28/05/10 Business leaders: budget to aid shift from spending to investingBy Greg ThompsonBusiness leaders have responded positively to the 2010 Budget, saying it will help New Zealand’s economy to shift from consumption spending, to investing in productive assets. Although more than 90% of 157 business leaders surveyed at Post Budget events held in Wellington and Christchurch felt the budget would aid this shift, financial risk management and taxation experts counsel businesses to maintain a steady hand on the tiller while still ensuring they are well placed to take advantage of an economic upturn. Peter Cavanaugh, Senior Client Advisor at Bancorp Treasury Services, says the budget may encourage many businesses to think ahead and plan to invest but they needed to understand that the Budget itself will not drive the economy. “They should watch for signs of positive change and be prepared to leverage it by investing cautiously,” he says. He notes that financial risks typically facing most businesses investing in productive assets – such as foreign exchange exposure, credit and counterparty risks – will remain the same but their potential impact upon a business will be proportionate to investment level. “When businesses are in investment and growth mode, it’s easy to get carried away and focus on the future rather than continuing to also pro-actively examine potential risks,” says Mr Cavanaugh. “The best time to manage financial risk is before it happens – not after.” Greg Thompson, Grant Thornton’s National Director, Tax believes businesses will find tax cuts helpful but only to a minor extent. “The Budget’s tax benefits are a bit of an enigma for businesses because the cuts will provide some incentive to retain profits and therefore be healthy, but they are not really big enough to trigger significant changes in business thought processes.” Mr Thompson warns that the pending GST increase provides businesses with medium-term uncertainty because even though they can control their own spending, they can’t control or predict how their customers will spend. “The best advice is to avoid making any assumptions about GST’s medium-term impact on spending.” Messrs Cavanaugh and Thompson agree with business leaders that the Budget will help to stimulate investment in productive assets by encouraging businesses to grow and invest in the future. They both, however, counsel businesses to take care and to identify, manage and mitigate their tax and financial risks before undertaking any significant capital or workforce investments.
|
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 |
24/05/10 Spend to saveBy Colin DeFreyneAs predicted, the rate of Goods and Services Tax (“GST”) has increased in the budget from 12.5% to 15% (which equates to a 2.22% increase in the price of goods and services which include GST) effective from 1 October 2010. This is expected to result in an approximate 2% increase in the rate of inflation (the difference being due to the cost of some services which do not included GST, for example rents and interest costs). There are arguments for and against GST being increased, particularly with GST being a progressive tax which proportionately hits lower income people more than those on higher incomes. To compensate those on lower incomes there will be a 2.02% increase in payments of superannuation, various benefits, family tax credit and student allowances. This increase will also be effective from 1 October. Such an approach to compensating those affected is far more preferable than exemptions which apply overseas and which were proposed by various political parties as a means of diffusing the impact of the GST increase. Any such exemptions would provide difficulty with interpretation, boundaries for debate, and system manipulations that complicate the efficiency of the GST collection mechanism and create opportunities for error. The key benefit of GST is its efficient operation and broad reaching effect. It is very difficult in a pure and efficient system for people to avoid paying GST. This is one of the key findings of the Tax Working Group was that our overall system was broken given a heavy reliance on personal and corporate income tax rates. That reliance was unsustainable in view of international pressure for continued reduction in corporate tax rates (or risk the loss of our businesses overseas), and an aging and mobile individual taxpayer base (particularly our educated high income tax contributors). GST is a tax that is difficult to structure out of without leaving the country or reducing consumption! The window between now and 1 October gives retailers and other businesses a great opportunity to attract the consumer dollar as shoppers try to beat the 1 October GST increase, particularly with personal income tax rates being reduced from the same date. Without any doubt, the last weekend in September will see sales as strong if not stronger than the last weekend before Christmas. However, retailers and GST registered businesses will need to do a great deal more than sit back and listen to the tills ring. There are significant business issues they will need to consider well before then:
Consumers will, by their very nature, spend to save the GST increase before 1 October. However, businesses will also need to spend to ensure they get systems and processes in place to be saved from the tax penalties which will be levied if they get it wrong.
|
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 |
20/05/2010 Budget a major step in the right direction.By Murray BrewerThe global competition for skills and capital has been intense. One merely needs to reflect on the number of Kiwi trained engineers, medical professionals and business people now living comfortably offshore to recognise that over the last decade we have lost a significant level of our home grown skill base. Today’s budget is a major step in the long term aim of reversing this resource drain with the added hope that some of our best and brightest and wealthiest will consider a return home. In 1999 we saw a newly elected Government increase personal taxes from a top rate of 33% to 39%. For many this move was a thinly veiled jealously tax and was untenable. Individual reactions varied. The law of unintended consequences certainly holds true when one reflects on the changes that have followed in the wake of the 1999 tax increases. We have seen the outflow of highly skilled and highly paid Kiwis offshore. So much so that in 2003 the previous Government took steps to stem the flow by reducing tax barriers to migration to New Zealand – an initiative that finally came into effect on 1 April 2006 with the transitional tax resident concession. On the local front we saw an explosion in negatively geared rental property investment. Taxpayers were happy to lose money on their rental investments because the Government was handing them back 39% of each dollar they lost via tax refunds. We now see that over 9,000 recipients of working for families tax credits leveraged those credits by reducing their incomes through losses from rental investment. Tax free capital gains were an added bonus as demand for rental investment pushed up prices. Consumption driven inflation and a roller coaster ride of high interest rates were not far from our minds. None of this was good news for New Zealanders many of whom now visit their children and grandchildren based in Australia. The budget will take way some of the incentives that have fuelled the rental market. Rental losses will still be offset against other taxable income. However the 33% tax rate and the removal of depreciation allowances for rental buildings will focus an investor’s mind. The reality is that it will cost the investor $3 to save $1 in tax, not a pleasing prospect in a flat property market. The 28% PIE rate will provide a good contrast for those investors who may now prefer to have their nest egg in the ‘bank’ rather than bricks and mortar. It is not a big bang approach but rather a well thought out series of levers which will hopefully have the effect of rebalancing investment preference and assist in investment into technology and economic growth to the benefit of the entire country. The 33% rate will also remove many concerns facing those that departed shortly after 1999 tax increases. The foreign income exemption available to those that have been non-resident for 10 years or more will be an added advantage. We need skills and capital to remain here and for investment preference to be balanced towards economic growth. Today’s budget announcements will assist in turning the ship around.
