A Week in Review

Accounting for your foreign rental income

I suspect most of you have had at one time or another, clients with investment rental properties located in overseas jurisdictions, with foreign bank and loan accounts attached to those properties, the annual transactions of which you then have to convert into $NZD, in order to prepare the clients New Zealand income tax returns.

In case you were not aware of the legislative niceties, section YF 1 of the ITA07 requires you to undertake the requisite foreign currency conversion, using the close of trading spot exchange rate on each day a transaction occurs, with an alternative to use a mid-month (15^th day) close of trading spot exchange rate average, where either the Commissioner or a specific provision in the Act allows it.

Further, section YF 1(5) permits the Commissioner to issue general conversion rates and calculation methods approved by her for use in defined circumstances, and last week we saw the issue of a determination – FX 20/01: “Approval — foreign residential rental property amounts — currency conversion”.

FX 20/01 allows the conversion of income and expenses using either a monthly or an annual method, meaning that you can total a relevant month or an entire income year, and use a monthly average rate or average annual rate accordingly. The determination, also referred to as the Approval, also explains what exchange rates to use if you are using either the monthly or annual method.

Used of FX 20/01 is entirely optional, simply being a compliance cost reduction tool.

Extension of small business cash flow (loan) scheme

Originally the scheme was to have an application period of only 30 days (12^th May to 12^th June), however the Government has now extended the application period until the end of the year – 31^st December 2020.

The announcement of the extension did not include any changes to the existing terms and conditions attached to the SBCS, being:

• If you repay the loan fully within 12 months, then it is interest-free.
   
• Otherwise the interest rate is 3%, from the date of drawdown, for a maximum term of five years.
   
• There are no repayments required for the first two years.
   
• Businesses employing 50 or fewer staff, who were eligible for the original wage subsidy, are eligible to apply for the one-off loan (there are common owned group limitations).
   
• The loan amount is $10,000 plus $1,800 per equivalent full-time employee (divide the total amount of the wage subsidy you were entitled to claim by $7,029 to compute number of FTE’s), up to a maximum amount of $100,000.

Applications are still to be made via myIR and cannot be made by an agent on behalf of the applicant. A New Zealand business number (NZBN) must also be provided at the time of applying.

Election date of GST ratio method extended

Covid-19 has resulted in IR issuing another due date extension under their new administrative flexibility powers.

This time the extension is with respect to taxpayers who had wished to elect into the GST ratio method for calculating provisional tax payments for the 2021 income year, and due to Covid-19 were unable to file their elections pre 31^st March 2020 (section RC 15 requires the requisite election to be notified to IR pre the start of the relevant income year).

The extension applies until 19^th August 2020 or the day before the start of the taxpayer’s relevant 2021 income year (whichever is the later), and IR will then give taxpayers ten working days to make the provisional tax payment once they have been notified of their GST ratio, where if the required payments are made within that time frame, any penalties and interest will be remitted.

Foreign residential rental property IS’s finalised

In late April, my AWIR alluded to IR’s closure of the public consultation process, with respect to three draft items focussed on ownership of foreign residential rental properties.

Interpretation Statements IS 20/06 and IS 20/07 (along with the approval item above) have now been issue by IR as the finalisation of those draft items.

IS 20/06 – ‘Tax issues arising from owning foreign residential rental property’, as my earlier commentary outlined, is very generalised in its nature, in essence only identifying ‘consideration issues’ and then referring you to numerous other IR interpretation statements to actually find the answer you are looking for.

IS 20/07 – ‘Application of the financial arrangements rules to foreign currency loans used to finance foreign residential rental property’, is however more detailed in its content, considering for income tax purposes, the application of the financial arrangements (‘FA’) rules to foreign currency loans used to finance overseas rental property. The document discusses first, the two potential, although unlikely, excepted financial arrangement scenarios which would then negate your clients having to consider the application of the FA rules. The document then moves into a discussion outlining the cash-basis persons test (and calculations in this regard), followed with commentary as to how those non-cash basis persons should apply Determination G9A to determine their annual FA income/expenditure, and concluding with a discussion on the Base Price Adjustment and its calculation methodology.

Child support penalty changes in the wind

A recent SOP added to the Child Support Amendment Bill, proposes changes to child support incremental penalties and to simplify the penalty write-off provisions.

With respect to incremental penalties, it is proposed that these would no longer be charged on child support amounts not paid on time, with the amendment applying from 1^st April 2021. So, in this regard, incremental penalties will not be applied to any new debt arising on or after 1^st April 2021, and with respect to existing unpaid amounts due before 1^st April 2021. Those penalties imposed before 1^st April 2021 will remain.

The proposal to simplify the write-off provisions, would facilitate the write-off of any penalties imposed from 1^st April 2021, when:

• there was a reasonable cause for the late payment;
   
• the late payment was due to the failure of another person to make a deduction;
   
• the late payment was due to an honest mistake by the liable parent;
   
• an error was made by IR;
   
• a person is in serious hardship;
   
• it is an inefficient use of IR’s resources to collect the penalty; and,
   
• the receiving carer has uplifted the debt, or waived the right to the payment, to which the penalty relates, and a write-off would be fair and reasonable.

To ensure parents who are charged penalties on or before 31^st March 2021 are not worse off under the new rules, a “fair and reasonable” penalty write-off provision would be retained that would only be used to write-off penalties charged on or before 31^st March 2021.