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Agents Answers - 2010

Agents Answers issue 129 October 2010

Welcome to Agents Answers

If you have any suggestions for topics you'd like covered in this newsletter, email agents.answers@ird.govt.nz

Reminders

Budget 2010 tax rates have changed

Are your systems in place for the 1 October changes?

  • GST is now 15% - have you increased your rates?
  • Tax rates have reduced - are you using the right PAYE tables/calculations?
  • RWT - are you using the new rates?

New double tax agreement in force

The double tax agreement between New Zealand and Singapore signed last year came
into force on 12 August 2010. This brings withholding tax rates on dividends, interest and royalties more into line with New Zealand's new standard treaty rates.

Find out more about tax treaties on our Policy Advice website.

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Tax help for small businesses affected by the earthquake

As a result of the Canterbury earthquake we'll be taking a sympathetic and realistic approach with businesses that can't meet their tax obligations.

After an earthquake we understand that tax isn't the first thing on your mind. We've put some tax relief measures in place to help you and your clients at this time.

If you have clients who think they'll have difficulty meeting tax payments, please call our disaster response line on 0800 473 566.

Read the latest tax information for people affected by the earthquake.

Returns and payments

Please encourage your clients to file returns and make payments where they can. They can pay online, by cheque or at any open branch of Westpac. If they can't file a return or make a payment on time, that's okay.

They won't have to pay any late penalties or interest on the unpaid amount. If they get a letter from us charging late penalties and interest you'll need to call us on 0800 227 771, or write to us and we'll cancel them.

Please call us on 0800 227 771 to discuss options if you/they can't:

  • file a return because of lost business records
  • afford to make a payment.

Financial hardship

We understand it may take some time before tax can be paid. We offer a range of options for paying overdue tax, such as setting up an instalment arrangement. In some circumstances we may be able to write off debt.

GST refunds

If you or your client is expecting a refund and the money is needed urgently, please call us on 0800 473 566.

If you or your client is expecting GST refunds over the next few months you may want to file either monthly or two-monthly returns. This way any refunds will be more regular.

To change a GST filing frequency, call us on 0800 377 776.

Earthquake support subsidy for employers

You or your clients may be entitled to the earthquake support subsidy available through Work and Income. This is a payment for employers with fewer than 20 employees. A payment of $350 (GST inclusive) a week can be received for each employee for up to four weeks.

For GST-registered recipients of this payment, this will need to be included as income in their GST return. Deductions of PAYE and any other deductions from wages paid to staff, eg, child support and KiwiSaver, will need to be made as normal.

Employers' KiwiSaver contributions for employees will need to continue to be paid to us.

Find out more about the subsidy on the Work and Income website.

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GST - what to do now the rate has changed

Now that 1 October has passed and GST is at the new rate of 15%, you may need to consider some of the transitional and administrative activities accompanying the change.

We talk here about transitional returns, credit and debit notes, and invoices showing an incorrect rate. Also recently passed legislation now allows for replacement tax invoices and changes in accounting for ongoing supplies.

GST transitional return

Some of your clients will need to complete a GST transitional return if they file their GST returns on a two- or six-monthly period that spans 1 October.

The key difference between a normal GST return and the GST transitional return is that supplies made or received before 1 October 2010 will be accounted for on Part 1 of the return, and supplies made or received on or after 1 October will go on Part 2.

Part 1 of the return for GST calculated at 12.5% is where your clients account for any GST rate change adjustment they need to make. Part 2 is for GST calculated at 15%, GST collected on sales and income, and credited on purchases and expenses. Totals from both parts are combined to find the total GST to pay or refund for the transitional return period.

If your client pays provisional tax their GST transitional return will also have a third part to calculate their provisional instalment. Unlike the standard GST and provisional tax return, the provisional tax section of the GST transitional and provisional tax return won't be tailored to your client and may contain key-points they won't need to complete.

Credit or debit notes for invoices issued prior to 1 October

Credit or debit notes issued for an invoice that was originally at 12.5% also need to have GST at 12.5%.

Usually the difference between the price on the credit or debit note and the original invoice is included as either income or an expense on the GST return in which the note was issued. However, when a credit or debit note is issued at 12.5% after 1 October, then accounting for them in this manner will result in an incorrect amount of GST being calculated. This is because the return will work out the GST at 15%.

