20/05/11 Tinkering around the tax edgesBy Greg ThompsonFollowing the significant tax changes arising out of the 2010 budget, including a GST rate increase and broad income tax cuts, this years budget was always going to be about consolidation of the policy initiatives, sustainability and tinkering around the edges. The Government signalled well in advance its intention to modify the three key platforms administered by the Inland Revenue, being Working for Families, Student Loans, and the KiwiSaver schemes. All have been modified, essentially to make them sustainable in the long term. Significant growth over the past few years in costs associated with all three schemes, meant changes had to be made to ensure they could remain viable. Any fundamental change, however, was never on the cards given how entrenched all three regimes are in the New Zealand psyche and the political suicide resulting from any major change. Working For Families is being amended at the “wealthy” end of the scheme. There is a modest reduction in the abatement threshold from $36,827 to $35,000, and an increase in rate of abatement from 25% to 20%. There is also a temporary halt in the inflation indexation for payments relating to children aged 16 and over until they align with those for children aged 13 to 15. All these changes will be drip fed at the time of the next four CPI inflation adjustments, which are expected biannually. Student loan changes are intended to reduce the cost of the scheme by focussing on the areas where a greater loss to Government arises. Changes include restricting access to further loans to those who are in arrears with their payments, limiting access to the scheme for those aged 55 and older to tuition fees only, denying access for part-time full year students, shortening a repayment holiday for students going overseas from three years to one and widening the definition of income for student loan repayment purposes. The most significant changes to the KiwiSaver regime effective 1 April 2012 are the removal of the exemption from Employer Superannuation Contribution Tax, where the tax liability will be at the marginal tax rate applying to the member, and a halving of the Member Tax Credit to a maximum of approximately $10 per week. These reductions to a member’s scheme contributions will be offset by increasing the minimum employee contribution rate from 2% to 3% from 1 April 2013 with an equal rise in the compulsory employer contribution rate. The initial kick-start payment of $1,000 will remain. In addition to its existing tax work programme, the Government has also indicated an intention to generally tinker through new rules for mixed-use assets (targeting yachts and holiday homes), a new approach to livestock valuation elections for farmers (to stop flip flopping between regimes), and to capture as taxable more non-cash benefits to employees. The banks are not exempt from the tinkering either, with a change in the thin capitalisation ratio for foreign owned banks, with the minimum prescribed equity percentage increasing from 4% to 6%. Importantly, the Government has indicated a continued focus on audit activity and debt enforcement action meaning taxpayers will continue to feel the direct hand of Inland Revenue in their affairs. After one of the heaviest year of tax changes in recent history, a tinkering was not unexpected and a welcome relief from that pace of change.
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Greg ThompsonNational Director, Tax ProfessionalGreg is the National Director, Tax based in Wellington. Greg also represents New Zealand on the Asia Pacific Tax Advisory Committee for Grant Thornton International and chairs the Grant Thornton International Asia Pacific Direct Taxation Committee. He joined the firm as a partner in March 2004, having significant "Big 4" chartered accountancy experience prior to this. Greg has a wide range of experience in domestic and international taxation, including mergers and acquisitions, inbound and outbound structuring and planning, tax policy advice, and corporate taxation. His clients cover a broad spectrum of businesses including those in the manufacturing, distribution, utilities, primary sector and film industries. Greg is a regular contributor of comment on matters of tax principle, and provides advice and makes submissions on matters of tax policy. His previous experience with Inland Revenue provides a sound basis for dealing with Inland Revenue, including the management of Inland Revenue audits. Greg has presented at numerous seminars, including NZICA, Grant Thornton International, and the New Zealand Law Society most recently on the ability for lawyers to incorporate their businesses. Contact details:D +64 (0)4 495 3775 |
20/05/11 Carefully balancing the economic seesawBy Mark HucklesbyIn putting together this year’s budget the Government, just like business, has had to carefully consider the trade off between controlling expenditure and putting in place initiatives that will generate more revenue to improve the country’s overall financial position. All this of course having to be done against an unforgiving political backdrop that must satisfy both short and longer term goals. Drafting a successful budget can quite readily be likened to children exploring and enjoying the mechanics of a seesaw. Getting the right balance of components on both sides of the economic fulcrum always presents a challenge. The best time is had when those playing on this piece of playground equipment have between them achieved a good sense of balance. Yet there will be bumps along the way as people come and go. Science can play a useful role in explaining why things happened the way they did, but the art is in continuously adjusting the variables so that everyone has a great time. Today’s budget onlookers include not only the public of New Zealand, who are in a powerful position because they have the power to vote out the Government in six months time, but also the credit ratings agencies who presumably, under a cloak of secrecy, had the opportunity to vet the broader policy decisions before they were finally approved. In light of the Global Financial Crisis and what’s happening to sovereign debt in some European countries its clear we ignore credit agencies at our peril. Just as parents keep a watchful eye on their children and their friends when they are on playground equipment to make sure they are safe, investors and business owners around the country will be doing the same: assessing the risks that surround this year’s budget to make sure that if the scales, or in this case seesaw, tips quickly, they will not be seriously hurt. Winding back the clock 12 months, who could ever have imagined the impact that earthquakes or the recent booms in commodity prices would have so quickly changed the economic landscape? Events like these are just like having more people unexpectedly join and leave you when you are on the seesaw. It can be good ─ it can be bad. A slightly changed, but still well balanced strategy, seems to have been found in dealing with KiwiSaver, Working for Families and student loans. There is a momentum and purpose behind all three policy initiatives that will make rapid change virtually impossible without creating political carnage. That sense of balance remains with the tax rates announced last year all remaining in tact. Again this is generally good news, though successful businesses would always like their taxes to be lower! It was interesting to note in Bill English’s budget speech the observation that “the main sector not saving is Government”. Getting the balance right across the economy is clearly going to take time. It’s just like a new set of children coming to and from the seesaw with two options: the savings end and the spending one. The Government very clearly is still wanting people to head to the savings end rather than spending so it can quickly balance its books. Few would disagree with the Prime Minster’s closing remarks at his Beehive press conference on Monday when he said that the economy was ‘finely balanced”. He backed this up today with a press release headed “ Responsible, balanced Budget for the times”. That said, it would be dangerous to focus solely on the economic seesaw which is described in such great detail in the 2011 Budget. There are plenty of swings and roundabouts in the economic playground as well. That’s when the x-factor comes into play. They are the global trends and developments beyond our direct control that range from wars and conflict, through to natural disasters and the consequences of poor governance. The Government, just like Kiwi businesses, is not immune from any of these influences which is why it’s so important to keep everything in balance, and when it is, why everyone is able to go home from the playground happy and content.
