News Articles

What does it mean when you reduce an employee’s pay or hours? The current pandemic has seen a lot of confusion for employers as well as for employees about what happens when hours or pay are reduced. So, first things first, in general terms, an employer cannot reduce an employee’s pay or hours without first consulting with them and getting their agreement. In this post, I want to cover what it means for payroll when you reduce pay or hours for an employee (with the employee’s agreement). It is not as straightforward as many employers and HR believe and it is impacting on the work we are doing in payroll. Just to make it clear, the examples I am using are regarding minimum entitlement by law. The employer can always do better (if that’s possible in the current environment we are all facing). I have had so many queries that start with “management has decided to pay 80% of what we usually pay our employees during lockdown”.  My first question is always has this been agreed by the employee and 50% of the time the answer is NO. It now means the employer is running around trying to get that agreement in place (after the fact).  And, if the employee does not agree, then the employer must pay what has been agreed. If there is no way this can be done, even if the wage subsidy is to be applied, it could mean the only option after everything else has been looked at is redundancy (there is a process to follow here). Now for the other 50% of employers that did get agreement from employees to reduce pay and or hours, as this can be done several ways, there is a second question that needs to be asked: what have you agreed?  I will use an 80% reduction to explain this: Have you agreed to reduce the employee’s pay by 80% only?  Or, have you agreed to reduce the employee’s pay and hours by 80%?  If you have agreed to reduce hours, what has been agreed? The employee normally works 40 hours per week, Mon to Fri 8 hours per day and this is now reduced to 32 hours, Mon to Fri 6 hours per day.  Or, the employee normally works 40 hours, Mon to Fri 8 hours per day and this is now reduced to 32 hours, Mon to Thurs 8 hours per day. For payroll, if the employee is at home (lockdown) and cannot work and there is an agreement to pay 80% of what they normally would get paid (the wage subsidy can be used for this), this is straightforward as it is a clear reduction in pay and is not about changing hours. If there is any agreed change to hours, then it is an issue for payroll because a week is by agreement and that means the week has now changed from the requirements of the Holidays Act.   So, using the previous example, if the week has now been reduced to 80% (32 hours), then that means the week for annual holidays is now an agreed 32 hours per week.  For payroll, any entitlement earned (not accrual, 8%) would need to change to reflect the new week. So, 3 weeks of entitlement based on a 40-hour week (120 hours) would now become 3 weeks of 32 hours (96 hours).   If the employee applies to take annual holiday (entitlement), or if the employer uses Section 19 to get the employee to take annual holiday entitlement (giving them not less than 14 days’ notice) after agreeing to the change in the week, this is the impact on the employee.  In payment terms, there should not be a real change as AWE will still be based on the week going back 52 weeks (the longer the change, the more impact there will be), but OWP Section 8(1) will now reflect the new agreed week. Now, changing hours will not just affect annual holiday entitlement. If you change the day (hours in a day) or the days of the week, it will also create some issues for payroll. Using the example from before: The employee normally works 40 hours, Mon to Fri 8 hours per day and is now working 32 hours, Mon to Fri 6 hours per day.  Or, the employee normally works 40 hours, Mon to Fri 8 hours per day and is currently working 32 hours, Mon to Thurs 8 hours per day. If the employee agrees to change from an 8-hour day to a 6-hour day, then that means if they go sick RDP is based on the 6-hour day and what would have been paid on that day.  This also has an impact if the day is a public holiday. And so if the employee is at home but can’t work, then the day will be a public holiday taken at RDP based on the 6-hour day.  There have been a few lawyers stating as they are at home during the lockdown, they would not get the public holiday. I disagree based on what has been agreed between the employer and employee. If it has not been agreed upon, then I would always provide the benefit to the employee. (It is up to you whether to do this, but I do believe it is on the employer to clearly define the agreement and to then get the employee’s consent and not rely on the gray areas where lawyers live).  Now, the other issue is when the days agreed have changed by agreement. Using the example above instead of 5 days, it is now agreed to reduce working to 4 days (instead of Mon to Fri, days worked are now Mon to Thurs).  For payroll, it means if there were a public holiday on a Friday that is no longer a working day for the employee, and they would not get paid for a public holiday taken. In conclusion, it’s not that simple for

