It is that time of year again…

Yes, it is tax time…  If you have had a change of tax rate or change in income this last year please let your adviser know NOW.

Tax rates are important especially for investments, when you have them with fund managers.  These tax rates are called your PIR – Prescribed Investor Rate.  If you have invested in or are considering investing in a certain type of portfolio investment entity (PIE) such as a KiwiSaver scheme, then you will need a prescribed investor rate (PIR) to give to the PIE along with your IRD number.

Here is the link to the IRD website to check that you have your PIR correct:

Work out your PIR on the IRD website

If you have given your adviser/fund manager your PIR and you now think it is changed you can check what to do from the link below.  If you are investing through a Trust you have options, you may choose a 28% or 0% tax rate, depending on your circumstances.  The information about all obligations is listed in the IRD website here:

PIR ObligationsFeijoa-with-leaves-00005378

If you have any questions about this please discuss it with your financial adviser or fund manager.

On a more enjoyable note, it is also feijoa time, apple and feijoa crumble, yum!

The kiwifruit need just a bit more colder weather and it will be time to pick them too.

‘T’ is for Tax – NZ Initiative

The ABC of economic literacy | info@nzinitiative.org.nz

ABC_s_of_economic_literacy_2_2_.1Taxes are one of the most tangible links between the government and civil society. We all pay taxes in some form, and in exchange we expect the government to provide certain goods and services: roads, infrastructure, the courts, law enforcement, education, and support for society’s most vulnerable.

From this perspective, the oft-quoted declaration ‘taxes are the price we pay for a civilised society’, widely attributed to Oliver Wendell Holmes, rings true.

However, it is a common misconception that a dollar taxed is a dollar that can be spent by government on goods and services. In reality, a dollar taxed is a dollar that must be spent on collecting tax, ensuring tax compliance, public administration of policy and, of course, the actual public policy.

Besides, increases in tax rates do not automatically lead to an increase in tax revenue, as illustrated by the Laffer curve. Named after Arthur Laffer, this curve popularised the notion that higher tax rates may actually cause the tax base to shrink so much that tax revenues will decline. Conversely, a cut in tax rates may increase the tax base so much that tax revenues increase.

How so?

Taxes distort behaviour by influencing the personal decisions people make about their work and consumption. For instance, people who would prefer to work longer hours or at a higher pay may work less or refuse a pay rise to avoid being taxed at a higher rate. Higher personal income taxes encourage workers to substitute their preference for work to economic activities that they would otherwise not prefer.

This is known as the deadweight loss of taxation, where the tax system causes individuals to pursue actions they would otherwise not prefer. To gain maximum tax revenue, there must be a careful balance between low rates with a greater tax base, and high rates with a smaller tax base.

There is also the issue of tax incidence, which describes who bears the cost of the tax. For example, increasing the tax on high income earners may not necessarily mean that they bear the cost of the tax. If workers are receiving less money in their pocket, for an equal or greater amount of work, employers may feel compelled to raise their wages to ensure employees receive the same take-home pay. Thus it is employers who bear the burden of a higher rate of income tax.

Taxes are not the price we pay for a civilised society. At best they are the price we pay for a civilised government. But they are also the price of overly bureaucratic procedures, unpredictable outcomes, and the loss of freedom to make our own decisions.

Loosely coinciding with this year’s election campaign, Insights is campaigning for economic literacy from A to Z. Coming up next week: ‘U’ for Utility.

Profits from Shares – A Tax Perspective

The rules and case law relating to share profits are not that clear. The relevant legislation is that gains made from any of the following scenarios are taxable:

  1. The investor is in the business of dealing or trading in shares;
  2. The shares were acquired with the dominant purpose of resale; and
  3. The investor acquires shares as part of a scheme or undertaking to make a profit.

Whether an investor is conducting a business of dealing in shares or as part of a scheme or undertaking is a matter of degree. Typically Inland Revenue and the courts would look at:

  1. The number of transactions;
  2. How long shares are held; and
  3. Whether there was a pattern of acquisition and sale.

Case law strongly suggests that relatively few transactions are required to constitute a business.

