Terminal Tax for year ended 31 March 2021
GST payments & returns for Period ended 31 March 2022
One would think that the Government has caused enough damage through tax measures targeting the residential property market such as the loss ring fencing rules, increased brightline period from 5 to 10 years, restriction on interest deductions and introduction of the 39% top marginal tax rate for individuals. In that case think again. Not only are some of these rules extremely iniquitous, but they add significantly to taxpayer’s compliance costs.
The Government has decided that further measures need to be introduced to prevent people avoiding the 39% top marginal tax rate. The latest round of proposals were released in the Governments Consultation document “Dividend Integrity and personal services income attribution”. The Government is consulting on these proposals and has invited submissions, which are due by 29th April. What are these proposals?
Introduction of Capital Gains Tax on sale of shares
- Sale of shares in a company that an individual and/ or their associates have controlled, where the retained earnings have not been paid out prior to the sale (and therefore avoiding 33% now 39% tax rate) will be subject to the deemed dividend rules. Such a sale would have historically given rise to a tax-free capital gain, but it is proposed that proceeds are taxable to the extent of the vendors share of retained earnings in the company. This is unlikely to raise much in the way of revenue for the Government because those earnings would, to the extent that they could be imputed, have been distributed to avoid the loss of imputation credits.
- This will apply to groups of companies as well as where the shares are sold in a holding company as opposed to the operating company.
Maintaining ASC (available subscribed capital) and ACDA (Available capital distribution amount) records
- Whilst most of us do this as a matter of good practice, Government feels that there is a need for this to be mandated by law.
- This will enable the IRD to easily verify the non-taxable amount that arises when shares are repurchased by the company or the company is liquidated. Under the current rules
- An amount paid to a shareholder on repurchase of shares by the Company is tax free to the extent that the repurchase amount does not exceed the ASC.
- An amount paid to a shareholder upon liquidation is also tax free to the extent that it consists of ASC or ACDA (in essence third party capital gains).
- The consultation document suggests that the reporting should be done on an annual basis.
Changing the personal services attribution rules
- To remove the 80% single customer rule. Currently when a person provides personal services through a company, where 80% of the income is received from a single customer or is performed/ generated by a single person, income needs to be attributed to the individual. Government is proposing to remove this threshold entirely.
- The Government is also proposing to reduce the working person threshold from 80% to 50% and to increase the substantial business asset threshold from $ 75,000 to either $ 150,000 or $ 200,000 and excluding luxury vehicles, unless the business in question is that of transportation. This will have a significant impact upon the likes of incorporated real estate salesperson. The increase in threshold will not affect taxpayers whose business assets cost more than 25% of their income. Consequently, the threshold of $ 75,000 will be greater where the income from personal services is greater than $ 300,000.
- Government also noted in this document that as part of stage 2 of its review, it will focus on Trusts and retention of company profits as well as a review of taxation of PIE income ( tax rates) .
- One can only assume that the trustee rate and top personal rate are likely to be aligned in the near future to 39%.
What are the consequences
- The main consequence is that these rules, if in fact enacted, will force companies to pay larger dividends more frequently.
- In terms of changes to the personal services rules, the application of the attribution rule will be much wider. Companies providing services where the majority of the work is done by working owners will have the income attributed to the owners as if the company was a partnership.
The Income Tax Act 2007 has been amended by inserting a definition of clean vehicle discount scheme into s YA 1.
Schedule 5 (which deals with the fringe benefit values of motor vehicles) has been amended to clarify that, for fringe benefit tax purposes, the cost of the motor vehicle in relation to which a payment under the clean vehicle discount scheme is received by the owner is net of the amount of the payment. This amendment to the Income Tax Act 2007 is deemed to have come into force on 1 July 2021.
COVID 19 & TAX RESIDENCE COV 22/12
This variation allows a natural person who is New Zealand resident for tax purposes only by virtue of personal presence in New Zealand, and who may otherwise become non-resident because they are absent from New Zealand, to ignore any days that they were unable to return to New Zealand because of the imposition of COVID-19-response measures or as a consequence of COVID-19. An affected person should carefully read the conditions attached to this variation.
MAIN HOME EXCLUSION FOR BRIGHTLINE PURPOSES FOR HOMES OWNED BY THE FAMILY TRUST
It is important to remember that the exclusion applies to one property only, whilst in most cases a family home owned by a Trust will be excluded, situations can arise where this is not the case.
The most common situation will be where parents advance funds to their child’s trust for the purposes of acquiring a home. In this case the parents are likely to be the principal settlors of the child’s trust as they provide the most funding on an interest free basis. As they are the principal settlors and have a home of their own either in their personal capacity or in another trust, the home owned by the child’s trust will not qualify as a main home for the purposes of the brightline exclusion and suddenly the property will need to be held for 10 years or be subject to tax if sold within 10 years of acquisition.
