CAN DEEMED INCOME BE BENEFICIARY INCOME?
The Inland Revenue Department (IRD) has released a draft Interpretation Statement which considers whether income that is deemed to arise for the purpose of calculating taxable income, but not for trust law purposes, can give rise to beneficiary income. This is an issue which accountants and their clients have grappled with, particularly since the introduction of the new Foreign Investment Fund (FIF) rules from 1 April 2007.
Deemed income would arise under the FIF rules where a taxpayer adopted the Foreign Dividend Rate (FDR) method and, therefore, had income equal to 5% of the opening market value of their investments for the year, rather than the actual dividends that they received during the year. In the case of a trust, the issue was whether this deemed income could be passed out to the beneficiaries of the trust as beneficiary income and taxed at their marginal tax rates, rather than being retained as trustee income and being subject to tax at 33%.
The draft Interpretation Statement highlights three different scenarios that may occur. The first is where the Trust Deed uses a traditional trust law definition of income, which means that the trustees can only vest or pay-out trust income, and would not be able to pay-out any deemed income as beneficiary income. The second scenario is where the Trust Deed defines trust law income as taxable income.
In these circumstances, the trustees may vest or pay amounts that equate to deemed income to a beneficiary.
The third scenario is where the Trust Deed uses the traditional trust law definition of income, but the trustees have the power to distribute trust capital to income beneficiaries. This provides the ability for deemed income to be paid out to the beneficiaries by topping up the actual cash income with capital distributions to equal the deemed income.
The draft Interpretation Statement confirms that deemed income is never of itself beneficiary income, but a combination of the relevant Trust Deed and the trustees actions, deemed income can in some situations give rise to beneficiary income. In other cases, deemed income that is in excess of trust law income must be treated as trustee income.
How it affects you
For trusts that derive deemed income, the draft Interpretation Statement clarifies the income tax treatment associated with that income. If the trust is deriving deemed income and this does not fit with the Trust Deed or the income tax requirements of the beneficiaries, then the trustees may want to reconsider their investment strategy.
HOLIDAY PERIOD TAX PAYMENTS
As the Christmas holidays are nearing, now is a good time to be reminded of your income tax requirements over the summer period.
For most provisional taxpayers, the next provisional tax instalment will be due on 15 January 2012. 15 January is also the due date for GST returns for periods ending 30 November 2011. For many businesses, this can be a problem as staff members are away on holiday and tax due dates can easily be forgotten. Taxpayers also need to remember to put away sufficient funds to meet their provisional tax and GST liabilities. January can also be a difficult time with low sale volumes, higher costs due to the holiday period, and lower productivity as the staff are in “holiday mode”.
If you think that you will be unable to make the payments required, we urge you to get in contact with the IRD now, through your tax advisor. It is better to be proactive and contact the IRD before payment becomes due, as this could ultimately save you money. For example, if you think that you will not be able to meet your payment obligations on 15 January, and you advise the IRD now and enter into a payment arrangement, you will not be charged the incremental 4% late payment penalty or any of the monthly late payment penalties (provided you adhere to the arrangement entered into). You will still be liable for the initial 1% penalty and use of money interest until the tax is paid in full. You may be able to come to an arrangement with the IRD to enter an instalment arrangement. This could be by instalments over a period of time, or a lump sum at a later date. In most situations, your advisor can organise an instalment arrangement for you by phone.
If you do nothing and leave the tax bill outstanding, then the IRD can take stronger action against you, and you could end up paying a lot more than the value of your original tax bill once adding on interest and penalties.
For provisional tax, it may also be appropriate to revisit your provisional tax calculations and make an estimate, but be wary of the consequences of doing so. There are also a number of finance options in relation to making the 15 January provisional tax payment which may defer the problem with less cost than just ignoring it.
How it affects you
If you are unsure of any tax liabilities you have that are due for payment soon, or if you know that you are unlikely to be able to make payment, we urge you to contact your tax advisor to determine the best solution for you. Don’t wait until nearer the due date because with all of the Christmas festivities, 15 January 2012 will be here in no time.
POINTS OF INTEREST…
The High Court has struck out a taxpayer’s proceeding as it was frivolous, vexatious and an abuse of Court process. It was noted that this was the twenty-eighth proceeding filed by the taxpayer in connection with events which first occurred more than 40 years ago.
The Tax Administration Act 1994 has been amended to relieve certain use of money interest obligations for foreign workers in New Zealand following the Canterbury earthquakes. It was decided that use of money interest was inappropriate in these circumstances because the workers may have become liable for income tax in New Zealand through extremely unusual events beyond their control. Interest relief ceases to apply from the date it is clear the worker had a New Zealand tax liability and cannot be extended beyond 4 September 2011.
TO THE POINT…
“You lose some, you win some. As long as the outcome is income”.