AGENDA
Ordinary meeting of the
Audit, Risk and Finance Subcommittee
Tuesday 26 June 2018
Commencing at 9.00a.m.
Council Chamber
Civic House
110 Trafalgar Street, Nelson
Membership: Mr John Peters (Chairperson), Her Worship the Mayor Rachel Reese, Councillors Ian Barker, Bill Dahlberg and Mr John Murray
Guidelines for councillors attending the meeting, who are not members of the Committee, as set out in Standing Order 12.1:
· All councillors, whether or not they are members of the Committee, may attend Committee meetings
· At the discretion of the Chair, councillors who are not Committee members may speak, or ask questions about a matter.
· Only Committee members may vote on any matter before the Committee
It is good practice for both Committee members and non-Committee members to declare any interests in items on the agenda. They should withdraw from the room for discussion and voting on any of these items.
Audit, Risk and Finance
Subcommittee
26 June 2018
1. Apologies
Nil
2. Confirmation of Order of Business
3.1 Updates to the Interests Register
3.2 Identify any conflicts of interest in the agenda
Document number M3483
Recommendation
That the Audit, Risk and Finance Subcommittee
Confirms the minutes of the meeting of the Audit, Risk and Finance Subcommittee, held on 15 May 2018, as a true and correct record.
6. Chairperson's Report
7. Annual Tax Review 12 - 23
Document number R9395
Recommendation
That the Audit, Risk and Finance Subcommittee
Receives the report Annual Tax Review (R9395) and its attachments (A1847439 and A1985957).
8. Corporate Report to 30 April 2018 24 - 35
Document number R9396
Recommendation
That the Audit, Risk and Finance Subcommittee
Receives the report Corporate Report to 30 April 2018 (R9396) and its attachments (A1969286 and A1986404).
9. Audit engagement letter for year ending 30 June 2018 36 - 66
Document number R9208
Recommendation
That the Audit, Risk and Finance Subcommittee
Receives the report Audit engagement letter for year ending 30 June 2018 (R9208) and its attachments (A1955165 and A1955166); and
Notes the Subcommittee can provide feedback on the Audit engagement letter to Audit New Zealand if required, noting the Mayor will sign the letter once the Subcommittee’s feedback has been incorporated.
10. Interim audit letter for the year ending 30 June 2018 67 - 83
Document number R9213
Recommendation
That the Audit, Risk and Finance Subcommittee
Receives the report Interim audit letter for the year ending 30 June 2018 (R9213) and its attachment (A1988268); and
Notes the suggested responses to the recommendations.
Note:
· There is an Audit, Risk and Finance Subcommittee Workshop following this meeting.
Audit, Risk and Finance Subcommittee Minutes - 15 May 2018
Minutes of a meeting of the Audit, Risk and Finance Subcommittee
Held in the Council Chamber, Civic House, 110 Trafalgar Street, Nelson
On Tuesday 15 May 2018, commencing at 9.10am
Present: Mr J Peters (Chairperson), Councillors I Barker, B Dahlberg and Mr J Murray
In Attendance: Councillor Courtney, Chief Executive (P Dougherty), Group Manager Corporate Services (N Harrison) and Governance Adviser (Rebecca Terry)
Apologies: Her Worship the Mayor R Reese, and Councillor Barker for lateness.
1. Apologies
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Resolved AUD/2018/018 That the Audit, Risk and Finance Subcommittee Receives and accepts an apology from Her Worship the Mayor Rachel Reese, and Councillor Barker for lateness. Murray/Dahlberg Carried |
2. Confirmation of Order of Business
The meeting was adjourned at 9.11am (at which time Her Worship the Mayor left the meeting, giving her apologies for attendance). The meeting reconvened at 9.15am.
3. Interests
There were no updates to the Interests Register, and no interests with items on the agenda were declared.
4. Public Forum
There was no public forum.
5. Confirmation of Minutes
5.1 13 February 2018
Document number M3252, agenda pages 7 - 15 refer.
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Resolved AUD/2018/019 That the Audit, Risk and Finance Subcommittee Confirms the minutes of the meeting of the Audit, Risk and Finance Subcommittee, held on 13 February 2018, as a true and correct record. Murray/Dahlberg Carried |
6. Chairpersons Report
There was no Chairperson’s report.
