Fraser Hurrell, Author at Whangarei Accountants - Elevate CA - Tax, Xero, Business Development, Accounting

Q: Are you bound by tax law not yet drafted?

A: If you’re negotiating to lease commercial premises for your business, you are now subject to an as-yet-unwritten change in tax legislation. Read on.

Times are tough for many a commercial landlord. Many buildings are less than 100% occupied with prospective tenants keen to drive a tough bargain before signing a lease. Often this includes a lease inducement payment – paid by the landlord to the tenant on signing.

As it stands, commercial landlords can generally claim a tax deduction for these payments while the tenant pays no tax on the payment. This does create an incentive for prospective tenants to push this line when negotiating to lease a building.

But on 26 July, the IRD released a tax policy consultation paper around cash payments made by commercial landlords to tenants. The Government clearly plans to tax these lease inducement payments in the hands of tenants.

Fair enough. Of course the Government is quite entitled to do what it needs to do to protect the revenue base. On the one hand John Key has boldly proposed a return to surplus by the 2014 / 2015 fiscal year – but on the other hand he has ruled out tax rate increases. So closing asymmetrical tax planning possibilities like this one is an obvious area of focus.

But this amendment is somewhat unusual. The Revenue Minister Peter Dunne signalled that any legislation changes would be retrospective, with effect from 26 July 2012. We have no idea of the wording of these proposed amendments as they have not yet been drafted. They will be included in some future tax bill that could be a year or more away. But we do know that once passed, these changes will apply to commercial lease arrangements being entered into right now.

Good Tax, Bad Tax

Q: When can tax be a positive thing?

A: When it encourages behaviour that makes the world a better place for us all. In my humble opinion, that is.

Tobacco excise falls into this category – it provides a disincentive to smoking, surely saving many Kiwi lives every year.

Next question.

Q: When is a tax particularly bad?

A: When it actively discourages behaviour that could make the world a better place for us all.

The Road User Charges (RUC) tax regime on diesel cars falls squarely into this category. Once again, in my humble opinion.

Visit Europe or the UK and rent a car, and the chances are it’ll be a super-economical diesel that goes like crazy while sipping less than 5 litres per 100km. There’s plenty of fun to be had zipping around France or Italy in a Fiat Punto, Citroen C4 or BMW 116 diesel with a six speed manual and a throaty exhaust note.

But all that frugal motoring fun does give rise to one more question.

Q: Why have Kiwis not embraced this super-economical common rail diesel technology in small passenger cars? When we buy a small car, why do we tend to choose a petrol model that burns maybe 8 litres per 100km rather than the equivalently powered turbo diesel that might consume less than 5 litres over the same distance?

A: Owners of diesel powered cars pay RUC by the km at the Post Office counter – and the cost is the same regardless of the efficiency of the vehicle. At today’s pump prices, a diesel hot hatch using 5 litres per 100km will cost you just $75 to drive 1,000km. But add the RUC and the cost increases to $123. The RUC tax is the same regardless of whether you’re driving a 3,500kg truck or a Suzuki Swift DDiS, effectively counteracting the benefits of all that fantastic diesel technology that the rest of the world enjoys. So almost no-one in New Zealand buys small diesel cars.

New Zealand must export a lot of butter, wool and logs to buy a barrel of oil. So why do we have a tax system that actively encourages us to ignore the advances in diesel technology over the last decade which would allow us to collectively burn less imported fuel?

This is an easy fix, Mr Joyce. Petrol powered cars pay excise tax at the pump so drivers of economical cars are rewarded by paying less excise tax. Apply the same logic and charge RUC at the diesel pump rather than at the Post Office counter, so purchasers of super-economical diesel cars can genuinely enjoy the financial rewards of this technology. Hey presto, more Kiwis will buy cars of this ilk saving the country a significant amount of foreign exchange each year. Over the years our nationwide vehicle fleet will become more economical as Kiwis will no longer be disincentivised to choose a more economical model when replacing their existing cars.

Look beyond the three year electoral term, Mr Joyce. Yes there will be a one-off cost in changing the system, but over the longer term this is a no-brainer.

Drugs, dangerous equipment and process

If an employee reports for work ready to operate dangerous equipment – then tests positive on a random drug test, you’d be on safe grounds dismissing for serious misconduct, right?

