TAX UPDATE 23 Nov 2012
STATE INCOME TAX: TAX CREDIT AVAILABILITY
The Inland Revenue Department (IRD) recently released QB 12/13; discussing the availability of tax credits for State income tax paid in the United States of America (US).
In addition to federal income taxes, which are collected by the Internal Revenue Service; most US states collect a "state income tax". The administration of these taxes and the rates at which they apply tend to vary by State.
New Zealand taxpayers who face taxation in the US can find relief in both our domestic legislation, and in the agreement reached between our respective Governments, through tax credits. Tax credits serve to reduce the amount of their New Zealand tax owing where a taxpayer has already paid the relevant taxes in the US.
The agreement (the current Double Taxation Relief (United States of America) Order 1983 (the DTA)) refers to treatment of Federal income tax paid, but does not make any mention of State income taxes. This has caused some confusion, with taxpayers interpreting this to mean that a tax credit is allowed for federal income taxes, but not allowed for US State income tax.
The IRD item clarifies the requirements for a tax credit being provided:
• The tax credit must be for State income tax paid on US-sourced income;
• The State income tax must be of substantially the same nature as a New Zealand income tax;
• The tax credit allowed cannot be more than the amount of New Zealand income tax payable on the US-sourced income;
• Because it does not mention State income taxes, the DTA does not apply and the requirements for tax credits in relation to State income tax are instead found under our domestic legislation (subpart LJ of the Income Tax Act 2007 (the Act)).
How it affects you
We were a little disappointed that the IRD has not taken the opportunity to state a view on which States it would accept (or not accept), leaving each taxpayer to do the analysis.
Determining whether a State income tax is of "substantially the same nature" as a New Zealand income tax will generally require some expert analysis, and thus cost.
If you are a New Zealand taxpayer, and State income tax impacts you, we recommend discussing these developments with your advisor.
NEW TAX ACT PASSED
The Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act (No 88 of 2012) came into force on 2 November, bringing with it changes that will impact the 2012/2013 financial year for many taxpayers.
Those impacted by the Canterbury Earthquake will find some refinement of the earthquake related measures. In particular, clarity has been provided where the tax treatment of damaged or destroyed assets and insurance payouts are concerned. The Act specifically addresses timing, deductibility and optional timing rules of expenditure, depreciable property, and insurance receipts.
Other changes include allowing an immediate deduction to be claimed for expenditure incurred in the year a software development is abandoned.
Contributions to KiwiSaver (and complying superannuation funds) for both employers and employees will rise from 2% to 3% from 1 April 2013.
For those who hold investments overseas, and face taxation of interests in controlled foreign companies, the Act has aligned tax treatment more closely with income in order to provide relief. A number of other remedial matters concerning international tax rules have also been addressed
Further changes which may impact you or your business include:
• Rules allowing the IRD to accept applications from data storage providers to store New Zealander taxpayers' business records and information offshore;
• A change to the tax return filing system which will require salary and wage earners who select a favourable year for a tax square up, to also have their tax obligations squared up for each of the previous four years as well;
• Eligibility for the in-work tax credit to shareholder-employees in a close company producing gross income;
• Profit distribution plans will treat shares issued as a taxable dividend;
• GST related changes – largely addressing rules introduced last year to prevent "phoenix" fraud schemes;
• Non resident film renter's tax has been replaced with non resident withholding tax.
POINTS OF INTEREST…
The New Zealand-Malaysia Double Tax Agreement has been updated.
A new KiwiSaver discussion document has been released, considering whether changes should be made to the default provider arrangements.
The Inland Revenue Department have released a draft Standard Practice Statement for consultation on the retention of business records in electronic format, and detailing the IRD's role in storing business records offshore.
TO THE POINT…
People who complain about taxes can be divided into two classes: Men and Women.
TAX UPDATE 30 Nov 2012
IMPORTANCE OF GST TREATMENT FOR PROPERTY SALES
A recent case in the High Court has highlighted the importance of certainty GST treatment in relation to agreements for sale & purchase of land.