7. Status Report - Audit Risk and Finance Subcommittee - 15 May 2018
Document number R9278, agenda pages 16 - 17 refer.
Group Manager Corporate Services, Nikki Harrison advised that Manager Governance and Support Services, Mary Birch was currently investigating options for managing protected disclosure for elected members. They would be collating information and working with Tasman District Council to identify the most appropriate option.
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Resolved AUD/2018/020 That the Audit, Risk and Finance Subcommittee Receives the report Status Report - Audit Risk and Finance Subcommittee - 15 May 2018 (R9278) and its attachment (A1753947). Dahlberg/Murray Carried |
Attendance: Councillor Barker joined the meeting at 9.20am.
8. Key Organisational Risks - 1st Quarterly Report Calendar 2018
Document number R9223, agenda pages 18 - 35 refer.
Risk and Procurement Analyst, Steve Vaughan presented his report and answered questions in relation to how risk was managed within business units, the effectiveness of risk management controls and recruitment of staff.
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Resolved AUD/2018/021 That the Audit, Risk and Finance Subcommittee Receives the report Key Organisational Risks - 1st Quarterly Report Calendar 2018 (R9223) and its attachment (A1951823). Murray/Dahlberg Carried |
9. Corporate Report to 31 March 2018
Document number R9198, agenda pages 36 - 48 refer.
Senior Accountant, Tracey Hughes and Manager Capital Projects, Shane Davies presented the report. Ms Hughes noted a correction to the report, on page 37 at paragraph 4.2.6. The last sentence should read: ‘The bar graph records year to date expenditure against forecast expenditure by activity’.
Mr John Murray raised a question about finances going to other committees. Group Manager Corporate Services, Nikki Harrison confirmed this was not a requirement.
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Resolved AUD/2018/022 That the Audit, Risk and Finance Subcommittee Receives the report Corporate Report to 31 March 2018 (R9198) and its attachments (A1958594 and A1956070). Barker/Dahlberg Carried |
10. Internal Audit - Quarterly Progress Report to 31 March 2018
Document number R8842, agenda pages 49 - 55 refer.
Internal Audit Analyst, Lynn Anderson, presented the report.
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Resolved AUD/2018/023 That the Audit, Risk and Finance Subcommittee Receives the report Internal Audit - Quarterly Progress Report to 31 March 2018 (R8842) and its attachment (A1949842); and Approves the proposal to reduce the Internal Audit Plan to 30 June 2018 by three audits. Murray/Barker Carried |
11. Internal Audit - Summary of New or Outstanding Significant Risk Exposures and Control Issues to 31 March 2018
Document number R9251, agenda pages 56 - 61 refer.
Internal Audit Analyst, Lynn Anderson, presented the report and responded to questions around business continuity planning and delegations.
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Resolved AUD/2018/024 That the Audit, Risk and Finance Subcommittee Receives the report Internal Audit - Summary of New or Outstanding Significant Risk Exposures and Control Issues to 31 March 2018 (R9251) and its attachment (A1950727). Dahlberg/Barker Carried |
12. Health Safety and Wellbeing Performance Report: January to March 2018
Document number R9216, agenda pages 61 - 76 refer.
Health and Safety Adviser, Malcolm Hughes presented the report.
Mr John Peters suggested a change to the format of the Health Safety and Wellbeing Performance Report to include a summary at the beginning of the report from the Health and Safety Adviser outlining the main issues.
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Resolved AUD/2018/025 That the Audit, Risk and Finance Subcommittee Receives the report Health Safety and Wellbeing Performance Report: January to March 2018 (R9216) and its attachment (A1946126). Dahlberg/Barker Carried |
13. Exclusion of the Public
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Resolved AUD/2018/026 That the Audit, Risk and Finance Subcommittee Excludes the public from the following parts of the proceedings of this meeting. The general subject of each matter to be considered while the public is excluded, the reason for passing this resolution in relation to each matter and the specific grounds under section 48(1) of the Local Government Official Information and Meetings Act 1987 for the passing of this resolution are as follows: Barker/Dahlberg Carried |
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Item |
General subject of each matter to be considered |
Reason for passing this resolution in relation to each matter |
Particular interests protected (where applicable) |
|
1 |
Current Legal Proceedings
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Section 48(1)(a) The public conduct of this matter would be likely to result in disclosure of information for which good reason exists under section 7 |
The withholding of the information is necessary: · Section 7(2)(g) To maintain legal professional privilege |
The meeting went into public excluded session at 10.31am and resumed in public session at 10.52am.
