Business Tax Update - 2011
Business Tax Update Issue 16 February 2011
- Reminders
- New tax entity for companies
- Other 1 April 2011 tax changes
- Using the right tax code for new staff
- Number of pays for tax year ending 31 March 2011
- New use-of-money interest rates
- Online trading - are you getting it right?
- VisaView makes employment checks easy
- Using our online services
- Child support deduction notices
- Cost of KiwiSaver to employers
- Business.govt.nz website for business advice
Welcome to Business Tax Update
If you have any suggestions for topics you'd like covered in this newsletter, email BusinessTax.Update@ird.govt.nz.
Reminders
Tax and other payments due 7 February 2011
The 2010 income tax (terminal tax), student loan and Working for Families Tax Credits payments (if you don't have a tax agent with a valid extension of time) are due Monday 7 February 2011.
Find more information on payment options.
If you're still unable to pay the amount due in full, consider an instalment arrangement. You can send an "Instalment arrangement proposal" under "Get it done online" to pay any amount(s) you owe by instalments.
Alternatively, call us on 0800 377 771 to discuss your situation.
New tax entity for companies
The second stage of the Government's Budget 2010 tax package brings a number of changes that will come into effect on 1 April 2011. Over the next few months we'll run a series of articles explaining these changes and how they may affect you and your employees.
One area signalled in Budget 2010 was the tax treatment of loss attributing qualifying companies so shareholders can no longer claim losses against their personal income.
New legislation enacted in December 2010 has introduced a transparent income tax treatment for electing closely held companies.
Qualifying company reforms
From 1 April 2011 changes to the qualifying and loss attributing qualifying company rules will come into effect. The changes include:
- providing transparent income tax rules through a new tax entity called a look-though company (LTC, see below) - shareholders of a closely held company can elect for it to become an LTC
- allowing existing qualifying companies (QCs) and loss attributing qualifying companies (LAQCs) to continue to use the current QC rules but without the ability to attribute losses (pending a review of the dividend rules for closely held companies)
- allowing existing QCs and LAQCs to transition to the new look-through company tax rules or change to another business option, such as a limited partnership, without a tax cost during the period 1 April 2011 to 31 March 2013.
New look-through company (LTC)
"Look-through" effectively means that for income tax purposes we ignore the company, which is the legal entity carrying on a business, and include the company's profits or losses in the shareholders' tax assessment instead.
Under the new LTC rules, income, expenses, tax credits, gains and losses are generally passed on to the company's owners, in accordance with their shareholdings in the company. The income of an LTC is assessed, and expenses deducted, as if each owner had received that income and incurred the expenses personally.
Any profit is taxed at the owner's marginal tax rate, and the owner can use any losses against their other income, subject to a loss limitation rule similar to that for limited partnerships.
The LTC retains its corporate obligations and benefits under general company law, but will generally be ignored for income tax purposes. However, for certain other tax purposes, such as PAYE and GST, we’ll continue to recognise the company.
Transitional options
If your company is an existing QC or LAQC in the 2010-11 income year, then from 1 April 2011 you can choose one of the following options:
- continue as a QC without the ability to attribute losses - this will be the "default" option
- elect to be taxed as an LTC
- elect to be taxed as an ordinary company by revoking your QC or LAQC election
- change to a limited partnership, an ordinary partnership or sole tradership.
You can elect to transition to an LTC or change your business structure in either the first or second income year that starts on or after 1 April 2011. This is called the transitional year.
There is no tax cost (but there may be other costs) if you elect to transition to an LTC or change your business structure to a partnership, limited partnership, or a sole tradership within six months of the start of the transitional year when it takes effect.
A major difference between an LTC and LAQC is that an LTC passes both its profit and losses to its owners, while an LAQC only passes on its tax losses.
Other 1 April 2011 tax changes
A number of other tax changes come into effect on 1 April 2011 as a result of Budget 2010 and subsequent legislative amendments.
Find more information on all Budget 2010 tax changes, including GST.
Company tax rate
The company tax rate will reduce from 30% to 28% from the 2011-12 income year. For most companies, this will apply from 1 April 2011.
Dividends issued after the new rate takes effect can be imputed at the existing 30% rate for up to two years if company tax has been paid at the 30% rate.
Building depreciation
Depreciation deductions will no longer be allowed for buildings with an estimated useful life of 50 years or more, such as rental houses and offices. At the same time, new rules ensure the fit-out of commercial and industrial buildings will continue to be depreciable.
