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Part two: New financial reporting standards – charities

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Introduction

The new financial reporting standards are now in place (as at 1 April 2015) for registered charities.  Part one of this series summarised the different tiers of the reporting standards, and how to move between tiers.  This part outlines the non-financial information which is required to be included in the reports.

Entity information

The new reports must contain a general descriptive summary to provide information concerning a charity’s activities including what it does and how it is organised.  This is necessary to assist the public’s understanding and to help with the interpretation of the performance report.  This should include the following details:

  • The charity’s name, type and legal basis (for example, charitable trust or incorporated society);
  • A purpose or mission and the key difference or awareness the charity is trying to achieve;
  • General information on the structure of the charity’s operations.  This should include governance arrangements and details of those holding governing and managerial positions in an organisation;
  • A brief overview of the charity’s main sources of income and resources (as a brief introduction as this is covered further in later sections of the financial report);
  • The main methods used to raised funds (if applicable);
  • Details of  volunteer numbers and information about reliance on any goods or services provided to the organisation;
  • Any additional information that may assist the public to gain an overall understanding of the particular charity.

The above points are required only for the purpose of a summarised introduction to the financial reports.  The details of each point are required to be expanded on in the financial performance report headings, set out in more detail below.  The amount of detail required will depend on the size of the charity and the complexity of its operations.

Statement of service performance

A charity should provide mainly non-financial information under this heading.  This information is required to help understand the activities of the entity during a financial year. This can be broken down into two main sections:

  • Outcomes: what a charity is seeking to achieve in terms of their impact on society.  This is closely related to its mission or purpose as outlined in the entity information above but this section should aim to provide further specific details on its short to mid-term goals.
  • Outputs: this section should provide quantification of the goods and/or services that a charity has delivered in the current year.  A charity is not expected to provide detail on every output in a year, rather only the outputs that are significant to performance.
Statement of financial performance

The performance report will need to include financial statements that show details of a charity’s revenue and expenses (balance sheet) and the resulting surplus or deficit from each financial year.  Revenue, for the purposes of financial statements, is income other than that received from borrowings or asset sales.  Examples of revenue may include public donations, philanthropic grants, donations, membership fees received, and proceeds from goods and services to a charity on its own account.  Expenses are regarded as day to day expenses of an organisation such as petrol, rent, office supplies, advertising, salaries/wages and power.  Capital expenses are not required to be reported.  These are fixed asset purchases of significant value to an organisation and that last longer than 12 months.  For example, motor cars, computers, furniture, as well as additions to existing assets such as buildings or land, all of which will not need to be reported.

Statement of financial position

Charities will be required to provide details regarding their total current assets and liabilities.  This is essentially a snapshot of what the charity owns and owes and the value of its member’s financial interest in the charity.  “Current” for the purposes of the report means assets or liabilities that are expected to be cashed within the following reporting period.  For example bank accounts, cash, debtors and prepayments, inventory, property, equipment and investments.  Liabilities that are required to be reported may include bank overdrafts, creditors/accrued expenses, employee costs payable, unused donations or grants and any loans owed by a charity.

Statement of cash flows

Cash flow statements are required to inform those interested about a charity’s cash movements during a financial period.   A statement of financial performance indicates the revenue and expenses while a statement of cash flow provides those interested with information around the timing of transactions.  A charity’s cash flow statement is comprised of payments and receipts from operating and investment/financing activities.  For instance a charity will need to report on receipts from operating activities such as donations, fundraising, fees, subscriptions, goods and services and dividends and any operating payments made to suppliers and employees.  Investment receipts may include things like property, equipment or capital from members while investment payments comprise payments to acquire property, equipment or capital repaid.

Next steps for registered charities

While the financial side of the reports will not be different to what was done previously by many charities, the non-financial aspects of the new reports will be.  No doubt some charities may find the extra steps time consuming where resources are already stretched.  Other charities may see the changes as an opportunity to reflect on the overall purpose of the organisation and how it is achieving or attempting to achieve that purpose.  This reflection may lead to a refocusing of the activities long-term.  In any event, the information will be available to the public, funders and other stakeholder, and may influence how charities are supported by these stakeholders.

This article is part two of a three part series.  The final article in this series will summarise the rules for related entities and provide guidance as to when consolidated accounts are required.

If you would like further information please contact Jessica Middleton on 07 958 7436.

What’s mine is yours, right?

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Introduction

The Property (Relationships) Act 1976 (“the Act”) sets out the law governing the distribution of relationship property on separation.  The starting point in any relationship property dispute is equal sharing between the two parties.  However, a contracting out agreement may be entered into by the parties and this will take priority over the Act (historically known as a “prenuptial agreement”).  That said, entering into such an agreement demands caution; there are strict rules and conditions that must be satisfied in order for the agreement to have any legal footing.  If the correct procedure is not followed, the agreement may well be set aside.

Requirements for a valid agreement

For an agreement to be valid regardless of what it may be trying to achieve, a specific procedure must be followed when the agreement is drawn up:

  • The agreement must be in writing and signed by both parties;
  • Each party must have independent legal advice;
  • The signature of each party must be witnessed by a lawyer;
  • The lawyer who witnesses the signatures must certify that the implications of signing have been explained to both parties.

