TAX UPDATE 1 Mar 2013
GST ON HOLIDAYS HOME
In general, the supply of accommodation in a "dwelling" is exempt from GST, but a supply of accommodation in a "commercial dwelling" is taxable for GST purposes. The definitions of these terms were amended with effect from 1 April 2011. A property is a "dwelling" for GST purposes if it is occupied by the recipient as their principal place of residence, or it must be reasonably foreseeable that this will be the case. They must be entitled to "quiet enjoyment of the property". A commercial dwelling now includes a bed and breakfast establishment, inn, or hostel, a serviced apartment managed or operated by a third party, or any premises of a similar kind.
Where a holiday home is rented out, it has potentially become a commercial dwelling under this wider definition which has therefore, on the face of it, brought the holiday home into the GST net which it was not previously.
The Inland Revenue Department ("IRD") has proposed that a person has the option of including a commercial dwelling as part of a broader taxable activity if their supplies of the commercial dwelling are under $60,000.
The proposed option would be available only if the person:
• is affected by the changes to the "dwelling" and "commercial dwelling" definition; and
• is required to be registered for reasons other than the supply of a commercial dwelling
An example would be if a taxpayer who was registered for GST owned a holiday house which he occasionally rented out. The new definition of "commercial dwelling" captures this holiday house. The proposed rules seek to allow the taxpayer to exclude the commercial dwelling as part of his taxable activity and therefore keep the home outside the GST net. Because he is GST registered, he would otherwise have to include the rent from the holiday home in his GST return.
These changes are currently going through the submission process, and may be enacted later on in the year.
How it affects you
Although the changes have wider application than to holiday houses, it is these that have the potential to catch people out. If you have a holiday home, and either are currently GST registered or are looking at becoming GST registered, we recommend that you contact your advisor to discuss the potential impact of these changes for your business.
TRUSTEES BASED OVERSEAS – TAX ISSUES
We have seen some interesting statistics regarding the number of trusts in place in New Zealand since the review of the law of trusts commenced. There have been suggestions that New Zealand has between 250,000 and 400,000 trusts, which is a higher per capita number of trusts than exist in the UK, Australia, and Canada. A number of reasons have been put forward for this including the comparative low cost of establishing trusts in New Zealand in comparison to the other countries.
For the majority of trusts, at the time they were settled, the taxation treatment of the income and expenses, and distributions to beneficiaries was clear and simple. The income and expenses would be collected in the trust. If the taxable income was retained in the trust, the trustees would pay tax on the income at a flat rate of 33%. If the income was distributed to the beneficiaries, the income would be taxed at the beneficiaries' marginal tax rates. Any distributions of capital fell outside the tax net and were tax free.
For many trusts, that simplicity remains.
What we have seen in more recent times, however, is the Trans-Tasman drift. Beneficiaries, trustees, and settlors have found their way to Australia or even further afield. Suddenly, the taxation treatment of the trust that was settled when everyone was in New Zealand has become more complicated.
Where a trustee moves overseas, whether or not the trust has to return passive income (most commonly interest and dividends) in New Zealand will depend on a variety of factors. Income may also become foreign
sourced (an investment on behalf of the trust is made in Australian for example), which further complicates the taxation treatment of the income in the hands of the trustees and the beneficiaries.
If all trustees are in New Zealand and the settlor is overseas, the income will be exempt. If a settlor is still in New Zealand, the income will be taxed in New Zealand. If the trustees and the settlor are overseas, the income most likely is not taxed here.
If all of the beneficiaries are overseas, regard must then be had to what distributions are taxable and to what extent.
How it affects you
If you have settled a trust in New Zealand for the benefit of your family, and either your children have gone offshore or you yourself are looking at moving abroad, we recommend that you speak to your Tax Advisor to understand what, if any, taxation consequences there will be, and how best to manage them. Like many things, the more notice you have of a change pending, the better the plans that can be put in place to manage the consequences.
POINTS OF INTEREST…
The IRD has again issued a further revised work programme for 2013, which has updated projected timeframes. The work programme confirms that there will be plenty of tax change coming.
Finance Minister, Bill English, has confirmed that the Budget for 2013 will be released on 16 May 2013.
The opportunity to make submission on the Sixth Issues Paper on the Review of Trusts closes this Friday, 22 February 2013.
TO THE POINT…
All the world is made of faith, and trust, and pixie dust.
J M Barrie, Peter Pan