No 37 AUTUMN 2016
THE RISK ISSUE TRUST AND THE CLOUD Is your data secure?
THE HEALTH & SAFETY AT WORK ACT 2015 What you need to do
FIGURED EMPLOYEE FRAUD
New accounting software to help keep farmers afloat
The risk may be greater than you think
LIVE IN AUSTRALIA AND SAVE IN NZ Opportunity for tax savings
www.staplesrodway.co.nz
DIRECTORS AUCKLAND
David Searle
HAMILTON
Rosanna Baird (07) 834 6800
TAURANGA
Chris Downey (07) 578 2989
HAWKES BAY
Stuart Signal
(06) 878 7004
TARANAKI
Chris Lynch
(06) 757 3155
WELLINGTON
Robert Elms
(04) 472 7219
CHRISTCHURCH Ross Erskine
(03) 343 0599
No 37 AUTUMN 2016
(09) 373 1128
DISCLAIMER No liability is assumed by Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this document. It is recommended that you consult your advisor before acting on this information.
TAKING CLOUD ACCOUNTING TO NEW HEIGHTS
IN THIS ISSUE 2 Trust and the (long white) cloud How secure is your data?
4 Figured New accounting software a game changer for farmers
6 The Health and Safety at Work Act 2015 What do I need to do?
10 Employee Fraud The risk may be greater than you think
12 Live, work and play in Australia But save and invest in New Zealand
14 Women in Business profile Christine Sharma of Ruby
16 Intellectual honesty in the boardroom Why do some Boards struggle to make any real contribution?
18 Dman Entertainment Moving Taranaki and soon the world
20 A new life on leases The new accounting standard for leases
23 Ask an Expert Introducing our new column where you get to ask the questions
24 Retirement planning Is it time for a rethink?
27 Auckland Art Fair 27 Movers & Shakers Senior partners honoured by CAANZ More senior hires for Auckland office CPA leadership roles for Staples Rodway Directors Wellington tax team boosted Gavin Ghuman and Ian Renner
www.srrealtime.co.nz
TRUST
AND THE (LONG WHITE)
CLOUD
Article by Michael Brick LEGAL & CORPORATE AFFAIRS DIRECTOR, MICROSOFT NEW ZEALAND
“Cloud” is becoming integral to business transformation around the world for both large and small businesses. The success and growth of the cloud in New Zealand is not a surprise given the economic, security and mobility benefits it provides, as well as New Zealand’s acceptance of new technologies.
STAPLES RODWAY ARE TEAMING UP WITH MICROSOFT AND XERO TO PRESENT NEW ZEALAND-WIDE SEMINARS ON TECHNOLOGY AND SMALL BUSINESSES.
TAKING CLOUD ACCOUNTING TO NEW HEIGHTS
D
ESPITE THE SUSTAINED GROWTH IN cloud and cloud services, they are not always well understood. Over the last year, I have increasingly spent time helping Microsoft’s customers around New Zealand understand what the cloud is, where the cloud is, and what the cloud can do. In its simplest form the cloud is a group of servers located in a data centre on the ground (not in the sky). These servers are typically shared by multiple users, and are accessed from devices via the internet. The cloud is commonly used to store things like data, documents, and photos, and also in more sophisticated ways to run software programmes like email, client relationship management systems, accounting programmes, and data analytics. The cloud provides businesses with flexibility and options. For example, the cloud offers a pay-as-you go business model, the ability to scale up or down as business needs change, and the ability to access cloudbased information from any location or device. With the cloud, businesses can decrease costs spent on IT infrastructure while providing access to the latest technology, and opportunities to increase productivity, collaboration and mobility. Businesses often want to know whether the cloud is something that they can trust. It makes sense that businesses will only adopt and use technologies that they can trust. At Microsoft, we have developed the Trusted Cloud principles to help guide businesses – small and large - on their assessment of the cloud. The four Trusted Cloud principles (Security, Privacy & Control, Compliance, & Transparency) outline our vision of what businesses are entitled to expect from their cloud provider. You should use these principles as a framework to assess whether the cloud, and which cloud provider, is right for your business. Consider each of the principles: Security You have the right to expect that your data will be safeguarded using state of the industry technology, processes, and encryption. A cloud provider’s security programme should include: physical security of cloud data centres; platform and operating system security; data protection including encryption of data in transit and at rest; business continuity processes; and, a demonstrated focus and investment in cybersecurity. Privacy and control You control the privacy of your data and access to it. A cloud provider’s privacy and control programme should clearly set forth: how you access and share your data; choice and control over where your data is stored; flexibility around use of both your public (shared) and private (nonshared) cloud; a commitment not to use your data for advertis-
ing purposes; and, a clear policy around disclosure of data to government and law enforcement. Compliance The cloud service should adhere to international standards, certifications, and applicable regulatory requirements. Specific standards should include ISO Standards 27001 and 27018, as well as SOC 1 and SOC 2. The standards should be audited by independent third party auditors, and you should have the ability to see the certifications for each service. In regulated industries, like health and finance, your cloud provider should work with you and regulators to help you meet your compliance obligations. Transparency You should have clear visibility into where your data is located and how your data is being managed. The cloud provider’s policies around how it uses, manages, and protects data should be written in comprehensive, plain language. It is important that you know where your data is stored, and who has access to it and when. The Trusted Cloud principles are embodied in Microsoft’s contractual commitments to all customers in the Microsoft Online Services Terms at www.microsoftvolumelicensing.com. When you think of cloud, you should think about trust. You can learn more about the Trusted Cloud at www.microsoft.com/ trustedcloud.
ADDITIONAL RESOURCES MICROSOFT TRUST CENTER A single compliance resource that lists adherence to certifications and attestations, privacy and data protection policies and procedures, and information about data transfer and location policies. www.microsoft.com/trustcenter MICROSOFT TRANSPARENCY HUB Customer source for disclosures to help stakeholders evaluate how we handle law enforcement requests and content removal requests. www.microsoft.com/transparencyhub CYBERTRUST BLOG The Microsoft Cyber Trust blog provides in-depth discussions on topics of security, privacy, compliance and transparency. It includes timely news, trends, analysis, practical guidance and tools from experts. blogs.microsoft.com/cybertrust
Keep an eye on our Staples Rodway RealTime website - www.srrealtime.co.nz - for further details.
www.srrealtime.co.nz
NUMBERS Autumn 2016 • 3
NEW ACCOUNTING SOFTWARE A GAME CHANGER FOR FARMERS As dairy prices continue to tumble, banks are keeping a close eye on farmers’ credit exposures. Indeed, DairyNZ predicts that 85 percent of Kiwi dairy farmers will make a loss this year, up from 49 percent in 2015. Now, more than ever, farmers need to have effective financial management systems in place to control costs and stay afloat.
TAKING CLOUD ACCOUNTING TO NEW HEIGHTS
T
RADITIONALLY, A FARM’S FINANCIAL MANAGEMENT has relied on historical information for significant business decisions. The process requires manual data collation and entry into multiple systems – a time-consuming exercise and no easy feat in today’s volatile market. Unsurprisingly, perhaps, a high percentage of farmers simply don’t budget or forecast. “We see first-hand the pressures farmers are under to constantly re-evaluate their finances to keep pace with fluctuating market conditions,” says Jordan Hartley-Smith, Business Advisory Services, Staples Rodway Taranaki. “Incumbent systems don’t operate in a connected environment; they offer little more than a foggy view of how the business is performing. “So cloud-accounting solutions, which operate in realtime, can have a considerable impact on a farmer’s business.” Enter Figured, online software that provides farmers with an automated approach to staying on top of their farm financials. While real-time cloud accounting has been available in the commercial world for some time, the farming sector has had limited options. Staples Rodway has been working with its clients to offer tailored cloud-based accounting solutions. With the accounting firm’s support, Canterbury farming business Terracostosa is close to completing its implementation of the Xero + Figured offering. Operating five dairy farms and milking more than 3,500 cows, Terracostosa has already noted increased control over its budgets, forecasts and the wider business. Figured launched less than two years ago when farm investment company MyFarm integrated with online accounting software Xero. Figured, working hand-in-hand with Xero, delivers instant business data from livestock tracking and milk production to operating expenses and cash flow. It enables decision-making based on a true picture of farm performance. “Because Figured is cloud-based, the farmer, accountant and banker can all access the data and make instant updates. It offers a rolling forecast, and the ability to re-calculate the farm’s financial position when conditions change – quickly and with ease,” says Neil Landers, Senior Relationship Manager, Figured. “Farmers have a view of how their business is performing and, if necessary, pinpoint how big the hole is. They are empowered to make the required changes at the right time.” Jordan says Figured’s efficiency means as accountants they can spend less time focused on compliance, and more time planning ahead.
