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IRD – STILL HOT ON TAX

AVOIDANCE

The Inland Revenue Department ("IRD") has issued a draft Interpretation Statement about tax avoidance for public consultation. Comments are due by the end of March and the IRD is looking to finalise the Interpretation Statement by mid year.

Although there is nothing surprising in the draft statement, we consider it is useful to summarise what is likely to become the IRD's approach to dealing with tax avoidance.

Generally there are three stages of enquiry. The first is "is there an arrangement?". An "arrangement" may be a legally enforceable contract, a less formal agreement or plan that may or may not be legally enforceable, or an informal, unenforceable understanding. For there to be an arrangement there must be two or more persons involved, but a person can be a party to an arrangement even if they did not know some or all of the details of the arrangement or the mechanisms by which the arrangement would be carried out.... ignorance is no excuse (effectively).

The second stage is to consider whether any specific provisions apply and whether the purpose or effect of the arrangement is within parliamentary contemplation. This involves a two step enquiry: first, what was the economic effect and/or the commercial reality of the arrangement; and secondly Parliament's purpose: "If Parliament had foreseen transactions of this type when enacting the specific provisions used in the transactions, would it have viewed them as within Parliament's contemplation for those specific provisions?".

The third stage is to consider the general avoidance provision and ultimately look to "reconstruct" the arrangement from a taxation perspective to counteract the "tax advantage" obtained.

The IRD has discussed the legislation and the history of tax avoidances cases in detail when explaining how tax avoidance is to be decided.

As indicated above, there is perhaps nothing surprising in the draft statement, but it is a clear indication that the IRD is not letting up on challenging arrangements as tax avoidance any time soon.

How it affects you

Although it may be unlikely that your affairs are tantamount to tax avoidance, because it is an IRD focus currently we recommend that when you provide your advisor with your year end information (for many that time is approaching shortly after 31 March) you ask your advisor to review your affairs from the perspective of tax avoidance, just to be safe.

RELOCATING EMPLOYEES – TAX

CONSEQUENCES

Two years ago changes were made to the Income Tax Act to specifically ensure that payments by employers when relocating their employees, and providing them with overtime meal allowances are exempt from income tax and fringe benefit tax when certain criteria are met.

The changes meant that employers and employees made efficient employee relocation decisions by ensuring that tax considerations do not distort their decisions.

For relocation expenses to be deductible to the employer, but tax-free to the employee, all of the following criteria need to be met:

The employee's relocation needs to be as a result of the employee:

- Taking up new employment with a new employer; or

- Taking up new duties at a new location with the employee's existing employer; or

- Continuing in the employee's current position, but at a new location.

The employee's existing home must not be within reasonable travelling distance of the new work place (unless accommodation is provided as an integral part of the job).

- The expense needs to be on the list of eligible relocation expenses.

- The payment needs to reflect the expenditure incurred.

- The expenditure has to be incurred within certain time limits.

For an overtime meal allowance to be tax-free, the employee must have worked a minimum of two hours beyond their ordinary hours on the relevant day and:

- Either the employee's employment contract needs to specify that the employee is eligible for a payment in relation to overtime hours worked, or an employer has to have a policy or practice of paying an overtime meal allowance; and

- The allowance needs to reflect the actual
expenditure incurred by the employee or, alternatively, the allowance could be a reasonable estimate of the expected costs likely to be incurred by the employee or group of employees.

How it affects you

If you are relocating staff or paying overtime meal allowances, and you are not sure whether the criteria for the allowances to be tax-free are met, contact your advisor.

POINTS OF INTEREST…

The IRD has proposed to add "quad bikes" as a general asset class to the "Leisure" industry category and the "Transportation" asset category with depreciation rates of 30% DV or 21% SL to apply.

Since payroll giving was introduced, nearly $4 million has been donated directly to charity or donee organisations.

The IRD review of the scrap metal industry is underway in Otago and Southland.

The IRD has confirmed that certain interest deductions allowed to a company that was an LAQC continue to be allowed when the company becomes an LTC.

TO THE POINT…
"If you can't make it good, at least make it look good".

- Bill Gates

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