Business and Tax Updates November 2024: IBBZ Accounting

Summary:

As November draws to a close, the excitement of the holiday season is upon us. Christmas is just around the corner, bringing with it the perfect opportunity to reflect on the accomplishments of the past year and prepare for the festive celebrations ahead. For many businesses, this is a critical time to finalize year-end goals, review financials, and lay the groundwork for a successful start to 2025.

At IBBZ Accounting, we recognize the importance of a seamless transition into the new year. With the hustle and bustle of the season, now is the ideal time to assess your financial strategies and ensure everything is on track before the year ends. Whether it’s tidying up your accounts or planning for growth, we’re here to support you every step of the way.

As we embrace the festive spirit, we’d like to thank you for choosing us as your financial partner this year. Let's finish the year strong together and welcome a prosperous 2025 with confidence.

Key Business Updates

1. OCR Cut Announced

The Reserve Bank of New Zealand has cut the Official Cash Rate (OCR) to 4.25% to help boost the economy as growth slows and inflation eases. This cut is expected to lower borrowing costs for businesses and households, potentially boosting spending and investment. Exporters may also benefit from a weaker New Zealand dollar, making their products more competitive internationally. Businesses are encouraged to review their financial strategies to capitalize on these changes.

2. One year of Government chnages and how they affect your business

The National-led government has completed its first year, implementing several policies and reforms that could impact businesses. Here are the key points:

1. Tax Cuts: The government introduced tax cuts by adjusting income tax brackets. This could leave more cash in the hands of consumers, potentially boosting spending in key sectors. Businesses should evaluate how this might affect demand for their products or services.
   
   
2. New Trade Opportunities: New trade deals with the UAE and sustainable agreements with countries like Switzerland are expected to open up export markets. If you're in manufacturing or exports, now is a great time to assess market expansion opportunities.
   
   
3. Employment Law Changes: The repeal of the Fair Pay Agreements Act and reinstatement of 90-day trial periods for new employees simplify hiring for businesses. These changes provide more flexibility for employers, particularly small businesses.
   
   

4. Resource Management Reforms: Easier regulations for farming and primary industries could mean cost savings for businesses in these sectors. However, compliance with new policies should still be closely monitored.

5. Healthcare and Community Safety: Record investments in healthcare and stricter laws on gang insignia aim to improve public services and safety, creating a better environment for businesses and communities. 

Important Tax Changes

1. Proposed Information Sharing Reforms Between Inland Revenue and MBIE to Strengthen New Zealand’s Business Integrity and Tax Compliance

Inland Revenue (IR) and the Ministry of Business, Innovation, and Employment (MBIE) have proposed significant changes to enhance how the two agencies share information. These reforms aim to strengthen New Zealand’s tax system and improve the overall integrity of the business environment. The proposals were outlined in a discussion document released in October 2024, with submissions open until December 2024.

1. Addressing Phoenix Companies: One major focus of the proposal is to combat unethical practices by directors of failed companies, commonly known as "phoenixing." This occurs when a company’s assets are transferred to a new business, often at below-market value, while creditors are left unpaid. These directors then continue their operations under a new entity, avoiding liabilities and harming creditors and suppliers.
   
   Currently, Inland Revenue investigators may identify such practices but cannot legally prevent individuals from acting as directors in the future. The proposed reforms would enable IR to share critical information with MBIE, allowing the Companies Office to take action. This could include disqualifying individuals from serving as directors under the Companies Act 1993. These measures aim to deter repeat offenders and ensure fairer business practices.
   
   

2. Enhanced Business Information Sharing: Another key aspect of the reforms is improving information flow between IR and MBIE. Inland Revenue holds valuable data on New Zealand businesses, such as contact details, industry type, and business size. However, current legislation limits the sharing of this information.
   
   The proposal suggests allowing Inland Revenue to share this data with MBIE to improve direct communication with businesses. This would enable MBIE to provide tailored compliance support, offer relevant resources, and reach non-compliant businesses more effectively. A temporary exemption during the COVID-19 pandemic demonstrated the benefits of such collaboration, allowing the government to support businesses more efficiently.

3. Strengthening Policy Development: The proposed reforms also aim to enhance policy development. Currently, Inland Revenue and MBIE operate independently, with limited access to each other’s data. This makes it challenging to identify compliance trends or develop effective business policies. By enabling data sharing, both agencies could create targeted interventions, better measure the impact of policies, and provide more robust support to businesses.

4. What This Means for Businesses: For ethical businesses, these changes promise a fairer playing field by targeting those who engage in fraudulent practices. Improved information sharing will also mean more effective compliance outreach and tailored government support, helping businesses meet their obligations with greater ease.
   
   The reforms will also address gaps in oversight, ensuring that individuals involved in repeated mismanagement cannot continue to harm creditors or the economy. While these changes primarily target unethical practices, all businesses stand to benefit from a more transparent and supportive system.

2. Taxation of Overdrawn Shareholder Current Accounts: What You Need to Know

Overdrawn shareholder current accounts can result in significant tax consequences if not carefully managed. A shareholder current account tracks the financial relationship between a shareholder and the company, showing how much money has been withdrawn or contributed. If the account has a debit balance, it means the shareholder owes money to the company, while a credit balance indicates the company owes money to the shareholder. While credit balances typically don’t create tax issues, debit balances can lead to taxable dividends or fringe benefit tax (FBT).

From a tax perspective, debit balances are closely scrutinized. If a shareholder withdraws funds without repayment or without the company charging interest at Inland Revenue’s prescribed rate, the withdrawal could be classified as a taxable dividend or an interest-free loan, triggering FBT. The prescribed interest rate is crucial here—charging interest at or above this rate eliminates these tax concerns. Additionally, repayments made to clear debit balances can often be backdated within the tax year, reducing potential tax liabilities.

For example, if a shareholder withdraws $30,000 during the year, leaving an overdrawn balance of $10,000, the company can either charge interest at the prescribed rate or the shareholder can repay the amount to avoid tax complications. If these steps aren’t taken, Inland Revenue may treat the balance as a taxable dividend or an FBT liability.

Proper management of shareholder current accounts is essential to stay compliant and avoid unexpected tax obligations. This includes regular monitoring of account balances, charging the prescribed interest on overdrawn accounts, and planning repayments well before the tax year ends. It’s also important to understand that certain transactions, like forgiving an overdrawn balance, could be taxed as dividends, further increasing the company and shareholder’s tax exposure.