The Trust Issue

Family Trust
Do you have a family trust? Thinking of forming one as a way to future-proof your assets for you and your children? Take note – the Trustee Act is getting a makeover. While there are still a few parliamentary hurdles to jump, now’s the time to get your head around what the new bill will mean for you and your business. 

In a nutshell

Last August, a new Trusts Bill was introduced to Parliament – the first big change to New Zealand’s trust law in more than 60 years. With up to 500,000 trusts operating in our country, they are an essential part of our legal system but the current legislation is no longer cutting it.

How will the act change my role as a Trustee?

Up until now, a trustee’s job description has been clear as mud with many families getting into strife unaware of their trustee’s responsibilities. If the new bill comes into place, a trustee’s role will be clearly outlined, and include:

  • Knowing the terms of the trust
  • Acting according to the terms of the trust
  • Acting honestly and in good faith
  • Acting for the benefit of the beneficiaries or the permitted purpose of the trust
  • Exercising trustee powers for a proper purpose.

What changes will affect my business?

#1 Extending perpetuity laws

At the moment, when you set up a family trust, it has a time limit of 80 years. Then you have to wrap it up and distribute the assets. The new legislation suggests extending it to 125 years, which may involve significant succession planning adjustments.

#2 More information access for beneficiaries

In its draft form, the Trusts Bill proposes to give most trust beneficiaries the legal right to financial reports on the state of the family trust – meaning they’ll be able to request more information including ‘who’s getting what’. Whether beneficiaries have the right to request this information under our current law is a bit of a grey area.

Because this potentially opens a can of worms for trustees, this proposal has been controversial and has attracted a lot of feedback from trust advisers. We will have to wait until later in the year to see what changes (if any) are made to this proposal.

I have a Family Trust, what do I need to do?

Get your paperwork in order: Document your trust actions carefully (if you don’t already) and make sure they’re accurate.

Revisit your succession planning: Talk to us to make sure your succession plans still make sense if this legislation goes through.

Review your trust: There might be opportunities to improve your tax structure, reduce your risk profile and better your family’s financial situation.

Know your CRS obligations: New Zealand uses the Common Reporting Standard for the automatic exchange of information (AEOI) to help tackle global tax evasion. This means Reporting New Zealand Financial Institutions (NZFIs) have new IRD obligations, so you’ll need to know if your trust falls into this category.

Is a Family Trust right for me?

Family trusts are a popular way to protect and manage your assets, such as the family home, for you and your family, now and in the future. They can have a valuable role to play, but they’re not suitable for everyone. Here are the pros and cons of family trusts to help you decide if it’s worth investigating further.

FIVE GOOD REASONS TO FORM A FAMILY TRUST

  1. Protect your assets against claims and creditors in the event of business failure or a lawsuit.
  2. Set aside money for special reasons, such as a child or grandchild’s education.
  3. Ensure your children, not their partners, keep their inheritances.
  4. Protect your children from squandering assets or falling prey to financial scams before they’ve gained sufficient life experience to make sound decisions.
  5. They have a life of up to 80 years (or 125 years under the new bill) unless it’s wound up and distributed earlier.

THREE DISADVANTAGES OF SETTING UP A FAMILY TRUST

  1. Transferring your personal assets to a trust means you lose complete ownership and it will be the trustees’ responsibility to control them.
  2. The time and cost involved in setting up a trust and meeting its annual accounting and administrative requirements.
  3. Disgruntled beneficiaries have the power to sue trustees where trustees have acted in breach of trust. While it’s not common, it is happening more often.

Think before you leap:

What are my responsibilities as a trustee?

Whether you’re thinking of becoming a trustee for your own family trust or someone else’s, it’s important to know your obligations under the current law before accepting the role.

8 things to know before becoming a trustee

  1. It’s a legal responsibility with a lot of work involved (most often voluntary) and you could end up being liable for losses made by the trust if you don’t do the job properly.
  2. You’re in it for the long haul – some trusts have a set end-point, ie: when a child turns 18, but others can go on for over a century.
  3. You must know and understand the trust deed, all associated documentation and the trust’s property, assets and liabilities.
  4. You’ve got to stay impartial when managing or distributing trust property to beneficiaries – no favourites!
  5. You have to ensure all relevant documentation with regard to the trust’s assets are signed by all trustees, not just the ‘Mum and Dad’ of the trust (check the trust deed, though, in case it says otherwise).
  6. When making trust decisions, you have to agree with the other trustees (unless the trust deed says otherwise). So you need to be sure that you can work well with the other trustees before taking on the job.
  7. You must actively participate and make all the decisions – no delegating or relying on others to do your job.
  8. Paperwork will be your friend – keeping accurate accounts and recording all trustee decisions as requested by beneficiaries will keep you out of deep water.

