Newsletter December 2011
Inside This Edition
• Renting the Bach – GST LIability
• Building Fit-Out – What is Depreciable
• Penny & Hooper Update – Two Year Limit for Voluntary Disclosure
• KiwiSaver – More Changes to Come
Renting the Bach – GST Liability
Following on from the changes in the definition of dwelling and commercial dwelling for GST purposes, effective 1 April 2011, the renting of a bach is likely to constitute a taxable activity. The renting of a dwelling is an exempt activity for GST whereas the renting of a commercial dwelling attracts GST where the owner is GST registered or deemed registered where the annual taxable activity turnover exceeds $60,000.
A requirement for a dwelling now includes that the person occupy the property as their principal place of residence and be entitled to quiet enjoyment while occupying the property. Therefore, where a person owns or leases a property as their home and rents a bach for (say) a 10-day period for a holiday, the occupation of that bach is unlikely to meet the definition of dwelling due to the occupant’s principal place of residence being elsewhere. The definition of commercial dwelling has been extended to specifically include a home stay, farm stay, bed and breakfast establishments, certain serviced apartments, and any premises of a similar kind.
All information in this newsletter is to the best of the authors’ knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.
The issue is going to be in defining a person’s principal place of residence. This is defined as the place a person occupies as their main residence for the period that the agreement for the supply of accommodation relates. From a casual review, the result would be that the main residence is where the person usually lives, and certainly not be a holiday home that is casually rented short- term.
However, the definition requires a determination of the main residence for the rental term of (say) the holiday bach stay.
Consider the following two examples:
Example 1
A family trust owns a number of assets, including some commercial property and the family bach. The trust is GST registered as the rent received from the commercial property was over $60,000. The family bach was occasionally used by the beneficiaries of the trust however, due to minimal use, the trustees decided to advertise the property for rent. The property was listed on a number of websites and rented out on a nightly basis. Linen was provided and there was also a cleaning service arranged for when a person finished using the bach. The trust rented the bach out for $150 per night and, on average, was rented for about 70 nights per year.
In this example, the renting of the family bach would form part of the taxable activity of the trust, i.e. the commercial leasing of property. The people who booked the bach and stayed there on a short-term basis would not be occupying the property as their principal place of residence.
There are three issues to consider here where the renting of the bach is deemed to form part of the taxable activity:
(i) There is a requirement to charge GST on any accommodation provided on a night-by-night basis;
(ii) Consideration should be given as to whether any input tax credit can be claimed under the new Section 21HB;
(iii) Consideration should be given to the amount of output tax required to be returned on the sale of the property.
In relation to the point raised in (ii) above, this Section was introduced to allow taxpayers that previously weren’t registered for GST, but as a result of the changes to the definitions of ‘dwelling’ and ‘commercial dwelling’ were required to register for GST, a one-off input tax adjustment.
A person is allowed to deduct input tax under Section 20(3)(c) and the goods or services are treated as being acquired on 1 April 2011 at their original cost. We note that while an input tax claim may be available to some taxpayers, it should be noted that this is likely to be based on cost while output tax on sale will be based on the sale proceeds.
Example 2
Mr Harris set up a company to own a number of residential rental properties. He also decided to purchase the family bach in this company. The company is not GST registered. The family bach is currently being rented to third parties and the company receives around $40,000 per annum. Mr Harris also uses the bach from time-to-time and does not pay the company rent for the time he uses the property. As Mr Harris is associated to the company (being the sole shareholder), the use of the property with no rent being paid is deemed to be a transfer of value giving rise to deemed dividend issues (unless a Qualifying Company (QC)) and also deemed supplies under the GST rules.
While the rent received from the bach, in addition to the deemed rent for the shareholder’s use of the bach, might be over the $60,000 threshhold for GST purposes, we consider that the deemed supply from the company to the shareholder could be argued to be an exempt supply under Section 14 of the Goods and Services Tax Act. This is on the basis that while Mr Harris is residing in the bach, it is his principal place of residence. While Mr Harris also owns a home, the difference in this example is that he also owns a bach, albeit indirectly, and whilst residing there it is his principal place of residence.
Building Fit-Out – What is Depreciable?