www.srrealtime.co.nz
Staples Rodway Taranaki helped shape the Figured offering. “Typically accountants are at the centre, they drive the financials,” says Neil. “Accountants provide advice to farmers and direct data to the banker, which is where the insights from Staples Rodway proved invaluable when we were developing version 2.0 of the software.” Staples Rodway was an early adopter of version 1.0 with three of the firm’s farm clients testing the software. “The pilot phase – which offered both an accounting and a farming perspective – was crucial to ensure a robust product,” says Jordan. “We worked closely with the Figured team to discuss ideas and visions, and provide advice on how to develop milk forecasts and how information could be grouped together. These conversations, coupled with our findings from the test phase, fed into the overall development of version 2.0 by Figured.” Working closely with Xero, Figured 2.0 was launched in 2015 and the revamped software quickly became a game changer in the agricultural industry. Notably, Figured recently reached a significant milestone: it has now exceeded 1,000 active farms with over 2,300 users collaborating on their accounts. And, in another development, Figured has partnered with BNZ bank (who holds a 17 percent stake in the company) and ASB bank. Together they’re working to streamline the credit application process for farm lending; they’re also developing a multi-year planning tool that will explore various scenarios – like buying the neighbor’s farm – and analyse their impact on a farm’s financial position. For more information visit www.figured.com
NUMBERS Autumn 2016 • 5
THE HEALTH & SAFETY AT WORK ACT 2015 WHAT DO I NEED TO DO? Article by Chris Wright HR CONSULTANT, STAPLES RODWAY AUCKLAND chris.wright@staplesrodway.com
Many of our clients have asked what they actually need to do to ensure they meet the requirements of the Health and Safety at Work Act 2015. There have been endless articles, seminars and conferences all attempting to enlighten us on the changes. We are now coming to grips with new terminology such as “duty of care”, “officer”, PCBU (person conducting business undertaking – which is now gaining phonetic notoriety as “peek-a-boo”) and the need for us all to take all “reasonably practical steps” in relation to our health and safety duties.
O
UR PERFORMANCE IN HEALTH AND safety makes sobering reading. In 2014 New Zealand had 46 workplace fatalities and 3,497 serious harm notifications (see tables). In comparison, Australia had 187 work-place fatalities in 2014. Given our workforce is 20% of that of Australia, they have a better record per worker, and therefore it made sense to base our health and safety legislation on Australia’s model Health and Safety Act. The Health and Safety at Work Act 2015 is driving a new way of thinking. While specialists need to absorb the 187 pages of the Act and associated regulations, the focus of this article is to provide an overview for business owners on the practical steps they should take. It is important to be clear from the outset that this is intended to be a practical overview only, rather than a comprehensive analysis.
ACCOUNTABILITY The new Act is clear about accountability and the duty of business owners to exercise due diligence so the business complies with its health and safety obligations. Due diligence includes having an understanding of health and safety matters generally, and then reviewing the operations of the business and forming an understanding of the hazards and risks associated with those operations. A first step for business owners is to track through their policies, business objectives, KPIs and job descriptions to see where accountability really sits. Broad policy statements are not enough. There needs to be a clear line of sight for each area of responsibility, making sure that all areas are covered, with responsibilities being set out in writing. Business owners have a clear duty of care in areas including training, availability of appropriate information, maintenance of safe working conditions and the provision of safe plant and structures.
STRUCTURE AND REPORTING The Act requires business owners to ensure the business has appropriate processes for receiving and considering information regarding incidents, hazards and risks and for responding in a timely way to that information. Effective health and safety structures and reporting processes are therefore essential. Without meaning to be flippant no business (through cumbersome structures) can afford to be caught in the equivalent of the children’s game of ‘pass the parcel’ on health and safety matters. A business owner will not want to be caught holding the parcel when something goes wrong. www.staplesrodway.co.nz
Whatever structure is in place, worker participation and the duty to engage with workers is a requirement under the Act. Businesses with less than 20 people which are not operating in a high-risk sector or industry prescribed by legislation do not have to have an elected health and safety committee. Despite this, from 4 April 2016 all business owners need to be satisfied there is appropriate worker participation built into their systems.
WORKPLACE FATALITIES BY INDUSTRY These statistics show the number of fatal work-related incidents reported to WorkSafe NZ under the Health and Safety in Employment Act 1992. They do not include deaths in the maritime or aviation sectors or fatalities due to work-related road crashes. INDUSTRY
2013
2014
2015*
Accommodation & Food Services
1
-
-
Administrative & Support Services
-
-
-
Agriculture
22
21
15
Arts & Recreation Services
3
3
3
Construction
6
5
1
Education & Training
1
-
1
Electricity, Gas, Water & Waste Services
-
1
3
Forestry
10
1
3
Health Care & Social Assistance
2
2
-
Manufacturing
1
1
-
Mining
-
-
5
Other Services
1
1
1
Professional, Scientific & Technical Services
1
-
-
Public Administration & Safety
2
3
-
Retail Trade
1
-
-
Transport, Postal & Warehousing
6
8
1
Wholesale Trade
-
-
-
57
46
35
TOTAL *2015 figures are calculated up to 18 November 2015
NUMBERS Autumn 2016 • 7
So, if your business does not have a sound system in place, what should you do? A health and safety committee meeting or, at the very least, a regular staff meeting where health and safety matters are raised and actions recorded is a simple and effective solution. Formality is important so that the scope and responsibilities of these meetings are clear and the minutes and actions arising from these should be referred to each Board of Directors meeting for consideration. Have a formalised annual general meeting for all staff, or their representatives, to discuss such issues as accidents and incidents over the prior 12 months, trends that are of concern and goals for the next 12 months will also be helpful. No matter what the size of your business these structures and reporting requirements fundamentally work. In the new environment every business owner needs to recognise that health and safety governance is as important as financial governance. Business owners need to determine what regular reports they need to have available to be satis-
WORK PLACE SERIOUS HARM NOTIFICATIONS BY INDUSTRY
THE BASICS
INDUSTRY
2013
2014
2015
Accommodation & Food Services
100
82
72
Administrative & Support Services
63
59
81
Agriculture
317
289
333
Arts & Recreation Services
311
229
265
Construction
606
514
508
Education & Training
674
170
237
Electricity, Gas, Water & Waste Services
86
49
40
Financial & Insurance Services
13
11
10
Fishing
11
6
5
Forestry
160
107
79
Health Care & Social Assistance
393
267
307
14
9
11
Manufacturing
796
572
588
Mining
20
22
17
Not Elsewhere Included
130
103
38
Other Services
541
326
97
Professional, Scientific & Technical Services
28
25
60
Public Administration & Safety
161
101
135
Rental, Hiring & Real Estate Services
13
9
11
Retail Trade
348
220
166
Transport, Postal & Warehousing
351
296
295
Wholesale Trade
34
21
11
To be confirmed
-
10
19
5170
3497
3385
Information Media & Telecommunications
TOTAL
8 • NUMBERS Autumn 2016
fied they are meeting their obligations. Records should, at a minimum, encompass: Information on progress toward health and safety targets that have been set – including KPIs established for managers. Updates on accidents and incidents (including ‘near misses’) with details of any investigations and what changes may need to occur to prevent reoccurrence of an issue. Matters involving contractors including confirmation they are observing health and safety protocols. Outcomes of regular risk assessment audits. Information on any new risks to the business (including new material, products or equipment). Health and safety committee reports, if applicable. Business owners need to exercise intellectual curiosity around health and safety reporting and be determined about getting the right answers. There is an old saying that “curiosity killed the cat”, however, in the post 4 April 2016 world a lack of curiosity could be the issue that hurts the business and its workers.
