TAX UPDATE 12 Oct 2012
TIGHTENING RULES FOR DEDUCTIONS UNDER FAs
The Government have recently announced plans to tighten the rules regarding the tax treatment of excepted financial arrangements.
At present, a loophole enables taxpayers to take advantage of short term agreements for sale and purchase of property or services, by electing to treat them as financial arrangements ("FAs"). Ordinarily, these agreements would be "excepted financial arrangements". However, by electing to use financial arrangement treatment, a taxpayer is able to claim a deduction for amounts that are essentially capital in nature. A tax advantage is created whereby deductions are allowed for the cost of acquiring agreements, and/or on any loss or disposal of an agreement.
This advantage was unintended by the rules, which are aimed at reducing compliance costs by streamlining short term debt under the agreement, treating it uniformly for both tax and accounting purposes. The agreement itself should be on capital account.
The proposed amendment will remove a taxpayer's ability to claim a deduction under the rules for the cost of acquiring a short term agreement to acquire goods or services, or any losses on disposal of the agreement. This will apply retrospectively from the start of the 2008/2009 tax year.
These changes come on the heals of a focus on the deductibility of losses under FAs in relation to those who invested in what are now failed finance companies. Generally, the FA rules have allowed for at least some tax relief
for those with large investment losses. Those investors that were or are in the business of holding or dealing in FAs are able to claim a greater level of tax relief than the "Ma and Pa" investors, but as noted, they too have been entitled to a deduction to the extent that they had returned income previously.
In addition to the potential for tax relief, additional relief may be available.
A Whangerei man with $90,000 worth of debentures in Bridgecorp has recently successfully taken action against his financial advisor. The man made his claim (following Bridgecorp's collapse in mid 2007), under section 13 of the Fair Trading Act, claiming that he had been misled as to the investment.
How it affects you
In relation to the taxation position, if you have suffered a loss you should contact your tax advisor regarding what claim may be available to you. We note that secured creditors of Bridgecorp are expected to receive a second payout from receivers which will also need to be taken into account when determining the taxation position.
TRANSFER PRICING – RULE CHANGES IN AUSTRALIA
Transfer pricing is a set of taxation rules that looks to ensure that an appropriate amount of income and expenses is allocated to each country when transactions between associated parties occur across jurisdictions.
In Australia, new transfer pricing legislation has recently been passed that will change the Australian transfer pricing landscape and may have an impact on those with Australian businesses that are subject to Australian taxation.
A second tranche of legislation is due to be introduced by the end of the year.
The new transfer pricing legislation increases the potential exposure for all those that have Australian taxation exposure to an Australian Tax Office ('ATO') transfer pricing review and/ or subsequent adjustment. Essentially the new rules broaden the scope to also now require consideration of the arm's length nature of the arrangement, not just the 'price' of a transaction. This could include considering such things as the market conditions at the time.
The catalyst for the changes came from two recent court cases that the ATO lost due, in part, to ineffective legislation.
However, controversially the new legislation has been backdated to 1 July 2004, thus allowing the ATO to seek retrospective adjustments in relation to situations where it considers a taxpayer has received a 'Transfer Pricing Benefit' in any income year since 2004.
Essentially, a 'Transfer Pricing Benefit' arises where the profits derived by an Australian
taxpayer are considered to be less than what is an arm's length profit. This applies to both Australian companies and permanent establishments (branches).
For those that have Australian transfer pricing obligations, the outcome is that those Australian taxpayers with riskier or potentially non arm's length transfer pricing positions, have an increased risk of a current or historical review and of an adjustment.
These riskier positions include low profits or ongoing losses in Australia, high levels of related party funding or cross border restructuring within a group. The risk can be minimised by ensuring adequate transfer pricing documentation is prepared.
How it affects you
If you have any transactions that occur between an associated Australian entity or through a branch, contact your tax advisor.
POINTS OF INTEREST…
Details of the Government's decisions on lease inducement payments have been released. Details can be accessed at www.taxpolicy.ird.govt.nz.
The Taxation Review Authority has held that no statutory provisions give priority to the Treaty of Waitangi over the Inland Revenue Acts.
The IRD work programme for 2012/2013 has been updated to add to the list of projects, a review of the treatment of foreign tax credits, the deductibility of consumable aids, and the tax treatment of goods for own use.
The IRD has stated that the abusive tax position penalty under s 141D does not apply automatically where there is a tax avoidance arrangement.
TO THE POINT…
"A successful man is one who makes more money than his wife can spend. A successful woman is one who can find such a man."