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The Government’s Budget was announced on 24 May 2012. Compared to previous years, there are few, if any, changes impacting business. Some of the changes that have been made are outlined below.


Mixed-Use Assets

The term ‘mixed-use assets’ is used to describe assets that are used for both private and business purposes. The classic example is the kiwi bach, which might be used for only a few weeks during the year, but available for rent during the rest of the year. Under the current rules, tax deductions can be claimed for the period a mixed-use asset is available to derive income, regardless of whether it actually derives any income. Going forward, tax deductions will be based on how much an asset is actually used personally versus its use to derive income.


Tax Credits

Three tax credits have been removed as they were seen as “outdated” and no longer serving their original policy intent. They are the tax credits for:

  • Income under $9,880 – this was introduced in 1986 to ensure low paid full-time workers were not worse off due to tax reforms. A taxpayer earning less than $9,880 could claim the tax credit for every week they were in paid work for 20 hours or more.
  • Childcare and housekeeper tax credit – this credit (of up to $310) was first introduced in 1933 and last revised in the 1984/1985 tax year. Since then Government support programmes such as Working for Families and free early childhood education have been introduced.
  • Tax credit for active income of children – this was introduced in 1978. The policy intent was to reduce the compliance cost for employing children part-time. The tax credit meant that employers of children on low annual salaries did not need towithhold tax i.e. PAYE. This will be replaced by a limited tax exemption for income not taxed through the employer’s PAYE process.

The tax credits will be repealed from the 2012 – 2013 income year. Taxpayers will still be able to claim them for the 2011 – 2012 income year.

Livestock Valuation Rules

A further notable change is to the livestock valuation rules. The livestock regime caters for the fact that some farmers might hold stock on capital account versus other farmers who might hold stock for resale (or both). The purpose for which a farmer holds
livestock was intended to determine which valuation method is to be used, as that determined how increases and decreases in stock values are taxed. However, under the current rules farmers are able to switch methods causing a disconnect between the purpose for owning the livestock and the tax outcome. This was not intended and the rules have been tightened to restrict switching between valuation methods.

Whether the budget reflects a “steady as she goes” approach to provide certainty in uncertain economic times or a budget produced by a Government with a lack of inspirational vision is a matter of opinion.

repairsThe phrase “repairs and maintenance” (“R&M”) is typically used to refer to costs for repairing, altering or maintaining a capital asset. These costs are immediately deductible if they are revenue in nature and not subject to the capital limitation. In practice it can be difficult to determine whether costs are of a capital or revenue nature, as there is no succinct legislated provision to be “ticked off”. Instead, the question is answered with reference to a considerable body of case law and the specific facts in a given scenario.

In June this year, the IRD finalised its Interpretation Statement (IS 12/03) setting out its view on what it considers the general principles for determining whether expenditure qualifies as R&M. The statement has replaced previous commentary issued by the IRD. Although the IRD’s view has not changed in any substantial way, the latest statement is 55 pages, compared to the previous five page statement released in 1994.

Broadly, a two step process is used to determine whether expenditure is R&M. Firstly, the relevant asset is identified. Secondly, the nature and extent of the work is considered in the context of that asset.

As a general rule, if work carried out on an asset results in the reconstruction, replacement or renewal of the asset or substantially the whole of the asset, the cost of that work will not qualify as R&M. However, costs to repair or maintain an asset, or restore an asset to its original condition, without going so far as to reconstruct, replace or renew it, will qualify as R&M and will be deductible.

The line between restoration of an asset versus its renewal can be difficult to identify and one of the examples provided by the IRD is of concern. Example 23 of the Interpretation Statement involves a residential rental property in a good state of repair that was damaged in an earthquake. To get it back to a tenantable state the foundations are replaced, the floors reconstructed and three external walls are rebuilt and the roof replaced. The IRD considers the costs would be capital in nature as the work results in the “effective renewal” of the asset. However, case law provides strong support for this work being revenue in nature and therefore R&M. That case law suggests the work is to repair something that previously existed, it is not to produce something new, it does not significantly improve the asset or make it different in kind by changing its character, and thus does not increase its value or extend its useful life. It does no more than restore it to its original condition and should therefore qualify as R&M.

The Interpretation Statement sets out the IRD’s current view and therefore reflects the view that can be expected to be taken by the IRD’s investigators. Unfortunately, it is a matter of opinion, not fact, as to whether it is correct.

An organisation’s payroll function can be a confusing and time consuming task, but there are a range of options available that can help. Rather than battling away in isolation, an organisation could consider acquiring an appropriate software package, using a third party payroll contractor or outsourcing the payroll function to an internet-based provider. Choosing the right option will inevitably be a case of balancing the cost of each option against the advantages to be gained. The main options are outlined below.

Payroll Software

Many employers use payroll software purchased from a third-party supplier. The software is designed to assist the user with processing payroll information, producing an employee’s payslips, IRD schedules and management reports. Some systems are able to be integrated with the organisation’s primary accounting system. This allows the payroll transactions (e.g. wage and PAYE payments, month end journals and employee provisions) to be updated to the general ledger on a weekly or monthly basis.

These software systems, once set up with the required deductions and calculations, can efficiently produce the required information for each pay-run. Where an employer has only salaried staff, this information can be produced with minimal time and effort as the same information is generally used for each pay-run, with only staff changes and leave information required to be input into the system.

