Free accounting resources and information
Sale of Physical Goods via the Internet
If a GST-registered person sells goods via the internet and the goods are physically supplied to a customer in New Zealand, GST is chargeable at 15%.
If goods are sold via the internet and physically supplied to customers overseas the sales can be zero-rated for GST purposes. It is important to prove the goods have been exported (entered for export by the supplier) and sufficient evidence should be held to prove the export.
Sale of Digital Goods via the Internet
If a GST-registered person sells digital products via the internet which are downloaded such as music, software or digital books, to a New Zealand customer they must charge 15% GST. (These products are treated as services for GST purposes).
If digital products are sold via the internet and downloaded by an overseas customer they can be zero-rated but it is important to prove that the products are “exported” otherwise GST must be charged.
Evidence required to prove products are exported
Physical goods are exported overseas by the supplier. The customer is located overseas.
- Delivery evidence, for example, bill of lading showing export by sea, air waybill for export via air, packing list or delivery note showing overseas delivery address, insurance documents.
- Purchase order showing overseas delivery address.
Physical goods are exported overseas by the supplier. The customer is located in New Zealand at the time of purchase.
- Delivery evidence, for example, bill of lading showing export by sea, air waybill for export via air, packing list or delivery note showing overseas delivery address, insurance documents.
- Purchase order showing overseas delivery address.
Digital products are downloaded by a customer who is located overseas.
- The customer should make a declaration at the time of the transaction that they are located overseas and that the products will be used outside New Zealand. For example, “I declare that I am not in New Zealand at this time and will not be making use of this supply in New Zealand” and provide their name and full address.
- Evidence of payment received from overseas customer. Credit card information may be a guide as certain credit card number series may only be issued in New Zealand. However, this process is changing and is not entirely reliable.
- Email address may suggest that the customer is overseas but is not final proof as a New Zealand resident can obtain an overseas email address.
- Internet Protocol (IP) address of the customer – although this is not final proof that the customer is overseas.
Note: In this scenario, as can be seen from the above list, it is unlikely that only one form of information will prove that the customer is overseas. It is expected that a reasonable attempt would be made to confirm the customer is overseas to support zero-rating. For more information refer to the E-Commerce and GST section on the IRD website.
GST is a tax on the supply of goods and services in New Zealand by a registered person on any taxable activity they carry out. The rate for GST is 15% although it can be zero-rated for exports.
Certain supplies of goods and services are ‘exempt supplies’ and exempt from GST. These include:
- Certain financial services
- Sale or lease of residential properties
- Wages/Salaries and most Directors’ Fees
GST registration is required if the annual turnover of the business for a 12-month period exceeds or is expected to exceed $60,000.
GST returns can be filed monthly, bi-monthly or six monthly. There are certain requirements for who must file monthly returns and who can file six monthly returns.
There are three methods of accounting for GST:
If your turnover exceeds $2,000,000 pa you cannot use the Payments basis option.
If you are selling or are thinking of selling your products through your website please also refer to the section on GST and E-Commerce.
For more information on GST and how to register give us a call or visit the GST section of the IRD website.
Fringe Benefit Tax (FBT) is a tax on benefits that employees receive as a result of their employment, including those benefits provided through someone other than an employer.
The four main groups of fringe benefits are:
- Motor vehicles (refer to the IRD website for more information on how to calculate)
- Low-interest loans other than low-interest loans provided by life insurance companies
- Free, subsidised or discounted goods and services, including subsidised transport for employers in the public transport business
- Employer contributions to sick, accident or death benefit funds, superannuation schemes and specified insurance policies
Gifts, prizes and other goods are fringe benefits. If you pay for your employees’ entertainment or private telecommunications use, these benefits may also be liable for fringe benefit tax.
Fringe Benefit Tax is payable quarterly (however some employers may be able to elect payments filing on an annual basis).
Refer to the IRD website for more information on how fringe benefit tax is applied and calculated on:
If you would like further information on whether FBT is payable and how this is calculated just give us a call.
