The Holidays Act 2003 stipulates that all existing employment agreements must be amended to include a provision that confirms employees’ rights to be paid “time and a half” for working on a public holiday.

     Youths (16 & 17 year olds) Adults (18+ years)
     Per hour                      $7.60                        $9.50
                              (was $7.20)              (was $9.00)
     8 hr working day      $60.80                       $76.00
                            (was $57.60)            (was $72.00)
   40 hr working week $304.00                     $380.00
                          (was $288.00)          (was $360.00)

Employees who have been employed by the same employer for at least an average of ten hours a week during the immediately preceding six months, are now entitled to 13 weeks’ maternity leave or one week’s partner’s / paternity leave.

This entitlement to maternity leave will increase to 14 weeks after 1 December 2005. Certain medical practitioners and teachers who have periods of employment with more than one District Health Board or Board of Trustees respectively, may be treated as having one single employer.

The Disputes Resolution process has had an overhaul and changes to the process came into effect from 1 April 2005:

  • The allowance for a time bar waiver has been extended from the current period of 6 months to 12 months, with a     further option of a 6 month extension being available to the taxpayer. New issues cannot be raised during the time bar     period.
  • Where a Notice of Proposed Adjustment (NOPA) has been issued and the matter has not been agreed to, the     Commissioner must complete the disputes process and not make an amendment under Section 113. A number of     exceptions exist; however, in most cases these exceptions will not apply.
  • A taxpayer and the Commissioner may agree to suspend a dispute where a “test case” is identified and where the facts     and relevant law are significantly similar. The Commissioner may make an assessment or perform an action that is     consistent with the outcome of the “test case”.
  • Taxpayers now have four months to issue an NOPA to the Commissioner to dispute an assessment. It was previously      two months
  • The contents required for an NOPA have been altered with the intention of making them streamlined. Taxpayers are also     required to provide documentation to support an NOPA.
  • The amount in dispute in order to take a case to the Taxation Review Authority has been raised to $30,000. It was     previously $15,000.
  • The Commissioner’s discretion to accept a late NOPA or NOR, (Notice Of Response) has been widened to include     minimal delay and delays related to public holidays. For example, if a response period were to end on Good Friday, but
    an NOPA was posted on Thursday and was not received by the Department till the following Tuesday, the     Commissioner may accept the notice as being received in time.
  • The time bar for GST disputes has also been clarified. It is the 4-year period from the end of the GST return period in     which the GST return was provided.

As to whether or not these changes will make any noticeable difference to the taxpayer – only time will tell.

Interest Deductibility

In general, people have the correct understanding that interest is deductible if it is incurred directly in relation to acquiring assets that are used to derive income. However, some confusion exists when it comes to interest incurred for reasons that are not directly related to earning income. For example, when someone borrows to pay taxes or if a qualifying company borrows to pay a dividend. In order to try and provide some clarity on the issue the IRD recently issued a draft interpretation statement on interest deductibility.

Deductibility will depend on the use made of the funds borrowed. So, interest is deductible if it is incurred in deriving assessable income or incurred in carrying on a business for the purpose of deriving assessable income. It is not deductible if the funds are used for a private or domestic purpose. What about interest on funds borrowed to acquire capital assets? The Pacific Rendezvous case confirmed that interest is deductible on funds borrowed to acquire capital assets that are used to produce income. Since this case, the courts have applied a “use” test, to identify what the funds were used for and therefore determine interest deductibility. For example, if a person took out a loan to purchase a property to generate rental income, the interest will be deductible. However if the same person used the loan to purchase a new home to live in and kept their existing property to be used as a rental the interest would not be deductible. In the second scenario, the funds borrowed are being used to acquire a property that is not being used to derive income, therefore the interest is non-deductible. Although through the use of an appropriate structure, it may be possible for the interest to be deductible.

The “use” test is relatively easy to apply. In the Public Trustee case the issue related to funds borrowed to retain income earning assets. Money was borrowed to pay death duties so that income earning assets did not have to be sold to pay the duties. In this case, the necessary connection was not so easy to identify. In the example where a taxpayer borrows to pay a tax bill, you still need to look for a connection to the income earning process.

The analysis could be as follows:
  • A tax bill is a mandatory liability placed on a taxpayer.
  • If the taxpayer does not borrow to pay the taxes, he may have to sell income earning assets to fund the tax bill.     Therefore to safeguard his ongoing income earning process the borrowing has to occur.
  • In addition, if the tax bill itself came from the use of those assets, it can be shown that the borrowings are being used to     maintain the income earning assets and therefore, the link to the income earning process is established.

