Newsletter September 2019
TAX CALENDAR
September 28
GST returns & Payments due for taxable period ending 31 August
September 30
Student Loan repayments due for overseas based borrowers
October 28
Provisional Tax payments for ratio option customers and GST returns and payments
GST ON LOW VALUE IMPORTED GOODS
From 1 December 2019, overseas businesses selling low value goods to consumers in New Zealand may need to register for, collect and return Goods and Services Tax (GST) of 15%.
Low value goods are those valued at NZ$1,000 or less (excluding GST). Examples include books, clothing, cosmetics, shoes, sporting equipment and electronic items. New Zealand Customs Service will continue to tax goods sold for more than NZ$1,000 at the border as they come into New Zealand.
Businesses must register for GST if their total supplies, including services, digital products and low value goods, to consumers in New Zealand exceed or are likely to exceed NZ$60,000 in any 12-month period from 1 December 2019.
The rules apply to overseas businesses selling low value goods directly to New Zealand consumers, as well as online marketplaces and re-deliverers.
From early September 2019, overseas businesses will be able to register.
GUN BUY-BACK SCHEME
The Government launched a gun buy-back and amnesty scheme which includes compensation payments being paid for firearms, parts, magazines and ammunition. This is effective between 20 June and 20 December 2019.
If you are receiving a compensation for firearms, parts, magazines or ammunition intended only for personal use there are generally no tax obligations. In this case any payment received under the scheme is not taxable. Any loss incurred is not tax deductible.
There are tax obligations you need to meet if you receive a compensation for firearms bought and used, or planned to use, as a part of a business and claimed the cost as an expense or claimed depreciation.
Revenue expense: If you deducted the cost of the original purchase, you must treat any payment you received as income to the extent of the initial deduction. You are required to return this in the income year in which you receive the compensation payment.
Capital expense: You may have treated firearms as a capital asset and depreciated the original cost. In this case, you’ll have either depreciation recovery income or a depreciation loss.
BROADENING OF TAX NET?
HABITUAL BUYING & SELLING OF LAND
IRD has published a consultation document in which it is proposed that the pattern of regular buying and selling of land be considered in the context of a group of persons as opposed to a one single person.
The land taxing provisions including the brightline rules contain various exclusions from the taxation of land which is used as a main home, residence or business premises. If the respective exclusion applies then the gain derived from disposal of such land would not be taxable. However, the main home exclusion in CB 16A and the residential exclusion in CB16 do not apply where there has been a regular pattern of buying and selling land for such purpose.
The government officials are of the view that the current legislation does not operate as intended. Their main concern is that even if there is a regular pattern of buying and selling land that the gains derived from disposal of such land is not taxable. This can currently be achieved where, for example, the following happens:
- First Residential Property is acquired by mum it is renovated whilst lived in and then it is sold
- Second Residential Property is acquired by dad, it is renovated whilst lived in and then it is sold,
- Third property is acquired by a Family Trust, it is renovated and then it is sold, and so on.
Under the current rules a group of persons or entities will not have a regular pattern of buying and selling land merely because they are associated. It is necessary that the same person, or group of person or entities all occupy each of the properties.
Furthermore, the regular pattern restrictions have been very narrowly interpreted to apply only where there is a similar or same activity between transactions by the respective persons. The regular pattern will not apply if there are different activities ie. The first property is bought, lived in and sold, the second property is bought, renovated whilst lived in and sold, and third where bare land is acquired and a dwelling is erected, lived in and then sold.
WHAT WILL CHANGE?
The summary of proposal is as follows:
- The regular pattern restrictions should apply more broadly to any pattern of buying and selling land used as a residence or business premises. It should be irrelevant what actually happened to the land. What will be relevant is that there are regular transactions.
- The test will be broadened to apply to associated persons as well and not only apply on a single person or entity basis.
- The time period restriction for the purposes of Brightline Rules where the exclusion has been applied twice within two years to the current sale will be extended to residential land and business premises.
TAX TIPS, TRAPS AND TROUBLES
DEEMED SETTLORS & BRIGHTLINE RULES
HC27(2) of the Income Tax Act 2007 (ITA) deems certain persons to be settlors of a Trust. For the purposes of this Article sHC27(2)(a) and (b) are of interest:
HC27(2)(a) states that a person is a settlor if at any time that person transfers value to the Trust, or for the benefit of a Trust.
HC27(2)(b) states that a person is a settlor if at any time that person provides financial assistance to the trust or for the benefit of the trust with an obligation to pay on demand, and the right to demand is not exercised or is deferred.
