Whilst the legislation has not been finalised, the residents will not be affected by these measures.

If you would like to discuss the above points and their possible impact on your business or personal situation please contact Nigel Smith.

Family Business ~ Insight | The Drought is Over!

2013 will long be remembered for the summers we all remember from our childhoods, not the more recent wet and windy ones we had grown accustomed to of late. The long dry warm summer did however had a dark under belly being the economic impact that it bought to our regional economies. This has clearly had an impact on NZ as a whole when you look at the GDP figures. While Auckland may have been insulated from the rural impact, it did have some major impacts of its own largely at the retail level, where people simply did not go and buy the new winter stock stores had on offer from as early as February. Flat retail sales have a flow thru effect onto the local economy. Hospitality aside, retail sales figures and feedback from retailers has seen a poor start to the year for many.

On the other side of the coin, while the savings level continues to climb nationally, many clients seem impatient to get better returns. Chasing higher yields may seem a good idea, but we are not sold on the world economy being fixed just yet. We continue to caution clients to make sure their principal is secure before they worry about returns, as Cyprus showed us Europe and the USA still have a lot of issues to resolve. Many of these may take up to a generation to be resolved; so patience remains a theme for our investing clients. While we don’t give investment advice, we do ensure they have a clear understanding of the risks they face.

The IRD remains a worry to many taxpayers. Their audit and risk assessment activity is at an all-time high from our experience. There is a definite need to get more blood out of the stone. Some targeted areas like the cash economy are proving very successful for the IRD, with its recent focus on restaurants, bars and takeaways being lucrative. Many of their audits in this area have netted very large re assessments for the IRD so expect the IRD to maintain interest in this area. However, the IRD has also been over zealous at times, and we have had to fight their use of arbitrary ratios and surveys as the basis for taxation.

Finally we continue to see and hear stories of cut backs to NZ businesses. Expect more of this particularly as the Australian economy shrinks and slows down. It will be easier for Aussie bosses to get rid of workers in NZ than to get rid of their mates at home, even if the NZ businesses have already gone thru the downsizing exercise when we hit the global financial crisis a few years ago.

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If you would like to discuss the points I discussed above or another area please feel free to contact me