NEW CALENDAR YEAR 2020
Welcome to the 2020 calendar year. We hope you all managed to get some well deserved rest and relaxation over the holidays and we wish you a successful and profitable year ahead. We are open and all the team are at their desks. If you are in the area do pop in as we would love to see all our clients calling in. Here is to a great 2020!
GST returns and payments for period ended 31 January
AMERICA’S CUP & YACHT IMPORTATION
With preparations for the America’s cup in full swing you may be faced with a question around GST and customs duty on importation of foreign flagged vessels to New Zealand.
In general, a bonafide foreign owned Vessel can be imported to New Zealand under the Temporary Import Entry (TIE) Exemption without the imposition of customs duty and GST for a period of 24 months. In the event the Vessel is owned by an offshore entity which is ultimately owned and/or controlled by NZ residents the exemption from duty & GST will not be available.
The Vessel can still enter NZ on a TIE but can remain in NZ for a period not exceeding 12 months, after which time it must be exported out of NZ. A security payment to Customs will be required upon arrival which will become the customs GST and duty in the event that the Vessel is not exported. An extension to the 12 month TIE can be applied for before its expiry. Customs are likely to request documentation in support of the application.
TINY or MICRO HOMES & GST
With the shortage and the ever increasing cost, housing is becoming a problem and for many, the popularity of Tiny or Microhomes (Tiny Homes) is increasing. Recently we have been asked a question as to whether or not a lease of Tiny Homes on a long term basis is subject to GST. More often than not these Tiny Homes are delivered by the lessor to the site specified by the lessee, as they tend to be too big to be pulled by an ordinary vehicle.
Essentially the lease of a Tiny Home to a person on long term basis, who uses it as their principal residence, is no different to leasing a caravan. For the lease of a Tiny Home to be an exempt supply it will have to be leased together with the land on which it is situated. Therefore, unless the Tiny Home is supplied with a piece of land to the lessee, the lease will amount to nothing more than an ordinary chattel lease. Consequently, the lease of the Tiny Home will be subject to 15% GST.
GOOD, BAD AND THE UGLY
Trust Law:Beneficiary Right to Information
In our November Newsletter we touched on the new Trusts Act 2019 (The Act) which will come into force on 30 January 2021. Whilst this may feel like a long way off, it really is not. This time should be used wisely for the existing trust deeds to be reviewed and possibly varied where necessary. A big headache for professional trustees will be the requirement to notify beneficiaries of the existence of a trust under which they have a right to benefit. In simplified terms a trustee has an obligation to notify the beneficiaries of the fact that they are beneficiaries of a particular trust.
Whilst the purpose of these rules is to ensure that the beneficiaries have sufficient information to enable the terms of the Trust and the trustee’s duties to be enforced against the trustees consider the following:
A charity that is named as a beneficiary of a trust will need to be notified that it is a named beneficiary of a particular Trust. Representatives of the respective charity decide that they wish to enforce their right to benefit, as they never received a beneficiary distribution out of the trust and could file a motion through the courts.
Consider another situation where Mum and Dad set up a trust for their benefit and the benefit of their children. Children reach adult age with one becoming more successful than the other, or one having gambling or another form of addiction. As the professional trustee has the obligation to notify all beneficiaries that they are beneficiaries of a particular trust and provide them the Basic Trust information, this is likely to create nightmares for trustees for years to come as beneficiaries will become more aware and could start enforcing their rights.
Whilst, in principle, the disclosure obligation is a good idea, in reality it is likely to cause lot of headaches not only for the trustees. The Settlors and beneficiaries are likely to be affected as well, especially if the family dynamics are already volatile, as beneficiaries could pursue their right to benefit under the Trust.
At this point we recommend to all trustees that they become familiar with their Trust Deeds, the beneficiaries and family dynamics. It may be prudent to consider whether or not certain clauses precluding beneficiaries from benefiting for example if they have a dependency of some sort should be inserted. Furthermore, it may be prudent to consider whether or not named charities should be removed as beneficiaries or whether the trusts should be resettled or wound up. We anticipate that number of trusts will be wound up in the next few years.
If you have concern about beneficiaries rights feel free to give us a call or pop in for an informal chat. We will also gladly review your trust deed and suggest corrective measures that should be put in place.
Global Recovery of Child Support
NZ became party to the Convention on International Recovery of Child Support and other Family Maintenance. This will assist IRD to recover child support obligations from foreign based parents. This is a good news for NZ based parents carrying the costs.
Foreign Deceased Estates
A NZ resident receiving a distribution of money or property from a foreign testamentary trust (trust created by will upon death of a person who was resident outside of NZ) will often have an income tax liability for having derived taxable income or a taxable distribution from a foreign trust although the ordering rules won’t apply.
Ring Fencing Rental Losses
This is a quick reminder that from 01 April 2019 the ring fencing of rental losses apply. This means that losses from rental activities whether conducted in a personal capacity or through LTC’s (despite the Look Through Status) will not be available to be offset against other income from 2020 income tax year.
If you are concerned about these regulations please come and see us to assess your situation and see if debt restructuring to avoid this is possible.
DID YOU KNOW?
