LARGE ENTERPRISES UPDATE Inland Revenue s corporate update

LARGE ENTERPRISES UPDATE Inland Revenue s corporate update Issue No 19 May 2012 IR 785 Deducting ESCT from your employer cash contributions From 1 April, you must deduct ESCT (employer superannuation contribution tax) from any employer cash contributions you make to your employees KiwiSaver schemes, complying funds or other superannuation funds. Depending on your employees employment agreements you can deduct ESCT from either the gross or the net employer cash contributions. The employment agreement you have with your employees will determine whether you can deduct ESCT from your employer cash contributions or deduct it on top of your employer cash contributions. In most cases you ll be able to deduct ESCT from your employer cash contributions. There are two ways to calculate ESCT using your employee s ESCT rate. You can calculate ESCT from the: 1. gross employer cash contribution if you re deducting ESCT from your employer cash contributions 2. net employer cash contribution if you re deducting ESCT on top of your employer cash contributions. Remember, you need to calculate ESCT using the ESCT rate unless your employee has asked (and you ve agreed) to include your employer cash contributions with their salary or wages and then deduct PAYE from the total. The ESCT rates are given below. Income range ESCT rate $0 $16,800 10.5% $16,801 $57,600 17.5% $57,601 $84,000 30% $84,001 and over 33% For more information about the changes to ESCT see www.ird.govt.nz (keywords: Budget 2011). You can also go to www.ird.govt.nz (keywords: PAYE calculator) to calculate the net or gross salary or wage details. Calculating ESCT from the gross employer cash contribution To calculate ESCT from the gross amount you need to: 1. calculate your KiwiSaver scheme, complying fund or superannuation scheme employer cash contribution 2. deduct ESCT from your employer cash contribution. You need to round your employer cash contribution down to the nearest whole dollar. (continued on next page) Welcome to Large Enterprises Update In this issue: Deducting ESCT from your employer cash contributions, tips for GST and EDF, get faster refunds with direct credit to your bank, leaky buildings and GST, important information for investors in Guinness Peat Group plc, student loan changes from 1 April 2012, filing the correct FBT return, tax treatment of shares following Telecom demerger, calculating voting interests for companies, interest calculation error for some non-resident companies, changes to the livestock valuation election rules, due date falling on weekend or public holiday. If you have any suggestions for topics you d like covered in this newsletter, email us at LargeEnterprises.Update@ird.govt.nz REMINDERS 7 May: GST returns and payments are due for March 2012 period. Note Box 9 on the return can only be a debit entry and box 13 a credit entry. 31 May due date for: FBT IR 420 for quarter ending 31 March 2012 and annual IR 422 and payment IPS IR 15S and certificates RWT IR 17S and certificates NRWT IR 67S and certificates. 30 June: Annual reconciliation return (IR 853) and Investor certificates (IR 854) due for portfolio investment entities (PIEs) with an early or 31 March balance date. As this is a weekend you have until Monday 2 July to file. 1

(continued from previous page) Example Rachel is an employee of Red Bottle Ltd and is a KiwiSaver member. Her employment agreement includes Red Bottle Ltd making a gross 2% employer cash contribution to her KiwiSaver scheme. Rachel is paid $660 a week. She uses the M tax code and doesn t have a student loan or pay child support. Rachel s yearly income is $34,320. This is between $16,801 and $57,600 so her ESCT rate is 17.5%. Rachel s wage details Gross KiwiSaver employer cash contribution (2% of $660) Less ESCT @ 17.5% ($13.00 17.5%) The total ESCT for all employees for the month goes on your IR 345. Net KiwiSaver employer cash contribution This goes on your IR 348 with Rachel s other wage details for the month. $13.20 $2.27 $10.93 Calculating ESCT from the net employer cash contribution If you want the total employer cash contribution paid into your employee s KiwiSaver scheme you will need to gross-up the employer cash contribution to calculate the ESCT amount payable. To calculate ESCT from the net employer cash contribution you need to: 1. work out your employer contribution and the ESCT rate for your employee 2. calculate ESCT using the formula: ESCT = a (1 a) b, where a = ESCT rate and b = employer contribution. You need to round your employer cash contribution down to the nearest whole dollar. Example If Rachel s employment agreement included a net employer cash contribution of $13.20 per pay to her KiwiSaver scheme, Red Bottle Ltd would need to calculate how much ESCT to pay on top of its employer cash contribution. Rachel s wage details Net KiwiSaver employer cash contribution $13.20 This goes on your IR 348 with Rachel s other wage details for the month. ESCT rate 17.5% ESCT = 17.5% (1 17.5%) $13.00 = 0.175 0.825 13.00 = $2.75 The total ESCT for all employees for the month goes on your IR 345. Gross KiwiSaver employer cash contribution $15.95 Tips for GST and EDF (employer deduction form) The following tips may save you some time when filing your GST and EDF. GST refunds You don t need to send invoices or supporting documents with your