In October and November, ACC will be sending out annual invoices which would have normally been sent in July. ACC made a decision to delay these invoices for three months to help relieve the immediate financial impact felt by many businesses earlier this year.

ACC also realise that the financial impact may only just be reaching other businesses too.

During invoicing this year ACC want to provide their customers with early communication on what to expect and will be on hand to support them manage their invoice payments.

To improve the accuracy of invoices, it’s important that all customer details are up to date.

The new Trusts Act 2019 will come into force on 30 January 2021. This is the first major reform to trust law in New Zealand which provides greater transparency of trustee activities and increased trust compliance requirements.

If you are a settlor or a trustee of a trust (or family trust), it is important to review your trust in light of any personal, legal and policy changes provided under the new Act.

Here are some of key changes to the new Act.

FORMALISED ROLES OF TRUSTEE AND BENEFICIARY
The Trusts Act incorporates a new concept by classifying the duties as either ‘mandatory’ or ‘default’.

MANDATORY DUTIES
Mandatory duties must be performed by the trustee and may not be modified or excluded by the terms of the trust. Otherwise, it may be evidence that there was no intention to create a trust and will undermine the asset protection strategy if the trust is ever challenged.

1. The mandatory duties include that the trustees must:
2. Know the terms of the trust
3. Act in accordance with the terms of the trust
4. Act honestly and in good faith
5. Act in the interest of the beneficiaries in accordance with the terms of the trust deed
6. Exercise their powers for a proper purpose

DEFAULT DUTIES
These default duties include a general duty of care, which the trustees must perform unless they have been excluded or modified in the trust deed.
Some of the general duties of care include:

*Duty to invest prudently
*Duty not to exercise power for own benefit
*Duty to consider exercise of power
*Duty to include to avoid conflict of interest
*Duty not to profit
*Duty to act unanimously

If your current trust deeds already excluded some of the default duties, this will continue to be acceptable provided that the exclusions fit within the permitted limits.

OBLIGATION TO GIVE CERTAIN INFORMATION TO BENEFICIARIES
The Act creates a presumption that a trustee must make ‘basic trust information’ available to every beneficiary and ‘trust information’ available to beneficiaries who request it. The purpose of such disclosures is to hold the trustees accountable for their duties and obligations.

“Trust information” is information that it reasonably necessary for the beneficiary to have to enable the trust to be enforced. However, before providing the trust information, the trustees must consider a range of factors and if the trustee reasonably considers that the information should not be disclosed, then it may withhold the information.Those factors, amongst other things, include:

*The nature and interests of the beneficiary (such as the likelihood of the beneficiary receiving trust property in the future)
*Whether the information is subject to personal or commercial confidentiality
*The intentions of the settlor when the trust was established
*The age and circumstances of the beneficiary in question and the other beneficiaries of the trust
*The effect on trustees and other beneficiaries of the trust of providing the information; and
*Other factors a trustee reasonably considers is relevant.

Trustees will have to carefully consider any decision not to disclose information.

REPLACEMENT OF THE RULES AGAINST PERPETUITIES
Previously the maximum duration was 80 years after which the property had to be vested upon beneficiaries. The Act now establishes a definite, extended maximum duration of 125 years for most trusts.

RECORD RETENTION REQUIREMENTS
The Act prescribes what information trustees should keep and for how long. Each trustee will be obliged to keep copies of the trust deed and any variations.

Trustees must keep their own copies of ‘core trust documents’ or at least one of the other trustees holds all of the core trust documents and will make them available on request.

RESTRICTIONS ON EXEMPTION AND INDEMNITY CLAUSES
The Act makes it clear that trust deeds must not limit a trustee’s liability or provide an indemnity for dishonesty, wilful misconduct or gross negligence.

Any terms in a trust deed that purport to limit the liability of the trustee or to indemnify them in breach of these provisions is invalid.

Trustees should be aware of these restrictions when acting.

There has been a confusion amongst many tax payers, not necessarily the ones in small and medium size business, but also amongst some of the large tax payers on whether the Covid-19 Wage subsidy is taxable or not taxable. Let us look more closely in to this.

