Newsletter September 2020
TAX CALENDAR
Sept 20
PAYE payments
Sept 30
CRS disclosures for NZFI’s FATCA information for disclosure to IRS.
LABOUR TO HIKE UP TOP TAX RATE to 39%
Grant Robertson has announced that Labour is intending to hike up the top individual marginal tax rate from 01 April 2021 on income over $ 180,000 to 39% which would add roughly about $ 500 Million to the government coffers. There should be no other increases to current tax rates.
A lot of work has been done by previous governments to align the tax rates, so as to discourage investment through entities with lower tax rates by aligning the top marginal tax rate to the trust tax rate. Assuming this proposal will go through the disparity in tax rates will no doubt result in effective tax planning all over again.
Taxes that will remain the same:
- Corporate Tax Rate 28%
- Trust Tax Rate 33%
- Individual tax rates on earnings up to $ 180,000 p/a
With the top marginal tax rate going up to 39%, if Labour wins the upcoming election, keeping the good old trusts alive may make good economic sense. Despite the more onerous rules that are imposed on the Trustees by the Trusts Act 2019 which will come into effect on 31 Jan 2021, trusts will, once again, become effective tool for tax planning. To explain:
Investment income is taxed at 33% if retained in the Trust as opposed to 39% if earned by an individual, assuming that the individual’s marginal tax rate is 39%. A Distribution of accumulated income from a trust, which was already taxed at 33% as trustee income, can be distributed tax free to the beneficiary on high marginal tax rate of 39%.
What does this mean for companies & dividend income?
If the tax rate goes up, a dividend distribution from a company to an individual with other income of $ 180,000 or more will be subject to additional 11% tax. This is made up of 5% RWT deducted by the company and an additional 6% suffered by the shareholder.
Possible Tax Planning Opportunities?
Like anything every cloud has a silver lining. A major change like this presents itself with tax planning opportunities. Why pay more tax than is absolutely necessary?
One could consider transferring investments held personally to a Family Trust. In case of shares care should be taken that imputation credits are not lost due to breach of continuity. Transfer of shares may give rise to loss of tax losses brought forward. Care also needs to be taken in cases where the company is a land rich company where 50% or more of assets is made of residential land, as that may give rise to application of brightline rules.
DID YOU KNOW?
Taxing crypto currencies
Investing in cryptoassets is no different than investing in other assets. Taxable income or loss firstly depends on whether you are in business or not and the type of crypto activity you are engaged in and the type of crypto assets you hold.
How does one work out cryptoasset income?
Income is generally derived in the year it is received and may include income from the following:
- mining crypto assets such as block rewards, transaction fees, income from mining pool
- staking cryptoassets or using stake-as-a-service provider
- lending cryptoassets to another person (incl crypto interest)
- getting paid in cryptoassets for goods and services you provide
- selling or exchanging cryptoassets (incl mining rewards)
- closing value of crypto assets if you are a trader and hold crypto assets as trading stock.
How does one work out cryptoasset expenses?
As mentioned above the allowable expenses depend on whether you are in business or not. In general, the following can be deducted from cryptoasset income:
- the cost of your cryptoassets incl transaction fees
- interest paid on money borrowed to purchase crypto assets (if profit from cryptoassets is taxable)
- depreciation of capital assets such as computer hardware & software
- there could be other costs such as electricity or rental costs if you engage in mining activity.
- opening value of cryptoassets if you are a trader and these form part of your trading stock, if these are not held as trading stock the deduction is only available when cryptoasset is sold or exchanged
In general deduction can be claimed in the income year it is incurred, which is generally when payment is made.
Compensation or recovered stolen crypto assets
Compensation or insurance payment received for stolen crypto assets will be income if you have claimed a loss. The amount of income will generally be limited to the amount of loss claimed.
VALUE OF CRYPTOASSETS
Not all cryptoasset transactions have NZD value (i.e. receiving mining rewards or receiving payments in cryptoassets). The NZD value of crypto assets received as income needs to be quantified using an appropriate conversion rate. Cryptoassets may need to be converted to foreign currency before they are converted to NZD.
Cryptoasset conversion rates can be obtained through platforms such as Coin Market Cap or Yahoo Finance: Cryptocurrencies. The Commissioner considers these acceptable.
COVID 19 VARIATION
Application for R&D Activities
COV20/10 was recently released that extends the time for filing a general approval application for research and development (R&D) activities by three months for those taxpayers who are materially delayed or disrupted by the COVID-19 outbreak and its effects.
The variation applies from 01 Sept 20- 30 Sept 21.
THE GOOD, BAD & THE UGLY
OVERSEAS RENTAL PROPERTIES
NZ tax residents that own rental properties, personally, outside of NZ, other than transitional residents, are required to return income from these properties in their NZ tax return.
The way one calculates income for NZ tax purposes may be different to the way income is determined under laws of the country where the property is situated. In addition to having to recalculate the income and allowable deductions by reference to NZ legislation, one must be mindful of converting the foreign currency to NZ dollars using the appropriate rate of exchange.