As these factors indicate, an agreement drawn up at the kitchen table will not be enforceable regardless of the intention or agreement of the parties.  This is to ensure that both parties understand and agree to exactly what they are signing, because often it can be overlooked when parties are caught up in the emotion of the relationship.

You have a valid agreement – but is it enforceable?

Assuming the procedural requirements above are followed, on the face of it the agreement will be valid.  However the question then becomes will it stand the test of time?  Relationships are not static and the assets and liabilities of each party will continue to develop.   A contracting out agreement should be treated as a living document, constantly evolving, and therefore should be updated as you would your will.

An agreement made in light of current circumstances will not necessarily be relevant five years later if the position of the parties has changed so that it would be a “serious injustice” to uphold the agreement.  As earning capacity, assets and debts change, the agreement may become less and less fair, which may give rise to a serious injustice.   However the passing of time in itself will not invalidate an agreement; other circumstances must be taken into account.

In making an assessment of whether the agreement will be upheld the court will have regard to:

  • The provisions of the agreement;
  • The length of time since the agreement was made;
  • Whether the agreement was unfair or unreasonable at the time it was entered into;
  • Whether the agreement has become unfair or unreasonable in light of changes in circumstances;
  • The fact the two parties wished to achieve certainty with the agreement;
  •  Any other matters the Court considers relevant.

Taking into account all of these factors that may be relevant, if the Court is convinced that the provisions have given rise to a serious injustice then the agreement will be set aside and the equal sharing provision under the Act will apply.

One particularly common consideration is whether the agreement has become unfair or unreasonable since the agreement was entered into.  Whether or not the change in circumstances was foreseen will also be relevant.  Not every injustice will entitle a Court to set aside an agreement.   There must have been at the time of entering into the agreement, or subsequently because of a change of circumstances, unfairness or a lack of equity of a substantial kind.

What is a “serious injustice”?

When undertaking its assessment the Court is essentially looking for a significant change in circumstances of one party compared to the other, thus making the agreement that was entered into significantly unfair at the time of separation.  A common example is where one party is unduly forced to sign an agreement that the party is not happy signing, that is to their own detriment or the others benefit.  There must be a mutual agreement between the parties.

An example is the Family Court decision of M-LA v AVW.  In this case, due to the agreement to keep all assets separate, the result would have left the wife with $4,387.00 in assets and the husband with $289,903.00. The reason was because the wife had given up work in order to care for a child.  The Court held the agreement caused a serious injustice, as the agreement “went too far in depriving the wife of any realistic opportunity of accruing relationship property”.   The structure and changes to the relationship over its course invalidated the agreement, showing the importance of keeping the agreement updated and relevant over the course of the relationship, regardless of how long the relationship is expected to last.

Conclusion

Continuing to update a contracting out agreement over the course of a relationship is vital.  Although it may seem costly, as a percentage of the assets you are protecting, the legal fees are minimal and it is best to be safe and not risk having the agreement pulled apart at the mercy of the Court.   The agreement should be updated every few years or whenever there is a significant change in the dynamic of the relationship.

If you would like further information please contact Renika Siciliano on 07 958 7429.

Residential care subsidy applications and trust reversals

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Introduction

The 2011 abolishment of gift duty means that property or money of any value can be freely gifted by natural persons without any duty imposition.  However, gifting limits allowed under the Social Security (Long-term Residential Care) Regulations 2005 remain unchanged and therefore gifting property to a Trust or third party (or company) must be done with caution.  In some instances, where a home has been transferred to a Trust, the question is whether an applicant’s home should remain in the Trust, or be returned to the settlor prior to the application for the rest home subsidy.

The gifting limit

These limits are $6,000 per 12 month period in the five year gifting period before the date of assessment for a residential care subsidy, and $27,000 per year for each 12 month period prior to this. Where an applicant for a subsidy has previously gifted more than either of these limits, eligibility may be affected when applying for a subsidy.

The Court of Appeal in B v The Chief Executive of the Ministry of Social Development [2013] held that these gifting limits apply per couple.  That is to say, if a couple gift a total of $54,000 ($27,000 each) to a Trust or third party, half of this may be included (i.e. “added back”) in an assessment by the Ministry of Social Development (MSD) if the gift is made outside the five year gifting period.  A gifting programme in the five years prior to the application being made can be entered into.  The yearly (12 month) limit imposed here is $6,000.

A failure to accurately disclose all gifting may well result in a finding of “deprivation”. The MSD will take deprivation into account in an assets assessment, so it is vital that assets are disclosed. Deprivation may also be found where assets are sold at undervalue, finance is restructured so as to reduce the income or assets of the applicant, or ownership of property is transferred from the applicant to a third party.

Threshold and eligibility

Current Government policy is very much along the lines that if an individual has the resources to support him/herself in relation to residential care then he/she will not receive assistance from the State.  The MSD will assess each person on the basis of the value of his/her assets and his/her ability to pay.

