Welcome to the last month of winter 2021! The team here at JMA have been really busy getting financial statements & tax returns completed. We thought it was time to highlight a few of the recent changes that have been announced. These include changes to sick leave entitlements, investment property changes and motor vehicle fees.
Sick Leave Changes
– Applies from 24July 2021
The number of sick leave days employees are entitled to will increase from five to ten. Employees will get the extra five days when they reach their next entitlement date – either after being employed in a job for six months or on their sick leave entitlement anniversary (12 months after they were last entitled to sick leave).
Employees who already get 10 or more sick days a year will not be affected by this change.
What you need to do: After an employee has been working for you for six months, or when an employee reaches their next entitlement date after 24 July 2021, they will be entitled to an extra five days paid sick leave a year.
This means everything else remains consistent but there are slight variations to what you need to do.
- Allow for employees to accumulate up to 20 days of sick leave. This means employees can carry over 10 days of unused sick leave into the next year.
- Ensure that payroll systems have been updated to reflect the increase in sick leave.
- Update employment agreements to align with employee’s new sick leave entitlements where necessary. The new minimum entitlements will apply whether or not an employment agreement is updated, but updating the agreement is best practice.
- Be aware of the changes and communicate with employees.
- Allow employees to use sick leave to care for a sick or injured spouse, partner, dependent child or any other dependent individual.
- Pay a sick employee what they’d get if they’d worked a normal day, including bonuses, overtime, etc.
- Let employees who’ve worked for you for less than six months take sick leave in advance.
- Choose to let employees carry over extra sick leave, beyond the 20 day requirement from year to year.
- Offer more than 10 days sick leave a year.
This also applies to casual workers if, after six months, they have worked:
- an average of at least 10 hours a week and,
- at least one hour a week or 40 hours a month.
Investment Property Changes
For properties acquired on or after 27 March 2021:
- Legislation has passed that extends the bright-line test from five years to ten years on residential property.
- The Government intends for the bright-line test to remain at five years for new builds and will be consulting on what a new build is soon.
- Legislation has passed that introduced a ‘change of use’ rule. If the sale of your property is subject to the bright-line test, and you don’t use the property as your main home for 12 months or more, you will be required to pay income tax on a proportion of the profit made through the property increasing in value.
- If you sell a property within 10 years of acquiring it (or five years for a new build) and it was your main home for the entire time you owned it, you will not pay tax under the bright-line test on any gain in value.
- Any gain in property value that is considered taxable income (including under any of the bright-line tests) will also affect any other obligations or entitlements you have based on taxable income, such as student loan repayments, child support payments, and Working for Families.
For properties acquired before 27 March 2021:
- The previous bright-line test for five years will continue to apply for properties acquired before 27 March 2021.
- The Government has proposed that interest on loans for investment properties acquired before 27 March 2021 can still be claimed as an expense, but the amount will reduce each year until it’s completely phased out by the 2025-2026 tax year.
Fees on Utes
Plenty of Kiwi businesses buy utes as company vehicles. If you’re in the trades, for instance, a ute can be the perfect wat to haul everything around and promote your brand at the same time.
However, the recently announce EV feebate scheme is likely to hit ute buyers the hardest, since these vehicles tend to have some of the highest emissions of any on our roads.
Here are three things to know if you’re buying new utes in 2022:
The fee depends on the model
Only the highest-emission models will require you to pay the highest fees. For example, the Nissan Navara is a relatively low-emission ute model and the fee on a new Nissan Navara is forecast at $810. That is considerably lower than the fee of $5175 expected to be incurred by the highest-emission Toyota Hilux model.
Hybrid utes are expected to arrive in 2025
Four years from now, in 2025, it’s expected that plug-in hybrid utes will be available in New Zealand. These are likely to be followed by fully electric utes. So if you want to avoid the fees, with careful maintenance, your current fleet of utes might last that long.
Electric vans are already available
Plug-in hybrid electric vans are eligible for rebates. For instance, a new Ford Transit PHEV looks set to qualify for a $5220 rebate. Ongoing running costs for electric vans should also be lower than for utes. And while they may be less fashionable, vans have their additional benefit of being more secure – Kiwi tradies often have tools stolen from their utes.
