Operating as usual
DON’T LET THE IRD NAIL YOU
Published by The Small Business Institute Limited ISSUE 2006
GST and supplies of real property Inland Revenue has produced PUB00308, which is an interpretation statement. We are looking at sales which include the supply of a residence or other real property. S 5(15) of the GST Act deems the residence and other real property to be separate supplies.
Have a look at clause 5 in the summary. The second bullet point brings the residence into the GST net where it is used in the taxable activity of the business purchased. We commonly think of the sale of a farm but these rules also apply to other situations such as a commercial property, where there are flats above.
Have a look at clause 37. A GST registered farmer claims an automatic 20% deduction for farmhouse expenses. The property is being used as part of the taxable activity. Therefore, the farmhouse if sold is a supply in the course or furtherance of a taxable activity and to that extent is subject to GST.
Clause 40 deals with the situation where there is a residence and a separate cottage on the same piece of land. The cottage is being used for short stay accommodation. The residence and the cottage are separate supplies.
There are three worked examples at the end of this publication. Some question whether the Commissioner has got this one right.
Tax pooling COV 20/05 contains another Covid related concession, being a variation to the tax pooling rules. A taxpayer is entitled to ask a tax pooling intermediary to arrange the transfer of an amount to satisfy an obligation for provisional tax (other than under the aim method), terminal tax or use of money interest on the provisional tax or terminal tax for the 2019 income year on or before the date that is 365 days after a person’s terminal tax date for the 2019 tax year.
You will notice there is a condition that the contract with the tax pooling company has to be in place before 21 July 2020.
The 2nd bullet point on the first page sets out the conditions relating to the decline in revenue caused by Covid 19.
Allocation of timber income The CIR has released COV 20/06 (again a concession for Covid) which extends the time for spreading back income for those with balance dates between 25 March 2019 and
30 June 2019. The date for getting the application to Inland Revenue is now 31 July 2020.
Tax write off threshold increased For the 2020 tax year only, the write-off threshold to be used by Inland Revenue for tax to pay, has been
increased to $200. The Minister of taxation says this will ease the financial stress for around 149,000 taxpayers. Holding period – companies: DTA with Australia (and in agreements with other countries)
When dividends are paid to an Australian company shareholder, who holds at least 10% of the voting rights, the NRWT deduction can be reduced from the standard 15% to 5%. CS 20/03 is a Commissioner’s statement. From 1 January 2019 the DTA was modified requiring the Australian company shareholder to have held the shares for at least 12 months (365 days) at the date the dividend is declared, to qualify. If the company shareholder will have satisfied the 12 months rule at some date after the dividend is declared, the dividend payer must retain NRWT at 15% and the shareholder can claim back the excess withholding tax from Inland Revenue once it has completed the qualifying period.
An Australian company holding 80% or more of the shares in a New Zealand company paying a dividend can have NRWT deducted from the dividend at the rate of 0%.
Wages subsidy extension Business revenue (read sales) has to have declined 40% for a continuous 30 day period. This period needs to be in the 40 days before application (but no earlier than 10 May 2020) it must be compared with the closest period last year and, of course, the decline must be related to Covid 19. Refer to Work and Income for full details. The basis for determining a decline in income is different from the one used for the first subsidy. You should have a look at this.
A pre-revenue research and development start-up business can include a drop in projected capital income when determining a 40% decrease in revenue.
The subsidy rate is $585.80 for full-time (20 hours or more per week) employees and $350 for people working less than 20 hours per week. The subsidy runs for 8 weeks. Be sure to read the conditions for applying for the subsidy.
Bad debts write-off COV 20/04 issued on 11 June 2020 has extended the time for writing off a bad debt to 30 June 2020 for the 2020 income year. The failure to write-off must have been caused by Covid 19.
Small Business Cash flow Loan Scheme The time for making an application has been extended to 24 July 2020.
GST – short stay accommodation IS 20/04 is the final interpretation statement dealing with short stay accommodation. We outlined the proposals, contained in PUB00347, earlier this year and we recommend you now refer to the finalised interpretation statement, if required.
The information supplied in this publication has been researched with care. However, the author and the company accept no responsibility to anyone for any error which may occur in the information provided. Readers are advised to consult their normal source of expert advice before acting on anything they read in Tax-e-mail. 127 Queens Drive, Lower Hutt, Phone 04-9394156, e-mail: [email protected]
Feasibility expenditure The new rules for deductibility of feasibility expenditure are contained in the latest Bill before parliament. They are to apply starting in the 2021 financial year.
