Newsletter August 2022

TAX INCENTIVES FOR DEVELOPERS AND SUBSEQUENT OWNERS TO BOOST LONG TERM RENTALS

On 12^th August 2022 the Government announced a new policy which will provide tax incentives for developers for long term rentals also referred to as built to rent properties. The tax incentives will include an exemption from interest limitation rules for developers for newbuilt as well as existing properties.  In order for development to qualify for the incentive the development needs to:

• offer long term residential rentals of at least 10 years. The tenant does not need to accept the 10 year term and can shorten the rental term. As long as a 10 year tenancy is offered the exemption from interest limitation will apply,
• there must be 20 dwellings in one or more buildings that comprise a single development, whether or not held in one title or multiple titles,
• the dwellings are used or available for rent under the Residential Tenancies Act 1986; and,
• explicit personalisation policies must be offered, over and above the Residential Tenancies Act 1986.

Whilst the tenants will be able to break their tenancy agreements at any time by providing a 56 day notice period, this will not be the case for the landlord. The interest limitation rule will not apply to a subsequent owner of the property, provided that the property is operated as built to rent property. 

For existing built to rent properties interest will not be phased out. Taxpayers that hold existing built to rent properties will not be subject to interest phase out for the period 01 October 2021 to 31 March 2022 and will continue to be exempt from interest limitation. It is proposed that the new legislation will be introduced in the next Omnibus Tax Bill, which is expected to be introduced by the end of August 2022.

Whilst the above may sound like a good idea, it is initially aimed at property developers. Property developers already get a deduction for interest. Whether or not developers will have an appetite to deal with tenants and enter the quasi property management market, the same outcome is achieved by renting the homes to a Social, Emergency or Transitional housing provider. With this option the developer and/ or any person holding a residential investment property does not need to deal with tenants and chase the monthly rent payments. The rent is paid directly by the social/ emergency housing provider like WINZ or Kainga Ora. As long as agreements are in place which provide for remedial works in relation to damages, this may be an alternative.  This option is also available to a mum and dad who own one single rental property. There is no requirement to own a property portfolio consisting of numerous properties.

BITS & PIECES

UOMI rates increase 

Effective 30 August 2022, UOMI rates will increase as follows:

• Interest on unpaid tax from 7.28% to 7.96%
• Interest on overpaid tax paid by Commissioner from 0% to 1.22%.

FDR Determination 

An investment by a NZ resident investor in units in the Two Trees Global Equity Macro Fund – Class Z, to which none of the exemptions in section EX 29 to 43 of the Income Tax Act 2007 apply, is a type of attributing interest for which the investor may use the Fair Dividend Rate method to calculate Foreign Investment Fund income for the interest.

FEES VS DONATIONS  GST & INCOME TAX 

An exposure draft PUB00341 was recently issued by the IRD in relation to payments made by parents to private schools. Whilst this is still a discussion document the submissions are due by 26^th September.

The exposure draft in essence states the following:

• Most payments that parents make to their children’s private schools are fees that are subject to GST, as these are generally made in return for the supply of education or related goods and services provided by the school.
• Whilst most fees will be subject to a GST at standard rate of 15%, some schools in particular those offering boarding services will charge the lower rate for the supply of domestic goods.
• Parents may be entitled to claim a donations tax credit, where the school is a Donee Organisation and where the parent makes a genuine donation (i.e. payment is made voluntarily to benefit the school with nothing expected to be received in return). Where a donation is made it is exempt from GST.

Where the school provides boarding services special rules apply for the purposes of GST.

• Where a student stays in a boarding facility for 4 weeks or more a lower GST rate of 9% will be charged provided that the boarding fee is for the supply of domestic goods or services. This will include a boarding fee including  power, internet, etc)
• Supply of non-domestic goods and services such as laundry, meals or pastoral care are always subject to GST at 15%.

QB 22/04  GST – IMPORTERS & GST 

In cases where importers overpay GST to the NZ Customs Services (Customs) they can claim the full amount of GST payment in their GST return.

QB 22/04 confirms that Customs is prevented from refunding overpaid GST where the importer is a registered person who can claim a GST input tax deduction. Consequently, a proper mechanism for obtaining a refund of overpaid GST is to include the full amount in the GST return of the registered Importer.

TDS 22/05  WEATHERTIGHTNESS PAYMENTS BY CROWN  & GST

The Crown FAP (Financial Assistance Payments) to the taxpayer are gratuitous payments to encourage or promote the repair of leaky buildings. Accordingly, the payments are in the nature of a grant or a subsidy for the purposes of s 5(6)D of the Goods and Services Tax Act and consequently subject to GST.

IS22/03  LAND SALE RULES & CO-OWNERSHIP CHANGES

Transfers of land will give rise to considerations of the application of the Brightline Test. IS 22/03 is a usefull interpretation statement in this regard, which we briefly digressed in our July Newsletter.

What is disconcerning is the IRD’s view that : There is a disposal when the parties proportional interest change. 