|
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 |
20/05/10 The taxing business of taxing businessBy Greg ThompsonFrom the time the Tax Working Group released its long-awaited report on the design of the tax design, speculation has been rife on how the budget would fix a tax system which was widely regarded as “broken.” Fundamentally for businesses, the enigma faced by government was how to balance the “big brother” comparisons with Australia, significant constraint through falling revenues and increasing expectations with the need to set businesses on the path to recovery. Overall, the government has delivered a broadly neutral package for business. In a surprise move to remain competitive with our neighbours New Zealand has finally got one up on the Australians by reducing the corporate tax rate to 28% from the 2012 tax year (generally April 1, 2011), a full year ahead of a similar move by the Australian government in its budget released earlier this month. Unfortunately, if businesses are not currently making money the tax rate reduction won’t provide any immediate relief but does give a signal to the future of businesses as they move to profitability. Likewise, to ensure the proliferation of foreign business ownership in New Zealand companies pay a greater share of tax in New Zealand, the thin capitalisation rules have been strengthened. Thin capitalisation refers to the extent to which a business is funded through debt rather than equity. Debt reduces New Zealand corporate tax liability (at 28% under the announced changes) replacing it with a withholding tax cost of 10%. The ratio of debt to assets has been reduced from 75% to 60%, meaning 18% more tax will be paid on 15% more profits earned by foreign owned businesses. One of the key question marks is the effect other measures in the budget will have on businesses. Those measures include the increase in GST rate to 15% from 12.5% from October 1, 2010, the removal of depreciation from all buildings from the 2012 tax year, the removal of the 20% accelerated loading on deprecation on plant and equipment on all new acquisitions from budget day, and the reduction in personal tax rates. While the increase in GST should be directly neutral on businesses, other than those involved in the supply of exempt services, the effect on consumer behaviour on these businesses is less certain. It is likely that an amount of knee-jerk consumer spending will result in the lead up to the change in GST rate which businesses will gear up for. The extent of the post-GST blues is less certain, particularly running into the traditional Christmas spending spree which may not eventuate this year. The effect of the loss of depreciation claims on businesses is also uncertain. This will have a direct cash flow effect on businesses, whether as landlords or tenants, particularly as a significant number of small businesses also own their own premises. Many landlords have structured their affairs in the knowledge of the cash flow advantage that a deprecation claim provided. It is difficult to restructure their affairs given property is not a liquid asset at a time when other property owners are facing the same problem. Their only choice may be an increase in rents. Although there has been a timing advantage that historic depreciation provided, the removal of the deprecation claim will have an immediate negative cash flow impact on businesses. The government has also signalled a review of the border between the building structure and what qualifies as fit out, which will inevitably lead to further denial of depreciation. To top off the bad news on this front, the government has removed the incentive to invest in business structure through the removal of the 20% loading of plant and equipment. The final piece of the uncertain puzzle is the effect of the broad ranging personal tax cuts on business. Historically there has been an increase in consumer spending when personal tax cuts occur. However, the message given by the government is that such cuts are designed to offset the impact of GST and encourage individuals to save or reduce their personal debt levels. With interest rates projected to rise in the immediate future, it is likely the personal tax cuts will have a limited direct effect on buying behaviour and thus not result in a beneficial increase in consumer demand for businesses. The government has stated the budget is about rebalancing the tax system for growth. That means less immediate benefits for businesses and more changes about how businesses are taxed; reducing the headline corporate tax rate, removing an incentive for investment in property and reducing the competitive advantage foreign-owned businesses have investing in New Zealand. All that is needed is a positive turn in the economic fortunes of the country to take advantage of these changes.
|
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 |
20/05/10 Healthcare wins signal reshuffling of the deck chairsBy Pam NewloveHealth is one of the few areas of public spending receiving an increase in funding allocation in a budget that has many government agencies receiving no increases. Vote Health 2010 includes $1.4 billion of extra funding for District Health Boards and $59.5 million more for more elective surgery. Although there are many winners from Vote Health, there is also a reshuffling of the deck chairs with vulnerable areas such as mental health and oral health being sacrificed at the expense of new screening programmes for bowel cancer and greater public funding for breast screening and treatment including breast reconstruction surgery. The earmarking of greater spending for breast reconstruction surgery is addressing the inevitable social consequences that arise from any publicly funded screening program. Wider access to screening means earlier detection, higher rates of survival and more genuine cases for reconstructive surgery on the public health tab. Still this is probably money well spent as the costs of earlier detection are significantly less than the costs of more complex treatment later when cases develop and become more costly to treat with a poorer prognosis. Government have obviously listened to the pleas from primary sector health practitioners with an undertaking to commit a further $51 million toward the current Very Low Cost Access (VLCA) programme which directs more funding into primary healthcare. This is after previously advising that it would not expand that scheme. The existing VLCA scheme has already cut the costs to accessing primary healthcare for those patients who are registered in a VLCA practice. It is worthwhile noting that currently that accessing of VLCA funding is not means tested at individual patient level meaning that it is not necessarily an efficient mechanism for getting primary healthcare funding to the right people who genuinely need it. However primary healthcare has had to make sacrifices to win additional VLCA funding, with $8 million cut from management fees provided to Primary Healthcare Organisations, (PHOs). This will have an impact on the delivery of primary healthcare. The Minister of Health has previously signalled that the number of PHOs needs to reduce so the cut in funding will probably not be a surprise for those organisations.
|
Pam NewloveNational Director, Business Advisory 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 |
20/05/10 Cometh the taxmanBy Greg ThompsonWhen any Government is faced with falling revenues, a recessionary environment and an inability to raise its headline tax rates, there is little room for movement. One way that Governments around the world are resorting to is raising additional revenue through increasing its audit activity and assessing additional taxes on taxpayers. New Zealand is following that trend with an announcement in Budget 2010 for an additional allocation of funding to the Inland Revenue to bolster its compliance activities including audit and debt collection. The Budget was all about the integrity of the tax system, and its redesign to remove anomalies, such as the focus New Zealanders have on property. A strong compliance function also has a role of ensuring equity between taxpayers, particularly where New Zealand relies on a voluntary compliance regime to collect its taxes. That is, taxpayers are required to assess the tax they are required to pay and pay it on time. Inland Revenue will then decide on a risk based approach who to audit to confirm whether those tax treatments were in fact correct. The Budget allocated an additional $119.3 million over the next 4 years to increase that compliance function. Part of that allocation is in the area of debt collection, a clear problem at present given the poor financial situation of taxpayers who do not have the cash flow to meet their obligations. It is unclear whether the recent policy of Government to assist taxpayers in their debt management rather than persecute them will remain under this renewed focussed. It could also be a recognition that the level of taxpayers facing debt problems will inevitably increase over the next few years, meaning greater resources are required to manage them. The audit function is the one which most taxpayers will fear the most. Additional funding has previously been targeted against the property sector to catch activity in this sector which comes within the ever-expanding reach of our property taxation rules. This Budget will inevitably lead to further scrutiny in this area, although with the drop in housing values there may be little short-term gain to the government. The Government has also highlighted a focus on the cash economy, that is required to pay tax like everyone else, and GST Phoenix schemes. Such schemes involve transfers of assets from old defunct companies to newly formed ones where a GST claim is made on the transfer of the assets to the new company, without the old company being in a position to pay the resulting output tax. Despite these particular focuses, it is inevitable that a more broadly applied activity will occur. With Inland Revenue having significant powers to penalise and charge interest in addition to assessing the core tax at stake, taxpayers in general will be more likely to see the taxman knocking on their door.