 

 

Content courtesy of Accelerate.

 

Anti-money Laundering and Countering Financing of Terrorism Information

AML – Why we need to ask you for information
 

New Zealand has passed a law called the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (we will call it the AML/CFT law). The purpose of the law reflects New Zealand’s commitment to the international initiative to counter the impact that criminal activity has on people and economies within the global community. 

Recent changes to the AML/CFT Act mean that from 1 October 2018, accountants are required to comply with its requirements. This law requires accountants and others to do a number of things to help combat money laundering and terrorist financing, and to help Police bring the criminals who do it to justice. The AML/CFT law does this because the services accounting firms and other professionals offer may be attractive to those involved in criminal activity.

The law says that accountants and other professionals must assess the risk they may face from the actions of money launderers and people who finance terrorism and to identify potentially suspicious activity. To make that assessment we must obtain and verify information from prospective and existing clients about a range of things. This is part of what the AML/CFT law calls “customer due diligence” (‘CDD’). CDD requires us to undertake certain background checks before providing services to clients or customers. Accountants must take reasonable steps to make sure the information they receive from clients is correct, and so they need to ask for documents that show this.

We will need to obtain and verify certain information from you to meet these legal requirements. This information includes:

  • your full name; and
  • your date of birth; and
  • your address.

To confirm these details, documents such as your driver’s licence or your passport, and documents that show your address, such as a current bank statement or utilities bill will be required.

If you are seeing us about company or trust business, we will need information about the company or trust including the people associated with it (such as directors and shareholders, trustees and beneficiaries).

We may also need to ask you for further information. We will need to ask you about the nature and purpose of the proposed work you are asking us to do for you. Information confirming the source of funds for a transaction may also be necessary to meet the legal requirements.

If we are not able to obtain the required information from you, it is likely we will not be able to act for you.

Before we start working for you, we will let you know what information we need, and what documents you need to show us and let us photocopy.

Please contact us if you have any queries or concerns.

Get the Staff Hiring Right

Staff (1)

 

If your business is doing well and you can no longer do it all yourself, you need to hire staff. That's when the real work begins.

Hiring the right staff is what small businesses say is the one most difficult task – and one which can so often lead to problems. Potential staff might look good on paper and in person, and interview well, but you'll only know whether you've made the right decision when they begin to do the work.

Here are a few tips to help you get the right staff.

Do the checks. Too many companies in New Zealand don't check to see whether qualifications are genuine, or follow up with previous employers. The experience of those employers could be critical to your decisions. Three key questions to ask have to be:

Why did the employee leave?

Did you have any specific or general problems with their work, their behaviour or their attitude?

And perhaps most crucial, would you hire them again?

Identify the role and aim at getting the person with the right attitude (first and foremost) and skills for the job. Don't be side tracked by a good candidate who's not suited to the role you need to be filled.

Consider experience, but also learning ability. Your company will always operate differently than someone else’s, so a staff member's ability to learn how you do things is important. They are also more likely to use their initiative to suggest improvements in work practices.

Include someone you trust in your interview team. If you can afford to hire a professional recruiter, you should do so. There are self-employed individuals, if you can find them, who would be happy to receive a fee.

As a business owner, your focus is going to be different than theirs. You will ultimately make the decision, but another person's perspective can often provide insights you might never think of.

Whatever your business, if you're expanding it means a new staff member is going to be part of a team. The big companies always look for people who are able to work in a team. They also look for good written communication skills and an ability to solve problems. Whether you're hiring waiting staff for a cafe or an IT specialist, these qualities will matter.

Tax is not for the DIYers

Female

The following story indicates the folly of trying to prepare your own tax returns.

It involves a taxpayer who bought three properties. He paid costs for his business and his rental, plus personal costs, from personal credit cards and funds in a revolving credit account. He also put all his income into the revolving credit account.

