Residential rental loss ring-fencing

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Many of you will have heard about the ring-fencing of losses made from residential rental properties which applies from 1 April 2019.

Deductions for residential properties are now ring-fenced so they can only be used against income from that property, or sometimes a portfolio of properties.

Deductions that exceed the income from that property/portfolio of properties will need to be carried forward, to offset future income from that property/portfolio of properties.

This means that losses from a rental property, that you in the past would have used to offset against your other income, is no longer available for that purpose. They can only be used to offset future profits from that property/portfolio of properties.  

The rules apply to all entity structures, ie sole traders, partnerships, trusts, LTCs and ordinary companies.

Family homes, farms, commercial rental and business premises are excluded.

We will send some detailed information including going over different scenarios, to those of our clients who have residential properties in the new year.

Inland Revenue to probe hospitality sector for businesses hiding cash sales

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First published in Stuff 4th October 2019

This serves as a word of warning to anyone who owns a business where cash is regularly received as payment for goods and services

Four members of the Thai restaurant family have been sentenced to prison or home detention after a $2.3 million tax evasion case brought by Inland Revenue, and another was convicted but discharged.

They were also been ordered to pay more than $2.2 million in reparations by the High Court in Wellington over tax evasion carried out through 21 “Thai House Express” restaurants around the country.

The five – Boonrouen Thongskul, Sirirat Kampeng, Anchalee Minwong, Chanaratt Thongskul and Anuchit Tongskul – originally denied the charges but entered guilty please five weeks into the trial that had been expected to last ten weeks.

They were accused of having been part of co-ordinated tax evasion effort over a seven-year period which involved not reporting cash sales to the taxman, and distributing the cash directly to family members.

The charges related to the filing of 366 false income tax, GST and personal tax returns evasion relating to their own tax affairs and those of their 11 companies.

“Once they’d heard much of the Crown evidence against them, these five entered guilty pleas in relation to the GST and income tax returns of the businesses for which they were responsible, and their own income tax return,” said Inland Revenue spokesperson Richard Philp.

“By their guilty pleas the brothers and sisters acknowledged they knew their returns were false and were a deliberate ploy to evade tax. Cash sales were deliberately suppressed to pay less tax.

“An aggravating feature of the offending for Chanaratt Thongskul and Anuchit Tongskul was that their declared income was low enough to qualify for Working for Families Tax Credits in some of the years charged.

“The case followed an extensive investigation into the family group with searches of private properties disclosing business records, luxury goods and cash in some instances.

“The general allegation was that the family distributed the cash amongst themselves, as part of a deliberate practice of not reporting or recording cash sales and diverting the cash to private use.

“This is not trivial tax evasion. At one point in the trial the cash deposited in personal bank accounts was said to be more than $9 million. For these five defendants the sum is more than $5.2 million.”

At the High Court in Wellington today Chanaratt Thongskul was sentenced to two years and eight months in prison and ordered to pay $900,000 in reparation.

Sirirat Kampeng was sentenced to 12 months home detention and ordered to pay $600,000 in reparation.

Anchalee Minwong was sentenced to 10 months home detention with $400,000 in reparations.

Anuchit Tongskul was sentenced to nine months home detention and must pay $300,000 in reparations.

Boonruen Thongskul was convicted and discharged with $5000 in reparation to pay.

Moving on from cheques

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IRD recently announced their decision to no longer accept cheque payments for any form of tax from 1st March 2020. We will be in touch with those who for one reason or another (ie no rural broadband) can’t pay online to help you identify other payment methods.

Here’s what IRD had to say in their news release:

Cheque usage continues to decline every year. Last year cheques only accounted for 5% of payments to Inland Revenue and some people who used cheques also used other payment methods.
From 1 March 2020, Inland Revenue will no longer be accepting cheques if customers have an alternative payment option available. This includes post-dated cheques (cheques dated after 1 March 2020).

Around 90% of the cheques we receive come from clients of tax agents. If you or your clients use cheques you will be instrumental in the transition to alternative payment methods. There’s plenty of time before next March for people to explore their options and find a convenient and secure way that works for them.

There are many different ways to pay – electronically or in person.

Ways to pay

Here’s a summary of payment options:

  • myIR: You can pay by direct debit and make debit card and credit card payments securely through myIR online services. Visit our website (ird.govt.nz) and login or register for myIR.
  • Online banking: You may be able to make payments using online banking. Contact your bank for more information.
  • Credit or debit card via our website: Use your credit or debit card to make online payments through our website. Visit ird.govt.nz/pay.
  • In person at Westpac: Pay by EFTPOS or cash at a Westpac branch or Smart ATM.
  • Money transfer: If you are overseas you can pay us using a money transfer service. Search for “make a payment” on our website for more information.

Charges may apply for some payment options.

We are soon going to start contacting cheque payers (and their tax agents) to let them know about this change and alternative ways to pay.

In the meantime, if you would like more information visit our website at ird.govt.nz/pay.

Ir-file discontinuation for filing Employer Monthly Schedules and payday filing reminders

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The ir-file service in myIR will be discontinued on 11th March.

That means if you file your February Employer Returns online before 11th March, you can file under ir-file as you do now.

If you file after the 11th March you need to use ‘payroll returns’ account in the Business tab section of myIR.

March Employer Monthly Schedules must be filed through the ‘payroll returns’ account.

From 28th February payroll returns will be available in myIR (or earlier if you’ve opted in early to payday filing) and you will need to add it to your work space.

The Business tab section is where you will go to file your payday schedules from 1 April unless your software supports payday filing and you can file directly from the software.

A reminder, your last Employer Monthly Schedule will be for the month of March, due on the 20th April.