The proposed section DB 66 is to override the capital expenditure limitation. A deduction is to be allowed when the property would either be depreciable property or revenue account property and progress on the asset is abandoned and also no other deduction for the expenditure is allowed under the Act.
You should note if the property has 0% depreciation a deduction for feasibility expenditure is not allowed. Reminder: 0% depreciation on commercial buildings is to be changed. The new rates are to be 2% DV and 1.5% SL. This change is going to be effective starting from the 2021 tax year. Feasibility costs incurred on commercial property are therefore going to be tax deductible. For example, a study on a proposal for earthquake strengthening.
Deductions meeting the conditions above can be spread in equal proportions over a 5 year period from the income year in which the progress has been abandoned.
Section DB 67 is similar to DB 66 but it allows an immediate deduction if the total expenditure in the year is $10,000 or less. There is no requirement that the property be abandoned.
If an abandoned project is resurrected, the written off cost has to be clawed back under section DB 66 but no clawback is required for a claim under section DB 67 (see page 15 of the link)
Sometimes a feasibility project will be shelved but the further expenditure creates a depreciable tangible asset. In that case, feasibility expenditure write-off does not apply. There are a number of other examples where no claim for feasibility write off is permitted. See page 14.
Charities and donee organisations – Charities ED0207a is the first of a 2 parts outlining how IRD will monitor and advise charities of the requirements for income tax exemptions and donee status. There are a lot of points to consider, including:
• Charities must have an IRD number.
• Charities must be registered with Charities Services (at IRD) to qualify as a tax charity.
• Charities that are registered under the Charities Act will, prima facie, qualify for the income tax exemption for non-business income in s CW 41.
• Business income will only be exempt for that part of the income which is carried out for charitable purposes in New Zealand. The charity will need to self assess the proportion of business income.
• From the 2021 financial year charities with income derived from a business carried on by or for the benefit of a trust, society or institution of the kind referred to in section CW 41 (1) will be exempt from income tax on that income, only if the entity carrying on the business is at the time that the income is derived also registered as a charitable entity under the Charities Act.
• Bequests are exempt from income tax.
• A newly registered charity does not need to make a separate application to Inland Revenue for donee status.
• From 1 April 2020 registered charities will not need to apply for RWT exempt status.
• The FBT concession for charities only applies to the extent the fringe benefits provided are part of the charities business activities that are within its charitable, benevolent, philanthropic or cultural purposes.
• Change to GST rules from 15 May 2018 including rules relating to the valuation of assets on disposal and upon deregistration.
• Consequences of being removed from the Charities Services register.
• Deregistration rules from 1 April 2019 applying to the valuation of assets and liabilities.
• Rules applying to Maori organisations.
• Commissioner may approve an exemption from income tax for an international/non-resident charity that is unable to be registered with the Charities Services, subject to certain criteria.
• There can be disclosure requirements in terms of FATCA and CRS.
• The Commissioner no longer requires a charities rules to contain a clause preventing it from altering certain clauses without the Commissioner’s prior approval
Charities and donee organisations – Part two: donee organisations
ED0207b deals with the Commissioner’s view on the law relating to donee organisations.
• From 1 April 2020 all entities established for a “charitable purpose” will be required to register as a charitable entity with Charities Services to be included on the IRD donee organisation list, unless they get approval from the Commissioner to be placed on the list for purposes other than charitable purposes. These are benevolent, philanthropic or for cultural purposes.
• Refer to QB 16/05 to find out what qualifies as a gift. Similarly, for gifts to State and to State integrated schools go to QB 18/10 and QB 18/11.
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Reliable Accounting Services Centre Limited My wife Rupal Dalal & I, operate ‘Reliable Accounting Services Centre Limited’ since 2011. Before we moved to New Zealand, I worked as a Chartered Accountant in India for more than 20 years and gained hands-on experience in the field of accounting and taxation. Our competitive advantage is intel...
આ મહાદેવનું મંદિર 8 મહિના સુધી પાણીમાં ડૂબેલું રહે છે, પાંડવો દ્વારા બનાવાયેલી સ્વર્ગની સીડીઓ હિમાચલ પ્રદેશ ફક્ત પોતાની સુંદર વાદીઓ અને બરફથી ઢંકાયેલ પહાડો માટે જ પ્રખ્યાત છે એવું નથી પણ અહીંના મંદિરો પણ પ્ર....