Claiming Vehicle Expenses in Your Business for Tax Purposes
Previously companies which owned motor vehicles that were available for private use, had limited options for accounting for the private use of the business vehicle. The rules have been relaxed somewhat so small closely held companies can now adjust for private vehicle usage on a similar basis to sole traders and partnerships.
Options available include:
- Fringe Benefit Tax (FBT) – Under this method the company claims 100% of the costs relating to running the vehicle for tax purposes. 100% of the GST paid is also claimed on the purchase of the vehicle and the running costs. FBT has to be paid on the days the vehicle is available for private use. Sometimes the FBT amount paid can be significant, especially if the original cost f the vehicle is quite high. In addition the days FBT is payable on are the days the vehicle is available for private use, not just the days it is actually used privately. This is the method that has been in existence for many years and will be what a number of you currently use. There is an exemption to this but this must be met.
- Work-related vehicle exemption
FBT does not apply to a vehicle if it meets all of the following conditions:
- it is drawn or propelled by mechanical power (this includes trailers)
- it has a gross laden weight of 3,500 kg or less
- it is not principally designed for carrying passengers
- it has prominent company branding that cannot easily be removed
- you tell your employees in writing that the vehicle can only be used for travel between home and work, and for travel related to the business, such as stopping and the bank on the way home from work.
- Cost Method – Under this method companies can apportion the expenses relating to the motor vehicle between private use and business use. The claim is then only for the portion of the expenses that relate to the business use. A vehicle log book must be completed to establish the portion of business use of the vehicle. The percentage of vehicle expenses that are for private use get put through to the shareholders current account as private drawings. GST is claimed on the business portion of vehicle expenses.
- Kilometre Rate Method – Under this method a log book is required to keep a record of all travel undertaken by a vehicle and to determine the kilometres travelled for business use as well as private use. You then multiply the number of business kilometres travelled by the Inland Revenue mileage rates to determine what you can claim. Under this system any actual vehicle costs paid by the company get charged to the shareholder current account as private drawings. No GST can be claimed on the kilometre rate paid on the running costs.
These are just the basics of the three methods and there are other things you need to consider for each of these methods. The cost method and kilometre rate method are the new options and only available where private use of a vehicle is the only non-cash benefit provided to a shareholder-employee of a company, not currently owned vehicles.
Note: The three options above all relate to vehicles owned by the Company. They do not relate to vehicles owned in the individual shareholders name but used for company business. There are separate rules for that.
Sole Traders and Partnerships
If you are a sole trader or in a partnership and you use your own vehicle in the business, you can claim the running costs for income tax. If you use the vehicle strictly for business, you can claim the full running costs, without making any adjustments. If you use the vehicle to travel from home to work, or any personal travel, you will need to separate the running costs of your vehicle between business and private use. (Travel between home and work is not classed as business use.)
You should keep a logbook for at least three months every three years. You will need to record the distance, date and reason for the trip in the logbook. You can use the difference between the odometer readings at the start and end of the three months to work out the percentage of vehicle expenses you can claim. Without a logbook you may claim up to 25% of the vehicle running costs as a business expense by default. However, you could be asked to substantiate the percentage claimed.
Vehicles Provided to Employees
If you are providing your employees with motor vehicles for business-related purposes which the employee is taking home overnight, ensure they are not making the following common mistakes:
- A motor vehicle that fulfills the business-related vehicle definition, must still have any private use of the vehicle restricted by the employer in order for no FBT to apply. One of the first things IRD is likely to request in the event of any review, are copies of the private use restriction letters.
- Claiming that the employees need to take the vehicle home for security reasons will not exclude you from an FBT liability where the vehicle does not fulfill the business-related vehicle definition. The legislation specifically defines private use to include home to work travel unless the vehicle qualifies as a business related vehicle, so even a vehicle that has private use restriction in place will be exposed to FBT because there will still be actual private use of the vehicle.
- Sign-writing a vehicle is not enough to qualify a car (one designed principally for the carriage of passengers) as a business-related vehicle. To avoid IRD asserting an FBT liability exists, appropriate alterations ill need to be made to the vehicle to essentially convert it to be principally one for the carriage of goods.
