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1 "# $% &$ ' # $() Recent case law has emphasised the need to take care when drafting sale and purchase agreements, particularly when the transaction is being treated as a going concern for GST purposes. In Case W57 (2004) 21 NZTC 11,539, the Taxation Review Authority (TRA) found in favour of the Commissioner in holding that the supply of a commercial property could not be zero rated as a going concern. The vendor taxpayer sold a retail site which had originally been built as a theatre, but was used as a commercial rental property. At the time the agreement was entered into, the building was run down and in need of repair. The purchaser claimed that the supply was a standard rated supply, but the vendor taxpayer maintained that the transaction was a going concern and consequently the transaction was zero rated by them. The Commissioner considered that the transaction could not be zero rated. This was because there was no agreement in writing between the parties that the supply was a going concern, even though the rest of the going concern requirements were met. existence of an agreement in writing for GST zero rating purposes. In addition, the parties did not reach an agreement that the supply was of a leasing activity. In Case W56 (2004) 21 NZTC 11,525, the vendor entered into an agreement for the sale and purchase of land and buildings. The property comprised a commercial portion and a residential portion, which were both leased. The commercial portion was leased for three years, subject to renewal. On settlement, the purchasers intended to acquire the property subject to the restaurant lease and simultaneously transfer it to their company. There was a separate cottage on the residential portion rented for $120 per week, but there was no written tenancy agreement. The Commissioner accepted that there was a supply of the leasing activity as a going concern, but considered that the transaction could not be zero rated because there was no agreement in writing. Again, there was no mention of tenancies in the sale and purchase agreement. Continued over the page "# $ %& ' (() * +(()), -.%#./ %#./ The TRA agreed with the Commissioner and found that there was no agreement in writing that the sale was the supply of a going concern. This was because the agreement itself did not mention that the property was tenanted. The vendor was therefore obliged to give vacant possession on settlement. Although the purchaser accepted that there was a current lease arrangement, that did not establish the Page 1

2 # % $ $44 5, ' 30 & ' 36 6%0 7, 8 '9 :(;() * :(;()) -.%#./ %#./ $$4 "# $< '6#+)(= %& The TRA considered that where there were two simultaneous contracts involving the same purchasers and the same property, each conditional on the other, they should be read together. It was noted that the particulars of a tenancy could be imported into the agreement for sale of real estate because it was interdependent with the agreement for sale of the business. However, the TRA stated that, although the agreement for sale and purchase of the business clearly pivoted on the existence of the lease and made references to it, there were no particulars of that lease in any agreement in writing. The TRA said that to zero rate a transaction, it was insufficient that a supply be of a going concern. This was because there was the further requirement that the parties agree in writing that the supply is a going concern. As the agreement made no mention of tenancies, the agreement was subject to vacant possession on settlement. Consequently, if your clients are involved in the sale or purchase of a commercial leasing activity, it is crucial that the written documentation records the existence of the leasing arrangement. The standard Auckland District Law Society sale and purchase agreement requires the details of all tenancies to be set out on the front page of the agreement. Otherwise, the purchaser is entitled to vacant possession on settlement. The fact that a going concern clause is contained in the standard agreement will not assist when the agreement is silent as to tenancies (as both of the above cases will attest). This clause is only triggered when the agreement is for the sale of tenanted property. 3 " At a recent ICANZ operational meeting with IRD a request was made for IRD to issue some guidelines/policy on their application of Case W33 (the dentist trading trust case). IRD advised that there is currently a large amount of investigation work being done in this area. They have found a spike of activity in this area linked to the increase in individual tax rates and a number of instances where taxpayers income levels have reduced significantly. In one situation a shareholder salary had been reduced from $800K to $60K. IRD expect to be issuing some guidelines after this initial period of investigation. The issue will be raised again at the National Public Practice meeting. There has been particular concern among practitioners that IRD will apply the Case W33 principles to company structures thereby requiring shareholder employees to be paid market salaries. It is fair to say that IRD have traditionally focused on the issue of excessive salaries and in our experience have not questioned whether shareholder salaries have been below market rates. Some guidance from IRD in this area would be welcomed. We will keep you up to date with any developments. Page 2