The new Act requires us to move from a hazard management to a risk management environment. In practice what is the difference? The following definitions from “How to Manage Work Health and Safety Risks Code of Practice” published by Work Safe Australia are helpful (this Code of Practice provides helpful detail and is available at www.safeworkaustralia.gov.au). Hazard means a situation or thing that has the potential to harm a person. Hazards at work may include: noisy machinery, chemicals, trip hazards, working at heights, stress, a repetitive job, bullying and violence at the workplace. Risk is the possibility that harm (death, injury or illness) might occur when exposed to a hazard. Risk control means taking action to eliminate health and safety risks so far as is reasonably practicable, and if that is not possible, minimising the risks so far as is reasonably practicable. The Work Safe Australia publication “How to Determine What is Reasonably Practical to Meet a Health and Safety Duty” also provides practical advice on steps businesses can take. It is available at www.safeworkaustralia.gov.au.
GETTING IT RIGHT As has been well-publicised, the penalties for not taking workplace health safety seriously are severe. These include the potential for an individual to be sentenced to a term of imprisonment not exceeding 5 years or a fine not exceeding $600,000, or both. The publicity around the new Act has provided focus on New Zealand’s health and safety record and the need for change – our hope is it really does deliver a reduction of workplace deaths and serious harm accidents in our workplaces. If you want more detail on how to meet your responsibilities under the Health and Safety at Work Act please contact: Chris Wright, Staples Rodway Auckland Kearin Pollard, Staples Rodway Taranaki Andrea Stevenson, Staples Rodway Hawkes Bay
NEW ZEALAND'S RATE OF WORKPLACE ACCIDENTS
New Zealand has 93 workplace injury claims per 1000 equivalent full time employees
2
1
New Zealand
Spain
France
Canada
Australia
OF THESE ACTIVITIES HAPPEN IN 5 KEY INDUSTRIES
Sweden
0 Norway
75%
3
Finland
THE WORST RATES OF WORKPLACE FATALITIES
4
UK
Compared to other developed countries we have one of
5
DEATHS PER 100,000 PERSONS PER YEAR
9%
OF FULL TIME EMPLOYEES GET INJURED AT WORK
THE COST OF WORKPLACE INJURIES CONTINUES TO RISE 100
Agriculture Mining Construction Forestry Arts & Recreation
$ MILLION
80
60
40
20
0
DATA SOURCEs: www.stats.govt.nz, hstaskforce.govt.nz, www.business.govt.nz
2010-2011
2011-2012
2012-2013
2013-2014
2014-2015
EMPLOYEE FRAUD THE RISK MAY BE GREATER THAN YOU THINK Article by David Goodall STAPLES RODWAY TARANAKI david.goodall@staplestaranaki.co.nz
Major corporate scandals such as Enron (2001), Worldcom (2002) and Saytam (2009) which involved fraudulent activity such as omission of debt from financial statements, inflation of assets and falsification of revenue may create the impression fraudulent activity is only relevant to large corporate, or high profile entities. But that is not the case, and fraud extends across all levels and types of business.
F
OLLOWING THE GLOBAL FINANCIAL CRISIS there has been a marked increase in incidents of fraud and in the exposure of entities to fraudulent activity. In September 2006 fraud was estimated to cost the UK £40 billion annually. By the following year this had almost doubled to £70 billion. Approximately 43% of companies worldwide indicate they suffered one or more frauds in the previous two years. The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and with management of the business, particularly (but not exclusively) the finance function. If your organisation is subject to an audit of its financial statements, you may consider that the risk of fraud occurring is mitigated because of that audit process. In accordance with the International Standard on Auditing (New Zealand) 240: The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, an auditor conducting an audit is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. Owing to the inherent limitations in the scope of an audit, there may be an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the required standards. For a small to medium sized, owner managed business, it may feel as though the close relationship with staff and the foundation of trust established with employees means the risk of fraudulent activity is low. However, it is in just these types of businesses where we have seen an increase in the frequency of fraud in areas such as cash handling, income recognition and payment of suppliers or employees. One of the most susceptible areas is in relation to controls around the payment of suppliers or employees. In smaller business with limited segregation of duties and lack of understanding of the importance of controls by management, there have been instances where payments have been made to relatives of employees and to non-existent employees. A key strategy to manage these risks is ensuring that there is clear segregation of duties between the preparation of payroll and batch payment documentation and the approval and electronic processing of payments. As part of the review and approval process individuals should have access to supplementary documentation such as audit exception reports from payroll software which highlight changes in bank details, new employees and terminated www.staplesrodway.co.nz
employees, among other aspects. The reviewer needs to take their responsibilities seriously, rather than relying on trust and more is required than carrying out a high level sense check and a quick overview of the numbers. Recently we have witnessed a high profile court case surrounding the theft of around $800,000 from a school in Hamilton. Seven fraud related charges were made against an individual who was in the role of commercial manager at the school; two counts of using a document for pecuniary advantage, two counts of altering a document and three charges of using forged documents. The funds were obtained through the creation of false invoices addressed to the school in relation to the redevelopment of the school’s food technology block and to conduct work on the principal’s house. The fraudulent activity was only brought to light following an investigation into improper use of the school credit card, although building costs for the project, as evidenced in the school’s financial statements, ended up almost double the original proposal. The full amount of the funds acquired has since been repaid by the individual and the individual has pleaded guilty to the charges. The issue could have been avoided, or at least identified earlier, with appropriate segregation of duties, diligent approval and authorisation of invoices/payments and more vigilant Board members. Further charges have since been made by the individual’s former employer, SkyCity Hamilton who alleges that $1,226,000 had been stolen. This is particularly concerning given the expected stringent fraud controls that casinos are well-known to implement, at least in respect of gambling activities. In all entities, regular consideration should be given by the owners and management to the appropriateness and effectiveness of internal controls at addressing the risk of fraud and financial crime. Testing should be carried out on possible methods to override controls and exert influence over the financial reporting process. Steps should be taken to ensure a culture is created within the organisation which promotes honesty and ethical behaviour that is led and demonstrated by management. It is critical that management, with support from those charged with governance, place a strong emphasis on fraud prevention and detection. Staples Rodway can assist with the development of systems designed to reduce the likelihood of fraud. Where a fraud is suspected or detected, we can conduct a thorough investigation and, if required, document findings for legal proceedings. NUMBERS Autumn 2016 • 11
LIVE, WORK AND PLAY IN AUSTRALIA BUT SAVE AND INVEST IN NEW ZEALAND Article by Roger Shackelford STAPLES RODWAY WELLINGTON roger.shackelford@stapleswellington.co.nz
With Kiwis continuing to dip their toes in the Tasman and venturing to Australia to live, Tax Partner Roger Shackelford thinks there might be a few tax savings to be had for those making the move. GETTING INTO AUSTRALIA New Zealanders who live and work in Australia normally do so under what’s called a ‘Special Category Visa’ (SCV). This is what makes it very easy for us to ‘fly’ through Australian immigration largely unhindered. This also allows kiwis to remain indefinitely living, working, and studying in Australia, as long as they remain NZ citizens. Needless to say, SCV holders are not entitled to the same benefits as Australian residents and citizens in terms of social security, the right to vote, education assistance, and to join the defence force, etc. It is well understood that residency for immigration purposes bears no resemblance to residency from a tax perspective. What we also know is that very few tax jurisdictions care whether you reside there or not – if you earn income there, you pay tax there! Australia treat New Zealanders a little bit differently. And we’re not talking about sport!
THE TAX POSITION FOR KIWIS LIVING IN AUSSIE Holders of a SCV for immigration purposes also appear to satisfy the definition of ‘temporary resident’ for income tax purposes in Australia. So for the first time it seems that immigration status and tax status might be aligning. According to the Australian Tax Office, a temporary resident's connection with Australia is ‘more tenuous’ than for other residents and so a temporary resident should be treated more like a non-resident for tax purposes. So far so good. Temporary residents cannot benefit from Australian public spending to the same extent as permanent residents, so in theory they should not have to support that spending to the same extent. A temporary resident for income tax purposes is a defined term under the Australian income tax legislation. You are a temporary tax resident if you:
hold a temporary visa (SCV for example); and you are not a resident under the Social Security Act 1991; or your spouse is not a resident under the same act. For completeness, a resident under the Social Security Act is normally an Australian citizen or a holder of a permanent resident visa.