Employees vs Contractors
Another issue we see often is the treatment of Employees or Contractors in the building industry. Below is a summary of the difference between them and the tax treatment required.
Employees: Employees have Pay As You Earn (PAYE) tax, which includes any ACC levies, student loan, KiwiSaver or other superannuation payments (all where applicable) deducted from each salary payment. This means that unless they have other income in their names, their core taxes are paid on their behalf by their employers. The responsibility for these payments is on the employer, and any non-compliance with the law regarding these is a matter settled between the employer and the IRD. Tax returns can be filed with the IRD by way of Personal Tax Summaries.
Employees are also fully entitled to holiday pay and sick leave payments from their employer. This is by far the simplest approach to personal income tax for a worker, but is more complicated for the employer.
Contractors: Conversely, if you hire someone as a contractor, the task of complying with New Zealand Tax Law is more complicated for the worker, while it’s simpler for you.
Labour-only building contractors have 20% withholding tax, withheld by the payer and administered at the same time as PAYE, but are still required to file an income tax return each year and pay any additional tax (based on their marginal tax rates). Most other contractors do not have withholding tax withheld, but may be required to make provisional tax payments throughout the year. They are also able to claim certain expenses against their income, such as travel necessary for work, or in a builder’s case, expenses for repairs and maintenance on any tools they use in the course of their work, along with depreciation on tools and vehicles.
Contractors are required to be GST registered if they earn over $60,000 in a 12-month period, and must file a full income tax return at the end of the financial year. Contractors are not entitled to sick leave or holiday pay, and are not able to take up personal grievance claims against the employer.
How do I tell the difference?
As shown above, there are definite advantages and drawbacks to each party in each situation. However, the decision to hire someone as a contractor or an employee does not rest simply on what works best for your business!
The best method to decide how to treat your worker for tax purposes is to consider the following areas:
- Do they have the ability to work for another employer on another job while working for you? If they do, then they would fall under the contracting realm of employment.
- Who dictates the amount to be paid to the worker? If the worker is planning on invoicing based on an hourly rate that they have offered to the employer, they would be deemed a contractor. However, if the worker is paid a set rate based on the employer’s discretion, they would be viewed as an employee.
- Can the worker take holidays as they wish, or is it up to the employer’s discretion? If holiday periods are dictated by the employer, then the worker is likely to be deemed as an employee.
- Do they supply their own tools for work? If they supply the majority of their own tools, which are not paid for by the employer via any tool allowance contribution, or are expected to provide their own tools, then they would likely be deemed a contractor. An employee would not be expected to provide their own tools.
- Does the worker invoice the employer for hours completed on jobs? If so, they are a contractor. Employees are paid a rate based on a full day of availability for work, whether the work is there or not. Contractors only get paid based on the hours they work.
These are just a few examples of areas that the IRD look at, and as you read through the above methods, it is easy to see why it has become a grey area for businesses.
In certain situations, it may be that a worker meets some of the tests for being an employee, while also meeting some of the criteria for being a contractor. What is important is that all reasons for the treatment of a worker are documented, with a rigorous process being followed to determine their nature. Essentially, the less control a business has over a worker and their activities, the more likely they are to be deemed a contractor.
Labour only contractors in the building industry are required to have tax deducted by the person paying them as they are “schedular payments”. Page 3 of the Tax rate notification for contractors (IR330C) form has a list of schedular payment activities.
If you are a contractor and have a good record of tax compliance you can apply for a certificate of exemption (COE) so no tax is deducted from your payment. You’ll still be required to pay tax on your income at the end of the year, and you may be liable for provisional tax. You can apply online through the IRD website.
Covid-19 Business Support Update
Since 2020, measures to help support businesses adversely affected by COVID-19 have been introduced in several waves. Initially the intention was to boost confidence and help businesses get through the crisis. Subsequently it became clear that support through a recovery period would be needed, as well as ‘just in case’ measures for possible rapid response to higher Alert levels for some regions.
The original package included:
- A tax loss carry-back scheme
- Greater flexibility for taxpayers in respect of statutory tax deadlines
- Measures to support commercial tenants and landlords, and
- Proposed changes to the tax loss continuity rules
- Further business consultancy support.
