The quarterly round up - December 2016
TRUSTEES NEED TO MINUTE THEIR DECISIONS
If you have a family trust, be fussy about recording trustees’ decisions. One problem that arises is taking money out of the trust for your own use.
This can be:
A reduction of money owing to you
A distribution of some of the trust income
A payment out of the capital of the trust
Reimbursement for trust expenses paid by you
A beneficiary loan
It’s important to clarify these withdrawals. This is done by means of a trustee minute.If there could be any doubt about the reason for a transaction, be sure to prepare a trustee minute and make sure all trustees sign it before it is actioned.
SOME CONTRACTORS NOW ABLE TO CHOOSE THEIR OWN TAX RATE
From 1 April 2017, the Government is proposing to allow contractors whose income is subject to withholding tax deductions, to choose their own tax rates.Those who have typically been over-taxed might want to choose a lower rate. The minimum for New Zealand residents has been set at 10%. Others, who have a lot of year-end tax, might be more comfortable having higher deductions.
The maximum number of times you will be entitled to change your rate during the year is twice. After that, the payer will have to agree to your request to make the change.
If you haven’t been complying with your tax obligations, you might not be allowed to choose your own tax rate.
Do you contract yourself to a Labour Hire Firm...?
If you contract to a firm hiring labour, from 1 April 2017, the withholding tax deducted from your income will be at the rate of 20%. This will mess up your provisional tax payments from 28 August 2017 and the next two payments. Even if you are trading as a company, you will still have withholding tax deductions from income. You will be allowed to choose your own rate so long as it’s not less than 10% – see above.
Voluntary withholding agreements
SOME contractors don’t have to have withholding tax deducted from their income. As a consequence, they have substantial provisional tax liabilities. Some people prefer to have some tax deducted as they go. It’s proposed that from 1 April 2017 they will be entitled to require the payer to deduct withholding tax at a rate they choose, so long as it’s at least 10%.
DON’T GRAB ALL THE MONEY
If you sell your business, which you run through a company, the money does not belong to you. It belongs to the company.
You can only take it out if you are entitled to do so. If there is money owing to you, according to the balance sheet of the company, then that money can be paid out. However, any
more than this becomes a loan to you or may even be an illegal distribution.
A problem often arises when a business is sold. The seller gets paid for “goodwill”. This is the value of the customers who have been built up over the years. It is a payment for the potential to get a higher income. The sale of goodwill in excess of what was paid for it (if anything) is usually a capital gain. This capital belongs to the company.
You can get it out if your company happens to be a Look-Through company or one of those old qualifying companies. Otherwise, it must stay there until the company is wound up. If you take the cash out prematurely it has to be treated as a loan from the company to you. There are tax consequences as a result. If you want the capital gain paid out to you, without tax consequences, you must first have a signed special resolution of shareholders resolving to wind up the company.
Please contact us to discuss before taking the money out and we will navigate you through these issues.
NEW RULES FOR MILEAGE RATES
There is currently a bill before Parliament which has a section dealing with tax deductions based on mileage.
We won’t bore you with the new proposed calculations, the most important thing for our clients to note is that the Government plans to bring in these new rules from 1 April 2017. This new system provides a more accurate way of calculating mileage, but it is going to add to the amount of record-keeping. You’re going to need to tell us the total number of kilometres you travel in each year.
Therefore, please start now. Get a logbook and get into the habit of noting down your busines vs personal usage. Make a diary note to record your odometer reading when you finish work on 31 March 2017. Then make another diary note to do the same on 31 March 2018 and so on. If you change vehicles, you’ll need to get your odometer reading before you trade in your old
vehicle and then make a note of the reading on the new vehicle. We hope you’ve got a good memory for this.