SO WHAT’S THE BENEFIT FOR NEW ZEALANDERS? A temporary resident of Australia does not pay Australian income tax on their foreign sourced income. Yes, you did read that right. This means for New Zealanders who have certain types of investments back home, any income earned in NZ will not be taxed in Australia. This creates some interesting opportunities. The ‘exemption’ does not apply to employment income or any income from personal exertion. So if for example a New Zealander living in Australia as a temporary tax resident earned some consulting income from NZ, that would remain taxable in Australia in the normal way (and probably also in NZ). New Zealand investment returns are not taxed in Australia, including; interest; dividends; rental income; and capital gains (in most cases). This means that if the rates of tax applying in NZ are lower than they would be if that income was taxed in Australia, New Zealand investors are ahead. This might be particularly relevant for those high income earners paying income tax in Australia at their highest rate of 45%. Special rules apply in NZ to interest income earned here by non-residents. Application can be made to have a 2% levy charged on interest income as a full and final tax. Approved Issuer Levy (AIL) is simple and inexpensive to apply for. Our Australian high income earner with a substantial term deposit in NZ will save themselves 43% tax on that income by leaving it in NZ and paying AIL.
CASE STUDY Here is a simple example of the savings that might be available for Andrew - a New Zealand citizen currently working in Australia on a temporary Visa. Andrew is currently earning $180,000 working in Perth as an Engineer. He has term deposit investments in New Zealand with a total value of $1,000,000.
Likewise dividends with resident withholding tax credits attached may be refunded to the Australian temporary resident if their tax rate in NZ on that dividend income is lower than 33%. And rental income earned in NZ will only be taxed at our marginal tax rates further saving the Australian temporary resident some tax that would ordinarily be payable if that income was also taxable in Australia.
IS IT TOO GOOD TO BE TRUE? Well it seems not. Whilst the very concept of ‘temporary’ resident doesn’t sit well with New Zealanders who live, work, and play permanently in Australia, it certainly seems that unless a permanent resident visa is sought, or Australian citizenship is acquired, by implication New Zealanders will remain in Australia under the temporary SCV arrangements. This means they are likely to be temporary residents indefinitely. The ATO has also confirmed that a New Zealander who has entered Australia on a SCV and who subsequently returns to NZ for holidays etc, will not invalidate that visa for the time they are back in NZ. So whilst the SCV temporary visa has ceased to be in effect when a person is back in NZ, a New Zealander is treated as holding that visa during their period of absence from Australia. According to the ATO this is because they are entitled to re-enter Australia on presentation of their current NZ passport. Like all concessions and technical ‘loopholes’, they will only apply to those whose particular circumstances and set of facts fits the wording of the legislation. Take a look at our simple case study below to illustrate how these rules might assist you. If you are living in Australia or thinking about moving across the Tasman, and you have some NZ passive investments, it might be worth talking with your Staples Rodway tax adviser as there could be some potential and substantial tax savings to be had.
T he current interest rate on Andrew’s term deposits are 3.8%. Andrew has registered for approved issuer levy (“AIL”). Andrew is able to save $16,340 in tax paid on $38,000 of interest income – achieved by saving his hard earned cash in New Zealand. Although the interest is modest in terms of his total income, the tax saving reduced his effective tax rate on all income to 25% from 33%.
TAX IF INVESTMENTS ARE HELD IN NZ
TAX IF INVESTMENTS ARE HELD IN AUSTRALIA
SAVING
Salary $180,000
$54,547 (taxed at Aust. rates)
$54,547 (taxed at Aust. rates)
-
Interest $38,000
$760 (2% AIL)
$17,100 (45% top Aust. rate)
$16,430
TOTAL TAX PAID
$55,307
$71,647
$16,340
25.37%
32.87%
+22.81%
Effective Tax Rate on Income
www.staplesrodway.co.nz
NUMBERS Autumn 2016 • 13
CHRISTINE SHARMA RUBY
Interview by Jess Stewart & Annette Azuma STAPLES RODWAY WOMEN IN BUSINESS www.staplesrodway.co.nz/wib
Christine Sharma is the Managing Director of the successful New Zealand fashion brand, Ruby. She met with us to share her experiences and inspiration. Q: How did you become involved in the fashion industry – what drove your career choice? A: While I was at teachers’ training college, I had a part time role at JoshuaBrown on Queen Street selling jeans. I loved it! I later moved to the States and lived in Hawaii and California, where I worked full time in fashion and gained experience in selecting ranges to stock in store. Q: Can you share a bit more about your experiences to date? A: My husband and I set up a fabric import business in the late 80’s. In the early 90’s, the duties on imports were reduced and we began importing garments. Around this time, our neighbour’s daughters set up Ruby, and my husband offered to help the girls with imports. After a while the girls wanted to do different things, and we had more stock, so we took over Ruby and registered in 2008. Now we have ten physical stores, plus an online store! Q: What difficulties have you faced along the way? A: Competition from the global market creates a huge challenge! We can’t compete on price with places like Zara and Topshop, so our directive is to create an uncontested space – to be a leader and be different. We focus on coming up with new concepts, and on keeping in touch with our customers. Our brands (Liam and Ruby) are about happy, healthy, girls. We also have a mother/daughter customer base. Ruby was originally aimed at daughters, and Liam is a little more grown up, but we frequently find that pieces from the ranges suit both! We also take on initiatives such as having our products certified as child labour free – we were a pilot brand for this. Q: Have you had to make any sacrifices? A: Yes! Running a business can be very stressful. The Christchurch earthquake was awful – we had a store in the same street where others passed away. We have also been through litigation with an international brand, who was using a name very similar to ours, and attempted to deregister our brand. This took a lot of time to resolve, was costly, and very stressful – it just ate at me emotionally. There was a lot of brand confusion at the time, but we were successful and now have brand ownership in New Zealand. Q: What have your experiences as a woman in business been like? A: There is a reason not many women are in the board room, it’s hard! Ruby is a family business; my husband is on the board, one daughter is a designer, and another does marketing. Sometimes people ask my husband how the business is going, as they automatically think it is his. I don’t want to sound sour, but it is very annoying! As a woman, you have to cut your own track, be a bit resilient, and a bit defiant. I don’t like that some women in business feel as though they have to power dress, to try and appear more masculine. We should embrace who we are! Results are what should matter. www.staplesrodway.co.nz
Q: If you could go back in time and give yourself one piece of advice, what would it be? A: Keep your passion! If you aren’t passionate, then your plans won’t work. You have to love what you do. Q: Do you have any skills or personal characteristics that have contributed to your success? A: I am passionate about what I do, I am firm and fair, and I love a good laugh. I empathise with the young women I employ – I feel a big responsibility to be a good role model for them. I like to manage from the bottom up – if someone is struggling I will talk with them to find out why. Having my own daughters in the team has helped with this mindset, I think we have a strong sense of family in the firm. I think humour has been very important in my success. I can be a bit crazy sometimes, but humour is good, you need to be able to laugh at yourself. Q: Can you tell us about one of your proudest moments in business? A: My proudest moment was definitely my most nervous too – our first fashion week show! I actually find every big show very nerve racking. I feel for the girls and I am well aware of all the effort they put in. Seeing each girl succeed and develop is lovely – I feel proud when I see them do well. Q: How do you balance business and leisure? A: I think this is very important – if you don’t feel balanced and you haven’t rested, then you can’t perform at your best. I usually don’t get into the office until 10am – 11am, as I spend my mornings doing Pilates, walking, and pottering around at home. I really enjoy having time to myself at home. I also split my time between Auckland and our bach in Whiritoa. When I can, I like to head down there on Thursday afternoons, relax and restore, and return to Auckland the following Monday morning. It’s a nice way to start the week. I am always working, even when I am at the bach, but I am able to have some space for creative thinking when I am there. Auckland is my treadmill for work and the bach is my place to take time out! Q: Do you have any personal goals or mottos that inspire you? A: I have a little file of facts that I carry with me, and it includes a lot of mottos! I like ‘be the best you can be’, because all you can do is give life your best. I also like ‘failing to plan is planning to fail’ – I really believe in this. I am a list person, I like to cross things off, take notes, and read off paper. I love a good diary – paper won’t freeze! Q: What is your favourite item of clothing? A: I love jumpsuits! They are so fun, and the one item is your whole outfit.
