What is tax pooling
FROM April 1, 2003 taxpayers may pay tax to an intermediary company. The tax is paid into a pool account at IRD. Participants in a tax pool may transfer overpaid tax to others who have under paid. This enables the recipients to avoid Use of Money Interest (UOMI) at 11.93 percent. Instead, they pay interest into the pool at 8.93 percent . The pool management takes 1.6 percent and the remainder, 7.37 percent, goes to the firm providing the tax credits.
Is tax pooling safe?
Yes and No. The first tax pooling, company has been structured in such a way as to appear to be very safe. Money is paid into a trust account at Guardian Trust who on- pay it to IRD. Tax pools are vetted and have to be accepted by IRD before they can start trading. However IRD does not guarantee tax pools. If one failed those who paid their tax into it would lose their money.
Can a person get a higher rate of interest from the pool than IRD would pay?
Yes, the current rate is 4.83 percent and the tax pooling company will pay 7.33 percent. You will need to register with the company. The minimum fee is $750 per year. This is likely to rule out most small businesses.
Can a person save UOMI by using a tax pool?
Yes, but an annual fee will be charged for an accounting firm to register as a "preferred supplier tax firm" and this will need to passed on to clients using the scheme. The number of preferred supplier tax firms is likely to be limited, based on the supply
of overpaid tax available. Presumably, if there are spare tax credits, and the practice is not a preferred supplier tax firm, anyone will be able to apply for them through their accountants. Again, it seems smaller businesses will be unlikely to gain the advantage of tax pooling.
Is there any certainty of saving Use of Money Interest?
Absolutely NO. Tax credits can be bought from firms who have overpaid and the pooling company says these will be made available on a first come first served basis. If there are no tax credits left for you, then you will pay the full rate of Use of Money interest. First come are likely to be bigger firms which ill have the facility to know their tax requirements quickly. Logically, if you were one of these, you would contact the tax pool and secure a chunk of the credits to be on the safe side. Smaller firms are the least likely to benefit from tax pooling.
Could anyone set up a tax pool?
Yes. The law sets out the standards to be met. Comply with them and you can be registered. You would need to build up to at least 100 taxpayers and IRD can deregister if they believe there will not be 100 taxpayers in the pool. Tax pools handling, many small amounts of money are likely to be less viable than those dealing with large sums.
Do other countries have tax pooling?
No, not as far as we are aware.
Tax evasion and avoidance
MOST people prefer to pay as little tax as possible. This article will explain when it is OK to minimise your tax and when not.
The Oxford Dictionary shows the words avoidance and evasion as having the same meaning. Not so Inland Revenue Department. Evasion means illegal ways of dodging tax. Avoidance involves legal ways to minimise tax.
This is the deliberate action of either failing to declare income or the inclusion of expenses which are not tax deductible. The emphasis is on the word deliberate. If you can convince a judge you did not realise you were erring, you will not have broken the law. You might still have tax and penalties to pay but IRD will not be able to impose the highest penalties reserved for tax evasion.
It is legal but you can still be in trouble. There are really two types of avoidance. That which IRD can upset and, naturally, that which it might not like but it is stuck with.
Let me introduce you to the most famous tax case of all time. In 1936 the UK tax department took the Duke of Westminster to court alleging tax avoidance. The Duke had decided to pay his gardener an annuity rather than a salary. In those days wages were not tax deductible but the annuity was. Inland Revenue did not like his scheme. It claimed the Duke was trying to avoid tax. The judge said: "Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it would otherwise be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he can not be compelled to pay the increased tax." This is tax avoidance, legal and not capable of being upset by IRD.
Distinguish this from the case of three New Zealand lawyers who assigned their practice assets to a company so they could lease them back to reduce their tax. In this case they were re- arranging their affairs. The Duke, on the other hand, had never paid his gardener a wage. There was no change of direction, unlike the lawyers.