Instead, the difference between the GST component of the credit or debit note and the original invoice should be accounted for as an adjustment in the return period that the note was issued.

Credit or debit notes for a supply with a GST rate change adjustment

Your clients may issue or receive a credit or debit note for a qualifying supply that they've already made a GST rate change adjustment for.

If the qualifying supply hasn't been paid, they'll need to do a further adjustment to make sure the GST is correct. The adjustment is calculated like this:

  • Subtract the GST-inclusive price on the new credit or debit note from the GST-inclusive price on the original tax invoice.
  • Divide the result by 51.75.
  • If the result is a positive amount, they'll have GST to pay. If the result is a negative amount, they'll have a GST credit.
  • The amount will be returned as an adjustment on the return period in which the debit or credit note is made or received.

As well as this adjustment you'll also need to account for the GST difference on the credit or debit note.

Tax invoices showing incorrect rate of GST

It's possible that some businesses may inadvertently issue tax invoices showing the old 12.5% GST rate, even if the supply itself was made after 1 October. Regardless of the rate of GST showing on a tax invoice, a supply made on or after 1 October is deemed to include GST at the rate of 15%, and will have the GST calculated at the new rate when the GST-inclusive amount is accounted for on a GST return.

Provided the tax invoice meets all the requirements of a valid tax invoice, then your clients will still be able to use it to support their claim of the expense, even if the supplier has made an error in the GST rate shown on the invoice.

If the mistake made by the supplier also meant they charged less than they intended to, due to miscalculating the GST, it's a matter between the supplier and their customer as to whether the price can then be changed. If the price is increased, a debit note will need to be issued to record this.

Issuing a tax invoice instead of a debit or credit note

Normally only one tax invoice can be issued for a supply. But to simplify things for GST - registered businesses, recent legislation allows a second tax invoice to be issued to replace a pre-1 October 2010 invoice for supplies that are being provided successively. If the supplier chooses to increase instalment payments due after 1 October 2010, they can issue a replacement invoice to show this, rather than issue a debit note.

Also instead of issuing a credit note when the price of a pre-1 October supply reduces, a business has the option of issuing a replacement tax invoice with GST recorded at 12.5%.

Accounting for ongoing supplies at 12.5%

Recent legislation allows for the 12.5% GST rate to be used for payments made on or after 1 October for finance leases entered into before 1 October, provided the supplier advised the lessor they were electing to do so.

Similarly, subrogation payments made or received on or after 1 October can also be treated as having GST included at 12.5%, provided the underlying insurance claim was agreed and settled prior to 1 October 2010.

Payments that will continue to be made at 12.5% can't be included as either income or an expense on a post-1 October GST return, as that would result in an incorrect rate of GST being calculated.

Instead, the GST-component of these payments should be accounted for as an adjustment on the return period in which they are made or received.

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Changes to help businesses move to the new GST rate

Legislation enacted on 7 September 2010 made a number of amendments intended to help businesses during the transition to the new GST rate. The changes relate to certain situations where the supply of goods or services spans the GST rate change, including:

  • annual contracts involving successive supplies
  • subrogation payments received by an insurer (see above)
  • finance leases (see above)
  • lay-by sales
  • payments to private training establishments.

These changes also align legislation with normal business practice regarding issuing tax invoices or replacement tax invoices during the period of the GST rate change.

Find out more about the new rules.

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Recent standard practice statements

We have recently released the following standard practice statements. View all current standard practice statements.

Imaging of electronic storage media

Standard practice statement SPS 10/02 sets out our practice when taking an image of a taxpayer's electronic storage media.

It covers a small part of our wider information-gathering powers provided by the Tax Administration Act 1994 and will be applied where no other appropriate or adequate means of obtaining information exists.

Electronic recording of our interviews

Standard practice statement SPS 10/01 sets out our standard practice for using technology to record interviews where it's appropriate.

It applies from 1 July 2010 and replaces SPS INV-330 Tape-recording Inland Revenue interviews.

Find out more in the Tax Information Bulletin Vol 12, No 5, May 2000.

