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Issue Number: 16/2009


In this issue:

  • New tax bill including trans Tasman super portability
  • Amendments to July 2009 tax bill including FITC
  • Residential rental properties - depreciation
  • Renting home from LAQC – tax avoidance
  • Business relocation costs
  • FBT rate

New tax bill including trans-Tasman super portability

Making it easier for New Zealanders returning home from Australia to bring their retirement savings with them is one of the major policy items in a new tax bill introduced into Parliament on 19 November 2009 .

After its first reading, the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver and Remedial Matters) Bill will be referred to the Finance and Expenditure Select Committee for consideration.

Trans-Tasman portability of retirement savings

Currently many New Zealanders working in Australia make compulsory contributions to an Australian complying fund. The scheme locks those funds in until the saver reaches retirement age, which poses a problem for New Zealanders who return home permanently.

Under the changes proposed in the Bill, New Zealanders with retirement savings from certain Australian superannuation funds will be able to transfer their funds into KiwiSaver when they return home permanently. Similarly, KiwiSaver members who are moving to Australia will be able to transfer all of their savings in KiwiSaver, including Government contributions and any member tax credits, to an Australian complying superannuation scheme.

Currently a taxable dividend can arise when a person transfers their savings from Australia to New Zealand . The proposed reforms will ensure that the transfer is not subject to entry or exit taxes.

Portability will be voluntary for both retirement savings providers and members. In addition:

  • The new rules will apply only to permanent migration between New Zealand and Australia .
  • A KiwiSaver member will no longer be able to withdraw retirement savings in cash on permanent emigration to Australia . This will still be possible if the person emigrates to a country other than Australia .
  • Members who transfer retirement savings from Australia into a KiwiSaver scheme will be able to withdraw the funds when they reach 60 as long as they have retired - as set out under Australian scheme rules. Members will be able to withdraw KiwiSaver savings transferred to Australian schemes when they reach 65 – in line with KiwiSaver rules.

The portability arrangements are expected to come into effect during the second half of 2010.

Binding rulings

Currently the Commissioner cannot determine whether facts provided by an applicant for a binding ruling are correct.

The Bill replaces the current general prohibition on determinations of facts with a prohibition only for “proscribed questions”. The purpose of this amendment is to clarify that the Commissioner can rule on questions of tax avoidance.

“Proscribed questions” include those relating to the taxpayer's intention, to the value of an item and to what constitutes commercially acceptable practice.

The Commissioner may enquire as to the correctness or existence of the facts provided by the applicant but is not required to do so.

Other changes to the binding ruling rules include:

  • limiting the Commissioner's discretion not to rule on matters before the Courts only to cases involving substantially similar arrangements;
  • allowing the Commissioner to make a binding ruling if the arrangement is the subject of a dispute by way of notice of proposed adjustment (NOPA) but the application for the ruling relates to a different tax type from that in the NOPA;
  • allowing promoters of arrangements or those with an interest similar to that of a promoter to apply for a product ruling for prospective arrangements; and
  • not imposing use-of-money interest or the unacceptable tax position penalty on taxpayers who rely on official Inland Revenue advice.

Other policy changes

  • Additional exemptions from gift duty including on transfers of assets and gifts made to local or central government and gifts made to approved donee organisations.
  • Minor changes to the KiwiSaver rules including changes relating to the enrolment of children.
  • Codification of the Commissioner's practice of permitting the use of alternative currency conversion methods and alternative rates instead of the actual exchange rates at the time a transaction occurs.
  • Extension of the exemption (to 31 December 2014 ) for income derived by a non-resident from oil and gas exploration in an offshore permit area. The exemption was due to expire on 31 December 2009 .
  • Amendments to align the income tax treatment of various transactions under the Permanent Forest Sink Initiative with the income tax treatment of post-1989 forest land units under the Emissions Trading Scheme.
  • Amendments to cancel branch equivalent tax account ( BETA ) debits that arose from conduit-relieved dividends. Taxpayers will still be able to use debit BETA balances derived from non conduit-relieved dividends.
  • Changes to the requirements for distributing to cooperative company members. Currently a resident co-operative company can deduct a distribution to a member if the distribution is in proportion to trading stock transactions between the member and the co-operative. The Bill proposes to allow a 20 percent differential.