14. Re-admittance of the Public
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Resolved AUD/2018/028 That the Audit, Risk and Finance Subcommittee Re-admits the public to the meeting. Barker/Dahlberg Carried |
There being no further business the meeting ended at 10.53am.
Confirmed as a correct record of proceedings:
Chairperson
Date
Item 7: Annual Tax Review
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Audit, Risk and Finance Subcommittee 26 June 2018 |
REPORT R9395
Annual Tax Review
1. Purpose of Report
1.1 To advise the Subcommittee of Council’s tax activities over the prior year and provide some context for the current tax environment.
2. Recommendation
|
That the Audit, Risk and Finance Subcommittee Receives the report Annual Tax Review (R9395) and its attachments (A1847439 and A1985957). |
2. Background
2.1 The Tax Risk Governance Framework was adopted by Council in May 2017 as a proactive step towards identifying and managing tax risk to maintain its low risk profile. As part of the Tax Governance Framework, staff have prepared this annual tax update.
2.2 This report provides:
· A summary of the tax advice that Council has sought during the period 1 July 2017 to 30 April 2018
· Commentary on tax matters currently being addressed as at 30 April 2018
· A more general high level update on the wider tax environment as it might affect Council.
Tax Advice received to 30 April 2018
2.3 For the most part, the tax compliance of Council has been ‘business as usual’ for much of the year with the various tax returns (GST, PAYE, FBT, etc) being filed on time and without any concerns being raised.
2.4 That said, it is appropriate to comment on the following areas where assistance has been provided to Council:
· Council’s tax advisors (PwC) submitted the voluntary disclosure (15 March 2018) on the taxable income from a Council Controlled Trading Organisation (CCTO), being Nelmac, and successfully applied for the adjustment to Council’s tax losses without interest or penalties being applied;
· PwC prepared and filed Council’s 2017 Income Tax Return on time in March 2018;
· Advice on the rules around non-resident contractors tax (NRCT) and how the NRCT exemptions may apply;
· In November 2017, Council sought advice on the unclaimed money rules, how they apply to local authorities and how a local authority might deal with funds not covered by the rules; and
· In July 2017 PwC provided advice in relation to the GST treatment currently adopted by Council, as the Administering Authority in relation to the GST liabilities arising from the Joint Committees with Tasman District Council.
Tax matters currently being addressed
2.5 On 14 December 2017 the tax risk strategy was adopted by Council. This approach supports Council to confidently demonstrate it is taking a proactive approach in assessing its overall tax compliance and managing its tax risk effectively.
2.6 As per that strategy, a comprehensive GST review will be undertaken in the second week of June 2018. The scope of the review is as follows:
· Assess the extent to which Council is compliant;
· Identify the level of tax knowledge within the organisation as a whole;
· Determine the degree to which Council has appropriate tax policies and procedures in place;
· Identify any instances of non-compliance and advise on appropriate solutions to rectify past errors; and
· Raise awareness of tax compliance across the organisation and educate staff within the specific organisational environment.
2.7 Two Council officers attended the local government tailored ‘tax update’ training held at St Arnaud by PwC in December 2017. These training sessions not only ensure that personnel are aware of recent and forthcoming developments, but also provide:
· A refresher of fundamental tax principles that underpin all tax risk management; and
· An opportunity to interact with personnel from other local authorities in the region (both Nelson/Tasman and West Coast) which assists with overall collaboration.
2.8 A Council officer also attended the tax session of the SOLGM strategic financial management conference presented by PwC to hear about the latest tax updates.
2.9 Finally, it is noted that Council has continued to obtain support via:
· Subscribing to PwC’s online Indirect Tax Policies and Guides;
· Maintaining a Tax Risk Governance Framework; and
· Adhering to a Tax Risk Management Strategy.
Other relevant matters
2.10 The Department of Internal Affairs issued a paper on Better Local Government Services. The discussion in this paper was converted into draft legislation, contained in the Local Government Act 2002 Amendment Bill (No. 2) 2016 (the Bill).
