Inside this edition
• Budget May 2013
• Trading Stock
• IRDs Take on Residence
• The Boat, the Batch & the Private Jet
• GST & Holiday Homes
Budget – May 2013
From a tax perspective there are no radical changes proposed in this year’s budget. The main features include:
- Allowing deductions for certain ‘black hole’ expenditure.
- Focus on incentivising R & D type businesses by enabling tax losses to be converted to cash.
- Widening of the thin capitalisation rules to capture non-residents who act together when investing into NZ.
- Additional funding provided to IRD’s Property Investigation Team which monitors taxpayers who buy, sell, develop and invest in property.
Black Hole Expenditure
Immediate deductions will be available for:
- Legal/administration costs incurred in applying for patents.
- Abandoned resource consent applications that have not been lodged.
- Costs associated with paying company dividends.
- Annual fees for listing on the stock exchange.
- Annual shareholder meeting costs (excludes special shareholder meeting costs).
While these changes are welcomed, there are still a range of costs that businesses incur which should be deductible, such as feasibility costs and capitalised R & D expenditure that does not result in depreciable property.
R & D Incentive
In most R & D driven start-up businesses, several years can go by before a successful product/service is generated and able to be sold. In an attempt to help these businesses through those difficult years, tax losses will be converted to cash, giving a timely injection into the business. The refund will be capped at a certain limit and mainly directed at small innovative businesses.
In a move to protect the tax base, the Government released an issue paper, earlier this year in relation to thin capitalisation rules. Currently these rules mainly capture companies that are owned 50% or more by a non-resident. The rules limit the amount of interest expenditure the business can claim where the debt/asset ratio exceeds 60% of the NZ group and 110% of the worldwide group.
The main change proposed is in relation to non-residents who are acting together where their combined interest in the company is 50% or more. For example, two Australians and a Kiwi form a New Zealand company to buy a commercial property. Each owner has a 33.33% shareholding. Currently, the thin capitalisation rules do not apply, as no overseas owner holds 50% or more. Under the proposed rules, if the two Australians are deemed to be “acting together” interest expenditure may need to be apportioned where the debt/asset ratio is breached.
Land Acquisition Date
On the same day of the Budget announcement an issues paper was released with the aim of clarifying the date a person acquires land. This is relevant for section CB6 of the Income Tax Act 2007, as a person who acquires land with a purpose or intention of disposal is subject to tax on any gain, and that purpose or intention must exist at the time of acquisition.
It is proposed that the date the test will be applied is either:
- The date the sale and purchase agreement is entered into; or
- The date the agreement becomes unconditional and the purchaser has an equitable remedy of specific performance available.
In some cases, a purchaser’s intention may change between the date they enter into the contract and the time the title is transferred.
Often overlooked as a compliance saving cost is Section EB23 of the Income Tax Act Clients with a turnover of $1,300,000 or less who estimate the value of their year end trading stock will be less than $10,000, are able to use the value of the opening stock as the year end value. This saves smaller clients from having to count and price their trading stock each year.
IRDs Take on Tax Residence
We are aware that the IRD have increased their focus on the tax residency status of individuals coming to and leaving NZ. The last commentary in relation to tax residency released by the IRD was over 20 years ago and this commentary has now been updated in a draft Interpretation Statement. Under NZs domestic legalisation an individual is tax resident if:
(a) They are present in NZ for more than183 days in any 12 month period or
(b) They maintain a permanent place of abode (PPOA) in NZ.
The updated commentary issued by the IRD seems to place considerable emphasis on rental properties being considered as available dwellings particularly where taxpayers have lived in these properties before moving overseas. In relation to the availability of a dwelling the IRD comment that if a property was on a fixed term tenancy this does not automatically mean that the property is not available to the owner as it would have been available if they had chosen to stay in NZ and it is available on their return. However, in an example where a taxpayer visits New Zealand and leases her home in Canada for a fixed term of 18 months the IRD consider that the taxpayer does not have a permanent home available to her in Canada. In relation to the length of time a person needs to be away from NZ to be considered a non-resident the IRD notes that there is no specific length of absence required.
In the updated commentary the IRD suggest that an agreement for a rental property that can be terminated on short notice will indicate that a permanent home is available to a taxpayer in NZ.
In an example given by the Inland Revenue a taxpayer (Jane) is seconded to Canada by her NZ employer for a period of three years and lets her NZ house out, whilst living in rented accommodation overseas. Most of her personal property remains in NZ and most of her investments are in NZ. Jane’s partner and children accompany her to
Canada. The IRD’s view, in this example, is that a PPOA exists in NZ. In a similar example in the old IRD commentary they take the view that no PPOA exists due to the “protracted period of absence” away from NZ.