Some investors keep long-term investments and share trading activities separate by either using:

  1. Separate accounts to separate trading from long-term investing; or
  2. Separate entities such as a company or trust to hold the different portfolios.

Stagging is the practice of buying initial public offerings at the offering price and then reselling them once trading has begun, often for a substantial profit. If you intend to stag shares from the Mighty River Power share offer the gains will be taxable income as you will have acquired the shares with the dominant purpose of resale. Again the length of time held and whether there is a pattern of such behaviour are key factors that Inland Revenue and the courts would look at.

Onus is on the taxpayer to show that gains are not taxable rather than with Inland Revenue. In determining “purpose” Inland Revenue looks at the circumstances surrounding the transaction. The investor who stags a number of new issues may find it hard to prove their intention was anything but making a quick profit.

Please note that any shares that are subject to the foreign investment fund (FIF) regime are taxed solely under that regime.

Murray McClennan is the principal of Tax Central Limited, a specialist tax advisory firm. He can be contacted at taxcentral@xtra.co.nz.  The above comments are of a general nature only and are not a substitute for specific advice.

Will UK Inheritance Tax bite you?

New Zealand no longer has Estate Duty or Gift Duty; however, many New Zealanders may have exposure to UK inheritance tax (IHT). The current rate of IHT is 40% on assets in excess of £325,000.

Exposure to IHT can arise by either having:

  1. UK domicile, in which case IHT applies to worldwide assets; or
  2. UK assets, but no UK domicile, in which case IHT is limited to those assets.

The term “domicile” is a legal concept quite distinct from that of tax residency or even nationality, and one which may affect a number of people considerably in determining whether and how much IHT they pay.

While there are a number of situations that could result in a UK domicile the two most main scenarios giving rise to UK domicile are:

  1. You were born in the UK, and
  2. Your father was born in the UK and had his permanent home in the UK.

Living outside of the UK for a long time, although an important factor, does not of itself prove that a new domicile has been acquired. There is a stronger argument for having created a domicile of choice (i.e. a new domicile) if someone has spent 30 years in one country such as New Zealand. If, however, someone spends 10 years each in South Africa, Australia and New Zealand the argument for having created a domicile of choice is much weaker.

A domicile of choice can only be acquired where an individual is both:

  1. Resident within another country; and
  2. Intends to reside there indefinitely.

Even then subsequent actions may result in a return to a UK domicile.

The above is only a brief summary of UK domicile, which is a complex topic.

For those without UK domicile but with UK assets of more than £325,000 there is a presumed IHT liability.

If you believe either scenario affects or may affect you, you should seek appropriate professional advice.

Murray McClennan is the principal of Tax Central Limited, a specialist tax advisory firm. He can be contacted at taxcentral@xtra.co.nz.  The above comments are of a general nature only and are not a substitute for specific advice.

Overseas Income – Southland Times

A New Zealand tax resident is subject to New Zealand income tax on his or her worldwide income. This obligation exists irrespective of whether or not the income has been taxed overseas (usually a credit is given for tax paid overseas up to the level of New Zealand tax payable on the same income) or whether or not the income is repatriated to New Zealand.

In my experience not all New Zealand tax residents return all overseas income. Sometimes it is due to ignorance of tax laws or poor advice. Sometimes it is the result of a deliberate decision not to return the income. Often there is no time limit on Inland Revenue seeking to retrospectively impose tax on unreturned overseas income.

Types of income that are often overlooked are:

  • Foreign investment fund income including fair dividend rate income;
  • Controlled foreign corporation income;
  • Realised and unrealised foreign exchange gains; and
  • Employment income.

The fact that it may be difficult for Inland Revenue to discover undeclared overseas income is often a factor in encouraging evasion of overseas income. Inland Revenue does receive information on income from many countries.

There can be severe penalties for evading tax. These may include:

  • Shortfall penalties – 150% of the underlying tax;
  • Interest;
  • Late payment penalties; and
  • Publication of evaders’ names.

Occasionally repeat New Zealand tax evaders receive jail terms for tax evasion. Other countries, however, are more likely to imprison tax evaders.