GST refund requests. If you re filing online, please use the drop-down box to give us additional details. We ll request further details from you if we need them. Employer deduction forms If you re required to send employer deductions on a twice monthly basis, please ensure each IR 345/EDF has the correct figures. The first IR 345/EDF covers the first 15 days of the month and is due by the 20th of the same month. The second one is for the 16th to the last day of the month and is due by the 5th of the following month. A common mistake is putting the same figure from your EMS on your second EDF. This means you will return the full not the second half of the month s deductions, which then creates payment allocation and account balance problems. Get faster refunds with direct credit to your bank Did you know you can get your refund faster if you direct credit to your bank account rather than waiting for us to post you a cheque? To set this up, send us your completed Direct credit authorisation (IR 587) form. You can complete the form online then print, sign and post it to us (the address details are on the form). You can also email or fax these details to your account manager if you have one. You ll find the IR 587 at www.ird.govt.nz under Forms and guides. When we receive your completed form we ll update your bank account to the tax types you ve requested. If you only have one bank account we suggest you tick the box for All. Remember to tell us if your bank account details change, so you always get refunds you re entitled to. If you receive an incorrect refund you have 15 days to return it to us. Please repay the exact amount to the correct tax type and period it came from and phone us on 0800 443 773, or call your account manager, so corrective action can be taken. LARGE ENTERPRISES UPDATE Issue No 19 May 2012 2

Leaky buildings and GST We ve been asked about the GST treatment of compensation payments received for a leaky building. Our Tax Information Bulletin Vol 14, No 10 (October 2002) explains the basic principles that govern compensatory damages and the GST treatment of any payments awarded. Leaky building compensation payments aren t subject to GST and the payer isn t entitled to an input tax credit. They are GST neutral. This also applies to out-of-court settlements for compensation on a leaky building. Read the full interpretation statement IS3387 GST treatment of court awards and out of court settlements at www.ird.govt.nz (keyword: IS3387). Important information for investors in Guinness Peat Group plc From the beginning of the 2012 13 income year (generally 1 April), the tax treatment of shares held in Guinness Peat Group plc may change. Portfolio investments in offshore companies (including foreign unit trusts, superannuation schemes and life insurance policies) are generally taxed under the foreign investment fund (FIF) rules. However, there are some exceptions to these rules. One of these exceptions is a five-year temporary exemption for investments in offshore companies with a significant New Zealand shareholder base. This exemption was introduced with the new FIF rules in 2007 to allow time for companies to consider moving their place of incorporation to New Zealand in line with the controlled foreign company rules. The only company that met the relevant criteria was Guinness Peat Group plc. This five-year exemption will expire at the beginning of the 2012 13 income year, which may mean shares in Guinness Peat Group plc will be taxed under the FIF rules. This will be the case if all the shares you have in offshore companies (including Guinness Peat Group plc) had an original cost of more than $50,000, or the holder isn t a natural person or a trustee of an eligible trust. The ways to calculate your income under the FIF rules are described at www.ird.govt.nz (keywords: FIF calculation). If the cost of shares in offshore companies was less than $50,000 and the holder is a natural person or a trustee of an eligible trust, the tax treatment of these shares won t change. Note: The cost or amount of a share can be modified in certain circumstances for the purposes of determining whether you meet the $50,000 threshold. This is explained at www.ird.govt.nz (keywords: FIF glossary). Student loan changes from 1 April 2012 Changes to student loans from 1 April 2012 will help improve the way student loans are managed, repaid and administered. Adding SL to the tax code From 1 April 2012, all student loan borrowers must add SL to their tax code if they have a student loan, unless they have a repayment deduction exemption or use a CAE, EDW or WT tax code. Pay-period repayment obligations Employers will still make student loan deductions from their employee s pay when they earn over the pay-period repayment threshold, currently $367 weekly. However, from 1 April 2012 these repayments are now considered as meeting the borrower s repayment obligation for that pay period, unless there s a significant over- or under-deduction. Employers must ensure their deductions are correct and properly identified on their employer monthly schedule (EMS). Significant under-deductions If the correct student loan deductions aren t made on an employee s salary or wage, they may be paying significantly under what they re required to pay. We may contact both the employee and the employer and ask for compulsory additional deductions on top of