The Income Tax Act 2007 has long contained provisions to tax the sale of property (or other assets) acquired with the intention of disposal. However, ‘intention’ is a subjective concept and has been difficult for Inland Revenue to police. Hence, the brightline test, (section CB 6A) was introduced as a means to tax profits made on property purchased and sold within a short space of time. It has been in effect for a few years and it is now worth revisiting how it works.

The brightline test applies to land for which a person first acquired an interest in, on or after 1 October 2015. Typically, a person acquires an interest in land when a Sale and Purchase Agreement (S&P) is executed.

This is important because …..

Various tax concessions exist that can save significant time and money, but they are often overlooked. You may want to save this article as a handy reminder to take advantage of these options whenever possible.

Business-related legal fees are tax-deductible irrespective of whether they are capital in nature, provided the total amount for the year is $10,000 or less. The concession is not just for companies – trusts and individuals can also take advantage of it. Because the concession allows capital expenditure to be claimed, it can be applied to legal fees to purchase or sell assets. The Government has accepted a recommendation by the Tax Working Group to increase and expand it to other categories of professional fees and some feasibility expenses, providing a tax incentive for businesses to invest and expand, so watch this space.

For indirect taxes…

The Tax Working Group (TWG) released its long awaited Final Report (‘the Report’) on 21 February 2019, following a 13 month review during which the Group received over 7,000 public submissions. The report contained 99 recommendations for the Government’s consideration; including the introduction of an broad Capital Gains Tax (‘CGT’).

Two months later the coalition Government ruled out the introduction of a CGT for the foreseeable future. The current Government is a coalition and without consensus it could not impose this new tax.

Where does this leave us? What about the remaining 97 recommendations? The government has provided a written response to each of the TWG’s recommendations. However, the overall theme is that there will be no significant change or major evolution.

A number of the recommendations by the TWG were to make no change. For example, the TWG recommended the corporate tax rate should remain at 28% and no progressive corporate tax rate system should be introduced. The government has endorsed maintaining the current business and personal income taxn regimes as they are.

The government has agreed to investigate …..

It is common from a layman’s perspective to not appreciate the relevance of treating separate legal entities as separate. Where expenditure is incurred to derive income, it is typically deductible for income tax purposes to the person that derived the income. Documentary evidence should be held that reflects this connection to ensure the expenditure comprises an allowable deduction. The High Court recently considered this issue in the decision of Wong v Commissioner of Inland Revenue (2018).

In Wong v CIR, the taxpayer was an accountant by profession. He derived income from a consultancy business and two rental properties. He was also trustee of his family trust that derived rental income from a third property. Mr Wong financed both the consultancy business and rental properties throughn a number of loans and credit facilities in his personal name.

For more information on ‘You versus your Trust’ please go to our Latest News page (Issue 1: Feb – April 2019) or contact us.

In 2011 the GST Act was amended to prescribe that a supply of land between two GST registered parties was subject to a rate of 0% if the land was ton be used by the purchaser to make taxable supplies and not as a principal place of residence.

Given the change reduced the GST rate to 0% it is fair to assume it should have simplified how GST applies, i.e. there wouldn’t be any. However, in practice the change continues to cause problems both from a contractual and technical perspective. This led to Inland Revenue (IRD) issuing additional guidance in 2017. However, problems persist. Two examples are outlined below.

Under the GST Act, a purchaser is required to notify the vendor of their circumstances so that the vendor can establish whether or not to zero rate the sale. In practice, this occurs by completing Schedule 1 of the Auckland District Law Society (ADLS) Sale and Purchase (S&P) agreement. However, there are instances where the schedule is not completed at all, in which case there is no ‘agreement’ between the parties regarding how GST applies.

If a GST registered purchaser does not complete ….

The way employers report payroll information to Inland Revenue (IRD) is changing. From 1 April 2018, IRD introduced a new electronic reporting system, providing employers the option of filing payroll information every payday. From 1 April 2019, the new system will be compulsory for most employers, so it is imperative business owners get to grips with the new rules to avoid the risk of non-compliance.

