Inside this edition
Workforce Planning – How Prepared Are You?
It’s Their Job to Be Fair
Student Loan Scheme Act
New Employee Relocation Expenses.
GST and Homestays Etc.
Snippets.
|
All information in this newsletter is to the best of the authors' knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information. |
Workforce Planning – How Prepared Are You?
In the next 20 years we are going to see a dramatic change in the number of people qualified and available to undertake work. It is predicted that if our birth rate and net migration rate remain at their current levels, New Zealand will be 100,000 people short by the year 2026 to fully support our infrastructure services, let alone for employers to have the number of staff they need to run their business.
Couple this trend with statistics on the workforce in Europe, which are projecting that over the next 25 years the working age population will reduce by 50 million, and it is not hard to conclude that businesses here need to start thinking about how they are going to source their staff and structure their work in the future.
Not only does the number of people available to work need to be considered, but there is also going to be a more diverse ethnic mix within the New Zealand community. Companies that embrace diversity within their culture will have a greater pool of potential candidates than those that don’t. It is expected that within the next 15 years 16% of New Zealand’s working age population will identify themselves as Asian, 15.9% Maori, 8.5% Pacific Island and 67% European.
To have an edge in the competitive employment market you need to get smart about your people strategies. You need to think about:
- · What is it about our company that gives us a good reputation and makes people want to work here?
- · What opportunities can we create in-house to challenge and motivate our staff members so that they remain loyal to us?
- · What labour intensive roles do we currently have that could be automated?
- · How can we restructure the way we work so that our staff members have the flexibility to meet the competing demands on their lives?
If you think it is tough finding good staff now, then take a deep breath, because it is only going to get tougher.
If the IRD conducts a tax audit that results in an adjustment to a return, shortfall penalties must be considered. Depending on the circumstances, the rules can be black and white, which can leave the taxpayer feeling unfairly treated. IRD has recognised that this result does not promote voluntary compliance.
With respect to the penalty for an “unacceptable tax position”, it is proposed that the discretion given to the Commissioner to not charge the penalty under section 141 KB be repealed and replaced with one of the following three options:
- · returning to the pre-2003 “unacceptable interpretation” wording;
- · limiting the penalty to income tax, i.e. excluding GST and withholding taxes; or
- · increasing the thresholds at which the shortfall penalty applies. At present the threshold is more than both:
- o $20,000 and
- o the lesser of $250,000 and 1% of the total tax figure.
It is proposed to increase the threshold to more than both:
- o $50,000 and
- o 1% of the total tax figure for the return.
The upper threshold of $250,000 would also be removed.
Presently, if a tax agent is used to prepare a return and that return is later found to have an error, a shortfall penalty for exercising a lack of reasonable care is unlikely to apply. Use of a tax agent to prepare a tax return is recognised as taking reasonable care as long as the agent is given adequate instructions and information. It is proposed to formalise this approach in the legislation but also charge a penalty where a tax shortfall has occurred in the past and the same error or action has been repeated. The logic for this proposal is that the taxpayer, being aware of the earlier error, should have checked the agent’s work to make sure the error doesn’t reoccur.
The IRD is also proposing to introduce a warning system for late payment penalties. If a payment is not made on time a taxpayer will receive a warning letter and a new due date before a late payment penalty is charged. However, once an extension is given, no further extensions will be given for two years. A late filing penalty for GST may be introduced to replace the current system of applying default assessments. This proposed penalty would perhaps only add additional stress with tighter time pressures for agents in light of the upcoming alignment of GST and income tax balance dates.
It has always been considered unfair that a taxpayer who makes a voluntary disclosure may also be charged with a shortfall penalty. It is proposed that if a taxpayer voluntarily discloses a tax shortfall to the IRD within two years of the tax position being taken, a penalty for “lack of reasonable care” or “unacceptable tax position” will not be charged.
The rules surrounding who can be a tax agent may be amended to give the IRD greater power to exclude individuals who it considers to be inconsistent with maintaining the integrity of the tax system. The rules could apply in situations where taxpayers have been convicted of an offence under the TAA or if they have bad compliance histories in their own affairs or affairs as an agent.
A number of other proposals was considered and rejected. It was disappointing to see that one of the proposals rejected would have seen no shortfall penalty imposed where taxpayers correct their tax positions before the due date. However, depending on the type of breach, the expectation is that this issue will largely be fixed by the proposal to impose no penalty where a voluntary disclosure is made within two years.
On the whole the proposals being considered are a step forward and will be welcomed. The IRD will still retain the ability to punish those who deserve it, but these changes will also force the IRD to soften its approach when dealing with the average New Zealander who is trying to keep the IRD off their back and out of their wallet.
