McLEAN AND CO. Chartered Accountants

Accounting          Taxation         Business Advice and Development Assistance           Audits                             

 P.O. Box 10 , Clive         133 Main Rd, Clive           Tel. (06) 8700952          Fax. (06) 8700955 

Email murray@mcleanandco.co.nz                                  Website www.mcleanandco.co.nz

 
 
EMAIL NEWSLETTER  NOVEMBER 2009
 
 

Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. We trust you find it informative.  

 

NEW CLIENTS

We are happy to accept new clients.  We would be happy to assist colleagues and acquaintances as new clients.

 

INDEX

  1. New Tainting Rules

  2. Trustees Duties

  3. Changes to Tax for Volunteer Payments

 

 

NEW TAINTING RULES

New tainting  rules apply to land acquired on or after 6 October 2009 and in certain instances to improvements made to buildings after that date.  

In the context of land transactions, up until now, it has been possible to arrange your affairs so that if you wanted to carry out property dealing / development or building activity you could separate this from your investment properties and prevent the former from tainting the latter.  The IRD have long seen this as a weakness in the legislation and a loophole and for the last couple of years have been pushing for reforms to be enacted.  The end result is that there is a new series of associated persons tests that are extremely comprehensive. 

They include new tests that associate two Trusts, new wider tests to associate two companies and companies to shareholders and a tripartite test whereby two parties can be deemed to be associated, even though not directly associated to each other, but where they have a common party to which they are both associated.  Where a property is tainted, a gain that otherwise would not be subject to income tax, is subject to income tax if sale occurs within 10 years of acquisition (or in some instances within 10 years of completion of improvements).

The new association rules are so comprehensive that if you are engaged in the business of property dealing or development and you wish to acquire an investment property post 6 October 2009 it is highly likely that the property will be tainted.  In fact the rules are designed to be so comprehensive that it is likely that the IRD would view any attempt to structure around them as tax avoidance.  

Another aspect of tainting that taxpayers need to bear in mind is that the association to the property dealer or developer has to exist on the day that the investment property (that you do not wish to be tainted) is acquired.  Taxpayers who cease their property dealing and development activity no longer have a tainting issue and can then acquire rental property free of tainting risk.  This means if you have entities that have been involved in these types of business in the past, you should consider winding them up to cease any tainting risk. 

It should be recognised  that even under the new comprehensive association rules, the 10 year test still applies. This means in a worst case scenario where a property is acquired and tainted as a result of association to a property dealer or developer you can still break the tax impact of tainting by holding the property for 10 years.  As a technical point you should note that if you are in the business of erecting buildings then tainting only applies if you make improvements to the rental property, but then applies to sale within 10 years of completing the improvements.

 

TRUSTEES DUTIES

 

 

The duties of a trustee need not be onerous,     but   a failure to carry out those duties may, in a worst case scenario, result in a claim against you by a beneficiary who has suffered a loss as a result of your actions or omissions.

If you have consented to act as a trustee for a friend or family member without really understanding what that role entails - the list below, while not exhaustive, sets out some of the most important trustee duties.

 

The Duty of Efficient Management

·   Whether you are an original, substitute or additional trustee you must first become familiar with and abide by the terms and conditions of the Trust Deed.

·   Know the extent of the assets and liabilities of the trust and make sure that these are properly held in the name of the trustees.

·   Ensure that the trust is managed and administered properly and that the trustees meet to discuss and agree on issues. Do not be a rubber stamp of the settlor’s wishes. Take minutes of these meetings and record all resolutions.

·   Make sure that the administration costs of the trust are kept to reasonable levels.

The Duty to Keep and Render Accounts to Beneficiaries

·   Make sure that a clear audit and paper trail is kept of all decisions and transactions. This will involve secure storage of the trust deed, minutes of meetings and resolutions, financial accounts, correspondence and other trust documents.

·   If the beneficiaries request information, the trustees have a duty to make certain information available, such as the trust deed, financial statements and investment strategies.

 

The Duty to Act Personally

·   Carry out your trustee duties personally.

·   You may instruct an agent to carry out your decisions but you must make your own decisions and not be dictated to by other trustees, the settlors or beneficiaries.

·   Trustee resolutions must be unanimous.

 

The Duty of Loyalty

·   Always act in the best interests of both present and future beneficiaries and be impartial between beneficiaries.

·   Avoid conflicts of interest.

·   Do not benefit or profit from your position as trustee unless authorised to do so.

·   You must always protect the interests of the beneficiaries.

In all things, a trustee’s standard of care is measured against that of an ordinary prudent business person managing the affairs of others. Of course a higher standard is required if the trustee is a professional person such as a lawyer or accountant.  

The management of trusts often come under scrutiny and all of the benefits of having a trust may be lost if the trust records and procedures do not meet the required standard. It is therefore important to keep a clear audit and paper trail and to bear the above trustee duties in mind. It is also important to insist that you, as a trustee, are kept up to date with all of the trust’s affairs.

 

CHANGES TO TAX FOR VOLUNTEER PAYMENTS

New legislation has changed the tax treatment for volunteer payments from the 2009-2010 income year.

There are two types of payments volunteers may receive: reimbursements for expenses and honoraria for services.

Reimbursements

Reimbursements for actual expenses incurred during volunteer activities are exempt income for the volunteer and are tax free. Reimbursement payments may be based on actual expenditure or a reasonable estimate of an expense likely to be incurred by a volunteer.

Honoraria

Honoraria are payments made for services provided. They are schedular payments. Therefore PAYE rules apply to the payment and these payments are taxed.

Combination honoraria and reimbursement

If the payment is a combination of honoraria and reimbursement of expenses incurred, and the honoraria and the reimbursement portions are clearly identified and recorded, the honoraria will be subject to tax as a schedular payment and the reimbursement will be tax free.

If there's no distinction between the honoraria and the reimbursement then the entire payment is treated as an honorarium and subject to tax as a schedular payment.

Note

For the purpose of these rules, a volunteer is someone who freely undertakes an activity in New Zealand, chosen either by themselves or by a group of which they are a member, that benefits others without benefiting themselves.

 

 

 

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The information provided in this email newsletter is for informational purposes only.   McLean and Co. accept no responsibility for the opinions and information expressed in the information provided and it is provided "as is" without warranty of any kind.    The user assumes the entire risk as to the accuracy and use of this document.   Readers are asked to seek professional advice pertaining to their own circumstances.    The McLean and Co. email newsletter may be copied and distributed subject to the following conditions:
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