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Mark HucklesbyNational Technical Director, Audit ProfessionalHaving worked for two of the Big 4 (PWC & EY) prior to joining Grant Thornton new Zealand, Mark has more than 15 years experience creating, interpreting and commenting on internationally recognised standards in three financial reporting domains: IFRS, XBRL and audit. Hands-on experience working with clients operating in many industries, particularly insurance, to help them efficiently and effectively resolve complex business reporting issues in areas such as revenue recognition, business combinations, financial instruments and tax. Mark has designed and then globally deployed software tools to ensure that IFRS disclosure requirements are fully complied with as well as created IFRS and corporate governance training programmes to help improve the productivity of partners and staff undertaking audits both in New Zealand and around the world. Mark has been the Deputy Chair of the Financial Reporting Standards Board of NZICA and also the Chairman of XBRL New Zealand, representing the country on the International Steering Committee of XBRL International. Contact details:D +64 (0)9 308 2730 |
20/05/11 Rebuilding Christchurch – positive steps taken to clearly explain what is going onBy Mark HucklesbyIt is good to see that amongst all the detail explaining why the Government will end up with a $16.7 billion deficit for the year ending 30 June 2012, significant attention has been given in the budget to the rebuilding of Christchurch because it affects the nation, not just the region. Rebuilding Christchurch is likely to add 1.5% to the level on GDP in both 2012/13 and 2013/14. The Canterbury Earthquake Recovery Authority has quickly moved from design to delivery with the appointment last week of Roger Sutton as its Chief Executive – but from the Budget, what more have we learnt about it? CERA will receive $25.5 million of funding over two years which is quite outside and on top of the central government funding for the rebuild of Christchurch. As pointed out in the budget speech Christchurch is New Zealand’s second largest and the resulting $15 billion of damage represents around 8% of GDP which is significant when compared with the March earthquake in Japan which is currently estimated to have caused damage equivalent to 4% of its GDP – so half that of New Zealand. Back in March the Minister of Finance, based on advice from Treasury officials in March was saying the cost of the earthquake would be approximately $5 billion. Then in other forums both he and the Prime Minister were saying the cost of the rebuild would be about $20 billion ─ $5 billion resulting from the initial quake, and then another $15 billion from what happened on 22 February. Could reconciling these numbers be as simple as the Government assessing the total cost of the damage to $20 billion upfront for the restoration and rebuild, and then as costs are incurred, reinsurance would refund the amount spent so that at the end of the day the “net cost” to the people of New Zealand was $5 billion? Not quite. The Government is to end up fronting up with $5.5 billion to cover its share of local government infrastructure, roads, insurance excesses on schools and hospitals, temporary housing and other policy responses. In addition, the Earthquake Commission and ACC are paying out another $3.3 billion (net). It’s interesting to note the reference to net, rather than gross, because generally accepted accounting standards in New Zealand do not currently permit netting insurance proceeds. This means that there will still be lumpy cash flows throughout the rebuild period and it still not clear how ─ whether the insurance settlements will be paid up-front or settled after costs have been incurred because either way will result in additional financing costs. On top of all this, and quite outside the 2011 Budget, there is the $15 billion previously mentioned that presumably relates to the estimated amount that will be paid out in private insurances. Interesting to note that the move from $5 billion in March to the $5.5 billion in May just happens to be represented exactly by an AMI insurance contingency amount of $500 million that is now reported as an expense. Kiwis are used to facing up to the truth, and hate political spin. They want information succinctly presented to them without the use of jargon so it was good to see the Minister for Canterbury Earthquake Recovery, Gerry Brownlee, noting in his press release “The Government has created a new fund for the Canterbury earthquake to ensure the transparency of the money we spend in rebuilding greater Christchurch.” So this action will show where the money is coming from and where the money is being spent. It will also show the level of investment in the 4 year Canterbury Earthquake Kiwi Bonds that are being offered at 4% per annum. Given the losses, interruptions and economic significance associated with the earthquakes the country deserves nothing less. Table 1 – Earthquake costs and funding sources
Source: page 7 of Minister’s Executive Summary
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Mark HucklesbyNational Technical Director, Audit ProfessionalHaving worked for two of the Big 4 (PWC & EY) prior to joining Grant Thornton new Zealand, Mark has more than 15 years experience creating, interpreting and commenting on internationally recognised standards in three financial reporting domains: IFRS, XBRL and audit. Hands-on experience working with clients operating in many industries, particularly insurance, to help them efficiently and effectively resolve complex business reporting issues in areas such as revenue recognition, business combinations, financial instruments and tax. Mark has designed and then globally deployed software tools to ensure that IFRS disclosure requirements are fully complied with as well as created IFRS and corporate governance training programmes to help improve the productivity of partners and staff undertaking audits both in New Zealand and around the world. Mark has been the Deputy Chair of the Financial Reporting Standards Board of NZICA and also the Chairman of XBRL New Zealand, representing the country on the International Steering Committee of XBRL International. Contact details:D +64 (0)9 308 2730 |
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19/05/2010 Trans-Tasman rivalry: budget questions 2011By Murray BrewerNew Zealand clearly has a harder trail to blaze when compared with Australia. Despite the hangover of the GFC and the impact of recent natural disasters including floods and cyclones, Australia has managed to create in excess of 300,000 new jobs in the last 12 months. Looking forward, the Australian position looks rosy. The Australian Labor Government intends to substantially increase the level of investment in mining to around 8 times that preceding the mining boom. Australia’s terms of trade are in good shape and its debt levels are enviable compared with many countries including New Zealand. It certainly looks like the good times will continue to roll for Australia. So are we fooling ourselves with the vain hope of New Zealand’s standard of living one day matching its closest neighbour, or are there similarities that we can leverage? Taking a look at the Australian Budget there are some common home truths that Bill English will no doubt reiterate today. Wayne Swan’s budget speech highlights the following aims:
The Australian budget focuses on up skilling the workforce, geographically balancing the skill resource across the entire economy, investing where it counts in infrastructure and in health and education, cutting expenditure to accelerate the return to surplus and providing opportunity while demanding responsibility from all Australian citizens. It is clear that New Zealand does not have Australia’s economic leverage. Neither are we a bright light that attracts the same level of foreign skill that currently flows into Australia, drawn by strong wages and currency. However, it is also clear that many of Australia’s challenges and hopes are those that we share. Like Australia, New Zealand needs to ask some hard questions.
Whatever the answers Bill English delivers through this year’s Budget, we should not lose sight of the fact that these are the same questions faced by Australia. The Australian Budget seeks to answer these questions. New Zealand’s budget will hopefully follow suit, and as the smaller team our success will be even more dependant on the participation of all Kiwis.