An example would be a situation where land is held by owners as joint tenants in common, who cannot for whatever reason separate their interests at the outset. 

Once the separation of interests occurs no ownership interest is fully disposed off. IRD is of the view that this separation will amount to a disposal to the extent of the reduction. Consequently, the Brightline period will restart in relation to the proportionate interest in the land that was transfererd but not with respect to the balance of the land. More importantly IRD considers such a separation of interest as a disposal.

LOSS CARRIED FORWARD – PUB00376 

The new loss carry forward rules are contained in s IB3 of ITA07. The new rules provide that a tax loss may be carried forward from the 2020/21 income year, despite an ownership continuity breach, provided that there is no major change in the nature of the business activities carried on by the company, during the business continuity period, unless the change is a permitted major change.

The business continuity period is typically the period starting immediately before the ownership continuity breach and ending on the earlier of:

• The last day of the income year in which the tax loss component in question is used; and 
• The last day the income year in which the fifth anniversary of the ownership continuity breach falls.

The main rule in s IB3(2)( c) focuses on the nature of the business activities carried on by the company and whether or not there was a change in the company’s business activities. The Company business activities should be described by reference to:

• Its core business processes (e.g. farming, manufacturing, development, construction, distribution, retailing services);
• The type of products or services produced or provided;
• Significant assets utilised (e/g premises plant, machinery, livestock, intellectual property, goodwill);
• Where relevant, significant/suppliers or other inputs (i.e. Key staff);
• Scale (e.g. approximate turnover and size); and
• The main markets supplied to (retail/ wholesale/ national/ specific territories)

Whether there has been a major change requires consideration of all the facts of each case. The change will be major if it is of greater importance when comparing the nature of the company’s business activities before and after the ownership continuity breach. The extent to which relevant assets used in deriving the company’s income have remained the same or similar over the continuity period also needs to be taken into account when determining whether a change has occurred. In most cases the assets recorded in the statement of financial position will be the relevant assets. However in some cases, depending on particular circumstances, other assets may also be taken into account , such as internally generated goodwill, brands, customer lists and early stage intangibles.

The assets of a company may need to be replaced due to wear & tear , obsolescence or to keep up with new improvements. Provided that the replacement assets are of the same character as the assets they are replacing (i.e. perform the same function)  and are simillar in size and number , the change in those assets will not be taken into account when assessing whether there has been a major change. 

If there has been a major change in the business activities , the business continuity test may still be satisfied if the major change is a permitted major change.   There are four permitted major changes:

• Those made to increase the efficiency of the business activity ;
• Made to keep up to date with advances in technology relating to a business activity;
• Caused by an increase in the scale of a business activity; and
• Caused by a change in the type of products or services produced or provided

Tax losses incurred prior to 2013/14 income tax year cannot be carried forward under the new Business continuity method. These losses can only be carried forward under the Ownership Continuity test.

Furthermore if a company ceases to carry on its activities during the continuity period, it cannot carry forward losses.

The deadline for comments is 1^st September 2022

COV 22/18  EXTENDED FILING DEADLINE FOR R&D LOSS TAX CREDITS

For a statement in relation to R&D loss tax credit and R&D repayment tax for 2021  tax year  under s 70C of the Tax Adminsitration Act  1994, the date by which the statement must be filed has been extended to 31 August 2022.

Subject to the following:

• Taxpayer must have difficulty filing statements on time because of circumstances arising either from imposition  of COVID 19 response measures or because of COVID 19. This could include a key staff member or advisor having reduced availability or the financial impact of COVID 19 causing significant disruptions to the normal buisness operations.

BR PUB22/06 FBT- CHARITABLE AND OTHER DONEE ORGANISATIONS

• Where a short term charge card facility is provided to an employee of a qualifying organisation and the value of that benefit for the employee in an income year is more than the lesser of 5% of the employees salary or $ 1,200 that benefit is a Fringe Benefit and exclusions in CX25 (1) do not apply.
• Where any other non-monetary benefit is provided to an employee of qualifying organisation:
  • A fringe benefit is NOT provided where the benefit is not received in connection with their employment
  • A Fringe Benefit is NOT provided where the benefit is received mainly in connection with their employment to the extent that:
    • The employee is employed  in carrying out the qualifying organisation’s benevolent, charitable, cultural or philantropic purpose 
    • The employee is employed in a business carried on by the qualifying organisation, where the business activity is within  the organisation’s benevolent, charitable, cultural or philantropic purposes

• A fringe benefit is provided if the employee is employed in a business carried on by the qualifying organisation, where the business activity is outside of the  organisation’s  benevolent, charitable, cultural or philantropic purposes, regardless of whether the business profits are applied to the organisation’s benevolent, charitable, cultural or philantropic purposes.

OTHER NOTICES

Delays in response times by IRD. It was brought to our attention that it is taking longer than usual to answer calls, and correspondence. We have been advised that the IRD is facing an unprecedented volume of calls. If you are trying to get in touch with IRD with not much luck, let us know and we will try to assist.