Originally signaled in March 2018, in a discussion document, draft legislation to introduce the ring fencing of rental losses has been released just in time for Christmas.  The rules that are proposed will bring to an end the ability for taxpayers to offset losses from a rental property against their other sources of income.  The ability to do this has been perceived as an unfair tax advantage to rental property investors and coupled with other recent changes will further discourage involvement in being a land lord.  As background, where a rental property was in a loss making position (often due to interest costs) those losses were able to be offset against other sources of income.  This was often structured to allow individuals to utilise the tax loss against their salary and wage income to receive a tax refund.  The loss incurred by the taxpayer in this situation was real and the offsetting of the loss against other sources of income consistent with the principles of the tax system.    The removal of the ability to offset rental losses against other sources of income will instead mean that those losses must be ‘ring fenced’ and carried forward to be offset against future rental profits or income from the taxable sale of land, i.e. under the bright-line test or the subdivision rules.  Application date  These rules will apply for the 2019/2020 income tax year, for most taxpayers this will mean an application date of 1 April 2019.   Features  Some of the key features of the proposed rules are;  It will apply to “residential land’ by utilising the definition from the previously enacted bright-line test.  Much like the bright-line test there will be an exemption for properties used as a main home, properties classed as farm land, land used predominantly as a business premises and certain employee accommodation.  There will also be further exemptions for properties that fall under the mixed-use asset rules i.e. holiday homes.  The rules will apply on a portfolio basis allowing losses from one rental property to be offset against income from another profitable rental property owned within a portfolio.  Losses that are ring fenced will be carried forward to be used against residential rental income in future years or income from the taxable sale of land.  Any unused losses will remain ring fenced.  The use of companies or other entities to try and achieve a deduction that would be otherwise ring fenced will be prevented.  Potential issues  With the legislation being a first draft there is still opportunity for the detail to change but some of the issues that will require consideration are;  Tracking of losses, will Inland Revenues new system handle this or will it be a taxpayer requirement to maintain a record of the amount of ring fenced loss.  Ensuring that the rules cope with the complexity of ownership structures for farms such that farm houses provided to employees are not inadvertently captured.  The possibility that some rental losses may be ring fenced forever if a taxpayer exits ownership of rental properties and never derives future rental income.  Opportunities  There appears to be very little opportunity between now and the application of the rules.  However consideration should be given to bringing forward any repair and maintenance work or deductible expenditure that would otherwise form a future ring fenced loss and claim a deduction in the current income tax year.  If you have any questions or wish to discuss this further, please contact our team at CooperAitken. Disclaimer The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. There is no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation   Written by Rory Noorland, Director.

After the recent increase of the bright-line test period from two years to five years the continued pressure being put on the rental property market through tax settings continues. Inland Revenue have recently released a discussion document to ring fence losses made on residential rental properties.  This will mean that for rental properties that make losses owners will no longer be able to offset those losses against other sources of income such as salary or wages.  Rather the losses will be carried forward to be used in future years when the rental property, or properties, make profit.       Alternatively, the losses can also be used against profits if the person is taxable on the sale of a land. The key features are; It will apply to residential land, but would not apply to a person’s main home.  The same rules as under the bright-line test. The loss ring fencing would apply on a portfolio basis, meaning losses from one rental property could be offset against profit from other properties. When losses are not fully used in a year they would be carried forward and ring fenced to residential rental income in future years or if taxable on the sale of land. The rules, as proposed, would apply from the start of the 2019-20 income year (1/4/2019) and may be phased in over two to three years. At this stage the contents of the discussion documents are proposals but we will keep you updated in future newsletters on the progress of these proposals.

Deciding which dairy company to supply when buying a farm is an important decision when it comes to shares. Dairy company shares make up a substantial part of a farm purchase. For an average sized Fonterra farm to be fully shared up producing 100,000 kg/ms at $6.00 per share equates to $600,000. There is the option to supply a dairy company where no share purchase is required. This is viewed by many as an attractive option. Without the need to invest in shares, a farmer significantly increase’s available working capital, and with that they significantly increase their options. Imagine buying the farm you have dreamed of sooner or expanding into a larger farm with the funds that would have otherwise been used to purchase shares. To remain competitive and assist farmers with purchasing shares Fonterra has revised and introduced new share purchase options. The aim of these is to remove the requirement to be fully shared up on day one. Fonterra Strike Price contract Under the Strike Price contract farmers have up to nine years before they have completely paid for their shares. Farmers purchase 20 percent of the shares up front based on an estimate of the first three season’s production. The requirement to purchase the remainder of the shares is only when the farm gate milk price goes above the strike price, currently set at $5.25 kg/ms for the 2018/2019 season. For an average farm producing 100,000 kg/ms the initial share up of 20 percent would be 20,000 shares at an average of $6.00, which totals $120,000. The requirement to purchase shares in the current season at the milk price of $6.40 and the current strike price of $5.25 is a difference of $1.15. Of the $1.15, 50 percent would be required to purchase shares, and would total $57,500 (57.5 cents @ $100,000kg/ms). At the end of season one, the farmer would have paid $177,500 for shares and at $6.00 per share, own 29,583. At the current strike price this equates to just under one third of the total shares required to back milk production at an estimate of 100,000 kg/ms. The current Strike Price contract lasts for a minimum term of six years. If farmers are not fully shared up at the end of the six years, they will need to buy at least one-third of their remaining shares in each of the subsequent three years. If they cease supplying Fonterra before the end of the full term they may be required to pay compensation. Share up over time contract Another option is the Share up over time contract. This offers two options the three year contract or the six year contract. The three year contract requires the farmer to purchase the shares over three years with a minimum of one third per year, based on estimated production. Under the six year contract shares are only required to be purchased in seasons four, five and six – effectively deferring the requirement to purchase shares. The number of shares required to be purchased is calculated as equal to one third of the average actual quantity of milk solids supplied in seasons one, two and three. Similar to the Strike Price contract there are minimum contract requirements that apply. As outlined the Fonterra share options are different and appear to offer some flexibility for sharing up in the Co-operative. In addition, the option still remains to supply a dairy company where no share up is required at all. In reviewing which option is right for you, it is important to consider: Estimating milk production. Commitment to supply Fonterra. Budgeting for share purchases and dividends. For every paid share the Fonterra dividend is payable (even if you are not fully shared up). Taxation Payments – the purchasing of shares is a capital item even when it is spread over time. If funding shares out of cash flow, remember to budget for tax payments. Bank – understand how your bank capitalises the share transaction under the various share up options, as the banks differ in their treatment. In deciding which option is right for you, there is no one size fits all approach and what works for you may be different than what works for the neighbour.  Please contact your rural professional if you would like further information on deciding what option is right for you.       Amy Coombes CooperAitken Accountants amy@www.cooperaitken.co.nz 027 715 2728 