The moral of these stories is —
Look ahead. When starting in business decide how you would like to structure your activities and be prepared to live with those decisions.
Often there are ways to re-arrange things which IRD can still not attack. The principle here is that the transaction has a purpose which is not tax saving and if any tax benefits do accrue they are merely incidental. These transactions need to be commercially realistic. For example, if a sole trader converts her business into a company, she will pay a top rate of tax at 33 percent compared with 39 percent as a sole trader. However, she would say she wanted a company for the protection it offered her and any reduction in tax could not be avoided. The IRD would not object. She might form a family trust to own most of the shares in the company so profits would accrue to it and not to her, thus protecting her wealth even more. It would also lock in the 33 percent tax rate as the dividends from the company paid to her would attract 39 percent but paid to the trust only 33 percent.
Incidentally, tax avoidance refers to tax only. Rearrangements to avoid Use of Money Interest cannot be upset by IRD.
How long should you keep records?
HOW long, do you have to keep your paperwork? Here are some answers.
The basic rule is seven years after the year the records relate to. This means, for those who have a March 31 balance date (most of us), an invoice dated 30 March 1996, can now be destroyed, but one dated 1 April 1996 must be retained until after 31 March 2004.
Records have to be kept in English, but Maori is permitted subject to Inland Revenue approval and guidelines being followed.
In July 1991 the IRD announced it would consider reducing the period for retaining records to four years if a taxpayer applied to the manager of the taxpayer audit section at the local tax office. Those who have a good record should be given the green light.
The Tax Administration Act 1994 says you do not have to retain records of a company which has been struck off.
If you have a family trust, you must keep details of forgiveness of debt for the life of the trust and would probably be advised to do the same for most other records.
The Companies Act 1993 also has its own rules. You are expected to keep some records, such as copies of annual accounts for 10 years.
Sometimes it is interesting to compare our rules with those in a similar country overseas. Recently it was suggested in Australia that the record retention period for tax purposes should be reduced from five to three years.
The proposal was unsuccessful.
IRD now requires you to attach receipts and also put in the names of the people who provided you with the service. Be sure to collect these during the year.
Company shareholder rights
MARRIAGE breakdowns are not uncommon. One of the partners, commonly the wife, asks us to provide information.
Shareholders have statutory rights to inspect:-
• The minute book of the shareholders meetings
• Copies of all written communications to shareholders which includes the annual report and annual accounts
• The various certificates directors must complete in order to comply with the Companies Act 1993
• A register which discloses the financial interests directors have in any contracts involving the company
Shareholders are entitled to ask for copies of these documents. They should apply to the registered office of the company, which they could find by inspecting the details of the company kept at the office of the Registrar of Companies. This information can easily be obtained through the internet.
Looking after your staff
IT is a cliche but it is true. Your staff are your firm's most valuable asset. How well do you look after them? There are firms, for example, where "professional" staff are seen as superior to the others. No one stops to consider how "the others" feel about being labelled second- class citizens.
Staff meetings can take a lot of time so need controlling. However, they are an important means of communication, firstly for you to listen and secondly so you can pass on information or promote discussion of ideas. Ricardo Semler, author of Maverick, says he has a 1000 staff and each has a brain so he uses all of them.
What do you do when some things goes wrong?
Commonly one finds someone to blame. However, success causes resentment, which is itself counter-productive. There is a better method. Involve the person in finding a way to ensure the same mistake is not repeated. If possible get your employee to come up with the ideas as he or she will own the solution and is more likely to implement it. If you produce the answer it could be seen as being imposed on the employee and is more likely to meet with resistance. Next, have a look at your systems and weave the solution into them. Once your staff are used to the idea there will be no witch hunt, they will be more ready to contribute to the process of finding the better way.
The difficult person
Occasionally you get someone who is not a team player, constantly finding fault and consistently negative. Such people will never work successfully with you. Encourage them to leave taking care not to infringe the Employment Relations Act.
