More GST Changes...

The introduction of the LTC regime at the expense of LAQCs was sneaky enough being put through on the 20 December 2010, but what about the GST changes that came through at the same time? In many instances, they have largely gone unreported on. However, we have noted some of the changes in terms of the impact they may have on our clients.

Land
Determining Zero Rating
New legislation deems that a seller of land must zero rate the supply, if the supply wholly or partly consists of land. The seller must also insure that the purchaser gives them the following information in order for the transaction to be zero rated.

The supply is being made to another registered person
The purchaser acquires the goods with the intention of using them for making taxable supplies. The purchaser will not use the land as a principal place of residence, nor will an associate of the purchaser do the same thing. We understand the Auckland Law Society will be amending its Sale and Purchase Agreements to include the above conditions.

Transactions Involving Nominations
Nominee transactions normally involve a purchaser nominating another person to receive goods and services to settle the Transaction. Typically, on a sale and purchase agreement the following may have been added “Joe Smith and or Nominee”.

Under the new legislation, the GST treatment will depend upon an economic substance, which means the GST treatment will depend on which party provides payment for the supply of goods or services. In respect of transactions involving land however, the supply will always be treated as being made by the supplier to the nominee.

Land Being Purchased For Taxable Supplies But With Private Element
This typically would represent a farming type scenario where provision needs to be made for a dwelling and curtledge. In these situations, the supply will be zero rated in its entirety and the purchaser will be liable to account for the output tax on the land not used for a taxable purpose under the new apportionment rules.

New Apportionment Rules
Under the new rules, a person must estimate on acquisition how they intend to use the goods and services that have a private use and chose a determination method that gives a fair and reasonable result. This may include previous experience, business plans, valuations or some other suitable method. However, often there will be different private use particularly in the nature of a motor vehicle, hence the introduction of “Adjustment Periods”. The default method for adjustments reverts to a 3 tier system

$5,001 to $10,000 Two adjustments
$10,001 to $500,000 Five adjustments
$500,001 or more Ten adjustments

If the percentage actual use of goods or services differs from the percentage intended use or previous actual use, then an adjustment will need to ne made if the amount is more than 10.00% of the monetary value or more than $1,000.00. so working through an example:

Peter acquires a luxury boat for $500,000 plus GST. On acquisition, Peter estimated that the boat would be used 100% for chartering (taxable purpose) and claimed the full input tax deduction however, in later periods Peter used the boat partly for private purposes.

Because the boat was purchased for $500,000 (not $500,001), there are only five adjustment periods – refer above; so

In first adjustment period, boat used 100.0% for taxable purposes
In second adjustment period, boat used for 80% taxable purposes
In third adjustment period, boat used for 83% taxable purposes
In fourth adjustment period,boat used for 45% taxable purposes
In fifth adjustment period, boat used for 90$ taxable purposes
The first adjustment period is 6 months and the remainder 12 Months; so

First adjustment period
Intended use 100.0%
Actual use 100.0%
No adjustment required

Second adjustment period
Previous actual use 100.0%
Percentage used 86.6%

Percentage use for 2 periods
(100%*6/18)+(80%*12/18)=86.6%
In this calculation the figures 6 and 12 represent the months of the first and second installment, while 18 represents the number of months since the acquisition. The difference from period 1 to period 2 is more than 10.0%, so an adjustment must be made.

Third adjustment period
Previous actual use 86.6%
Percentage used 85.2%

Percentage used for 3 periods
(100%*6/30)+(80%*12/30)+(83%*12/30) = 85.2%
The difference form period 2 to period 3 is less than 10% at 1.4% but this represents a difference of $1,050 which is greater than $1,000, so an adjustment must be made

Fourth adjustment period
Previous actual use 85.2%
Percentage used 73.7%

Percentage used for 4 periods
(100%*6/42)+(80%*12/42)+(83%*12/42)+(45%*12/42) = 73.7%
The difference from period 3 to period 4 is more than 10.0%, so an adjustment must be made.

Fifth adjustment period
Previous actual use 73.7%
Percentage actual use 77.3%

Percentage used for 5 periods
(100%*6/54)+(80%*12/54)+(83%*12/54)+(45%*12/54)+(90%*12/54) = 77.3%
While the variance is only 3.6%, the difference is $2,700, which is greater than $1,000, so an adjustment must be made.

Summary
So some subtle changes but changes with significant impact on cash flow. The new adjustment rules will apply to cars (likely most effected) from 1 April 2011, so if looking to make a change talk to us first.

Look Through Companies (LTC) - They are Getting Closer!

Last week we looked at the options to carry losses forward and in particular we focussed on LTCs and what defined effective an owner's interest. This week, we will continue our look at LTC's looking at the eligibility criteria, ownership rules, classes of shares and the tax status to become a look through Company.