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सर्वागमानामाचारः प्रथमं परिकल्पते ।
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सब शास्त्रों में आचार प्रथम माना जाता है, आचार से ही धर्म की उत्पत्ति होती है और धर्म के स्वामी भगवान श्री नारायण हैं..।।
"जय श्रीमन्नारायण महाप्रभु"
BNZ Cash back
BNZ ceased to offer air points from 1 April this year. Instead, the bank is now offering to pay rewards as cash onto the credit card or qualifying loans monthly. Is this taxable income?
For a business, it is pretty clear cut that it is.
A person using their card privately is probably merely getting a discount on purchases and is therefore probably not taxable.
What about mixed use? The answer would seem to be to apportion the cash back.
LP or LTC, which is the better?
One shareholder in an LTC can scuttle LTC status. One partner in an LP can only get out by selling their share in the partnership.
An LP is forced into having a partnership agreement where as an LTC is not, even though it might be good business sense if it did have one.
The count test for an LTC is a maximum of 5 people. A and A’s trust are usually two people:-
• The beneficiaries of the trust
• The Trustees
So if A and B want to start in business together, having themselves and their trusts as shareholders, under LTC they’ll exceed the 5 person limit unless they are very disciplined in the way they distribute income from the trust. Even worse, if A and B want to give C an equity interest, the problem is compounded.
Both LTCs and LPs can be used to distribute business income or losses directly to trusts, which may be a lot more tax efficient than only being able to pay dividends. In addition they both avoid the double taxation which can arise when trading overseas, where tax paid overseas cannot be credited to the ICA.
An LP may be more expensive to set up but it is so much more flexible than an LTC when it comes to shareholder numbers. Keep costs down by finding a lawyer who is used to forming LPs. Let us know if you want the name of one.
The case for LTC
1. A trust shareholder could offset trust losses against the company income
2. Distributions to beneficiaries of a trust shareholder on low tax rates
3. Changing an existing company to LTC avoids RWT on dividends. However, there could be a risk of creating a tax avoidance issue if this is a major reason for the change. The company should remain in the LTC regime for as long as possible.
4. Restructuring to make interest tax deductible as in retaining home as a rental property. Documentation is everything
Document everything you can. Even casual comments by clients could prove useful. Tuck them away in your computer. In the current evolving environment this is becoming very necessary.
Secret Hotels2 is an English company, selling holiday accommodation. The British IRD succeeded in clobbering them for VAT on their sales. The company said it was merely getting commissions and acting as agents. However, when the case got to the Supreme Court the decision made by the previous two courts was over-turned. The company won because it stated its terms in an Accommodation Agreement and on its website. Both documents referred to the company being an agent.
ID Tours Tax-e-mail
DON’T LET THE IRD NAIL YOU
Published by The Small Business Institute Limited in New Zealand created tour packages. It sold them to overseas tour operators and cruise ships. It said it was acting as an agent and its commissions were therefore zero rated. IRD said it was merely buying and selling the tours and it must pay GST on the difference. ID tours did not have documentary evidence to back up its claim. It lost.
Kids can get out of KiwiSaver
Some 56,000 children (10,000 under 16) have been enrolled, incorrectly, into KiwiSaver. This happens mostly because some employers automatically enrol all new employees without checking if they are over 18. Legislation is being introduced to allow children affected to get out of the scheme, if they choose. It could be worth reminding clients who employ young workers of the 18 years minimum age. The Bill before Parliament proposes an amendment to allow minors who have been incorrectly enrolled in a scheme to opt out at any time before their 19th birthday. If they choose to opt out they would receive back their employee contributions but not their member tax credits, kick-start amount, or their employer’s compulsory contributions.
Can distributions from a family trust to family members be avoidance?
No. The Commissioner, in “Questions we’ve been asked”, confirmed distributing income in a family trust to family members on low tax rates was not avoidance. Don’t overlook the opportunity offered by an LP or LTC . However, do not try and get too smart or it might be tax avoidance. E.G. Do not allocate all to one beneficiary who has the lowest tax rate and then get that beneficiary to gift to the other beneficiaries with higher tax rates.
IR 871 to be extended?
The requirement for Australian shares, exempt from the FIF rules, to be listed on one of the 4 approved indices is to be changed to just the shares being listed on the ASX.
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Blog - Reliable Accounting Services Centre Ltd The Gamble Posted On: 6/08/14 11:52 AM Gamble verb “take risky action in the hope of a desired result. synonyms: take a risk, leave things to chance, act in the hope of, bank on” Most are familiar with the concept of taking a gamble and many have the “odd flutter”. Even when the odds are low we’ll…
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