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

On 3 April, Inland Revenue issued a draft ‘Questions we’ve been asked’ (QWBA) covering the tax treatment of allowances and benefits paid or provided to farm workers. A key principle covering such payments centres on the tax treatment of ‘reimbursing allowances’ – this is relevant not just to farm workers but all employees. 

 
Reimbursing allowances are paid to employees for expenses incurred, or likely to be incurred, in connection with their employment, e.g., vehicle mileage and tools. Section CW 17 of the Income Tax Act contains the requirements that must be met for such payments to be received tax-free and one of the key tests is that the expense incurred must be a ‘necessary expense’ incurred in performing the employment duties.
  
Furthermore, if employees were allowed to deduct expenses incurred to derive salary or wages, the expense would need to qualify as tax deductible. For example, if an employee was instead self-employed and the expense was tax deductible because it was incurred to derive their self-employed income, the test would be met. 

Labour’s pre-election manifesto proposed to increase the fairness of the tax system and improve housing affordability. In the six months since the 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. 

Landlords may need to incur significant improvement costs to bring properties up to the required standard, so the inevitable question will arise - are the costs tax deductible, or capital in nature. Because buildings are not depreciable, if expenses are considered to be capital, no tax deduction will be available at all. The process of determining whether expenditure comprises tax deductible repairs and maintenance work (R&M) has been established by the Courts, but it is inherently a judgement call and is open to interpretation. As a result, it is a common area of review by Inland Revenue during the investigation process.

Trusts are a popular way of protecting property and managing assets in New Zealand. The number of trusts we have in New Zealand is unknown, but estimates put the figure between 300,000 and 500,000.

Fringe benefit tax (FBT) doesn’t apply on days where a motor vehicle qualifies to be a work-related vehicle. To qualify, all of the following conditions must be met:

• the principal design of the vehicle isn’t for carrying passengers
  
• the exterior of the vehicle permanently and prominently displays business signage
  
• employees are notified in writing that the vehicle is available only for travel between home and work and travel incidental to business, eg, passing by the bank on your way home from work
  
• regular checks are carried out and recorded to make sure employees are following vehicle restrictions.
  

Note: Sedans and station wagons don’t qualify as work-related vehicles, unless the necessary alterations are made to convert them.

Some examples where FBT is payable on work-related vehicles (eg, utes, double cab utes or vans) is a vehicle:

• which doesn't have permanent sign-writing
  
• made available to use privately over the weekend
  
• that has no restrictions in place about using it privately
  
• where the employer has notified the employee(s) in writing of any private use restrictions, but doesn’t make regular checks on restriction compliance
  
• where regular checks on restriction compliance are undertaken by the employer and private use that has taken place is identified.
  

For how to establish if an indiviudal is tax resident in New Zealand - please click here

As seen through the media recently, errors within holiday pay calculations are more common than we’d like to think and not just limited to Government organisations. Due to the complexity of the calculations required to monitor and record holiday pay, errors or deviations from the Holidays Act 2003 (the Act) requirements can occur.

• Incorrect leave payments for employees returning from paternity/maternity leave.
• Systems incorrectly calculating the amount of leave paid based on hourly rates instead of daily rates (bereavement, alternate, public holiday and sick leave) or weekly rates (annual leave) as required by the Act. 
• Previous allowances earned are not included in leave payments (i.e. underpayment). 
• Discretionary payments (e.g. bonuses) are included in leave payments (i.e. overpayment). 
• Time-and-a-half earned on public holidays is not included in subsequent leave payments (i.e. under payment).
  
  

The Government has recently announced a package of proposed tax changes that intend to reduce compliance costs and make tax simpler for businesses. The package is part of the Inland Revenue’s big picture ‘Making Tax Simpler’ initiative that aims to modernise and simplify the tax system. While the proposals will generally apply to all businesses, the changes are expected to benefit small businesses the most.

For more information on the ideal business structure for your business please go to our Latest News page or refer page 1 of the pdf version click here or contact us.

When establishing a business, there are a number of considerations to take into account to determine the ideal structure to adopt.

One such consideration is protection of assets, not just the assets of individuals who invest in the business, but also protection of the business’s assets. This objective typically means a company structure is chosen. It is also common to use multiple companies to separate a business’s assets from its trading operations to ensure the assets are not at risk if the business fails.

For more information on the ideal business structure for your business please go to our Latest News page or refer page 1 of the pdf version click here or contact us.