Tax changes to research and development (R&D)11.06.2014

Two tax measures which were signalled in last year’s Budget were explained in more detail in the 2014 Budget:

o Loss-making start-up companies will be able to “cash out” up to $500,000 of their tax losses from R&D expenditure (ie instead of carrying forward the losses, they will receive a cash payment). This cap of $500,000 will eventually rise to a maximum of $2 million.

o Businesses will be allowed tax deductibility for R&D “black hole” expenditure that is currently neither deductible nor depreciable. In particular:

  Capitalised development expenditure that relates to a patent, patent application or plant variety rights, and which results in a depreciable tangible asset, will be depreciable for taxpayers carrying out R&D.
  A one-off deduction will be available for capitalised development expenditure that does not result in a depreciable intangible asset.

These measures take effect from the 2015/16 income year

FBT rate for low-interest loans increases6.06.2014

The prescribed interest rate used to calculate fringe benefit tax on low-interest loans provided by employers will increase from 5.90% to 6.13% from 1 July 2014.

The Income Tax (Fringe Benefit Tax, Interest on Loans) Amendment Regulations 2014 (LI 2014/183), which came into force on 29 May 2014, their date of notification in the New Zealand Gazette, amend the Income Tax (Fringe Benefit Tax, Interest on Loans) Regulations 1995.

Changes to Financial Reporting Requirements for Companies29.05.2014

Financial statements are widely used by investors, Inland Revenue, Banks and other financial institutions to gather information on various entities. While the benefits of financial statements as an information source for businesses are highly valued, the compliance and preparation of the statements can sometimes be an onerous task for some small to medium-sized businesses.

The Financial Reporting Act 2013 and Companies Act 2013 have just been amended to simplify the financial reporting requirements of small companies.

As of 1 April 2014, companies with annual revenue of $30 million or less and assets of $60 million or less will no longer be required to prepare general purpose financial reports. Entities which fall into this category will instead be required to prepare special purpose financial reports. The minimum requirements for the special purpose financial reports have been set by Inland Revenue through an Order in Council.

The general premise behind the changes is to reduce the compliance costs for small to medium-sized business with annual revenue between $2 million and $30 million.

Certain companies will continue to be required to prepare general purpose financial statements:

o A FMC Reporting Entity. This is a new term which includes most entities previously known as issuers and also other investment management entities (where securities are offered to the public).
o Large NZ companies (i.e. companies with revenue over $30 million or assets over $60 million).
o Large overseas companies or NZ subsidiaries of overseas companies (i.e. companies with revenue over $10 million or assets over $20 million).
o Public entities (e.g. SOEs)
o Companies with 10 or more shareholders (unless they opt out).
o Companies with fewer than 10 shareholders who opt in.

While the changes aim to simplify reporting requirements from an accounting perspective, in many instances this will not be the case. Inland Revenue will still be expecting financial statements to be prepared to the minimum standard the Department has set out. In fact some disclosure areas in which the Inland Revenue will now need businesses to report on are wider than had GAAP applied. Further, banks and financial institutions will continue to require the same level of information and assurance from customers as they have done in the past.

The new rules have also introduced some changes to when entities are required to file financial statements with the Companies Office. For accounting periods commencing after 1 April 2014, only FMC reporting entities, large overseas companies or subsidiaries and large NZ companies with 25% or more overseas ownership are required to lodge their financial statements with the Companies Office.

Another important point to note is that the due date for having financial statements filed has also been brought forward for some entities. Previously, all entities had five months and twenty working days after balance date to file. Going forward, FMC Reporting entities will be required to file within four months of balance date.

Although heralded as a compliance cost reduction measure, the reality is somewhat different. For the most part, the same level of financial reporting will continue to apply for most businesses in order to satisfy the requirements of both the Inland Revenue and banks.

Donation tax credits for Individuals21.05.2014

Question
Our client, an individual, has $45,000 of income for the 2013 income year. However the client has brought forward losses of $50,000, making his 2013 taxable income nil.

Can our client claim a donation tax credit even though his taxable income for 2013 is nil?

Answer
The amount of the donation tax credit must not be more than the taxpayer’s taxable income. Taxable income is determined by offsetting available net losses against net income.

Accordingly, as the client’s taxable income is nil, no donation tax credit is available.