Working for Families tax credits are available to families with dependent children aged 18 years or younger. These are refundable, meaning that if the credits exceed the person’s income tax liability they are able to be refunded to the taxpayer.
The Working for Families tax credits are made up of the following:
- family tax credit – credits of tax paid for each dependent child
- in-work tax credit – available to couples who work at least 30 hours a week between them and to sole parents who work at least 20 hours a week
- parental tax credit – available to working families with a newborn child who do not receive paid parental leave or income-tested benefits
- minimum family tax credit – this credit ensures a minimum annual family income for those families falling below the threshold
Inland Revenue administer the Working for Families tax credits, however taxpayers who receive an income-tested benefit will receive payments from Work and Income.
For more information just give us a call or visit the IRD website.
Entertainment expenditure is limited to a 50% deduction if it falls within the following:
- Corporate Boxes
- Holiday Accommodation
- Pleasure Craft
- Food & Beverages consumed at any of the above or in other specific circumstances, for example:
- incidentally at any of the three types of entertainment above, eg, alcohol and food provided in a corporate box
- away from the taxpayer’s business premises, such as a business lunch at a restaurant
- on the taxpayer’s business premises at a party, reception, celebration meal, or other similar social function, such as a Christmas party for all staff, held on the business premises (excluding everyday meals provided at a staff cafeteria)
- at any event or function, on or away from your business premises for the purpose of staff morale or goodwill, such as a Friday night ‘shout’ at the pub
- in an area of the business premises reserved for use at the time by senior staff and not open to other staff, such as an executive dining room used to entertain clients
There are a number of exemptions from these rules, please contact us if you are unsure, or see the IRD Entertainment Expenses (IR268) booklet for more information.
All New Zealand residents and people entitled to live here permanently up to the age of 65 are eligible for KiwiSaver. All new eligible employees must be automatically enrolled in KiwiSaver. However there are some employees who are exempt from automatic enrolment. These include:
- Those under 18 years of age
- Casual agricultural workers or Election Day workers
- Private domestic workers
- Casual and temporary employees employed under a contract of service that is 28 days or less
Employees who are automatically enrolled can opt out but must do so within a specified time (from the end of week 2 of their employment to the end of week 8) by filing the prescribed from (KS10).
All eligible existing employees can join the scheme at any time they wish by notifying their employer.
There are 3 employee contributions rates, being 3%, 4% or 8%. The employee can elect the rate at which they want their contributions deducted. If an employee does not elect a rate then the default rate of 3% will be used by the employer for contribution deductions made.
Compulsory Employer Contributions
From 1 April 2008 it became compulsory for employers to contribute to their eligible employees’ KiwiSaver scheme unless the employer is already paying into another registered superannuation scheme for the employee.
This minimum compulsory contribution rose to 3% from 1 April 2013.
Employer contributions are subject to Employer Superannuation Contribution Tax (ESCT) on a progressive scale based on the employees’ marginal tax rate.
The government also:
- Contributes $1,000 (tax free) when a member first joins
- Pays annual member tax credit (for those 18 and over) of up to $521.43 (effective from 1 July 2011)
- Funds first home deposit subsidy through Housing NZ if the relevant criteria are met
Note: There is no Crown guarantee of KiwiSaver schemes or investment products of KiwiSaver schemes.
- Give new employees and other existing staff who are interested an Employee information pack (KS3)
- Pass employees’ details to Inland Revenue to enable them to be enrolled
- Deduct contributions from employees’ gross salary and pay these to IRD through the PAYE system
A list of KiwiSaver providers is available at www.kiwisaver.govt.nz
For more information on KiwiSaver and how this may apply to you give us a call or refer to the KiwiSaver for Employers information available on the IRD website.
Deciding the most appropriate structure for your business can be difficult. Each type of business entity has its own unique advantages and disadvantages. The following outlines some of these and can help when deciding which structure best suits your needs.