|
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 |
20/05/10 Government takes a rain check on opening up ACCBy Pam NewloveMany would have expected today’s budget to announce the opening up of the ACC Work Account to competition. Interestingly government seems to be signalling a cautious approach to any mass changes to ACC with $2 million of funding to the Department of Labour for a more robust review of where ACC policy should go. National’s 2008 election policy included a promise to undertake a review of whether or not the ACC Work Account should be opened up to competition. In October 2009, they announced it had established the ACC Stocktake Working Group, put together to evaluate the merits of opening certain areas of ACC up to competition. This apparent slowdown in the pace of any change for workplace ACC will see many employers breathing a sigh of relief. For those who experienced the mass changes to ACC workplace insurance in the late nineties, any substantial change needs to be managed in a orderly fashion without a return to days of old with businesses taking shortcuts on ACC cover and employees who had the misfortune to suffer a work place injury, facing a tortuous rehabilitation process. In 1999, the ACC Work Account was opened to competition briefly by the National government. Although premiums reduced significantly during this time, many have disputed how sustainable they really were. Were the drastic reductions representative of fair prices or were they just an attempt by private insurers to gain market share? Unfortunately we cannot know for sure as Labour quickly restored the ACC monopoly after less than a year of private competition. The simple fact is that the Work Account is currently ACC’s only profitable account and, therefore, the most likely to succeed in private competition. If ACC is to be sustainable in the long term, its best chance would be to operate in a private environment. After all, if any business out there was running ACC’s numbers, it would have been bankrupt a long time ago. Hopefully the allocation of extra funding to this process ensures that we see a robust analysis of the options with some sensible pragmatic solutions put forward. Employers will be watching this space closely.
|
Pam NewloveNational Director, Business Advisory 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 |
17/05/10 Competitive playing field looms for ACC?By Pam NewloveWill this year’s Budget see the Government re-open competition for ACC’s Work Account? In October 2009, the National Government announced it had established the ACC Stocktake Working Group, put together to evaluate the merits of opening certain areas of ACC up to competition. This now looks to be increasingly likely as the group’s recent interim report has deemed the idea to be workable. Although it is understood that various accounts will continue to be assessed, it is ACC’s Work Account, which covers personal injuries in the workplace, that will be the first candidate. So what will this mean for businesses?First and foremost, the obvious benefit is more choices for workplace cover. Businesses will have the ability to change providers if they are able to find lower rates elsewhere. There is a compelling argument behind this – businesses are able to make educated decisions about all other types of insurance and, in fact, all other types of expenditure. One would think it makes sense that the same be possible for workplace cover. Secondly, private workplace cover will likely offer greater incentives. Currently ACC gives no or little consideration to the track record of an employer when levies are charged. In fact, levies are charged at a flat rate based on the industry you operate in. The result is businesses operating safe workplaces in dangerous industries are penalised when they should in fact be rewarded. It is true that many businesses have never experienced a workplace accident yet they are forced to pay higher levies year on year. The same inequity is illustrated on the flipside, where injuries are frequent and the increase in levies is comparatively modest. Many employers argue that this is unfair because it is essentially good workplaces paying for injuries in bad workplaces, whilst providing no incentive for the preventions of such injuries. In the insurance industry, good behaviour is rewarded – lower premiums, lower excesses, no claims bonuses and the like. There’s no reason to assume the same wouldn’t be true with private ACC. There are some arguments against the change. Some believe that such incentives encourage employers to hide their workplace injuries. Others say it paves the way for more disputes and difficulties in receiving payouts. All valid points to be fair, but they will most likely only affect a minority of workplaces and, in reality, are not too different to the risks involved with any other type of insurance. It helps to remind ourselves that we have been here before. In 1999, the ACC Work Account was opened to competition briefly by the National government. Although premiums reduced significantly during this time, many have disputed how sustainable they really were. Were the drastic reductions representative of fair prices or were they just an attempt by private insurers to gain market share? Unfortunately we cannot know for sure as Labour quickly restored the ACC monopoly after less than a year of private competition. The simple fact is that the Work Account is currently ACC’s only profitable account and, therefore, the most likely to succeed in private competition. If ACC is to be sustainable in the long term, it’s best chance would be to operate in a private environment. After all, if any business out there was running ACC’s numbers, it would have been bankrupt a long time ago.