The Commissioner of Inland Revenue has recently announced changes to the deductibility of farm house expenditure for farmers.  For the majority of our clients there will only be a change in the default percentage that can be claimed from 25% to 20%.  However for a small group where the value of the farmhouse is greater than 20% of the value of the farm the change will be much more significant. Type 1 vs. Type 2 The approach that has been developed by the Commissioner distinguishes between a Type 1 and Type 2 farm based on value of the farm house compared to the value of the farm. In summary: farming businesses where the value of the farmhouse (including curtilage and improvements) is 20% or less of the total value of the farm are Type 1 farms; and farming businesses where the value of the farmhouse (including curtilage and improvements) is more than 20% of the total value of the farm are Type 2 farms. To determine the value of the farmhouse (including curtilage and improvements) and farm the Commissioner will accept a formal valuation or a reasonable estimate of the values of the farmhouse (including curtilage and improvements) and farm. To reduce compliance costs, the respective original costs of the farmhouse and farm may also be used to determine whether the farm is a Type 1 or Type 2 farm. The term “curtilage” refers to the land surrounding the farmhouse that is used primarily for private purposes. The curtilage may be fenced (like a backyard) or not. If the curtilage is not fenced, the Commissioner will accept a reasonable estimate of the curtilage area and its value.  Improvements would include things such as swimming pools, tennis courts and sheds used privately. Deductions for a Type 1 farm Farmers who live in the farmhouse on Type 1 farms may determine whether expenses are deductible based on assessment of the relationship Statement. However, the Commissioner will also accept that 20% of the farmhouse is used for business purposes without any supporting evidence. As a result, such farmers can claim 20% of all farmhouse expenses as deductible business expenses.  This covers the expenses that were previously being claimed at the rate of 25%, expenses such as electricity, insurance and repairs and maintenance. In addition you may now only claim 50% of the cost of their telephone and internet charges down from 75% previously, unless you can justify that the percentage should be higher. Type 1 farmers may continue to claim 100% of the interest costs relating to the farmhouse and 100% of rates. Deductions for a Type 2 farm Farmers who live in the farmhouse on Type 2 farms must determine whether expenses are deductible under the general permission and general limitations as set out in this Interpretation Statement. For farmers operating Type 2 farms, there is no minimum percentage of the farmhouse that the Commissioner will accept as being for business purposes. Farmers operating Type 2 farms may only claim deductions for expenses, including interest and rates, relating to the actual business use of the farmhouse.  There is also the same limit of 50% of the cost of their telephone and internet charges down from 75% previously, unless you can justify that the percentage should be higher. Calculating actual use When apportioning expenses between the business and private use of the farmhouse, Type 2 farmers must undertake a “home office” calculation like any other taxpayer who carries on their business from home. This calculation must be based on the actual use of the farmhouse (for example, on a time and space basis), regardless of whether there is a dedicated home office or different parts of the house are used in the business. The following is an adapted example of how to calculate the “home office claim” in the situation of a non-dedicated office. “The farmhouse does not have a home office. Instead, the taxpayer holds business meetings at the kitchen table and manages the farm accounts from the family computer in the dining room. In addition, they sometimes prepares lunches for business visitors in the farmhouse kitchen. The partnership can claim deductions for the business proportion of expenses relating to the farmhouse. The partnership’s telephone bill lists the toll calls made each month and can only claim a deduction for the calls made for business purposes. For the fixed telephone charges, there is a claim for 50% of the fixed telephone charges unless they can show that the actual business use of the telephone is greater than 50%. The floor area of the house is 150m2. Together, the dining room and kitchen make up 40m2 in total, or 27% of the floor area of the farmhouse. They calculate, on a fair and reasonable basis, that these rooms are used for the farm business for 20% of the time. This means that the business use of the farmhouse is 5.4%.” Practical application Where you are preparing your own GST return we recommend that the percentage change is made for your next return, this might require some changes to any auto coding.  However as the amounts are likely to be immaterial any adjustments required will be made upon preparation of your year-end accounts. If you have any questions, would like us to review your assessment of Type 1 vs Type 2, or assistance in changing any auto coding please contact your usual CooperAitken contact.