The Government has passed regulations implementing a new minimum financial reporting framework for companies that are no longer required to prepare general purpose financial statements.
This will generally be companies with total assets of less than $60 million or annual revenue of less than $30 million.
As these companies are still required to prepare special purpose financial statements for tax purposes.
Inland Revenue Department (IRD) has developed a set of minimum requirements in the Tax Administration (Financial Statements) Order 2014. The new reporting rules apply for income years beginning on or after April 1, 2014.
Some exceptions
IRD’s minimum financial reporting requirements do not apply (1) If other financial reporting requirements (e.g. under the Companies Act 1993 or Charities Act 2005) apply to a company instead (b) To entities that are not companies; their requirements will follow (c) To small companies (defined as companies that are not part of a group and have not derived income, or incurred expenditure, in excess of $30,000 in the year) and (d) Non-active companies (if a non-active declaration has been filed with IRD).
The requirements
The financial statements should include a profit and loss statement and balance sheet. These must be based on double entry accrual accounting principles, with amounts valued at tax (the default method), historical cost or market values (if they provide a better valuation basis). Prior year comparisons will also need to be provided.
Dividends and interest income must include imputation credits and resident withholding tax.
The following supplementary information should also be provided: (a) A statement of the accounting policies relied upon and any material changes in those policies (b) Reconciliations between accounting and taxable income (c) Taxation based fixed asset registers (d) Information required for completion of the IR10 form, including a detailed breakdown of ‘exceptional items’ (d) Specified related-party transactions between the company and a non-company (e.g. a trust or individual) or a foreign company. This includes details of outbound loans, interest expense, wages/salary and other payments for services, rents and royalty payments, as well as a reconciliation of movements in shareholders’ equity, and loans or current accounts to/from the owner and related parties. However, this requirement will apply only from April 1, 2015.
Application and changes
The new reporting rules will be relevant for companies that are not subject to the Financial Reporting Act 2013.
We expect that most small and medium sized companies, some subsidiaries of large companies, and overseas companies and subsidiaries of such companies with revenues of less than $10 million and assets of less than $20 million will be affected. They should take note of the minimum requirements.
The rules are broadly consistent with those consulted in November 2013.
The Order contains the detailed rules and a few important tweaks to the original proposals.
Some omissions
The following requirements, which were in the original proposals, have been omitted from the Order: (1) Reconciliations of tax loss balances and opening and closing imputation credits (2) The need to track the company’s Available Subscribed Capital (ASC) and realised capital gains (3) The related-party transaction schedule needing to include all transactions with associates, other than vaguely defined casual/irregular transactions and those within a wholly-owned New Zealand group. The Order limits the schedule to domestic non-company transactions and cross-border company transactions of a specific nature (i.e. interest, remuneration, rents and royalties). This targeted approach appears to be aimed at identifying key profit shifting risks.
Changes positive
The changes are positive and should help reduce some of the compliance costs for affected businesses from complying with IRD’S minimum requirements.
In particular, KPMG is pleased that ASC and capital gain amounts need not be tracked, as this would have imposed requirements that do not exist at present.
However, it is good practice to track these amounts. These amounts typically allow tax-free payments to be made by a company. Tracking them now means the amounts are readily proved and confirmed when they become relevant. Companies will have a choice to follow this good practice or not.
Similarly, while we welcome the narrowing of information required in the related party disclosure schedule and the application date of April 1, 2015, we can see no reason for disclosure of interest information, for example, when this information is already captured by IRD via other means (i.e. RWT/NRWT reconciliations).
Our main concern is the ability for IRD to prescribe additional data points in the IR10 and have these form part of the minimum financial reporting requirements.
This ‘back door’ needs to be monitored, and its use limited, to provide certainty to businesses that IRD cannot arbitrarily change the reporting requirements.
Dinesh Naik is Tax Partner at KPMG based in Auckland. The above is only a part of a long analysis. For full text, please visit www.kpmg.com/nz. KPMG is the Sponsor of the ‘Business Excellence in ICT Category’ of the Indian Newslink Indian Business Awards 2014.
