Newsletter August 2020
TAX CALENDAR
Aug 28
GST returns and payments for period ending 31 July.
Provisional tax payments for standard balance dates, being 31 March.
Sept 20
PAYE payments
Sept 30
CRS disclosures for NZFI’s FATCA information for disclosure to IRS.
COVID-19 RELATED MATTERS
WAGE SUBSIDY EXTENSION – coming to an end on 01 September
If you met the qualifying criteria for wage subsidy extension and you have not applied for it yet, you have until 01 September to do so. The payment of the wage subsidy is for an 8 week period. If your business experienced a decline in revenue of 40% or more for a continuous 30 day period due to COVID 19 you will qualify for the wage subsidy extension if the 30 day period is in the 40 days before you apply (but not earlier than 10th May) compared to closest period last year.
RESURGENCE WAGE SUBSIDY – coming to an end on 3 September
Resurgence wage subsidy is an extension of the current wage subsidy extension. The applications for this subsidy are open till 3 September. The payment of wage subsidy is for period of 2 weeks. Similarly, as with the Wage Subsidy extension there are qualifying criteria whereby the you must have had or expect to have a revenue drop of at least 40% for a 14 day period, between 12 August to 10 September 2020, compared to a similar period in 2019 and the decline must also be related to COVID-19.
GST MEASURES – VARIATION TO S 52(3) & 52(4) OF GST ACT
The commissioner issued a determination COV 20/09 which is targeted at GST registered providers of short term accommodation who during the period between 14 Feb 2020 to 31 Oct 2020 have changed their taxable activity to exempt supplies such as providing long term accommodation leaving them with no taxable activity and potential GST output tax liability.
In the absence of this variation the Registered person has an obligation to notify the Commissioner within 21 days of the event and state whether or not the registered person expects to carry on a taxable activity within the following 12 months. The variation extends the 12 month period to 18 months.
The registered person must notify the Commissioner that their taxable activity has changed and whether or not they are expecting to carry on their taxable activity within 18 months. The notification is to be done via e-mail : STRdisclosures@ird.govt.nz
It should further be noted that with the change of taxable activity to an exempt activity the usual annual change of use adjustments will still need to be made.
MORTGAGE HOLIDAY EXTENSION
The Reserve bank has announced that the current mortgage holiday scheme that was due to expire on 27 September will be extended to 31 March 2021.
DID YOU KNOW?
DIRECTORS LIABILITY FOR CONTINUING TO TRADE
The Commissioner has issued BR PUB 20/06 which confirms that s HD 15 of the ITA 07 and s 61 of GST Act which relate to director’s liability for tax of a company affected by COVID 19 will not apply to a director of a company that relies on the safe harbour in schedule 12 of Companies Act 1993.
During the safe harbour period (03 Apr 20 – 30 Sept 20 or later if extended by regulations) a decision by directors to continue to trade and incur new obligations on commercial terms will not result in breach of s 135 and s 136 of the Companies Act and consequently will not give rise to application of s HD15 of ITA07 and s 61 of GST Act.
FINANCE VS OPERATING LEASES
If an operating lease (lease where payments are deductible for income tax purposes) entered into before 14 Feb 2020, was extended up to 18 months, over and above the 75% useful life, it would under normal circumstances become a finance lease. The Commissioner issued a determination COV 20/08 which allows the taxpayer to treat the extension as being part of operating lease provided that the extension is entered into between 14 Feb 20 and 30 Nov 20.
CORRECTION OF ERRORS
No need to make s113 request if following applies:
Total discrepancy per return is $ 1,000 or less, or where the error is not material (lower of $ 10,000 or 2% of the annual gross income or output tax).
Adjustment can be made in next Income or GST return.
WINDING UP OF TRUSTS
If you are considering winding up of your existing Trust as the compliance with the new Trusts Act 2019 seems untenable a careful review of your particular trust situation should be made. In addition to the tax implications which may arise (detailed below) a question should be asked as to who is in line to receive the assets of the trust upon winding up. As a general rule the assets on winding up of the Trust are distributed to the final beneficiaries. The question is whether you are the beneficiary that is entitled to such distribution. If answer to this is no, then perhaps variation to the Trust Deed may need to be made first before proceeding with winding up. Alternatively a distribution of most of the capital be made prior to winding up.
From Tax perspective
Winding up or a resettlement gives rise to a disposal of trust assets with corresponding income tax and GST implications which include:
- Winding up or resettlement is treated as a disposal at market value which gives rise to immediate depreciation recovery for depreciable property
- Taxation of gains for any revenue account property or property subject to Brightline Rules
- Taxation of gains for land that is tainted by association where the land is not held for less than 10 years
- Disposal or resettlement of residential land, may be subject to brightline rules for the recipient if the land is disposed within 5 years, unless the recipient could rely on the main home exemption.
- If Trust has tax losses these will be lost upon winding up or resettlement
- If trust holds shares in a company, such shares are deemed to be disposed which may give rise to loss of imputation credits and losses carried forward by the company.