SPS 10/01 doesn't apply to independent contractors conducting interviews on behalf of Inland Revenue, such as a research company contracted to carry out a customer survey, or an external solicitor contracted to carry out a child support review.

The full commentaries of both standard practice statements are in the Tax Information Bulletin Vol 22, No 7, August 2010.

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KiwiSaver amendments effective 7 September

The Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 (the Act) contains a number of amendments to KiwiSaver for potential and existing members, employers and scheme providers.

PAYE and KiwiSaver deductions for school children

Current inconsistencies between PAYE and KiwiSaver deductions for school children have been addressed.

The Act ensures that if employers aren't required to make PAYE deductions from the salary or wage of a school child because they receive the tax credit for children, no KiwiSaver deductions need be made either.

Also school children whose total earnings from all employment are less than $45 a week, don't have to complete a Tax code declaration (IR330) form.

Enrolment of under 18-year-olds into KiwiSaver

The rules around the enrolment of minors into KiwiSaver have been changed to include the following:

  • Children under 16 years old can only be enrolled with all their legal guardians' consent, and can't enrol themselves in KiwiSaver.
  • Children aged 16 to 17 must co-sign with one of their legal guardian(s) to enrol in KiwiSaver. They won't be able to enrol themselves, and a legal guardian can't enrol a child aged 16 to 17 without the child's consent.
  • Children aged 16 to 17 without a legal guardian, but who are married, in a civil union or living with a de facto partner, can opt-in to KiwiSaver by contracting directly with a scheme provider. This means that such children won't need a co-signed application to opt-in to KiwiSaver.

Electronic provision of annual reports

The requirement for KiwiSaver scheme providers to send an annual report to all KiwiSaver members in their scheme has been amended.

The Act lets providers fulfil the annual report provision requirements by sending a hyperlink, which links to the annual report, via email. This will only apply to those members who have supplied their provider with their email address and have specifically agreed in writing to receive the annual report by hyperlink.

Leasehold estate

The Act amends clause 8 of Schedule 1 of the KiwiSaver scheme rules and eligibility for the first-home withdrawal.

These rules have been amended to allow KiwiSaver members who currently have, or have held, an interest in a leasehold estate to apply for a first-home withdrawal from their KiwiSaver savings. The previous definition of a leasehold estate included an interest under a residential tenancy agreement. This amendment ensures KiwiSaver members, who have been or currently are in a rental tenancy agreement, won't be excluded from the KiwiSaver first-home buyer or KiwiSaver deposit subsidy schemes.

The first-home withdrawal and deposit subsidy aren't administered by Inland Revenue. KiwiSaver members should contact Housing New Zealand for more information about the eligibility criteria and subsidy entitlements.

Temporary employees

The Act addresses the current inconsistencies for existing KiwiSaver members who want their employer to make KiwiSaver deductions and contributions when the employee is on a temporary employment contract.

This means that if a KiwiSaver member, who begins temporary employment, requests an employer to make deductions and contributions, the employer is obliged to do so.

Retirement savings portability with Australia

Note

It may take up to two months after Australia passes the necessary legislation for the portability arrangements discussed below to come into effect. Australian legislation may not be finalised until 2011.

The Act amends the Income Tax Act 2007 to allow a person who has retirement savings in both Australia and New Zealand to consolidate those savings into one account in their country of residence.

KiwiSaver members who permanently emigrate to Australia will be able to transfer their KiwiSaver funds, including all Government contributions, to an approved Australian superannuation scheme. They'll no longer be able to withdraw their savings after one year when emigrating to Australia.

Members of an approved Australian superannuation scheme who are eligible to join KiwiSaver will be able to transfer their Australian funds to a KiwiSaver scheme. This will mean that New Zealanders who have worked in Australia in the past and have superannuation funds there, will be able to repatriate the money to New Zealand if they join the New Zealand KiwiSaver scheme.

The rules that apply to the host scheme provider will continue to apply to the funds that are transferred. In other words, funds transferred to Australia will continue to be subject to the withdrawal rules under the KiwiSaver Act 2006. Funds transferred from Australia to KiwiSaver will be subject to the Australian rules for withdrawal.