- Simple and does not involve any costs relating to establishment or administration of a separate entity.
- The income is subject to progressive rates of individual tax.
- Does not easily permit equalising of income with other family members.
- Does not provide limited liability.
Income is subject to provisional tax.
- This form is most satisfactory for small businesses, where other family members have other income or where there are no family members to share income with.
- Simple and not expensive to establish or administer.
- Can provide for income to be shared in desired (fixed) proportions.
- Tax is paid at personal rates.
- Losses are deductible against other income, subject to certain loss offset limits.
- No limited liability.
- Income distributions may be inflexible.
- Income is subject to provisional tax.
Best used for husband and wife businesses where simplicity and equalising of income achieves maximum effectiveness.
- It is generally well understood by financial institutions and customers.
- Provides limited liability, although most lending institutions will require personal guarantees.
- Permits splitting of dividend income to family members through shareholdings.
- Dividends may have imputation credits attached which will reduce or eliminate the individual’s tax liability
- If the company is a ‘qualifying company’, dividends will either carry imputation credits or be tax-exempt, and tax losses can be attributed to shareholders (if the company is also a ‘loss attributing qualifying company’.
- The Companies Act 1993 allows the registration of a ‘one person’ company.
- Income is taxed at a flat rate of 28%.
- Costs of establishment and administration.
- Splitting of income by way of shareholding is inflexible and cumbersome.
- The company tax rate may be higher than that applicable to individuals with relatively low levels of income.
- Except in the case of a ‘loss attributing qualifying company’, losses can be utilised only in the company (or within a group of companies) and are available for carry forward only where there has been continuity of ownership.
Where the company ‘profit’ is distributed by way of salary, the salary is deductible and taxed at the individual marginal rates. Alternatively, profits distributed by way of dividend may have imputation credits attached, eliminating the double taxing of company income. The ‘qualifying company’ tax regime can also permit beneficial treatments of dividends and losses.
- Provides maximum flexibility and distribution of income or capital gains to family members.
- Income vested in beneficiaries (beneficiary income) during the year or within 6 months thereafter is taxed at personal tax rates.
- Income not vested in beneficiaries, ie trustee income, is taxed at a flat rate of 33%.
- Not always understood by financial institutions and creates problems when borrowing.
- Is relatively expensive to administer where a corporate trustee is used.
- Losses can be recouped only against future trust income.
- Trustees are required to comply with New Zealand trust laws.
- For the 2001-02 and subsequent income years, distributions of beneficiary income from trusts to children under 16 years will generally be taxed at a flat rate of 33%.
The profits may be distributed as beneficiary income and are taxed at the beneficiaries’ individual marginal tax rates.
Talk to us before deciding on any business structure. There may be tax implications depending on your particular circumstances that may need to be considered.
It is common knowledge that Inland Revenue is increasing its reliance on auditing and investigating taxpayers’ affairs, and is more aggressive in its demands for access to information. These are practical guidelines for use in most situations.
Information requests will generally either be informal requests or formal demands.
Examples of informal requests are telephone calls or letters requesting information without putting the recipient under a legal obligation to provide information. Some letters will routinely cite the Tax Administration Act 1994.
Generally, requests for access to audit workpapers will only be made in exceptional circumstances, where inquiries are being conducted by the general audit units of Inland Revenue.
Information will be requested first from the taxpayer.
Inland Revenue will seek access to accounting and tax return workpapers containing information which supports the financial statements and/or the tax return.
Requests will be limited for access to advice workpapers in which an accountant gives advice to a client on tax or other matters, and all workpapers in support of that advice, including due diligence and prudential review workpapers and those prepared for litigation.
Access will be sought to the factual content of advice workpapers, but generally only after attempts have been made to obtain such information from the taxpayer.
Powers of Inland Revenue
The law gives Inland Revenue the power to require any person to furnish in writing any information and any books and documents which they consider relevant.
They may remove and retain any books or documents for as long as it is necessary for them to carry out a full and complete inspection of those books and documents. They can also make copies of any books or documents produced for inspection.
