Client Newsletter [February / March 2017]
Where there is a common shareholding of 66% or more between two companies, the tax loss of one company can be offset against the profits of the other company for tax purposes.
More commonly, however, the preferred option for offsetting the loss is for the profit company to make a subvention payment to the loss company. A subvention payment is where the profit-making company makes a payment to the loss-making company. The profit-making company reduces their profit by the amount of the payment while the loss-making company reduces their loss by the equivalent amount. This is because loss offsets lead to a situation where the loss company ends up having retained losses carried forward in the financial accounts with no tax losses and the profit company having retained earnings with no imputation credits. Also, if the loss company makes a profit in subsequent years, it would have imputation credits with no retained earnings to attach them with.
It has been proposed that from the 2018 income year, the imputation credits of the loss company be allowed to transfer to the profit company (which has unimputed retained earnings). However, as expected, there are restrictions on such transfers including:
|•||A four year time limit|
|•||Matching of the profit set off in the profit company|
|•||Only when the loss company pays a dividend [on the subsequent profit]|
|•||Notifying the IRD by email|
Minor Errors in Tax Returns
There is currently the option to amend the previous year’s tax return if the amount of tax difference involved is less than $500.
From 1 April 2017, however, a taxpayer will be permitted to correct minor errors in the following year’s tax return without penalty, if it does not exceed $1,000.
Accrual or Cash Accounting
It is often assumed that accounts are to be prepared on an accrual basis and not a cash basis for tax purposes.
The only exceptions to this being where individuals offer personal professional services such as barristers sole and doctors. But is this always correct?
It is quite common, for example, for doctors to run their business by employing others eg nurses, technicians or even partnering with doctors, and derive their income as a practice. Is these cases, accrual accounting will certainly apply because business income is derived from other members of the practice.
But what about other small businesses such as lawn mowing or gardening enterprises which are operated as sole traders. They provide services (not products) and derive taxable income from their own personal effort? Should they be permitted to account on a cash basis?
According to IRD’s latest interpretation statement, IS 16/06, cash basis reporting for tax purposes may be appropriate in the following cases:
|•||An ordinary individual who is not carrying on a trade, profession or a business.|
|•||A professional person who is only offering personal services and receiving only professional fees.|
|•||A business in which the expenditure is only a minor cost in deriving income|
|•||A business in which the risk of non-collectable trade debts is unusually high|
Enduring Power of Attorney
An Enduring Power of Attorney (EPOA) is exactly what it says it is – it is enduring. Unlike a will, an EPOA does not automatically get revoked or replaced if a new EPOA to a different person is made at a later date.
It is quite common, for example, for a husband and wife to give each other an EPOA and then forget about it. If later on, they were to divorce or separate legally, the EPOA will still remain in force at law until it is revoked.
There are some important things to note regarding revoking EPOAs:
|•||The right to revoke an EPOA at any time is one of the key rights that come with an EPOA.|
|•||The person who has given the power can revoke any time while they are mentally capable.|
|•||The revocation must be completed in writing and delivered to the person appointed as attorney under the EPOA. There is a specific form for this notice.|
|•||EPOAs are not automatically revoked by marriage, separation or divorce. They remain in place despite those events occurring.|
Reports required for Charities
Following the introduction of new legislation, new types of financial reports are now required by the Charities Services.
The financial reports are based on financial reporting standards that have been prepared to assist several groups of people make informed decisions. Most often, these groups include the governance group, members, funders, and donors.
The reports required by the Charities Services will include the following:
Financial statements – these provide information about the activities, transactions and balances of the charity and will include a statement of profit or loss which shows revenue and expenses, and balance sheet which lists all the assets and liabilities.
Performance reports – these contain financial and non-financial information such as mission or purpose and what the charity does.
In addition, reports need to include information about all the different parts of the charity which may contain:
|•||Activities – charities are often involved in many activities for which finances may be recorded separately, for example a special fundraising event.|
|•||Trading operations – goods or services a charity sells to generate income, for example, an opportunity shop.|
|•||Branches – to provide services in different locations, for example a Christchurch charity might have branches in Timaru and Ashburton.|
|•||Bank accounts – different accounts may be established to keep money separate for different purposes, for example, a savings account keeps donations separate from a charity’s day-to-day cheque account.|
|•||Other organisations – over which the charity has control, for example, it has the “power” to govern the policies of another organisation in order to “benefit” from its activities. Both power and benefit must exist for a control relationship.|
Important: This is not advice. Clients should not act solely on the basis of the material contained in the Client Newsletter. Items herein are general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Client Newsletter is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and should not be made available to any person without our prior approval. 01/2017.