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Murray BrewerPartner, Tax ProfessionalChartered Accountant (CA) of the New Zealand Institute of Chartered Accountants Murray joined Grant Thornton in 2004 and became a Partner in January 2008. Murray has 15 years of New Zealand tax experience and provides advice to multi-national’s and SME’s on domestic and international tax issues, including those arising from business and funding structures. Murray also has considerable specialist experience with New Zealand’s international tax rules meaning that he is highly qualified to deal with personal and corporate taxation issues relating to international tax planning, employee transfers and trust planning issues for migrants and high net worth individuals. Key Expertise
Contact details:D +64 9 308 2586 |
19/05/11 Pseudo capital gains tax rules must changeBy Andy CrossenThe OECD’s April 2011 economic survey on New Zealand is clearly in support of structural reforms to the economy in areas such as tax and benefit policy reform, including the introduction of a comprehensive realisation-based tax on capital gains. It has long been recognised that the lack of a tax on capital gains in New Zealand creates a distortion to the investment decisions made by New Zealanders with an over reliance on investment in real estate. The 2010 Budget included a range of tax changes aimed at reducing investment distortion towards real estate including the removal of depreciation deductions for most buildings and changes to the LAQC regime which only became effective from 1 April 2011. While New Zealand does not have a tax on realised capital gains, there are a number of tax rules with tax realised and unrealised value movements on specific assets including foreign shares, foreign superannuation, foreign life insurance and foreign currency deposits. Ironically, these pseudo capital gains tax rules do not cover investment in foreign real estate. The pseudo capital gains tax rules require taxpayers to account for tax on annual asset value movements under complicated and unpleasant rules. Taxable gains can arise merely because the NZD devalues against the currency of the overseas asset and in many cases New Zealand tax is charged where the overseas value of the asset actually drops. The added barb is that tax is imposed irrespective of whether the asset has been sold or whether or not any income has been paid to the investor. In other words cash flow problems arise in terms of paying the tax imposed on accrued gains before they are realised. These pseudo capital gains tax rules are a problem for two broad groups. Firstly, the rules are a clear barrier to wealthy investors and many highly skilled people with more modest foreign savings, including offshore based Kiwis, who would otherwise wish to set up shop in New Zealand. This is hardly desirable for New Zealand which like many countries is hungry to attract skills and capital from offshore. Secondly, the rules create a barrier to New Zealand tax residents who would otherwise prudently invest on a globally diversified basis rather than holding all of their eggs in an undercapitalised New Zealand market. The immediate reaction to this might well be that New Zealand is far better off having these types of rules because it encourages local investment. This is a good point, but to date the result seems to have been a demand driven price war for the next rental property or the next farm. It is concerning that when these regimes are explained, most taxpayers find it incredible and unacceptable that in a country which purports not to tax capital gains that income tax can be imposed on unrealised gains on certain assets such as foreign shares, foreign superannuation, foreign life insurance and foreign currency deposits. Put yourself in the shoes of a highly trained medical specialist who has studied and worked offshore for 20 years and then returns to New Zealand to continue practising. The pleasure of living and working in New Zealand clearly overcomes the downside of lower remuneration in the New Zealand market. However, the imposition of New Zealand tax on the value of a private superannuation nest egg every single year is potentially a bridge too far, especially when retirement itself is a long way off. In terms of the global financial crisis, these rules create taxable income from the rebound in the value of foreign assets from losses suffered in previous years, for which no tax loss benefit was available. This is often seen as unfair and provides a worse result than the realised capital gains tax systems of many other countries which collect income tax after the asset has been sold and the capital gain has been quantified. While local investment in New Zealand is clearly the priority to achieve enduring productivity increases, there are upsides as well if the Government was to remove current tax barriers to global investment. These benefits include global diversification of risk, which is hard to achieve locally given the small size of our capital market, with the flow on benefit to New Zealand’s international investment position and its bearing on our credit rating and cost of capital. In contrast to our pseudo capital gains tax rules, a broad capital gains tax on realised asset disposals is arguably a better approach for New Zealand in terms of simplicity, enforcement, compliance, foreign tax credit recognition, a level playing field and tax payment cash flow. New Zealand has a range of close trading partners which have well established capital gains tax systems and it would be an easy matter to pick the eyes out of best of each system. Clearly an exemption for the principal residence and for assets acquired prior to the establishment of such a regime would address the majority of concerns and would make the introduction of such a regime politically acceptable. Given that both major parties have steered well clear of a broad capital gains tax regime this outcome appears unlikely. As an alternative we advocate for immediate changes to the pseudo capital gains tax rules that are currently in place. This is because the current rules have over stepped the mark and are now inequitable and the playing field needs to be levelled. Immediate changes should include a substantial lift to the de minimis and cash basis concessions applying to the foreign investment fund and financial arrangement regimes. This would take the majority taxpayers with foreign assets out of these regimes and would put them in the position of paying New Zealand tax on income as it is received. An alternative to de minimus changes would be to allow losses to be recognised and carried forward for offset against future recovery in value. This would remove the inequity where losses arise due to market turbulence, which are not recognised for tax purposes, and are followed by taxable recovery gains which merely put the investor back to square one. Whether the Government signals any such changes in 2011 budget is anyone’s guess, but the likelihood appears limited. In the mean time investors will continue to stumble on with complicated and unwieldy rules which they don’t understand and which only tax academics consider equitable.
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Andy CrossenAssociate, Tax ProfessionalAndy is a Chartered Accountant (CA) and a member of the New Zealand Institute of Chartered Accountants. Andy has been with Grant Thornton since January 2008. Prior to arriving at Grant Thornton he had worked for PwC and Deloitte in Auckland since 1995. Whilst providing advice on a wide range of tax issues to clients, Andy has a particular interest in international tax issues and tax residency. He has a background in advising on the tax issues arising from employee international assignments both into and out-bound from New Zealand and at the employee and employer level, which has given him extensive experience in dealing with New Zealand’s international tax regimes. His experience in this area allows him to provide our clients with excellent advice in the understanding and application of these international tax regimes. Contact details:T +64 9 308 2977 |
17/05/11 Who wants to be an exporter?By Greg ThompsonBusinesses understand the need to take sensible risk. They also desire certainty, as much as is ever possible in business, to enable them to make sound business decisions. Never before is the level of uncertainty as high as it currently is for exporters as they strive to carry on their trade. And never before is the need as great for the New Zealand economy to have a flourishing and productive export sector. As budget day approaches, businesses are looking for direction from the Government to create more certainty in relation to their foreign businesses. The Prime Minister’s recent comments that in his view the exchange rate is over valued are welcome, as a signal to the market to rein in the ongoing rises. But the exchange rate is also a measure of sound fiscal policies, confidence of the market in our future direction and, outside of our control, world markets and events. Fundamentally, New Zealand is surviving on the unprecedented growth of world commodity prices to shore up our foreign earnings. Specialising in providing food to the world is a sound business strategy, and one that is keeping New Zealand’s collective head above the quagmire of world disaster stories at present. The soaring commodity price has sheltered the New Zealand economy against the equally rampant exchange rate to ensure an increased level of foreign earnings is maintained. This is critical to keep our balance of payments in check, and pump much needed foreign earnings into the economy. The importance of this cannot be underestimated, with a flow on effect to the domestic economy as those foreign earnings are spent by the New Zealand businesses. Anecdotally, however, the maximum benefit of this trickle down effect may not be happening, as banks line up the farmers for a grab of the increased Fonterra payouts to reduce their exposure in the primary sector from excessive debt levels. So if a business is not in that commodity sector, what challenges are being faced? Most accept the uncertainty of a foreign market, dealing with distance and time zone differences, understanding and dealing with local bureaucracy and potential foreign tax liabilities as a necessary part of doing business offshore. The biggest concern, however, is the continued overvaluing of the exchange rate, which has had some minor corrections in recent days. Whilst New Zealand consumers celebrate cheaper international goods, and breathe a sigh of relief that petrol prices are not as bad as they could be, exporters cringe at the giddying heights of the exchange rate. The key issue is the longer the exchange rate remains high, the bigger the impact on New Zealand business and the economy as a whole. Short term fluctuations can be offset by hedging foreign currency and locking in sale prices in advance. However, long term exchange rate rises permanently impact foreign earnings and force business to re-evaluate their target markets and methods of operation. So for budget day, we need a fiscally sound Government strategy that will make things happen. Exporters can then get on with what they do best, selling into foreign markets.