NUMBERS Autumn 2016 • 15
INTELLECTUAL HONESTY IN THE BOARDROOM Article by Colin Theyers STAPLES RODWAY AUCKLAND colin.theyers@staplesrodway.com
Why do some Boards of Directors consistently perform while others struggle to make any real contribution?
B
OARD AND COMPANY CULTURE HAS a major part to play in creating an environment where issues can be identified and positively resolved. Human nature is sometimes unwilling to be objective because this can lead to questions on the wisdom or otherwise on past decisions, particularly those we ourselves were involved with making. Unless the right culture and systems are present Boards of Directors will not have the necessary openness to be as objective as the role demands. Directors and, in particular, independent Directors have responsibilities to seek the best outcomes for the companies which they serve. While Directors have many obligations under the Companies Act boardroom culture, which is created by the personalities involved and cannot be legislated, plays a significant part in Directors discharging their responsibilities. Bad news is all part of being in business; how Directors recognise and react to an unacceptable pattern emerging is a measure of their culture and capabilities. One Managing Director with whom I worked would regularly fire executives who gave him bad news. This created a company-wide culture of deliberately hiding any adverse information, so Directors (especially the MD) were starved of real facts and decision-making suffered. If the CEO, Chair or Board has an unrealistic approach to receiving bad news, a culture of ignoring reality is created, problems simply fester and become more difficult and expensive to resolve. Over time the CEO will become isolated from what is actually happening. In my view: Deal with the issues first, deal with reasons later. Early in my career my mentors regularly talked about being ‘intellectually honest’ and seeing issues for what they were. One liners such as ‘it is what is’ summed up a view of the world, that senior executives and most importantly Directors needed to be continually objective in assessing how things were going. There is no room in the boardroom for personal agenda and egos; issues need to be discussed on their merits. The relationship between the CEO and the Board, especially the Chairman, must create a culture that allows open discussion and debate. There must be the ability
and freedom within the Boardroom to constructively express a view, particularly where it is a contrary opinion. The Chairman must encourage all Directors to contribute and express their views. I have sat on various Boards where some Directors have made little constructive comment and just agreed with all recommendations put before the Board, without debating the merits or otherwise of a proposed course of action. This has particularly been the case where there were long-serving Directors who had ceased to contribute some time before, but continued to hold on to their roles. Board composition must ensure that there is a mix of skills and views to ensure that the Board will consistently reach balanced and well thought through decisions. The issues of transparency and objectivity become more challenging in smaller and medium-sized businesses which include Directors who are also part owners. The Chairman must recognise these ownership dynamics and must manage the Board to best advantage to see difficult issues resolved. The Chairman may need to mentor individual Directors, and ensure that there is separation of personalities from issues that need to be discussed in an open and intellectually honest environment. Good governance and strategic planning processes balance business opportunities and the attendant risks. Progressive businesses have superior planning processes that recognise strategic opportunities and measure and manage potential risks. The Board must set clear objectives, define required outcomes and ensure that risk is justified and will create longer term shareholder value. There are times in the business cycle where a more bold approach is required because the risk is limited while in other parts of the cycle the likely return does not justify the attendant risks. Intellectual honesty in the Boardroom is an essential ingredient of successful businesses, and at the same time helps create and maintain a business-wide culture based on the same principles. Objectivity about what has happened and clearly thought-through analysis about what may happen, will support the continued sustainable development of most enterprises. For further information about how Staples Rodway can help you with Directorships and Governance, please contract Colin Theyers in our Auckland Office on 09 373 1124 or colin.theyers@staplesrodway.com
DMAN
ENTERTAINMENT
MOVING TARANAKI AND SOON THE WORLD If three years ago you’d suggested to family man Dinnie Moeahu that he would be standing on stage receiving the 2015 TSB Bank New Business Excellence award, he would have laughed.
I
N ITS THREE YEARS OF business, Dman Entertainment has evolved from an idea sparked by a $1.89 iTunes app, into a comprehensive entertainment company operating nationally and across the ditch. Dinnie is the main man and driving force behind the company, and is supported by his team of DJs and performers, including Taranaki local music identities ‘Ash and Aidan’. Together, they combine their passion for music and love of entertaining to offer an extensive range of quality DJ, live music and MC Services – something unique to Taranaki. For four months Dinnie conducted local research to see if there was a need for entertainment services within Taranaki. There were plenty of talented local artists operating around the region; however no one had formalised it as a business and promoted it. He put on a few gigs to get a feel for the market and soon realised people wanted variety and choices for their events. With his experience and tight networks in the local music scene, Dinnie realised he had the perfect solution but needed help to get the idea in motion. In his research all business owners had reiterated the same advice “one of the most important things you need to do is to find a good accountant.” So he did. Dinnie met Jordan Hartley-Smith, an accountant at Staples Rodway and they instantly hit it off. Dinnie says he’s hit the jackpot,
Dinnie Moeahu & Jordan Hartley-Smith
“Jordan understands what I’m trying to achieve and I love his energy and focus. He’s as passionate about what I’m doing as me and I’m so much more aware of how to run my business because of Jordan’s guidance and friendship.” Dinnie says he’s also a huge advocate of Xero, which Jordan introduced him to early on. “It’s been a lifesaver. I can reconcile on the go, email invoices, and track bookings all from my phone, and I’m only scratching the surface.” Using Xero, Dinnie is also able to take care of compliance responsibilities such as GST Returns and Withholding Tax Returns, something that was once completely foreign to him. www.staplesrodway.co.nz
He has also developed systems and worksheets so there is clear communication and expectations between him, his subcontractors and suppliers at all times. Because of well-established systems and effective use of Xero, Dinnie has removed a lot of administration time and is able to spend more time in the field doing what he loves. It also means that his meetings with Jordan are focused on growth and strategy, and looking at the business processes to make sure it is as efficient as possible. They’ve had strategy sessions with their contract DJ’s and artists to ensure that everyone contributes to and understands the direction of Dman Entertainment. This has been important for Dinnie, as he believes that the success of the business is a team effort. With good business processes in place and strong growth through sales, Dinnie was in an enviable position to enter the Taranaki Business Excellence Awards. Although he admits he was naïve about what the process really involved, he knew it would be a good move for his business. “You go in front of a panel of judges who do a live audit of your whole business. They grill you for an hour. But when you’re doing something you absolutely love – it rubs off.” As a result, Dman Entertainment received a commended for the Brand Marketing, Design and Technology Excellence Award, a highly commended for the Visitor Industry Excellence Award, and took out the title of the New Business Excellence Award. They were also one of four businesses in the running for the Supreme Award, which Dinnie says “blew my mind”. The awards have given Dman Entertainment instant credibility, especially within the corporate sector which, along with weddings, is their key target market. Their brand can now be marketed as Award Winning, which Dinnie says is very powerful for generating new business. But Dinnie says they’re only scratching the surface. He wants to take Dman Entertainment global and introduce world class entertainment to New Zealand as well as provide a platform for Taranaki talent to gain exposure and get paid to do it. With its brand and reputation continuing to grow, his aspirations for global expansion are within good reason. Of all his successes, Dinnie admits that the most important has been able to provide for his family, which he says drives him every day. “I wouldn’t be in this position without them. Everything I promised is paying off. I’m living the dream – to its fullest.” Find out more at www.dmanentertainment.co.nz Jordan Hartley-Smith is an Assistant Manager at Staples Rodway Taranaki and a member of our wider information systems team. If you’re interested in talking to Jordan or learning more about Xero, give him a call on 06 757 3155 or email Jordan.hartley-smith@staplestaranaki.co.nz NUMBERS Autumn 2016 • 19
A NEW LIFE ON LEASES The former Chair of the IASB, Sir David Tweedie once said ‘One of my great ambitions before I die is to fly in an aircraft that is on an airline’s balance sheet.’ Why would an aircraft not be on the balance sheet? Because some airlines structure aircraft ownership using operating lease arrangements which has meant the aircraft can remain “off balance sheet”.
