TAX UPDATE 8 Feb 2013
FURTHER HELP FOR KIWIFRUIT GROWERS
In December 2012, the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill 2012 proposed changes to further assist Kiwifruit growers affected by Psa-V.
The default treatment for any tax book value of vines and/or grafts removed is that it will be able to be claimed as an expense in the year the vines or grafts are destroyed. Alternatively, an election can be made to use the concessionary repairs and maintenance (R&M) rule where less than 15% of an orchard of "listed horticultural plants" is replaced by "listed horticultural plants" over a three year period (but limited to a maximum of 7.5% per year). Where the election is made, the tax book value of the plants that were replaced is not deductible, but rather the replacement costs are deductible as R&M. The tax book value of the original plants carries forward as the tax book value of the replacement plants. This is a change that will be retrospective so that these costs will be deductible once the Bill is enacted .
Where the default treatment above is applied, the costs of replanting or re-grafting a new variety of kiwifruit are capital costs that are amortisable. Where the concessionary R&M rule above is applied, the costs are deductible as R&M. Where the crop is replaced with a new crop on the existing structures and the default treatment of removal applies, the costs of a replacement crop are treated as a new crop for tax purposes. Where the concessionary R&M rule is applied, the costs are deductible as R&M.
Where structures are removed and another crop grown, the tax book value of the structures would not currently be deductible as it is considered to be a capital expenditure or loss, but this is to be changed retrospectively so that these costs will be deductible once the Bill is enacted. The costs of any replacement crop or new crop will be the same as the treatment applied to use of existing structures being maintained.
Where a grower receives financial assistance, to the extent the receipt is for loss of income or profits, its taxable. To the extent the receipt is related to a tax deductible expense or loss (e.g. of a capital asset where the write off is deductible), it would also usually be taxable. This will be changed retrospectively so that the "capital contribution" rules will apply and the amount will not be taxable.
How it affects you
Whilst these changes have been targeted at kiwifruit growers, all growers of listed horticultural plants will benefit. If you are a grower, we recommend you contact your advisor to discuss the impact of these changes for your business.
CHANGES TO TAKE EFFECT 1 APRIL 2013
A number of changes that were contained in the 2012 Budget are due to come into force from 1 April 2013 that will change the way employers must tax payments made to employees.
KiwiSaver changes will see the minimum contribution rate for employers and employees increased from 2% to 3% of gross salary or wages from the first pay period commencing on or after 1 April 2013.
Employers will need to change the contribution rates for existing KiwiSaver members if the employee's contribution rate is 2%. If the employee currently contributes at either 4% or 8%, there is no need to change the contribution rate.
The default rate for new employees over the age of 18 years that are automatically enrolled into KiwiSaver has also increased from 2% to 3% of gross salary or wages from the first pay period commencing on or after 1 April 2013.
There are also changes in relation to employment of primary and secondary school children. First, the tax credit that covered the tax on their first $2,340 of income from employment was repealed from 1 April 2012 and the entitlement to claim it was withdrawn in May 2012.
Employers must now deduct:
• PAYE from payments of salary/wages, or
• Tax from schedular payments.
If the employee is a KiwiSaver member, you may also need to start making employee
deductions at 3%. If the employee is less than 18 years of age, employers will not need to make employer contributions.
For the 2012-2013, and future tax years, individuals can no longer claim the:
• Childcare and housekeeper tax credit, and
• Tax credit for income under $9,880.
Consequently, employees using either the ML or ML SL tax code, from 1 April 2013 will have to have PAYE deducted using M or M SL rates as appropriate, unless they complete a new Tax code declaration (IR330) form.
From 1 April 2013, the Student Loan repayment rate for standard deductions will increase from 10% to 12%. Employers will deduct at the new rate for the period ended 30 April 2013 and all future periods.
How it affects you
There are a number of changes that employers will be required to make from 1 April 2013. Speak to your advisor if you would like any assistance with implementing the changes.
POINTS OF INTEREST…
This is a reminder that there is still time to make submissions on the preferred approach to law reform of trusts set out in the 6th Issues Paper of the Law Commission.
As the tax year end is approaching for many, it is time to start reviewing the nature of any work completed on rental properties. We recommend that you get advice on whether the expenditure will be fully deductible as repairs and maintenance, subject to a claim for depreciation, or totally non-deductible.
The IRD is continuing to review claims for bad debt deductions by those who lost money in failed finance companies.
