Useful tips for Small Business

There are four important proposed changes to tax laws announced by the honourable minister Peter Dunne today while making Budget 2013 announcement:-

What is imputation credits?

Imputation credits regime was introduced in NZ in 1988. It is a system which avoids double taxation on already taxed income. So, when NZ Company issue you a dividend this is reported in your tax return as income, and imputation credits attached with that dividend are used as tax credits to avoid double taxation.
Section LA5 (4) ITA 2007: permits imputation credits to be used as credits to settle one's income tax liability.

What is franking credits?

Franking credits is similar to what we have in NZ as imputation credits. In Australia imputation credits are referred as franking credits.
NZ and Australia both have similar imputation credit tax regime which ensures the taxes paid in local jurisdiction are not paid twice.

Financial Reporting Act 1993 (FRA) defines companies into two categories: Exempt companies and Reporting Entity.

Exempt Company audit requirements

Exempt companies need not to comply with the auditing requirements.
Section 6A of FRA defines exempt company:
Exempt company must not be an issuer or overseas company or the subsidiary of another body corporate and did not have any subsidiaries. Further more it must meet two of the following criteria:

• the value of the total assets of the company (including intangible assets) reported in the statement of financial position did not exceed $1,000,000
• the turnover of the company did not exceed $2,000,000
• the company has 5 or fewer full-time equivalent employees

From 01 April 2011, depreciation on building and items attached to the building are depreciated at zero %, thus there is no deduction for you.

However, there are lots of assets in your rental property for which you can claim deduction and reduce your taxes.

Commissioner’s view (TIB vol 22 No 4 May 2010) on a depreciable asset is to follow a 3 step process to ascertain whether the assets are a part of the building or are individual assets.

Increasing mobility of capital, cross-border investments and international trade have all necessitated the need for ‘Double Taxation Avoidance Agreements’ between countries, aimed at eliminating ‘double jeopardy’ and facilitating global partnerships.

New Zealand has such agreements with many countries including Australia, UK, European Union and India (to mention a few) but the increasing Trans-Tasman trade and investment has necessitated a better understanding of the financial impact and more importantly, filing appropriate tax returns. While the importance of tax compliance cannot be undermined, individuals and companies must ensure that they are not burdened beyond their taxable limits.

New Zealand Double Tax Agreement with Australia does not allow tax credits received on Australian dividends as tax credits in your tax returns filed in New Zealand. 

There has always been a different opinion between taxpayer and the Commission of Inland Revenue in defining repair or capital expense. A taxpayer will always try to encompass its view in such a way that it can label the expenditure as repairs to avail tax advantage in the year of expense. If the expense is labelled as repairs & maintenance you can avail deduction immediately otherwise it is capitalised and depreciated over the useful life of an asset.

Capital can be defined as a tree, and repair is like watering to that tree. In the other words capital expense is something which gives you a brand new asset, and repairs is usual maintenance of that asset. Sounds simple, but it’s not that easy.

Significant changes are being made to the financial reporting standards from 01^st April 2014. What does this mean to you as a small business owner? Basically the changes are being made in the way your end of year accounts are prepared. The whole idea is to make it simpler to prepare end of year accounts so you will have less compliance cost and can focus more on growing your business.

The initial draft suggested that financial statements were not required for all businesses with less than $30 million turnover, but the IRD objected to that and suggested financial statements are required with a minimum standard level. The requirement for the IRD is to have a basic set of accounts on which they can rely upon in the event of auditing a business.  To reflect those changes The Tax Administration (Financial Statements) Order 2014 has been passed which is effective from 01 April 2014, which means your first set of accounts prepared on this basis would be for the year ending 31^st March 2015.

New Zealand GST is pretty unique in the world as it has very little exemptions. Almost all countries have similar kind of tax in their jurisdiction called VAT or GST. New Zealand’s goods and services tax (GST) system is based on the “destination principle”. This principle ensures that tax is charged by the provider of goods and services to the consumer based on their destination.

In cross border business to business transaction sometimes it is hard to determine the destination of a recipient. In determining the location of the recipient, New Zealand has, since relied on Wilson & Horton decision [Wilson & Horton v Commissioner of Inland Revenue [1996] 1 NZLR 26], which provides direction in determining the location of the recipient.

What is a trust?

Trust is not an entity; it is just a relationship between the settlor and the trustee. There are three important parties in a trust. They are settlor, trustee and beneficiary. Settlor is the person who set up the trust. Trustee is a representative of settlor who manages the trust and is the legal ‘face’ of the trust. The Trustee is liable for the trust’s tax and legal obligations. The Beneficiary is the person who is benefits from the trust income.

One of the important elements of a trust is that the trustee looks after the property (assets) for the benefit of beneficiary. The Trust can be started with a sum of $100, and later family home, investments, and other assets can be gifted to the trust. A trust, other than a charitable trust has a maximum life span of 80 years. The rationale is to promote the liquidity of assets in the society, otherwise assets can always be locked into trust and the general public may not have access to that.

It is now easier for overseas businesses to operate in New Zealand. New financial reporting standards simplify audit requirements for overseas companies.

Currently if New Zealand business is owned by the Overseas Shareholders (company incorporated outside of New Zealand) the financial statements of the company must be prepared, audited and filed with the NZ Companies office. The auditing of financial statements does add financial burden especially on a small business, and this could be up to $8,000. The law itself had been quite stringent on all overseas investors so regardless of size of the business all financial statements must be audited with the exception of non-active status of the business.
However, from 01-04-2014 these requirements have been changed, and the new requirements making it simple for Overseas Companies to operate in New Zealand. For example, A New Zealand business which is owned by overseas shareholders will benefit from this exemption. The benefit would be mainly for businesses small in size i.e. less than $10 million in revenue or $20 million in assets.