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 | An Update around the Covisory Group

Over the last 18 months Covisory has quietly grown as we realised some of our long term goals around you the client and providing you with the best opportunities and services that best fit what you need in all facets of your business and personal lives.

The Covisory Group has developed into four different operations under the Covisory brand made up of:

  • Covisory Partners
  • Covisory Management
  • Covisory Trust Holdings
  • Covisory C&A LP.

 

Covisory Partners is headed by myself and we continue to specialise in taxation matters, mergers and acquisitions, strategic planning, succession planning and corporate governance and directorships.

Covisory Management was established by Barry Tuck and specialises in advanced business support including business valuations, mergers and acquisitions, litigation support and provision of independent directorships and trusteeships that are either privately of court-appointed.

Covisory Trust Holdings was formed August 2014 with Marcus Diprose, an experienced trust lawyer, who joins me to provide a specialist Trustee Company offering full trustee services to both Foreign and Domestic Trusts as well as assisting with Insurance considerations relating to Shareholder Buy-Sell Agreements.

Covisory C&A LP – As a group we were particularly conscious of some Covisory clients requirements for us to facilitate completion of annual accounts and tax returns. This “all services” accounting practice has been established with Amanda and Colin Davies and Rob Campbell, accounting professionals with over 35 years of combined public practice accounting experience focused on combining appropriate up-to-date technology with a personal approach in the delivery of cost effective and timely accounting services.

Please give me a call if you would like to find out more about any of the four companies within our group and how they can help you.

 

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.

Insight | New Zealand Tax Focus – Will GST be charged on imported digital goods and services?

The Government issued a discussion document in August on the GST treatment of cross border services, intangibles and goods.  Broadly they are seeking to force non-resident suppliers of certain digital services (movies, music and video streaming) to register in New Zealand and account for GST.  It is still only a discussion document but again clearly shows the Government’s intent on where it is heading.

Insight | New Zealand Tax Focus – Residential Property in the Gun

The Government and IRD made their intentions clear that they intend to continue their focus on the taxation of property transactions. The recently introduced 2 year rule and the newly proposed withholding tax for certain non-residents show that there is an intention to get serious about the collection of tax.

In short, the key changes are as follows:
1. Income tax will be payable on any gains from the disposal of residential land acquired and disposed of within 2 years of acquisition.
2. Residential land will be defined but will exclude land that is used predominantly as a business premises or farm land. It will be ordinary homes.
3. There will be 3 specific exemptions to the rule:

a. The disposal of the main residence of the transferor;
b. Inherited land;
c. The transfer under relationship property agreements.

4. The main home exemption will apply if property has been used predominantly for most of the time that the person has owned the land as their main home. However, there are also rules which pick up when the exemption has been claimed twice in relation to other properties in the previous 2 years, ie you cannot have a regular pattern of buying and selling these.
5. A similar rule will apply to trusts where it is the main home of a beneficiary or settlor.
6. Losses arising from the Bright line test will be ring fenced and only able to be used against similar gains.
7. There will also be some anti-avoidance provisions around transfers of shares in companies.
8. A withholding tax is proposed is relation to certain sales of land by non-residents. This is still at the Bill stage.
9. There has also been increased requirement for non-residents to provide documentary evidence and information enabling them to be tracked to their home country so that the IRD can pursue them for taxation if required.