2.11 In essence, this paper proposed changes to the legislation that would enable the Local Government Commission to require local authorities to establish substantive Council Controlled Organisations (CCOs) – in particular, relating to the provision of water and transport services.
2.12 The proposed changes had a number of impacts, and of note, potentially adverse income tax compliance consequences. Submissions were prepared (primarily by SOLGM) requesting that any substantive CCOs were exempt from income tax.
2.13 Following Select Committee hearings, an update has been made to the Bill (i.e. per Section CW 39B of the Income Tax Act 2007) which now provides local authorities with an ability to allow certain CCOs to elect whether to be subject to income tax or not. The Bill has yet to be enacted but further amendments are not expected.
2.14 Inland Revenue has been active in the Local Government sector over the last couple of years and in the last 18 months, notified six local authorities that they are considering undertaking an audit of their tax compliance. This is part of the Inland Revenue’s general interest in encouraging organisations to be tax compliant, and is part of their interest in the wider public sector. One of the standard questions when Inland Revenue review any organisation is whether there has been an independent assessment of tax compliance, and if so, to request any reports issued.
2.15 Inland Revenue’s ongoing internal transformation will have likely caused disruption in this area. As such, an audit is not necessarily imminent and indeed may never occur, but one cannot discount the possibility that it may. As such it was timely to have in place a Tax Governance Framework and Tax Risk Management Strategy to ensure that tax risk management is front of mind.
Council’s tax figures
2.16 Generally Council is exempt from income tax with the main exception being income from CC(T)O’s. However, Council has significant tax obligations in relation to GST and PAYE in particular. The quantum is highlighted in this section.
2.17 In the 12 months ending 31 March 2018, Council has accounted for:
|
Tax |
12 month period ending |
Amount |
|
GST output tax |
31 March 2018 |
$16,393,679 |
|
GST input tax |
31 March 2018 |
$13,716,782 |
|
PAYE & ACC |
31 March 2018 |
$5,329,908 |
|
FBT |
31 March 2018 |
$9,555 |
2.18 Council also acts as agent for the Nelson Regional Sewerage Business Unit, Nelson Tasman Regional Landfill Business Unit and Nelson Tasman Civil Defence and Emergency Management. The numbers above exclude these entities (except for the NRSBU between July and December at which point NCC and NRSBU were separated for GST return purposes).
3. Conclusion
3.1 Council formally adopted the Tax Governance Framework on 18 May 2017 and the Tax Risk Management Strategy on 14 December 2017. These form a solid foundation for managing tax risk.
3.2 The Tax Risk Management Strategy (attachment 1) is a simple tool to ensure that tax risk is being identified and managed appropriately while providing the Subcommittee with a quick visual tool to see the steps Council has taken to manage tax risk and the forward looking strategy.
3.3 The adoption of the Framework and the Strategy ensures that complacency does not arise amongst the finance team, senior leadership team or those with oversight for audit and risk.
Tracey Hughes
Senior Accountant
Attachments
Attachment 1: A1847439 - Tax risk management strategy ⇩
Attachment 2: A1985957 - Wider tax developments ⇩
Item 8: Corporate Report to 30 April 2018
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Audit, Risk and Finance Subcommittee 26 June 2018 |
REPORT R9396
Corporate Report to 30 April 2018
1. Purpose of Report
1.1 To inform the members of the Subcommittee of the financial results of activities for the ten months ending 30 April 2018, compared to the approved operating budget, and to highlight and explain any permanent and material variations.
2. Recommendation
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That the Audit, Risk and Finance Subcommittee Receives the report Corporate Report to 30 April 2018 (R9396) and its attachments (A1969286 and A1986404). |
3. Background
3.1 The financial reporting focuses on the ten month performance compared with the year to date approved operating budget.
3.2 Unless otherwise indicated, all measures are against approved operating budget, which is the 2017/18 Annual Plan budget plus any carry forwards, plus or minus any other additions or changes as approved by Council throughout the year.
3.3 Officers have assessed budgets and applied a range of phasing mechanisms depending on the nature of the expenditure to reflect the timing of anticipated actual income and expenditure.
