December 2010

1. End Of The LAQC & Beginning Of The LTC

2. October Tax Changes - Ongoing Effects

3. Gift Duty Going....

4. Government Tightening Of Social Assistance Rules

5. Saving Works Group

6. GST On Land Sales At Zero Percent

7. Public Ruling-Deductibility Of Loan Break Fees

8. Shareholder Employee ACC Coverplus Extra Premiums Now Deductible

9. GST Late Filing Penalties

10. Use Of Money Interest Rate To Reduce

11. FBT Rate For Low-Interest Loans Reduced

12. Code Of Professional Conduct For Authorised Financial Advisers-Close

13. Change To Immigrant Requirements

14. Industry Specific Balance Date For Kiwifruit

15. Public Holidays 2010 / 2011

16. Losses And Payment Of Income Tax

17. Taxpayer Not Allowed To Deregister For GST Retrospectively

18. News About The Office

1. END OF THE LAQC & BEGINNING OF THE LTC

The Government released draft legislation in late October 2010 to remove tax loss attribution linked to Loss Attributing Qualifying Companies (LAQCs). The legislation introduces a new tax entity called a look-through company (LTC) that provides for the flow through of income and losses to shareholders of closely-held companies. In effect all LTC profits and allowable losses are allocated to shareholders in proportion to each owner’s effective interest. Shareholders will pay tax on those profits or take a deduction for losses (subject to loss limitation rules) at their marginal tax rates. Tax rebates and credits will also pass through to shareholders. Losses that cannot be offset by shareholders can be carried forward and those will be ring-fenced and can be offset only against income from the LTC.
The shareholders of LAQCs must make a decision within a transition period of 6 months from the start of the 2012 tax year on whether to remain in the LAQC regime. The change needs to be made in that period to qualify for tax concessions which in effect ignore the tax implications of all restructure transactions.
Shareholders will have the choice of:
staying with the LAQC regime;
electing to become an LTC; or
change to another business vehicle, such as a limited partnership (LLP), general partnership or sole trader.
The differences between the LTC and LAQC regime are highlighted in the table on the following page.
A significant number of taxpayers have interests in LAQCs and will need to make a decision when the legislation is released. A major factor in that decision will be the value placed on the allowable losses, and the difference in company and shareholders tax rates in profitable years. There will be administration costs in making the change.



The optimal tax structures will not necessarily be the same for all situations and therefore there is no definitive recommendation for all.
The Taxation (GST and Remedial Matters) Bill 2010 is expected to be enacted before the end of this year, and the new rules will apply from 1 April 2011.

2. OCTOBER TAX CHANGES - ONGOING EFFECTS

Ongoing GST adjustments at 12.5%
The following payments will need to be accounted for at the 12.5% rate rather than 15% in GST returns for period after 20 September 2010:

• payments towards a finance lease entered into before 1 October 2010 where the lessor has elected to have payments continue to include GST at 12.5%.
• late claims of GST for invoices that include GST at 12.5%.
• replacement invoices, and credit or debit notes issued or received where the original invoice was at 12.5%.

When a replacement invoice or a credit or debit note is issued, the GST rate must be the same as that of the original invoice. Instead of including these as income or an expense in your return, make an adjustment for the GST portion.
Those claims should be made as an adjustment to be disclosed in the GST return by gross up of the GST portion by the tax fraction of 20/3. The Inland Revenue Department has redesigned the GST adjustments calculation sheet (IR 372) to allow for adjustments at the 12.5% GST rate.

Replacement tax invoices

Normally only one tax invoice can be issued for a supply; if the price later changes then a credit or debit note will need to be issued. However, legislation enacted in September 2010 allows for the issuing of a replacement tax invoice in two situations:
A replacement tax invoice that includes GST at 12.5% can be issued after 1 October 2010 instead of a credit note to correct a price reduction for an invoice that originally included GST at 12.5%.
A replacement tax invoice that includes GST at 15% can be issued if there is a price increase after 1 October for an invoice that originally included GST at 12.5%. This may be useful when notifying a customer of the increase in the amount payable for successive supplies or periodic payments due after 1 October because of the GST increase.

