Newsletter November 2020
TAX CALENDAR
Sept 20
PAYE payments
November 20
PAYE payments for SME’s
RWT payments for period ended 31 October 2020
November 28
GST payments & Returns for Period ended 31 October 2020
December 20
PAYE payments for SME’s
RWT payments for period ended 30 November 2020
December 31
Final date for CRS disclosures for year ended 31 March 2020
Final date for FATCA disclosures for year ended 31 March 2020
Extension of due date due to COVID 19
Sept 20
PAYE payments
Sept 30
CRS disclosures for NZFI’s FATCA information for disclosure to IRS.
TEMPORARY LOSS CARRY BACK SCHEME AND APPLICATION OF ANTI-AVOIDANCE PROVISIONS
In August 20 the Commissioner produced an Interpretation Statement IS 20/03 which focuses on application of specific anti-avoidance provisions as they apply to temporary loss carry back provisions.
The temporary Loss Carry Back provisions allow a taxpayer to carry back losses to a prior year and receive a refund of tax paid in the prior year. There are however anti-avoidance rules that are designed to void arrangements that have been put in place to obtain an undue tax advantage. These provisions as they apply are briefly outlined below.
The specific anti-avoidance provisions in s GB3B & GB4 require that
- a company share is “subject to an arrangement” (which includes “an arrangement directly or indirectly altering rights attached to the shares”);
- the arrangement “allows” the relevant company “to meet the requirements” of the temporary loss carry back regime; and
- a “purpose” of the arrangement is “to defeat the intent and application” of the regime.
The arrangement must “allow” (ie, permit or enable) a company to obtain or maintain compliance with the ownership continuity or ownership commonality requirements during the relevant period. The intention of the loss carry back rules is that the economic benefit of tax losses can only be obtained by the same people who effectively bore the direct economic burden of the losses.
The Commissioner considers that the test as to whether the arrangement is subject to anti-avoidance provisions is the same as per general anti-avoidance provisions in s GB 1. It is aimed at arrangements that in legal substance satisfy the requirements of a particular provision or regime, but when viewed in a commercial and realistic way, make use of (or circumvent) the provision or regime in a manner that is inconsistent with the provision or regime’s purpose.
IS 20/03 lists few useful examples which the Commissioner will consider as avoidance arrangements. In essence these include but are not limited to arrangements where there is an immediate advance given by the investor in exchange for a deferred acquisition of shares, deferred acquisition of shares where the investor takes control of the day to day operation of the target company, receipt of funding from investor where call option over shares is exercisable at later date.
Examples that cover funding obtained from a third party that require security over company’s shares and assets are deemed to be legitimate and not entered into for the purposes of circumventing the loss carry back rules.
PROPERTY TAXATION
THINKING OF SUBDIVIDING OR DEVELOPING YOUR PERSONAL PROPERTY?
Recently we have received a number of enquiries from taxpayers about subdividing land which is owned by a family trust and either selling the new resulting lots as bare land or erecting a house on one or more lots and selling the bare lots or developed land whilst retaining the part of the land with the original family home.
The common misconception is that such a subdivision or a development is not subject to income tax as the subdivision or development relates to land on which the family home is situated.
Where a Family Trust owns the land the residential exclusion in s CB17 that covers subdivision or development within 10 years of acquisition of the land will not apply as it does not extend to land owned by a family trust. As soon as the division or development is more than minor in nature and undertaken within 10 years of acquisition of the land the gains derived from disposal will be subject to tax.
The Commissioner has recently released an interpretation statement IS 20/08 in which she expresses her view on when a development or subdivision is minor in nature. Whilst the expenditure needs to be considered in absolute and relative terms the Commissioner accepts that expenditure on development or division will be considered minor if it is
- $ 50,000 or less in absolute terms; and
- less than 5% of the market value of the land at the start of the development or division in relative terms.
Whilst the above thresholds are useful, most divisions and developments will exceed the $ 50,000 in absolute terms.
In situations where the family residence is owned personally then the exemption is s CB17 would ordinarily apply providing the area of land is no more than 4500 sqaure metres.
However, if the taxpayer erects a building on those lots for sale rather than for the purposes of deriving rental income, the profits from the sale will be taxable under s CB12. For the purposes of determing the development profits the market value of the land immediatelly before the commencement of the development will be allowed as a deduction from the proceeds.
In certain circumstances where the development or division work involves significant expenditure on channelling, contouring, drainage, earthworks, kerbing, leveling, roading, demolition or any other amenity or service or work customarily undertaken in major projects could impose taxation under s CB13.
Whilst this would not be very common as the section focuses on taxing major projects, there may be circumstances where s CB 13 may apply, in which case the 10 year holding period would not apply.