He mixed up his personal, his business and his rental income and expenditure.

When it came to a claim for interest on money borrowed, he was unable to identify precisely how much had been borrowed to finance the rentals. As he couldn’t prove the amount, Inland Revenue allowed none of the expense.

Believe it or not, in spite of his family trust owning one of the properties, he returned the rental income as his own income. To make things even worse he bought furniture, carpet, stove and other household items and couldn’t show that these were actually bought for the rental properties.

Inland Revenue had a field day. Don’t let this happen to you. Let us deal with tax issues so you can claim all your entitlements and be compliant with tax laws.

Don't get caught by Phishers

Phishing

The dictionaries can hardly keep up with the words coming from new technology. One of them is phishing, which sounds like fun but is far from it.

Phishing is a scam that tries to trick you into providing personal online information such as passwords, bank details and payments to legitimate sources. Once the “phishers” have your details, they can steal your money, or even use your identity for their own gain – and your loss.

Knowing how to spot a phishing expedition online will help ensure you're not caught.

Phishing is usually activated through a phony email. It often looks like it's coming from your bank or other trusted sources. It often suggests you need to reactivate your account, your account will be closed, or you need to claim a prize. With logos and corporate-style wording, it looks legitimate.

So how can you tell if it is?

Firstly, don't trust emails from someone you don't know. If it's legitimate and important, they'll ring you.

Banks rarely ask you to verify anything online.

Many phishers don’t have English as a first language, so look for poor spelling and grammar, and the quality of logos and other images.

Look at the email address it's coming from. It might have a bank name in it, but often along with something else, for example, anzguest, or bnzinfo.

If it's not addressed to you personally, ignore it.

If you're asked to click to a website, beware. Look for https in the url – the 's' means it's secure. Just http is not secure, so don't go there. However, even https doesn't guarantee authenticity, so remain wary.

If you do feel you've been caught because you've clicked through and provided details in good faith, notify the appropriate organisation, such as your bank, or shut down your browser, restart and change your relevant password immediately.

Paid Parental Leave updates

Parental

1 July 2018, the paid parental leave entitlement increases from 18 weeks to 22 weeks. This is expected to increase to 26 weeks from 1 July 2020.

Self-employed parents (including farmers) are eligible for paid parental leave under the Parental Leave and Employment Protection Act 1987. Paid parental leave applies to both births and adoptions.

The amount of paid parental leave payments will equal the applicant’s average weekly income. Currently, this is up to a maximum weekly payment of $538.55 per week before tax. This equates to an annualised income of $28,004.

Taxpayers who make a loss or earn less than the minimum wage are entitled to receive payments for 10 hours a week at the minimum adult wage ($157.50 based on minimum wages of $15.75/hour but will increase to $16.50 from 1 April 2018).

Herd Sale & Purchases - Which Year Should it Fall In?

Cow

For May balance date farmers who are looking to buy or sell herds, when is the best time for the transaction to occur – in May 2018 (2018 income year), or June 2018 (2019 income year)?

This is a balancing issue, with both parties trying to get the best tax planning opportunities and timing of tax payments. Depending on the negotiating position, one party may be in a stronger position that the other, and will have a greater ability to influence the transaction date. In many cases the date is chosen by the lawyer or real estate agent. We need to be reviewing the sales and purchase agreement.

Sale of Herd
For those looking to sell, having the sale of the herd occur in June 2018 has the sale fall into the 2019 income year, allowing tax to be deferred by another year. The ability to defer tax helps the cashflow and provides greater opportunities to manage the timing and the amount of tax payable.

The earlier that an accountant knows of a pending herd sale, the more opportunities there are to utilise livestock valuation elections, deferred fertiliser, losses carried forward and income equalisation deposits.

If the sale occurs in the 2018 year and the taxpayer has RIT of less than $60,000, the additional tax from the sale is payable as terminal tax on 7 April 2019. The third and final 2018 provisional tax payment can be made based on the 2017 income plus 5% uplift. The livestock sale increases the 2018 taxable income, increasing the 2019 provisional tax payments. Thought will need to be given to clients using AIM as once elected into the scheme there is no easy exit.