|
Pam NewloveNational Director, Business Advisory 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 |
10/05/10 Hauling the New Zealand economy forwardBy Trevor ThorntonOne of the major questions asked of this year’s budget is … will the budget help deliver the leap in productivity and economic growth this Government has vowed to achieve? There’s no doubt that whatever changes are made to the tax regime an allocation of funding will potentially have a direct impact on whether the Government meets its growth goals. But the answer to New Zealand’s lagging economic performance isn’t just in economic and fiscal policy. Other aspects of the way we run this country and people’s attitudes will have just as an important effect in the long run. A prime example of how changes in policy can impact the economy is shown in the Government’s decision to allow trucks to be heavier and in some instances slightly longer. Looking at the facts, this is a no brainer. A Government trial of truck combinations weighing just six tonnes more than the current 44-tonne maximum weight showed vehicle productivity could increase by 10% to 20%, trip numbers could reduce by 16% and fuel use decreased by 20%. The Road Transport Forum calculates the higher mass and dimension could mean up to a million fewer truck trips a year and could cut road freight rates by around 10%. Any potential rate reductions are important because road transport costs here are on average 30% higher than in Australia. Reducing our freight rates will make many businesses more competitive. On top of this, fuel use and emissions will be reduced and with fewer truck trips, our roads will be safer. So what’s been the response? Apart from the Minister of Transport’s explanation of why the Government has made the change, there’s been no mention of the economic benefits it will bring and no quotes from exporters and major industries on the advantages they see for their businesses and the economy overall. The focus has instead been on road safety and extra roading costs for local Government. Firstly, let’s look at the safety issue. The claim is that heavy trucks make up 4% of vehicles on the road and are involved in 16% of fatal accidents. That’s correct, but the alarmists fail to mention that in three quarters of fatal accidents between a truck and another vehicle, it’s not the truck’s fault. Put bluntly, the fewer trips trucks take, the less the risk of other vehicles hitting them. Other critics say heavier trucks will be more dangerous as they won’t stop as quickly. That’s wrong too. These heavier trucks, which it is worth remembering will be strictly controlled under a permit system, will have to meet exactly the same performance criteria, including braking, as trucks already on the road. But arguably the best evidence is to look across the Tasman where they’ve been running heavier trucks for decades and their accident rates are lower than New Zealand. Of course, some roads, whether local or state highway, will need upgrading and, given the way Government funding for local roads is structured, there will be costs for ratepayers if trucking operators and their clients want to use specified routes. Given the current rating burden, this is a serious issue. But it is one that needs careful consideration where ratepayer costs need to be carefully balanced against economic benefits. It may well be that by allowing heavier trucks to operate, an existing business will be able to continue or even expand. It could also allow a new venture to start, with the income, rates revenue and jobs it would bring. That would seem to be particularly important for all those regions outside the Auckland-Waikato-Bay of Plenty triangle and Canterbury, the major areas of future growth, which want to retain businesses and people. New Zealand needs economic growth. If we can’t lift our performance, then we will face increasingly difficult choices over what most of us regard as essential services including health, education, welfare, superannuation and possibly even policing. Plus, more and more New Zealanders will go abroad for better opportunities. Changes have to be made if we are to record the level of economic growth required to lift us up the OECD rankings. However, for these changes to be fully effective, we must embrace them positively. We can’t have one without the other.
|
Trevor ThorntonPartner, Specialist and business advisory ProfessionalTrevor is a former Chairman of Grant Thornton New Zealand and has been a part of the organisation since 1982. He is a member of the Christchurch Business Advisory Services division and a member of Grant Thornton International Asia Pacific Advisory Group. As a Specialist Advisory Partner he heads up the Transport Specialist Advisory Team for the Grant Thornton New Zealand practice. In his Business Advisory work he assists underperforming businesses turnaround their performance, and works closely with a range of companies to strengthen management and governance procedures. Trevor is involved at Board level (formal and Advisory boards) assisting directors and owners in setting and achieving strategic outcomes, maximising operating performance in both the short and longer term and implementing best practice. Contact details:T +64 3 379 9580 |
5/05/10 Will GST be the main game in the budget?By Colin DeFreyneGST rising to 15% in the Budget is a given. What will come with it, is not so clear cut. Prime Minister John Key has already noted the adverse effect that a rise in GST could have on lower income families and has suggested ‘that any GST increase would need to be accompanied by a combination of tax cuts and increases in benefits, NZ Super and Working for Families.’ But is there another way to manage the impact of a possible GST increase on lower income families? Other countries seem to be able to exclude many categories of goods from the GST net, so what about New Zealand? Let’s take a closer look at some of these other countries and compare them with the GST regime in New Zealand. I have been fortunate to have advised on GST in both New Zealand and Australia and on VAT in the UK, so I will stick with these three. When GST was introduced in New Zealand in 1985, it was politically unopposed given the strength of the Government at the time. This was far from the case in Australia in 1999 where the Liberal Government battled with its political opponents and was forced to introduce a compromise GST package with many exclusions. This has led to an Australian GST regime which is very complicated both for the businesses which are responsible for collecting it and the advisors who try to make sense of it. The same complications arise in the UK where a wide range of exclusions exist. New Zealand, on the other hand has a relatively simple regime. We do “zero rate” (i.e. charge a zero GST rate) on some supplies such as exports and certain sales to international travellers, but our list is short. It is fair to say that our GST regime is both simple and effective, given that it raises 27% of the Government tax revenue. However, despite the relative simplicity, many GST cases are heard by New Zealand courts. The UK excludes GST from, or “zero rates”, supplies of food. Similarly, Australia does not charge GST on food but calls it “GST free”, just to be different. This does not sound complicated, but not all food is zero rated (or GST free if you are Australian). Generally, the UK and Australia do not charge GST on basic foods, but as soon as food ceases to be basic and takes on a more luxurious character, GST is charged. Sometime the boundary between a basic and luxury foods is very hard to define and this creates the complexity. For example, in 1999 the Australia media was full of discussions about “cooked chooks” and “uncooked chooks”. This arose because a basic fresh or frozen chook qualified for GST free status (i.e. no GST) whereas the cooked chook was subject to the standard rate of GST. This type of problem creates huge complexity for the grocery trade and it is a problem which still features in both the UK and Australia. I recall advising a UK biscuit manufacturer of its GST obligations. Their plain biscuits were zero rated (basic foods), their fully coated chocolate biscuits were subject to GST and their half coated biscuits were subject to half the GST rate. As for their boxes of mixed plain, half coated and fully coated biscuits, the company employed a mathematician! The types of food which do not qualify for zero rating include food consumed on premises (e.g. restaurants), hot takeaway food, certain prepared food, bakery products and confectionary. The boundary between basic and luxury food will always be a problem. In the UK a cherry on a cake has GST, but take it off the cake and it is has no GST. Ice cream is subject to GST but frozen yoghurt may not be. The GST on food packaging also causes problems for our Tasman neighbour. So, do we have the correct system? Probably yes, because of its simplicity and relative ease of compliance. Is an increase fair to everyone? No, not if it is introduced alone, but we know that will not happen. As with all new tax changes, the effectiveness needs to be determined by whether it can achieve its objective with minimal compliance imposition on the real tax collectors, New Zealand businesses. These tax collectors eagerly await the Budget on 20 May to see what it will mean for them. You can be assured that the devil will be in the detail.
