A Week in Review

 Good morning everyone,

 

Well didn’t the weekend weather actually come true to form and be the beginning of the summer season. Hopefully you all remembered the slip/slop/slap and are therefore not nursing the pains of unprotected exposure as you sit at your desks this morning. I remember the times when I was a kid (and this will clearly be reflective of my age), when you could dance around all day in the sun with absolutely no protection, and best case you might brown a little. Certainly gone are the good old days!

 

Enjoy this week’s read.

 

Regards

Richard

 

Private Rulings – “Material Difference”

When a taxpayer is considering entering into an arrangement but is uncertain as to the taxation outcomes that may arise for them as a result, there is the ability to seek a private ruling from the Commissioner under the provisions of section 91E of the Tax Administration Act 1994 (“TAA”).

Once issued, the Commissioner will usually be bound by the terms of the private ruling, and must apply the taxation law in relation to the applicant, the tax type and the arrangement covered by the ruling (s.91EA(1) TAA).

The Commissioner will not be so bound however, where any one of the carve-outs in section 91EB(2) apply, the first of those being where the arrangement is materially different from the arrangement identified in the ruling.
Guidance has been sought over what is meant by the term “materially different” and IR has responded with the release of draft QWBA PUB00319. Naturally each case will be fact dependent, and the narrative of the draft suggests it is not possible therefore to list all the factors that will be taken into account by the Commissioner in assessing the issue, however in general terms, where the difference between the revised arrangement and the ruling arrangement is capable of affecting the tax outcome referred to in the ruling, then section 91EB(2) is likely to have application.
PUB00319 contains a number of examples to illustrate the point. So apply for a ruling for an arrangement that intends to utilise a limited partnership structure but end up using a look through company structure instead, and you are likely to discover that your costly private ruling is no longer of any benefit to you due to section 91EB(2). Conversely, seek a ruling on the deductibility of interest in relation to funds borrowed from ASB, where the only difference is that you eventually borrow from the BNZ, and you can probably sleep easy.

Should you wish to comment of PUB00319, the deadline for submissions is 31st January 2018.

Full or Partial Disposal of Asset?

Back in August, I commented on the release of PUB00258, which was a draft QWBA on the issue of whether a person’s contribution of an asset owned by them, to a general or limited partnership as a capital contribution, was seen to be a full or partial disposal of the asset. Naturally the answer to the question will usually only be of significance to the person, if they previously held that asset as an item of depreciable
property or as revenue account property – the transfer of ownership to the partnership triggering potential tax implications for the person – deprecation recovery income for example.

IR have now finalised their view and have issued QB 17/09 – the position unchanged from draft PUB00258 – that there is a full disposal of the asset, primarily because there is a fundamental change in the legal ownership of the asset, and consequently the person’s interest in the asset, from sole ownership to joint ownership. The draft QWBA had considered arguments that there was only a partial disposal of the asset, because the person at all times (pre and post contribution to the partnership) retained “some” ownership interest in the asset.

As with most interpretative views issued by IR, there is some detailed narrative contained in QB 17/09 on why contrary arguments are considered to be an incorrect interpretation of the relevant taxing provisions, in the present case, this being an analysis of the income tax legislation’s partnership rules contained in section HG 2 to HG 12. While the separate legal person status of a limited partnership appears to provide a more black and white answer (disposal of an asset from one separate legal person to another), the murkier waters surrounding the legal status of general partnerships has required IR to discount a partial disposal argument using the following rationale:
 The legal ownership of the asset, its juristic character, and the person’s interest in the asset, all fundamentally change.
 Before disposal, the person is the owner of the asset. Once the person has introduced an asset into a partnership as a capital contribution, the asset ceases to be the person’s property. It belongs to the partners of the partnership and becomes partnership property.
 The asset belongs to the partnership – not in the sense that each partner individually owns a separately identifiable part of the asset, but in the sense that the partners are the joint owners of the whole asset.
 Following disposal, the person ceases to have any beneficial interest in the asset that is qualitatively different to that of the person’s co-partners, and the asset must be used by the partners exclusively for the purposes of the partnership.

Alongside QB 17/09, IR has also issued a Commissioner’s operational position, to recognise that her position has changed as a result of the release of QB 17/09 (both disposal positions were previously accepted). For those taxpayers who have used a partial disposal approach prior to the date of publication of QB 17/09, and where the asset is still held by the partnership, the status quo can continue, provided the person notes the partial disposal in their accounts each year until the asset is disposed of by the partnership, and upon the partnership disposing of the asset, the person accounts for any applicable tax liabilities with respect to the retained part of the asset.

Richard Ashby BBus, CA, CPA PARTNER
Em: [email protected] Ph: +64 9 365 5532 Fx: +64 9 309 5260 Mb: +64 21 823 464