With a qualifying company that borrows funds to pay a dividend, the interest would not be deductible as it has not been incurred to derive income and is not in relation to acquiring or retaining income earning assets.
As the circumstances in every case can vary, we recommended that the “use” test be applied before including interest deductions in your tax return.

Rates and Thresholds
A number of changes have been made to rates and thresholds, as follows:

  1 Use of Money Interest charged by the IRD has increased from 11.93% to 13.08%, the interest rate paid by the IRD has      increased from 4.83% to 5.71%, and the new rates will apply from 8 March 2005. Where the tax payable is significant,      tax pooling should be considered to save use of money interest.
  2 The changes effective from the 1 st of April 2005, are as follows:
     •  Student loan threshold has risen from $16,172 to $16,588
     •  The student loan interest rate has remained unchanged at 7%, although the base interest portion has decreased from         5.5% to 4.2%, accordingly the interest adjustment portion has increased from 1.5% to 2.8% The maximum income         level for a full interest write-off for part-time or part year students has risen from $26,140 to $26,799
    •  ACC earners levy rate has been set at $1.0667 per $100 of earnings, exclusive of GST ie $1.20 per $100 of earnings         (GST inclusive)
    •  The level of earnings on which a levy is payable for a self employed person working more than 30 hours per week         has increased to $17,680 and $14,144 for those aged 17 or under
    •  The FBT rate for low interest loans has risen from 8.52% to 8.76%

Income Equalisation
A timely reminder to farmers that the income equalisation scheme is an option to consider especially when there has not been sufficient provisional tax paid on income earned. A deposit into the income equalisation scheme will defer the income tax liability to a future year, enabling farmers to “square up” their tax payments accordingly. The scheme is especially useful when there are unexpected income fluctuations. Operating like a bank account, the scheme allows farmers to make payments for a rainy day.

“Market” Salary
Trading trusts are coming under increasing scrutiny from the IRD if the trusts employ professionals to provide the services of their business. IRD has been targeting trading trusts that have been paying salaries to associated persons at what the department considers to be less than market salary, for what it considers to be the provision of personal services. In a recent media release, the Department indicated that the requirement to pay “market” salaries may not be restricted to trading trusts. IRD has indicated that companies may receive similar scrutiny if it believes “market” salaries have not been paid.

Upcoming Float
In late August/early September Vector will have an Initial Public Offer.
“Vector is primarily an electricity lines company owning the lines of the old Auckland Power Board network. In addition, the company has acquired UnitedNetworks lines in Auckland’s North and West, and in Wellington. It also owns 67 per cent of NGC and 15 per cent of the gas network in Auckland. It also has a communication business, offering capacity on a fibre-optic network, and a tree-trimming company, for removing tree limbs around power lines”. The Dominion 20 th April 2005.

We expect this to be a popular IOP and are taking expressions of interest now. Please contact Natalie to register your interest. Vector’s Prospectus will be released in June.

Many of our clients receive the Forsyth Barr Limited weekly diary. If you are interested in the New Zealand Stockmarket and would like to find out more please contact Natalie to receive your free copy.

Investment News
At present we have some very attractive Secured Debenture interest rates.
    •  UDC Finance Limited 7.00% for 1 year minimum investment $25,000.
    •  South Canterbury Finance Limited for 2 years 7.75%
    •  Elders Finance Limited 8.75% for 15 months minimum investments $5,000

For more information please contact Natalie to receive your application form and investment statement.

UDC Finance Limited Telephone Call Account Rates for May:
         6.45% - $5,000 up to $19,999
         6.45% - $20,000 up to $99,999
         6.55% - $100,000 and over

A UDC Telephone Call Account gives you ready access to your funds while offering competitive, on call interest rates that are fixed for the entire calendar month – even if market rates fall. Our fully secured Call Account lets you manage your deposits and withdrawals by simply contacting Cindy at our the office.

Please note withdrawals and deposits need to be received in our office by 3pm to be actioned on that day.

Please remember to return your signed tax declarations as this is a requirement by both our Insurers and the Inland Revenue Department to have these before we file your returns. We also require Trustee Minutes, Shareholder and Directors Resolutions to be returned so that they can be filed in the Trust Minute books and Company Registers

Office News
With regret we farewelled Ian Williams after 11 years with the firm. Ian has moved with his partner to Paraparaumu and we wish them well for the future. Ian’s knowledge of our clients and his sense of humour will be sadly missed by all.