Alteration of Share Rights
In Dec 2019 IRD issued a Public Ruling 19/05 in which they considered whether or not CB4 will apply in cases where shares were acquired for the purposes of disposal and the rights attached to shares were altered. This ruling provides guidance as to when the taxing point arises.
- The time of alteration, or
- The time of disposal, or
The Commissioner concluded that no tax event arises at the time the share rights are altered as the shares with altered rights are the same property as they were before the alteration, regardless of whether or not the alteration was minor or a complete change of class.
Accordingly, the alteration of share rights does not in itself give rise to a disposal of shares for purposes of CB4. If however the alteration requires the cancellation of the old share and issuing of a new share then this would give rise to a disposal for the purposes of CB4.
Whilst the alteration of share rights, where there is no cancellation of old shares, will not result in a disposal for the purposes of CB4 it may have an impact on the shareholder continuity for the purposes of loss or imputation credit carry forward, if the alteration results in a change in voting rights.
Leases Subject to IFRS Reporting
In Dec 2019 the Government agreed to propose changes to the Income Tax Legislation that would allow taxpayers who are subject to IFRS reporting to align the tax treatment of leases to the accounting treatment if NZIFR16 or IFRS 16 is used. It is intended that these changes will only apply to the lessee and not the lessor. These changes will also not apply to leases of real property.
There are no changes proposed for the tax payers that do not follow IFRS reporting. There are also no changes proposed to the definitions of operating and finance lease.
It is contemplated that these new rules will be included in the tax bill scheduled for early 2020 and will apply to income years beginning on or after 01 Jan 2019.
Sale of Business Price Allocation
In Dec 2019 IRD issued an Official’s Issue Paper that deals with the allocation of the purchase price paid in relation to a sale of a business where the total purchase price is not itemised in to its respective components. The issue often is how to allocate the total purchase price paid as it can have a material impact from tax perspective.
In most cases the ITA 07 prescribes that purchase price allocated to taxable assets must be determined by reference to market value. Consequently where land and buildings are sold the portion of consideration that relates to the land cannot be inflated with the objective to avoid depreciation clawback. These rules however, with the exception of trading stock, do not require the buyer and the seller to apply the same price allocation.
In case of arm’s length transaction, the CIR in general has no power to challenge the allocation if there is no specific rule governing the allocation and the transaction is at arm’s length.
The CIR proposes that both vendor and the purchaser must use the same allocation of purchase price to the different types of property that is sold.
The proposal can be summarised as follows:
- If the parties do not agree on the price allocation then the purchaser must use the vendor’s allocation in their tax return and must notify the Commissioner of the allocation within a certain time frame (suggestion at this point is 3 months).
- If the Vendor does not notify the Commissioner then the purchaser’s allocation will be made available to the Vendor and the Commissioner and the Vendor will be required to use that allocation.
- It is also recommended that there should be a de minimis carve out from these rules.
It is expected that the new rules will be included in the next tax bill in early 2020.
Income Tax & GST for Air BNB Operators
With summer in full swing and tourists flooding NZ, the Air BNB activity increases. The question often arises as to what are the income tax obligations if any. The Rules summarised below apply for situations where a room or rooms are let in a home which is not subject to the mixed use asset rules.
Standard Cost Method
Is a simplified method for short term accommodation providers. This method is available to if short term accommodation is provided for less than 100 room nights in the income year and the accommodation is either owned by an individual or a trust provided that the individual has paid all the running and holdings costs for the property. The standard cost set for 2020 year is $ 50.00 p/ night. This means that income over $ 50.00 p/ night is included as income. No deductions can be claimed.
Actual Cost Method
This is the general method where all income is returned as income and deductions are claimed by reference to the actual costs. Some of these costs will only be partly deductible as they also relate to private use of the home. The apportionment of costs needs to be made by reference to the % of the areas well as % of the nights.
20 sq m used solely by guests – 100% deductible
55 sq m common area so 50% guests & 50% private
25 sq m private area – 0% deductible Room is rented for 120 nights
Exclusive use by guests:
[20m / 100m] x [120/ 365 night] x 100 = 6.58%
Common areas 50% use by guests
[55/100m] x [120/365 nights] x 50% = 9.04 %
In this case 15.62% of mixed expenses (6.58% + 9.04%) can be claimed as a deduction. Mixed expenses will include interest on mortgage, rates, power, internet, insurance, etc.
In our view unless the mixed use asset rules apply, where a portion of a home is set aside solely for deriving income, and is available for occupation by guests all year around then a daily aportionment is not applicable.
Who needs to declare the income?
In general, the income needs to be declared by the owner of the property. In the case of joint ownership ( i.e. husband and wife) the income needs to be allocated accordingly. If the property is owned by a Trust, depending on the situation, the income may need to be returned by the Trust or the individual.
Where the property is let to an associate, GST legislation imputes market rent. Where there is a lease for inadequate consideration and lessee uses the property for the purposess of deriving income, the income Tax Act imputes market rent as well.
We would like to remind our clients that the tax return filing deadline is approaching. If you do not bring us your information by middle of February we are unable to guarantee that your tax returns will be done on time.
Michael has recently undertaken a reclad project so if you are in need of a good builder or gibstopper he can recommend one
Level1, 10 Manukau Rd, Epsom, Auckland