Tax

A tax credit is able to be claimed on donations made to organisations and charities that are registered on Inland Revenue’s (IRD) list of Donee Organisations.

The amount of the credit is one third of the amount of the donation, and is limited to the amount of a person’s taxable income. The claims process is straightforward; donation receipts can be uploaded to a person’s online ‘MyIR’ account, and they are processed by IRD at the end of the tax year. However, as with many tax rules, there can be complexity.

The Income Tax Act 2007 requires a donation to be a “…gift of money of $5 or more…”, but there is little guidance on the meaning of the phrase. It is generally understood to require the gift to be of money and not goods or services. However, confusion arises because monetary gifts can take various forms. A dispute on the issue has been making its way through the Courts.

The taxpayers, Mrs Roberts and her late husband, created the Oasis Charitable Fund in 2007. Soon after its creation they lent the charity approximately $1.7m. Between 2011 and 2015, they signed several deeds of gift progressively releasing the charity from the obligation to repay the loan. On each occasion they claimed donation tax credits for the debt forgiveness.

By forgiving a portion of the loan amount each year, the donation rebate claims were maximised because the annual amount was kept under the ‘donor’s’ taxable income. Meanwhile, the charity was able to receive the benefit of the cash up-front.

The Commissioner disputed the donation rebate claims on the basis that debt forgiveness is not a ‘gift of money’, however both the High Court and Court of Appeal subsequently ruled in favour of Mrs Roberts. The Courts analysed historic legislation, as well as various dictionary definitions, and concluded that the words ‘gift of money’ mean more than just cash.

The decision was applauded by charities and philanthropists alike, as the flexibility of loan forgiveness encourages donations. However, this has been short-lived. On the same day as the Court of Appeal decision (17 December 2019), the Revenue Minister announced that the Court decision was contrary to the policy intent. The Minister’s statement made clear that donation tax credits should be limited to gifts of cash or cash equivalents only (i.e. bank transfers / credit cards) and should not be available for either debt forgiveness or other gifts in kind.

The Income Tax Act will be amended to reflect this intent. The change will be backdated to 1 April 2008, unless someone has already taken a tax position based on the old wording.

The charitable sector will need to wait and see whether this rule change will influence donors, and have an impact on the overall level of giving across New Zealand.

The recent High Court decision of Burke v Commissioner of Inland Revenue (2019) is a timely reminder that understanding the legal form of a transaction is important for applying the correct GST treatment.

Mr Burke was a GST registered, self-employed contractor, who renovated houses and buildings. In mid-2006, Mr Burke entered into a venture with Citywide Capital Limited (CCL). CCL gave Mr Burke a loan to fund the purchase and development of two properties.

The loan agreement had a number of terms. Mr Burke was responsible for paying any suppliers and sub-contractors directly. He was required to use CCL’s accountant to process his GST returns, with any GST refunds to be collected by CCL as partial repayment of any outstanding loan.

Cashflow constraints meant Mr Burke was required to drawdown additional loan capital from CCL throughout the project, in order to pay suppliers. Under the loan arrangement, CCL paid suppliers directly, however the legal form of the arrangement between Mr Burke and CCL was an increase to the existing loan. At the time, CCL’s accountant submitted Mr Burke’s GST returns claiming GST on the payments made to suppliers.

In August 2007, the first property sold, and Mr Burke made a loan repayment of approximately $500,000 to CCL. During an IRD review commenced in 2015, the Commissioner discovered that GST had not been returned on the sale of the property in 2007, however it had been in a later GST return, filed on 11 March 2016. Furthermore, in the same GST return Mr Burke claimed GST on part of the repayment to CCL, equivalent to the additional amount he borrowed to cover supplier costs.

Mr Burke asserted that he was entitled to claim input GST on this amount, given it was in respect of payments to suppliers.

The Taxation Review Authority (TRA) concluded that input GST could not be claimed, as the repayment of these costs to CCL was simply a loan repayment, and not in exchange for a supply of any good or service as defined in the Goods and Services Tax Act 1985. Mr Burke appealed to the High Court, but unfortunately for him, the High Court agreed with the TRA.