Invoices showing incorrect GST rate

Any supply made on or after 1 October 2010 by a GST-registered business will be deemed to include 15% GST, even if a different rate shows on the invoice. An incorrect GST rate will not always make a tax invoice invalid, and if valid, the claim for GST is at 15%,

Provisional tax changes

Provisional tax is reduced for companies who pay provisional tax on the uplift basis from the beginning of the 2011/12 income year. That is to reflect the reduction in company tax rate to 28%. The provisional tax uplift rate for the standard method reduces from 105% or 110% to 100% or 105%, and the reduction applies to the calculation of a taxpayer’s provisional tax liability for the 2011/12 and 2012/13 income years.
Companies and Trusts that are provisional tax payers are liable for use of money interest on under and over payments of income tax irrespective of basis of payment. Companies and trustees in particular therefore need to take care in assessing provisional tax payments for other changes in income such as the removal of building depreciation.

FBT rate changes

Both the single rate and the alternate rate used for calculating fringe benefit tax (FBT) have changed.
On 1 October 2010, for quarterly filers, the single rate changed from 61% to 49.25% and the alternate rate changed from 49% to 43%.
For annual or income year filers not using an alternate rate calculation, the FBT rate for the 2010/11 year has changed to 55.04%.
The basic rates of attributed fringe benefits for the year 1 April 2010 to 31 March 2011 are as follows:
Income range FBT rate
$0–$12,390 12.9%
$12,391–$39,845 23.84%
$39,846–$54,915 45.99%
$54,916 upwards 55.04%
The basic rates of attributed fringe benefits change again for the 2011/12 year.

PAYE changes

The Inland Revenue Department has issued employers with updated PAYE tables or a letter outlining changes that take affect from 1 October 2010. The new PAYE rates applied to pay periods ending on or after 1 October 2010.

RWT changes

The new resident withholding tax (RWT) rates on interest align with the income tax rate changes that came into effect on 1 October 2010 and those apply to interest payments made on or after 1 October 2010, regardless of the term over which the investment runs.
The RWT rate of 38% will move to 33%, 33% to 30%, 19.5% to 17.5% and 12.5% to 10.5% for payees that elect to change to the new rate on or after 1 October 2010. The default rate is 33% for those that have not provided a tax file number and 17.5% for those that had RWT withheld at 19.5% prior to 1 April 2010. The default rate for new accounts opened after 31 March 2010 will be 33% for those that do not elect a rate. Recipients can elect 38% where the elected rate was 39.0% prior to 1 April 2010.
There is no change to the RWT rate deducted from dividends, which remains at 33%.

3. GIFT DUTY GOING....

The Taxation (Tax Administration and Remedial Matters) Bill 2010 was introduced into Parliament on 23 November 2010. The Bill abolishes gift duty and will be effective from 1 October 2011. The official reason for the change is that gift duty no longer raises any significant revenue and that the limited protection gift duty offers does not outweigh the significant compliance costs that it imposes on the private sector. It was therefore recommended that gift duty be repealed. Officials have noted that abolishing gift duty will require full repeal of the Estate and Gift Duties Act 1968 and any consequential provisions in other legislation.

4. GOVERNMENT TIGHTENING OF SOCIAL ASSISTANCE RULES

The Government has indicated that it intends to introduce legislation to broaden the definition of family scheme income, which is used to determine entitlements for Working for Families Tax Credits and other programs. This broader definition will also be used for the student allowance parental income test, and for some community services cardholders. The changes should be enacted before the end of 2010 and apply to entitlements for Working for Families Tax Credit and all new applications for the community services card from 1 April 2011. The new definitions will apply to all new applications for student allowances from 1 January 2012.

5. SAVINGS WORK GROUP

A Savings Working Group was set up by the Government to research options for improved national savings in New Zealand. The Group will report to the Minister of Finance by the end of January 2011. The intention of the Savings Working Group is to provide high-level advice on options that would help deliver better functioning domestic savings performance. The scope of the Savings Working Group includes:
the role of Government savings as part of New Zealand’s overall savings picture, including long-term savings/debt targets and the interaction of government and private savings;
the impact of the tax system on the level and composition of national savings and investment decisions; and,
the role of KiwiSaver in improving national savings.
The March 2011 Newsletter will review the content of that report.

6. GST ON LAND SALES AT ZERO PERCENT

The Finance and Expenditure Committee reported back on the Taxation (GST and Remedial Matters) Bill 2010 on 15 November 2010. The Bill provides for GST on supplies of land in transactions between registered persons at the rate of 0%, to simplify the method of making adjustments for changes in use, and to streamline transactions involving nominated persons. It also contains other policy and remedial amendments to GST and other Acts.
The Bill will progress through the final stages of enactment in time for the amendments to apply from 1 April 2011. The March 2011 Newsletter will review the implications of the new legislation.

