PROPOSED CHANGES TO
Yes, that's right. Even before the changes proposed in the Taxation (Annual Rates, Returns Filing and Remedial Matters) Bill have been passed, there are yet further changes proposed to the Look-Through Company ("LTC") regime.
The IRD has taken the proactive step of introducing changes to remedy problems that had been identified with the owner's basis calculation. The owner's basis is the cornerstone of the deduction limitation rule. The IRD wanted to make sure people receive a credit for all funds that are "put at risk" when calculating what deduction may be available to them. Remembering that an LTC is effectively transparent for taxation purposes, the deductions are therefore treated as being incurred by the look-through owner, but they can only claim them to the extent of their "owners' basis".
Two main changes are proposed. Firstly, it is proposed to alter the calculation of the "secured amount". A secured amount is to be the lesser of the following applicable amounts:
a. the amount of the look-through company's secured debt for which the person is a guarantor, divided by the total number of guarantors for the secured debt;
b. the proportion of the market value of recourse property that is attributable to the person, net of higher-ranking calls whether actual, future or contingent.
This drafting is intended to provide that for the vast majority of people, the amount of the guarantee (divided by the number of look-through owners responsible for the guarantee) will be the respective secured amount. Only where a guarantee is a limited recourse guarantee will it be necessary to consider the amount applicable under (b).
It is intended that the change will give people a greater claim than under the current rules.
Furthermore, where an LTC derives FIF income, if a dividend is paid by a FIF that is greater than deemed FIF income, the owner now receives a credit for the excess amount of the dividend. This does not alter the tax treatment of the dividend, or the calculation of FIF income. All it does is ensure that a look-through owner has an increased basis, therefore allowing greater access to deduction from the LTC.
How it affects you
If you are a look-through owner and are looking to claim deductions from the LTC, the amount you can claim may well be greater in future years, as the changes will likely be effective as at 1 April 2012.
DEDUCTIBILITY OF EXPENSES
The IRD has issued a number of Exposure Drafts in the last week that outline the IRD's interpretation of deductibility of repairs and maintenance, widening or metalling a farm access road, constructing a cattle stop in an access road, and expenditure on stock yards.
First, on the wider issue of general repairs and maintenance, there is essentially a two step process. The first step is to identify the asset that is being repaired or worked on. The second step is to look at the extent of the work being done.
The steps have long been established through case law but are often difficult to apply. For example, if a reconditioned engine is installed into a vehicle, the costs would be repairs and maintenance, but if a more powerful engine were installed that would be capital and non-deductible. The asset is the vehicle. In the first scenario there is no improvement to the vehicle, but in the case of a more powerful engine, the vehicle is sufficiently improved to change the character of it.
When we are looking at commercial or residential rental properties, regard must be had to be IRD's published view on what is part the building, and what is fit-out when it comes to ascertaining exactly what the asset is that is being repaired. As such, the IRD three step test for depreciation of "fit-out" will need to be considered.
Secondly, in relation to farm related expenditure, the cost of construction of stock yards, in the IRD's view, will be deductible as "fences" if the stock yards are not an integral part of a wider asset, such as a shearing or diary shed. If however they are part of a wider asset, they will not constitute fences and therefore the cost will need to be capitalised.
The cost of widening or metalling a farm access road will be capital in nature but will be subject to an amortisation type deduction under s DO 4 of the Income Tax Act 2007.
In relation to expenditure incurred in constructing a new cattle stop as part of a fence where it crosses a farm track, where the cattle stop is constructed in an opening in a fence, the cost of constructing the cattle stop is deductible in the year in which it is incurred.
How it affects you
Repairs and maintenance, and the deductibility of farm expenditure are determined by the particular factual situation.
If you are undertaking significant expenditure on repairs and maintenance, we suggest you contact your advisor to determine the tax consequences of that expenditure before you commence the work.
POINTS OF INTEREST…
KiwiSaver providers ANZ and One path have reported that approximately 250 hardship withdrawal applications have been approved each month by the end of January 2012. ASB reported 712 hardship withdrawal approvals for the 2010-11 year. A person applying for a withdrawal to purchase RWC tickets was, however, denied.
Supplementary Order Paper No. 5 to the Taxation (International Investment and Remedial Matters) Bill issued yesterday makes minor drafting corrections to Budgets 2010 and 2011 legislation, and removes items covered in the Taxation (Tax Administration and Remedial Matters) Act.
TO THE POINT…
"I have a farm and I live it there. There's really nothing to do, but even watching the chickens, its fun."