There are currently two asset value thresholds for an applicant aged 65 years or older, which will render an applicant eligible for a residential care subsidy:

  • Threshold A is $218,423 (including the value of the applicant’s house and car), and may apply if the applicant is single, or if both the applicant and partner are in long-term residential care;
  • Threshold B is $119,614 (not including the value of the applicant’s house and car), and may apply for a couple if only one spouse is in long-term residential care.  A couple eligible under threshold B will however, have the option of opting for threshold A instead, if they wish.

Certain assets are always excluded from an MSD assets assessment: personal belongings, such as clothing or jewellery; household furniture and effects; and pre-paid funeral expenses up to $10,000 in a recognised funeral plan.

Effect on a trust

These gifting limits create the anomaly that a settlor of a Trust may end up in a worse position having his/her home in a Trust, than that which would apply if they had never gifted away the property in the first place.  If the value of the gifting is above the limits set out above, this will be added to the applicant’s asset value when the assessment is conducted.  If the value is above threshold A, the applicant will not be eligible for a residential care subsidy.  An applicant in this situation is also unable to claim under threshold B for the personal home exemption, as the home is owned by the Trust.

There is however a silver lining: if “but for” the gifting of the home to the Trust, the applicant would have been below threshold B, a Trust reversal may be initiated.  This means ownership of the property in the Trust will be distributed back to the settlor of the Trust.  The settlor will be in the same position he or she was in prior to the gifting.  Such a situation will only arise if the applicant would have otherwise been under the threshold B value ($119,614), when totalling the value of his/her assets excluding home and car.

Trust income

Aside from the assets assessment of the individual, MSD will also consider the income of the applicant in an income assessment.  Income from a trust is considered to be a form of deprived income. “But for” the Trust – the income would have been available to the settlor(s) of the Trust.  The current income thresholds for the year 1 July 2014 to 30 June 2015 are:

  • Single applicant: $963 per year;
  • Couple, if both are in care: $1,925 per year;
  • Couple, if only one is in care: $2,887 per year.

MSD will look at the deprivation by the applicant settlor and may (and in most cases will) “add it back” to the financial means assessment.  This means that Trust income will usually be taken into account in any income assessment.  The MSD position is that an applicant should take all reasonable steps to maximise his/her income.

Conclusion

It is crucial that every applicant understands the range of choices available, and the implications of each of those choices, not only in the short term but in the later stages of life. Before deciding to gift property to a Trust, it is important to consider the size of the gifting, and how gifting will affect eligibility for a residential care subsidy. It is important to seek legal advice on the best approach to gifting assets, as future planning is essential, taking into account the implications of each option.

If property has already been transferred to a Trust, legal advice should again be sought to ascertain whether a Trust reversal should be commenced.  A number of factors need to be considered, including: what assets (other than the house) the Trust has; what assets the applicant has in his/her personal name (for the purpose of a threshold calculation); wider trust obligations; and the other implications of reversing the Trust. Other benefits in retaining a Trust may of course be relevant. All of these factors need to be taken into account to ensure that an informed decision is made.

If you would like further information please contact Gerard Rennie on 07 958 7422.

Landlocked Māori land

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The Māori Land Court (“the Court”) has the ability to order reasonable access to landlocked Māori land.  This article examines the considerations the Court takes into account when determining whether to grant access, what the Court can actually do when faced with an application for access, and how McCaw Lewis can help.

Te Ture Whenua Māori Act 1993 (“the Act”), which governs Māori land, recognises that land is a tāonga tuku iho of special significance to Māori and therefore the retention of it should be promoted, and the occupation, development and utilisation of it facilitated.

It is with this philosophy in mind that the Court has the jurisdiction to order reasonable access to Māori land, being either Māori freehold land or general land owned by Māori that ceased to be Māori land under the Māori Affairs Amendment Act 1967, where that land does not have reasonable access i.e. it is surrounded by other blocks and has no road, driveway or easement leading to it.  The key consideration is whether there is “reasonable access” to the block.  In some situations access to a block by boat may be considered reasonable where in other cases it may not be considered reasonable.  Each application is assessed on a case by case basis weighing up all the circumstances.    Therefore, whilst informal arrangements can be made with neighbours to access your land, an application to the Court is the only way this access can become legal.

With this in mind, and given up to a third of Māori land was landlocked in 2000, the jurisdiction of the Court to unlock the land is particularly important.

Considerations of the Court

Whereas in the past applications to unlock Māori land had to be made to the High Court, since an amendment to the Act in 2002 applications are made to the Māori Land Court.  This, it is hoped, makes it easier for owners of landlocked Māori land to bring their applications before a less formidable and less costly court.  Under the Act, when considering an application, the Court must have regard to a number of factors:

  • The nature and quality of the access (if any) to the landlocked land that existed when the applicant purchased or otherwise acquired the land;
  • The circumstances in which the landlocked land became landlocked;
  • The conduct of the applicant and the other parties, including any attempts that they may have made to negotiate reasonable access to the landlocked land;
  • The hardship that would be caused to the applicant by the refusal to make an order in relation to the hardship that would be caused to any other person by the making of the order;
  • Other factors where the access would cross conservation land or a railway line; and
  • Such other matters as the Court considers relevant.

Of those matters we consider the following in more detail.

