A Week in Review

Richard AshbyPartner, Gilligan Sheppard

What’s on the agenda?

The waiting is over as Winston (sorry, the NZ First board), decided that mixing with red and green was a better colour match for NZ than going blue.

All eyes were then on the release of the coalition agreement and exactly what was in store for NZ over the next 3 years, particularly (and perhaps more selfishly from my own perspective) on the tax agenda.

As it transpires, not a lot however, although naturally the coalition agreement itself is simply a high level documenting of the meeting of the minds, with no significant detail at this stage.

What is identified presently is:

  • A harsher penalties regime for Corporate fraud and tax evasion (potentially a diverted profits tax) – essentially irrelevant therefore if you continue to play by the rules;
  • A tax on the export of bottled water – industry focused so again of limited impact to the majority.

While not directly under the tax heading, there is mention of a focus to increase R&D expenditure to 2% of GDP (1.3% in 2016) over the next 10 years, and pre-Election, Labour was hinting about re-introducing the R&D tax credit regime (which National terminated when it introduced the Callaghan fund) to encourage such spending in the private sector. Should we see the new Coalition head down this path, will this also mean changes to the existing loss “cash-out” regime?

Not in the coalition agreement itself, but likely to happen:

  • A reversal of National’s planned tax cuts from 1st April 2018;
  • The establishment of a Tax Working Group (within the first 100 days).

There was also a lot of talk about Labour’s proposed Tax Working Group pre the Election, with particular focus on whether this would mean the introduction of a capital gains tax. However whatever the outcome of the review, Labour eventually promised that no changes would take place until the 2021 tax year.

I do note however on Labour’s website under their tax plan, separate from their statement regarding setting up a Tax Working Group, are proposals to increase the existing 2 year bright-line period for residential land sales (you are automatically subjected to paying tax on any disposal gain within the bright-line period, with limited exclusions) to 5 years, removing the ability to offset tax losses from rental properties against the investors other taxable income, and to eliminate secondary tax. Watch this space therefore (particularly Budget 2018 I would suggest), to see which of these three items (if any), Labour attempts to legislate for during its first term.

Airbnb Operators Beware…

We have received several letters recently from IR with respect to a number of our clients who have decided to operate in this arena. I thought it may be timely therefore to provide a few comments in respect of what we are seeing and therefore what the owners of this type of accommodation facility should be aware of:

  • We already know that IR has a large property compliance team, with proposals to continue to increase its resource numbers. It is clear from the correspondence we have been receiving, that these team members are trolling various Book-a-Bach, Airbnb and other accommodation websites. Consequently, if your client is trying to make a quick buck, they need to be reminded the information is publicly available and it may only be a matter of time before IR come knocking at their door if they are not being fully tax compliant in respect of the Airbnb income.
  • GST second-hand goods claims are common due to the initial property acquisition usually having been from a non-GST registered vendor. IR will want to ensure “short-term stay” accommodation of the type that will satisfy the commercial dwelling definition is the nature of the properties use, so client’s may experience delay’s in the processing of their refund claim, while this “intention” is proved to the satisfaction of the IR investigator. Having sufficient evidence to respond to an IR critique is critical therefore.
  • Ensure clients that are simply sharing the use of their own homes (upon which GST has never been claimed) are fully aware of the turnover threshold triggering compulsory registration. Last thing they will want (and you potentially as their trusted advisor) is experiencing the shock of a forced GST registration, having exceeded the registration threshold, and the corresponding output tax exposure for the home (an asset used in the taxable activity), should they ever sell the home or simply cease their Airbnb operation.
  • Do not forget the annual GST adjustment periods, where actual use percentages may have changed over the past year, usually due to the owner’s personal use of the property. As part of their review, IR will ask the question regarding actual or anticipated private use of the accommodation by the owners.
  • Clients must understand all the cash flow implications from a GST perspective. Yes they may receive a nice refund up front when they commence the activity, however they must also appreciate that should they ever cease the activity, either in its entirety or convert to long-term stays instead, there will be a resulting output tax liability, potentially higher than the initial refund claim, and this obligation will need to be funded by other means considering in these cases the property may not have been sold.

Richard Ashby BBus, CA, CPA PARTNER
Em: [email protected]

Ph: +64 9 365 5532

Fx: +64 9 309 5260

Mb: +64 21 823 464