TAX UPDATE 5 Oct 2012
MIXED USE ASSETS CHANGE PROGRESSES
Earlier this year, the Government announced that it intended to reduce tax relief available to those with assets used partly for "business" and partly for private purposes.
One of the key targets of this legislation has without doubt been those who have claimed tax relief in relation to financing and maintaining holiday homes.
The first indication of how these changes may apply was released recently. The Bill proposes, from 1 April 2013, to apply a new apportionment formula to all expenditure on mixed-use assets that is not directly attributable to either private use or a taxable use. The formula limits a deduction for such expenditure to the fraction of the income-earning use of the asset over the total actual use of that asset in the income year.
These changes will apply to all land and any asset that costs more than $50,000 that is not used for at least 62 days in an income year if the asset is used both privately and to earn income. The meaning of private use will include use by any person associated with the taxpayer and any use at less than market value. This means that a property owner offering the use of a beach house to family friends or renting it out to family, even at a market rental, will increase their amount of "private use" under the formula and reduce the amount of deductions they can claim.
Taxpayers can still claim a reasonable proportion of the indirect costs associated with owning the property provided the private use is kept to a minimum. If renting the house at fair
market value still generates a net loss after the apportionment of indirect expenditure, the Bill proposes to ring-fence this loss where the gross income from the asset is less than 2% of its cost or rateable value. Ring-fenced losses can only be carried forward to offset against future net income from the same asset.
Owners deriving income of $1,000 or less from the asset may elect to treat the income as exempt (and not claim any deductions).
Motor vehicles and mixed-use assets, such as home offices, are excluded from these rules.
How it affects you
We expect the impact on many will be great. Very few holiday homes, for example will be used for 10 months of an income year, and most will struggle to reach an annual gross income greater than 2% of the rateable value of their holiday home.
If you have a mixed-use asset, we recommend you contact your advisor to discuss what these changes will mean for you.
TRANS-TASMAN HIDDEN INCOME A CONCERN
The Inland Revenue Department ("IRD") appears to think so. The IRD is not limiting its focus to those cash industries that are suspected of hiding money and those taxpayers that are considered to be moving wealth into trusts to avoid paying tax.
It will be extending its programme to look into complex financing arrangements, habitual non-compliance, misuse of charity status, fraud, and under-reporting of income.
Attention will now also be directed to those that are suspected of "hiding" their money offshore.
The IRD is looking particularly at untaxed assets sitting in offshore accounts. Just how much money is escaping the tax net is unclear, but resource is to be dedicated to making sure that whatever income should be taxed in New Zealand is being captured.
New Zealand has a detailed set of rules designed to capture income from offshore assets and transactions. The Foreign Investment Fund regime captures income from investments made overseas. The Controlled Foreign Company regime also brings into the New Zealand tax net income from overseas companies in which a New Zealander (and any associated party) has a 40% or greater interest. Transfer pricing rules and thin capitalisation that deal with cross border transactions are also designed to limit deductions and ensure the correct level of income is taxable in New Zealand.
It has been said that New Zealanders rank among some of the most compliant taxpayers the OECD. It is thought therefore that part of the issue around non-compliance in relation to offshore assets comes from the fact that New Zealander's are taxed on their worldwide income, meaning tax is still applicable even if offshore funds that are never repatriated to New Zealand.
The IRD's aim will be to encourage voluntary compliance on both offshore and domestic funds.
The IRD is putting systems in place to improve risk profiling techniques and data matching capabilities among the 20 offshore finance centres the IRD has signed tax information sharing agreements with to date.
How it affects you
If you have any assets offshore (bank accounts, investments, or real property, for example), make sure that you are correctly returning the income in New Zealand. With access to information sharing details from overseas countries, the chances are that if you have not been returning it as you should, the IRD will find it.
POINTS OF INTEREST…
Last week, the Australian Government released an exposure draft and explanatory memorandum of the legislation that will give effect to the trans-Tasman retirement savings portability scheme.
A taxpayer who kept no business records and fraudulently used a de-registered GST number when invoicing and charging his clients, and then failed to file GST or income tax returns, despite knowing his tax obligations has had a sentence of 22 months imprisonment confirmed.
Knox Investment Partners LP has an investment in a FIF. If you invest in Knox, you may need to return FIF income.
TO THE POINT…
'The avoidance of taxes is the only intellectual pursuit that carries any reward".
John Maynard Keynes