|
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 |
3/05/10 Is the Primary Healthcare purse starting to close?By Pam NewloveThe Minister of Health has asked Primary Healthcare to reduce next year's spending growth by $25 million. What does this mean for the provision of primary healthcare for New Zealanders and are universal subsidies a luxury that cannot be sustained? The previous Government progressively introduced subsidised healthcare for all New Zealanders, by region and age brackets initially. Finally by 2007 every New Zealander was entitled to a Government subsidy for healthcare regardless of age, ethnicity or socio-economic status. There was no recognition or special funding offered directly to high needs users. The new regime also allowed certain eligible practices to join the Very Low Cost Access Scheme (VLCA) whereby additional state funding could be accessed by a practice (not individuals) but even lower fee costs were imposed as a condition of joining that scheme. The scheme was targeted at high needs users but research has shown that over half of those participants attending VLCA funded practices are not high needs patients. At this stage the Ministry of Health is not willing to extend this scheme so that funding reaches more high needs users. The current Government has so far maintained this funding regime, but is it affordable and does it deliver sufficient healthcare to the right people? The reality is that the current system means affluent patients can access relatively cheap healthcare. Further, if their doctor’s practice is participating in VLCA funding, charges to patients are limited to $16.50 per consultation. This means that a high needs, low income patient attending the same practice gets the same amount of Government subsidy as the wealthy patient. With patient co-payments of $16.50 per consultation at VLCA practices, this equates to an hourly income of approximately $70 for the GP. Anyone who has recently engaged the services of any other professional or tradesperson recently will appreciate that that is an extremely low hourly rate. It is presumed that middle to high income earners are willing to pay a fair market charge for good professional service, regardless of which profession they are dealing with. Why would this socio-economic group view the purchase of their medical care any differently? In fact, increasingly, upper income earners are taking out medical insurance to further safeguard themselves and their families as evidenced by Southern Cross’s membership of 840,000 and growing Given that primary medical services are now significantly cheaper for many than they were five years ago, does that mean that we expect a lower quality of care from our GPs? Certainly not. The funding regime brought in by the previous Government was clearly laudable at the time. It has changed the financial side of general practice on many fronts, whether through the reduction of cost barriers to accessing primary care or the rise in incomes for GPs and the associated potential increase in value of their practices. Maintaining the current Primary Health Care Strategy funding would be a nice thought, but if the costs are spiralling annually and sufficient dollars in care are not reaching the right people, the time may have come to overhaul universal subsidies. Targeting funding for middle income earners, particularly for those families with one income earner supporting a spouse and children, would need special thought. Arguably families falling into this group would view a return to historical charges as unpalatable. Perhaps a system aligned to the Working for Families tax credit system could target funding for that group? Clearly the elderly, children, adolescents and low income earners will surely always be viewed by any Government as groups needing more support from the public healthcare purse.
|
Pam NewloveNational Director, Business Advisory 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 |
26/04/10 Budget economic stimulus is the key catalyst to improved succession for Baby BoomersBy Tim KeenanMany baby boomers eyeing a successful succession from their businesses will be looking to the Budget to provide a sufficient economic stimulus package to assist them in this goal. Having sat and watched over the last two years as the value of their businesses has fallen at the same time as bank lending has almost dried up, many have had to be patient as they await a market upturn that will return value to their business and confidence to would-be purchasers. While personal tax cuts and reduction in compliance costs will be of interest to this group, it will be more the Government’s limited ability to stimulate economic recovery, including the impact of the Emissions Trading Scheme that will be of greater interest. It is a much more serious problem for New Zealand than any other country as we lead the world in the number of business owners who are looking to sell as part of their succession plan – a massive 69% compared with the global average of 25%. To further complicate matters, New Zealand is working its way through a demographic bubble, the Baby Boomer phase, which is characterised by a proportionately high number of businesses being owned by people rapidly approaching retirement age. It really is a twin edged sword. You have a bubble of people looking to sell their businesses before retirement against an economic environment with a low appetite for risk and tight capital markets. This has resulted in a great number of baby boomer owners reluctantly agreeing to continue in business and prolonging the date of exit until better economic conditions return. A bubble on a bubble. The main factor affecting the successful ownership succession of these private enterprises is that of market value. In the current economic environment with low growth and high unemployment, the profitability of these businesses is deteriorating. Margins are being squeezed and with revenue down in a number of sectors the resulting effect on the bottom line is not pretty. Treasury forecasts highlight this with reduced tax take from this sector of the economy over the next two years. Potential purchasers for these businesses, being trade players, internal management or even family, are wary of the current environment and the reduced profits and reflect their assessment of this risk through a discount on value from what could have been historically achieved three to five years ago. Vendor owners are testing the market place and gaining an understanding of the markets appetite for their business and its current value. They are doing the sums and quickly concluding, in some cases reluctantly, that it makes more economic sense to continue to trade through the effects of the recession and take their business to market in better times. Akin to perhaps, selling the family home in spring rather than the middle of winter. For a significant number of these baby boomer owners the majority of their personal wealth is tied up in their business. The successful sale of their business and the resulting proceeds will dictate the quality of their retirement. Very quickly these owners are concluding that with reduced profits and lower multiples the discount to their business value is not worth crystallising now. Their quality of retirement living would be severely impacted, so they trade on. An additional factor which impacts on the quantum of business sales in the current environment is the availability of debt. Following the global crisis the banking industry in Australasia has taken a more conservative stance on the provision of funding for these transactions. In a number of examples of private enterprise operations there is a heavy reliance on the business owner from an operational perspective. The banks are wary about the ability of a new owner or management team making the transition. This risk is being reflected in the limited debt they are willing to provide to fund the transaction. The banks are willing to consider funding to facilitate the ownership succession for these businesses, however, they are being far more careful and cautious as they review opportunity on a case-by-case basis. For a number of New Zealand’s entrepreneurial owners the dream of selling their business in their sixties is now being postponed to their seventies as they await improved trading conditions and better value assessment of their business. Hopefully, the Budget can give them some solace!
