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Salaries in the IRD Spotlight…
In one of the biggest tax decisions in years, the Court of Appeal has found in favour of the IRD in their case against two Christchurch surgeons. The surgeons were found to have avoided tax through use of their family trusts.
The surgeons both set up substantially trust-owned companies to buy their practices, whilst dramatically reducing their salaries. The effect was, in the Court’s judgment, to avoid paying tax in the top 39 cent tax bracket on salaries, with the rest of the income left in the business to be taxed at the 33 cent corporate rate.
Tax experts have warned that the ruling could have wide consequences, as the tax structure being used by the surgeons is very common. But it is equally worth noting that the facts of the case were key to the ruling; as Justice Randerson noted: “the…salaries were adopted at levels so far below ordinary commercial expectations that, in the absence of legitimate reasons for doing so, there is a strong implication of tax avoidance."
Key findings were:
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The quantum of the salaries were unrealistic for the size and type of business; and
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The taxpayers’ control over the salaries was high due to the correlation with their personal effort; and
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The use of the Trust structure had the effect of diverting or splitting income generated by the personal exertions of individuals, thereby reducing tax paid.
What Does this Mean for You?
If you own a business through a Trust, you should ensure that:
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Your salary is set each year with “fair market” considerations taken into account; and
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You receive up to date advice on “fair market” from your Chartered Accountant and with reference to any relevant industry information; and
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The rationale for any decision is clear, documented and defendable.
Whilst it is expected that the decision will be appealed to the Supreme Court, the IRD has signalled with this case and prior litigation that it intends to pursue taxpayers who appear to be using Trust structures in this way. Additionally, the Government has come out strongly in favour of the IRD’s audit and investigation ramp-up.
Next steps
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Contact Richard or Julie to discuss your salary-setting process and to provide advice on market norms for your size of business; and
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Access where possible benchmark industry data.
GST Increase Looming – Is Your Business Ready?
In the 2010 Budget announcement, the Government confirmed that GST will increase to 15% from 12.5%. The new rate will apply from 1 October 2010, giving businesses only three more months to prepare.
Are you ready for the change? You need to plan now otherwise you risk being caught out and incurring unnecessary costs and/or risks.
Helping you get it right
Francis Consulting has developed a GST Roadmap for clients. The Roadmap outlines the main issues which will affect the majority of businesses. However, as there are factors that may have an impact in your particular circumstances, you should considering taking specific advice for your business.
If you would like to discuss the implications of the GST rate increase for your business in more detail, please contact Julie. We can help you plan appropriately, streamline implementation and minimise risk.
Until next time,
Richard & Julie Francis
Directors
The Budget was perhaps the most significant in the last 20 years or so, with bold structural changes, realignments and an impact that will be felt by all New Zealanders. Businesses, individuals, and consumers will all have to adapt to the new 'rules' and consider how the Budget measures will change their decision-making.
Read on to learn about how the changes will impact on you...also visit our website for simple to read Tax Factsheets.
Tax Cuts for all Individual Taxpayers
Personal tax rates for all income bands are falling from 1 October 2010:
| Old Rate |
New Rate |
|
| $0 to $14,000 |
12.5% |
10.5% |
| $14,001 to $48,000 |
21.0% |
17.5% |
| $48,001 to $70,000 |
33.0% |
30.0% |
| $70,001 plus |
38.0% |
33.0% |
Virtually every New Zealander will have more cash in the pocket from their salaries, wages, Super or Benefit. To check out how the tax cuts affect you, visit the Tax Guide website.
GST Rises to 15%
GST increases from 12.5% to 15% from 1 October 2010. For most New Zealanders, the rise in GST paid on goods and services will be significantly less than the compensating tax cuts, Benefit and Super increases.
GST & System Issues
You need to ask yourself now - can our systems handle the GST rate rise? Those of you on systems like Xero will be fine as the system will be modified to take this into account, however other systems like MYOB will need to be upgraded and if you are not on a support contract then this would result in you needing to purchase an upgrade. Time for a change?
Contact Julie if you want to talk about matters relating to system and process changes required by the GST rise.
Company Tax Rates to 28%
Company tax rates are decreasing from 30% to 28% from 1 April 2011 to promote productive investment in the NZ economy. This was a significant move by the Government and puts us a step ahead of the foreshadowed Australian corporate tax rate fall to 28%.
Depreciation Changes
After budget day there is no longer a 20% uplift on depreciation rates for any new assets purchased. This means that all assets purchased regardless of whether they are second hand or brand new will be depreciated at the same rate.
One for property investors or owners of commercial property – from the 1st of April 2011 landlords and businesses are no longer able to claim depreciation on buildings which have an estimated useful life of 50 years or more.
Boost for Savers
The Government is encouraging you to save money. From 1 October 2010 most PIE income (most Kiwisaver schemes are PIE’s) will be taxed at a maximum rate of 28%. Tax on Bank interest received will be aligned with marginal tax rates.
The budget has delivered a number of significant changes for individuals and businesses - only some of which are highlighted here. If you would like to discuss any aspects of the budget or plan for how this will impact on you or your business, please contact either Julie or Richard.
Until next time,
Richard and Julie Francis
Directors, Francis Consulting