Two Americans have been jailed for a year for concealing assets in undeclared bank accounts in Switzerland, Liechtenstein, the Isle of Man, Hong Kong, New Zealand and South Africa. The couple also have to pay the Internal Revenue Service more than USD$3 million in penalties, having failed to file foreign bank account reports while maintaining a Swiss bank account.

If you are unsure about your responsibilities and possible liabilities, contact an appropriate adviser or Inland Revenue.

Murray McClennan is the principal of Tax Central Limited, a specialist tax advisory firm. He can be contacted at taxcentral@xtra.co.nz. The above comments are of a general nature only and are not a substitute for specific advice.

Trust Income – Tax issues – NZ only

We would like to kindly thank Murray McClennan (principal of Tax Central Limited) for this article.

Income received by the trustees of a trust may be distributed as beneficiary income or retained as trustee income. In making decisions about income distribution or retention the trustees must have regard to the trust deed and trust law.

An issue that I have often wrestled with is whether deemed income recognised for tax purposes can give rise to beneficiary income for income tax purposes. Examples of this include:

  1. Unrealised foreign exchange gains;
  2. Attributed controlled foreign company income; and
  3. Foreign investment fund income.

Inland Revenue has recently issued a very comprehensive interpretation statement (IS 12/02) on this issue. The interpretation statement concludes that deemed income is never of itself “beneficiary income”, but by a combination of the relevant trust deed and the trustees’ actions, deemed income can in some situations give rise to beneficiary income. For this to be the case, any vesting or payment of deemed income must be effective for trust law purposes to be beneficiary income for tax purposes.

The interpretation statement identifies three separate scenarios:

The trust deed does not define income;

  1. The trust deed defines trust law income as income calculated for income tax purposes; and
  2. The trust deed defines income using trust law concepts of capital and income, but the trustees have the power to distribute trust capital to income beneficiaries.

Under the first scenario trustees cannot distribute deemed income as beneficiary income for income tax purposes.  Under the second and third scenarios trustees may distribute deemed income as beneficiary income for income tax purposes.

This issue further highlights the need for trustees to act carefully in administering a trust!

Murray McClennan is the principal of Tax Central Limited, a specialist tax advisory firm. He can be contacted at taxcentral@xtra.co.nz.  The above comments are of a general nature only and are not a substitute for specific advice.

Do I Need a Family Trust?

This is a question that we as advisers are often asked. Over the years Trusts have been widely used for a variety of reasons, from removing ownership for risk reduction, to ordering family inheritances for families to ensure fairness and safety, to just needing more control over finances with reference to a guide (a Trust Deed).  They are also different types of trusts, but we are only referring to the concept of a trust here, not specifics as that is something to be discussed a professional.

The first questions you need to ask are:

  • Do I have wealth that needs protecting?
  • Do I own my family home?
  • Do I have an inheritance coming to me?
  • Am I potentially going to enter a second “relationship”?

If you answered yes to any of the above it is time to start looking further into your requirements.  The main purpose of a trust is to have a separate entity that can manage the wealth gifted to it and do it in a manner that you so determine when you establish the Trust Deed.

*The Trust Deed sets out the rules around the Trust, it tells you such things as:

*Who the Settlor is (the person/s establishing the Trust and gifting the wealth)

*Who the Trustees are (the people/company appointed to manage the Trust)

*What the rules are that bind the Trust (who is allowed to take income or capital, what purpose it is allowed to be used for.

*Who the Beneficiaries are (the people/companies the Trust is allowed to give funds to and if the Trust is dissolved who is entitled to the proceeds)

If you do think you need you would like to talk further about this to a professional, we can give you help with knowing which questions to ask and the types of information you really should have sorted before meeting with your solicitor.

A Family Trust needs to be part of an overall plan for your financial future, and this is where a financial planner/adviser can help.  If you would like to talk about what is involved with writing a plan please contact one of our advisers for more details.

The information above is very general in nature and is not meant to be taken as specific advice. 

Why do I need a Financial Adviser?

The most common feedback I get to this question is that they have no money so why bother!