This decision emphasises the importance of understanding the true legal nature of payments. GST is deducted on goods and services that are acquired for use in making taxable supplies.

The inability to connect the loan repayment to CCL, to the acquisition of goods and services used in the development should have led him to the conclusion that GST could not be claimed.

Two recent (connected) cases at the Taxation Review Authority (TRA) demonstrate that unnecessarily complex transactions can raise a red flag for IRD.

Both cases related to a taxpayer referred to as Mr Brown, who acquired a 2/3 interest in a joint venture known as the NPN Partnership (NPN) back in 1981. NPN held several residential property investments, of which a 2/3 share was transferred into one of Mr Brown’s family trusts.

Over a period spanning 20 plus years, the income rights to the rental income derived by NPN were sold from one of Mr Brown’s family trusts to another on three separate occasions. Although each transaction was slightly different, broadly, on each occasion the trust acquiring the income rights funded the purchase by way of vendor loan, with the interest capitalised and not payable until the expiry of the loan.

Close to the end date of each loan, the trust would sell the income rights to a newly settled family trust for a price equivalent to the outstanding loan with accumulated interest. In effect, each of these sales from trust to trust created a new loan. On each occasion, the new loan gave rise to an interest expense which the trust claimed as tax deductible, offsetting the rental income derived from NPN such that no tax was paid.

The Commissioner contended that the arrangements constituted a tax avoidance arrangement pursuant to BG 1 of the Income Tax Act, and sought to deny the interest deductions whilst reconstructing the income derived by NPN onto Mr Brown. The Commissioner contended that during the time the income rights were held in trust, the rental income was used my Mr Brown for his personal and family expenses. The taxpayer contended that the transactions were all standard commercial transactions, and there was no artificiality in the trusts obtaining the interest deductions.

However, the TRA supported the Commissioner, ruling that the transactions were driven with a tax motive in mind, with no commercial reality, given that the loans resulted in no economic cost to the trusts. The structure was artificial and contrived.

In sentencing, the TRA allowed IRD to impose re-assessments dating back to 2001, as they considered Mr Brown’s tax returns to be wilfully misleading. As a further sting in the tail, it was deemed that the Trustees of the family trusts had failed to meet their tax obligations, hence the income was taxable at the ‘non-complying trust rate’ of 45%.

A good reminder that whilst all taxpayers are entitled to arrange their affairs in a tax efficient manner, tax should not be the main motive for a transaction with no commercial substance.

Fringe Benefit Tax (FBT) on privately used vehicles is neither new nor rare. However, errors in FBT calculations are common due to the murky and complicated nature of the rules and principles that apply.

Generally, FBT is payable when a business-owned vehicle is available for private use by an employee. The availability component of this definition is often misinterpreted; as FBT is payable when a vehicle is simply available to the employee, whether or not the vehicle is actually used privately.

By definition, if a vehicle is used for home to work travel, this counts as private use. However, that same travel from home to work is ignored if the vehicle qualifies as a “work-related vehicle”.

This leads to our next common error – the application of the work-related vehicle definition. To qualify, the vehicle can’t be designed principally to carry passengers, the name of the employer’s business needs to be identified permanently and obviously on the vehicle’s exterior, and finally, it needs to be a condition of employment that the employee stores the vehicle at home.

A common error is to treat a sign written sedan as a work-related vehicle – in factory form, sedans will not qualify for the exemption as they are principally designed to carry passengers.

When it comes to calculating the amount of FBT payable, the formula seems simple enough: multiply the proportion of days that the vehicle was available for private use during the quarter by the relevant vehicle value and a specific percentage. However, each of these elements can be misunderstood.

There are two methods available to determine a vehicle’s value – either the cost price method, or the tax book value (TBV) method. The TBV method is the original cost price less its total accumulated depreciation at the start of the FBT period. A minimum value of $8,333 applies when using the TBV method.