the standard deductions to recover the amount. This needs to be identified separately on the EMS using the new SLCIR repayment code. Repayment exemption for full-time students An employee may not have to make student loan repayments if they re studying full-time and expect to earn less than $19,084 (the annual repayment threshold) in the tax year. They will need to give their employer a certificate authorising their repayment deduction exemption. They won t have to use an SL repayment code and have student loan deductions while they have this. When the exemption ends, the employer must add back SL to their employee s tax code. This will ensure the correct student loan deductions are made without significant under- or over-deductions. Reduced deductions for secondary earnings There are new rules for getting a special rate for student loan deductions. If an employee gives the employer a special deduction rate certificate, student loan deductions must be made at the rate specified for the period stated. Additional repayments through salary or wages Employers who are asked to, or already make, voluntary extra student loan deductions by their employee, must identify this extra deduction on the EMS separately using the new SLBOR repayment code. We recognise these voluntary extra deductions when processing the EMS and will include them in the employee s voluntary repayment bonus calculation. For more information on what student loan changes mean for employers, go to www.ird.govt.nz (keyword: tax codes payroll). LARGE ENTERPRISES UPDATE Issue No 19 May 2012 3

Filing the correct FBT return If you re responsible for filing multiple FBT returns it may be a good time to check that the correct return is being prepared. If your organisation is an employer (this includes companies) you could file quarterly, annually or for the income year. For quarterly filers a Fringe benefit tax quarterly return (IR 420) must be completed unless you re a company with shareholder-employees or you ve elected to file your FBT annually. Filing due dates for quarterly returns are shown below. Quarter Period Return due 1st 1 April to 30 June 20 July 2nd 1 July to 30 September 20 October 3rd 1 October to 31 December 20 January Final 1 January to 31 March 31 May If you file annually for the period 1 April to 31 March each year, then complete the Fringe benefit ordinary employee annual tax return (IR 422). To file by income year, companies with shareholderemployees should file a Fringe benefit shareholder/ employee income year return (IR 421). To be eligible for income or annual returns your annual gross PAYE plus ESCT must be less than $500,000 for yourself or your group if the group provisions apply. Filing an incorrect return may delay processing and unnecessary letters may be sent to you. If you re not sure which return to file, please call us on 0800 443 773. We can then tell you which return to use, when it s due and, if necessary, issue a return. Elections to change your filing type must be made by 30 June 2012 for the year ended 31 March 2013. We can t accept late elections. If you d like to change the basis on which you file and pay FBT, please complete the online Fringe benefit tax election form at www.ird.govt.nz (keywords: FBT election), or send us a letter or secure email. Please note the quarterly option is not available online. If you have the DLN number (the 14-character number computer-printed at the top of the page) from your paper return you can complete these forms online using our efbt service. If you don t have the DLN number call us on 0800 443 553. The online forms can be found at www.ird.govt.nz Get it done online (look for Fringe benefit tax (FBT) ). The FBT income year return and payment are due each year on 7 April for clients of agents with a 31 March balance date (or 7 February if you don t have an agent). The income year return and payment are aligned with your balance date and are due when your end-of-year income tax is payable. For annual return filers the return and payment are due on 31 May each year. Tax treatment of shares following Telecom demerger We ve been asked to provide information about the market values of Telecom and Chorus shares to be used in the formula to calculate the price a person will be treated as having paid for the shares following the Telecom demerger. The demerger resulted in Telecom shareholders receiving one Chorus share for every five Telecom shares held at the date of the demerger. The percentage portion of Telecom shares to Chorus shares immediately following the demerger was 75.17% to 24.83%. Product Ruling BR Prd 11/05 published in Tax Information Bulletin Vol 23, No 9 (November 2011), sets out the statutory formula calculating the amount a holder of Telecom shares will be treated as having paid for the Telecom and Chorus shares following the demerger of Telecom: pre-calculation amount paid individual MV combined MV The pre-calculation amount paid is the amount of a person s expenditure or loss incurred in acquiring their Telecom shares held at the date of the demerger. The individual MV (market value) for Telecom shares is calculated as the number of Telecom shares on issue times the volume-weighted average price: 1,925,409,580 $1.9870 = $3,825,788,835 The individual MV for Chorus is calculated as the number of Chorus shares on issue times the volumeweighted average price: 385,082,123 $3.2816 = $1,263,685,495 The combined MV is: $3,825,788,835 + $1,263,685,495 = $5,089,474,330 The price that a person will be treated as having paid for Telecom shares will be: pre-calculation amount paid 3,825,788,835 5,089,474,330 This simplifies to pre-calculation amount paid 0.7517. The price that a person will be treated as having paid for Chorus shares will be: pre-calculation amount paid 1,263,685,495 5,089,474,330 This simplifies to pre-calculation amount paid 0.2483. For example, if a person paid $600 for Telecom shares purchased before the demerger, they ll be treated as having paid the following amounts for the original Telecom shares and the Chorus shares acquired on the demerger. For the original Telecom shares: $600 0.7517 = $451.02 For the Chorus shares acquired: $600 0.2483 = $148.98 LARGE ENTERPRISES UPDATE Issue No 19 May 2012 4

Calculating voting interests for companies Many large enterprises company clients have several classes of equity on issue. We ve found that some clients with different classes of equity may miscalculate the voting interests of shareholders. Voting interests need to be calculated in a variety of circumstances, such as when: checking whether losses or imputation credits can be carried forward establishing whether two companies are associated. Broadly, a shareholder s voting interest is measured as their share of the shareholder decision-making rights in a company. Shareholder decision-making rights mean a right to vote on four issues: 1. Dividends 2. Constitution of the company 3. Variation in capital of the company 4. Appointment of a director. The right to receive dividends attached to shares doesn t constitute shareholder decision-making rights on dividends. The holder of the shares must have the right to vote on matters related to dividends. The basic formula for calculating a shareholder s voting interest is: Voting interest = % dividend + % constitution + % capital + % director 100 + 100 + 100 + 100 The formula averages out the rights to vote on the four matters. If no voting rights exist for a particular matter the formula is adjusted to remove that item from the averaging. For example, if no shareholder in the company had the right to vote on dividend matters the formula would be: Voting interest = % constitution + % capital + % director 100 + 100 + 100 Typical mistakes companies make when calculating voting interests include: assuming all equity classes carry equal voting rights failing to include extra rights that a particular class of equity might have. For example, a particular class of equity might give the holder 50% of the shareholder decision-making rights on matters related to the constitution of the company, director appointment and capital variation, but 75% of the voting rights on dividend matters. This would increase the voting interest of the shareholder not adjusting the voting interest formula when no rights on a particular shareholder decision-making right exist. Interest calculation error for some nonresident companies All non-resident contractor companies, non-resident entertainer companies and agents for foreign insurers with balance dates between October and February will have incorrect use-of-money interest (UOMI) calculations. This is because of a system miscalculation at our end. End-of-year tax for a company that doesn t have a fixed establishment in New Zealand and isn t considered to be resident in New Zealand is due and payable on: 7 February in the next income year, or 7 April if the company is linked to a tax agent. If you re affected, please call Large Enterprises on 0800 443 773 and we ll put a hold on the account and arrange a correction. Unfortunately this will take several weeks we thank you for your patience. Changes to the livestock valuation election rules On 28 March 2012, changes to the livestock valuation election rules were announced. The Government has changed the rules so that those who elect to use the herd scheme can t change to the alternative national standard cost scheme, except in limited circumstances. The potential change was flagged in Budget 2011 last May and in an 18 August 2011 officials issues paper. The change follows consultation between tax officials, farmers and their advisers on options for tightening the rules. The new rules will take effect immediately, cancelling the ability of farmers to switch schemes for the 2012 13 income year, effective for elections made from 18 August 2011. There is no effect on tax payments that have already been made. For more information see the Election to exit the herd scheme factsheet at www.taxpolicy.ird.govt.nz Publications, March 2012. Due date falling on weekend or public holiday If a due date falls on a weekend or public holiday, the date moves to the next working day. Your return or payment will also be treated as being on time if it s postmarked on the next working day. To find more about when a payment is deemed to be received on time go to www.ird.govt.nz (keyword: SPS 07/01). Large Enterprises Update comments generally on topical tax issues relevant to large enterprises. Every attempt is made to ensure the law is correctly interpreted, but articles are intended as a brief overview only. The examples provided are not intended to cover every possible factual situation. Email: LargeEnterprises.Update@ird.govt.nz www.ird.govt.nz LARGE ENTERPRISES UPDATE Issue No 19 May 2012 5