The nature and quality of the access (if any) to the landlocked land that existed when the applicant purchased or otherwise acquired the land

Since the establishment of Māori freehold land titles legislation has sought to ensure that special succession rules exist in order that such land remains with the whānau upon the death of an owner.  Therefore, today, most owners of Māori land hold title through succession and not through purchase.  In light of this, it is unlikely that the inherited nature of access will be an impediment to owners seeking to unlock Māori land.

The circumstances in which the landlocked land became landlocked

Generally, given Māori land was landlocked through no fault of the owners (through historical partitions or because of public works takings) it is unlikely that owners applying for reasonable access will be denied upon this consideration.

The hardship that would be caused to the applicant by the refusal to make an order in relation to the hardship that would be caused to any other person by the making of the order

The Court has found that, if it comes to the view that the benefits for the owners as a whole outweigh the detriment to the landowner affected by the application, or that the detriment can be compensated for or dealt with in some way, then the Court may look favourably upon the application, provided that all other requirements have been met.

In Houpapa v Woods – Taharoa A Sec 6D No 2 Block (2012) 44 Waikato Maniapoto MB 167 (44 WMN 167) the Court considered these matters closely.  In that case the applicant had applied for access over a neighbouring block as there was no access by road.  There was access by boat and by foreshore however the applicant gave evidence that these methods were expensive and difficult.  Despite the application being dismissed as only one of a number of owners had applied (which did not equate to the statutory requirement that “the owners” make the application), the Court provided a comprehensive decision which considered each of the factors closely.  There the Court set out a number of matters the owners would need to address if they were to make an application for access in the future including:

  • When determining what was considered “reasonable access” the Court took into account the purposes which the land was used for as well as what physical access is reasonably necessary in this case.  Here, the Court indicated that it would need further evidence as to what the intended land use would be before making an assessment as to the kind of access that was reasonably necessary.  It did however note that access by boat or along the foreshore was sufficient for recreational uses of the block, including visiting wāhi tapu that may be on the block;
  • Both the applicants and neighbours raised misconduct on the part of the other party.  The Court found that none of the evidence produced for either side was sufficient for it to determine who was at fault, or who was most at fault.  Regardless the Court found that such misconduct by each party, even if proven, would not be sufficient on its own to determine the application one way or the other, although it might weigh with other factors;
  • The applicant alleged he would suffer hardship if the application were not granted due to the difficulty he would have in establishing a proposed economic farm on the property if he did not obtain easier access.  The Court was sceptical about the proposal and noted a lack of business plan, feasibility study or other evidence to show there would be economic benefit concluding that any future application would need to address these matters if it were to have a chance of success.

The above factors highlight just how unique every application for access to landlocked Māori land is and while there are some general factors the Court will look at when faced with such an application, each case is determined on its merits.

What can the Court do?

If, after considering all matters the Court is of the opinion that reasonable access should be granted to the landlocked land, the Court may create an easement (which gives you permanent permission to use a piece of land for access) or transfer another piece of land to the owners of the landlocked land.

When granting access the Court can also set such terms and conditions as it thinks fit, most of which involve costs to the applicant, including payment of compensation or exchange of land with another person, the fencing of any land and the upkeep and maintenance of any land or fence.

How can McCaw Lewis help?

McCaw Lewis can assist you to determine whether your land is landlocked, negotiate with neighbours for access and, if necessary, make an application to the Court.

If you would like further information please contact Kylee Katipo on 07 958 7424.

Commercial leases: What happens when they come to an end?

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Reinstatement

The current version of the Auckland District Law Society (ADLS) commercial deed of lease form provides that the tenant will, at its own expense, if required by the landlord, no later than the end or earlier termination of the lease, reinstate the premises to their condition as at the lease commencement date.  If the tenant fails to reinstate then any costs incurred by the landlord in reinstating the premises will be recoverable from the tenant.

Under the ADLS form of lease, if the lease is assigned to a subsequent tenant, then the subsequent tenant as at the expiry or earlier termination of the lease is liable to reinstate the premises to the condition of the premises as at the commencement date of the lease to the original tenant.

Reinstatement obligations are potentially wide-ranging and may, for example, include the removal or reinsertion of office partitioning, cabling, wiring and other office fit-out, computer systems, bathroom and kitchen facilities together with repainting, redecoration and replacement of floor coverings. This can lead to significant costs for a tenant. Where possible, the potential reinstatement costs should be factored into the calculations made by a tenant when considering the financial viability of the letting.

In addition, both the tenant and landlord can incur costs (such as professional fees, internal management costs and the like) in attempting to resolve any dispute between them around reinstatement issues and as to exactly what the state of the premises was at the commencement date of the lease. As many years may have elapsed since the original lease term commenced, it can be very difficult to establish the condition of the premises at the commencement date without any supporting evidence.

Premises condition reports

The inclusion of a premises condition report (sometimes also referred to as a schedule of condition) in a deed of lease is potentially very useful in determining the state of the premises at the commencement date of the lease.

The current version of the ADLS commercial deed of lease form includes the option for the parties to include a “premises condition report” and provides that where such a report is included, it will be “evidence as to the condition of the premises at the commencement date of this lease”.

The inclusion of a comprehensive premises condition report in the deed of lease means that the parties have clear evidence as to the condition of the premises at the commencement date.