The Bill also includes a number of remedial amendments.

The due date for submissions on the Bill has not been set. The Finance and Expenditure Committee will invite submissions once the Government refers the Bill to it for consideration.

Profit distribution plans

Proposals to change the tax treatment of profit distribution plans (PDPs) have not been included in the Bill as was initially expected.

We understand that the Ministers of Finance and Revenue are awaiting the final reports from the Victoria University Tax Working Group and the Capital Market Development Taskforce before making decisions about this issue. In particular, the Ministers understand that the Capital Market Development Taskforce is specifically considering how companies can encourage retention of capital and, in this context, is interested in the tax treatment of PDPs. Following final reports from the two groups and advice from Officials, the Government is likely to make decisions on the tax treatment of PDPs early to mid next year.


Amendments to July 2009 Tax Bill including FITC

The most significant change in a Supplementary Order Paper (SOP) to the Taxation (Consequential Rate Alignment and Remedial Matters) Bill that was introduced in July is an end to the general availability of supplementary dividend tax credits.

The foreign investment tax credit (FITC) regime ensures that foreign investors are not taxed at more than the New Zealand corporate tax rate. Foreign investors are allowed a FITC equalling the non-resident withholding tax (NRWT) that they would have had to pay on their New Zealand sourced investment income.

The new double tax agreements with USA , Australia and Singapore all reduce the NRWT rate on dividends paid to corporate shareholders that hold 10% or more of a New Zealand company from 15% to 5% or 0%. Consequently, in some circumstances, there will no longer be a need for the FITC regime in its current form.

The Bill proposes that:

  • only portfolio investors (i.e. those with less than 10% holdings) on NRWT rates of at least 15%, and supplementary dividend holding companies, will qualify for relief under the supplementary dividend rules.
  • a zero rate of NRWT will apply to dividends paid to non-portfolio shareholders (i.e. shareholders with more than 10% holdings) and to any other dividends subject to lower tax rates, to the extent they are fully imputed.
  • these changes will apply from 1 February 2010 .

The supplementary dividend regime will cease to apply to holding companies from the 2013/14 income tax year.

The changes will affect provisional tax calculations for taxpayers who take into account their anticipated FITC in calculating their provisional tax. Taxpayers should also consider the need to impute dividends where a tax treaty applies to reduce the NRWT rate.

Other policy changes in the SOP include the imposition of GST (at the standard 12.5% rate) on inbound tour operators' facilitation services, a change that was flagged by the Prime Minister at a recent tourism conference.


Residential rental properties – depreciation

Inland Revenue is proposing a three-step test to determine whether an item is part of a residential rental property (and therefore depreciable at the building rate) or a separate item of depreciable property.

Exposure Draft (INS0064) Residential Rental Properties – Depreciation on items of depreciable property sets out the test as follows:

  • Step 1: Determine whether the item is in some way attached or connected to the building. If it is attached, move to step 2.
  • Step 2: Determine whether the item is an integral part of the residential rental property such that the rental property is incomplete or unable to function without the item. If it is integral, move to step 3.
  • Step 3: Determine whether the item is built-in, attached or connected to the property in such a way that it is part of the “fabric” of the property e.g. would there be significant damage to the item or building if it were removed. If so, then it is part of the building for depreciation purposes.

The Exposure Draft also revises a number of the examples used in the earlier draft, including:

  • kitchens and bathrooms are now considered independently; and
  • hot water cylinders and water heaters are now considered part of the building and should not be depreciated separately.

The principles in the Exposure Draft (and not the fact that Inland Revenue's Table of Depreciation Rates lists a rate) will determine whether a taxpayer has a right to claim depreciation on an item.