Article by Aniela Tkacz NATIONAL TECHNICAL MANAGER aniela.tkacz@staplesrodway.com
T
HE ACCOUNTING STANDARD THAT APPLIES in New Zealand, NZ IAS 17, distinguishes between operating and financing leases. Payments made under operating leases are recognised as an expense in the profit and loss of a company, with no balance sheet impact. For finance leases, the present value of the future payments under the lease is shown as a liability and on the other side of the balance sheet the right to use the asset. The aim should be to look at the economics – for example, does an operating lease have a non-cancellable period? Yes, the lessee is committed to a period of lease payments over the life of the contract, for an airline this is typically seven years. Can the future payments be reliably measured – yes, it’s in the contract! Therefore, the airline has an obligation to which it is committed and which can be measured reliably. It should, therefore, show as a liability the present value of the payments that will have to be made over the lease term and, on the other side of the balance sheet, the right to use the aircraft for the same period. Off-balance sheet financing impacts a number of industries. Listed companies using IFRS or US GAAP disclosed approximately $3.3 trillion globally as off balance sheet, representing around 85% of all leases. To understand the impact of lease accounting, investors often adjust the financial statements to recognise ‘in substance’ assets and liabilities and the impact on operating profits arising from lease transactions. Furthermore, accounting for leases under US GAAP differs significantly from IFRS, just to make matters worse.
WHAT DOES THIS MEAN FOR ME?
IT’S HERE
An illustration of the impact on the P&L of NZ FRS 16:
I n January, the IASB released the new leases standard IFRS 16 Leases, a joint effort with the US standard-setter to improve transparency and comparability in accounting for lease arrangements. IFRS 16 eliminates the distinction between operating and finance leases, introduces a single comprehensive model and additional disclosure requirements. A lease arrangement provides an entity with the right to use an asset and, if payments are made over time, an element of financing. The immediate effect of these rights means the lessee is required to recognise: i. Assets and liabilities for all leases with a non-cancellable lease term greater than 12 months, unless it is a ‘small ticket’ item; and ii. Depreciation of lease assets separately from interest on lease liabilities in the income statement. There is no fixed value for ‘small ticket’ items, but it applies to items such as single phones and laptops. www.staplesrodway.co.nz
Entities are expected to see an overnight growth in the balance sheet whilst key leverage and capital ratios may deteriorate. Retail, airlines, shipping and other industries that have significant off balance sheet financing are likely to be most affected. For example, retail companies that lease buildings may on the face of the balance sheet, appear to be akin to a property investor with a significant number of leased premises on the balance sheet. In other cases, an intermediate lessor would account for a head lease and sub-lease separately, unless the contract meets the combination guidance in NZ IFRS 16.
CHANGES TO KEY FINANCIAL INFORMATION P&L Under NZ IAS 17, operating lease expenditure includes depreciation and an embedded interest element representing a finance expense, and has generally been constant amounts over the lease term. Under NZ IFRS 16, interest is included within financing expenditure. Interest is expected to decrease over the life of the lease at the same time as the principal asset decreases. Therefore lease expenses will be ‘front-loaded’ in the P&L. The higher operating profit (because interest is typically excluded from operating expenses) will impact EBITDA and other profit measures which exclude interest and depreciation but include operating expense. i.e. EPS, ROCE, EBIT.
NZ 1AS 17
NZ IFRS 16
FINANCE LEASES
OPERATING LEASES
ALL LEASES
Revenue
x
x
x
Operating costs (excluding depreciation & amortisation)
-
Single expense
-
J
EBITDA Depreciations & amortisation
Depreciation
-
#
Operating profit Finance costs Profit before taxes
Depreciation
Interest
-
Interest 1
NUMBERS Autumn 2016 • 21
The new Standard will provide much– needed transparency on companies’ lease assets and liabilities, meaning that off balance sheet lease financing is no longer ‘lurking in the shadows’. It will also improve comparability between companies that lease and those that borrow to buy." Hans Hoogervorst, IASB (INTERNATIONAL ACCOUNTING STANDARDS BOARD) CHAIRMAN
Cash flow There is no change to the total amount of cash flows paid in the lease arrangement, however there will be a presentation change with financing cash flows increasing and a corresponding decrease in operating cash flows. Balance sheet Entities will appear to be asset-rich but also more indebted. The new standard impacts almost all financial metrics, in particular: gearing ratios, asset turnover, ROCE. EBITDA, EPS, operating profit, etc. The greater the lease portfolio, the greater the expected impact on performance metrics. If leases are part of a portfolio with different useful lives and commencement dates, the impact will be moderated. Fortunately, it is common to have ‘frozen GAAP’ clauses, adjustments for off-balance sheet lease commitments or the option to re-negotiate debt covenants in the event of a change in accounting treatment.
THIS MAY BE EYE-OPENING… Companies and their stakeholders may be surprised to see the extent of lease exposures and the financing impacts of these. NZ IFRS 16 is expected to drive better capital allocation and management decision making. Leasing will remain an attractive form of financing without owning 100% of the risk. The standard will result in greater comparability between companies who elect to lease long-term with those that purchase equipment outright.
DISCLOSURE CHANGES The new standard results in significant changes in disclosure as a result of the feedback received, changes in the new lessee accounting model and a maturity analysis requirement under NZ IFRS 7. An entity must disclose any material entity-specific information the entity considers relevant to understand the nature and timing of leases e.g. sale and lease-back transactions, optionality.
LOOK TO THE FUTURE - TRANSITION OPTIONS The standard is likely to be applied by NZ companies for the first time for the financial years ended 31 December 2019, 31 22 • NUMBERS Autumn 2016
March 2020 and onwards. Despite the long lead-time, leases are a core part of many companies’ financing strategies and span multi-year periods, therefore the impact is likely to be fundamental to many IFRS reporters. NZ IFRS 16 allows lessees to use either a full retrospective (adjust your comparatives) or a modified retrospective approach on transition for leases existing at the date of transition. For some entities this may require an update to leasing software to record the information needed or may drive a review of how financing decisions are made.
HOW WE CAN HELP? The changes are likely to be pervasive including tax, procurement, IT, treasury, and legal. Entities will need to consider the reliability of IT systems, business processes and internal controls to comply with the new leases standard. For further guidance on this and other new standards on the horizon, contact your Staples Rodway regional Partner or Aniela Tkacz, National Technical Manager at aniela.tkacz@ staplesrodway.com.
WHAT YOU NEED TO KNOW N Z IFRS 16 removes the distinction between operating and finance leases and brings all leases onto the balance sheet apart from short term or small ticket leases. NZ IFRS 16 focuses on control as the key factor in identifying a lease arrangement. Lessor accounting is largely unchanged. Disclosure requirements are expanded and a lessee is encouraged to provide additional quantitative and qualitative information if doing so results in a greater understanding of the lease obligation for users of the financial statements. The new standard is effective for annual periods beginning 1 January 2019. Early adoption is available if NZ IFRS 15 has been applied.
N EW CO LU M N
ASK AN EXPERT Got a burning business question? We're starting a new column in Numbers where we will answer your accounting, tax, business and investment questions. Staples Rodway has experts throughout New Zealand in every aspect of accounting, business and investment, from taxation and audit to HR and property. Take advantage of our expertise and send your question to questions@staplesrodway.com and one of our specialists may answer it in a forthcoming issue of Numbers.
RETIREMENT PLANNING Planning your retirement is one of the least understood areas of financial planning. The challenges are many and include:
How much will I spend in retirement? How much capital do I need to retire on? Will the superannuation still be there for me? What will I need for travel in the early years and healthcare in the later years? What will investment markets do?