Summary

Before entering into lease arrangements, landlords and tenants should thoroughly check the reinstatement obligations under the proposed lease.  If you have any queries in relation to reinstatement obligations either before entering into a new lease or when approaching the expiry of a lease we recommend you obtain legal advice.

If you would like further information please contact Dale Thomas on 07 958 7428.

Building law changes: Enhanced consumer protection

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Introduction

The Ministry of Business, Innovation & Employment (“MBIE”) has recently announced a number of new consumer protection measures with the aim of improving practices in the residential construction sector.  The new measures are contained in the Building (Residential Consumer Rights and Remedies) Regulations 2014 (the “Regulations”).

The Regulations have been introduced following the Building Amendment Act 2013 (the “Amendment Act”), both of which came into force on 1 January 2015.  The Amendment Act is the result of a comprehensive review of the Building Act 2004 (the “Act”), which is the primary piece of legislation governing the New Zealand construction industry.

New rights for clients – what you can expect from your builder

The key consumer protection measures introduced by the Regulations and the Amendment Act include the following:

  • For all residential building work costing $30,000 (including GST) or more (the “price threshold”):
    • Contracts are to be in writing;
    • Building contractors are to provide checklists and disclose certain information;
    • There is now minimum content that must be included in residential building contracts;
  • There are various default clauses that are taken to be included in a residential building contract, in the circumstances outlined further below;
  • Information that a building contractor must provide to its client after the building work is completed; and
  • Fines of $500 where a building contractor breaches any of the written contract, disclosure or checklist requirements.

The price threshold is based on the total price for all work being done by the building contractor, regardless of whether it is covered by one or more contracts.  Any attempt to break the required work into separate, multiple, lower-priced contracts to get round the Regulations will therefore be ineffective.

Subject to the price threshold noted above, the Regulations apply to all “residential building contracts”.  The Regulations will therefore apply both to owner-occupier homeowners and residential landlords undertaking construction work on their rental properties.

Some further details on the new measures follow below.

Checklists and disclosure statements

The checklist prescribed by MBIE contains useful information for a client to consider before engaging a builder on a construction project.  The checklist covers various points, including:

  • Details of the type of construction work caught by the Act;
  • Agreeing the project scope and management structures;
  • Issues to consider in hiring competent building contractors;
  • Agreeing on a contract price and making payments;
  • Having a written contract;
  • The importance of effective communication; and
  • Resolving disputes.

The prescribed disclosure statement requires the builder to provide details of various project-specific matters relating to the proposed work, including:

  • The name of the building contractor;
  • Contact details for the person responsible for supervising the work;
  • Details of relevant insurance policies held or to be held by the building contractor; and
  • Information about any guarantees or warranties which the building contractor offers in relation to the building work.

A building contractor who knowingly provides false or misleading information, or who knowingly leaves out information they are required to provide in the disclosure statement, is liable to a fine of up to $2,000.

Minimum content

The Regulations set out minimum requirements for the content of contracts for building work above the price threshold.  This includes:

  • Party details;
  • Details of the works;
  • Start and completion dates;
  • Payment arrangements;
  • The contractual mechanisms governing how changes to the scope of the work (also known as “variations”) will be managed and agreed; and
  • Dispute resolution procedures.
Default clauses

The Regulations prescribe default clauses which will be considered to be part of a construction contract in the following circumstances:

  • Where residential building work is above the price threshold and there is no written contract; or
  • Where the written contract does not including the minimum content required by the Regulations.

The default clauses cover such aspects as:

  • A requirement for the building contractor to obtain all necessary building consents (written and oral contracts) and code compliance certificates (oral contracts only);
  • How variations will be managed;
  • Monthly progress payments; and
  • How disputes will be managed.
Post-completion information

The Regulations set out the information and documentation that a building contractor must provide to a client on completion of the building project.  This includes:

  • Copies of relevant insurance policies;
  • Copies of any guarantees and warranties relating to the work; and
  • Information on how to maintain any element of the building work if the validity of any applicable guarantee or warranty could be prejudiced by the failure of the client to carry out maintenance in the prescribed manner.
Other relevant provisions

Aside from the consumer protection provisions of the Regulations, the Amendment Act itself sets out implied terms that apply to all residential building work, regardless of whether or not there is a written contract and what the contract terms are.  The implied provisions are wide-ranging in nature and cover such aspects as:

  • The building contractor’s compliance with the Building Code;
  • The requirement for good workmanship;
  • The timely completion of work; and
  • The remedying of any defects notified within one year of completion.

Considerations for clients

Before embarking on a residential construction project, clients should familiarise themselves with their rights as consumers under the new Regulations and the Amendment Act.  The MBIE website contains a useful consumer guide – Building or Renovating? Do Your Homework (2014) – for those considering undertaking residential building work.

For work above the price threshold, a client can now expect to receive from a builder:

  • A written building contract containing prescribed minimum content;
  • A checklist;
  • A completed disclosure statement; and
  • A pack of information following completion of the work, including applicable insurance details, product guarantees/warranties and maintenance advice.

Even if the proposed building work falls under the price threshold specified in the Regulations, it is still recommended that the client and builder have a written contract to help avoid later misunderstandings, and clients may still request a checklist and MBIE-prescribed completed disclosure statement from the building contractor.

