A Week in Review

Ring-Fencing on the Horizon…

If you thought the increase of the bright-line period from two to five years was a political overkill, just wait, there’s more.

Also in action at the recent NZ International Fiscal Association conference in Queenstown, was the new Revenue Minister, Stuart Nash. Top of his speech agenda, was the second bullet aimed at killing the residential property market (the first, the bright-line extension), new rules which would see ring-fencing of residential rental losses – eliminating the ability to offset tax losses from residential investment properties against the investors other assessable income.

While bright-line has clearly been targeted at property speculators (unnecessary in my view considering that s.CB 6 has been around since Adam met Eve to tax any gain on the disposal of speculative land), ring-fencing of residential losses affects genuine long-term investors as well. Does the Government of the day really think this tool by some miracle is going to improve housing affordability for owner-occupiers? What is going to happen to those owner-occupiers, who due to Government over-action, see a crash in the market which results in the value of their cherished home suddenly being worth less than the debt on it? The only glimmer of hope I guess, is that this one should go through the full GTPP process (unlike the bright-line change). Watch this space for further updates.

The Minister’s speech also addressed:

• BEPS and multinationals – how the new legislation presently before Parliament was going to prevent multinationals:
  • from avoiding a taxable presence in NZ,
  • from stripping out NZ profits with aggressive transfer pricing strategies (over-priced debt or mispriced related party transactions)
  • from using structured hybrid instruments (deductible in NZ but non-assessable in home jurisdiction).
• R & D Tax credit – reintroducing the regime (reshaped in whatever form) dropped by the National Government in 2008. Hmm, wait a minute – what about the research and development cash out credit? Ok, so it applies to only those start-up’s with tax losses, but then what about s.DB 34, which already permits a deduction for expenditure incurred on research and development? I guess the latter is not actually a tax credit however.
• Feasibility study expenditure – well, yes we understand it’s important to you, but it’s just not something we can focus on right now…

and last but not least (and post some back-patting surrounding IR’s business transformation project and how it may save you 8-14 hours a year on compliance activities by 2024),

• AIM – the accounting income method which will be a new way of calculating provisional tax from 1st April, as new software capable systems will allow IR to look directly into your accounting information, just so they can help you get your tax payments right (and for no other reason…hmm).

One thing is for sure, it is certainly going to be an active year in the world of tax, and not for all the right reasons potentially, however one must be patient and see what ultimately eventuates and look-out for Budget 2018 as the new Government will certainly be looking to impress.

Calculating Motor Vehicle Deductions…

The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017 introduced amendments to the way deductions for motor vehicle expenditure would be calculated, where a motor vehicle was used for both business and private purposes. The new rules applied with effect from 1st April 2017, with application for the 2017-18 and later income years.

IR has just released ED0203, which is a draft operational statement in which the Commissioner explains how to use the kilometre rate for the business running of a motor vehicle, including when the employer is reimbursing an employee who has used their personal motor vehicle for employment purposes.

ED0203 does not set the kilometre rate itself, instead advising that this will be a separate exercise undertaken by the Commissioner each year, once relevant third party data become available.

The main elements of the new rules are:

