REPEAL OF GIFT DUTY CONFIRMED
The Taxation (Tax Administration and Remedial Matters) Bill has been reported back from the Finance and Expenditure Select Committee. Whilst largely administrative in its nature, the Bill does contain: the legislation required to repeal gift duty; legislation to provide the Inland Revenue Department with greater discretion with respect to taxpayer secrecy and information sharing with other Government departments; changes to the availability of tax pooling for voluntary disclosures; and the introduction of foreign investment Portfolio Investment Entities (PIEs) to allow non-resident investors to elect a 0% tax rate on their foreign sourced income.
A number of concerns were raised around the proposed abolition of gift duty, particularly in reference to creditor protection, relationship property, and the proliferation of trusts in New Zealand. However, the majority view of the Select Committee was that gift duty is not an appropriate mechanism to deal with any inadequacies in New Zealand trust law, and that these had been addressed in the current law commission’s review of trusts. Further, existing measures contained in the Companies Act, Insolvency Act, Property Law Act, and Family Proceedings Act were considered to provide protection from the issues raised. Accordingly, gift duty will be abolished without any new measures being put in place to protect creditors or effected parties, as it is considered that sufficient measures currently exist.
Other changes of note include the extension of tax pooling to voluntary disclosures in relation to Resident Withholding Tax and income tax when no return has been filed. This will give taxpayers an opportunity to make use of a tax pooling intermediary to reduce the use of money interest costs in those circumstances.
A final point of note is with respect to foreign investment PIEs, whereby a new class of PIE will be established where a non-resident investor can elect a 0% tax rate on their foreign sourced income. It will bring PIEs more closely in line with the tax treatment of other investments for non-resident investors.
How it affects you
The most significant changes for most contained in this tax Bill is the abolition of gift duty. We stress that the abolition of gift duty should not be a trigger for a “free for all” in terms of gifting outstanding loan balances to trusts, and careful consideration should be given to the gifting of any amounts after the abolition of gift duty takes effect on 1 October 2011.
LTCS – HAVE YOU MADE YOUR ELECTION YET?
As we are at the half way point in the first transitional election period for an existing Qualifying Company (QC) or Loss Attributing Qualifying Company (LAQC) to become a Look Through Company (LTC), it is worth noting that it is not simply a case of completing the application form and sending it off to the Inland Revenue Department (IRD), as there are a significant number of issues to consider when determining whether a LTC is an appropriate structure to adopt.
In our experience, the long-term goals and future income position of the shareholders and the company are key considerations to determine whether it is appropriate to elect to become a LTC or simply remain in the QC regime. If the company will continue to make losses, a LTC may be appropriate provided that the shareholders will have a sufficient owner’s basis (and other income) to utilise any loss that is allocated to them.
We see little reason for an existing LAQC to elect to become a standard company when remaining a QC at present is a no cost option. We note that there is uncertainty surrounding the future of the QC rules and, once this is dealt with, election to become a standard company may become appropriate. Remaining a QC by doing nothing is a valid option, provided that this is carefully considered.
For companies continuing to make losses, becoming a LTC may seem like the simple answer, however, if shareholding changes are contemplated in the future, the election to become a LTC may give rise to the bringing forward of tax liabilities as a shareholder in a LTC is deemed to own their share of the underlying assets of the company.
Whilst it is possible to transition your LAQC to a partnership, limited partnership, or sole tradership, in practice this is an option we are not seeing significant use of and only a small proportion of taxpayers will gain any real benefit from completing such an election.
How it affects you
If you have not started considering what you should do with your existing LAQC, we suggest that you contact your advisor soon so that you have time to weigh up each of the options available to you, and make an informed decision on whether you elect to become subject to the regime.
One thing is for certain; the choice to elect to become a LTC is something that should not be made in a hurry but should be carefully considered before any election is filed.
POINTS OF INTEREST…
In an earlier edition of Tax Update, we noted that the IRD had changed its position on the deductibility of unsuccessful software development costs. Following significant concern from the software industry, the Revenue Minister, Peter Dunne, has announced that a legislative change will be made to ensure that a tax deduction will be allowed for failed software developments - as to not do so would inhibit productivity and innovation. The legislative amendments, which will be included in tax legislation to be introduced in September, will be backdated to 1 April 2011 so that there is no change in treatment for those involved in the software development industry.
TO THE POINT…
“ It was the last wish of the Icelandic economy that its ashes be spread over Europe”.