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Tax Talk | September 2018

Welcome to Staples Rodway Tax Talk

In this edition we discuss:

Motor Vehicle Kilometre Rate Changes

NZ Business Numbers And Additional Information From 2018 Year

Payroll Changes

Changes To Thin Capitalisation And New Interest Limitation Rules

MOTOR VEHICLE KILOMETRE RATE CHANGES

Inland Revenue recently released a two-tier approach to the use of the kilometre rates (Operational Statement 18/01).

The two tiers are:

  1. Deductions available to a person using their motor vehicle for both business and private purposes; and
  2. Reimbursements paid to employees using their vehicle in the employer’s business.

Deductions for Business Running of a Motor Vehicle

This applies to persons in business (for example sole traders or close companies) and specifically to motor vehicles used for dual purposes.  The first step is to calculate the proportion of business use using a logbook or actual records.  The result is then multiplied by the actual costs, or a kilometre rate times kilometres travelled.  The Commissioner sets kilometre rates annually for this purpose.

The rates are now made up of two tiers.  Tier One applies to the first 14,000 kilometres travelled by the motor vehicle in a year.  Tier Two applies to kilometres travelled in excess of 14,000.

For the 2017/2018 year, the rates are as follows:

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Any vehicle type not included in the above table must use the actual cost method.  Future rates will be set annually when third party data becomes available.

The previous 5,000 kilometre limit for motor vehicle deductions no longer applies.  Use of the kilometre rate requires a logbook to be maintained.  Failing to keep a logbook limits the business use to 25%.  The odometer reading must be recorded at each balance date to determine whether the 14,000 kilometre limit has been exceeded.

Depreciation deductions, depreciation recovery, interest deductions and actual costs are not deductible when using the kilometre rate method.

Employee Reimbursement for Business Running of an Employee’s Motor Vehicle

This applies to employees being reimbursed for business running costs.  Employers can reimburse their employees using either actual costs or making a reasonable estimate.  The Commissioner’s mileage rate is considered a reasonable estimate.

Where the employee maintains a logbook, the exempt portion of reimbursement may be calculated using the kilometre rate set by Inland Revenue, in the same way as above.  Where no logbook is maintained, the use of the Tier One rate is limited to the first 3,500 kilometres travelled for business purposes.  Tier Two rates apply after this.

As there is a time lag with the release of the new kilometre rates, the Tier One rate may be used for all kilometres travelled for the 2018/2019 year from the date the new policy was released (being 9 July 2018) up to 31 March 2019.  Note the rate prior to 9 July 2018 is 73 cents per kilometre.  However, the two-tiered rates must be used for the 2019/2020 and subsequent years.

Close Company Option

Whilst the kilometre rate method primarily applies to self-employed people, this methodology can now also be used by close companies instead of applying the FBT rules, where the only benefits provided are one or two motor vehicles made available for private use.  Please see our previous Tax Talk (insert link – November 2017) for further information on this.

The use of the kilometre rate method requires an irrevocable election on a vehicle-by-vehicle basis in the year the vehicle is first acquired or used for business purposes.  An election can also be made for vehicles used for dual purposes held at the start of the 2017/2018 year, unless the vehicle is disposed of in that year.  The election is made by calculating the deduction under this method and including it in your income tax return.

Alternatives

Reputable alternatives, such as AA rates, can continue to be used and can be favourable in some circumstances.

If you would like to know more about deductions for the business running of a motor vehicle, or exempt motor vehicle reimbursement, please contact your usual Staples Rodway advisor.

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NZ BUSINESS NUMBERS AND ADDITIONAL INFORMATION FROM 2018 YEAR

In recent times, all New Zealand companies have been allocated unique New Zealand Business Numbers (NZBN) which will be on an NZBN register.  This is separate from the Company number or IRD number.

The Companies Office are also requesting more information in the annual return, but provision of this information is currently voluntary.  This additional company information includes the following:

  • Trading Name
  • Phone Number
  • Email Address
  • Website Address
  • Industry Classification

This information will be publicly available.  It is designed to make it easier for external parties, such as customers, suppliers and government bodies to obtain more information about the business operations of the company.  The NZBN is designed with the future in mind with service offerings such as e-invoicing being made available.

Feel free to contact your Staples Rodway advisor if you would like more information about the NZBN.

payroll

PAYROLL CHANGES

Are you ready for payroll changes?

Recent legislative changes promise to significantly change how PAYE is administered.  While the changes do not start until next year, now is a good time to review your business and ensure you are ready for these changes well in advance of then.

