There are no major law and tax moves planned for 2012, but 1 April heralds student loan and KiwiSaver changes that employers need to be aware of. Kevin Kevany reviews these and the overall business law landscape with the experts.
So, you’ve no sooner washed out the buckets and spades and put away the after-sun, when you get that gut-grabbing feeling that there are a number of business law and tax changes due to come into effect before the suntan even fades? Many business owners know that feeling!
Recent years have been real lulus for owner-managers trying to get on top of a tranche of new laws and their attendant tax implications. The administrative – not to mention the financial – impact, plus the inevitable rumour churn, made me go to the font of all wisdom, in this case the IRD, and ask about any specific tax changes this year that will impact on SMEs.
I also called on that accomplished tax commentator and expert at the New Zealand Institute of Chartered Accountants, Craig Macalister, who was particularly keen that readers should be aware of the employer superannuation contribution tax changes which kick in immediately after Tax Year 2012 in April – involving the taxation of contributions to KiwiSaver and/or complying funds. He also provided a perspective on two other Bills which could be made into law by Parliament this year which will have a lesser impact.
“New Zealand is likely to see some belt-tightening in the tax area this year to support the revenue base; for example the proposed changes to mixed-use assets,” he says.
Chris Bradley, a partner at full-service law firm Duncan Cotterill also provided me with some background comment on law changes in specialist sectors and has some good news for people considering taking up franchises in 2012 (see sidebox).
And, if you’ve been a bad lad/lass when it comes to running up non-payments with the IRD, I’ll introduce you to an expert who specialises in helping defaulting tax payers to negotiate a way out of their immediate problems and get back into the IRD’s good books.
What’s coming up?
So let’s nail down the definite changes you can expect to have some impact on you and your business this coming year – a year which NZICA’s Macalister seems to indicate that the newly re-elected National government has pretty much done its dash on significant tax changes and is largely in tidying-up mode (the government is also looking down the line at technology to cut compliance costs both for the IRD and taxpayers, even though their technology is not really up to it!)
In April 2012 there are some significant tax changes that can impact on employers, particularly regarding student loans and employer superannuation contribution tax (ESCT). In both cases if you use a payroll package you will need to upgrade your software by 1 April 2012. Inland Revenue is working with software developer companies to amend their payroll and related products to enable these changes.
The following are the key facts so you can be prepared when the changes come into effect immediately after 31 March this year.
Student loans changes
The Government has enacted the Student Loan Scheme Act 2011 to improve the way student loans are managed, repaid and administered. While these changes are designed to make life easier for borrowers, employers must also be aware of what’s happening. An employee may have new requirements you’ll need to take into account when you do the payroll.
Here’s what you need to know. All the student loan changes described below (it needs to be emphasised) take place immediately from 1 April.
Pay period repayment obligations
Generally, borrowers must use the ‘SL’ repayment code. Borrowers earning over the pay period repayment threshold ($367 a week) must make student loan repayments. You’ll need to deduct student loan repayments from your employee’s salary or wage, as is current practice.
The standard student loan deductions made from an employee’s salary or wages are generally treated as their repayment obligation, unless there’s an over or under-deduction. Make sure your deductions are correct and properly identified on your EMS.
A full-time student may qualify for an exemption from deductions (see ‘repayment deduction exemption’, below).
Over and under-deductions
Borrowers who have significant over-deductions can ask the IRD for a refund; or they can put the extra repayments towards their loan.
If there’s a significant under-deduction, the IRD will ask the borrower and their employer to make additional deductions from the employee’s salary or wage to catch-up this under-deduction. If your employee is in this situation, he/she will tell you how much the catch-up deductions will be. Use the repayment code ‘SLCIR’ to identify these extra repayments in your employer monthly schedule.
The IRD notes the student loan system is designed to help borrowers repay their loan ‘as they go’ so please make sure you’re deducting the right amounts every payday – not too much and not too little.
Voluntary repayments A borrower wanting to pay more towards their loan can ask you to make additional deductions from their salary or wage. Identify these additional deductions in your employer monthly schedule by using the repayment code ‘SLBOR’.