Any taxpayer considering heading overseas to work should beware that they could be liable to tax in NZ on their worldwide income. The IRD will take particular interest in overseas countries where low tax rates are imposed, such as the Middle-East and South- East Asia and with whom we don’t have a double tax agreement.
Where the taxpayer has accommodation available in the country where they are working and which NZ has a double tax agreement, then ordinarily even if they are seen to have a PPOA in New Zealand, they are likely to be treated solely as a resident of the other jurisdiction by virtue of the application of the tie breaker provisions of the treaty, with the consequence that New Zealand would not be able to tax them on their non-New Zealand source income.
In a recent Taxation Review Authority Case accommodation provided by an employer to an employee was held not to constitute a permanent home as the employee had no occupancy rights independent of his employment contract. Taxpayers in similar situations should review their residency status in light of this case.
If you have any questions regarding the tax residency status for those who have left NZ
or are considering leaving NZ, please contact a member of our tax team.
The Boat, the Batch and the Private Jet
Currently there is legislation before Parliament with new rules to be introduced in relation to expenses claimed on mixed use assets. The proposed application date of these new rules is 1 April 2013. The new rules are intended to apply to assets that are used privately and also to produce income. Common examples of these are boats, holiday homes, and aircraft. Certain assets are excluded from these rules including:
- Assets that cost less than $50,000 (Does not apply to land and buildings)
- Motor vehicles
- Any asset where expenditure is apportioned on the basis of space floor area or another similar basis.
- Assets which are used for 304 days or more a year.
Private use of the asset will include any private use by the taxpayer or person associated with the taxpayer. This applies regardless of whether or not market value rent is received for the private use.
Associated persons for the purpose of these new rules includes the shareholder of 5% or more of the shares in a company. Any use by a non-associated party where less than market value rent is received is also treated as private use.
Any costs that relate directly to the business use will be 100% deductible, e.g. advertising costs for a batch are not required to be apportioned. Expenses directly related to private use are non-deductible, e.g. fuel costs in relation to a boat taken out for a private trip. Expenses that do not directly relate to the business or private use of the asset are required to be apportioned under the following formula:
Expenditure x Income earning days/(Income earning days + Private days).
The resulting figure is the amount of common expenditure which is deductible. A good example of expenditure that is required to be apportioned i.e. it does not relate directly to business or private use, is interest expenditure on money borrowed to acquire the asset.
Special rules apply to companies that own mixed use assets and are seeking to claim interest deductions. These are complicated rules that apply with different adjustments required depending on whether the debt is equal to, greater than or less than the cost of the asset.
The proposed new rules also require any losses generated by the mixed use asset to be carried forward and offset against any future income from the asset. However losses generated can be offset against other income if:
(a) Gross income received from that asset is more than 2% of the cost of the asset or
(b) for land and buildings 2% of its latest valuation or cost if the asset was purchased after the most recent CV.
Taxpayers have the option to treat the income as exempt if either:
(a) The gross income from the asset is less than $1,000 or
(b) The owner incurs losses from the assets.
In relation to GST, special rules will apply that bring the mixed use asset rules in line with the new GST apportionment rules.
James incurs $10,000 of general expenditure for his batch. The batch is rented for 50 nights and used by the owners and friends at a discounted rate for 25 nights. Expenditure of $6,666 can be claimed against rental income
($10,000 x 50/(50+25))
The use of batch by his friends are treated as private days as less than market rent is received.
GST and Holiday Homes
In one of our previous newsletters (issued in December 2011) we covered the potential issue that could arise where the renting of a holiday home could be considered part of a taxable activity. Where the combined supplies exceed the registration threshold potential for a GST liability on a sale of the property could arise.
In December 2012 an official’s issues paper was released where GST remedial issues were raised and potential solutions were proposed. One of the issues raised was in relation to holiday homes that fall within the definition of a commercial dwelling in the Goods and Services Tax Act 1985 when those definitions were amended effective 1 April 2011.
The document gives an example of a sole trader operating an architectural business currently under the GST threshold who owns a holiday home. The IRD note that due to the changed definitions the architect is required to bring the holiday home rents into the taxable activity pushing her over the threshold, thereby requiring GST registration and output tax to be returned on subsequent rental income and eventual sale of the property.
A solution has been proposed whereby an amendment to legislation is to be made to give the taxpayer an option of excluding the holiday home from their broader taxable activity, if the rent received from the holiday home is less than $60,000. The proposed date of application of the amendment is 1 April 2011. At this stage it is unclear whether these amendments would also apply to say a trust that owned a commercial property and a holiday home.
We will keep you updated once any draft legislation is introduced.