Not so simple.

Correct process is essential regardless of the facts – and employers who do not pay close attention to this will struggle to defend their actions under the gaze of the Employment Relations Authority (ERA).

In a recent case, the ERA determined that Ursula Te Huia was unjustifiably dismissed by South Pacific Meats Limited (SPM) following a positive drug test result.

It seems that Ms Te Huia had been employed as a meat worker by SPM at its Awarua plant for five years – and that she was also a site union delegate. She had a poor record of absenteeism, although Ms Te Huia had recently succeeded in having this wiped by SPM leaving her with a clean attendance slate. SPM conducted a random drug test of their meat workers – and in some cases at their discretion, they offered a rehabilitation programme to those returning a positive result.

Ms Te Huia was one of those not offered rehabilitation – although her result was lower than some of those who were offered rehabilitation. At her disciplinary meeting, Ms Te Huia said she had only smoked cannabis and taken the drug test in her role as union delegate to prove that the results were unfair. Despite this explanation, SPM dismissed Ms Huia.

Convinced that her explanation was reasonable and that she had been treated unfairly, Ms Huia claimed unjustified dismissal – and the ERA agreed.

The ERA found a number of flaws in the process followed by SPM in dismissing Ms Te Huia:

SPM had already decided that Ms Huia wold not be offered rehabilitation before she had attended the disciplinary meeting;

A factor in this decision was Ms Te Huia’s record of absenteeism. This was unfair because Ms Te Huia had earlier negotiated a clean slate of her record of absence;

Even though Ms Te Huia had broken the law by consuming cannabis, it was unfair that she was dismissed when some others who returned a lower score had been offered rehabilitation and kept their jobs.

The ERA ordered SPM to pay Ms Te Huia $5,100 for loss of wages and an additional $5,000 as compensation for the humiliation of being dismissed.

We have no way of knowing whether SPM considered this to be a bargain price to rid themselves of an employee they may have considered troublesome. But we do know that if employers wish to defend themselves successfully at the ERA, they must be seen to treat their employees consistently – and to give them genuine opportunity to respond to any allegations put to them before any decision to dismiss.

Multi-choice Question of the Day

A $100 credit on your next Elevate CA accounting invoice for the first person to correctly answer this question!

Productivity – getting more from what you have (North Harbour)

Almost all business owners find themselves under intense pressure to do more with less. Maintaining competitiveness is a constant imperative with customers and clients typically wanting more, wanting it faster – and expecting it to cost less.

Continuous improvement in productivity is often a critical success factor in ensuring your business will still be prospering two, five or ten years down the track.

For those business owners who are focussed on improving productivity, the 16 August Business Owners Forum will be a must-attend event.

This event will be held at the BNZ Partners facility on Constellation Drive, North Harbour at 5:30pm on Thursday 16 August 2012 – and will run through to 7:30pm on the night.

We have assembled a varied and skilled panel for this event:

Jenny Smith. Jenny is an experienced Kaizen (Lean) >>> practitioner having embedded Kaizen principles throughout the BNZ. Jenny could speak for a day on Kaizen, so come and hear some nuggets from her considerable experience in this area distilled down to a short and snappy session.

Naomi Ballantyne. Naomi is in the middle of building her third life insurance company – Partners Life Limited. Naomi cut her teeth as one of the founding employees of Sovereign Insurance where she eventually went on to become the Chief Operating Officer, and three decades on she is keenly aware of the issues facing business owners striving for constant improvements in productivity. Come and hear some of the tips and traps Naomi can pass on from her journey.

David Webb. David is Managing Partner of PPB Advisory, an Australasian professional advisory firm that specialises in breaking through the barriers that may hinder business success. This may include a focus on optimising the value of a business, thinking differently about how a company is structured or addressing financial distress. David is well placed to offer some valuable insight to this topic.

As always for Business Owners Forum events, this session will be free of charge and completely free of sales pitches from the supporters or the panelists. And there will be pizza, beer and wine to lubricate quality discussion.

Business Owners Forums are held monthly on the third Thursday of the month – alternating between North Harbour and Whangarei venues.

If you’d like to attend this event, email Fraser Hurrell before the end of 14 August 2012. And if you’d like to be included on the invite list for future events, just add your contact details in the box to the right.