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Lease terms as an estimated useful life for depreciation purposes

Interpretation statement IS 10/05 was issued on 16 August 2010 and addresses whether a lease term is a relevant factor in determining an item's estimated useful life (EUL) for the purposes of setting a special depreciation rate.

The conclusion is that the EUL is a necessary component in determining a special rate. The definition of EUL doesn't allow lease terms to be relevant factors for the Commissioner to take into account when determining a special rate, because they aren't consistent with the criteria for considering an EUL. Therefore, the Commissioner can't issue a special rate based on an EUL that has been determined by the length of a lease to which the item is subject.

There may be cases where the EUL coincides with the lease term. However, in such cases the EUL won't have been determined by the length of a lease. In all cases the EUL will be determined by reference to the applicable criteria, being:

  • passage of time
  • likely wear and tear
  • exhaustion
  • obsolescence.

These criteria are restricted to considerations of deterioration, exhaustion and external factors that cause an item to no longer be of use to any business.

The full commentary go to the Tax Information Bulletin Vol 22, No 8, August 2010.

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How to link or delink your client when they're a restricted client

We've been asked what the correct process is for linking or delinking restricted clients.

Restricted clients are those individuals whose records are managed by our special files division for a number of reasons. Only special files staff can access their records.

For you or your staff to link or delink one of these clients, you'll need to provide a Tax agent linking or delinking (IR795) form. This needs to be sent to:

Special Files
PO Box 2848
Wellington 6140

Alternatively you can fax it to 04 890 0006.

Registered users of "Look at Account Information" at www.ird.govt.nz can apply for the "Client maintenance service" to link or delink online. But this service doesn't apply to restricted clients.

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Thinking about L letters?

The L letter helps you encourage your clients to provide their records so you can prepare and file their income tax returns by 31 March each year. It's available where a client with an extension of time hasn't provided you with all the necessary information you need to complete their returns.

The letter is issued in Inland Revenue's name and reminds the client they haven't provided you, their tax agent, with enough information to file a return.

Remember when an L letter is issued we remove the client from your performance statistics until the return is filed.

It's available from August until 15 February each year. If you want to start issuing to clients now, just request one through the tax agents' self-service line 0800 456 678.

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Summary reports for electronic notices

Paper Notices of Assessment and Return Acknowledgements for agents who use E-File have now been replaced by electronic versions. These are delivered to you each time you connect to the E-File service. Some software providers have updated their E-File software to also provide a report (summary) of any notices that you receive. We've been asked by some agents what we can do if they accidentally delete or misplace the report.

Unfortunately, as these reports aren't generated or issued by Inland Revenue, you'll need to contact your software provider to find out what options are available to either retrieve or re-run missing reports.

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Gift duty exemptions amended

Section 73 of the Estate and Gift Duties Act 1968 has been amended by the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 to exempt gift duty from gifts made to:

  • central government (excludes educational institutions)
  • organisations that are local authorities
  • council-controlled organisations and their subsidiaries

provided these organisations are not for the private pecuniary profit of any individual.

Also exempt under this section are gifts made to donee organisations approved by Inland Revenue and listed at www.ird.govt.nz/non-profit/np-donee or approved by Parliament and listed in Schedule 32 of the Income Tax Act 2007.

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Recent legislative changes

We've already talked about some of the legislation amendments in the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010. The following summarises some other key changes.

Binding rulings

Several changes have been made to laws governing binding rulings to make the law easier to apply.

  • The general prohibition on the Commissioner ruling on questions of fact has been replaced so that now the Commissioner can't rule only on "proscribed questions", which include the existence or correctness of facts.
  • The Commissioner's discretion not to rule on matters before the courts is being clarified by limiting its application to cases involving substantially similar arrangements.
  • Promoters of arrangements, or those with a similar interest, will be allowed to apply for a product ruling for prospective arrangements. Currently a promoter can't request a binding ruling if they're not a party to the arrangement.
  • The rule that prevents the Commissioner making a binding ruling if the arrangement is the subject of a dispute by way of notice of proposed adjustment (NOPA) has been relaxed to allow applications where the ruling relates to a different tax type from that in the NOPA.
  • The rules relating to when a ruling fails have been amended to provide that if a ruling is no longer valid but the reason for the invalidity applies only to a certain tax type or types involved in the ruling, the other parts of the ruling relating to other tax types should continue to apply.
  • The requirement for the Commissioner to publish the making and withdrawal of public and product rulings and certain determinations in the
    New Zealand Gazette has been replaced with a requirement that the publishing be in a publication chosen by the Commissioner, such as the Tax Information Bulletin.
  • A more flexible fee-waiver provision has been introduced allowing the Commissioner to waive all or part of binding ruling fees in appropriate cases.
  • Fees for zero-rated supplies of binding rulings will be reduced by the tax fraction of the fee. This is to recognise that non-resident applicants are unlikely to meet the requirements for GST registration and for claiming an input tax credit for the GST cost of acquiring the binding ruling.