These rules will change for all such buildings from the 2011-12 income year. For most businesses this will be effective from 1 April 2011.
We'll have more details on building depreciation in the March issue.
Thin capitalisation rules
The safe harbour debt-to-asset ratio reduces from 75% to 60%. This means for a person's New Zealand group of companies the tax deductions for interest payments will be apportioned or reduced where debt exceeds 60% of the group's asset value.
This change will take place from the 2011-12 income year. For many businesses this will be from 1 April 2011.
For a worldwide group, the debt-to-asset ratio of 110% doesn't change.
Working for Families Tax Credits changes
The definition of family income for Working for Families Tax Credits has been amended.
From 1 April 2011 people receiving Working for Families Tax Credits will no longer be able to use investment losses such as from rental properties to reduce their income.
The definition will also include an extra nine types of income:
- attributable trustee income - including income of a company controlled by the trust - if you're a settlor of a trust
- attributable fringe benefits - when 50% voting is held by shareholder employees or their associates
- unlocked PIE income - excluding superannuation funds or a retirement savings scheme
- passive income of children - includes interest, dividends and rent. Amounts over $500 a year (per child) are included as family income
- income of non-resident spouse - worldwide income
- tax exempt salary or wages - under specific international agreements in New Zealand (eg, United Nations)
- main income equalisation scheme deposits - made by you, your trust or a company controlled by you or your trust
- certain pensions and annuities - includes 50% of payments from life insurance policies or a superannuation fund (excluding NZ Super)
- other payments - received from any person or entity and used for the family's day-to-day living expenses. This is only included if the total amount exceeds $5,000 per family.
Redundancy tax credit
The last day for redundancy payments to qualify for the redundancy tax credit is 31 March 2011. Redundancy payments made on or after 1 April 2011 will no longer be entitled to this tax credit.
Using the right tax code for new staff
It's hiring season again. As you welcome new employees on board, make sure they're on the right tax code so the right tax rate is deducted. This is particularly important if they have a student loan.
Employees who are expected to earn over $19,084 for the tax year and have a student loan need to start making repayments towards their loan. To do this they need to choose a student loan (SL) tax code on their Tax code declaration (IR330) and start making repayments towards their student loans.
You can make things easier for you, your staff and us by reminding your employees to use the right tax code. This will ensure you deduct the right amount of tax from their wages, as well as other deductions like student loan repayments.
If we see your employee has the wrong tax code, we'll write to you requesting that you change it. We'll advise you which employees are using incorrect tax codes and let you know which code should be applied.
Number of pays for tax year ending 31 March 2011
Our PAYE tables and calculators are based on 52 weeks or 26 fortnights in a year. So if your employee had 27 fortnightly pays or 53 weeks within the tax year they may have a shortfall of PAYE because of the day their wages were paid.
It's important to tell your employees that they may not have had enough PAYE and/or student loan repayments deducted throughout the tax year if they've received an extra pay. Where your employee has a Working for Families Tax Credits entitlement there may also be an overpayment of this due to the underestimation of family income.
New use-of-money interest rates
Use-of-money interest rates on underpaid and overpaid tax have changed. The rates are reviewed regularly to reflect current market interest rates.
The following new rates came into effect on 16 January 2011:
- underpayment rate - 8.89% (down from 8.91%)
- overpayment rate - 2.18% (up from 1.82%).
An "underpayment" is interest charged by us on unpaid tax and "overpayment" is interest paid by us on overpayments of tax.
Find out more about UOMI rates.
Online trading - are you getting it right?
If your business uses the internet to sell goods or services you must include this income on your tax return.
As a guide you're regarded as being in business and should be declaring sales from online trading if:
- you acquired the goods with the purpose of selling them on
- the purpose was to make a profit
- your business deals in these goods.
If you regularly sell online, your tax obligations are the same as for selling goods in a shop. When you're in business and use the internet as a primary or secondary sales outlet you need to make sure all sales are returned for income tax. You must register for GST if you've got a turnover of more than $60,000 a year.
Most electronic transactions can be tracked and we commonly use data matching to identify businesses or people who may not be including income from online trading in their tax returns or paying GST.
If you think you've made a mistake regarding your tax obligations for online trading you can make a voluntary disclosure to us. The benefits of making a voluntary disclosure are greater if a full and complete disclosure is made before we notify you of a pending audit.
If you only use online trading to clear out personal possessions there are generally no tax obligations.
