TAX CONSEQUENCES OF ING SETTLEMENTS
The settlements that ANZ and ING have reached with their investors over the past two years have been widely publicised, however, the tax consequences arising from these settlements are not widely known.
The two ING funds (the ING Diversified Yield Fund and the ING Regular Income Fund) were both classified as Foreign Investment Funds (FIFs), and as such, were subject to tax under the FIF rules to the extent that the investor was subject to these rules (i.e. assuming the de minimis exemption did not apply). The use of the Fair Dividend Rate (FDR) method was prohibited due to Determinations issued by the Inland Revenue Department (IRD). For the majority of taxpayers, the use of the Comparative Value (CV) method gave rise to a tax deductible loss in the 2008 and 2009 income years.
During the 2010 income year, the ANZ and ING reached a settlement with their investors. The majority of investors exercised the “cash out” option, whereby they accepted cash offers of 60 and 62 cents per unit in the respective funds, with those monies then being held on term deposit for five years at a favourable interest rate. As part of the settlement process, the funds migrated back to New Zealand and ceased to be FIFs.
Some investors were successful in securing additional compensation from their financial advisor through the banking ombudsman. A further pay out was made to some investors following the release of the Commerce Commission Report during the 2011 income tax year, which gave rise to a further $45 million in compensation being paid to investors in the Funds.
To the extent that the taxpayer had an interest in a FIF, the settlement offer of 60 and 62 cents per unit gave rise to a non-taxable capital gain in the 2010 income tax year. A FIF calculation was also required for the short period the funds were FIFs in the 2010 year (i.e. prior to migration on 26 June 2009).
The subsequent receipt of compensation in whatever form is a taxable receipt to all those investors who were subject to the FIF regime. For de minimis investors, any compensation received is a tax free capital amount (as deductions were not previously claimed).
How it affects you
If you received compensation from the ANZ or ING in relation to either of the funds, we recommend you seek advice as to the correct tax treatment of those receipts as we understand the IRD are concerned with the tax treatment of funds received
INCOME FROM PRIVATE BOARDERS
If you are providing accommodation to private boarders, then you have a choice between the “standard cost method” and the “actual cost method” when calculating whether you have an income tax liability from the boarding activity.
The standard cost method uses an average price across the country for basics, such as the cost of food, heating, power, and transport. If the income derived from boarders is less than the standard cost allowed, then you do not have to file an income tax return with respect to that income received, nor will an income tax liability arise with respect to that income, however, no deduction is allowed for any loss made.
The current rates for the year ended 31 March 2012 are as follows:
- 1 or 2 boarders - $243 per week per boarder
- 3 or 4 boarders - $243 each for the first two boarders and $198 for each subsequent boarder.
If you have 5 or more boarders, you cannot use the standard cost method, and you are required to adopt the actual cost method. Under the actual cost method, you must retain sufficient records to determine what your actual income or loss arising from the boarding activity is, with any income being subject to tax and any loss being deductible against any other income that you derive.
For convenience, the Inland Revenue Department have a standard cost home based boarding services calculator on their website to enable you to work out whether the exemption applies.
If the income derived from boarders exceeds the weekly standard cost amount, then an annual capital cost calculation must be performed, which has the effect of providing a further deduction before any tax is payable on the excess income derived.
Each year the standard cost is reviewed and adjusted for inflation and since the 2009 income year, has increased from $227 per week to $243 per week for each boarder.
How it affects you
The standard cost method provides a compliance cost saving in that detailed records are not required to be maintained in relation to the boarding activity. The downside, however, is that if a loss arises as a result of the boarding activity, no deduction is allowed for that loss.
We recommend you seek advice if you have private boarders to ensure you adopt the appropriate method for you.