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Greg ThompsonNational Director, Tax ProfessionalGreg is the National Director, Tax based in Wellington. Greg also represents New Zealand on the Asia Pacific Tax Advisory Committee for Grant Thornton International and chairs the Grant Thornton International Asia Pacific Direct Taxation Committee. He joined the firm as a partner in March 2004, having significant "Big 4" chartered accountancy experience prior to this. Greg has a wide range of experience in domestic and international taxation, including mergers and acquisitions, inbound and outbound structuring and planning, tax policy advice, and corporate taxation. His clients cover a broad spectrum of businesses including those in the manufacturing, distribution, utilities, primary sector and film industries. Greg is a regular contributor of comment on matters of tax principle, and provides advice and makes submissions on matters of tax policy. His previous experience with Inland Revenue provides a sound basis for dealing with Inland Revenue, including the management of Inland Revenue audits. Greg has presented at numerous seminars, including NZICA, Grant Thornton International, and the New Zealand Law Society most recently on the ability for lawyers to incorporate their businesses. Contact details:D +64 (0)4 495 3775 |
17/05/11 Why four beats three – election termBy Paul KaneAs Budget time rolls around, the Government once more has to walk the tight rope…short-term popular policies vs less popular policies but greater long-term benefit to the country. Adding another complication in 2011, is that this is an election year. Does the Government take the easy path – don’t rock the boat, hold on to the present significant majority, set themselves up for another three years, or does it put its political safety at risk by making some tough calls that could endanger it in the short term, but will bring about the desired re-engineering of the New Zealand economy in the long term? In fact, the Government should never be put in this position. Trying to effectively change a country’s economy in three years is incredibly difficult. Year one the Government is feeling their way, year two they might get a bit more bold, year three they are looking to secure your vote for another term in office. So why not a four-year term? Why not put some trust in those you have elected to consolidate and introduce policies that can help the country by giving them the time necessary to effect such change? There are distinct advantages, among which are:
However, will a four-year term provide the opportunity for more effective economic and other management by the Government? And should we care, especially when governments are often re-elected and on that basis the length of term is not as important as it might appear. We have only ever had two one-term governments since the 1900s. The detractors of going to a four-year term state:
A change will take courage from the electorate. The electoral term does require a majority in a referendum or a 75% vote of all members of Parliament. New Zealand has completed two referendums in the last 50 years, one in 1967 when only 32% voted for a four-year term and one in 1990 where 31% voted in favour. However, I believe New Zealand as a nation has matured since these past referendums and we no longer distrust politicians to the same extent back in 1967 and 1990. The British Government has brought in a fixed four-year term, now is the time for New Zealand to follow
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Paul KanePartner, Privately Held Business ProfessionalPaul launched his career as an auditor in 1984, transferred to London and spent time working on corporate finance engagements and as a Group Financial Controller in Brussels. Upon returning to New Zealand he has spent many years as CFO for several companies in venture capital, import distribution, telecommunications and healthcare. During his career Paul has had experience in audit, financial management, business restructuring and business planning, debt and equity raising, due diligence and systems review. Paul’s extensive experience and business acumen has enabled him to provide practical and expert advice to Grant Thornton New Zealand’s Privately Held Business clients since January 2008. Contact details:T +64 9 308 2576 |
13/05/11 Health - a vote call or a brave call?By Pam NewloveThese are certainly challenging times for balancing the books as the Government has no choice but to look at options to reduce its overall operating deficit. In an election year, the health funding mantra is likely to be ‘steady as she goes’ in the hope of not upsetting the apple cart. Most will possibly view decisions to ensure investment in healthcare for long-term gain, rather than grabbing at low hanging fruit for easy short-term wins, as meeting the future health litmus test. So what are the health challenges facing the Government in this year’s Budget and what must it do to pass this litmus test? While health has been earmarked as one of the areas it sees as a priority in the upcoming Budget, the diversity of needs in the sector makes it a challenge to satisfy everyone’s expectations. If the litmus test of any spend is the likelihood it will improve economic growth in the long-term, then the potential shopping list could be quite long. Even within primary care alone, whether it is funding of after hours care or the reinstatement of funding for smoking cessation programmes, it is arguable that all of these initiatives and many more, have the potential to improve economic development. Ahead of the 2010/11 Budget, health bureaucrats were asked to identify potential savings in the sector. They courageously identified $186 million. Reducing the number of Primary Health Organisations (PHOs) was a key directive, but other potential areas of saving included the mental health and homecare sectors. The identification of these savings was of course attractive to Government as it meant the increase in funding required for the upcoming Budget, was reduced. To remind ourselves, the health vote received a $461.6 million increase in funding in the 2010/11 budget out of a total $1.1 billion of additional operational spend across all sectors. This also resulted in the health sector enjoying a total allocation of Government’s operational spend of $13.6 billion. Primary care benefited from $182.4 million allocated to services implementing the primary healthcare strategy. Most of these expenditure increases were intended to be phased in over a four-year period, providing clawback opportunity if other spending was reprioritised. Programmes such as the $134.3 million being spent on whanau ora over four years is quite substantial and will be a slow moving process covering multiple agencies. It will be some time before the success of these initiatives can be measured. Meanwhile, many PHOs have merged in the last 12 months highlighting buy-in by those at the grass roots to the efficiency strategy set by Government. Prominent in the minds of the many in the health sector will be the mention in the Ministry of Health’s statement of intent for 2010/13 which refers to finding ways to secure greater efficiencies internally and in particular to get staffing down to 1,290 FTEs (full-time equivalents). When National won the election in 2008 there were 1,675 FTEs employed by the Ministry of Health. Ideally this demonstrates pragmatic thinking that should maximise funding available for other areas within health, but perversely, reduced infrastructure supporting the delivery of services may also create challenges around the efficient delivery of services at all levels in the health sector. Given the large number of stakeholders to be consulted as part of any significant change in the health sector, change occurs slowly. While cynics may suggest that there has been little change in the last five years to improve service delivery and reduce inefficiencies, standing back one cannot overlook initiatives such as the establishment of the National Health Board (NHB), Health Workforce NZ and the Health Quality and Safety Commission (QSC). Arguably these have been substantial steps forward toward reform of the ‘system’. Progress is being made, but we are only starting the journey. Even in an election year, this is a time for long-sighted courage, not short-term vote grabbing. Do this and this Government will pass the litmus test.