THE GOOD, BAD & THE UGLY
GST & SUPPLIES OF ACCOMMODATION
IRD recently issued an interpretation statement IS20/05 which applies to situations where a private residence is sold as part of a wider supply of land. S 5(15) of the GST Act (GSTA) deems the supply of that residence to be a separate supply from the rest of the land.
S5(15) applies where a supply includes:
- A principal place of residence; or
- A supply refered in s 14(1)(d) of GSTA
The term principal place of residence means premisses occupied as the person’s main residence. However it does not need to be the vendor’s own residence. It is the vendor’s use of the property that is determinative, not the purchaser’s intention.
S14(1)(d) treats a sale of certain dwellings as an exempt supply, where the dwelling has been used exclusively as residential remtal for the preceding 5 years.
If a residence is included in a supply of wider land then s 5(15) deems there to be two or more supplies for GST purposes provided that one is used as a principal residence or is an exempt supply under s 14(1)(d). Good examples would be a supply of:
- a farm land and a farm house, or
- commercial bulding with residential flat above the building, or
- residential land with two properties where one is used solely for short stay accommodation.
It is often assumed that a supply of a residence with other land is exempt or non-taxable where the supply of other land is taxable and subject to GST. This assumption is not always correct and the actual treatment will largely depend on the facts of every case.
The supply of a principal place of residence will usually be a non-taxable supply and not subject to GST because it is a supply of a private home. It will not generally form part of a registered persons taxable activity. However, where a principal place of residence is used in a registered person’s taxable activity, then the supply will be subject to GST at either standard rate or zero rate.
Care needs to be taken where for example registered persons use their home or part of their home for the purposes of furtherance of their taxable activity (i.e. using downstairs part of a home for storing of goods and as a result claiming GST inputs and deductions for income tax purposes on part of the costs of the home). On this basis the home is used in the taxable activity of the registered persons and is subject to GST under s 8(1) on sale. The same situation would apply in the case of a farmer who claims GST input and deductions in relation to part of the costs of the farm house. However, the vendor will be entitled to claim a GST input tax credit in relation to the original cost of the property.
Where a person owns a piece of land which has their main residence and a holiday cottage which is rented out and earns income in excess of $ 60,000 then when this land is sold s 5(15) of GST Act will deem the main residence to be a separate supply which will have no GST implication, but the supply of the cottage will be a taxable supply and subject to GST either at Zero or 15%.
The common misconception that GST will not apply to a sale of someone’s main home can give rise to unpleasant surprises. It is recommended that if you are contemplating sale of your property which is used partly in your taxable activity that careful consideration to GST is given.
DEEMED SETTLORS
In our Sept 19 Newsletter we covered the possible application of the Brightline Rule to residential land owned by a Family Trust where s HC27 (2) or s HC 27(6) of ITA 07 deems a person who is not a settlor for Trust law purposes to be the Settlor for Income Tax purposes.
So what exactly is the problem with this?
Lets consider an example where mum and dad assist their son and daughter in law (children) with a deposit for their first home (not uncommon). Mum and Dad have their own trust (Trust A) which owns their own home.
Assume the Children have a separate trust (Trust B) set up for them to which mum and dad advanced $ 200K to assist with a deposit for their first home interest free and repayable on demand. There is no intention to exercise this demand for quite sometime. In addition to this, mum and dad are also included as a class of beneficiaries in Trust B.
Mum and dad can very quickly become principal settlors of Trust B [under both HC 27(6) & HC 27(2)]. If the Trustees of Trust B wish to sell the old home and acquire a new home within the brightline period, as mum and dad may be considered principal settlors of the Trust B, suddenly the primary home exemption can be in jeopardy.
The deeming provisions have a wider reach than the application of Brightline Rules to residential land owned by the Trust. Let us consider situations of Beneficiary current accounts.
Many Trusts reflect in their balance sheets credit balances in Beneficiary Current accounts which are often interest free and are in excess of $ 25,000. S HC27(6) will deem such beneficiaries to be the settlors of the Trust.
So what exactly is the problem with this?
The implications that may arise from treating such beneficiaries as settlors in addition to the possible application of Brightline Rules may include the entitlement for Working for Families, making beneficiaries accountable for tax on Trustee income (as settlors have joint & several liability for income taxes of a Trust in certain circumstances), and inadvertently increasing the number of persons associated with the Trust.
The associated persons rules could be problematic for the application of land taxing provisions to the Trust and/ or beneficiaries who are deemed to be the Settlors or persons associated with them. The association of the Trust to the Beneficiary (who is now a deemed a settlor), could give rise to tainting of land if either the Trust, or beneficiary (who is now the Settlor) or their associated persons are dealers, developers or builders.
The easiest way to prevent such situation from arising, is to ensure that the IRD prescribed rate of interest is charged on the beneficiary advances.
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 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