From the 2012 year onwards, buildings with an estimated useful life of 50 years or more are depreciated at the rate of 0%. This will need to be factored into any provisional tax calculations as, in some cases, the depreciation on buildings may be significant. When reviewing a fixed asset register, items that are shown separately from the building may still be subject to the 0% rate if they are deemed to be part of the building. For example, if the skylights were replaced and had been depreciated separately, these would be depreciated at 0% going forward. However, if an awning was put on the side of the building, this would continue to be depreciated at its current rate.
We note that the Inland Revenue have issued an exposure draft in relation to separating commercial fit-out on buildings acquired in prior years. In some cases taxpayers may have purchased a building and decided not to show the fit-out separately in the fixed asset register, depreciating the whole lot at the building depreciation rate. The Inland Revenue have advised that taxpayers are unable to go back in time and split out those items of fit- out and depreciate them at the fit-out rates.
Their argument is that the taxpayer has chosen to use a certain rate and they are effectively stuck with this rate and the principle of regretted choice applies i.e. a taxpayer chose to use a lower building rate for the fit-out, therefore they cannot change their mind at a later date.
Furthermore, a specific deductibility provision has been introduced for commercial fit-out. Taxpayers who have purchased commercial buildings in prior years and have not depreciated any of the items of fit-out can take 15% of the book value at 1 April 2011 and claim 2% of this figure each year. This allowance is not available if an item of fit-out acquired at the time of acquisition of the building has already been separately depreciated. For some taxpayers, this will be a token amount when compared to the deductions they potentially could have had by depreciating the building fit-out separately on acquisition.
We are still of the view, as noted in our previous newsletter of June 2011, that a taxpayer has the option to identify items of fit-out acquired on acquisition and depreciate these separately. We do not consider this to be applicable where the cost of that fit-out was not known at the time of acquisition. We consider that the exposure draft (ED0140) issued by Inland Revenue is not supported by adequate technical arguments. In our view, choosing now to separate fit-out, the cost of which was known at the time of acquisition, is simply correcting the depreciation rates.
Penny & Hooper Update – Two Year Limit for Voluntary
Disclosure
Earlier this year, a high profile tax case made its way to the Supreme Court where the taxpayers (two surgeons) lost an appeal against the Inland Revenue and were found to have entered into a tax avoidance arrangement.
In brief, the case concerned two medical practices which were incorporated as companies, and which subsequently paid low salaries to the surgeons, diverting the majority of their income to family trusts.
Inland Revenue’s view, which was endorsed by the Courts, is that income derived from personal services should be subject to tax at a person’s marginal tax rates. A full briefing on this topic can be found on our website under the ‘Newsletter’ section entitled Tax Alert! September 2011.
Following the Supreme Court decision, Inland Revenue issued a Tax Alert where they advised taxpayers that were in a similar position to make a voluntary disclosure. We are aware of an important change to this approach which has not been widely publicised. The Inland Revenue issued a letter to Craig Macalister at the New Zealand Institute of Chartered Accountants where they advised that taxpayers who were considering making a voluntary disclosure only needed to do so for the last two years.
Under the Tax Administration Act 1994, the Inland Revenue is entitled to go back four years (or further in certain situations) and reassess income tax returns. At the time of
writing this article, the 2006 income tax return is statute barred provided it was filed on time. However, the Inland Revenue have decided to show some leniency, most likely due to the limited resources available and the fact that the time bar is ticking and will eventually prohibit them going back.
On top of this requirement to only disclose the last two years, Inland Revenue have indicated that they will not impose any shortfall penalty where a voluntary disclosure is made.
If the majority of an entity’s profit is generated from the provision of the shareholder’s personal services and has been paid indirectly to the shareholders, it is worthwhile considering whether a voluntary disclosure should be made.
Please contact a member of our Tax Team to discuss any of the above
KiwiSaver – More Changes to Come
Both employers and employees need to be aware that changes to the KiwiSaver rules come into force from 1 April 2012.
As from that date the employer contribution which is currently set at 2% remains the same, however, this amount will be subject to Employer Superannuation Contribution
Tax (ESCT). The rate of ESCT that will apply is the equivalent to the employee’s marginal tax rate. Employers will need to be sure that their systems are ready to deal with this change.
There are also proposed changes which are yet to be legislated whereby the minimum employee and employer contribution rates are expected to increase from 2% to 3% from 1 April 2013.
If you have any questions about the newsletter items please contact us; we are here to help.