|
Tim KeenanPartner, Business Advisory ProfessionalTim commenced his career with Grant Thornton in 1997 becoming a Partner in 2001. Tim’s client base consists of successful private and entrepreneurial companies, predominately South Island based, who desire timely and proactive advice on a wide range of commercial issues. “Advising and supporting successful enterprises navigate through the commercial landscape to realise their ambitions, be it growth, lifestyle or wealth is incredibly rewarding.” Tim’s clients are well represented across a variety of industries including food and clothing manufacturing, construction, retail, logistics, import distribution and rural. “The diversification brings fantastic variety and numerous challenges in any working day. It allows cross pollination of concepts and initiatives using Grant Thornton as the advisory platform”. Tim specialises in leading transaction deals for clients in areas of acquisitions, mergers or disposal. This includes due diligence advice on structure and facilitating the provision of debt and equity finance. Contact details:T +64 (0)3 379 9580 |
19/04/10 IRD and the Budget – Get Out of Jail Card for Taxpayers?By Drew HerriotWith the Government expected to announce sweeping changes in this year’s Budget, resulting in a more efficient and streamlined tax system, how will this affect IRD operations and taxpayers in general? For starters, the IRD will need less money to operate, but will this result in a cut in the department’s operational budget, or an intensification in surveillance and auditing? The cynics among us might argue that the IRD will become even more vigorous and aggressive in their dealings, to ensure that the Government sees value in its operational budget. Others may wistfully think that taxpayers will have less scrutiny applied to them. The IRD receives a significant budget appropriation from government for operational expenditure ($174 million in 2008/09), which includes employing over 6000 staff. However, as with all government departments, we know they will undoubtedly come under pressure to ensure they operate efficiently. With the Government already indicating the three tax areas that it will be focusing on – a GST rate change, lower personal tax rates and an attack on property (whether commercial or residential) – where and how are these efficiency changes going to occur? While not the sole factor affecting taxpayer behaviour, tax rates have been long acknowledged as a driver of taxpayer compliance – the higher the tax, the lower the compliance. The reduced personal rates would be expected to improve compliance and thereby reduce the IRD’s purchase of audit activity. This comprises 30% of the operational budget of IRD, so any reduction will make significant savings for government. If we put aside any personal feelings, good or bad regarding an increase in GST, it is a highly efficient tax. Efficiency relates to the cost of collection verses revenue generated. A shift from high personal rates to a higher GST rate should reduce collection costs (or at least for IRD). Because of the relative simplicity of the New Zealand GST system i.e. very few exceptions, there is a high compliance rate. Any rate change, we believe, would not require additional resource. Currently, GST accounts for approximately 21% of tax collected, with a rate increase lifting this to 25%. While this increases the Government’s fiscal risk, it should be managed through current procedures. The final expected legislative change around property (although the details are unknown) is expected to be prescriptive. As a prescriptive piece of tax legislation, we would expect the administration to be less. Further, if losses are unable to be offset against personal income, fewer personal tax returns will be filed. The result of these expected tax changes is that there will be efficiency gains and while it is not yet known how this will affect the IRD’s budget, taxpayers would be deluded if they think they will be in for a free ride. In fact, quite the opposite in some cases, as we think that the IRD will target industries/sectors that are changing to pick up simple errors occurring through the change process. The IRD might even go as far as trying to argue for an increase in its budget so that it can educate taxpayers on the changes introduced.
|
Drew HerriotAssociate, Tax ProfessionalDrew has had over 20 years specialising in taxation and has worked for the Inland Revenue, a big four chartered accounting firm and large corporates. Drew has come to Grant Thornton New Zealand from one of the largest insurance and investment companies where he was the tax manager. Drew has wide experience in delivering business centric solutions, he was previously a key leader in the implementation of the new investment taxation rules for a company with one of the largest funds under management in the industry. This required a total business view considering, not only taxation issues, but what this meant for clients, sales teams, administrators, and systems. Part of the pre-implementation project was to work with Government Ministers and officials on the structure of the legislation and potential compliance costs on the business as a whole. Drew has said that he views tax as part of the total business solution and wants to ensure that tax issues are resolved on a practical level that fit with the business. "Tax must work for the business, not the business working for tax." Drew has a wide experience across a variety of industries, with a particular interest in insurance/investment/international finance and the entertainment industry. Contact details:D +64 (0)4 495 1728 |
12/04/10 Tax change inevitable in BudgetBy Geordie HooftThis year’s budget will be eagerly anticipated for the tax changes that are undoubtedly coming. Modern budgets create an air of expectation just like those of past decades. These days, it’s not so much about finding out how much the beer and baccy is going up; it’s more about how the Government plans to raise and spend our money in a way that will help grow the economy. The Tax Working Group (TWG) reported to the Government earlier this year and its findings provide an insight into what we can expect to see in the budget. The TWG was guided by what they saw as the principles of a good tax system, being:
The TWG was charged with ensuring that any changes are “fiscally neutral”. The Government does not intend to increase the overall tax take through any proposed changes; nor does it intend to reduce it. The current tax system was described by the TWG as “broken”. Too much emphasis is currently placed on taxes that inhibit growth (personal taxes and company tax). The system is unfair, skews investment decisions and discourages work participation. Their view is that a “broad base, low rate” system will address those issues. Specific recommendations include: Personal income taxReducing the top personal tax rates and aligning them with the rates applying to companies and trusts. The current top rate of 38% applies to income earned over $70,000. Alignment with the company tax rate would see this reduced to 30%. However, the Minister of Revenue has indicated that tax changes would be “across the board”, so there is likely to be some movement at all levels of the tax spectrum. Company tax rateThis was recently reduced to 30%, the same as Australia’s headline rate. The TWG considered lowering this to 27% to provide a competitive edge. GSTAnnouncements made by the Government since the release of the TWG’s report lend an air of inevitability to the prospect of GST being increased to 15%, although the TWG also considered 17.5% as an alternative. Also made clear by the TWG was the continuation of the broad application of GST, with no exceptions for food or other basics. PropertyMuch has been made of the apparent “tax loopholes” available to property investors. In reality, the rules applying to property are no different to those applying to other investments - other than a question over the true intention of investors in buying their capital asset. The effects are distorted by the economics of the property market. Some of the TWG’s recommendations have already been ruled out by the Government, including a comprehensive capital gains tax, a land tax and a notional “risk free rate of return” based on equity. That leaves curtailing depreciation claims, ring-fencing of property losses and/or some form of “bright line” test (regarding how many properties are bought and sold) as potential solutions to the problem of taxing property investment. WelfareThe TWG pointed out the entwined nature of tax and welfare, particularly Working for Families. Such initiatives create high effective marginal tax rates. Little has been said on this aspect, other than welfare being used as a conduit for compensating the less well off for any GST changes. Given the TWG’s report and the Government’s subsequent announcements, anticipating this year’s budget is less about “what” as opposed to “when”. There is nothing overly special about 1 April and most tax changes could be introduced as early as 1 October this year. The main considerations will be providing sufficient time for implementation and the influence of the electoral cycle, with an election due next year. How much can the Government implement this year and be forgiven for by then, and how much does it want to keep up its sleeve? All will be revealed on 20 May.