Further developments included wage and leave subsidies, resurgence support, loan products and further tax relief around depreciation, bad debt write-offs and tax losses/refunds for research and development tax credits.
Some support measures were extended or adjusted, sometimes repeatedly. You can be forgiven for being a bit confused about where we’re up to with all of them so we put together this update.
It’s important to keep current. Let us know if you’re worried about not being able to pay your tax on time, if your cashflow is dangerously low, or if you need access to capital. And if you’ve taken advantage of tax relief or business support measures, make sure your records are in good shape to support your tax return.
Consultancy support – Businesses had access to free professional consultancy services through Regional Business Partners (RBP) with tailored specialist support for business continuity planning, finance and cash flow management, HR and staffing issues. COVID-19 Business Advisory Funding has been fully allocated. The RBP can advise on what other support is available.
Debt hibernation – The business debt hibernation scheme helps businesses manage their existing debts until they can start trading normally again. It allows qualifying businesses to defer debt repayments by up to 7 months. The scheme has been extended to 31 October 2021.
Depreciation – From the 2020/21 income year onwards, depreciation is allowable for commercial and industrial buildings. For a limited period, the low-value asset threshold for depreciation increased from $500 to $5,000. For items that fall below the threshold, the depreciation loss is the item’s cost. Above the threshold, items must be depreciated using the diminishing value or straight-line method. The increase allowed the immediate expensing of assets that cost less than $5,000 and that were purchased between 17 March 2020 and 16 March 2021. For assets purchased on or after 17 March 2021, the threshold permanently increases from $500 to $1,000.
Insolvency support – The introduction of a ‘safe harbour’ from sections 135 and 136 of the Companies Act 1993 provided relief to company directors facing significant liquidity problems because of COVID-19. This temporary provision expired on 30 September 2020 but may be reinstated by regulation if required.
Leave support – Leave Support is available for employers, including the self-employed, to help pay employees who need to self-isolate and can’t work from home. A new short-term absence payment has been added to cover eligible workers needing to stay at home while awaiting COVID-19 test results. This also covers parents, caregivers, household members or secondary contacts of the eligible worker awaiting test results.
Loan products – The Business Finance Guarantee Scheme supports lenders by the government taking on the default risk of up to 80% of the loan. Participating lenders can provide new loans, increased limits to existing loans or a revolving credit facility to eligible businesses. The scheme was extended to June 2021 with additional availability and flexibility. Be aware that the Government guarantee does not limit your business’ liability for the debt. If your business defaults on a scheme loan, the lender will follow its normal processes to recover the debt.
The Small Business Cashflow Loan Scheme grants eligible businesses an interest free loan (up to a capped maximum), if they repay it within two years.
The scheme has been extended, broadening eligibility, and extending its availability to 31 December 2023. Businesses or organisations that have fully repaid their loan before the end of 2023 can re-borrow.
Loss carry-back – A temporary tax loss carry-back scheme, limited to a 3-year window, means losses in the 2020- or 2021-income years can be used to offset profits made the year immediately before. If you want to use this option, you need to be eligible and let Inland Revenue know you want to elect into the scheme. If you’re expecting a tax loss for the year ended 31 March 2021, you might be eligible for a refund of provisional tax previously paid for the 2020 year. There has been discussion about introducing a permanent scheme but there’s no further news on this yet.
Loss continuity rules – Loss continuity rules allow tax losses to be carried forward. Up till now, if a company had more than a 51% change in ownership it couldn’t keep its tax losses. As raising capital may result in a change to the existing shareholder structure, companies wanting help need flexibility to access capital and to carry losses forward to offset income when they return to profit. Proposed new rules are expected to apply for the 2020/21 and later income years with a “same or similar business” test, meaning the business must continue in the same or a similar way it did before ownership changed. Inland Revenue will be alert to prevent loss trading.
Provisional tax – The RIT threshold for provisional tax increased from $2,500 to $5,000 from the 2020/21 tax year. This allows small businesses to retain cash for longer and reduces the number of provisional tax taxpayers. If you are a building owner, you can adjust provisional tax payments in anticipation of additional deductions available as depreciation for commercial and industrial buildings was reintroduced from the 2020/21 income year. If your business is affected by COVID-19 and you need to re-estimate your provisional tax as your income falls short of the estimate and provisional tax has been overpaid, it may be possible to arrange early refunds.