Inland Revenue will not require taxpayers who have depreciated items separately in the past to restate their income for prior years. This is a welcome, pragmatic approach.

The deadline for comment is 18 December 2009 .


Renting home from LAQC – tax avoidance

The Taxation Review Authority has decided that an arrangement whereby a tenant rents a home from a loss attributing qualifying company (LAQC) in which they are the only shareholder is a tax avoidance arrangement.

Judge Barber found for the Commissioner in Case Z20 . He decided that, when viewed as a whole, in both form and substance, the taxpayer deployed the specific provisions of the Income Tax Act in an artificial and contrived way not contemplated by Parliament. This had the effect of allowing the taxpayer to obtain the advantage of the LAQC's deductions for what was, in substance, the shareholder's own private expenditure, giving her a tax advantage of $27,000 over 4 years.

The taxpayer argued:

  • the primary intent was to purchase a house and live in it, everything else done was incidental;
  • an LAQC is a corporate entity so that, by its nature, it cannot incur expenditure of a private or domestic nature; and
  • the saving was just a timing advantage and eventually the property would make a profit.

The Judge found that:

  • on the balance of probability, the arrangement must have been designed to circumvent the prohibition on the deductibility of private or domestic expenditure;
  • the attribution of the private or domestic expenditure to the LAQC was a device to "cloak its availability" to the shareholder; and
  • deductions for private and domestic expenditure are impermissible under the Act regardless of timing.

Judge Barber took much of his guidance from the judgment in Ben Nevis Forestry Ventures Limited & Others v CIR ; and referred to the recent High Court case, BNZ Investments Limited v CIR . The Judge agreed with the Commissioner that, once the Court finds that the tax avoidance purpose or effect of the arrangement was not within Parliament's contemplation, the disputants face a “considerable hurdle” to prove that the purpose or effect of tax avoidance was merely incidental.

Taxpayers with property held in LAQCs should review their arrangements in light of this decision.


Business relocation costs

Inland Revenue is clarifying its position on the deductibility of business relocations costs in Exposure Draft ( INS 0057) Deductibility of business relocation costs . The Exposure Draft considers the circumstances in which a taxpayer's business relocation costs are deductible for tax purposes.

Expenditure will qualify for a deduction under the general permission in the Income Tax Act 2007 (the Act) if the principal reason for relocating the business to a new location bears a sufficient nexus to the carrying on of the business for deriving assessable income.

The Exposure Draft concludes that relocation costs are deductible when:

  • the principal need or occasion for the overall business relocation is to maintain and preserve the business (rather than enlarging or extending it);
  • the relocation expenditure is incurred to move to new, and possibly larger, premises to enable a business to carry on the same business in much the same way; or
  • the relocation is made in response to natural fluctuations in the size of the business.

Generally, the capital limitation in the Act will apply to prevent a deduction for relocation costs only where the principal need or occasion for the business relocation forms part of a plan or strategy to:

  • embark on a new type of business;
  • introduce a new product line or service; or
  • carry on business in a new or different way.

In these situations, where the business structure (as distinct from the business premises or the business operations) is enlarged or extended by the relocation, the relocation costs will be more in the nature of “once and for all” expenditure and more akin to the costs incurred when establishing a new business and are likely therefore to be capital in nature.

A depreciation loss is not available for the costs associated with relocating depreciable property, as the asset's cost base is not uplifted for the relocation costs.

The Exposure Draft treats relocation expenditure as a whole rather than as a series of apportioned amounts based on the type of property relocated. This is on the basis that the principal reason for incurring the business relocation expenditure is the same, regardless of the type of property relocated.

The deadline for comment is 24 December 2009 .


FBT rate

The prescribed rate used to calculate fringe benefit tax on low-interest, employment-related loans falls from 6.41% to 6.00% from the quarter that began on 1 October 2009 .

The Government reviews this rate regularly to align it with the result of the Reserve Bank's survey of variable first mortgage housing rates.