From 1st April, you will also need to file payday information within 2 days of paying your employees.

If you file paper returns (only available if annual PAYE and ESCT are less than $50,000) you need to file your information within 10 working days of:

  • the payday, or
  • the 15th and end of month (if you choose to send information twice a month)

Please call Anna at our office on 03 5484894 or email anna@savage.co.nz if you have any questions re ir-file or payday filing.

International Automatic Exchange of Information

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New Zealand has signed up to the Automatic Exchange of Information (AEOI) – a global OECD initiative to combat tax evasion.

Inland Revenue has been running an AEOI awareness campaign since 9th June 2018 with a primary focus of this campaign being to generate awareness among New Zealand tax residents most likely to have offshore accounts or financial interests, so they can take steps to determine if their tax affairs are in order and disclose if they identify issues. New Zealand tax residents with complex international tax affairs should contact us for support or advice.

This awareness campaign has included online advertising on relevant websites and via Facebook. These ads include a link to IRD’s campaign landing page.

As part of AEOI financial institutions will provide Inland Revenue with information about foreign tax residents with financial accounts in New Zealand, in line with the Common Reporting Standard (CRS).

IRD are now exchanging information with many other countries so it is vital you tell us about any income or assets you may have in other countries, if you don’t then chances are IRD will find out about it and that may cause you a few problems, something no one likes happening with IRD

The requirement of New Zealand Tax Residents to report world-wide income hasn’t changed, but IRD are now more likely to find out about it even if you don’t declare it. Please make sure information regarding ALL overseas income, bank accounts or assets is provided to us for your tax return preparation, even if you think it’s non-taxable income!

AIM Method of Calculating Provisional Tax

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Many of our clients may have seen or received information from IRD about the AIM method of Provisional Tax calculation

This method will become available for use on 1st April 2018. We are not recommending it to our clients for the following reasons:

  1. Most SMEs (Small Medium Enterprises) qualify to use Standard Provisional Payments without any Use of Money Interest
  2. Depending on your business you may have to do things such as a physical stock take every two months
  3. While IRD are promoting that this is an easy method to use in fact, in our opinion, it is not and also the option is not available through Xero and MYOB for clients to use – it is only available to firms such as ours to use.

If you want to discuss the AIM option please give Sari or Anna a call.

Paying contractors or working as a contractor

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IRD’s latest update to tax agents includes some clarification around contractors and withholding tax.

There is a misunderstanding that all contractors are now subject to withholding tax. This is not the case. The change is only for contractors hired by a labour hire business.

From 1 April 2017, contractors working for a labour hire business under a labour hire arrangement must have withholding tax deducted from their income.

Activities and examples of a labour hire business
One of the main activities of a labour hire business is arranging for a person to perform work or services directly for:

  • its clients, or
  • clients of another person.

Examples of labour hire businesses are:

  • an on-hire business
  • an employment agency
  • contract management, or
  • recruitment services.

Withholding tax rate
The standard withholding tax rate for this category is 20%. However, a contractor may choose a lower rate (the lowest rate is 10%) when they fill in their Tax rate notification for contractors (IR330C) form.

They can also apply to us for a 0% special tax rate by filling in a Special tax code application (IR23BS) form. We review their tax compliance history before deciding if we’ll issue a 0% rate certificate.

Sub-contractors

Businesses (eg an engineering business) hiring sub-contractors don’t come under the new legislation. The sub-contractors wouldn’t be paid schedular payments so withholding tax isn’t taken out of their payments.

See some examples of what is and is not a labour hire business

Deductibility of Farmhouse Expenses

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IRD have released a Statement considering the deductibility of expenses relating to a farmhouse that forms part of a farming business. The general rules of deductibility and apportionment applies, ie you will be able to claim a percentage based on values and usage.

However, the minimum deduction of 25% for all farmers has been reduced to, and now available only in situations where the compliance cost of calculating private use element outweighs any likely deductions,  20% for farmhouse expenses ie power, while rates and interest remains at 100%. These deductions are allowed for some sole traders and partnerships when the value of the farmhouse is 20% or less than the total value of the farm. If the value of the farmhouse is more than 20% of the total value of the farm, all expenses that relates to both the farm house and the farm (rates, insurance, power, interest) must be apportioned.

Tax Refund Companies

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Yes, it’s that time of year again – the tax refund companies are back advertising!

Remember, if you are a client of ours, that we automatically check your tax situation so will advise you if there are any refunds due.

These tax refund companies take a percentage of any refund due. So, if you have a friend or family member who is thinking about using a tax refund company let them know that they can check on IRD’s website whether they are due a tax refund or not, at no cost.

Payroll – End of Year & Start of New Year

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Employer monthly schedules and ir-files filed with IRD are based on the payment date of the pay run (not the pay period end date). After you have finalised the last pay for March and printed your end of year reports (make sure this includes leave liabilities/balances), go ahead and file your ir-file with IRD as usual.

The next step is to review and update your employees’ salary and wage information. Ensure all employees on minimum wage have their rates updated to the new minimum wage of $15.75. The new rate needs to be applied from 1 April. If 1 April falls in the middle of a pay period, you can either pay different rates by inserting an extra line with the different rate, or apply the new minimum rate for the whole pay period.

If you have contractors using the WT tax rates on schedular payments (including those hired by labour-hire firms), they are from 1 April able to choose their own tax rate, subject to minimums. New contractors, existing contractors (if they need to change tax rate or starting a new contract) and those opting in to the schedular payments rules need to complete the IR330C Tax Rate notification for Contractors form.

ACC levies, ACC threshold and student loan repayment threshold are automatically updated if you are using payroll software.

Want to read more?

Tax and Contractors

IRD Contractor Changes