Repayment deduction exemption
This will be particularly important for your temp staff. Full-time students can apply for a ‘repayment deduction exemption’ (RDE) if they expect to earn less than the annual repayment threshold ($19,084 over the coming year) even if they earn more than $367 a week from time to time.
If your employee qualifies for the exemption, they can apply for this through the IRD’s online services from March 2012. They’ll present you with the RDE certificate, authorising you to stop making student loan deductions for the period covered. Take the RDE certificate and file it with your records.
Secondary employment. Borrowers who have more than one job can apply to Inland Revenue for a ‘special deduction rate for their secondary jobs’ if they expect to earn less than the pay-period repayment threshold ($367 a week) from their main job, but their total earnings will be greater than the pay-period repayment threshold. Importantly, the IRD expects them to review their estimated earnings every quarter.
If your employee qualifies, they can apply for the reduced rate through the IRD’s online services from March. They’ll present you with the special deduction rate (SDR) certificate showing the rate of student loan deductions you’ll need to take from the employee’s salary or wage for the period covered. You must take the SDR certificate and file it with your records. If in doubt, refer to: www.ird.govt.nz/studentloans
Craig Macalister welcomes the employer superannuation contribution tax (ESCT) which kicks in on 1 April 2012 and warns SME owner/managers to budget accordingly, rather than being too focused only on the tax year-end in March.
“This could provide a nasty wake-up call for employers, depending on the size of their operation and the number of employees they have making contributions to KiwiSaver and/or ‘complying funds’. The key here is to anticipate and factor it into cashflows.
“The reason I welcome the change in legislation, in this case, is because it corrects an unfortunate anomaly which goes back to Dr Cullen’s time in office when he was unashamedly promoting KiwiSaver, in particular, and thereby skewing the market.
“This latest change brings everyone back onto a level playing field.”
These were announced in Budget 2011, so there has been adequate warning. Basically, the exemption that applied to employer superannuation contributions to previously exempt funds will be removed from 1 April. From that date, any contribution you make to your employees’ KiwiSaver scheme or a complying fund will be liable for ESCT.
The way ESCT is calculated has also changed. From 1 April, the flat rate option of 33 percent can no longer be used, unless your employer contributions are being paid to a defined benefit fund. If your contributions are not being paid to a defined benefit fund then the ESCT will need to be calculated at the employee’s marginal rate, or you can treat their employer contribution as salary or wages, and tax them through PAYE (with the agreement of the employee).
Inland Revenue will be updating the online PAYE calculator to reflect these changes. They’re currently working with payroll software providers to get the rates updated into payroll. So that’s it from the IRD for now.
Legislation in the wings
Both Duncan Cotterill’s Bradley and NZICA’s Macalister believe that it is the Bills that haven’t made it into law which tell us more about the state of the nation’s finances and the government’s focus on ‘balancing the books’ than anything else. But, as we went to press, it was probably too soon to rule these out completely.
Bradley points to the much vaunted Consumer Law Reform Bill which promised much in aligning New Zealand and Australian law in this important area, but seems to have been ‘parked’, possibly due to the RWC and the election. The lack of progress may also be due to some of the more controversial parts: unfair contract terms and unconscionability or ‘unconscientious dealings’.
“In my view that was the proper step for the Ministry to take because despite the obviously desirable aspiration of aligning us to Australian consumer laws, they recognised that the uncertainty of the provisions and the time and damage caused by the process of Courts needing to interpret the new laws to create some certainty, outweighed any benefits from having them,” says Bradley.
“There are some useful provisions remaining in the Bill, though what is left is of interest but not major reform. Note in particular the sections on auctions, which will affect real estate auctions; extended warranties; enforcement under the FTA (the Commerce Commission can put people out of business); and of some interest the CGA and auctions, which will require traders (but not individuals) to guarantee their products if sold on Trade Me.”
Macalister, who reckons New Zealand is almost inevitably the ‘jilted-and-much-promised-bride’ in all these Trans-Tasman forays, has doubts about two other bills which sought to streamline business compliance costs, particularly when it comes to the IRD’s computing power – which he describes as “a retirement home for legacy computers – some are still using COBOL”.