3 Graeme Lindsay is the principal of Strategy Financial Services, a life insurance brokerage company based in a young vineyard at West Melton, Christchurch. 5#5 % #>>, "#? % #, #5 A *#?#, ## #%##5## # @ 0% # %# #B "# 1. *#,#?#, #C %# % # :(;(). Income Protection Insurance is an interesting financial tool, but of all life and health insurance products, it is the most misunderstood by customers and insurance industry people alike. Here are 11 traps for the unwary: 1. Make sure that you have a guaranteed right to renew the policy until age 65 Do not accept a policy that the insurer can cancel for any reason there are a few of these out there. The last thing that you need is to have your first heart attack the day after the insurer cancelled your policy. 2. Look out for the Benefit Period i.e. how long they will pay you if you have a long-term disablement. We sometimes see policies with 2-year and 5-year benefit periods. These are unacceptable we only ever recommend Benefit Periods to age Do not accept a policy that does not have a benefit payable if you are Partially Disabled A recent study of Income Protection claims showed that over 70% of claims go from Totally Disabled to Partially Disabled before, in most cases, full recovery. Don t get caught out in the cold with a no partial disability claim policy. 4. Watch for a 2 year limitation on Partial Disability claims. This is almost as bad as no Partial Disability claim I have two clients now who have been on Partial Disability claim for over 2 years in one case, almost 10 years 5. Do not accept a 2 year limitation on Mental Health ( read Stress and Depression ) claims. Anecdotal evidence shows that the greatest single cause of IP claims is stress and depression. Why would you have Income Protection that limits benefits for the largest cause of claims? 6. Beware the policy that says that the Partial Disability claim ceases if you are able to work full time. Many claims for partial disability involve conditions that reduce your productivity, but not the hours you can work. For example, we have one professional client who prior to his breakdown, worked 60 per week. On medical advice, he now works 40 hours per week and at a less frenetic pace than previously. He is earning about one half of his pre-disability income. If he had the bad policy, he would be out in the cold. He has a good policy that recognizes reduced productivity as a Partial Disability. 7. Watch out too, for the policy that allows the insurer to deem that you are earning if you are medically able to work but are unable to earn. For example, you can t hold down the responsibility of partner or business owner, but medically you are able to work as a clerk. But, you can t find a job after all, who wants to hire someone who had a nervous breakdown 18 months ago and has lost his/her business? The bad policy can deem that you are earning what they say you are capable of earning, and will offset that amount against any benefit you expect. 8. Be careful of group policies that are cheaper than retail they often have restrictive clauses. One that we see and don t like provides that a Partial Disability benefit is only payable if you are working for the original employer So, if your illness means that you can t work as an accountant, but can as a gardener, you are out in the cold Discounts usually mean reduced benefits 9. Watch for restricted cover policies. Some insurers offer policies that only pay benefits if you suffer a major trauma type illness/injury. These do not cover stress and depression, but are cheaper and some salespeople find them easy to sell. We will not use them. Continued over the page Page 3

4 %%&"% " #$% & '( & ' 10. Agreed Value policies do not automatically pay out the Agreed Value if you are disabled. All Income Protection policies offset any on-going income you receive or are entitled to receive for the Agreed Value. It is logical that they do, but many salespeople are unaware of this, or overlook it. 11. The tax treatment of Agreed Value policies is still an area of concern. Two insurers believe that any benefit will be taxable as income and accordingly the premium is deductible. These insurers will allow you to cover up to 75% of income. Four other insurers believe that the benefit is not taxable and the premium nondeductible. These insurers will only Many thanks to all clients who pay their accounts electronically. This certainly speeds up the processing of your payments and avoids cheques getting lost in the post. We do request however that if your clients are paying invoices directly to us by direct credit or internet banking, that they include either your client ID number or the tax invoice number in one of the reference fields. We have allow you to cover 55% of income. IRD has a working party considering the issue and we await their decision. The risk is if you have the 55% cover and IRD rule that they are taxable/deductible and you have become uninsurable. You now only have cover of 55% of income and it is taxable Our preference is for the taxable/deductible route. In summary, there are excellent polices, offered by quality insurance companies with none of these