Inside this edition
• 2011 Budget Update
• Goods and Services Tax (GST) & Land
• Commercial Fitout
• New Mileage Rate
2011 Budget Update
Following the recent Budget announcement, there are a number of proposed tax changes impacting New Zealanders. While last year’s Budget saw a raft of tax changes introduced, the Budget this year mainly impacts KiwiSaver, Working for Families and student loans.
The Government has also signalled they will proceed with mixed ownership by selling down part of their stake in state-owned assets in 2012 to assist in funding social services and reduce our reliance on foreign debt.
The proposed changes will impact the following areas:
- From 1 July 2012 the Government will continue to provide Member Tax Credits (MTCs), however these will be at half the current rate. At present the maximum amount of MTCs a KiwiSaver member receives is $1,040. This will reduce to $520;
- The current default rate for employees in KiwiSaver will increase from 2% to 3% from 1 April 2013 (for both new and existing members);
- The current compulsory employer contribution rate of 2% is also set to rise to 3% from 1 April 2013; and
- From 1 April 2012 all employer contributions will be subject to Employer Superannuation Contribution Tax (ESCT). Currently the first 2% an employer contributes is not subject to ESCT.
As the ESCT exemption will be removed a year before the employer rate increases to 3%, employees will receive less in their KiwiSaver fund for 12 months. For example, an employee on the top marginal tax rate receiving $200 a month as the compulsory 2% employer contribution will only receive $134 a month from 1 April 2012 to 31 March However, the increase in the employer contribution to 3% will offset the ESCT impost for 33% rate taxpayers from 1 April 2013.
The changes to employer and employee contribution rates give workers and business owners two years to adjust for the new rates.
The Government is also to investigate whether KiwiSaver should be made compulsory after recommendations from reports prepared by the Savings Working Group.
Working for Families (WFF)
Changes are expected to be made to those higher up the WFF scale who will receive less as the adjustments are phased in. There will be minimal impact to lower income families and beneficiaries who may actually see increased assistance from 1 April 2012.
The abatement threshold is expected to reduce from $36,827 to $35,000. There will also be in increase in the abatement rate from 20 cents to 25 cents in the dollar.
The changes are expected to be phased over four steps, every two years from 1 April 2012. This will help reduce the impact on affected families.
There are a number of changes expected to be made to the student loan scheme. The current three year repayment holiday for people working overseas is expected to reduce to one year.
Persons aged over 55 will continue to have access to a student loan but this will be limited to cover tuition fees.
Eligibility for student loans will be restricted for people who have overdue payments of $500 or more that have been in default for over a year.
Students who study part-time will not be entitled to receive course-related costs and the minimum repayment threshold will not be adjusted for inflation until 1 April 2015.
Budget Tax Initiatives
The Government has also announced three areas where they consider future changes will need to be made. The first two are in relation to capturing non-cash benefits paid to people receiving WFF and reviewing the two methods farmers use to value livestock.
The third area is of significant interest as the Government has signalled they will look into the rules that allow taxpayers to receive deductions for assets that are mainly used for private purposes. This will be applicable for owners of holiday homes, aircraft or luxury yachts where such assets are used for both business and private purposes.
Inland Revenue Focus
Following on from the funding provided in last year’s Budget, Inland Revenue have continued to increase their audit activity with a focus on areas referred to as “the hidden economy”. These include seasonal workers, the hospitality industry, and the property sector.
While the IRD seem to be focusing their resources on such areas, we suggest taxpayers that are at risk put their affairs in order. This can be done by making a voluntary disclosure to Inland Revenue and has the benefit of substantially reducing any shortfall penalties that may be imposed.
Goods & Services Tax (GST) and Land
We have had a range of queries over the last month in relation to the new GST zero-rating rules for land transactions between registered persons.
The issues that have arisen revolve around the time of supply rules and the new requirement for the purchaser to meet a list of criteria at the time of settlement, in order for the transaction to qualify for zero-rating.
Generally a property transaction involves a number of stages. To highlight the effect of the new GST rules we have simplified these into the following stages (which may vary between different transactions):
Stage 1 – A vendor agrees to sell a block of land and an agreement is entered into
– At this stage the vendor should obtain the purchaser’s representation.