• There are only two acceptable calculation methods, the costs method and the kilometre rate method.
• In the first year a motor vehicle is acquired (or for those already owned 1/4/17), an option must be selected in the tax return, the cost method being the default method if an election to use the kilometre rate method is not made. An election is irrevocable once made, until such time as the vehicle is disposed of (equally applies to an employee and their personal vehicle). Note the election is on a per vehicle basis.
• A logbook (see s. DE 7 for requirements) or some other acceptable recording method must be used to determine the motor vehicles business use proportion (3 month test period rules still apply) and failure to retain adequate records can result in claims being limited to 25%, or less. Even where a 3 month test period has been undertaken, for the kilometre rate method, annual speedometer recordings must still be maintained to establish the tier calculations outlined below.
• The kilometre rate method has a two tiered scale – tier one covering both fixed and running costs for the first 14,000 of total annual kilometres, and tier two just for running costs for any excess above 14,000 kilometres. There is no longer the 5,000 kilometre restriction that existed under the previous rules (for employee reimbursements as well).
• Close companies, where the only non-cash benefit provided is the use of company vehicles by shareholder employees, can also elect to use the subpart DE rules rather than paying FBT. In this regard, any interest cost deductions on the motor vehicle must be calculated under subpart DE, and not claimed under sections DB 7 or DB 8.
• Employee reimbursements will also be calculated under the new rules from now on, with employees required to maintain logbooks for their personal vehicles where the employer is electing to use the kilometre rate method to determine the exempt portion of any reimbursement under s. CW 17(3), to avoid the tier one annual kilometres being capped at 3,500 kilometres (25% of 14,000). In other words, no logbook maintained by the employee results in the reimbursement for tier one calculated only for the first 3,500 kilometres, with tier two rates used for any annual travel in excess of 3,500 kilometres. Annual speedometer recordings will still be required under a logbook based claim.

Note that you do not have to use the subpart DE rules where a motor vehicle is solely used for business purposes (s. DE 1(2)(c)(i) exclusion), however it may be prudent to still maintain a logbook for the 3 month test period just to have some evidence in support of the 100% business use claim.

The deadline for comment is 30th April 2018.

Parents Payments to State Schools…

IR has issued three draft items for consultation, although two have the same reference – PUB00298 and PUB00288 (which is set out in two separate items, distinguishing between payments made to state integrated and those made to state non-integrated schools).

PUB00298 considers the issue of payments by parents to the board of trustees to a State or State integrated school and whether GST should be charged on the supply.

The outcome of the analysis is twofold, depending on whether the payments are made to assist the school with the cost of delivering the education services the student has a statutory entitlement to receive free of charge (no GST) versus payments made for supplies of other goods or services, not integral to the supply of education to which the student has a statutory entitlement, where that supply is conditional on the payment being made (subject to GST).

The crux of the issue rests with an analysis of the term “consideration”. As there is a statutory right to free education, in circumstances where an amount is not paid for any particular purpose or for the undertaking of any specific obligation, there will not be a sufficient connection between the payments and a supply. Additionally, the supply of education services is not conditional on the payment being made, and payment is not required for the supply of education services. Consequently, payments made in this regard will not be
subject to GST.

The first PUB00288 considers what payments by parents to state integrated schools are gifts for donation tax credit purposes. A state integrated school provides education within the framework of a particular or general religious or philosophical belief – referred to as the school’s “special character”. A state integrated school establishes a partnership with the Crown by its Deed of Integration, which defines the special character of the school. The special character shapes the school’s curriculum, enrolments, staffing processes and culture.
The item concludes with the following four scenarios being gifts for donation tax credit purposes:

• made to the board of trustees to assist generally with funding the delivery of the school’s curriculum;
• made to benefit the school as a whole, where there is not a sufficient link between any material
  benefit obtained in return for making the payment;
• specific payments made to the board of trustees to assist with the school’s cost of delivering
  individual subjects or activities forming part of the school’s curriculum and in which the student may
  participate regardless of whether any payment is made, or
• made to a qualifying proprietor to assist the proprietor with its cost of supporting the delivery of the
  school’s curriculum with special character.

The second PUB00288 considers what payments by parents to state non-integrated schools are gifts for donation tax credit purposes, and concludes with payments made in respect of the following three scenarios:

• made to the board of trustees to assist generally with funding the delivery of the school’s curriculum; made to benefit the school as a whole, where there is not a sufficient link between any material benefit obtained in return for making the payment; or
• specific payments made to the board of trustees to assist with the school’s cost of delivering individual subjects or activities forming part of the school’s curriculum and in which the student may participate regardless of whether any payment is made.

The deadline for comment on any of the three items is 18th April 2018.

Richard Ashby BBus, CA, CPA
PARTNER

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