4. Discussion
4.1 For the ten months ending 30 April 2018, the activity surplus/deficits are $7.3 million favourable to budget.
4.2 The most significant variances are:
· $2.1m unbudgeted income being the gain recognised on the transfer of the NCC landfill assets to the joint landfill in exchange for a half share of the total assets of the joint landfill. (This was accounted for differently in the budget);
· $3.5m income from forestry greater than budget, offset by $2.9m forestry harvesting costs greater than budget (net income $0.6m favourable);
· Un-programmed maintenance costs $0.9m more than budget mostly related to February storm events;
· Other maintenance $2.2m less than budget including some seasonal activities and the delay of the desludging at the wastewater treatment plant;
· Invoicing from TDC for the Velodrome and Saxton Drive projects behind budget $1m;
· Salaries and overheads under budget $0.8m.
4.3 Financial information provided in Attachment 1 to this report includes:
4.3.1 A financial measures dashboard with information on rates revenue, operating revenue and expenditure, and capital revenue and expenditure. The arrow icon in each applicable measure indicates whether the variance is increasing or decreasing and whether that trend is favourable or unfavourable (green or red).
4.3.2 A grouping of more detailed graphs and commentary for operating income and expenditure. The first set of charts and commentary is by category (as in the annual report) and highlights significant permanent differences and items of interest. Variances due to timing will not be itemised unless they become permanent. The second set of charts is by activity.
4.3.3 A treasury measures dashboard with a compliance table (green = compliant), a forecast of the debt/revenue ratio for the year where available, and a graph showing debt levels over a rolling 13 month period.
4.3.4 High level balance sheet. This does not include any consolidations.
4.3.5 A debtor analysis graph over 13 months, clearly showing outstanding debt levels and patterns for major debt types along with a summary of general debtors > 3 months and over $10,000 and other debtors at risk.
4.3.6 Two capital expenditure graphs – The line graph records actual expenditure against budget plus carryover (the initial budget), approved budget (as amended by subsequent Council decisions), and forecast (current understanding of most likely outcome). The bar graph records year to date expenditure against forecast by activity.
4.3.7 A major projects summary including milestones, status, issues and risks.
4.4 Capital expenditure is $14.9 million under approved budget and $1.2m less than current forecast for the Long Term Plan 2018-28 as presented to Council workshops in late January (including vested assets and NRSBU capital).
5. Bad debt write offs for the year ending 30 June 2018
5.1 There
are no bad debts over $2,500 to be written off for the year ending
30 June 2018.
5.2 A number of accounts under $2,500 per debtor have been written off by the Group Manager Corporate Services under officer delegation. These totalled $3,516 excluding GST. The main areas of write-offs are $1,238 for 7 separate debts for dog impounding fees, $1,030 for crematorium/internment fees and $913 for compliance schedule fees.
5.3 The decision is an administrative one and although the debts are written off from an accounting point of view, a record is still kept and if an opportunity to recover the debt arises, action will be taken. $1,572 of this balance is with Credit Recoveries Limited, our debt recovery agency, who will continue recovery activities. Every possible effort has been made to locate and obtain payment from these debtors.
5.4 A summary of this year's write-off compared to last year's is as follows:
|
|
Write-off 2018 |
Write-off 2017 |
|
Over $2,500 |
0 |
3,128 |
|
Under $2,500 |
3,516 |
5,822 |
|
Cost for year |
3,516 |
8,950 |
Tracey Hughes
Senior Accountant
Attachments
Attachment 1: A1969286 - Finance Report to 30 April 2018.pdf ⇩
Attachment 2: A1986404 - Major projects summary ⇩
Item 9: Audit engagement letter for year ending 30 June 2018
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Audit, Risk and Finance Subcommittee 26 June 2018 |
REPORT R9208
Audit engagement letter for year ending 30 June 2018
1. Purpose of Report
1.1 To provide the subcommittee with the Audit Engagement Letter for the year ending 30 June 2018 and ask for any feedback before the letter is signed by the Mayor.
2. Recommendation
3. Discussion
3.1 The Audit Engagement letter for the year ended 30 June 2018 (Attachment 1) sets out the respective responsibilities for the 2017/18 audit of the Council, including Nelson Tasman Combined Civil Defence Organisation.