They are not allowed to retain the books or documents throughout the course of an investigation or otherwise beyond such time as is necessary for a full and complete inspection.
It is an offence for a person to refuse or fail to comply with any such demand. However, it is a defence if the person proves that they did not have relevant information, books, or documents in their knowledge, possession, or control.
The court may review the information to determine whether it is the subject of legal professional privilege.
The provision specifically overrides any enactment or rule of law requiring the taxpayer not to disclose information or to keep information secret, or not to perform an obligation. Compliance with such a request from Inland Revenue will not be held to be a breach of any such enactment or rule of law.
Inland Revenue can require written information, books, or documents to be produced to a particular Inland Revenue office.
Full and free access does not empower Inland Revenue to force entry, even with reasonable force. Access is only authorised to allow inspection of books or documents. It is probable that inspection cannot take place without the taxpayer being:
- Told with some precision what the Inland Revenue officer seeks to inspect; and
- Given time to determine whether anything which the officer seeks to inspect is or may be privileged.
It is only inspection that is allowed – not seizure. However, Inland Revenue is allowed to remove books or documents to make copies. Such copies are to be made, and the books or documents returned, as soon as practicable.
Copies certified by Inland Revenue will be admissible as evidence in court as if they were the originals.
The owner may inspect, and obtain copies of, books or documents removed by Inland Revenue.
Books or documents requested for inspection must be considered by Inland Revenue or an officer of the Inland Revenue to be:
- Necessary or relevant for the purposes of collecting any tax or duty;
- For the purpose of carrying out any other function lawfully conferred on the Commissioner; or
- Likely to provide information otherwise required for the purposes of the Revenue Acts.
There must be a reasonable basis for Inland Revenue determining that the documents may do any of the above.
Inland Revenue is not to enter a private dwelling except with the consent of an occupier, or under a warrant. Warrants:
- Can only be obtained from a judicial officer (being a judge, justice, or registrar of a District Court);
- Are valid for a period of 1 month from the date of issue or a lesser period, as the judicial officer considers appropriate;
- Must be in a prescribed form; and
- Must be produced when first entering the private dwelling and after entering whenever reasonably required to do so.
One of the exceptions to Inland Revenue’s powers to examine or seize documents relates to documents which are subject to solicitor-client privilege.
This privilege dates back to the 16th century. It protects the confidentiality of communications passing between a solicitor and their client by providing that such communications are not admissible as evidence in court, and may not be disclosed without the client’s consent.
Although the law does not admit any accountant-client privilege, there may well be instances of communication passing between an individual and their accountants which qualify as privileged communications under solicitor-client privilege. An example is where the accountant, acting expressly as agent on behalf of a client, requests and receives a legal opinion on a particular matter. Also included would be copies of letters between a client and the client’s solicitors which may be in the accountant’s files.
Similarly, communications between accountants and their clients, where the accountant is acting as agent for a solicitor, are protected from disclosure by solicitor-client privilege, although this situation is likely to be a rare occurrence.
Accountants are not generally involved in the actual drafting of trusts, but it is appropriate that we offer some advice.
People commonly refer to trusts as if they are separate legal entities, just like companies are separate legal entities. Although this is convenient, it causes confusion because it is incorrect and misleading.
A trust is simply a set of legally enforceable obligations. An essential feature of a trust is that a person, being the trustee, must use their legal entitlement to the trust property for the benefit of another person – the beneficiary.
Why Create a Trust
As an owner of a property, you may:
- Not wish to transfer the whole ownership but would rather divide the ownership among a number of people. Using a trust can facilitate this.
- Consider that absolute control of the property by a person is inappropriate to the way you want it managed. Using a trust means that person can benefit from a share of ownership of the property while ensuring they do not have control of its management.
- Want to transfer the ownership of your property, but not yet know who you want to transfer it to. Through a trust you can delegate the responsibility for choosing who should receive the benefit of this property to the trustee. The trustee may be in a better position to know how the trust property should be distributed either now or at the time at which they can make this decision.