But, what if getting a financial adviser could help you with that?  This will not always be true, and will you need to be motivated to make some changes, but success is waiting, the big holiday is waiting, the new car is waiting, the comfortable retirement is waiting…

A financial adviser first and foremost has your interests at heart.  It is written in stone in legislation and in the Institute of Financial Advisers’ Code of Ethics. So, by definition they MUST have your best interests at heart.

So why?

  • Are you paying your mortgage off as quick as you could?
  • Do you have a goal to work towards?
  • Do you want to have a better understanding of why you might need insurance?
  • Do you need a review of your insurances?
  • Are you concerned that you haven’t got a Will or Enduring Power of Attorney (what is one?) or a Family Trust? Do you need these?
  • How can you make the most of tax breaks or concessions?
  • Have you received an inheritance and don’t know where to start?

All these questions and more can be answered by a financial adviser, the trick is to find the right one.

The right one will easily answer questions straight away about their specialities, qualifications and registrations.

They should also ask you about what YOU want, what YOU need and what YOUR situation is.  YOU are their focus.

Try and ask others for recommendations if you know they use one, but be really careful that they service you need is the one that that person is using.  When you talk to an adviser you should feel comfortable, in control and realise that this will be a very personal relationship as far as professionals go, especially because you will not receive any benefit if you are not completely honest with yourself and your adviser.  If you don’t feel comfortable or feel intimidated, try elsewhere.

The Budget – Quick Overview

Changes to Kiwisaver:

  • For the year ended 30 June 2012 a halving of the Member Tax Credit
  • Removing the tax free status of employer contributions from 1 April 2012.
  • From 1 April 2013 the minimum employee and employer contribution rate will rise from 2% to 3%

Comment: Although we understand there needed to be changes, if they don’t stop making changes every year, it will become an unknown quantity and confusing for all.  The lifting of the savings amount will continue to be necessary, but the tax treatment changes must stop.

New Ways to Save

  • The partial privatisation of certain SOEs as a home for those investment dollars
  • Two new savings products being an Inflation Indexed bond and an Earthquake Kiwi Bond
  • The establishment of a new local government funding agency to provide cheaper funding for local body projects and more liquid assets for investors.
  • Treasury is to undertake preliminary work to prepare to extend the mixed ownership model to Mighty River Power, Meridian, Genesis and Solid Energy. Shares would be offered via initial public offerings.
  • The Government’s majority stake in Air New Zealand will be reduced.
  • Any divestments will be undertaken as part of a three to five year programme starting in 2012 – assuming the Government is re-elected in November.

Comment: As an investment adviser I can see merit to these ideas, it has worked well with Air NZ, we would just like some certainty around the percentage of New Zealanders who will own the shares rather than overseas residents. There needs to be overseas investment, we are too small not to accept it, but we would not like to see the ownership be only our Government and overseas interests and no mums and dads.

Bulleted points courtesy of Deloitte www.deloitte.com/nz/2011governmentbudget

What will the new tax changes mean to me?

This article has been written and researched by Judi Galpin from DecisionMakers in Palmerston North.

The May budget outlined a number of tax changes to come into effect on 1 October this year.

There have been complaints that the tax changes will not ‘give me anything extra’.  In many cases this may be the case, but the intention of the changes was not to give hand-outs.  It was to stimulate the economy, improve productivity and reward those who add to New Zealand’s long-term well-being.

Keeping tax neutrality for the most vulnerable sectors was important, however.  Following the recent global credit crisis where the people of some nations have had to accept decreased incomes, a neutral tax package must be seen as a bonus.

Moving New Zealand to a more productive economy in the long-term is definitely to everyone’s advantage, allaying the common fear of our welfare system becoming overwhelmed by the lack of genuine wealth in the community.  If the tax changes can start us on this road to wealth, eventually, we will all benefit.

Comments like the ‘rich will get richer’ are not helpful as we look to these earners to employ more, invest more and produce more.  Having lost any encouragement to do so previously, we now look to these individuals to own businesses and employ others.

There has been much comment on how the new taxes will affect different sectors of the community. Now that emotional comment has quietened, DecisionMakers has completed calculations to determine the facts.  In all cases we have assumed the worst scenario whereby all income is spent on expenses which have GST included. Read More