The facts of the case were in relation to the use of an older edition of the standard form contract for property sales. The seventh edition of the ADLS Inc/REINZ Agreement for Sale and Purchase of Real Estate had been used, despite the fact that the eighth edition had been released two months prior to the sale occurring.
Despite the focus on the use of certain forms, the claim arose due to the fact that the agent had made the agreement "inclusive of GST", on the understanding that there would be no liability for GST on the sale. This understanding was however incorrect, and left a sum of $110,000 of GST unrecoverable from the purchaser.
GST has long created difficulty in respect of these agreements – particularly where assumptions have been made about a party's registration status. More than one purchaser has found themselves paying a higher amount for a property on the expectation of making a GST claim at a later point, only to find that this assumption was incorrect, with no recourse.
The introduction of zero-rating of land transactions from 1 April 2011 has only further increased the room for error between parties in these transactions. Again, assumptions made regarding whether a party is GST registered
can have severe and unintended consequences.
How it affects you
The rules relating to zero-rating of GST in property sales can be complex, and the risks in zero-rating are largely carried by the vendor. If the parties make an error in whether GST is applicable, it is the vendor who will be liable for the GST amount.
Certain aspects of the agreement can be tailored in order to ensure an agreement is for the supply of a "going concern". Where this has been laid out in writing, relief may be available where an error in GST treatment has been made under s 78E of the Goods and Services Tax Act 1985.
In any event, recovery of the GST amount from the purchaser and potential penalties from the Inland Revenue mean that from a practical perspective, it's important to get the GST treatment on a sale right first time. If you are contemplating or in the process of a major transaction, we recommend you consult your advisor.
EMPLOYEE ALLOWANCE & REIMBURSEMENTS
Payments for meals, accommodation, clothing and cell phones are now under fire in the Government's latest Issues Paper, Reviewing the Taxation of Employee Allowances & Reimbursements.
The logic of the proposals centres around the fact that accommodation and meals have an inherently private component, and therefore should be taxable, in the same way as employee income. In explanation, the paper provides "food and drink are more commonly private expenditure since any meals purchased are to provide the employee with personal sustenance in order to live. They are generally not part of an employee's job".
The two most controversial policies relate to communications (e.g. internet costs), and payment for accommodation expenses during work travel. The proposal for communications seeks to make expenses taxable in full, unless a specific private use/work element can be identified. Payment for accommodation costs during work travel will be tax free, but only if the duration of the work or travel is for a period of less than 12 months. Beyond that, the costs will be taxable in full.
The official line from Minister for Revenue the Hon Peter Dunne is that the proposed changes "are to make the rules easier to apply". This is in keeping with the IRD's goal of an efficient tax system, with low compliance costs for individuals.
Arguably, proposals where individual workers have to monitor and self regulate their private use component of communications technology (undeniably an essential work tool), will only increase the tax keeping burden for the public.
This also appears to be at odds with the fact that provision of the equipment itself (i.e. a laptop) is excluded from the Fringe Benefit Tax regime (if they cost less than $5,000).
In addition, the 12 month cut off for travel deductibility seems arbitrary when considering large scale contracting and development projects that take place around the world, which quite regularly take longer than one year to complete. Secondments were however stated as being within the threshold. In our opinion, this does not create a consistent or clear application of the rules, but instead further muddies the water.
How it affects you
The paper has sought feedback on the proposed changes, so we will keep you informed of developments as they arise. In the interim, if you have concerns about how this may impact your circumstances, we recommend that you contact your advisor.
POINTS OF INTEREST…
The status of advice from the Commissioner has been clarified in a statement released by the IRD on 16 November.
The Law Commission has released the sixth Issues Paper in the ongoing review of Trust Law. Feedback on the proposals for reform is being sought.
The IRD have released a determination concerning non-attributing active insurance CFC status.
Following the freeze of Ross Asset Management, PWC have released a report detailing that only approximately $10 million of the estimated $450 million client funds appears to actually exist.
TO THE POINT…
It would be nice if we could all pay our taxes with a smile, but normally cash is required.