If you would like further information please contact Daniel Shore on 07 958 7477.

Part one: New financial reporting standards – charities

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The new standards

Registered charities in New Zealand enjoy a privileged position in that charities are not required to pay tax on income.  Despite this privileged position, to date, there have been no minimum standards on the content or the quality of financial standards for charities.  From 1 April 2015, new reporting standards come into effect for all registered charities in New Zealand.  One of the aims of the new standards is to raise the standards, ensure a level of conformity in reporting, and ensure charities remain accountable to the public.  All charities will now need to complete annual reporting which include, completing an annual return, and attaching to that annual return financial statements/performance reports which comply with the new standards.

Summary of tiers

The new standards have been set by the External Reporting Board (XRB) and introduce four different reporting tiers.  The tier that a charity may report under is determined by the annual expenses or operating payments of its previous two financial years.   The reporting tiers one-four aim to accommodate large to small scale charities.  The tiers mean that smaller charities prepare simplified financial statements and larger charities will be required to use a set of more detailed accounting standards.  It is estimated that 95% of charities will be eligible to use the simplified standards while larger scale charities will have the assistance of specially designed templates and guidance notes.

Tier one

All charities default into tier one but have the option to report to another tier if they meet the criteria. Charities with annual expenses over $30 million or with public accountability must report under tier one.  This tier is generally for large profit entities who must report in an independent and personally designed format.

Tier two

This tier is suitable for non-publically accountable entities and non-large entities with under $30 million annual expenses.  Unlike the full standards applicable in tier one, tier two is subject to a reduced disclosure regime.  This means that significantly less disclosures are expected, reducing the costs of preparing financial statements.

Tier three

This tier is suitable to charities with annual expenses under $2 million and without public accountability.  Charities that use accrual based accounting must report to this tier or the above tiers. Accrual based accounting records the revenue and expenses incurred by the charity at the time when they were earned or incurred (accrual).  Charities are able to use the simplified formatting standards with the assistance of specially designed templates and guidance notes for reporting on accrual based accounting.

Tier four

All charities with annual operating payments of less than $125,000 and without public accountability will have the option of reporting under tier four.  The simple formatting report under this tier will allow charities to continue using cash based accounting as long as operating payments are below the threshold for this tier.  Cash based accounting is typical in organisations where transactions tend to be small in scale and less complicated than that of larger scale transactions.  Transactions that are cash based are recorded at the time that cash is received or paid, rather than when earned or incurred.  If a charity currently uses accrual based accounting and would like to continue this method of recording then it will have to report to tier three regardless of whether their operating payments are below $125,000.  Operating payments do not include capital payments, for example the purchase of resources (physical assets or investments) or the repayment of borrowings.

Moving between tiers

The annual expenses or operating payments for a charity may change over time meaning the charity exceeds the requirements of the current operating tier.  In these circumstances, a charity may continue to report in their current tier for the accounting period and the following two accounting periods.   It is not until the third accounting period that it will have to report at a higher tier.  If a charity sits around the cost thresholds or fluctuates between the tier thresholds (and expects it will exceed the thresholds in the future) then a charity should consider reporting at another tier to avoid having to change reporting tiers at a later date.

This article is part one of a three part series.  The next article in this series will summarise the information that needs to be included in the new reports.

If you would like further information please contact Jessica Middleton on 07 958 7436.

Engineers and professional discipline: The Christchurch earthquake and the CTV building

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Introduction

In 1986 David Harding was involved in the design of the CTV Building in Christchurch.  As is now well-documented, this building collapsed in the earthquake of February 2011 – with fatal consequences.  At the time of designing the building, Mr Harding was a member of the Institution of Professional Engineers New Zealand (“IPENZ”).

Following the building’s collapse, IPENZ received complaints regarding Mr Harding’s involvement in its design.  The complaints initiated IPENZ’s disciplinary procedure, which resulted in an investigating committee in April 2014 determining that the complaints should be referred to a Disciplinary Committee.  In June 2014 Mr Harding resigned his membership of IPENZ.

The IPENZ Disciplinary Committee

In August 2014 the complaints went before an IPENZ Disciplinary Committee hearing.  Mr Harding argued that the committee had no jurisdiction to hear the complaints on the basis that he had resigned his membership of IPENZ a few weeks previously.

Despite Mr Harding’s objections, IPENZ proceeded on the basis that it did have jurisdiction and it subsequently released its ruling on that issue, Harding v Institution of Professional Engineers New Zealand Incorporated [2014] NZHC 2251.

Judicial review application

Following the IPENZ ruling, Mr Harding sought a judicial review of IPENZ’s decision that it had jurisdiction despite the resignation.  Mr Harding submitted in support of his position that:

  • IPENZ’s jurisdiction was limited to current IPENZ members only; and
  • It would be a breach of natural justice for IPENZ to retain jurisdiction in such circumstances.

In response, IPENZ contended that:

  • It was the individual’s membership status at the time of the complaint or conduct in question (and not at the time of the hearing) which impacted on the question of jurisdiction; and
  • It was sufficient that Mr Harding was a member of IPENZ at the time of the conduct giving rise to the complaints and when the complaints were made.