Obtaining government subsidies
Currently, applications for rest-home subsidies from the government are means tested as to income and capital. The allowable asset level is extremely low.
Where there is a large age difference between spouses, there may be spectacular consequences, as the younger spouse will also be means tested and will be expected to contribute disposable capital and income to pay rest-home fees for the older spouse.
The Department of Social Welfare currently looks back 5 years as a matter of course to see whether the rest-home applicant has divested themselves of assets in that time. If they have, the application will probably be declined.
However, if the applicant is a beneficiary under a discretionary trust this need not be disclosed under the current Department of Social Welfare means test. Therefore, if the applicant transfers assets to a trust early enough they may be able to obtain a rest-home subsidy. Note that there is no guarantee that these arrangements will prove effective.
In addition to setting up a trust during your lifetime, you may consider setting up a trust in your will for your surviving spouse. This may at least protect the assets passing under the will should your surviving spouse enter a rest-home.
Should I use a Trading Trust?
A trading trust is any trust in which the trustee carries on business as opposed to passive investment. As is the case with any trust, the trustee will be personally liable for trade debts.
The type of trading trust considered here is where a company is used as the trustee. This approach is often used, and is designed to avoid the liability for trade debts falling on those who would otherwise be trustees.
Liability of trustee
Under this form of trading trust, the trustee company will be fully liable for trade debts. The directors and shareholders of the trustee company will (at least in theory) not be directly liable to creditors for the trade debts.
They may, however, be directly liable if they personally guarantee the trade debts or make a material misrepresentation about them. They may also be liable to the trustee company itself (but not to the creditors directly) if they breach their directors’ duties under the Companies Act.
A trading trust will allow distributions to be made at beneficiaries’ tax rates rather than the company tax rate. This is because the trustee company will be earning income as trustee of the trading trust rather than on its own behalf.
Distributions of income or capital will also be flexible. This is because income can be allocated to one or more of the beneficiaries of the trading trust rather than shareholders.
Discretionary beneficiaries will also have no assets or liabilities relating to the enterprise. This is because the discretionary beneficiaries will only have a right to be considered for a distribution of the trust assets. This is not a property right.
Discretionary beneficiaries are probably not liable for trustee’s liabilities either. Therefore, while the assets remain in the trust they will be preserved during a discretionary beneficiary’s bankruptcy.
A trading trust may well protect trust assets on insolvency and liquidation of the trustee company. This is yet to be decided, but is at least theoretically possible. The trustee company will not have full ownership of the trust assets, because it holds them on trust for others. Therefore, at first glance these assets will not fall into the pool of assets available to satisfy creditors’ claims.
Under normal trust law, the trustee company will have rights to be indemnified from the trust assets. These rights are important on insolvency because a liquidator can claim under them and obtain access to the trust assets for the benefit of creditors. However, if the trustee company’s normal protection against the trust assets are excluded or lost the liquidator cannot reach the trust assets.
Exclusion or loss of these protection rights is a key issue with ‘aggressive’ trading trusts. It also dramatically affects the solvency of the trustee company and its directors’ duties.
Note that the courts are likely to view with suspicion attempts to exclude or limit trustee protection. It is seen as a device to avoid bankruptcy law, which makes exclusion even more difficult.
Even if the trustee company’s protection rights are lawfully excluded, the directors’ will run the risk of their duties being breached due to insolvent trading.
A trustee is only entitled to recover properly-incurred liabilities. If the liabilities are improperly incurred, there will be no right of recovery by the trustee and thus no right of recovery by a liquidator. For example, if a trading trust deed only allows the trustee company to carry out chicken-farming, any liabilities incurred in cattle-farming will not be recoverable under the indemnity.
However, this type of approach is dangerous. If a trading trust is set up with this intention, the whole scheme will be liable to attack as a sham because the trust deed will not truly reflect the intention of the parties.
