TAX UPDATE 14 Dec 2012
CHRISTMAS TIME TAX CONSIDERATIONS
Although an issue all year round, the festive season is an ideal time for employers to consider the tax implications of any gifts and functions that they provide for their staff. Even the complimentary bottle of wine for employees has the potential to create more than the obvious headache when it comes under scrutiny at the end of the financial year.
Most employers are aware that Christmas gifts fall under the Fringe Benefit Tax (FBT) regime, creating an additional tax cost. If managed and kept under a certain price threshold, these gifts can be treated as "unclassified benefits" and escape creating any tax liability. These minimum thresholds vary based on whether the employer is a quarterly or yearly FBT return filer.
For a quarterly filer, the benefits provided (per three-month quarter) must not exceed $300 per employee, and the total benefits for the year must not exceed $22,500. For the annual filer, the annual threshold per employee is $1,200. The threshold for all employees remains unchanged.
Unfortunately, FBT thresholds are an all or nothing rule - if a threshold is exceeded, FBT applies to all unclassified benefits provided, not just the excess amount above the threshold. However, all gifts that are subject to FBT will also qualify as deductible expenditure for income tax purposes, providing some reprieve for the employer.
Entertainment costs also require consideration, particularly in relation to Christmas parties. The entertainment regime
limits the deductibility of some types of expenditure – including Christmas parties, yachts / pleasure crafts, food and drink provided off work premises as a social function – to 50%. Some items are excluded from this regime, with business travel costs, light meals during work time and overseas travel and meal costs all excluded (for now), and fully deductible.
Though no changes have yet taken place, the entertainment regime is currently under review, with an Issues Paper recently released detailing plans to reduce deductibility for many employers.
GST registered employers must also remember to make a GST adjustment for Christmas gifts and party expenses that fall within the entertainment rules.
How it affects you
The tax treatment of benefits for employees can be complex. If you are uncertain about what deductions you are entitled to, we recommend you contact your advisor.
GST – LAND TRANSACTIONS AND TIMING
In a recent issue, we discussed the importance of certainty of Goods and Services Tax (GST) treatment in relation to Agreements for Sale and Purchase of land. A recent decision from the Court of Appeal has provided reason again to touch on this debate.
The case related to an unconditional Agreement for Sale and Purchase of land. The dispute centred around the date at which title was to be transferred, referencing amended clauses in the agreement.
As a result of the dispute, settlement never took place, the vendors cancelled the agreement, and resold the property at a less favourable time in the market, for a much lower price. The loss suffered on resale of the property was viewed by the Court of Appeal as a direct consequence of the purchaser's failure to settle. The vendors were then able to recover their loss from the purchasers.
For our purposes, the value of this case centres around the confusion in the terms of the contract in relation to when settlement or transfer of title takes place, and the interaction with the compulsory zero-rating rules.
The zero-rating rules apply where supplies of land occur between registered parties, and were brought in from 1 April 2011. These rules generally create confusion in these transactions. The GST rules provide that for zero-rating to apply, certain conditions must be satisfied at the time of settlement, not at the time of supply. However, the agreement has clauses dictating how zero-rating will apply inserted long before supply or settlement take place. This leaves, in many instances, a long period during which there can be changes to
parties' registration status or the intended use of the property may change, with potentially damaging consequences.
The Auckland District Law Society (ADLS) updated its standard form contract for these transactions accordingly on 1 April 2011. Sybrand van Schalkwyk of Staples Rodway Christchurch Limited has recently released an Evaluation of the Law and ADLS Standard Agreement GST Clauses.
The article addresses the lack of clarity in the law and resulting increased costs of these transactions, calling for a simpler version of ADLS clauses that deal more appropriately with these types of transactions.
How it affects you
We think this commentary makes some good points. Accordingly, it is vital to seek advice on your GST position before you enter into these types of agreements. If you are in contemplation of, or in the process of a land transaction, we recommend that you contact your advisor.
POINTS OF INTEREST…
The Minister for Revenue recently issued a Media Statement explaining issues relating to taxation of large multi-national companies.
The High Court of Australia recently handed down its decision in Mills v FC of T. The taxpayer was successful in that the Court overturned the finding of tax avoidance regarding franking credits.
The Taxation (Livestock Valuation, Asset Expenditure, and Remedial Matters) Bill (No.64-1) has received its first reading in Parliament and has been referred to the Finance and Expenditure Committee.
TO THE POINT…
"For the purposes of this Act, a reference to goods and services includes a reference to goods and services".
Direct from PNG GST Act