Similarly as with s CB12, whether the expenditure on the undertaking or scheme is significant for s CB 13 purposes requires consideration of the amount of the expenditure in absolute terms; the amount of the expenditure relative to the pre and post development value of the land; and the context of the project, as is with s CB12.
If the level of work involved is significant then the gain will be taxable and a deduction will however be allowed for the market value of the land at the time of commencement of the development or subdivision.
DID YOU KNOW
RING FENCING OF RENTAL LOSSES
Recently we have been asked to provide a reason why an investor might prefer allocating rental losses on property by property basis vs on a portfolio basis.
Whilst there is no perfect solution every case must be considered on its merits. However, the rules state that when the last property is sold from the pool of properties where a taxable gain was derived in respect of each property the excess deduction/ losses that were ring fenced will be released and could be offset against the taxpayer’s other income. However, if one property in the pool is not subject to tax on disposal, disposal of that last property would mean that the losses which were pooled will remain ring fenced and unable to be offset against other income.
In case of a property which is individually tracked and where the taxable gain in relation to sale is less than the ring fenced losses and current year deductions, the excess deductions will be released and available to be offset against other income such as salary, etc.
A good example where tracking property on individual basis as opposed to being part of a loss-making rental pool would be beneficial, would be a highly geared tainted property which is subject to land taxing provisions if the property is sold within 10 years of acquisition or a property which might be sold within the brightline period. In this case the excess losses would be released and available for offset against other income.
Whilst investors generally do not acquire properties with the intention to make a loss, circumstances can change especially if the property is highly geared and subject to taxation on disposal.
TERM DEPOSITS & ALL TIME LOW INTEREST RATES
With down trending interest rates and signals from the Reserve Bank of the possibility that the interest rates may dip below zero, cashed up investors nearing retirement age or those favouring safe interest-bearing investments may be wondering what is next for their hard earned savings.
Recently we came across Direct Mortgage Investments Ltd (DMI) which may provide an alternative means of investment with a 5.5% to 7% average rate of return.
DMI is a locally owned wholesale funding company. DMI’s model works by having multiple investors contributing funds to a single loan, which is then lent to borrowers on security by way of a registered first mortgage over property.
The investments are short term 6 to 24 months with an investment starting as low as $ 5,000.
What seems to be an advantage of DMI’s wholesale funding model is that an investor is able to review the type of security being offered to them prior to advancing the loan. This process is meant to ensure that the investor is included in the decision making process. Investors generally spread their funds through a number of different property investments so as to minimise exposure to one particular loan transaction.
If this sounds appealing to you, please get in touch with DMI directly.
T: 09-486-2168
The above is for your information only, and you should seek financial advice by a suitably qualified and licenced financial advisor when making investment decisions.
COMMISSIONERS PRELIMINARY VIEWS
GST: CERTAIN SUPPLIES OF WHOLLY OR PARTLY CONSISTING OF LAND
The Commissioner has recently released a draft PUB00381 which is a follow up to Interpretation Statement IS 17/08 and provides guidelines on application of the Compulsory Zero Rating provisions (CZR Rules) and GST. Whilst this PUB is not yet finalised, with deadline for comments being 3rd November, it provides a general flavour as to what the Commissioner’s view is.
This PUB, looks at the application of CZR Rules to the following:
- the sale of a purchaser’s interest in a sale and purchase agreement for land; and,
- the grant of a licence to use land.
Transferable Development Rights (TDR’s) are saleable rights created purely under the RMA. They are a market based mechanism that encourages voluntary transfer of development potential in locations where a councils supports restrictions on land use to a place where a council would like to see development. In effect a TDR enables the owner of a receiving site to obtain a subdivision consent where they would not otherwise have been able to.
The Commissioner’s preliminary view is that the following supplies that wholly or partly consist of land are subject to CZR rules:
- The Sale of transferable development rights
- The sale of standing timber, which is a profit à prendre (a right to take something off another person’s land, or to take something out of the soil)
- The purchaser’s interest in a binding sale and purchase agreement for land, even when it is conditional.
It should be noted that most conditional agreements (e.g. subject to finance or other conditions) are still binding contracts as opposed to an agreement where a due diligence process must be completed first before the purchasers will bind themselves to a contract with the vendor. The latter being non-binding.
The Commissioner’s preliminary view is that the following supplies that wholly or partly consist of land are NOT subject to CZR rules:
- The sale of purchaser’s interest in a non-binding agreement for land.
- The grant of a licence to use land
A licence is only a permission given by one person to another to do something that would otherwise be unlawful. It does not create any interest in land or proprietary right that is binding on the licensor.
OTHER NOTICES
Well deserved school and summer holidays are around the corner and so is the tax filing deadline of 31 March 2021. If you have not brought us your 2020 information, we encourage you to do so, to ensure that your financial statements and tax returns are completed within the due date.
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