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Pam NewloveNational Director, Privately Held Business and Leader of Healthcare Team ProfessionalPam leads a team in the Business Advisory Services Division of the Auckland office and also heads up the firm’s national Business Advisory Services service line for New Zealand. Pam also represents New Zealand on the Global Privately Held Business Advisory Committee of Grant Thornton International. She is involved providing business advisory services to a range of Privately Held businesses across a range of sectors. This includes offering advice on taxation compliance, business planning, restructuring, financing and advice on management accounting systems for those businesses. Pam is involved in the production of various regular client newsletters and is focused on developing the services that the Business Advisory Services team offers to its diverse client base to ensure that they reflect the changing circumstances of our clients. Pam has a substantial client base in the health sector and provides services tailored to the health sector including practice restructuring, valuations and purchase negotiations. Pam has over 20 years chartered accounting experience including over six years in a Big 4 firm. Contact details:D +64 (0)9 308 2579 |
09/05/11 What are the ‘In-Laws’ planning in this year’s Budget?By Dan LoweThis year hasn’t produced a great tax take for the Government, so expect a few indicators in the Budget on how the Government expects to increase its revenue in this area. With more specific audit activity likely to be on the agenda, what can you do to reduce the risk of the taxman from knocking at your door? Or if he invites himself in, is your business prepared to manage the audit activity to ensure the least amount of disruption? Dan Lowe, tax associate at Grant Thornton New Zealand Ltd, looks at how the Government has upped the ante on the audit front and provides suggestions for IRD management. Someone once told me that interaction with the Inland Revenue was comparable with putting up with your ‘in-laws’, no one particularly enjoys the process, everyone talks through fake smiles, but in order to get on with life you do what you can to make the relationship work. Although the majority of businesses do their best to comply, it is inevitable that discrepancies will occur and the ‘in-laws’ will be there to point out the error of your ways when this happens. Obviously no one enjoys the ‘in-laws’ snooping around, but it is a fact of life. How this exposure is dealt with will determine the timeliness of the audit process, costs involved in reaching an appropriate conclusion as well as the nature of the relationship with the ‘in-laws’ going forward. Like most things, prevention is the best cure. But how can you prevent something when you have no control over it? Audit risk cannot be avoided entirely, but it is possible to eliminate some risk by:
In addition to the above, each year the Inland Revenue releases a document detailing its Compliance Focus for the coming year. This document identifies patterns of non-compliant behaviour in various groups and focuses on those themes. For example, some of the areas targeted in the 2010/11 include:
So each year our “in-laws’ publicly tell us what they don’t like about us, and where they are going to focus their efforts. So why do they do this? Well it definitely focuses everyone’s attention on those sectors named, but primarily it is due to the limited resources that they have at their disposal, the advancement of technology which enables a greater refinement of large amounts of information and an increased pressure that the Inland Revenue generates a return on investment. That’s right, even the taxman has KPIs that they must strive to achieve. Inland Revenue has agreed in its Output Plan with the Minister of Revenue that during the period 1 July 2010 to 30 June 2011 it will conduct 1.088 million hours of audit activity. The level of return that has been agreed upon as an ‘output delivery target’ for this activity is $875 per hour. That is a staggering $952 million that our local taxman is expected to extract from the tax-base from audit activity. So does this mean if you are not on the list you are safe for that year – of course not! Inland Revenue continues to have standard criteria that may trigger audit activity such as receiving regular refunds, continually generating tax losses, deviations from industry standard benchmarks and poor compliance – or if you are really unlucky it may just be a random selection. In fact, only last month we were made aware that the ‘in-laws’ were turning up unannounced at various hospitality venues asking probing questions about stock control, till systems and how tips were dealt with. This type of approach can be very intimidating for the staff that are approached – in such instances the ‘in-laws’ details should be obtained and the business owner (after a discussion with their adviser) should make contact on their terms. This approach is interesting from the ‘in-laws’, but it highlights the desperate nature of wanting to increase the tax take. So if your number is up, what is the best way to manage the process? Audits are all about people management, establishing and meeting expectations…or to put it another way, communication. Here are five recommendations to assist in the process:
Like all business costs, tax must be actively managed. A poorly managed audit will cause disruption to your business, additional stress, a drain on your time and resources and it will increase your overall costs. Nobody enjoys probing questions from the ‘in-laws’ (why would you), but it is just part of life. Approaching the audit front-on will ensure that the length and costs will be kept to a minimum while allowing you to maintain an amicable relationship with the ‘in-laws’.