Losing staff is usually very expensive. "Those who play together stay together". Have some fun. You could have people queuing to work for you. A significant part of g,oing, to work is social. Employers need to provide for it. Socialising costs money. It pays to be generous even if you can only claim a 50 percent tax deduction in most cases.
Avoid GST registration
SOMEONE starting a business, who wishes to defer registering for GST as long as possible, could be better to forgo profit on materials for the gain of not paying GST. Get the customer to pay for materials and charge for labour only. Why hasten the time when the Government will take a ninth of your revenue?
A DAIRY proprietor in Wellington was always grumpy and quite unpleasant to his customers. One day a customer asked him why he didn't sell the business to which he replied "I am waiting for the goodwill to improve".
JOHN Wareham is a New Zealander who has created a high class executive placement service (head-hunter if you like), which he runs from New York. When looking for staff, he says, choose for perseverance ahead of talent and education. Better to have someone who is determined than a guy with a string of letters after his name.
Building your business?
HERE is a story of an information technology firm in Auckland, obviously keen to build its business. It undertakes, via its website, to provide a quote within one hour. When an email arrives a ringing sound is triggered. Forty people work in this firm and as soon as there is a rim', someone has to jump on the email and do something with it. A client tried the service, four minutes after sending the email the phone rang. It was the general manager.
Buying a house?
Go for the three Ds.
Tax traps - Extra on ACC, Cover Plus Extra BUT
DID you know you can slash the costs of ACC by means of Cover Plus Extra? You do not have to insure for the full amount of your shareholder remuneration or business profit.
There are two situations:-
• starting in business
• three or more years of recorded liable earnings
Starting in business
You can go straight to the minimum threshold of $13,312. You will probably find you can stay on the minimum for some years.
Three or more years of recorded liable earnings
The minimum threshold is 50 percent of the average of the last three years liable earnings or $13,312, whichever is the greater. If you are in partnership or are "a shareholder/employee in partnership" the minimum threshold is 40 percent.
Risk of sickness is many times greater than the risk of accident. It therefore pays to minimise ACC cover and substitute insurance cover inclusive of sickness.
ACC does not adjust the premium based on your age, in spite of the risk reducing each year.
It is worth making, inquiries and doing the arithmetic. You may well find you get a very pleasant surprise! Remember though your ACC cover will be less.
A word of warning, however, if you have a company! ACC premiums are in two parts. They are called the Earner Premium and the Employer premium. The first one is only tax deductible for self employed and partners. ACC bills the shareholder instead of the company when they take out Cover Plus Extra. Thus the bill is no longer a company cost and the entire expense is now non tax deductible. Likewise, no GST is claimable on the employer premium. Since the employer premium is so much smaller than the Earner Premium, this may not concern you. From a claims point of view it makes no difference. The income is taxable under both schemes.
August 7 2nd instalment of Provisional Tax (December balance date)
October 7 3rd instalment of Provisional Tax (October balance date)
1st instalment of Provisional Tax (June balance date)
November 7 2nd instalment of Provisional tax (March balance dates)
Terminal tax (October balance dates)
I'm an Aussie so I probably should just stop here ...
I grew up in the country in Armidale New South Wales and studied at Lismore before moving to Sydney. In 1985 I travelled to the UK, worked in London and lived on a farm at the top of Scotland for a few months and travelled Europe. On returning to Sydney I met up again with a Kiwi girl, and we had a daughter in 1991 before moving to Auckland at the end of 1995.
I worked with NSA Limited, tax consultants in the City until March 2001 when I joined JMV. I live in Browns Bay and have had three boys since our arrival in New Zealand.
My interests are surfing, golf and fishing.
All information in this newsletter is, to the best of the author's knowledge, true and accurate. No liability is assumed by the author or the publisher for any losses suffered by any person relying directly or indirectly upon this newsletter. You are advised to consult professionals before acting upon this information.