Macalister’s comments on the state of the IRD’s computing systems, which have long been a concern to many in the field, are particularly relevant when it comes implementing the government’s and the IRD’s intention of ‘making tax easy’ and simplifying filing.
Two Bills in particular concern him. “Simon Power promised to simplify financial reporting for SMEs and charities – the latter mainly to give the public confidence on how their money was being spent. Revenue Minister Peter Dunne’s Taxation (Annual Rates, Returns Filing, and Remedial Matters) Bill set out to simplify tax filing requirements for individuals and support businesses in handling their tax obligations electronically. Both are a long way from delivering on their promises,” he says.
“The latter is reliant on a system which the IRD will not be able to deliver on for a long while yet. And Power’s claimed reforms (which followed on from a review which found the existing framework was overly costly and not meeting users’ needs or expectations) delivered up claims the changes would reduce the number of companies required to prepare general purpose financial reporting from 460,000 to less than 10,000, and were expected to cut business compliance costs by $90 million a year.
“The reality is that most companies produce a full set of accounts to do their tax and to give banks reassurance on loans and overdrafts. So these projected changes in the form they were in last year are more philosophical and demonstrate intent – rather than day-to-day reality,” Macalister says.
Going in to bat
A man with a mission to assist taxpayers with tax arrears who have simply stuck their heads in the sand and hoped they’d go away, is Steve Dent of Tax Debt Brokers in Lower Hutt. He offers a ‘no resolution – no fee’ service.
“We are the ‘specialists’ in the area of negotiating settlements with the IRD, he says. “It is all we do. I want it to be clear that we are not out there trying to put the boot into the IRD, or for that matter any other professionals like accountants or solicitors, who might also do what we do. But it is not their ‘core’ role.
“It is true that any individual can act on behalf of another taxpayer in dealing with Inland Revenue, but appreciate this is a specialist area. I spent four years working in the IRD’s debt area – and that’s all I’m allowed to say.
“All I do is negotiate tax settlements with the IRD, on behalf of my clients. Accountants who have clients with tax debt problems come to us for advice. Obviously our client’s confidentiality is assured, and most importantly when it comes to professional fees in an area like this – those are fixed and agreed upfront, so there are no surprises,” says Dent.
He believes that the inherent fear people have of Inland Revenue leads to a shroud of rumour which inhibits satisfactory outcomes for many.
“There is just so much nonsense and ill-informed comment, I’m constantly amazed and some of that even comes from the professions; individuals who truly have no real experience in these matters. Like, ‘tax debts cannot be negotiated’ or ‘people with tax debts have no rights’ or ‘the IRD won’t pursue legal action if they can get more money in an arrangement’.
“Wrong, wrong. Tax debt can be negotiated, unless it involves periods that include shortfall penalties for tax evasion or a similar act. And every taxpayer has the right for their affairs to be treated lawfully, impartially, fairly and in a confidential manner.
“The last one is the most ignorant and outrageous, yet I believe many people in trouble over a long period are constantly misled by that. These are the facts: if a taxpayer cannot demonstrate an ongoing payment of ‘current’ taxes, generally, only full payment of the arrears will prevent legal action.”
Dent believes that in so many instances these false rumours come from people who are not properly informed, and that increases the risk of an unfair tax settlement.
“Here are some real facts to bear in mind:
• Not filing a tax return by the due date is a criminal offence. In addition to a criminal conviction, the court may impose a fine, up to a maximum $12,000 for each return. Importantly, this action does not absolve the responsibility – the return must still be filed!
• Not paying an employee’s tax by the due date is also a criminal offence. In addition to a criminal conviction, the court may impose a fine of up to $50,000 and/or up to five years imprisonment.
• Any unpaid tax amount is automatically subject to Use of Money Interest at a current rate of 8.89 percent per annum. This is also compounding.
• The IRD can impose Shortfall Penalties ranging from 20 percent to 150 percent of the resulting tax shortfall.
“And that’s not all,” he says. You have been warned!
Kevin Kevany is an Auckland-based freelance writer. Email email@example.com