According to Inland Revenue Department website we can see a broad notification under https://www.ird.govt.nz/covid-19/business-and-organisations/employing-staff/wage-subsidies as detailed below:

• The employer is not liable for income tax or GST on the subsidy received from MSD and is not entitled to an income tax deduction for wages paid out of the wage subsidy.
• While most tax payers read the first part (not liable for income tax or GST) they do not proceed to read and assimilate the later part which contains the sting in the tail!

It is true that the wage subsidy received in general is not liable for Income tax or GST, but one should remember that the wages paid out of the subsidy received is not tax deductible to the tax payer. Let us explore this with a small example:

Company A applies and gets wage subsidy of say $15,000 from the Government. It has a wage bill over the period that is applicable to the receipt of wage subsidy of say $18,000. Based on the current rules, the subsidy of $15,000 is not taxable and wages to the extent of $15,000 (of the $18,000 paid by the company) is not deductible! In reality most of the tax payers tend to believe that $15,000 is not taxable and $18,000 is tax deductible! Can this be true?

In a typical business such as yours, the wage payments are taken to wages expenses directly and it is normally treated as a deductible expense. Because of this normal treatment, the wage subsidy received is required to be taken to some kind of income (taxable) to the extent it is used for paying the wages. And therefore we can say that the Wages subsidy are in fact taxable, but the tax on this income is offset by the tax deduction on the subsidy paid out.

A lot of confusion may have been avoided if the Government and IRD explained this position clearly to all business owners.

We would even say that it may have been better by disclosing that these wage subsides are taxable receipts to the business instead of saying that they are not taxable to start with. We would have preferred leaving out the second part of saying that the wages paid out of the subsidy is not tax deductible! This in our view may have made it clear to the business owners about the taxable nature of the wage subsidies that are currently paid out.

More importantly it needs to be mentioned that the subsidy is in fact taxable in the hands of the final recipient. In case you are self-employed and have got wage subsidy you will include this as a taxable income and are required to pay tax on this subsidy receipt at your marginal tax rate.

In case you are trading under a company and normally get shareholder salary paid out from the company, then this will be included as income in your hands as the shareholder and will not form part of taxable income to the company.

In concluding – most business owners and tax payers will feel the impact of these in the 2021 tax year barring some who may have received the wage subsidy before 31 Mar 2020 and disbursed wages before 31 Mar 2020. Both IRD and the Government could have handled this in a better manner and avoided this confusion.

(article supplied by MBIE)

Are you thinking of taking on more staff, and trying to decide whether you need an employee or contractor? Take care. The initial appeal of a contractor may not be right in the eyes of the law and getting this wrong can be costly to you and your business.

Employment New Zealand have useful guidance to help you get it right and save you time and money.

Employee vs contractor the differences

Hiring workers as either employees or contractors can be lawful providing that the correct type of working arrangement is used in each situation. Employees work for you, while contractors work for themselves.

Employment New Zealand have useful guidance to help you get it right and save you time and money. Go to employment.govt.nz (search keywords: Employment agreements) to find out more.

How to decide – the legal tests

You need to know whether your worker is an employee or a contractor because your responsibilities as a business will be very different.

To make the correct decision focus on the real nature of the working relationship, not what you want to call them. The courts have developed some legal tests to help you tell the difference, they are the:

• Intention test (what the parties intended the relationship to be).
• Control vs independence test (the greater the control exercised over the worker the more likely they are an employee).
• Integration test (if the work performed by the worker is fundamental to the organisation they are more likely to be an employee).
• Fundamental/economic reality test (looking at the full circumstances of the work relationship to determine its economic reality).

Consequences of getting it wrong

If you hire someone as a contractor when they are actually an employee, you may be liable for many costs. These potentially include unpaid PAYE, minimum wages, holidays and leave entitlements, penalties from Inland Revenue and/or penalties from the Employment Relations Authority, and being banned from bringing in workers from overseas. Also, you may get negative publicity that could harm your customer goodwill, reputation and potentially the value of your business.

Employment laws

Most employment laws don’t cover contractors in the same way as employees. Unlike employees, contractors: don’t get minimum employment rights like annual holidays, sick leave and the minimum wage and much more, plus they can’t bring personal grievances.

However, health and safety laws apply to both employees and contractors. Go to employment.govt.nz (search keywords: Health and safety at work) to find out more.

For information about employment laws covering employees’ rights go to employment.govt.nz (search keywords: Minimum rights of employees).