TO THE POINT…
It is never too late to become what you might have been
REVIEW OF THE THIN CAPITALISATION RULES
On 14 January 2013, an Officials' Issues Paper outlining proposed changes to the thin capitalisation rules was released. The Issues Paper, "Review of the thin capitalisation rules", is intended to increase the taxation of highly leveraged investments made by foreigners in New Zealand. This review is a continuation of the IRD's review of taxation treatment of foreigners and foreign based entities.
New Zealand's international tax system is being overhauled bit by bit. We have seen the demise of conduit relief as this is no longer required. Last year changes were made to the Foreign Investment Fund and Controlled Foreign Companies regimes to align the regimes and simplify the rules with a view to encouraging investment in New Zealand and boosting the New Zealand tax base.
The current Issues Paper proposes further reform of the international tax system. The first of the three major proposals is to extend the thin capitalisation rules to non-residents who act together to operate businesses in New Zealand. The rules currently apply only if a single non-resident controls the business. This is aimed at widening the New Zealand tax base by ensuring that non-residents operating businesses in New Zealand do not fund those ventures by high debt funding rather than investing capital into the New Zealand venture.
The second proposal is to disregard some shareholder debt when calculating the global indebtedness of the foreign investor. At the moment this debt can be included and used to justify a high level of indebtedness in New
Zealand which can then be used to offset tax liability.
The third proposal is in relation to trusts. Currently, a resident trustee is subject to the thin capitalisation rules if the trust is a non-complying trust and more than 50% of settlements are made by a single non-resident. The Issues Paper proposes that a resident trustee be subject to the thin capitalisation rules if more than 50% of settlements on the trust are made by a non-resident, a group of non-residents acting together, or another entity that is subject to the rules.
Any changes, if they proceed, would take effect from the income year beginning after enactment of any legislation.
How it affects you
Anyone who is non-resident and operating businesses in New Zealand should contact their advisor to discuss what, if any, impact the proposals may have for their business and what changes can be implemented to address any issues that may arise.
LTCs – IS THE PROMISE A REALITY
Look-Through Companies (LTCs) were initially held out to be the new Loss Attributing Qualifying Companies, but they are not. Many thought that LTCs would be the answer to all because of the ability to access "losses". We question whether the promise of all things great is a fair reflection of the reality of LTCs.
Whilst the obvious immediate tax advantage is clear, there are some downsides to LTCs that have perhaps been too quickly overlooked.
One of those downsides is the consequences upon liquidation. When the company is trading there are no issues from either a taxation or a commercial perspective. An LTC, although giving access to income and deductions to shareholders from a taxation perspective, is still a company commercially, and any other liability for the shareholders is limited. Upon liquidation however, although there is no greater commercial risk, as an LTC is simply a tax fiction, from a taxation perspective if there is any taxation cost arising upon liquidation, this is a personal liability of the shareholders.
To highlight the issue, we will compare a standard company with an LTC. In a standard company, if there is a tax liability outstanding, or a tax liability arises, for example as a result of a debt payable by the company being written-off and therefore triggering debt forgiveness income, the liability is that of the company. The company has been struck off so if the IRD wishes to recover the tax, the company must be reinstated. If the company is reinstated, the debt is no longer written off and therefore there is no longer debt forgiveness income in the company. If the company is an LTC, however, and the debt is written off upon liquidation of the LTC, on the face of it, the
forgiveness income is income of the shareholders, and therefore the shareholders will have the income tax liability directly.
The IRD has added this issue to its work programme for the 2013 year as a result of a question that has been raised by a taxpayer. To date there is no time frame allocated for the review of these issues.
How it affects you
If you have entered the LTC regime, or are contemplating to do so, make sure that the benefit of accessing deductions in the year in which they are incurred is going to have a great enough benefit to ensure that any other limitations or costs are justified. Remember that to access the deductions you will need to have sufficient basis, and although these rules have been changed with a view, in the majority of cases, to increasing the amount of the basis, there can still be limitations on the ability to access those deductions until future years.
POINTS OF INTEREST…
The IRD has also made comment on steps that can and should be taken in relation to large multi-national's that are not paying a fair share of tax anywhere in the World. Steps to address this will need to be taken internationally to have any real impact.
The updated report on Ross Asset Management Limited is that there may be in excess of $11 million in the fund, although this is still a far cry away from the $450 million purported to be in existence.
The IRD has published a protocol between NZICA and the IRD for accessing audit workpapers. It is available at www.ird.govt.nz. The protocols establish how the request will be made and what information is to be supplied..
TO THE POINT…
I would like to be a one-man multi-national fashion phenomenon