These amendments apply from 7 September 2010.

Commissioner's official opinion

This is a new term and ensures that taxpayers who rely on the Commissioner's Official Opinion are not liable to unacceptable tax position penalty or interest. The amendments will apply to new rulings made from the date of enactment.

Special tax rate certificates for scheduler payments/Exemption certificates for scheduler payments

Amendments to both sections 24M and 24N of the Tax Administration Act 1994 (TAA) ensure that a person commits a knowledge offence, under section 143A of the TAA, if the person:

  • alters an exemption certificate or special rate certificate in relation to scheduler payments
  • uses an exemption certificate that has expired or been cancelled
  • uses a special tax rate certificate that has expired or been cancelled.

The amendments apply from the 2008-09 and later income years.

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New donee organisation listed

Cure Kids has been added to the list of donee organisations in Schedule 32 of the Income Tax Act 2007, and applies from the 2010-11 tax year.

Additions to the approved list aren't always announced.

Check if an organisation holds donee status.

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Student loan voluntary repayment bonus

If your client is eligible for a voluntary repayment bonus, it will show on their statement once the bonus has been processed. Remember though, the bonus doesn't form part of the end of year repayment calculation and won't show on any notice of assessment.

Find out more about when your client will receive their bonus.

As when making any financial decisions, you're advised to seek appropriate financial advice before taking advantage of the voluntary repayment bonus.

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Update to the definition of "honoraria"

The previous definition of "honoraria" didn't sufficiently cover payments made to public office holders. The definition now includes schedular payments for services performed by:

  • a local government elected representative
  • an official of a community organisation, society, or club
  • a chair or member of a committee, board or council
  • an official, chair, or member of a body or organisation.

This applies to payments for work and services made in the 2008-09 and later income years, other than a payment:

  • for work or services performed before the day of royal assent, and
  • the payer is not required to withhold tax.

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Your send and receive mail is changing

From November you'll see some enhancements to Send and receive mail. It will have a new look, more functionality and a new name - "Secure mail".

This means, as a tax agent you'll have the ability to:

  • choose whether you're sending a new message for your agency or for one of your clients
  • filter which mail messages you're viewing by All, Received, Sent or Drafts
  • save a draft message prior to sending it to Inland Revenue

Access to Secure mail will also change. You'll access "Secure mail" via a new tab, like 'Submit returns'; and 'Manage clients', at the top of your online services account.

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Educating about loss rules

One area we focus on in our compliance programme Helping you get it right: Inland Revenue's compliance focus 2010–11 is losses. In the compliance programme we said we’d work with taxpayers to educate them about the loss rules.

Most taxpayers correctly calculate and use their losses but we’ve identified a number of common mistakes. To raise awareness about the loss rules and how to avoid common mistakes we’ll be sending education letters to agents who have a significant number of clients who carried forward losses at the end of the 2009 income year.

We’re sending the letters to agents as our research shows that approximately 90% of taxpayers who have loss carry forward balances also have an agent.

We’d like agents to use these letters to initiate discussions with their clients about issues that may impact on the client’s ability to carry forward or use losses in 2010 or future returns. For example, companies may have had shareholding changes since the beginning of the income year in which the loss was incurred.

Footnote

Agents Answers comments generally on topical tax issues relevant to tax agents. Every attempt is made to ensure the law is correctly interpreted, but articles are intended as a brief overview only. The examples provided are not intended to cover every possible factual situation.

Email: agents.answers@ird.govt.nz

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Date published: 12 Oct 2010

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