|
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 |
5/04/10 Little on tax front for SMEs in BudgetBy Elizabeth BurrowsWhile the Government knows that in the current climate businesses need all the help they can get, there is likely to be little in the way of tax benefit for SMEs in the Budget, irrespective of the amount of discussion in the media. Firstly, one of the most publicised of the expected changes is an increase in the rate of GST to 15%, which could be brought in as early as October. Whilst there may be a short-term spending spree by consumers to take advantage of the lower GST rate, it inevitably leads to a period of little activity, right in the lead-up to Christmas when many businesses seek to boost their coffers for the holiday break. And thereafter, dampened consumer spending with the across-the-board increase in the cost of goods and services, notwithstanding personal tax cuts which are likely to have to fund predicted interest costs for home owners in the second half of the year. In addition, businesses will need to consider whether they can, or indeed should, pass on the increase in GST to the consumer. For example, some existing long-term contracts may not permit an increase in the contract price, resulting in a permanent cost to the business. For others, the competitive market may mean it cannot be passed on. Then there are the systems changes required in a tight time frame, a further compliance cost to add to the already heavy burden on businesses. Secondly, changes to the way property could be taxed have been well dissected – the most probable change is the removal of deductible depreciation on residential and commercial properties. Whilst an increase rent on GST should be neutral for most businesses, the loss of depreciation deductions and possible interest restrictions are likely to have an impact. Businesses that own their premises would no longer be able to claim a deduction for depreciation and businesses that lease their premises could see an increase in rent to cover the loss of deductions to the landlord. Thirdly, on the back of the loss of investment incentives for businesses through the removal of the “one year wonder” Research and Development expenditure regime, businesses also look to lose the 20% loading on plant and equipment assets. So what good news could be in the offing? Whilst there has been talk of a reduction in the corporate tax rate, the key focus currently is on a reduction in personal tax rates to move closer to the corporate rate. Unfortunately, this is a further compliance cost to employers and businesses to bear, although there may be a silver lining with a reduction in the pressure to increase wages as a result of employees having more cash in their pockets. New Zealand needs to be an attractive place in terms of tax requirements, to prevent businesses from relocating and a close eye will be kept on Australian tax reforms. Unfortunately for New Zealand, the current review of the Australian tax system looks increasingly likely to recommend a decrease in the Australian corporate tax rate as it tries to keep pace with the rest of the world in having low corporate taxes to attract multinational business and retain domestic business. The New Zealand Government would once again be in catch up mode to prevent more businesses from crossing the Tasman. Whatever changes are announced, businesses will need to make sure they are on the ball to minimise any negative changes or maximise any surprise benefits.
|
Elizabeth BurrowsPartner, Tax ProfessionalBased in Wellington, Elizabeth leads our Strategic Tax Review initiative which focuses on identifying areas of value which can be added and risk to be minimised for all taxpayers. She has seven years dedicated specialist tax advisory experience, which includes experience obtained from working with one of the big four accounting firms and several secondments to act as an in-house tax expert for major New Zealand Corporates. Elizabeth has significant experience across most business sectors in providing tax consulting and compliance services across all tax types to a wide range of clients, including New Zealand and international based businesses, high net worth individuals, central and local government organisations, and multi-national companies. Elizabeth has particular experience in domestic and international tax, structural planning, and tax due diligence for disposals, mergers and acquisitions. Contact details:D +64 4 495 3780 |
29/03/2010 Inland Revenues warn on new international tax rulesBy Paul GallagherIn the international tax arena, transfer pricing continues to dominate the news particularly the banks tax cases and the new international tax rules for companies. Bill English is expected to confirm in the Budget the impact of the international tax changes that will take effect from the 2010-2011 financial year. These changes are fundamental and will bring New Zealand in line with major trading partners including Australia, Britain and the United States. Importantly, if the government is struggling to fund personal tax cuts, or government spending in general, targeting the collection of additional tax through Inland Revenue audit activity in the international and transfer pricing areas seems a sure bet. The new international tax rules for Controlled Foreign Companies means that New Zealand controlled companies with foreign active businesses will no longer be immediately taxed in New Zealand on the income from those subsidiaries under new foreign tax rules. The exemption of active offshore income of these companies replaces the old system of taxing income as it is earned on an unrealised basis. Further important features of the changes are an exemption from tax for most foreign dividends paid to companies and measures to protect the tax base as a result of adopting an active income exemption. The purpose of these reforms is to assist New Zealand based businesses to compete effectively in foreign markets by freeing them from a tax cost that similar companies in other countries do not face. The changes will improve the competitiveness of New Zealand’s tax system and encourage businesses with international operations to remain in New Zealand, whilst establishing and expanding overseas. Inland Revenue is keen to ensure that there is no artificial erosion of the New Zealand tax base. In addition to specific anti avoidance measures introduced, a weapon that the Inland Revenue has in their arsenal to control offshore activities is to strictly enforce New Zealand’s transfer pricing rules. For example a New Zealand company might consider charging less for New Zealand manufactured goods or not charging at all for services provided to offshore related companies thereby deferring indefinitely the New Zealand tax take of the “international tax pie”. Under the previous rules, income made by such a foreign subsidiary was taxed at the company tax rate of 30 per cent less the amount of tax paid in the other country. This was irrespective of whether the profits were brought back to New Zealand. But under the new rules the income is not taxed in New Zealand till the proceeds are distributed to shareholders. The new rules may encourage companies to shift as much of their taxable incomes to offshore entities for example including production companies in low or no tax jurisdictions. This could allow the company to defer New Zealand tax indefinitely. However, the Inland Revenue has sent a clear signal that companies will have to keep a clear record of foreign transactions to ensure they can show any transfer pricing with a foreign subsidiary was done at arms length. IRD international audit chief advisor John Nash said recently: “A failure to prepare adequate transfer pricing documentation, or acceptance of pricing that is clearly inappropriate could result in a 40 per cent shortfall penalty for gross carelessness.” A number of New Zealand’s biggest exporters stand to benefit from these changes, including Fonterra, Zespri, Fisher & Paykel and Fletcher Building. Transfer pricing is the international requirement that ensures related party cross border transactions are carried out at arms length pricing. A global tax management issue, transfer pricing is a priority for tax authorities worldwide. It is rated as the number one tax issue facing multinational businesses, both from company and revenue Authority perspectives. And it’s easy to see why. Recall the GlaxoSmithKline transfer pricing case, which resulted in a settlement in 2006 of approximately US$3.4 billion. This is the largest recorded settlement in a tax dispute in IRS history. The GlaxoSmithKine case has wide reaching implications all companies transacting with foreign affiliates not only pharmaceutical companies. While little comment is available in New Zealand on the case, the issues raised should be reviewed and considered by all companies doing business with foreign affiliates. The Bank's tax casesThe transfer pricing aspects of the recent bank’s tax cases particularly assisted the judges to conclude that the transactions were tax avoidance. While strictly speaking the New Zealand transfer pricing legislation was not actually applied in the bank cases, the cornerstone principle of arm’s length dealings enhanced the Judge’s view (in the BNZ case) that tax avoidance was present. Whilst the tax at stake in the bank cases is significant, it pales into insignificance to the dollars at stake in current overseas transfer pricing disputes, which in most cases becomes a direct cost to the bottom line of business profitability. At a minimum, businesses need to look at their cross border transactions and assess the risk they pose to the business, not just in commercial terms, but also from attack by multiple Revenue Authorities. The last thing any business needs whilst it endeavours to ride the wave of financial uncertainty is to be exposed and unprepared for when the taxman comes knocking, as they inevitably do.