Article by James Scarr STAPLES RODWAY ASSET MANAGEMENT james.scarr@staplesrodway.com
F
OR THE ANSWER IT IS useful to turn to some US research contained in the article “The 4 Percent Rule Is Not Safe in a Low-Yield World” from Journal of Financial Planning (published with permission). The authors, David Blanchett, Michael Finke and Wade Pfau, are US based retirement specialists. The extract focusses on some of the issues you face and ways to meet the challenge of planning for your retirement. Remember while this article is based on US conditions many of the conclusions will apply to us in New Zealand.
IS IT TIME TO RETHINK ONE OF THE BESTKNOWN RETIREMENT GUIDELINES? Based on studies of stock and bond returns since 1926, financial planners had settled on a benchmark for how much a retiree could spend each year without fear of running out of cash. It turned out that a person who invested half in stocks and half in bonds could spend 4% of his or her wealth in the first year, adjust that dollar amount for inflation in subsequent years, and still have money 30 years later. That worked in every historical 30-year period, as well as in most computer simulations based on the historical rate of return. Even drawing a hefty 5% worked more often than not. Retiring in a Low-Return Environment Low bond yields and high equity valuations suggest lower spending for retirees. Prior research forecasted the impact on safe-withdrawal rates (SWRs), but a more sophisticated model can improve the accuracy of those predictions. We show just how low the SWRs should be for today’s retirees. SWR research, such as the well-known 4% rule, is based on a portfolio of stocks and bonds using historical return data. The sustainability of retirement portfolios is highly sensitive to asset returns – particularly in the first decade of retirement. Even if bond yields rise, today’s retirees face greater shortfall risk because the value of portfolios invested in bonds will fall. Equities are also not as safe as they have been historically. When prices are high (based on Price to Earnings ratios), future returns are more likely to be disappointing. Most retirees don’t annuitise and most investment advisors don’t recommend annuities. Without an annuity, a retiree needs to select an amount to spend each year from a portfolio. A reasonable goal is to withdraw as much as possible from an investment portfolio without running out of money. In order to estimate how much can be safely withdrawn each year, an advisor must make a number of assumptions about things like life expectancy and portfolio returns, typically using historical return data for projections. The problem with prior research William Bengen developed the 4% rule-of-thumb for retirement withdrawals in 1994. He found that an individual could www.staplesrodway.co.nz
have withdrawn 4% of their retirement-date assets, with spending adjusted each year for inflation, over a 30-year retirement period using a portfolio invested in 50% to 75% stocks. The Trinity Study from 1998 updated this approach for a variety of scenarios and confirmed that a 4% withdrawal rate based on 20th century U.S. portfolio returns would have allowed a retiree to withdraw the same real income each year with only a small chance of failure. A problem with using historical U.S. asset return data is that future market performance (and retirement outcomes) will depend on the price of stocks and bonds today. Stock returns depend on dividend income, earnings growth and changes in the valuation multiples placed on those earnings. If the current dividend yield is below its historical average, then history suggests that equity returns following periods of high valuations will also be lower than average. This is mainly because earnings growth is relatively stable. Stocks are priced based on supply and demand; higher prices indicate a lower required equity risk premium and/or a lower risk-free rate. Returns on bonds depend on the current bond yield and on subsequent yield changes. Low bond yields predict lower holding period returns from less income and the heightened risk associated with capital losses if interest rates rise. SWRs are directly related to the returns provided by the underlying investment portfolio. In particular, the returns experienced in early retirement will weigh disproportionately on the final outcome. Current market conditions are much more relevant than historical averages. We question the relevance of research based on what worked in the past. The U.S. historical record is relatively slim for determining how much can be safely withdrawn from a rather aggressive investment portfolio. Past outcomes have little bearing on the unique situation facing today’s retirees. Analysis To illustrate the difference in SWRs when valuations are taken into account, we estimate the probability of success for a 4% initial withdrawal rate over 30 years for different equity allocations using a past-returns model. This model assumes an initial CAPE (adjusted price to earnings) Ratio of 16, being the approximate long-term average, initial bond yields of 5.0%, no investment fees (as is common in retirement research) and an average equity return of 12% (consistent with the long-term arithmetic average historical total return of the S&P 500). We compared this to a forward-looking model that assumes an initial CAPE ratio of 27, an initial bond yield of 2.5%, an investment fee of 50 bps and an average future expected equity return of 9%. The figure on the previous page includes the probabilities of success for different equity allocations, from 0% to 100%, in 10% increments, for these two models. NUMBERS Autumn 2016 • 25
As we can see in the figure below, the probabilities of success for the forward-looking model are much lower than those based on historical returns. For example, using historical returns, the probability of success of a 4% SWR is approximately 95% (e.g., for a 50% equity allocation). In contrast, the probability of success using the forward-looking model for a 50% equity allocation is only 54%. It is as low as 1% for an allbond portfolio. 20% EQUITY ALLOCATION RETIREMENT PERIOD (YEARS)
80%
TARGET PoS
PROBABILITY OF SUCCESS FOR A 4% INITIAL WITHDRAWAL RATE
100%
60%
40%
15
20
25
30
35
40
99%
5.3%
4.0%
3.3%
2.7%
2.4%
2.1%
95%
5.7%
4.3%
3.5%
3.0%
2.6%
2.4%
90%
5.9%
4.5%
3.7%
3.1%
2.8%
2.5%
80%
6.3%
4.8%
3.9%
3.3%
3.0%
2.7%
50%
6.8%
5.2%
4.3%
3.7%
3.3%
3.0%
20%
40% EQUITY ALLOCATION RETIREMENT PERIOD (YEARS) 0%
20%
40%
60%
80%
100%
FORWARD-LOOKING MODEL
Recall that we are still using asset-return data from the past to project SWRs. We are just using more information about current valuations and projecting future returns using a regression model estimated from historical data. Using these more realistic forward-looking assumptions, our simulation shows that SWRs suggested by past research are not nearly as safe as originally thought. Which SWRs are safe? We estimated the probabilities of success for different equity allocations over various retirement periods using the forward-looking model. The assumptions are the same as in the previous analysis (CAPE ratio is 27, the initial bond yield is 2.5%, a 50 bps investment fee and the long-term average return on stocks is 9.0%). The values in the table to the right are the SWRs for a given target probability of success (PoS), retirement period and equity allocation based on 10,000 Monte Carlo simulations.
15
20
25
30
35
40
99%
4.8%
3.5%
2.8%
2.3%
2.0%
1.8%
95%
5.3%
4.0%
3.2%
2.8%
2.4%
2.2%
90%
5.7%
4.3%
3.5%
3.0%
2.6%
2.4%
80%
6.2%
4.7%
3.9%
3.3%
2.9%
2.7%
50%
7.0%
5.5%
4.6%
4.0%
3.6%
3.3%
60% EQUITY ALLOCATION RETIREMENT PERIOD (YEARS) 15 TARGET PoS
HISTORICAL RETURNS
TARGET PoS
PORTFOLIO EQUITY ALLOCATION
20
25
30
35
40
99%
4.0%
2.9%
2.3%
1.9%
1.6%
1.4%
95%
4.8%
3.6%
2.8%
2.4%
2.1%
1.9%
90%
5.3%
4.0%
3.2%
2.8%
2.4%
2.2%
80%
5.9%
4.5%
3.7%
3.2%
2.8%
2.6%
50%
7.2%
5.6%
4.8%
4.2%
3.8%
3.5%
80% EQUITY ALLOCATION
26 • NUMBERS Autumn 2016
TARGET PoS
RETIREMENT PERIOD (YEARS)
Staples Rodway Asset Management Limited is a boutique investment advisory service who specialise in providing personalised and impartial investment solutions for individuals and trusts. For a no obligation discussion with one of the Authorised Financial Advisers from Staples Rodway Asset Management (SRAM) please phone 09 309 0491 or email investments@staplesrodway.com. More information is available at www.staplesrodway.co.nz/investment-management.