Since 1 April 2006 student loans for borrowers who live in New Zealand have been interest free. This arrangement has led to an incentive for borrowers leaving New Zealand to not let the IRD know they are leaving the country. A bill was introduced into Parliament in November 2006 that allows information matching between the Customs Department and the IRD to resolve this issue.
To give non-resident borrowers who are likely to be identified by the data match a fresh chance to catch up on their obligations, the amnesty on student loan penalties for overseas borrowers is to be extended to 31 March 2008.
New Employee Relocation Expenses
In today’s global employment market it is common for employees to be sourced nationally or even internationally. If an employee is not local to the business the recruitment negotiation will often result in the employer paying the employee’s cost of relocation. This has been a contentious issue in the past as the IRD views the expenditure as income to the employee, and therefore should be subject to PAYE. The IRD position is in the process of being formalised; its position has been released in draft for comment.
The IRD has considered three situations:
- 1. Reimbursement from the employer of actual (or estimated) relocation costs
- 2. Direct payment by the employer of costs to a third party on account of the new employee
- 3. A lump sum payment to the new employee to cover all costs of relocation
The IRD has concluded that all three classes of payment are expenditure on account of an employee and therefore is part of the employee’s income. The IRD’s interpretation is based on case law that has concluded that relocation expenses are of a private nature.
The IRD has not covered the situation where the employer contracts directly with the relevant service providers used to relocate the employee. In this situation the argument would revolve around fringe benefit tax and whether or not the employee has received a benefit. It could be argued that since the employee is in the same position as before, although in a different location, no benefit has been provided.
From a strictly technical point of view the IRD’s view is difficult to fault. However, from a practical point of view it does not seem appropriate for relocation expenses to be considered employee income. It is not expected that the IRD should turn a blind eye to this issue. But, given the Government’s goal of trying to make New Zealand globally competitive and entice skilled workers to our shores, legislative amendment would be advantageous for employers. We hope that there will be more positive news on this issue in the future.
It is well understood that the supply of residential accommodation is exempt from GST. This is legislated under the GST Act by section 14(1)(c), which provides that supplies of accommodation in any dwelling by way of hire, service occupancy agreement or licence to occupy are exempt from GST. The definition of dwelling is aimed at an individual’s residence or abode, and excludes commercial dwellings.
In relation to holiday homes the IRD has the view that they are dwellings as their predominant function is to be a place of residence or abode. Holiday homes are considered to be too dissimilar to hotels and motels to be commercial dwellings.
Homestay or farmstay accommodation involves providing short term accommodation in a private home for a charge. The IRD views homestays and farmstays as clearly a dwelling, since the main function or purpose is to be a place of residence or abode. In addition the owners use the premises as their residence or abode. To be a commercial dwelling the IRD considers that a homestay operation would need to be run on a commercial basis with the example of a boutique homestay cited. Factors relevant to this differentiation would include the commitment of time and money, the planning and projections undertaken, the prospect of making a profit, the research and marketing undertaken, and the suitability of the location.
A serviced apartment(s) or time share will be a dwelling unless it is a commercial dwelling. In the IRD’s view a commercial dwelling provides accommodation for a number of unassociated people simultaneously. The commercial requirement may be met if a taxpayer has a significant number of serviced apartments.
We realise that tax law is far from black and white, but the IRD has taken an area in which a workable practice had developed over time and now has essentially changed its view and the rules we have to work by. Peter Dunne has indicated that if the document is finalised the GST Act will be amended to protect existing operators. However, the form of this protection is unknown at this point. We suggest that this is as much a protection for the government as the taxpayer, because if someone made an input claim on a property which is now time barred, then the property could be sold without accounting for the GST if the IRD doesn’t consider that a taxable activity existed.
Aircraft Maintenance Reserves
Civil aviation law requires aircraft engines and frames to be overhauled after a specified number of hours. Because of the certainty these rules create, many operators claim a provision for overhaul in their tax return. The IRD has released in draft form its view on this practice and has concluded that since these reserves are not “incurred”, they are not deductible. This might cause alarm to a number of aircraft operators as IRD policy in the past has been to accept maintenance reserves in this industry. It is acknowledged that if a service contract is in place creating an “existing obligation” then the reserves may still be deductible.
Tax Bills Passed
In December Parliament passed the Taxation (Savings Investment and Miscellaneous Provisions) Bill and the Taxation (Annual Rates of Income Tax) Bill. The main focus of the former Bill above received considerable attention through the news media because it relates to the taxation of overseas share investments.
If you have any questions about the newsletter items, please contact us, we’re here to help