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.

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.

Family Business ~ Insight | Proposed changes to Approved Issuer Levies

The IRD and Government recently released a discussion paper setting out proposed changes to the approved issuer levy (“AIL”) regime.  AIL was introduced originally because typically New Zealand corporates who borrowed funds from non-residents were subject to what are called gross up provisions in the lending documents.  This meant that if a New Zealand borrower was obliged to deduct non-resident withholding tax from payments to a non-resident lender, the interest rate the non-resident lender wanted was net of and after any New Zealand withholding taxes.  This in effect increased the cost of borrowing funds for New Zealand borrowers.

The Government implemented a solution which was approved issuer levy.  Instead of being a withholding tax like PAYE which was deducted from the interest paid to the non-resident, it was a stamp duty and it was a charge on top of the interest paid by the borrower.  It is 2% of the interest whereas withholding tax rates are typically 10% or 15% of the interest, but supposedly suffered by the lender (unless of course there were gross up provisions in the loan documentation).

The other requirement for approved issuer levy was that the lender and the borrower could not be associated, i.e. it needed to be an arm’s length transaction.

The Government had indicated in 2014 that it was going to review the NRWT and AIL rules and has now released a discussion paper on it.  While this is only for consultation at the present time, it is likely that within the next 12 months this will become law in a substantially similar format to what is proposed.

In broad terms, a simplified summary of the proposals is:

  1. NRWT will need to be used rather than approved issuer levy where there is a back to back arrangement where say an offshore bank is interposed between an offshore associated lender and its New Zealand associated subsidiary or related entity. Often a third party is used on a back to back basis so that approved issuer levy can be used in New Zealand whereas if funds had been advanced by the offshore associate directly to New Zealand, non-resident withholding tax would have been required to be deducted because the lending was then from an associated person.
  2. Similarly, a further anti-avoidance provision is also proposed where there is an arrangement between a group of persons to try to avoid non-resident withholding tax and ensure eligibility for approved issuer levy. An example of this would be offshore parent 1 lending to the New Zealand subsidiary of unrelated offshore parent 2.  At the same time, offshore parent 2 lends to the New Zealand subsidiary of offshore parent 1.  It is effectively a criss-cross arrangement where two unrelated overseas parents work together to ensure that the interest they receive is subject to approved issuer levy as opposed to non-resident withholding tax.
  3. It is also proposed that approved issuer levy could only be used by offshore financial intermediaries or where money is raised from a group of 10 or more non-associated persons. This will catch many current AIL loans and make then ineligible in the future for AIL.
  4. Finally, there are also some rules around the eligibility for onshore and offshore branches to use approved issuer levies in these circumstances.

It is likely that these proposals will be subject to submission and ultimately included in a tax bill by the end of 2015, with a view to them becoming law in the first half of 2016.

If you are affected by these in any way, please do not hesitate to contact us so we can look at how best to restructure your current position or to determine its status under the proposed changes. Call us today.

Family Business ~ Insight | Government Announces Crackdown on Property Transactions

As you will be aware by now John Key announced a number of proposals to improve tax compliance in New Zealand’s Property Investment sector the first parts of which will be included in Thursday’s Budget.

Currently, under New Zealand’s existing tax laws, anyone who buys a property with the intention of selling it for a gain is liable for tax on any gain. This applies equally to New Zealanders and to overseas buyers. These existing laws, while clear about taxing gains, have to rely firstly on establishing the intent of the buyer or an assessment of their intentions by the Inland Revenue at the time of purchase and then being aware that the property has been sold and then having sufficient information on the investor. This is especially true for overseas investors where currently the Inland Revenue may not have the information to track them down and enforce compliance.  They then may have to chase foreign vendors to recover the tax.

To ensure fairness the Government is proposing, in addition to the existing laws, new measures (tightening the tax rules and allocating extra funding to the IRD to track and identify transactions that are likely taxable and enforce compliance) to make sure that property investors pay their fair share of tax – whether they are from New Zealand or overseas.

Subject to consultation the new measures, which would come into force from 1st October 2015 for any property brought and sold, are:

  • A New Zealand IRD number will need to be provided by both New Zealanders and Non-Residents who are buying or selling property as part of the land transfer process. The exception will be the main family home.
  • Non-resident buyers and sellers, if resident for tax purposes in another jurisdiction, must also provide their tax identification number that has been issued to them by that country as well as identification (For example a current passport).
  • To ensure that the Anti-Money Laundering Rules apply to Non-resident buyers, they will be required to set up a New Zealand Bank Account, prior to applying for an IRD Number in order to buy a property.
  • A new “Bright Line” Test will be introduced for both New Zealanders and Non-Residents buying residential property to supplement the current Inland Revenue’s ‘intentions’ test. Under this new test, which will apply to any property brought on or after 1st October 2015, any gains from residential property sold within two years of purchase will be taxed. The exemptions are:
    • If the property is the seller’s main home, or
    • Inherited from a deceased estate or
    • Transferred as part of a relationship property settlement.
  • Under the Bright Line Test if the property is sold within the two year window any gains will be taxed at the seller’s normal income tax rate. The Seller will include the gain in their income tax return for the year.

In addition to the new measures the government is proposing to research the possibility of introducing a withholding tax for non-residents selling residential property. By ensuring all buyers and sellers are required to provide an IRD number for property transaction will make the tracking of non-residents for the Inland Revenue simpler. This additional measure is being mooted to be introduced as early as mid-2016 to ensure overseas property buyers meet their obligations under both the existing law and the new measures.