|
Paul GallagherNational Advisor - Transfer Pricing, Tax ProfessionalPaul’s extensive practical tax experience commenced in Ireland where he assisted many International companies (particularly U.S.A.) to establish operations there due to the availability of tax preferences. After a secondment to the U.K. Paul moved permanently to New Zealand in 1987. He continued as Senior Tax Manager of Ernst Young and then Senior Tax Consultant to Staples Rodway. Particular areas of interest include intellectual property transactions (marketing and trade intangibles), international tax (inbound and outbound). Over the last several years he has operated his own consultancy specialising in transfer pricing. Transfer Pricing ExperienceAs chief advisor in obtaining New Zealand’s first Advance Pricing Agreement (APA), which related to the payment of royalties (food manufacturer), Paul has continued to establish a reputation as one of New Zealand’s leading transfer pricing experts. He has advised in a large number of transfer pricing assignments including:
Contact details:D +64 (0)4 495 3760 |
22/03/2010 Limit GST to goods consumed in NZ – incentivise tourist spendingBy Dan LoweFor New Zealand businesses and Government agencies to fully reap the potential benefits of SBR (Standard Business Reporting), sufficient money needs to be set aside in the Budget to ensure that the programme is fully operational by 2011 when Australia goes live with its SBR programme. SBR aims to cut compliance costs for business by reducing the need to file the same financial information to multiple agencies, minimising duplicated and unnecessary data and automating the preparation and filing of statutory returns required to be filed with the SBR agencies – the Ministry of Economic Development, Inland Revenue, Statistics New Zealand and ACC. The key ingredient that makes all this happen is XBRL (eXtensible Business Reporting Language) which, after some 10 years in the wilderness has at last gained some traction around the world – particularly with the Securities and Exchange Commission in the US. Local studies carried out in 2008 suggested that if New Zealand spent between $18 million and $28 million on the SBR programme over the next three years, the estimated annual cost savings to business would be in the order of $55 million to $75 million per year once completed. Australia is already a step ahead. Their Government has committed $230 million over a three year period to the programme, with anticipated cost reductions for business of up to $836 million per year from 2013. It was disappointing last year when the New Zealand Government, in what was a very tough fiscal environment, determined that the scale of investment required to complete the SBR solution was simply not feasible and that a more modest, but targeted approach, was necessary. The result was $4 million to develop systems and taxonomy to harmonise and validate the processing of GST returns and eliminate GST data from statistics surveys. We need to do better. When you consider the relatively small amount that needs to be put aside in the Budget to ensure that SBR is up and running against the size of the benefits that will accrue, then it is a very positive and quick return on investment. It also needs to be taken in context with the other Government promises in last year’s Budget, in particular the $2.5 billion a year on ICT (information, communications and technology), an amount of spending that utterly overwhelms any section of the private sector. The Government’s commitment in this area should be applauded, including the $1.5 billion on ultrafast broadband. However, only making $4 million available for SBR in comparison with these other levels of spend fails to recognise the enormous potential of SBR to boost productivity in both the public and private sector. The Australians believe that an efficient and effective electronic business-to-government connection is essential for their future and have invested appropriately to ensure this will happen. We need to make sure we do likewise and the upcoming Budget is the perfect opportunity.
|
Dan LoweAssociate, Tax ProfessionalDan has been with the firm since the beginning of the 2000. Prior to working for Grant Thornton New Zealand 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. 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 |
15/03/2010 More investment needed to support Standard Business ReportingBy Mark HucklesbyWith an increase in the rate of GST likely in the upcoming budget and the desire to increase inbound tourism, there is no better time to redress the current imposition of GST on overseas visitors to keep New Zealand competitive with other tourist destinations. GST is a consumption based tax, so why not provide relief for goods purchased by tourists that are not consumed here? In essence, such purchases are delayed exports and should therefore not incur GST. The operation of such schemes in other countries has proven that the scheme has directly increased the average level of spending by tourists. Consumers are simple creatures and are likely to spend more if they perceive they are receiving a bargain. Just ask my wife (not that she’s simple), but she loves a bargain - when she starts a sentence with ‘guess how much money I saved’ I know the budget has been blown! Provisions in the GST Act already exist which allow goods to be zero-rated:
But they are limited in their approach and don’t allow the tourist to have possession of the purchase while in New Zealand. What is the point of buying a new video camera or watch if you can’t use it on your holiday? As the GST refund would only be provided on departure from the country, upon presentation of the goods and evidence of purchase (post customs), there is no risk to the New Zealand tax base. That is, if the goods are not presented within the relevant timeframe, then no refund would be provided. All responsibility rests with the tourist to meet the criteria (whatever shape they happen to take) as they are the ones receiving the benefit from the scheme. At the end of the day New Zealand has a natural competitive advantage amongst other tourist destinations, with its stunning landscapes, green image and friendly locals. The 100% Pure New Zealand campaign run over the last 10 years has cemented these aspects with the tourist market. Tourist numbers will not be affected by any rise in GST or the current punitive imposition of GST on ‘delayed’ exports. But, their spending habits while they are here may be adversely influenced. With 60,000 international visitors expected in 18 months for the 2011 Rugby World Cup, there has never been a better time to revisit this issue. Shielding tourists from GST on goods that will ultimately leave our shores will be a welcome change for the tourism sector - one of our country’s largest exports.
|
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 |