Research and Development (R&D) – Start-up companies are able to cash-out their tax losses arising from eligible R&D expenditure and avoid carrying the losses through to the next income year. The rules around R&D expenditure are detailed and eligible R&D expenditure requires approval from Inland Revenue. If you want to claim under these rules, you need to look at this sooner rather than later, and have good records of such expenditure.
Resurgence support – The resurgence support payment (RSP) is available to help businesses directly affected when there is a move to Alert Level 2 or above for a week or more. This is especially relevant to sectors like hospitality and events, who face particular disruption as Alert Levels change. Businesses can apply to receive the lesser of:
- $1,500 plus $400 per fulltime-equivalent (FTE) employee, up to a maximum of 50 FTEs, or
- Four times (4x) the actual revenue drop experienced by the applicant. Eligible businesses must have experienced at least a 30% drop in revenue or capital-raising ability over a 7-day period after the increased alert level. Where a business is one of a group of commonly owned businesses, that drop also needs to be present across the commonly owned group as a whole. Eligible businesses must have been in business for at least 6 months to apply.
The RSP has most recently been triggered by the 23 June 2021 alert level 2 measures for Wellington, Wairarapa and Kapiti Coast to the north of Otaki. Applications remain open for one month after the return to alert level 1 on 29 June.
Short-term absence payment – See Leave support.
Tax deadlines – Inland Revenue has discretion to grant extensions to filing dates for some income tax returns. Extensions can’t be granted for GST and PAYE returns, but late filing penalties may be remitted. Under limited circumstances, late payment penalties may also be remitted.
Tax Debt – If you are unable to pay tax by the due date, Inland Revenue has discretion to write-off penalties and interest. Contact them to indicate when tax can be paid, or request instalment arrangements. You may be eligible for a UOMI write off.
Tenants and landlords – Temporary law changes were made to support tenants unable to pay rent and landlords unable to meet mortgage payments. These made it easier to retain lease arrangements and get back to business as usual after the pandemic, giving parties more time to fulfil their payment obligations or negotiate temporary changes to agreements or payment plans. These temporary changes have largely ended.
Wage subsidy – The wage subsidy schemes ensured employers could keep paying their employees, and workers continued to receive income, and stayed connected to their employer, even if unable to work their normal hours. The wage subsidy is considered excluded income to businesses and is also GST exempt. When passed on as wages, businesses don’t get a deduction for income tax purposes. Keep comprehensive records of wage subsidies received and passed on to employees, as well as any subsidies your business subsequently repaid, to be prepared for any adjustments required in your tax return.
Working from home (WFH) costs and reimbursements – The timeframe for tax-exempt reimbursement payments made by employers to employees for WFH now extends from 17 March 2020 to 30 September 2021. Make sure your records have enough detail to show:
- What period these payments relate to
- Payments comply with requirements for qualifying payments to be treated as exempt income
- Where some payments are exempt and others taxable and where some portions of a payment are exempt but others are taxable. Note that:
- For telecommunications devices/plans, staff reimbursements are exempt income up to $5 per week. If reimbursement is above this amount, the exempt amount is 25% if the device/plan is used partly, 75% if used mainly, or 100% if used exclusively for employment purposes
- WFH payments claimed between 17 March 2020 and 17 March 2021 allow an additional $15 per week, per employee, to be exempt income for other WFH expenditure
- Payments may be tax exempt for use of furniture or equipment when WFH to reimburse depreciation on the item. The payment will typically be for the cost of the asset and the payment will still be deductible to the employer. Note the $5,000 low-value asset threshold applying between 17 March 2020 to 17 March 2021 applies here.
Write-offs – Ordinarily, a bad debt must be written off by the end of the tax year. For the 2020 year, the timeframe to write off a bad debt and be able to claim a deduction for that income year was extended to 30 June 2020. This is subject to conditions.
Make sure your records for the 2020 and 2021 years reflect any write-offs for bad debts for the relevant period and have sufficient detail to justify the write-off.