Once a method has been chosen for a particular vehicle, the same method must be used for five years. Typically, the lowest value is achieved by using the cost price method from acquisition, with a change to the TBV method after five years. Cue our next common error: when changing to the TBV method, the $8,333 minimum amount is not an automatic option; it can only be used if the vehicle’s TBV is less than $8,333. As a general rule, FBT is calculated based on GST inclusive vehicle values. GST exclusive values can be used, but the percentage needs to be adjusted accordingly.

FBT can be frustrating because it takes considerable time to calculate for what can seem like a small amount of tax. But it is worthwhile reviewing both the availability on which FBT is being calculated and the calculation itself. There may be savings to be had or errors to be identified, both of which can add up over time.

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 if this occurred before 1 October 2015, the brightline test does not apply. When the brightline test was first introduced it applied if the period between the change of title to the purchaser and the date they subsequently entered into a S&P to sell, was less than 2 years. If the change in title was not registered, it is measured from the date the person first acquires an interest in the land (e.g. the date of the S&P).

When the current coalition government took office, the 2 year period was extended to 5 years. The extended 5 year period applies if the owner first acquired an interest in the land on or after 29 March 2018. Again, this is important because the shorter period of 2 years applies if a person acquired their interest in their land between 1 October 2015 and 28 March 2018.

The provision captures a broad array of residential land, including land with a consent to erect a dwelling, and bare land zoned for residential purposes. However, the provision does not apply to the ‘main home’, farmland, and property used predominantly as business premises. Properties acquired by way of inheritance are exempt, while roll-over relief applies to transfers under a relationship property settlement.

In most cases, people will apply the ‘main home’ exemption. To do so the person must have lived in it for most of the period of ownership. If the house is in a trust, the main home exemption is basically only available if a beneficiary and the trust’s principal settlor lived in it. The main home exclusion can only be used twice in the two-year period prior to a disposal and cannot be used if a person has a regular pattern of buying and selling residential land.

Because the section has been drafted narrowly, it can apply unfairly. For example, if an investment property owned by an individual for 20 years is transferred to their family trust on 30 March 2018. For brightline purposes, 30 March 2018 becomes the acquisition date to the trust and a sale within 5 years will be taxable, even though ‘the family’ has owned it for over 20 years.

The brightline provisions are straightforward at first glance, but the devil is in the detail and deciphering the exemptions and timing requirements can be complex.

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 preparation of GST returns can be time consuming. When most businesses initially register for GST they ‘default’ to having a two-monthly filing frequency. However, for smaller businesses with annual sales below $500,000, taxpayers have the option to choose the six-monthly filing option instead.

For taxpayers making payments of interest, for example a company paying interest to a shareholder, or to a related entity, Resident Withholding Tax (RWT) needs to be accounted for and paid to IRD. However, there is no withholding requirement where total interest payments for the year are less than $5,000. At the other end of the scale, RWT exemption certificates are available for taxpayers with gross income of more than $2m.

The Fringe Benefit Tax (FBT) regime can be complex to navigate, however there is a useful de minimis threshold for ‘unclassified benefits’ provided to employees, such as gift vouchers, flowers and chocolates. FBT is not payable when the value of such benefits in a quarter is below $300 per employee, and the total value of unclassified benefits provided to all employees does not exceed $22,500 in the past year. For example, if 10 employees are each given $200 vouchers at Christmas, no FBT would be due providing no other benefits in the quarter were provided and the $22,500 annual threshold is met.

Finally, provisional tax payments for income tax can cause a headache for many small businesses, however the rules were simplified from the 2018 tax year. Now, where Residual Income Tax (RIT) for a year is between $2,500 and $60,000, provisional tax payments can be paid based on the standard uplift method, with any RIT not due until terminal tax date. This removes the requirement to estimate tax payments in advance, reduces interest costs and provides cash flow benefits.

Further simplification to the provisional tax regime is expected following the Government’s recommendation that Inland Revenue should consider increasing the provisional tax threshold from $2,500 to at least $5,000. This would be a welcome change for taxpayers who fall into the provisional tax regime due to a one-off transaction.

And as a final bonus to using an accountant, there is a specific provision that allows a deduction for expenditure relating to determining your tax liability. The provision also overrides the capital limitation, so in most cases, fees charged by your accountant should be tax deductible.