traps, so you don t need to settle for second best. If you would like to know more, please contact Graeme Lindsay on had instances in the past where we have been unable to identify payments from our bank statements and a trace has been required from our bank. If you have any queries in relation to electronic banking, please contact Denise Marks. "#$ This is just a reminder for those clients who use our tax help services that we have a number of people working in the tax team. As at June, we have 3 Directors, 2 Associates and 4 Tax Managers who are all able to take your queries. Some clients have become accustomed to dealing with only one staff member and tend to ask for that person solely. This can often result in that person getting a back-log of phone messages, and a delay in them getting back to you. We encourage you to ask for Tax Help when you call for a quick query, and our friendly administration team will do what they can to put you through to someone immediately. There will, on occasion, be times when all tax help staff are unavailable, but by letting us know that you are after tax help, not one person specifically, we may be able to help you out a lot faster. If you would like to know more about our professional team, check out our website and look under the People section. Page 4

5 ' "()" The information contained within this newsletter is of a general nature only and readers are advised that even minor differences in factual circumstances may result in significantly different tax consequences. This newsletter is not intended to replace specific tax advice. As always, specific advice should be obtained for the particular factual circumstances. We accept no liability for persons relying upon information contained within this newsletter. At NSA, we pride ourselves on keeping up with technology. We ve been running a paperless office system for 5 years now and also integrate other technologies such as digital fax imaging and automated system workflows. In late-june, we will be going live with another new module in our technological empire. We have teamed up with the team at Convergence Limited and will shortly be implementing a software system called AbilitySuite. This programme manages everything from customer details, documents and workflow processes as well as s. In the move there may be a few changes for you, the customer, and we thought it prudent to make you aware of these changes. Set out below is a brief overview of some of the processes which take place at our office and what will happen for you. Contact Methods In our AbilitySuite Customer Relationship Management (CRM) module, we record contact details for you and your employees. Each person can have different phone numbers, addresses and fax numbers. When we enter your details into our system, we will add your personalised details. Please be aware that if you tell us that you would like to receive information via , you will receive all documentation through this medium (e.g. newsletters, phone notes, job receipts). Being that we are a paperless office, we prefer not to send out documents such as newsletters by mail. If you are currently receiving documents such as this newsletter by fax and would prefer to receive it by , please contact Kay on (09) Receipt of Work For work of an ongoing nature, or work that requires some investigation, we set up what is termed a Job. When we receive instructions and/or documentation from you ( s, faxes, letters), we will store these items in our new system and set up a job. At the time that the job is set up, you will receive some or all of the following documents: (i) A fee estimate letter (if you have requested an estimate) sent by either or fax; (ii) A job receipt letter sent by either or fax; or (iii) A personal from the consultant carrying out the work. If you have not requested an estimate for the work to be undertaken, you will only receive a job receipt letter. Phone Notes Our standard procedure for phone notes is to save them into our system and then send a copy out to our clients. This process will not change, however the sending process will be automated. If you call for advice, please check with the consultant that we have the correct details for you. s and Faxes All of our s will now be sent using Convergence s AbilitySuite Content Management & Archiving programme. s will be processed in the exact same way as in the past, but will have a small attachment at the bottom of each , which allows us to easily associate outbound and inbound messages with a client and/or job. Since s are now immediately archived in a central AbilitySuite database, it is now easy for any of us here at NSA to retrieve all s (and documents) relating to a client or job - which allows us to provide you with better service. Summary For you, our loyal and wonderful customers, it should be business as usual. However, we ask that you bear with us should anything go awry and problems arise. Once we have the system running at full capacity, we will be inviting clients to come to our office and see how the system works. The team at Convergence are fantastic and we would recommend this system to anyone in the accounting or legal fields. If you have any queries about AbilitySuite or any of NSA s processes, please don t hesitate to contact me. 8 "#? " Page 5