When forming a trading trust, there will always be a trade-off between protecting the trust assets and protecting the individuals who will be directors of the trustee company.
If the trust deed claims to exclude or limit the trustee company’s indemnity rights against the trust assets, the exclusion or limitation may not be effective. If it is effective, a breach of directors’ duties may result. Therefore, much care is required when setting up and running this type of trust.
See Us First
As accountants, we are not generally involved in the actual drafting of wills, but it is appropriate that we offer some advice on why and how they should be drawn up.
A will is a document declaring the wishes of the person making it regarding the:
- Dispersion or management of their property on their death or; and
- Appointment of a person to carry out the instructions contained in the will.
A will is not intended to have any effect until the death of its maker and except in certain circumstances it is revocable at any time before this occurrence.
A will can be amended or updated by a subsequent document adding to or altering the terms of the original document.
The terms of a valid will are enforceable by the court and once death has occurred, the terms of the will can be varied only in exceptional circumstances.
Why Have a Will?
All persons over the age of 18 years who have any property whether personal property or real estate should for practical reasons make a will.
There is no legal requirement which forces any person to make a will and the execution of this document is purely voluntary.
If no will is made it can become cumbersome and costly to deal with the assets of a deceased person and the distribution of the assets may not be in accordance with what the deceased person would have provided had they made a will.
Wills allow people to dictate how their property should be distributed amongst their family members. This can avoid creating bitter family arguments and hardship for dependent children.
In the absence of a will, the property will be distributed to the beneficiaries according to a priority list, where all the family members (including the surviving spouse) will inherit a share in set proportions.
If nothing more is known than that the will traced to the possession of the deceased (and last seen there) is not forthcoming on their death, the natural inference is that the deceased destroyed the will with the intention of revoking it.
Making Your Will
Both solicitors and trustee companies provide professional expertise in the execution of a valid will.
Standard will forms are available for the making of wills but unless a person is familiar with the technical aspects of both the use of language in drafting and the law relating to the making of a will, we strongly advise you to avoid this method of making a will.
Tax Issues to Consider
A major issue to consider is the possibility of accounting for GST where it is intended that assets will be bequeathed directly to the beneficiaries.
If the deceased was registered for GST and the assets to be bequeathed were part of the deceased’s taxable activity, the transfer of assets to a beneficiary will constitute a taxable supply.
The deceased’s estate is required to account for GST on the taxable supply.
The beneficiary who acquires the assets may not be registered for GST and if not, they cannot claim GST input tax.
Even if the beneficiary is GST registered they are only entitled to claim a GST input tax of one-ninth of the cost of the taxable supply.
Unfortunately the cost to them is nil.
The net result within the family group is a tax hem rage of one-ninth of the open market value of the GST assets bequeathed under the will.
The bequeathed assets also do not constitute a ‘going concern’ for GST purposes as they do not meet part of the requirement of ‘going concern’ – that is, it should be ‘agreed in writing’ by the parties and this is not so.
A possible solution to this dilemma could be that the will is altered to provide for the sale of the assets to the relevant beneficiaries, at the same time as a bequest of the resultant debt back on sale value.
When Should a Will be Changed?
Wills should be revised as circumstances change, for example when:
- A person marries or enters into a de facto relationship – marriage automatically revokes an earlier will unless it is made in contemplation of marriage to a particular person;
- A person separates from a spouse or partner. Divorce does not automatically revoke a will but gifts to an ex-partner will be rendered ineffective;
- Children are born;
- A person acquires significant property; or
- There is a change to relevant legislation, eg the Property (Relationships) Amendment Act 2001.
Summary of Time for Administration
The following is a general guide only for relatively straightforward estates where there are no special complications.
Where special circumstances exist, the administration can take considerably longer.
- Grant of probate: 1 month
- Settlement of liability: 3 months
- Sale of assets such as residence and investments: 5-6 months
- Winding up of estate: 9/10 months
These are general guidelines only – speak to us.