Earlier in the month the FEC reported back on this bill, which was introduced in late 2021 and included some more draconian measures such as changes to brightline rules and new interest limitation rules in relation to residential land and amendments to GST, etc. No major changes were proposed, however a few noteworthy changes were made:
- Amendment to the definition of “New Built Land” to include leaky buildings that were substantially re-clad (that is 75% or more) and earthquake prone buildings that were remediated and removed from the earthquake prone buildings register on or after 27 March 2020.
- Amendment to “Development Exemption” in CB12/13 to ensure that the interest remains deductible after the land is disposed of for a loss. The purpose of this amendment was to encourage non-business developments and risks associated with such developments. The FEC felt that if the interest deduction ceased to apply at the time the land was sold, that this would discourage developments and therefore negatively affect the available housing stock.
- Clarification that boarding establishments that operate on a commercial scale are excluded from the interest limitation rules.
- The Roll over relief provisions were also amended to include transfers from a Trust to the Settlor (subject to meeting the same rules as apply for transfers from Settlor to the Family Trust) and extending the rollover relief provisions to transfers within wholly owned corporate groups.
- Introduction of new “Reasonable Time” test for the purposes of applying the main home exclusion. This is to cover situations where the construction of the main home is delayed (for more than 12 months). If the test is met then all the unoccupied and construction days are counted as “Main Home” (exempt) days. This is a welcome change due to current delays arising from building supply shortages.
This bill has now become law.
An Official Issues Paper “GST Apportionment and Adjustment Rules” has been released recently by the IRD. It requests feedback on proposed changes to the vastly complicated rules.
IRD acknowledges that current GST apportionment and adjustment rules are complex, have high compliance costs and that unexpected liabilities and compliance costs can arise because GST applies to private assets that have some business use and are owned by a GST-registered person.
Summary of proposed reforms
- The ability to exclude certain capital assets from the GST registered person’s taxable activity. For example, a dwelling part of which is also used as a home office.
- Removing a large number of assets from GST apportionment and adjustment rules.
- Assets costing less than $ 5,000 excl GST will be 100% GST recoverable provided that it was acquired for the purposes of making taxable supplies.
- 20% deminimis – if the taxable use of the asset is less than 20%, the asset will be regarded as non-taxable.
- Assets with 80% or more taxable use will be regarded as 100% taxable.
- Input tax deductions would still be apportioned on assets purchased for $5,000 or more (GST exclusive) with between 20 percent and 80 percent taxable use. However, a 20 percent change threshold is proposed to ensure adjustments would only be made if a major change in use occurred
- Changes are proposed to the definition of “dwelling” and “commercial dwelling” as GST apportionment issues arise when the same premises are used to make a combination of supplies (residential rental vs commercial guest accommodation). In such cases the GST treatment depends on the definition which can overlap.
- Whether a new set of rules for dwellings should be introduced. The special rules could make house sales (including owner-occupied houses, residential rental properties and holiday homes) by a registered person who is not a property developer an exempt supply.
- Removal of GST apportionment and adjustment rules for developers including removal of concurrent use of land adjustment, where land is used for making non-taxable supplies during the development period.
- The Government is concerned there is a risk that a registered developer will acquire land, claim 100% GST input upfront and later does not return GST output tax when the development is either deferred or is not undertaken. It is proposed that a developer would be required to sell the land within 36 months of claiming the input tax credit.
- Repeal of mixed-use asset rules in s 20G, which do nothing but add complexity to GST and in some cases result in adverse GST consequences in relation to private assets.
- Expanding the wash up eligibility rules, which would enable the GST registered person to remove the asset from the tax base quicker without having to wait until the end of the second GST adjustment period.
- It is proposed that most of these changes would come into effect on 1 April 2023.
Submissions close on 27th April 2022
FINANCIAL SUPPORT FOR BUSINESSES AFFECTED BY COVID 19.
If your buisness has been affected by COVID 19, please remember that there are still some support payments available.
- COVID 19 Support Payment
- Small Business Cashflow Scheme Loan
- IRD has also extended the due dates for various returns, payments and elections which are normally due by 31 Mar.
This has been another challenging year for most. We would like to say a BIG THANK you to all our customers for their support during this time. We certainly hope that some sense of normality will return as we pass the peak of Omicron.
Michael Roberts [email protected]
Martina Evans [email protected]
Shane Zhou [email protected]
Catherine Kemp [email protected]
Level 1, 10 Manukau Rd, Epsom, AKL