3.2 The Audit Plan (Attachment 2) sets out the audit arrangements and covers:
· Audit risks and issues, both specific focus areas for council and areas of interest for all local authorities
· Audit approach
· Reporting protocols
· Audit logistics.
3.3 There is a separate audit arrangement letter for the debenture trust deed but this is not yet available from Audit New Zealand.
3.4 Jacques Coetzee, the appointed auditor, will be in attendance at this subcommittee meeting to answer any questions that may arise.
3.5 This letter is required to be signed by the Mayor to confirm that the details of the audit match Council’s understanding of the arrangements.
4. Options
4.1 The options are to provide feedback to Audit New Zealand prior to the Mayor signing the letter or not.
Nikki Harrison
Group Manager Corporate Services
Attachments
Attachment 1: A1955165 - Audit NZ Engagement Letter Annual Report 30 June 2018.pdf ⇩
Attachment 2: A1955166 - Audit NZ Annual Report Audit Plan_1.pdf ⇩
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Important considerations for decision making |
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1. Fit with Purpose of Local Government Section 99 of the Local Government Act 2002 requires the audit of information contained in the Annual Report and Summary. |
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2. Consistency with Community Outcomes and Council Policy This report supports the community outcome that Council provides infrastructure that is efficient, cost effective and meets current and future needs of our community. |
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3. Risk There is no risk in approving this recommendation. |
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4. Financial impact The recommendation will not have any significant financial impact. |
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5. Degree of significance and level of engagement This matter is of low significance because it does not affect the level of service provided by Council or the way in which services are delivered and no engagement has been undertaken. |
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6. Inclusion of Māori in the decision making process There has been no consultation with Maori in the preparation of this report. |
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7. Delegations The Audit, Risk and Finance Subcommittee has responsibility for audit processes and management of financial risks. |
Item 10: Interim audit letter for the year ending 30 June 2018
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Audit, Risk and Finance Subcommittee 26 June 2018 |
REPORT R9213
Interim audit letter for the year ending 30 June 2018
1. Purpose of Report
1.1 To provide the letter to the Subcommittee on the interim audit for the year ending 30 June 2018 from Audit New Zealand.
2. Recommendation
3. Discussion
3.1 Audit New Zealand carried out the interim audit for the year ending 30 June 2018 in mid-April 2018 which focused on the Council's internal controls and the overall control environment. They issued the draft letter on 7 June 2018 (Attachment 1).
3.2 There were no significant issues identified during the audit. Two other matters were identified during the audit.
3.3 System access to make payroll Masterfile changes
3.3.1 Audit New Zealand raise that Payroll Masterfile changes should be reviewed by an independent person who does not have access to the software system or is able to make changes themselves. This issue has been addressed.
3.4 Suspense account review
3.4.1 Audit New Zealand raise that the clearing of suspense accounts should be formally documented and reviewed on a one-up basis and in a timely manner.
3.4.2 The payroll suspense account reconciliation lapsed due to staff leave; arrangements will be made in future for this to be reviewed in the event of absence. A record of the other suspense accounts (zero balances) will be kept in future.
3.5 The Audit New Zealand interim letter also contains a section of previous recommendations made and an update on the status of the recommendations.
4. Options
4.1 That the Subcommittee note the matters raised in the letter to the Council on the interim audit of Nelson City Council for the year ending 30 June 2018 and the manner in which officers propose to address them.
Tracey Hughes
Senior Accountant
Attachments
Attachment 1: A1988268 - Audit NZ - draft interim audit letter for the year ending 30 June 2018 ⇩
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Important considerations for decision making |
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1. Fit with Purpose of Local Government Section 99 of the Local Government Act 2002 requires the audit of information contained in the Annual Report and Summary and the interim audit forms part of that audit process. |
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2. Consistency with Community Outcomes and Council Policy This report supports the community outcome that Council provides leadership. |
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3. Risk There is more risk that Council will not meet all its responsibilities if the recommendations from Audit NZ are not accepted and actioned. |
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4. Financial impact There is no financial impact. |
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5. Degree of significance and level of engagement This matter is of low significance because there are no decisions to be made. Therefore no engagement has occurred. |
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6. Inclusion of Māori in the decision making process Maori have not been consulted in preparation of this report. |
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7. Delegations The Audit, Risk and Finance Subcommittee has the responsibility for considering audit processes and management of financial risk. |