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Dan LoweAssociate, Tax ProfessionalChartered Accountant (CA) of the New Zealand Institute of Chartered Accountants Dan has been with the firm since the beginning of the 2000. Prior to working for Grant Thornton Dan worked for the Inland Revenue, as technical support in the business call centre. Dan also carried out the role of facilitator for new employees, training them on the various tax types, the penalty regime and general tax issues. Dan works with a wide range of clients, ranging from SMEs to multinational firms. His particular areas of expertise include managing the interface between Inland Revenue and our clients; the extensive tax implications that arise from land transactions (and associated structuring considerations) and the area of indirect taxes. “Understanding what the client is trying to achieve, analysing the tax legislation and arriving at a workable answer is always my main objective” says Dan – “it is more than tax advice, it is business planning”. His experience provides an excellent grounding from which he is able to provide effective tax planning and advice to meet the needs of our clients at all levels. Contact details:D +64 (0)9 308 2531 |
29/04/11 Only subtle tax changes expectedBy Colin DeFreyneFollowing the raft of GST changes that the Government announced last year, many of which only came into force on 1 April 2011, the Government has already signalled that it is unlikely to touch GST again − this time round anyway. The Government’s macro economic policy includes encouraging people to spend less in order to reduce debt and encouraging productivity by increasing take home pay via tax reductions. These objectives could be achieved by further increasing the rate of GST to fund tax cuts, but where should this policy stop? Some years ago in the UK it was estimated that income tax could be abolished if VAT was increased to 25%. UK VAT is now perilously close to this threshold but there is no sign of income tax being abolished. Do we really want to follow the same path as the UK? The recent London riots would suggest that we clearly do not. However, there are some pressure groups who are still calling for GST changes. Some groups have been calling for an elimination of GST on basic foods, especially fruit and vegetables, generally for social equity reasons. Whilst, on the face of it, this proposal may appear appealing, it would create another GST boundary between food which attracts GST and that which does not. Wherever a GST boundary occurs, complication is never too far away. Complexity is often the result of political compromise and this is true for both Australian and UK GST/VAT regimes. The New Zealand Government, on the other hand, introduced GST in 1985 virtually unopposed due to its large majority and consequently our regime remains relatively efficient and uncomplicated. Examples of the complexity seen overseas include a cherry on the top of a UK cake tipping the VAT scales as well as chocolate on a biscuit tipping the balance between basic and a luxury food. Similarly, in Australia, a plain chicken is a basic food until it becomes cooked, when it becomes a luxury, subject to GST. So who wins when these complexities seep in? Possibly not the intended consumer at the end of the food chain, and certainly not the businesses. No, alas it’s the accountants. We will be the only ones to prosper from the introduction of complex GST rules. Given business is screaming out “keep it simple” on the compliance front, the Government may have little appetite for GST compromise on food. Social equality can instead be targeted in other ways rather than creating unnecessary complexity to an already efficient tax system. When you consider the changes that were introduced on 1 April, you will see just how wide sweeping current changes are, let alone any new proposals. Consider these:
We need time to digest not only these most recent changes, but also the ramifications of the Christchurch earthquake, the Japanese tsunami and trouble in the Middle East. New Zealand has some significant economic issues at present and a further GST rise would be a complicating factor at this time. However, as normality returns to both the world economy and also New Zealand’s, further tinkering with GST will be a matter of when, not if.
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Geordie HooftPartner, Tax ProfessionalChartered Accountant (CA) of the New Zealand Institute of Chartered Accountants Geordie commenced his career with Grant Thornton in 2000 becoming a Partner in 2007. His career includes a period as Financial Controller of a successful nationwide fast-food franchise and several years in chartered accountancy with both large and small practices in Christchurch. Geordie has considerable experience dealing with a wide range of taxation issues. “I enjoy the opportunity to provide constructive and pro-active advice to clients.” Geordie is noted for communicating complex taxation issues to clients in a way that they can understand. Valuable advice has been provided by Geordie to Grant Thornton’s clients, resulting in significant savings and clarity of obligations. Geordie has developed expertise in many areas of taxation, including:
Contact details:T +64 (0)3 379 9580 |
21/04/11 Cleaning up the balance sheetBy Peter SherwinThankfully, the country’s balance sheet is in pretty good shape, otherwise we would be looking at the upcoming Budget with absolute dread. Like many individuals around the country, the Government is asset rich and cash poor. According to the Government’s June 2010 Investment Statement, the country’s balance sheet had assets of $225 billion and liabilities of $125 billion, a net worth of $100 billion. A far cry from 1992 when the net worth of the country was negative $10 billion. So how does the Government successfully overcome the hangover from the global financial crisis, Pike River and the Canterbury earthquakes? With the earthquake bill already estimated at about $8.5 billion, we need money, and we need it quickly. The reality is that no one single thing is going to solve the challenge and preserve the Government’s balance sheet. The best answer will be a smorgasbord of measures to try and balance the short-term costs with the long-term benefits and gains. At present the Government is using this balance sheet strength to run deficits in order to shelter New Zealand and New Zealanders from the impact of these disasters. But it can’t keep on doing this forever. Just like any individual with assets, when they need cash, they need to sell something. Thankfully this has already been indicated with the idea of selling down significant but minority stakes in core state-owned entities (e.g. electricity companies) while still maintaining majority control. This has the twin advantage of giving New Zealanders the chance to spread their investment into equities and away from our love affair with property. While the Government is looking at raising money from asset sales, it should also start to rethink its mining policies. Many believe the strategy announced last year was shelved too quickly. We are a country rich in assets, especially coal, oil, iron sands and other precious metals and with modern mining techniques these can be extracted with minimum impact on the environment. The Government needs to be strong on this point. Cutting costs, especially in all non-core Government expenditure, has also been earmarked, which is another step in the right direction of trying to balance the books. This, hopefully, will include social welfare, superannuation, interest free student loans and working for families. As we look to overcome the shortfall we also need to be careful to spread the cost of the Canterbury rebuild fairly between generations. Increasing tax is not the way. For years the Government and the Governor of the Reserve Bank have been concerned and publicly criticised the high level of household debt that New Zealanders have as a percentage of nominal disposal income. From 2008 to the latest figures, the percentage of household debt has reduced from approximately 154% of nominal disposable income to approximately 110%. This is excellent news and partially explains why prior to the earthquakes the country was struggling to see the signs of a recovery as people used disposal income to pay down debt. Increasing tax erodes disposable income and will slow down this debt repayment. A tax on business would be just as damaging. As New Zealand businesses slowly emerge after the global crisis they do not need an extra demand on their depleted cash, a demand that could easily push some companies ‘over the side.” Yes, the Government does have its challenges, but unlike many other countries around the world, it does have a range of very viable options that it can introduce in this Budget that will see New Zealand grow and prosper in the future. We look to the Government to make a range of changes, but a “slash and burn” approach is not needed.