Employment New Zealand can help you get it right

In many simple cases, a business can decide what is the correct status for a worker. We have simplified the main legal tests into handy questions for you. For more information go to employment.govt.nz (search keywords: Contractor versus employee).

Employment New Zealand also have the employment law database so you can search cases from the Employment Relations Authority, go to employment.govt.nz (search keywords: Employment law database).

For comprehensive information on your employment rights and responsibilities, visit the Employment New Zealand website: employment.govt.nz

Updates to the Business Finance Guarantee Scheme were announced on 20 August 2020. The Scheme has been revisited to provide a higher level of loans to an increased number of businesses to help in the recovery from the impact of COVID-19. The aim of the revised Scheme is to support business recovery and growth plans.

The central feature of the Scheme is that the Government is guaranteeing 80% of the risk of Scheme loans, while the banks are covering the remaining 20%. This assumption of most of the risk by the Government (taxpayers) will encourage banks to make business loans that may otherwise have appeared too risky, thereby increasing the survival chances of such businesses.

There are standard criteria for Scheme loans (outlined below), but otherwise a normal lending process will be followed by the banks. The banks have put their application forms online so you can view and compare them, but we would expect that banks will be giving priority to existing customers.

Eligibility criteria

Entity

• New Zealand-based business
• Impacted by COVID-19
• Annual turnover of up to $200 million (previously $80 million)
• Not be on your bank’s credit watchlist as at 31 January 2020 (for retail customers) or 30 September 2019 (for non-retail customers)

Loan

• Maximum loan of up to $5,000,000 (previously $500,000 (with the maximum amount being determined by your Bank)
• Can be drawn as one loan or several loans
• Maximum term of 5 years (also determined by your bank)
  Primarily to support operating expenses and investment in recovery and growth
• Cannot be used to pay dividends or for on-lending outside borrower’s guaranteeing group
• Cannot be used to refinance or repay more than 20% of your existing business debt or overdraft facilities.
• Cannot be used to refinance or repay an existing loan advanced on or after 16 March 2020 or any loans or facilities that mature on or before 31 December 2020.

Ineligible entities

Scheme loans cannot be made to fund anyone engaged in:

• Property development and property investment
  Local government (i.e, a local authority, a council-controlled organisation or a council organisation for the purposes of the Local Government Act 2002)
• The supply of recreational cannabis
• The processing of whale meat
• The manufacture of cluster munitions, nuclear explosive devices, anti-personnel mines, tobacco, and civilian automatic and semi-automatic firearms, magazines or parts
• Any activity that is illegal in NZ
• Any other activity notified by the Crown to banks in writing, with effect from the date of that notification.

Apply for a loan?

You may meet the qualifying criteria as above and the bank’s own lending criteria. But, as with any commitment, you also need to weigh up the pros and cons of taking on the additional debt. We fully expect that banks will require personal guarantees and in that case you will also have to think carefully about putting your personal assets on the line, at least in respect of the 20% not guaranteed by the Government.

While the information requirements might differ depending on your Bank and your circumstances, generally you should expect to provide the following information in support of your application

• Your last set of financial statements for the business
• A copy of your most recent tax return
• A cash flow forecast detailing your income and essential expenditure for at least 3 months and what a return to more normal business might look like over 2-3 years.
• A personal statement of positon

We will be able to assist you put this information together to ensure you are providing a robust plan of how things look for your business and how you will service the loan.

This also raises the question of what happens to the borrower if the Government guarantee is called upon. The usual position would be that the Government becomes the lender in respect of the amount that it pays to the bank under the guarantee, but it is not yet clear whether the Government will then enforce or remit that amount.

Enforcement will simply mean that your creditor has changed
If the amount is remitted, current tax rules provide that the borrower is treated as having derived assessable income equal to the remitted amount. That may not be such a problem with a standard company or a limited partnership as the borrower as the income will not (ordinarily) be attributed to the shareholders or to the limited partners. But it could affect individuals in other cases (eg, sole traders, partnerships, LTCs).

If you are unsure if your business qualifies talk to your Banker or your Jacal advisor as they can help you to work out if you do fit or what other help you could seek.

Johnston Associates has decided to provide more regular information via social media channels – namely Facebook and LinkedIn. We will continue to publish our quarterly newsletter, but you will find more regular and timely information through these channels.

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