If the sale is delayed until June 2018, the sale falls into the 2019 income year. The 2019 provisional tax payments are based on the 2018 income with 5% uplift, meaning that the additional tax from the herd sale isn’t due until 7 April 2020 (assuming RIT is less than $60,000).

Where possible, farmers should look to only sell the mature livestock and that they keep the R1 heifers on for another year. Not only will their heifers’ sales price increase, but any tax on their sale is also deferred by an additional year. This works if the farmer still owns land to rear them on, but it may also work if cheap grazing can be found.

If the vendor’s balance date and GST periods are aligned, the GST from the sale of the herd will also be delayed. For a client on a two-monthly payments basis GST, the GST will be payable on 28 August rather than the earlier 28 June.

Purchasing a Herd
The deductibility of the livestock purchase is generally offset by the increase value of livestock on hand. This reduces the tax impact of the settlement date for the purchaser.

Where a client has their livestock on herd scheme, there is an opportunity to shift off the herd scheme by selling the existing herd in May and purchasing the new herd in June. As there will be only limited stock on hand at balance date, the herd scheme base numbers will drop. As the new livestock are purchased in the following income year, new livestock elections can be made.

Where the GST aligns with balance date, a purchase of a herd in May will result in a GST input claim in the May return (probable June refund). If the purchase occurs in June, the transaction falls into the June/July return for an August refund. A one day delay in the sale from 31 May 2018 to 1 June 2018 can cause a two month delay in claiming the GST refund.

Reproduced from the Busing Russell Farm Accounting NZ Newsletter

Farming - ACC & Passive Income

Acc

For farming clients who are in the process of moving away from the day-to-day farming activities, the question of whether they are still actively farming comes up annually when the ACC invoice arrives.

This tends to affect older clients who may have employed a 50/50 sharemilker, a farm manager or are leasing out their farm. The client is no longer actively farming - they are no longer milking, shearing, doing stock work or the general day to day farm activities. But is their involvement in the business still enough for their income to be subject to ACC premiums?

It can create particularly strong feelings when the taxpayer is a superannuant. They have to pay ACC levies on their business income but will not receive any loss of income compensation from ACC if injured.

ACC considers passive income to be income which continues to generate without there being any need to put in physical exertions or manage the farm on a day-to-day basis.

In short, passive income is income which is not affected by the client’s incapacity.

Legislation requires ACC to consider any income dependent on personal exertions to be liable for ACC levies. Any income generated from either physical or non-physical activity (mental) contributions to the day-to-day running of the business is liable for ACC.

For a farmer that has ceased to do physical day-to-day farm work, the income may still be subject to ACC due to the farmer’s mental exertion involved in the management, administration and planning of the business.

The key issue is the difference between how ACC and many farmers define the active/passive distinction. For many of our farming clients, active farming involvement is seen as hands-on farm work, while the administrative running of the business is perceived to be a passive role.

In reality, the administrative/management role is still active, but could possibly be subject to ACC levies at a lower levy rate.

What is Considered Passive Income?
Whether an ‘ex-farmer’s’ income from the land is considered passive will depend on the specific facts of their situation. What is their involvement in the farm, what contracts exist, and who is operating the farm. There needs to be proof that an individual has no physical or mental involvement in the farming activity to ensure that income is passive.

If farm land is leased out for a long-term period with fixed terms and conditions, and there is no expectation of either management or physical function in managing the lease, then it is likely to be passive income.

However, where the lease is to be renewed periodically with new terms and conditions, and it is required to be regularly monitored, the same activity can come under the scope of active income.

Other factors considered by the ACC as indicators of active/passive involvement:

• Taxpayer’s age (older is more likely passive)
• Residential location (living in town more likely passive)
• Taxpayer’s health (are they physically able to be actively involved)
• Taxpayer’s historical role in the business

What can be problematic is when an older farmer, who receives passive income, helps out on-farm or fills in as relief labour. If the farmer then gets injured, it may raise questions on the legitimacy of the passive nature of previous years’ income.

What To Do
As the financial statements and tax returns are prepared, there is an opportunity to review the client’s situation and their active/passive role in the business. It is easier to ensure that ACC invoices are correct at this stage, rather than after the ACC invoice has been received by the client. As business and taxpayers change, we should review this regularly and keep good file notes.