It is very common practice for family members, generally mum and dad to make interest free advances to Trusts set up for children that are repayable on demand. However demand is not exercised for a considerable length of time. In addition to the above beneficiary advances tend to be reflected in the balance sheet of the Trust without payment being made to the beneficiaries for a considerable length of time.
Section HC27(6) was introduced by the Taxation (Annual rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 to clarify that beneficiaries will in certain circumstances be treated as Settlors of a Trust, where;
the Trustees owe money to a beneficiary, unless
- Trustees pay interest to the beneficiary on their advance at the IRD prescribed interest rate or higher, or
- The amount owing to the beneficiary at the end of the year is not more than $ 25,000
The amendment comes into force on 1 Apr 2020, and does not have retrospective effect.
Whilst the above seems a nice clarification to the Act, s HC27(2) and HC 27(6) can give rise to issues when considering the application of Brightline Rules.
If for example 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 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 bright- line period, as mum and dad may be considered principal settlors of the Trust B, suddenly the primary home exemption can be in jeopardy.
It is recommended that you carefully consider advances made to the Trust by persons other than the named Settlors of the Trust and beneficiary current accounts, if the Trustees own a family home.
If you are in doubt or considering selling a residential property owned by a family trust to which the Brightline Rules may apply, please get in touch with us, so that we can assess whether a disposal of such property will be subject to the brightline rules and what strategy may be available to you in your particular circumstances.
TRANSFERRING MONEY OVERSEAS
If you do this through your traditional bank you may end up paying lots in fees. Instead you may consider using an alternative service such as XE money, that often provide highly competitive rates, zero transfer fees, hold client funds in separate trust account and provide 24/7 secure online platform.
The key is to compare and shop around! Why pay too much in fees?
WHAT HAS BEEN HAPPENING IN AUSTRALIA
ATO has published two Draft Taxation Determinations which outlines ATO’s preliminary position in relation to capital gains derived by non-resident or temporary resident beneficiaries of resident non- fixed trusts on an asset which is not Taxable Australian Property (TAP). This gain would be taxable to the non-resident beneficiary irrespective of whether or not it has source in Australia. If such gain would be derived by the non-resident or temporary resident directly, it would not be taxable in Australia.
It is not uncommon for Mum and Dad who are trustees of a NZ Family Trust to migrate to Australia whether it be for family or employment reasons. Without any planning the NZ Family Trust can very quickly find itself caught up within the Australian Tax Net as Australia has different criteria to asses residency of a Trust.
If a trust’s net income includes a net capital gain, irrespective of the source i.e. whether or not derived from Australian or foreign assets, and trust distributes income to a foreign resident beneficiary, then the beneficiary may be treated as having derived a capital gain, even if no CGT event occurred to that beneficiary s 115-215 (4A).
S 855-40 disregards a capital gain that a foreign resident beneficiary of a fixed trust is deemed to have made as a result of a CGT event happening to a CGT asset of that Trust. Such treatment is not available to non-fixed trust (most NZ discretionary trusts). Whilst s 855-10(1) provides that a foreign resident can disregard capital gain if it arises in relation to CGT asset that is not TAP.
The draft interpretation statements suggest that the intention of the legislation is for foreign resident beneficiaries of fixed trusts to have capital gains disregarded.
However, the capital gains which temporary residents are deemed to make under s115-C cannot be disregarded irrespective of whether the trust is fixed or non-fixed.
An alternative view put forward would be that s 855-10 has the ability to disregard any capital gain or loss that a foreign resident beneficiary makes indirectly from a non-TAP asset of a non-fixed trust, which would be the case if the gain was derived directly by a non-resident or temporary resident. However, the Commissioner did not consider this view correct.
As there is an overlap of various provisions, this item is out for consultation and the due date for submissions is 27 September 2019.
The current preferred view of the Commissioner will add an extra layer of complexity and trap for NZ trustees of NZ Family Trusts where the Settlors move to Australia.
We will keep you posted as to the outcome of this item.
QUOTES of the DAY
“Your time is limited, so don’t waste it living someone else’s life.” –Steve Jobs
“Everyone lives by selling something.” –Robert Louis Stevenson
“If you are not taking care of your customer, your competitor will.” –Bob Hooey
The golden rule for every businessman is this: Put yourself in your customer’s place.” –Orison Swett Marden
If you cannot do great things, do small things in a great way.” –Napoleon Hill
STAFF NEWS
Martina has returned to work after 7 months maternity leave spending time with her new daughter Olivia. We are glad to have her back.
CONTACT US
Michael Roberts
michael@robertsandassociates.co.nz
Martina Evans
martina@robertsandassociates.co.nz
Shane Zhou
shane@robertsandassociates.co.nz
P: 09-9661370
Level1, 10 Manukau Rd, Epsom, Auckland