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Peter SherwinPartner, Privately Held Business ProfessionalChartered Accountant (CA) of the New Zealand Institute of Chartered Accountants Peter Sherwin commenced his Chartered Accountancy career in a large accountancy firm. He joined a predecessor firm of Grant Thornton in 1979 and has been an integral part of Grant Thornton New Zealand’s development. During his career Peter has had experience in auditing, internal auditing, business appraisals, business rescue and special assignments. His current focus is business advisory services. He specialises in profit development, and the use of trusts for business owners and their businesses. Within this focus, Peter has been successful in helping business owners restructure their businesses to manage risk and develop their full profit potential. Peter is responsible for a broad range of business owners including companies, investment trusts, and charitable trusts. This includes property investors, property developers and professional service businesses. Contact details:D +64 (0)4 495 3777 |
15/04/11 GST - rate rises are safe for nowBy Colin DeFreyneFollowing the raft of GST changes that the Government announced last year, many of which only came into force on 1 April 2011, the Government has already signalled that it is unlikely to touch GST again − this time round anyway. The Government’s macro economic policy includes encouraging people to spend less in order to reduce debt and encouraging productivity by increasing take home pay via tax reductions. These objectives could be achieved by further increasing the rate of GST to fund tax cuts, but where should this policy stop? Some years ago in the UK it was estimated that income tax could be abolished if VAT was increased to 25%. UK VAT is now perilously close to this threshold but there is no sign of income tax being abolished. Do we really want to follow the same path as the UK? The recent London riots would suggest that we clearly do not. However, there are some pressure groups who are still calling for GST changes. Some groups have been calling for an elimination of GST on basic foods, especially fruit and vegetables, generally for social equity reasons. Whilst, on the face of it, this proposal may appear appealing, it would create another GST boundary between food which attracts GST and that which does not. Wherever a GST boundary occurs, complication is never too far away. Complexity is often the result of political compromise and this is true for both Australian and UK GST/VAT regimes. The New Zealand Government, on the other hand, introduced GST in 1985 virtually unopposed due to its large majority and consequently our regime remains relatively efficient and uncomplicated. Examples of the complexity seen overseas include a cherry on the top of a UK cake tipping the VAT scales as well as chocolate on a biscuit tipping the balance between basic and a luxury food. Similarly, in Australia, a plain chicken is a basic food until it becomes cooked, when it becomes a luxury, subject to GST. So who wins when these complexities seep in? Possibly not the intended consumer at the end of the food chain, and certainly not the businesses. No, alas it’s the accountants. We will be the only ones to prosper from the introduction of complex GST rules. Given business is screaming out “keep it simple” on the compliance front, the Government may have little appetite for GST compromise on food. Social equality can instead be targeted in other ways rather than creating unnecessary complexity to an already efficient tax system. When you consider the changes that were introduced on 1 April, you will see just how wide sweeping current changes are, let alone any new proposals. Consider these:
We need time to digest not only these most recent changes, but also the ramifications of the Christchurch earthquake, the Japanese tsunami and trouble in the Middle East. New Zealand has some significant economic issues at present and a further GST rise would be a complicating factor at this time. However, as normality returns to both the world economy and also New Zealand’s, further tinkering with GST will be a matter of when, not if.
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Colin DeFreynePartner, Tax ProfessionalColin has 24 years tax experience with Big Four accounting firms in the UK and New Zealand. He joined Grant Thornton as a partner in 2009. He has been the lead tax advisor to many private and public companies. Colin has a broad range of experience involving income tax planning and compliance (both domestic and cross border) through to advising on the alignment of tax strategies to broader corporate and stakeholder objectives. This always involves effectively managing clients tax affairs. With exposure to a number of sectors from energy to entrepreneurial business and exporting, Colin’s roles have been numerous and varied including involvement with the implementation of GST in Australia, development of a national series of exporting workshops and working closely with the IRD’s Policy Advice Division, especially with the evolution of the Research and Development tax credit regime . Contact details:D +64 (0)9 308 2573 |
08/04/11 What will it take to increase the size of your tax bill, Bill?By Greg ThompsonWith the Government having just announced that this year’s budget will report the largest deficit ever, Bill English faces a major hurdle to balance the competing social and policy objectives (particularly in an election year), whilst positioning the country on a sound economic basis for growth. It was widely recognised that the 2010 budget was a re-engineering not a revenue raising one. It was designed to tweak the various levers of the economy so that it placed the country on a strong footing for enhanced growth when the upturn came. This came through a combination of “dealing to” the property sector through removing apparent incentives in the tax basis of property investment and removal of depreciation relief where no loss in value actual occurred. Anticipating that the major problem facing the country in the future is an over reliance on corporate and personal taxes, the Government increased the GST rate. This incentivises workers to save by increasing the GST rate on consumption and reducing the rate on certain investments. The Government also incentivised businesses and individuals to work harder and earn more through reducing the personal and corporate income tax rates. On face value, these levers would normally have the desired effect – remove market distortions, encourage savings thereby reducing the economy’s personal debt exposure and incentivise growth. While the Government has clearly had an influencing role, it has been unable to control its destiny due to an ongoing proliferation of economic disasters including the European crisis (Greece, Spain, Ireland amongst others), Christchurch and Japanese earthquakes, Queensland floods, and Middle East melt downs. All have had a destabilising effect on any optimism and growth in the New Zealand economy, through the external impacts the world economy has on ours. The only bright light has been the growth in world commodity prices that has outstripped our strengthening exchange rate to give foreign earnings a lift that has kept New Zealand “in the game”. With the largest deficit on record, and a Government that is happy to borrow to fund the burgeoning expenditure needs, the real question is where will the revenue come from to keep our heads above water? Primarily the Government has ruled out an increase in the tax rates, whether this be GST (say to 17.5%), income tax (corporate or higher marginal tax rates) or indirectly (an earthquake levy for example). Without direct revenue it has to come from somewhere else. On the agenda are asset sales of large New Zealand businesses, such as state owned energy companies. While not the firesale of the 80s, and with an intention to maintain a majority stake in those assets, an accelerated exit seems on the cards. Tied in with this is likely to be an increase in the extent of Public Private Partnerships (PPP) to facilitate overdue infrastructure investment. Likewise, the Government has embarked on the first stage of a plan to make New Zealand a financial hub. It has already started the process of considering rule changes to remove the impediments for foreign capital markets to invest through New Zealand, starting with changes to the Approved Issuer Levy and PIE regimes. While the wholesale structural taxation change to effect a financial hub economy would be unaffordable in the short-term, a long-term plan may shift New Zealand in the right direction. As expected, increased Inland Revenue activity is already reaping rewards with a raft of successful tax cases rolling through the courts, most of which have a theme that should send shivers down the spine of business in New Zealand. Inland Revenue is enjoying unprecedented success in arguing most of its tax cases on a tax avoidance basis. While providing a revenue collection bonanza for the Government, it may instead have the unsettling effect of business development and growth where businesses question commercial structuring and dealings for fear of incurring the wrath of tax avoidance determination, and its punitive associated penalties and interest. Fundamentally, however, the government seems to be relying on one key thing (excuse the pun) to bring New Zealand back into the black. Growth. With growth comes an increase in the tax take, as consumption increases (GST paid) and incomes go up (income tax). It has a compounding effect as growth encourages growth, and growth leads to a greater tax collection. So, while the Government pulls the triggers of the economy to encourage and capture that growth when it comes, the powder keg for an exploding economy is being constantly dampened by a tsunami of economic storms. While the farmers wouldn’t like to hear this one, maybe we should all be hoping for an economically “dry winter”.