The Court focused on the internal rules and disciplinary regulations of IPENZ.  It was agreed that Mr Harding was a member of IPENZ at the time of his involvement in the design of the CTV Building and at the time of the complaints which were the subject of the disciplinary hearing – these points were not in contention.

The sole issue between the parties was whether the IPENZ rules and regulations provided jurisdiction to hear a complaint and to make a decision regarding a former member of IPENZ – and so (in the language of judicial review and public law), whether the decision of IPENZ was ultra vires (beyond its powers).

The IPENZ rules and regulations

The Court considered the IPENZ rules, in particular the following:

  • Rule 3, which sets out the object of IPENZ.  This is described as “the advancement of the professions of engineering within New Zealand”;
  • Rule 4, which sets out the professional obligations of IPENZ members, including the requirement for an undertaking by each candidate for membership that they will abide by the IPENZ rules and regulations.  Under Rule 4, members must also comply with a code of ethics and with obligations of competence and good character;
  • Rule 11, which requires IPENZ to prescribe disciplinary regulations.

Upon receipt of a complaint which may indicate that a member has acted in breach of the Rule 4 membership obligations, the rules provided that the Chief Executive of IPENZ must (in other words a mandatory, not optional, process) either refer the matter to a Disciplinary Committee or carry out further investigations.  Upon completion of its investigations, an investigating committee must (mandatory again) either refer the matter to a Disciplinary Committee or dismiss the matter.  Under Rule 11.5 there were various sanctions available to the IPENZ Disciplinary Committee, including suspension or expulsion.  If there were grounds for discipline, a Disciplinary Committee was required to decide whether and how to exercise its powers under the rules.

Mr Harding argued that as he was no longer a member of IPENZ, its rules and regulations no longer applied to him.  He further contended that as the Disciplinary Committee no longer had any power to make any orders against him, proceeding to hear the complaint was an empty exercise.  IPENZ accepted that it no longer had powers to make any orders against Mr Harding as a member of IPENZ.

The decision

In considering the meaning of the term “member” in the context of the rules, the Court concluded that a member included someone who may have resigned prior to the hearing of complaints made against him by a Disciplinary Committee.

Although Mr Harding’s resignation limited the Disciplinary Committee’s full range of potential disciplinary measures, the Court noted that the sanction of publication still remained open to IPENZ, and this could have a punitive effect in its own right.

The Court emphasised the importance to the public of there being an effective complaints procedure, to investigate and hold to account individuals who are members of a recognised professional body at the time of the conduct the subject of the complaint, or at least the time the complaint was made.

The Court also rejected Mr Harding’s suggestion that if “member” was limited to a current member, he would be denied the opportunity to appeal to IPENZ and that this would constitute a breach of natural justice.  The Court held that just as the committee had jurisdiction in respect of Mr Harding’s conduct as an IPENZ member, so too would Mr Harding be entitled to make a request for an appeal in respect of any sanction imposed by the committee.

Mr Harding’s application for judicial review was therefore unsuccessful.

Conclusion

This case will be of interest to engineers and others involved in the construction industry, but it is also of potentially broader application to members (both current and former) of any recognised professional body.  As a matter of pure legal interpretation the Court found that IPENZ had jurisdiction under its rules to hear complaints and make orders in respect of a former IPENZ member.  That must also surely be the correct outcome from a public policy perspective.

If you would like further information please contact Daniel Shore on 07 958 7477.

Changes on the horizon for community housing initiatives

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Recent amendments to the Income Tax Act 2007 create a tax exemption for charities that provide affordable housing.  Until the amendment, the provision of affordable housing was not seen as charitable. This is because it did not relieve poverty and there were associated private benefits to the housing provider (for example see Re Queenstown Lakes Community Housing Trust).  Organisations that only provided affordable community housing were not eligible for a tax exemption.

The Income Tax Act was amended with the introduction of new section CW42B, which created a general tax exemption for “income derived by a community housing entity”.  The section defines a community housing entity as a trust or company whose activities are predominantly for the provision of housing.  The entity must not carry out the activities for the private pecuniary profit of any individual or for the benefit of any individual who has some control over the activities; the profit must either be retained by the entity, or distributed to one of the following sources:

  • Other community housing entities that meet the requirements under this section;
  • Beneficiaries or clients of the entity;
  • Tax charities (registered under the Charities Act 2005);
  • For charitable purposes (as defined by law).

When the above threshold is met the entity will, on the face of it, be eligible for the tax exemption under this section.  However two exceptions are contained within the section.  Firstly, if less than 85% of the entities beneficiaries/clients are persons, or classes of persons described in the regulations then the entity will not be eligible for a tax exemption.  Secondly, if the beneficiaries /clients of the entity are substantially different from the persons described in the regulations, the entity will not be eligible for a tax exemption.  The problem with these exceptions being that the regulations are yet to be released (as at December 2014).

The general factors that may be used by the Minister of Revenue and Minister for Housing for creating the regulations have been released however.  The factors for determining the “persons or class of persons” for the purposes of assessing whether an entity is eligible for a tax exemption are:

  • Each person’s location;
  • The composition of each person’s household;
  • The combined income of each person’s household must be below a maximum (yet to be set);
  • The value of the assets held by each person (in relation to a cap yet to be set).