Timeline for the new Bright Line Test:

  • The government will be consulting with parties over the new proposals;
  • Issues paper released July 2015;
  • Legislation introduced August 2015
  • New Bright Line Test will apply to all properties brought on or after 1st October 2015.

So while there may be an arbitrary 2 year bright line test, the aim of the changes is to make it easier for the IRD to track who is buying and selling property and to recover tax from them. We would expect that there will be a very high chance that a withholding tax will be introduced.

Finally, recent Herald and other newspaper articles covering foreign buyers arriving at their lawyers’ offices with suitcases of cash to pay for properties may be true, but the current Anti Money laundering Rules are more than sufficient to cover these situations. The lawyers are under an obligation to determine the source of the funds and if in any doubt to notify the police immediately or they themselves will face prosecution.

As always, we are available to assist you. Call us to discuss.

Family Business ~ Insight | Base Erosion and Profit Shifting (BEPS)

There has been a lot of talk in the media and in tax circles recently about BEPS proposals internationally.  Basically the problem is that countries do not believe that existing transfer pricing regimes ensure that the correct amount of tax is paid.  One only needs to look at companies like Google, Starbucks and Apple to see the contrived international structures that they use.

However, in our opinion, BEPS is likely to never go anywhere.  The reason for this is simply that countries are not going to collectively sit down and work out how a corporate group’s profit should be divvied up between them and who gets the right to tax what.  Firstly, they do not have territorial authority over profits made in other countries.  Secondly, it ignores the simple political reality that each country will want to take a greater share of the profits and tax them than the others may agree.  For example, developing countries where goods are manufactured will argue that they should receive a greater share of the profits because they actually manufacture the goods, whereas developed countries will argue that they hold the IP and the IP gives rise to the profits.

The real problem underlying all the discussion around where tax should be paid and how much tax should be paid is that the very countries that are whinging and whining about the use of these structures are the very ones that create the opportunities.  The beneficial tax regimes in Ireland, the UK and the USA are there for all taxpayers to use.  Often the governments will put them in place so that they retain the very large companies that they then berate for paying no tax.

In some ways the analogy is of letting a child into a candy shop, not supervising them and simply telling them they should not help themselves to any lollies when all the lids of the jars are taken off and they are all within easy arms reach.  The governments themselves need to look at their rules before they can get concerned about what the companies are actually doing.

Family Business ~ Insight | A Recent Tax Case you need to take note of

Greymouth Holdings Limited v Jet Trustees Limited

This is an interesting little case out of the High Court involving a shareholder dispute between three different parties.  Court orders were made in 2013 requiring the group 2 shareholders to effectively sell their shares to the other shareholders but in actual reality the order was made to sell the shares back to the company itself.

What is interesting with the case is not the legal dispute, but it highlights a fact that we have seen before.  Often in litigation between commercial parties, where settlement is made, the transferor of shares often executes an agreement stating that they will transfer them to the transferee or their nominee.  Often the transferee will attempt to have these shares repurchased by the company but the consequence of this is that the transferor is deemed to receive a dividend which is taxable.

This would mean that the transferor is taxed on the share consideration and it is no longer a capital gain.  Naturally this reduces the net consideration received.

In the Greymouth Holdings case the court found that its orders were explicit that the fair market value was to be paid but this included the resident withholding tax, ie it was not Fair Market Value plus RWT.  There was no other right of set up or lien.

Accordingly, when dealing with sales of shares and in particular commercial disputes between parties which are settled, ensure that any nomination clause excludes the repurchase by the company itself.

Family Business ~ Insight | Nothing like Time, Interest and Penalties when it comes to Tax Bills

You may be aware that during May 14 the IRD went back to the High Court seeking a summary judgement against the accountant John Russell for a “blatant tax avoidance scheme” between the 1970’s to 2000. Russell was alleged to have set up an “elaborate, maze like structure of companies, partnerships and trusts” and provided advice on how others could avoid tax through their participation in the “Russell template”.

When audited the original tax bill under dispute was $5 million due to the IRD reassessing Russell’s personal income saying that he should have declared income of $15.76 million instead of the $298,700.

This case has been back and forth to the courts and the original amount of $5million has, as a result of this being over 25 years, inflated to a staggering $367 million of tax, interest and penalties. Russell has suggested a $1000-a-week proposal; at 79 one would think this is a good option to recover some of the funds outstanding, the alternative would be bankruptcy resulting in little or no recovery.

The case is still ongoing with both parties awaiting a summary judgement as requested by the IRD as well as Russell’s application for a judicial review.

The moral of the story is to sort out tax arrears at the time!

Family Business ~ Insight | Inland Revenue’s Annual Tax Statistics Available online….

You may well ask why in earth would I want to access or know about these BUT

The Inland Revenue for the past 5 years have responded to the request of many external users who want access to a range of data about tax revenue and social entitlements. This snap shot of statistics from both the IRD and the Court Statistics provides you with a visual picture of their customer’s world and hence the world you and I work in. Here you can see how trends are moving with the data, both in graphical and spreadsheet form, being provided between the years 2001 – 2013.

Did you know:
o there were 7,391,454 customers registered with the IRD as at 31st March 2013
o In the year to March 2013 11.9 million tax returns were processed
o In the year to June 2013 $53,771 million dollars of revenue was collected

So how could you use this data for you personally or your business….

Link to the Inland Revenue Annual Tax Statistics here