It should be noted that the land taxing provisions, including the brightline rules apply to property situated outside of NZ. Consequently a taxpayer may be liable to tax on gains derived from a disposal of property outside of NZ.
If foreign currency loan has been taken out to finance the foreign property acquisition, the financial arrangement rules will be applied to this loan. Movement in FX gain or loss may give rise to taxable income or will affect the amount of deemed interest expenditure that may be claimed.
To complicate things even further, having a foreign currency denominated loan from a third party non-resident lender such as foreign bank , may also give rise to NRWT liability in relation to the interest paid on the loan, unless this requirement is overriden by a respective double tax agreement. Alternatively approved issuer levy (AIL) registartion may be considered which brings down the 10% or more NRWT to 2% AIL
As most loans are on net basis, you are likely to have to gross up the amount if interest paid for the NRWT and pay that over to the IRD. The overseas bank is unlikely to appreciate a reduction in repayment to them by the value of NRWT deducted.
If you paid tax in foreign country yo will be allowed a credit against NZ inmcome tax for foreign tax suffered, which will be limited by the amount of income tax payable on that income in NZ. There may be circumstances where the overseas tax paid is higher than that in NZ. In this case the excess overses credit will be lost.
NON RESIDENT EMPLOYERS OBLIGATION TO DEDUCT PAYE, FBT and ESCT
IRD has released an exposure draft ED0223 which clarifies the Commissioner’s position in relation to non-resident employers. It can be summarised as follows:
- A non-resident employer has an obligation to withhold PAYE from a PAYE income payment made to an employee if:
- The employer has sufficient presence in NZ; and
- Services performed by the employee are attributable to the employer’s presence in NZ
2. Non-resident employer may also have FBT or
ESCT liability for a benefit provided to or a
contribution made for an employee if:
- The employer has sufficient presence in NZ; and
- The services performed by the employee are attributable to the employer’s presence in NZ
- There is no PAYE withholding obligation if a PAYE income payment is “non- resident’s foreign sourced income” for the employee.
- There is also no PAYE withholding obligation for a PAYE income payment made to a non-resident employee working in NZ if the exemption in CW19 applies, or where a Double Tax Agreement grants a relief from source taxation. (i.e where an employee is in NZ 183 days or less ina twelve (12) month period).
IL 2020/102 WRITE OFF AMOUNT 2020 Order
Effective 03 June 2020, the threshold for writing off individual income tax assessments is increased from $50- $ 200 if the individual is subject to auto – calculation rules.
OTHER
ENDURING POWERS OF ATTORNEY
We often come across situations where people have wills in place which deal with distribution of their assets to their loved ones. More often than not we encounter situations where individuals have not put in place enduring powers of attorney (EPA) for their assets or personal care and welfare and the nightmare associated with that.
Whilst everyone seems to have a pretty good idea how they want their assets distributed upon death, people do not tend to think about what will happen and how they will be taken care of should they become incapacitated.
Legal or mental incapacity is very real and can happen to anyone, either through an accident, injury, medical event i.e. having a stroke, or age-related diseases. Once an individual becomes incapacitated, they can no longer look after themselves, their assets or appointing someone to care for them.
The question is what can be done in advance to ensure that their assets and health and welfare is taken care of?
One should consider granting an enduring power of attorney (EPA) to another person. There are two types of EPA’s:
- for property – it gives another person the power to look after and make important decisions about one’s property, money and other assets;
- for personal care and welfare – it gives another person the power to make decisions about one’s health and welfare
EPA’s, unlike the ordinary power of attorney, remains valid even when the donor becomes mentally incapable. When granting an EPA to another person it is important to consider carefully as to whom the power should be granted.
The danger often lies in naming one single person (generally a close family member) as the attorney, who may with best intentions at heart, end up doing what is wrong. It may also be prudent to name more than one person to ensure that the right outcome is achieved.
The legislation also enables an individual to name a substitute or series of substitute attorneys who can take over if the first attorney has for example passed away or is unwilling or unable to act. Naming substitutes avoids situations where the initial EPA is ineffective because the named attorney has passed away, is himself incapable, unable or unwilling to act.
It is also prudent to review any existing EPA’s on a regular basis to ensure that the right person and substitutes are named. Reviewing these documents is important as it gives a comfort that the EPA’s will not be invalidated if for example the named attorney has passed away, is incapaciteted or lives outside of New Zealand, and no substitute attorney has been named.
OTHER NOTICES
As we are making our way through the 2021 income tax year which is marked with uncertainty, COVID 19 tax relief measures are still available to ease the situation. If you are likely to receive an income tax refund for the 2020 income tax year you may consider providing us with your information early so that we can ensure that your refunds are processed promptly.
We would like to wish all our clients and their families well in these uncertain times. We are here to support you.
Michael Roberts
michael@robertsandassociates.co.nz
Martina Evans
martina@robertsandassociates.co.nz
Shane Zhou
shane@robertsandassociates.co.nz
P: 09-9661370
Level 1, 10 Manukau Rd, Epsom, AKL