Effective from 1 April 2019, employers who pay $50,000 or more of PAYE and employer superannuation contribution tax (ESCT) in the previous year, and all payroll intermediaries, will be required to report relevant payroll information electronically to Inland Revenue within two working days of pay day.  If you wish, you have the choice to adopt this approach right now.  There are exceptions for certain “special payments”, such as schedular payments and employee share schemes, which can be reported either on a payday basis or twice monthly.

Employers who withheld less than $50,000 of PAYE and ESCT in the previous year can still submit information on paper but are required to report relevant payroll information either within 10 working days of pay day or twice per month (the 15thand last day of the month), except for certain special payments.

All new employers can choose to file paper returns for their first six months of business but will need to file electronically after this point if they exceed the $50,000 per annum threshold.  Their payroll filing obligations will then be determined accordingly.

Other payroll changes include:

  • New employee details will be transmitted electronically to Inland Revenue.
  • New sections have been introduced to specify how errors in employment income information can be corrected.
  • Late filing penalties will be due 30 days after the end of the month for both online and non-electronic groups if PAYE information was not provided by the required due date.
  • The eligibility threshold for the payroll intermediary subsidy is lowered from $500,000 to $50,000 of PAYE and ESCT withheld annually by the employer from 1 April 2019. This subsidy will be completely removed with effect from 1 April 2020.

Despite these changes, payments of PAYE will continue to be due on the 20th of the same month and the 5th of the following month for large employers and the 20th of the following month for all other employers.

Contact your Staples Rodway advisor if you have any queries in relation to these changes.  If you have any concerns about payroll in general, Staples Rodway offers a payroll review service which can identify areas for improvement, opportunities and give you peace of mind that your business is is meeting its obligations.

money tap

CHANGES TO THIN CAPITALISATION AND NEW INTEREST LIMITATION RULES

Since 1995, New Zealand has had a thin capitalisation regime.  This can limit the interest deduction available to overseas controlled entities with high levels of debt.  The rules generally do not apply to New Zealand controlled taxpayers but can do in limited circumstances.  The rules were tightened in 2012, again in 2014 and now in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (BEPS Act).

Thin Capitalisation

Broadly, the Thin Capitalisation regime restricts interest deductions to the extent interest bearing debt exceeds 60% of the value of total assets.

Under the newly strengthened rules, when an entity is calculating its New Zealand debt percentage, it will now be required to subtract its non-debt liabilities from its total assets when determining net assets.

Non-debt liabilities are defined as all liabilities that are not counted as debt except for:

  • Certain interest free loans from shareholders
  • Provisions for dividends
  • Certain deferred tax liabilities

In addition, the rules that allow taxpayers to calculate total assets using values not reported in their financial accounts (e.g. substituting market value) have been tightened.  Therefore, these changes could significantly reduce interest deductions in some cases.

The potential positive news is that, as a concessionary measure designed to minimise compliance costs, the thin capitalisation restriction will not apply to a taxpayer where they have interest deduction of less than $1 million in a year.  For this concession to apply, however, the interest must be paid to an unrelated entity and not guaranteed by an owner or group company.  In practice most debt will be provided by an owner or a group company so the $1 million concession will not help.

Restricted Transfer Pricing

A further concern of government has been the ability for related parties to include unusual terms and conditions in loan agreements with the sole purpose of increasing the interest rate that is able to be charged.  Accordingly, with the BEPS Act, the government has also introduced new restricted transfer pricing rules.  These rules limit the ability of related parties to charge high interest rates.  There are two main mechanisms by which the government has legislated to achieve these objectives.

Credit Rating Adjustment Rules

The first of these rules are the credit rating adjustment rules.  Inland Revenue have provided a helpful flowchart in the draft guidance (link).

For the credit rating adjustment rules to apply, the entity will need to have a 50% or greater interest held by a non-resident (or more than one non-resident acting in concert), related-party cross-border lending of more than $10 million and be a high BEPS risk.

A high BEPS risk refers to situations where either the borrower has a high debt ratio (more than 40%) or the lender has a tax rate in their home country of less than 15%.

If these apply, then there are special rules to determine what credit rating can be made to set the interest rate on the loan.

Restrictions on Unusual Terms

The second of these rules relate to “unusual terms”.  Under the new rules, unusual loan terms will be ignored when determining the rate of interest charged.  At a broad level, this will include loans where the term is greater than five years, subordinated loans and exotic features, including:

  • Payment other than in money
  • Interest payment deferral beyond 12 months
  • Options which give rise to premiums on interest rates

While all the new rules discussed only come into effect for years commencing 1 July 2018, it is prudent to ensure you implement any changes necessary to the financing of your business if you wish to continue claiming interest deductions.  Contact your Staples Rodway advisor today to discuss the potential impact.

Did you find this article interesting? You can stay up to date on tax with our regular Tax Talk email updates and events.

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