Eligibility Criteria
For a company to be able to be a LTC, it must have the following criteria:

- Be a resident company in New Zealand.
- In terms of a double tax agreement, the Company can't be defined as a non resident taxpayer ie NZ company based in Australia.
- Has to have five or less owners - spouses are counted as one owner.
- Has only shares that are part of the look through interests.

Ownership Rules
Shareholders of a LTC are known as owners and can be either individuals or trusts
We introduce a new term here and that is "Look Through Counted Owner". This term only applies when determining the count test (number of shareholders) and should not be used as interchangeable with the term owner or shareholder.

The definition of an individual shareholder is extended to beyond spouses and encompasses individuals who are related by the second degree of blood relationship. So Mum, Dad, two daughters and two sons will all count as one Look Through Owner.

All Trustees of a shareholding Trust are counted as one Look Through Owner.

Classes of Shares
A LTC must have only one class of share and all shares must have the same rights to vote:
- regarding distribuions
- the company constitution
- capital variation
- director appointments
- to an equal right to receive distributions of profits and net assets

Most of our companies on our client list would comply with the LTC in relation to the class of shares.

Tax Status of a LTC
For a company to remain as part of the LTC regime one it has entered, it must meet all the eligibility criteria for the whole of any income year.

If a LTC breaches this eligibility, it's Look Through Company status is lost from the first day of the income year in which the breach occurs. So, if there is a breach in equality on 28 February 2012, then the LTC status will be revoked right back to 1 April 2011 and it will be precluded from entering the status for the next two income years.

Next week we look at a Loss Limitation example.

Busy Bee Admin

We would like to announce that Walsh & Associates now has a sister company called Busy Bee Admin Limited (BBA).

BBA was set up to provide help and support for businesses saving you time and money so you can do the things you do best. All BBA support staff have experience and knowledge in all accounting software such as Xero, MYOB, QuickBooks and Bank Link.

BBA provide affordable and cost effective business solutions:
• preparation and filing of GST returns
• debtors and creditors / accounts payable and/or receivable
• general ledger maintenance
• financial reporting
• company formations/registrations
• bank reconciliations / transaction coding
• debtor management
• MYOB | Xero | QuickBooks | BankLink

So if you, or any other business (who may not necessarily be a client of ours) needs assistance in any of these areas please contact Sarah or Teresa - 0800 287 933 | info@busybeeadmin.co.nz | www.supportsolutions.co.nz

QCs & LTCs - What you need to Know - Part 1

Happy New Year from us all at Walsh & Associates, and we hope that each and every one of you has a prosperous and rewarding 2011 year.

We are excited by the year ahead; there will be lots of changes for us as a practice and challenges to all our wider business networks. Of significance is the tax changes planned last year that take effect from the 1 April 2011.

The Demise of the LAQC Company

There are a number of changes in this legislation. Rather than try and discuss all the points in one newsletter, we will do what we did with GST last year and cover the main points in a series of newsletters with a question and answer evening to be held in early March 2011.

From the 1st April this year, LAQC (Loss Attributing Qualifying Companies) will no longer be able to attribute losses. In essence, they will become normal companies for tax purposes. So if there is no need to access losses, remembering that as from the 1 April 2011, depreciation on buildings can no longer be claimed, then by doing nothing, we automatically assume the default position and become that normal company as mentioned earlier.

Great, But I Still Want Access to my Losses

So if you believe that continued access to losses is needed, we have three options:
• A new Look - Through Company (LTC)
• A Partnership
• Sole Trader

We will cover aspects of a partnership and a sole trader later but in the interim we will focus our discussion on LTCs.

LTCs are a new creature of statute – Tax Statute. For Company Law purposes it differs from no other Company, in that it retains all the existing rules and benefits of being registered under Company Law. So Changing from a QC / LAQC to a LTC requires no new entities to be set up.

Okay, So if I have an LTC, What Does That Mean For Me?

The key element in the taxation of LTCs, is that the Company’s income, expenses, gains and losses are passed through to its shareholders in accordance with each owners effective interest in the Company. So what does effective interest mean?

In summary, it means Investments – Distribution + Income – Deductions – Disallowed Amount. Yes, we have switched to a bit of “accounting talk” here and you may need some help in making this decision, so please don’t hesitate to contact us. However, in essence, the formula is explained as follows:

Investments
• Equity, goods or assets introduced by the shareholder on behalf of the LTC eg a Holden Ute
• Loans made by the shareholder to the LTC, for the LTC to purchase an asset
• Share of the LTC guaranteed debt by the shareholder.

Distributions
This will include dividends made by the LTC to its shareholders.

Income/Deductions
Easier to understand as one, as together it represents Income less Deductions, which as we know equates back to Net Profit.

Disallowed Amounts
Any investment, you as a shareholder makes within 60 days of the LTC balance date, unless the investment is less than $10,000.

Okay, that’s enough to digest in the first week about LTCs. Next week we will talk about LTCs in relation to their rules, ownership requirements, classes of shares and the tax status as an LTC.