Under the new payday filing system, the information must be reported every time employees are paid, which will be complex for businesses with a combination of employees paid weekly, fortnightly and monthly.

From 1 April 2019, the new system will be mandatory for any NZ employer who withholds more than $50,000 of PAYE and Employer Superannuation Contributionn Tax (ESCT, e.g. Kiwisaver) per year. Paper filing will remain available for smaller entities who do not exceed this threshold, although they may also opt in.

The details submitted to IRD will remain substantially the same, with additional information required in respect of ESCT payments, the pay cycle frequency, pay period start and end dates, and the payday date. There will also be amendments to the way information is collected for new employees, allowing electronic onboarding for new starters…….

For more information on Payday filing changes please go to our Latest News page (Issue 4: Nov 2018 – Dec 2019) or contact us.

The Labour Government established the Tax Working Group (“the Group”) in January 2018 to review the existing New Zealand tax framework and to provide recommendations for supposed improvements to the structure of the tax system over the next 10 years. An Interim Report was released on 20 September 2018, to provide interim conclusions on twelve areas of concern for New Zealander’s, based on the thousands of submissions received during their two-month public consultation.

One of the most topical issues is the potential introduction of capital gains tax. The report discusses potential design options for a capital gains tax, but the report makes it clear that the Group is still forming its view on whether to recommend a capital gains tax at all. Broadly, a capital gains tax could apply on a realised basis as assets are sold or on a deemed return basis. Assets captured would include interests in land, intangible property, income-earning assets not already taxed on sale, and shares in companies as well as Kiwisaver scheme. The Group confirms that family homes and personal assets such as cars, boats and jewellery should be excluded.

Another key area discussed is the taxation of retirement savings. …….

The Taxation (Annual Rates for 2018- 19, Modernising Tax Administration, and Remedial Matters) Bill was introduced into Parliament in June 2018. The Bill seeks to improve tax administration and modernise the revenue system by making tax “simpler and easier” for individuals.

However, the majority of the proposed improvements are heavily reliant on the success of the Inland Revenue’s shift toward increased automation.

The key proposals seek to help individuals pay and receive the right amount of tax during the year, for example by:

• enabling IRD to help individuals determine their appropriate tax rate or code
• using tailored tax codes
• automating tax refund streamlining the administration of donation tax credits

The proposals aim to minimise the need for tax adjustments at the end of each year. Current year-end processes, such as ….

For more information on the ideal business structure for your business please go to our Latest News page (Issue 2: May – July 2018) or contact us.

Labour’s pre-election manifesto proposed to increase the fairness of the tax system and improve housing affordability. In the six months since then Labour-led coalition entered Parliament, we have started to see some changes filtering through. As part of the proposals aimed at house prices, Inland Revenue has recently released an Issues Paper proposing to ring-fence rental losses, with draft legislation likely to follow once Inland Revenue has considered public responses. So how would the rules work? People derive income from multiple sources, such as salary/wages, business income, interest, dividends and rental income. It is a fundamental feature of NZ’s tax system that a person is taxed on their total income from all sources, whether a profit or loss.

This aggregation allows losses incurred from rental properties to be offset against other income, reducing a taxpayer’s total income and corresponding tax liability. This Government’s concern is that this mechanism allows property investors to take on high levels of debt to finance their property investments, giving rise to tax losses, which they believe is subsidising the rental portfolio through a reduced tax liability.

The proposed ring-fencing rules contained within the Issues Paper will prevent rental losses from being offset against other income. Instead, rental losses will be ‘ring- fenced’ and offset against future rental income, or any tax incurred on the future sale of the property.

Labour originally indicated losses might be ringfenced by individual property. Thankfully, the proposed ‘portfolio approach’ is more logical, enabling investors to pool their profits and losses from all residential properties, including overseas properties. If enacted, the rules will apply to all rental properties irrespective of how they are held, i.e. the rules will apply to individuals, companies and trusts. The proposed rules also use the existing definition of ‘residential land’. Thus, the rules will not apply to commercial property or property subject to the mixed-use asset rules.

For more information on the ideal business structure for your business please go to our Latest News page (Issue 2: May – July 2018) or contact us.