Payroll software usually requires an initial software licence to be purchased, and an ongoing annual fee for upgrades as required. The charges for this will vary depending on the software provider. Some providers offer a free trial system that can be downloaded from their website so users can try before buying.

While these software programs are regularly updated in line with changes in legislation, the employer will still need to have a payroll administrator who keeps up to date with legislative changes.


Employers who have a large number of employees that are paid on an hourly basis, or who simply don’t have the resources to complete their payroll themselves, may wish to consider outsourcing their payroll process or acquiring the services of a payroll contractor.


Internet-Based – using an internet-based provider, timesheet information is either input by the employer or sent through in a raw form to be processed. The provider can generally:

  • produce and distribute payslips,
  • produce and file PAYE schedules,
  • withdraw funds from the employer’s bank account and make payroll and PAYE payments directly, and
  • maintain records such as annual leave, sick leave and other entitlements.

The employer can access their payroll information remotely through the provider’s website removing the need for the employer to install, maintain and administer the payroll system. Some systems also allow employees to log on and print out payslips as and when required.

Payroll Contractors – for those employers who prefer a more traditional approach, similar services can be obtained by acquiring the services of a payroll contractor. As with an internet-based provider, the information (such as timesheet and employee information) can be processed either by the employer or the contractor. Typically, the contractor will use the employer’s payroll system, in which case the employer would still incur the cost of maintaining that system.

With either option there should be a reduction in the workload associated with the payroll process and the requirement for payroll staff to keep up to date with current payroll-related legislation.

Outsourcing the payroll function will come at a cost, but the cost could be outweighed by the time saved, and peace of mind knowing that the organisation’s legal and tax obligations are being looked after.

Many businesses continue to struggle in the current economic conditions and for some a decline in revenue through a sudden loss of custom could be quite damaging. As such, the unexpected resignation of an employee that has strong customer relationships could potentially jeopardise the business, if that employee moved to a competitor.

Many employers have a restraint of trade clause in their employment agreement to protect them against such contingencies. However, it is not until an employee leaves to go to a competitor that these clauses are tested. In the past, a restraint of trade clause was considered ineffective, however employment relations authorities now seem to be taking a more practical perspective. Their perspective should be taken with a degree of caution because a restraint of trade clause may not be the ‘silver bullet’ that some employers might expect. An employee will always have the right to use their skills and experience to earn a living. Therefore, the key to an employer protecting their interests rests in how reasonable the restraint of trade clause is, and this is generally tested as follows:

  1. What was the position of the employer and employee when they entered into the employment agreement? This test is essentially about bargaining equality. Were both parties free to obtain advice at the time the employment agreement was offered, or was the employee coerced into signing?
  2. What ‘consideration’ was provided? When an employee starts a new job, the remuneration offered in the employment agreement is usually considered sufficient consideration to include a restraint of trade clause. If an employee was promoted from an office administration role (where typically a restraint of trade would not be relevant) to a business development or sales role, then negotiation over the new employment agreement would need to demonstrate consideration.
  3. What is the nature of the proprietary interest to be protected? The restraint must be essential to protect an employer’s interest. For example, an employer would have difficulty restraining a hairdresser from establishing their own business. However, if that same hairdresser were to entice clients to leave by openly contacting clients of their former employer before or after leaving, then a reasonable restraint of trade is likely to offer protection to the former employer.
  4. How long could an employee be restrained for? In most cases restraining an employee for a period of 12 months would be difficult to enforce, however a period of six months or less is more likely to be considered reasonable.
  5. How far (geographically) would the employee be restrained from working? Using the earlier example, a hairdresser who seeks to establish a business within one kilometre of their previous employer might be restrained, but should be perfectly entitled to use their skills at a block of shops 10 kilometres away.
  6. How broad is the restraint? Similar to the geographic restriction, if the employer intends to prevent a former employee from working in the same industry, then this would prove difficult to enforce. However, restraining a technical sales representative working in the same specialist sector of the industry within a 100 kilometre radius may be more acceptable.

In summary, a restraint of trade should not restrict an employee from earning income once they leave an organisation, but it is sensible for an employer to protect their interests in today’s economic conditions. Employers should give careful thought as to what proprietary interests they need to protect and seek advice before drafting a reasonable restraint of trade clause.

houseEntitlement to Working for Families (WFF) payments is based on a family’s income, which is calculated using very specific rules. These rules have undergone a number of changes over the past few years to close potential loopholes and make the system fairer. The need to calculate the ‘income’ amount correctly was recently highlighted in a decision by the Taxation Review Authority (TRA).

The decision of ‘X v CIR’ involved a couple who owned five rental properties that incurred losses. These losses were included in the calculation, which reduced the taxpayer’s ‘income’ for WFF purposes and increased their entitlement. At issue was whether or not the activity constituted a business, in which case the losses are ignored.

The IRD disputed the income calculation and took the view that the rental activities of the partnership constituted a business and therefore their income should not be reduced by the losses. The taxpayers argued that they only ever intended to make capital gains from the properties, and therefore their rental activities were not a business. They were unsuccessful and the TRA upheld the IRD’s view.

The case is a timely reminder that income for WFF purposes needs to be calculated correctly, especially given the recent changes.