The regulations, when released, will detail what the relevant geographical locations, household compositions, and income and asset caps are.  Before the regulations are published it is difficult to speculate on where the line will be drawn in relation to each of these factors.  However we recommend that charities or other entities that may be affected by the changes begin collating this information.  When the regulations are released, the affected entities should seek advice on how the regulations will affect tax liability.

If you would like further information please contact Dale Thomas on 07 958 7428.

Health and safety reforms: What you should know

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Introduction

After the Pike River Mine tragedy and the subsequent Independent Taskforce report, the Government embarked on reviewing the current Health and Safety in Employment Act 1992.  As a result, the Health and Safety Reform Bill was introduced to Parliament on 10 March 2014 and passed its first reading a few days later.  The Bill provides for many changes to the current Act with key changes including:

  • New duty holder definitions;
  • New obligations on all parties, with increased worker participation requirements; and
  • Increased enforcement and penalties.
New duty holder definitions

The Bill seeks to define the parties that will be affected by the new Act.  The newly defined duty holders include:

  • A person conducting a Business or Undertaking (“PCBU”) who is a person or company conducting a business or undertaking whether working alone or with others.  A PCBU may or may not conduct a business or undertaking for profit or gain;
  • Officers who may be directors of companies or equivalents, and partners of partnerships.  Officers may also include any person occupying a position in a body corporate that is comparable to a director of a company and any person who is in a position of making decisions that will affect the whole or substantial part of the PCBU; and
  • A worker who is a person who carries out work for a PCBU which may include employees, contractors, subcontractors or their employees, apprentices, trainees, persons on work experience, volunteers, employees of labour hire companies.
New obligations on all parties

There is a shift from the current obligations of employers to take “all practicable steps” to the new standard of PCBUs, officers and workers taking “reasonably practicable” steps to ensure the safety of workers.  While on the face of it, the obligations appear to be the same however the new obligation means that the PCBU must do what is (or was at a particular time) reasonably able to be done in relation to ensuring the health and safety of workers.  This means that cost can no longer be relevant consideration, unless it is grossly disproportionate.

PCBU

It is the general duty for all PCBUs to ensure, so far as reasonably practicable the Health and Safety of:

  • Workers employed or engaged or caused to be employed or engaged by the PCBU, while in the business or undertaking; and
  • Workers whose activities in carrying out work are influenced or directed by the PCBU, while the workers are carrying out the work.

In addition to this, the PCBU must also take all reasonably practicable steps to ensure that the health and safety of others is not put at risk from work carried out as part of the conduct of the business or undertaking.

Officers

Under the Bill, Officers will also have duties to exercise due diligence to ensure that the PCBU complies with its duties.  Among other matters, Officers are required to:

  • Acquire and keep up-to-date knowledge of work health and safety matters;
  • Gain an understanding of the nature of the operations of the PCBU and the associated hazards and risks;
  • Ensure that the PCBU has and uses appropriate resources and processes to eliminate or minimise risks;
  • Ensure that the PCBU has appropriate processes for receiving and considering information regarding incidents, hazards and risks;
  • Ensure that the PCBU has and implements processes to comply with the duty the Act will imply; and
  • Verify the provisions and use of the resources and processes by the PCBU.
Workers

There is a shift to putting more onus and obligations on workers (formerly employees) in relation to taking care of their own health and safety.  Under the Bill, workers must:

  • Take reasonable care of their own health and safety;
  • Take reasonable care of their own acts or omissions so that they do not adversely affect others; and
  • Comply with any reasonable instruction that is given by the PCBU to allow the PCBU to comply with the Act.
Worker participation

The Bill puts further focus on worker engagement as it is believed that effective worker participation can reduce accidents and as a result improve safety.

Increased enforcement and penalties

Under the Bill, there will be number of enforcement mechanisms that are available to the Health and Safety Representatives within a PCBU.  The Health and Safety Representatives would be able to issue notices if they believe a person is in breach or is likely to breach the provisions of the Act or regulation.  If a party is issued with one of these notices, the party can apply to WorkSafe for an internal review into the actions and for recommendations on how to improve.

A party can be convicted for breaches relating to the Health and Safety namely for the following:

  • Reckless conduct exposing an individual to risk of death or serious injury with a maximum conviction of $3million fine or imprisonment term not exceeding 5 years;
  • Failing to comply with a health and safety duty that exposes an individual to risk of death or serious injury or illnesswith a maximum conviction of $1.5million fine; and
  • Failing to comply with a health and safety duty with a maximum fine of $500,000.
What this means for you

Overall the Health and Safety Reform Bill seeks to improve the workplace health and safety culture within New Zealand.  While the concept of protecting employees and workers is not new, the obligations have increased and so have the penalties.  The good news is that by ensuring your business has the correct processes and procedures in place to effectively manage and mitigate any health and safety concerns, you are able to protect yourself against maximum exposure.  Similarly, if you are a worker, you are able to personally reduce your exposure by ensuring you follow correct procedures and by bringing any health and safety concerns to the attention of your PCBU.

If you would like further information please contact Renika Siciliano on 07 958 7429.

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