ACC levy rates need to be reviewed to ensure that the business industry description is appropriate. If the farm owner is no longer actively involved in the day-to-day farming but still has a mental exertion involvement, then the appropriate ACC category could be “holder investor farms and livestock”. For a shareholder employee or self-employed person, the levy rate is $0.77 per $100 dollars versus $2.51 for dairy farming or $2.49 for sheep/beef farming.

Are all individuals actively or passively involved in the business? In some partnerships, one partner may be active and the other passive. If so, only the active person’s income should be subject to ACC.
ACC CoverPlus Extra allows taxpayers the ability to have an agreed level of ACC cover. This can provide those farmers who are still somewhat actively involved in the farming business a minimum level of cover while reducing the ACC levy.

Farming companies have the ability to allocate income via a dividend (passive) rather than shareholder salaries (active). This can be useful when the farming business has greater than usual income from one-off activity such as timber sales, depreciation recovered or sale of livestock. However, the IRD generally expect someone in the business to be deriving an active income at an appropriate fair market value, such as a PAYE or shareholder salary.

For taxpayers with in-fund current accounts or loans to the business, interest on these balances can be charged to the business. This will be passive income to the individuals, but will expose the business to RWT if interest paid exceeds $5,000 per annum. As mentioned above, the IRD will generally require one of the individuals in the business to be deriving active income at an appropriate fair market value.

Correction to ACC Invoices
To get an ACC invoice corrected when passive income is incorrectly returned as active income in a tax return, now requires correspondence with the IRD. Previously, this could be sorted with a phone call to the ACC helpdesk. Now the correction requires written correspondence with the IRD to get the tax return corrected. Once corrected, the IRD will then pass on the amended income details to ACC, who will then issue an amended levy invoice. A call needs to be made to ACC to advise them of the changes to the tax returns to avoid recovery proceeding for the unpaid ACC levies. Clients require us to be actively involved in managing this process.

Reproduced from the Busing Russell Farm Accounting NZ Newsletter

Accounting Information Method (AIM)

Income Tax

AIM could be helpful

If you have seasonal income or will pay more than $60,000 of tax in the year, the new Accounting Income Method (AIM) could be good for you.

From 1 April 2018 you're going to be offered another opportunity to avoid the interest charge on the shortfall of your provisional tax. If you use accounting software approved by Inland Revenue, you may be able to calculate and pay your tax on a two-monthly basis in tandem with GST. Provisional tax will no longer apply to you. If you don’t pay GST, you can still use AIM.

You will need to make several adjustments, but these are not difficult. Those who wish to use the new system will need to notify Inland Revenue before the beginning of the financial year for which they wish to use it. We recommend checking with us, first.

The following adjustments will be required for each return:

  • Private expenditure included in business payments.
  • The stock adjustment is perfectly easy. We won’t detail it here.
  • If you're on a payments basis or not registered for GST, you don’t need to adjust for money owing to you and money owing by you (accounts receivable and accounts payable).
  • If you make losses, these are adjusted period by period so you don’t have to pay any income tax until they are used up.
  • You can choose whether or not to adjust for depreciation, but you must conform with the IRD depreciation rules if you decide to claim a deduction for depreciation.
  • There are special rules for livestock.

Avoid the Bad Payers

 

Female

The first rule about debts is to try and avoid customers who don’t pay what they owe you. If the amount is going to be large, get a deposit first, get a credit report, or both.

When you get a bad payer:

  • Get onto the customer quickly.
  • Follow up on a planned basis and minimise the time between each follow-up.
  • When ringing the customer, get a commitment of how much will be paid and when.
  • When following up by phone, write notes of the commitment made and preferably the actual words used by the customer.
  • If you still have trouble collecting the debt, confront the customer with each of the promises and what was said.
  • If you still can’t get paid, warn the customer you are going to take debt recovery action. If this does not produce results, carry out the threat promptly.
  • If you're dealing with a company, the threat of winding it up can be very effective for those who are first in.

That's why it pays to act quickly. You don't want to be last in line when the money runs out.

The second rule is to avoid having your business dominated by one firm. If you possibly can, diversify your customer base as quickly as you can.

What if the company is too big to be concerned about your threats? There is little you can do other than reread rule 2. If the bad-paying corporate is only a small customer, some people load their bills to them to allow for bad payment practices.