15
20
25
30
35
40
99%
3.2%
2.3%
1.7%
1.4%
1.2%
1.0%
95%
4.3%
3.1%
2.4%
2.0%
1.8%
1.6%
90%
4.8%
3.6%
2.8%
2.5%
2.1%
1.9%
80%
5.6%
4.2%
3.5%
3.0%
2.7%
2.4%
50%
7.3%
5.8%
4.9%
4.3%
3.9%
3.6%
AUCKLAND ART FAIR IS BACK AT THE CLOUD AFTER A THREE YEAR BREAK. STAPLES RODWAY AUCKLAND IS PROUD TO BE ONE OF THE KEY SPONSORS FOR THE EVENT This is the premier international showcase for contemporary art and will take place from May 25th - 29th at The Cloud on Auckland’s Queen’s Wharf. The 2016 Projects Programme is being curated by Jarrod Rawlins, curator at MONA (Hobart) and Simon Rees, Director of the GovettBrewster Art Gallery and Len Lye Centre in New Plymouth. Staples Rodway clients will have access to VIP events, including our exclusive clients and contacts night which will be on Thursday 26th May. Look for your invitation or email events@staplesrodway.co.nz Check out details of the Auckland Art Fair at www.artfair.co.nz
MOVERS
& SHAKERS
It's been a big start to 2016 for Staples Rodway with the invaluable addition of top level talent and significant advancements and achievements for some of our team.
SENIOR PARTNERS HONOURED BY CAANZ Stuart Signal from Hawke’s Bay (pictured left) and Neville Grey (right) from Tauranga are both to be made Fellows of Chartered Accountants Australia and New Zealand (CAANZ). This honour is afforded to only a few members and shows the respect the profession holds for Stuart and Neville. cntd over
SENIOR HIRES FOR AUCKLAND OFFICE S
Tony Maginness
Aniela Tkacz
TAPLES RODWAY CONTINUES TO GROW with the appointments of Business Recovery Director Tony Maginness and National Technical Manager Aniela Tkacz to the firm’s Auckland office. Tony Maginness brings more than 15 years’ experience in commercial lending, restructuring, and insolvency to Staples Rodway. With extensive experience across a range of industries, his key strengths include helping directors implement realistic, achievable and time-bound strategies to get the best results for their stakeholders. Tony has helped a number of businesses turn around when faced with difficult trading conditions or where on-going finance has been challenging. He has played a key role in many large, high-profile insolvency assignments and provided advice in debt and business restructuring, asset rationalisation strategies and governance. Aniela Tkacz has a breadth of experience across extractive industries, telecommunications and standards setting. She has a passion for communicating complex financial reporting issues and specialises in share-based payment arrangements, valuation and impairment considerations, horizonscanning, and audit and assurance services. Aniela recently returned from working in the UK for a FTSE 20 extractive industry company where she was the technical accountant for the South American, Australian and Coal operations. Staples Rodway Auckland Managing Director David Searle says: “The senior appointments of Tony and Aniela to our Auckland team continue a great start to 2016 for Staples Rodway, and closely follow Roger Shackelford’s recent appointment in Wellington. Tony and Aniela bring outstanding skills and track records to Staples Rodway, which are sure to be of great value to our clients.”
CPA AUSTRALIA LEADERSHIP ROLES FOR STAPLES RODWAY DIRECTORS CPA Australia is the dominant professional organisation for chartered accountants in Australia and is rapidly increasing its role and profile in New Zealand. At present it has more than 1,700 members based in New Zealand. As a professional group, the management body is elected by the members and Staples Rodway are proud to note that Andrew Dickeson, Tax Director in the Auckland office, has recently been elected to the position of President of the CPA Australia – New Zealand branch. Andrew has previously been heavily involved in presenting webinars to CPA members on topical tax matters. He also heads the Special Interest Group on Taxation and chairs CPA’s special admissions committee. In addition, Tracy Hickman, a Corporate Advisory Director in Auckland, has been elected to one of the Vice President positions. Check out www.cpaaustralia.com.au for more details about the benefits of joining this organisation. 28 • NUMBERS Autumn 2016
Andrew Dickeson
Tracy Hickman
WELLINGTON TAX TEAM BOOSTED O
UR WELLINGTON FIRM HAS STARTED the new year strongly with its team boosted by the arrival of new Tax Partner Roger Shackelford. Roger joins Staples Rodway after 12 years as a partner at BDO, and brings extensive experience across a range of industries including construction, not for profits, real estate agencies, property development and professional services. Roger focuses on providing practical tax solutions that work commercially. He specialises in resolving disputes with Inland Revenue, structuring business transactions, doing business offshore and the taxation of trusts. He also brings significant experience in tax education through his regular presentations to industry body Chartered Account of Australia and New Zealand. Roger will also lead Staples Rodway’s respected Tax 111 Q&A Service with Thomson Reuters. Staples Rodway Wellington Managing Partner Robert Elms says: “Roger is a fantastic addition to our team. His tax exper-
tise and standing within the industry will be a real asset for our clients and ourselves, and we are looking forward to seeing what new opportunities he brings to the table”.
Roger Shackelford
GAVIN GHUMAN
AUDIT ASSOCIATE DIRECTOR, HAMILTON Gavin is an Audit Associate Director who brings to Staples Rodway several years of varied and comprehensive experience in the fields of audit, financial accounting, and taxation. Gavin has past experience in a “Big Four” CA firm and a financial accounting and reporting role, with a commercial focus, in a large New Zealand corporate. Gavin is professionally qualified as a Chartered Accountant with Chartered Accountants Australia and New Zealand. Gavin has extensive experience performing external audits for a number of small, medium and large organisations in industries including energy, manufacturing, property syndicates, not-for-profits, sports, public health and local Government. Gavin also provides other consulting services including technical advice on international financial reporting standards (IFRS) and international public sector accounting standards (IPSAS), due diligence, complete system reviews, designing internal controls, IFRS conversions, and project work. Gavin is passionate about meeting the needs of his clients and is considered a trusted advisor in addition to offering a high quality audit service.
IAN RENNER
ASSOCIATE, TAURANGA Ian has had over 20 years business advisory and chartered accountancy experience, with the last 7 years being spent with Staples Rodway Tauranga after moving from a mid-tier firm in Auckland. Ian provides business advisory and accounting services to clients in a wide range of industries, he has specialist industry knowledge within agriculture and horticulture but also works with clients in a diverse range of industries including retail, manufacturing, aged care, building, property and investment. Ian also has considerable experience in solvent liquidations and company wind-ups. Ian is passionate about helping businesses realise their full potential in all stages of their business cycle and has helped many of his clients manage the challenges each stage offers. www.staplesrodway.co.nz
NUMBERS Autumn 2016 • 29
AUCKLAND Level 9, 45 Queen St PO Box 3899 Auckland 1140 Phone 64 9 309 0463 Fax 64 9 309 4544 enquiries@staplesrodway.com
WAIKATO 4th Floor, BNZ Building 354 Victoria Street PO Box 9159 Hamilton 3240 Phone 64 7 834 6800 Fax 64 7 838 2881 staples@srw.co.nz
TAURANGA Level 1, 247 Cameron Road PO Box 743 Tauranga 3140 Phone 64 7 578 2989 Fax 64 7 577 6030 info@staplestga.co.nz
HAWKES BAY Cnr. Hastings and Eastbourne Streets PO Box 46 Hastings 4156 Phone 64 6 878 7004 Fax 64 6 876 0078 info@stapleshb.co.nz
NEW PLYMOUTH 109-113 Powderham Street PO Box 146 New Plymouth 4340 Phone 64 6 757 3155 Fax 64 6 757 5081 newp@staplestaranaki.co.nz
STRATFORD 78 Miranda Street PO Box 82 Stratford 4352 Phone 64 6 765 6949 Fax 64 6 765 8342 stfd@staplestaranaki.co.nz
WELLINGTON Level 6, 95 Customhouse Quay PO Box 1208 Wellington 6140 Phone 64 4 472 7919 Fax 64 4 473 4720 info@stapleswellington.co.nz
CHRISTCHURCH Level 2, Tavendale Centre 329 Durham Street North PO Box 8039 Christchurch 8440 Phone 64 3 343 0599 Fax 64 3 348 0186 info@srchch.co.nz
www.staplesrodway.co.nz