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Ring-fencing residential rental property losses

The inability to offset residential rental losses against salary and wages (and other income) is one step closer to reality after the Government released an issues paper today. In a nutshell –

• Losses arising from rental properties will not be able to be offset against the taxpayer’s other income. These losses often arise due to interest payable on mortgages on the rental property.

• The ring-fencing will apply to residential properties only (including overseas residential rental properties)

• The person’s main home will be excluded from ring-fencing, as well as properties that are held on revenue account (i.e. subject to tax on sale because of a land dealing, development or subdivision business) and properties that are subject to the mixed-use asset rules

• The ring-fenced losses can be carried forward to future years and offset against future rental income or against future taxable income on the sale of the property

• Losses will be able to be offset on a portfolio basis i.e. ring-fenced losses from one property can be offset against income from another rental property

• The rules will apply to individuals as well as trusts, companies (including LTCs), and partnerships

• The rules are intended to kick in from the start of the 2019/20 income year.

The Issues Paper can be found on Inland Revenue’s tax policy website: http://taxpolicy.ird.govt.nz/

Submissions close on 11 May 2018.

Rental properties and holiday homes: gotta hold ‘em for five years now

If you’re about to buy a rental property or holiday home, sit up and pay attention.

Yesterday (27 March) Parliament passed legislation that extends the “bright-line” test from two to five years. This means that if you sell a residential property (family home excluded) within five years of acquisition, you will be taxed on the proceeds, regardless of your intention when you purchased it.

Aside from extending the bright-line period from two years to five, nothing else has changed. The three exceptions (main home, inherited land and relationship property transfers) still apply.

The five-year rule applies to all residential property acquired from the date of the Royal Assent. We expect the Governor-General to assent to the legislation over the coming week.

Read more

What would a “tax working group” look like under a coalition government?

If Winston Peters decides to team up with Labour and the Greens to form a coalition government, the establishment of a  tax working group remains a distinct possibility. Terry Baucher* discusses what the agenda for a tax working group might look like. 

I believe the terms of reference for any tax working group should include:

  • reviewing the under-taxation of capital and the over-taxation of savings;
  • the interaction of tax and social assistance such as working for families’ tax credits and the issue of high effective marginal tax rates;
  • the taxation of multinationals; and
  • the role of “environmental” taxes such as the Green Party’s mooted Carbon Tax and the Labour Party’s controversial Water Tax.

 

Coincidentally, these topics are similar to those covered by the terms of reference of the McLeod Review in 2001. Its terms of reference Read more

Supreme Court: disclosure denied to beneficiary in billion-dollar Erceg case

The Supreme Court has dismissed Ivan Erceg’s appeal, refusing his application for an order to disclose trust documents.

Background

The case is the culmination of a long-standing family feud involving two trusts set up by Michael Erceg, a wealthy businessman who died 10 years ago in a helicopter accident. Ivan Erceg, the brother of the deceased, was a beneficiary of both trusts, but received nothing when the trusts were wound up in 2010. Analysts had put the value of the trusts at $1.2 billion in 2006. Read more

IRD chalks up another win: Supreme Court rejects Trustpower’s appeal

The deductibility of feasibility expenditure on capital projects got knocked back by the Supreme Court in its decision released today (27/07/16). The court said:

“ On a purist view of the capital/revenue distinction, any expenditure (feasibility in nature or otherwise) addressed to a capital project … is necessarily on capital account. On this approach – which has been espoused by Professor John Prebble QC and Hamish McIntosh – the feasibility expenditure in issue was necessarily not deductible.

The approach which we adopt is broadly similar to that proposed by Professor Prebble and Mr McIntosh but, for reasons which we explain, allows for some flexibility, for instance, in respect of initial stages of feasibility work … [W]e consider that some feasibility expenditure referable to proposed capital projects might sometimes be deducted. We do not, however, see such deductibility as extending to external costs incurred in respects which do, or were intended to, materially advance the capital project in question.”

  Read more

Government response to Shewan inquiry: she’s all go!

A new tax bill in August will see the government adopting all of the key recommendations made in the Shewan Inquiry on foreign trusts. Expect to see these initiatives in the draft legislation:

  • information on foreign trusts to be maintained in a register overseen by Inland Revenue
  • foreign trusts to file an annual tax return
  • disclosure of tax information and personal information about the settlors, non-resident trustees and classes of beneficiaries
  • exemption on foreign source income removed if registration and disclosure obligations not met
  • new registration fee ($270) and annual filing fees ($50) to apply to foreign trusts.

Increased Anti-Money Laundering (AML) requirements for lawyers and accountants are also signalled with effect from 2017.

Read the full summary of the government’s response here.

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NZ’s foreign trust regime: John Shewan’s report in a nutshell

The Government Inquiry into Foreign Trust Disclosure Rules was released yesterday (Monday 27 June). In a nutshell, John Shewan’s report concluded that the current disclosure requirements were “light handed” and reasonably likely to be facilitating the hiding of funds or evasion of tax in some instances. Against this backdrop, governments around the world have a legitimate expectation that the New Zealand government will step in and take action to change the rules.

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Are you ready for RLWT?

Residential land withholding tax (RLWT) kicks in on 1 July 2016. “Offshore RLWT persons” who sell land subject to the bright-line test may have RLWT deducted from their sale proceeds. Primarily, the vendor’s conveyancer will be responsible for deducting the tax, however, accountants may need to assist with calculating the amount payable to Inland Revenue.

The tax was introduced as a means of ensuring that offshore taxpayers who are required to pay tax under the bright-line test meet their New Zealand tax obligations. Collection of income tax from these taxpayers is more challenging then from New Zealand based taxpayers, and so deducting at source can be seen as a way around the issue. Read more

IRD confirms: no appeal pending on Diamond residency case

The IRD has confirmed it will not be appealing the recent Court of Appeal decision in C of IR v Diamond [2015] NZCA 613.

This is good news for taxpayers (and their advisers) as it provides a degree of clarity and certainty to the law on residency.

The Court of Appeal decision – which was a win for the taxpayer – explicitly rejected the notion that having a rental property “available” to the overseas-based taxpayer was sufficient to amount to having a permanent place of abode in New Zealand.

The Court also concluded by saying that the fact that a taxpayer provides a home for his family in New Zealand while living overseas would not necessarily be sufficient to establish that the taxpayer had a permanent place of abode in New Zealand.

Refer to James Coleman’s blog to read the background facts to the Diamond case.

FBT on car parks

In the past, the Commissioner’s view has been that car parks provided to employees under a license agreement did not qualify for the on-premises exemption and were therefore subject to FBT. However, the question of whether or not FBT applies to a car park now focuses on whether the employer has a right over the car park which is substantially exclusive. So if the employer has a right which is in fact, or effect, substantially exclusive, then the car park will not be subject to FBT.

In a nutshell, the higher the degree of control the employer has over the car park, the more likely it is that the right is substantially exclusive.

Going back a step, there is an FBT liability when an employer provides a free car park to an employee. However, there is an exemption for fringe benefits which are provided on the employer’s premises. This is sometimes referred to as the “on premises exemption”. The “premises” of an employer includes land which owned and leased by the employer.

A recent Inland Revenue ruling (BR Pub 15/11) states that when deciding on the question of FBT, employers will have to look closely at the nature of the car parking arrangement and whether it gives the employer a right to use the car park which is in fact, or effect, substantially exclusive. So a car park which is subject to a license can now be exempt from FBT if the employer has a substantially exclusive right to use it.

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