For more information read "Online trading - are you getting it right?".
VisaView makes employment checks easy
Immigration New Zealand is reminding employers about the importance of checking that job applicants are entitled to work for them.
Employers can use a free online tool VisaView to check information such as a passport number and surname against Immigration's database for (in most cases) a quick online "yes" or "no" as to whether a person is entitled to work here, together with any specific work conditions that may apply to the individual.
Registered employers can also confirm a jobseeker's New Zealand passport information and their entitlement to work in any job.
The Immigration Act 2009, which came into effect from 29 November 2010, continues the principle that businesses must not employ a non-New Zealander who isn't entitled to work for them.
Employer's obligations essentially remain the same as under the previous Act but there is a key change to the "reasonable excuse" provisions. A Tax code declaration (IR330) form is no longer a reasonable excuse for employing someone who isn't entitled to work for you.
Find more information about VisaView at Immigration New Zealand's website.
Using our online services
Using our online services is a faster and easier way for you to interact with us. If you haven't had time to find out how to use our online services we've got a quick two-pager that sets out all the information you need.
Our new factsheet Using our online services is easy (IR1001) tells you about our online services and how to register.
You can use our online services for:
- viewing GST, PAYE and FBT account information
- filing your employer monthly schedule using ir-File
- using our online calculators, for example PAYE/KiwiSaver calculator to calculate your employees' PAYE, KiwiSaver or student loan deductions
- filing your income tax return (IR3 only)
- sending and receiving messages through secure mail
- viewing and updating details for your personal Working for Families Tax Credits and child support
- viewing details of your student loan account balances and recent transactions
- viewing personal details of your KiwiSaver deductions and employer contributions.
You can download the IR1001 factsheet from "Forms and guides".
Child support deduction notices
In mid-March you'll receive a new Child support deduction notice for each employee who has child support deducted from their salary or wages.
The new notice will tell you when to make deductions for your employee and the correct amount to deduct.
We send new notices every year as all child support paying parents are reassessed for the new tax year starting on 1 April, which may mean a new payment amount.
If you don't receive a new notice for your employee please continue to deduct child support at the existing rate.
We usually issue a separate notice for each employee you make deductions for. However, we can send you deduction notices as a:
- consolidated notice - a notice in schedule form showing all additions and changes to child support payments for multiple employees on the same schedule
- combination - both individual deduction notices for some employees and a consolidated deduction notice for others.
If you'd prefer to receive deduction notices in one of the above formats please call us on 0800 220 222.
Cost of KiwiSaver to employers
For the first time, we now have information on how much it costs small to medium enterprises (SMEs) to meet their KiwiSaver responsibilities.
As part of the SME compliance cost survey 2009 and in a 2010 follow-up survey we asked SME employers about KiwiSaver costs and benefits.
The surveys measured the time and money SME employers spent on KiwiSaver, as well as any benefits they gained from the voluntary savings scheme.
We surveyed 815 SME employers with KiwiSaver responsibilities in the 2009 compliance cost survey, and 170 SME employers in the 2010 follow-up survey. Participants in the 2010 survey were businesses whose remuneration practices were affected by KiwiSaver and/or had a workplace superannuation scheme.
The research showed that the introduction of KiwiSaver saw an additional compliance cost of $705 annually for employers with KiwiSaver responsibilities. These businesses also spent an extra 14.5 hours annually meeting KiwiSaver requirements.
Other findings showed that:
- employers were able to absorb their KiwiSaver employer contributions as an extra cost to the business
- most employers had not changed their remuneration practices because of KiwiSaver
- most employers with an existing super scheme continued to operate the scheme alongside KiwiSaver.
On the whole, SMEs believed KiwiSaver had little benefit to them because the scheme was available to all businesses and didn’t offer them a "point of difference".
View or download the 2009 and 2010 reports.
Business.govt.nz website for business advice
Visit www.business.govt.nz for the latest advice, business tips and information from government to help you start, manage and grow your business.
Footnote
Business Tax Update comments generally on topical tax issues relevant to businesses. 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.
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Other issues this year
Business Tax Update Issue 26 December 2011
Business Tax Update Issue 25 November 2011
Business Tax Update Issue 24 October 2011
Business Tax Update Issue 23 September 2011
Business Tax Update Issue 22 August 2011
Business Tax Update Issue 21 July 2011
Business Tax Update Issue 18 April 2011
Business Tax Update Issue 17 March 2011
Date published: 01 Feb 2011
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