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Greg ThompsonNational Director, Tax ProfessionalGreg is the National Director, Tax based in Wellington. Greg also represents New Zealand on the Asia Pacific Tax Advisory Committee for Grant Thornton International and chairs the Grant Thornton International Asia Pacific Direct Taxation Committee. He joined the firm as a partner in March 2004, having significant "Big 4" chartered accountancy experience prior to this. Greg has a wide range of experience in domestic and international taxation, including mergers and acquisitions, inbound and outbound structuring and planning, tax policy advice, and corporate taxation. His clients cover a broad spectrum of businesses including those in the manufacturing, distribution, utilities, primary sector and film industries. Greg is a regular contributor of comment on matters of tax principle, and provides advice and makes submissions on matters of tax policy. His previous experience with Inland Revenue provides a sound basis for dealing with Inland Revenue, including the management of Inland Revenue audits. Greg has presented at numerous seminars, including NZICA, Grant Thornton International, and the New Zealand Law Society most recently on the ability for lawyers to incorporate their businesses. Contact details:D +64 (0)4 495 3775 |
01/04/11 So what does it take to live happily ever after?By Mark HucklesbyEveryone knows that to start a fairy tale you begin with the words “once upon a time”. And while no Budget speech has ever started with these four words, given that the Government has just announced that this year’s document will report the largest deficit ever, perhaps this year it should because the Government faces a huge challenge if it is to produce a happy ending for everyone, no matter what part of the country they live in. In the 10 months since the last Budget, New Zealand has faced some momentous events, the most vivid one in everyone’s memory - the earthquakes in Christchurch. While 4 September might be a date that eventually gets lost in the history books, few will ever forget how an earthquake that struck at 12.51pm on 22 February 2011 changed the nation. No longer were the earthquakes Christchurch’s problem, they became New Zealand’s problem. And what a complex problem it is to solve when current health and education resources are already stretched to capacity, the country is haemorrhaging approximately $300 million every week to service current debt obligations, and on top of all this, there’s now the need to substantially rebuild New Zealand’s second largest city. So what defines a really good Budget?Is it one where revenue targets are achieved, and planned expenditure comes in according to plan? Or is it one that drives new behaviours that will ultimately produce results all stakeholders end up feeling comfortable with? I would suggest it’s the latter. So in anticipation of what might be released on Thursday, 20 May 2011, I will consider some of the announcements made in last year’s Budget and whether or not they changed behaviours to help make New Zealand a better place to live and work in. Removal of property tax depreciationThe decision to remove the tax depreciation deductions around property initially created a huge outcry, and to many accountants, particularly those struggling to stay on top of International Financial Reporting Standards, an even bigger headache. But indirectly what this policy decision did was force people to critically look at their investment portfolios to decide whether this was an asset class appropriate for them. For some it resulted in no change; for others, when the decision to no longer allow a tax deduction for depreciation on rental property was linked with the decision to change the rules surrounding loss attributing qualifying companies (LAQCs), it became a trigger for change. At a macro level did last year’s Budget change perceptions and instigate an analysis of the level of investment in this sector? Most definitely, and while the jury is still out as to the eventual success of this policy decision, the Budget certainly prompted the need to consider change. Increase in GSTThe initial Christchurch earthquake on 4 September diverted attention away from another significant policy decision that came into effect on 1 October 2010. It was, of course, the Budget decision to increase GST from the 12.5% to 15%. Few can dispute the fairness of an across the board consumption tax. The more you spend, the more tax you pay so if you do end up buying a sports car or a super yacht you will end up paying more to the Government. However, for those at the other end of the wealth spectrum, there were calls for exemptions around healthy foods so that those struggling to make ends meet would not be impacted by the change. As many expected, no changes to the principle behind GST were made, but to compensate those on lower incomes, from 1 October 2010 there was a 2.02% increase in payments of superannuation, various benefits, family tax credits and student allowances. However, what this rate change also did was force all types of businesses to consider whether their billing processes and understanding of GST was still accurate and complete. Surprise, surprise – spurred along by the Inland Revenue reminders of the need to get things right or face the consequences (coupled with a 2010 $119 million Budget allocation over the next four years to expand its compliance function), many discovered that their systems and processes to account for GST were not up to scratch and that changes were needed. Tax rate changesLast year’s Budget generated another healthy change – eliminating the need to arbitrage tax rates between companies, individuals, partnerships and trusts. Although a great deal of tax policy is generated from the principle that those who earn more, should pay more to the Government in tax, the reality is that unless one is a wage and salary earner, this outcome is rarely achieved. This is not to say that no tax is being paid by individuals who earn significant incomes from their businesses, but with good advice from tax professionals, steps could be taken to reduce tax by channelling income into different entity types. But with last year’s top tax rate on individuals being reduced from 39% to 33% and a signalled rate change to reduce company tax rates from 30% to 28%, one year ahead of the Australians, attitudes to paying tax changed somewhat. This year’s Budget will no doubt see Treasury officials carefully assessing the trade-off associated with increasing tax rates with the need of the country to remain internationally competitive in terms of its overall tax burden on both individuals and body corporates. No capital gains taxAnd last, but by no means least, was last year’s Budget decision not to introduce a “comprehensive” capital gains tax (CGT). That decision produced a sigh of relief for many. But let’s not forget that not all property transaction gains are currently tax free. Take for example the decision in the 2009 Budget to target various taxpayers (and their associates) in some way involved in the business of land (eg builders). Is this decision likely to change in 2011? I doubt it, notwithstanding a projected shortfall in housing stock that will inevitably lead house prices to increase more rapidly than inflation. By not introducing a comprehensive CGT last year we saw a Budget reinforcing the need for New Zealanders to continue to pursue a broad spectrum investment policy in not only rental property, but also shares and fixed interest investments as well. For the Government, living happily every after simply means…staying in power. While current polls might suggest that John Key and Bill English have little to worry about at this stage, the reality is that if the 2011 Budget, and the ones that follow, are not bold and fail to change behaviour and attitudes, it’s highly likely nobody in the country is going to end up living happily ever after.
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Mark HucklesbyNational Technical Director, Audit ProfessionalHaving worked for two of the Big 4 (PWC & EY) prior to joining Grant Thornton new Zealand, Mark has more than 15 years experience creating, interpreting and commenting on internationally recognised standards in three financial reporting domains: IFRS, XBRL and audit. Hands-on experience working with clients operating in many industries, particularly insurance, to help them efficiently and effectively resolve complex business reporting issues in areas such as revenue recognition, business combinations, financial instruments and tax. Mark has designed and then globally deployed software tools to ensure that IFRS disclosure requirements are fully complied with as well as created IFRS and corporate governance training programmes to help improve the productivity of partners and staff undertaking audits both in New Zealand and around the world. Mark has been the Deputy Chair of the Financial Reporting Standards Board of NZICA and also the Chairman of XBRL New Zealand, representing the country on the International Steering Committee of XBRL International. Contact details:D +64 (0)9 308 2730 |