Stage 2 – A deposit is available to the vendor
– The payment of a deposit to the vendor, the issue of a tax invoice or the contract becoming unconditional (where a deposit is held by a stakeholder) will trigger time of supply.
Stage 3 – Settlement occurs whereby the balance of the funds is paid to the vendor
– This is the time to apply the test for the zero-rating of land.
At Stage 1 we recommend that the vendor obtains the information in Section 78F of the GST Act from the purchaser and that they follow this through to settlement. The standard ADLS / REINZ agreement has been updated to include clauses which allow for the zero-rating of GST to be applied (new Clause 17) and introduces Schedule 2 for the GST information to be provided.
At Stage 2, provided the vendor has obtained representation from the purchaser that they will be:
(a) GST registered at the time of settlement;
(b) Acquiring the land for the use in making taxable supplies; and
(c) Not intending to use the land as a principal place of residence;
the vendor will treat the supply as a zero- rated supply in that taxable period. The purchaser will not be able to claim GST on the deposit if the supply is zero-rated.
At Stage 3 the test is applied, which looks at whether the purchaser’s representation is still valid. If this is the case, the transaction qualifies for zero-rating.
If the purchaser’s GST status changes from what was initially advised in Stage 1, there may be a requirement for the purchaser to account for output tax on the transaction in the taxable period where settlement occurs.
For example, this can occur when a purchaser notifies the vendor that they will meet the conditions of (a) to (c) above at the time of settlement but at the time of settlement the purchaser does not in fact meet these conditions, e.g. they decide not to use the property for making taxable supplies or register for GST. In this case the purchaser is required to account for output tax under Section 5(23) of the Goods and Services Tax Act 1985.
If this occurs, the purchaser is treated as being registered from the date of settlement and is required to account for output tax on the value of the supply, i.e. if the transaction was for $1 million plus GST, $150,000 will need to be returned as output tax by the purchaser, being the GST which the purchaser would otherwise have paid to the vendor. The purchaser may be able to claim the GST back at a later date if they use the relevant goods in making taxable supplies.
In our July 2010 newsletter we gave an update on the changes to the depreciation rules. The new rules mean that any building that has an estimated useful life of more than 50 years will be depreciated at the rate of 0%, applicable from the 2011/12 income year onwards. However, there is a provision in the Act which gives taxpayers a 2% deduction for fit-out based on 15% of a building’s closing Book Value at the end of the 2010/11 income year. To qualify for this deduction, the following criteria must be met:
(i) The person must own the building and the building must meet the definition of a commercial building (i.e. where the main use is for non-residential premises).
(ii) The building must be depreciable at the annual rate of 0% from the 2011/12 income year.
(iii) Depreciation has been claimed on the building in the 2010/11 income year and the building has not been sold since then.
(iv) The person has not claimed depreciation for a separate item of commercial fit-out that was acquired at the same time as the building and relates to the building.
(v) The building was purchased in the 2010/11 income year or earlier.
(vi) The person is not allowed a deduction for the building under any other provision of the Act.
We have been aware of cases where building owners have depreciated some items of fit-out upon acquisition of a building and treated the remainder of any fit-out as part of building. We understand that any taxpayer who has claimed a deduction for an item of fit-out (whether part or all of the fit- out) acquired with the building will not be entitled to the 2% deduction in Section DB65(2).
If, for example, a taxpayer had purchased a commercial building and depreciated the plumbing from the date of acquisition, no deduction would be allowed under this provision. However, there may be cases where items have been depreciated but they may not be considered as an item of commercial fit-out relating to the building. For example, if the only items depreciated were free-standing cupboards or carpets, the taxpayer would still be entitled to the deduction as these items would not be considered to be attached to the building.
In our opinion, if a taxpayer has not split out the fit-out included in a commercial building at the date of acquisition, we see no reason why they could not do so now providing they can identify the related cost and accumulated depreciation of the same.
We expect the introduction of these new rules to create a range of issues for taxpayers, particularly owners of buildings that provide both commercial and residential use.
New Mileage Rate
The Inland Revenue have advised that the mileage rate for self employed and employee reimbursements has increased to 74 cents, applicable from the 2011 income year. However, it is accepted that employers can
use motor vehicle running cost information published by a reputable source (including the Automobile Association rates).