7. PUBLIC RULING-DEDUCTIBILITY OF LOAN BREAK FEES

The Inland Revenue Department recently issued a public ruling “Deductibility of break fee paid by a landlord to exit early from a fixed interest rate loan on sale of rental property”.
The public ruling applies to a situation where a person has entered into a fixed interest rate loan and the money has been used to acquire a property from which rental income is derived. The person subsequently pays a break fee to the lender to repay in full and terminate that loan earlier than its agreed repayment date in order to sell the rental property. Therefore, the person ceases to derive rental income from the property.
The ruling provides for an automatic deduction for companies (other than qualifying companies), and a deduction for other taxpayers under the general permission in tax. The ruling has wider application to deductibility of all break fees.
The ruling will apply from the first day of the 2008/09 income year to the last day of the 2011/12 income year.

8. SHAREHOLDER EMPLOYEE ACC COVERPLUS EXTRA PREMIUMS NOW DEDUCTIBLE

Previously, premiums for ACC CoverPlus Extra (CPX) have not been tax deductible for shareholder employees. Now, when an employer company pays a shareholder-employee’s CPX levy, or reimburses them for payment of those levies, the amount paid or reimbursed (excluding the earners’ levy) will be tax deductible as an expense to the employer company.

9. GST LATE FILING PENALTIES

Late filing penalties apply to GST returns.
The first time a taxpayer files a GST return late they’ll receive a letter from the Inland Revenue Department requesting lodgment of the overdue return and advising that a late filing penalty may be charged on any GST return filed late in the future. If in the next 12 months a GST return is filed late, an automatic late filing penalty will be charged.
Late filing penalties for GST returns are $50 for those on the payments basis or $250 for those on the invoice or hybrid basis at the date the GST return is due.

10. USE OF MONEY INTEREST RATE TO REDUCE

The use of money interest (UOMI) rates on underpaid and overpaid tax is to change in line with market rates. The rate charged by the Inland Revenue Department on unpaid tax will fall from 8.91% to 8.89%, and the rate for overpayments of tax will increase from 1.82% to 2.18% from 16 January 2011.

11. FBT RATE FOR LOW-INTEREST LOANS REDUCED

The prescribed rate used to calculate fringe benefit tax on low-interest employment-related loans will rise from 6.00% to 6.24% for the quarter beginning on 1 October 2010.

12. CODE OF PROFESSIONAL CONDUCT FOR AUTHORISED FINANCIAL ADVISERS-CLOSE

The Code of Professional Conduct for Authorised Financial Advisers was approved by the Minister of Commerce on 21 September 2010 but has not yet been brought into effect by the Commissioner for Financial Advisers.
The Commissioner may at its discretion, grant exemptions from compliance with any obligation under the FAA, the regulations or the Code of Professional Conduct for Authorised Financial Advisers (Code); and from the obligation to register under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA) by virtue of providing financial adviser services or broking services. Applicants must be able to demonstrate that the statutory criteria set out in the FAA are met in relation to their exemption application.

13. CHANGE TO IMMIGRANT REQUIREMENTS

A new Immigration Act will come into effect on 29 November 2010. As an employer, the obligations under the Immigration Act 2009 remain essentially the same as under the Immigration Act 1987—an employer must not employ a non-New Zealand citizen who isn’t entitled to work in New Zealand. The key change for employers in the Immigration Act 2009 is that holding a Tax code declaration (IR 330) form will no longer be a “reasonable excuse” for employing a non-New Zealand citizen who isn’t entitled to work in New Zealand. Instead, an employer has to show that “reasonable precautions and exercise of due diligence” was undertaken to check whether the immigrant is entitled to work in New Zealand.

14. INDUSTRY SPECIFIC BALANCE DATE FOR KIWIFRUIT

As a consequence of earlier kiwifruit harvest seasons, and the development of new earlier fruiting varieties of kiwifruit, the Inland Revenue Department has been asked to review the current industry specific balance dates for kiwifruit orchardists.
Currently, the Department allows kiwifruit orchardists to use (on application) balance dates of 30 April, 31 May and 30 June, in addition to the standard balance date of 31 March. It is proposed that approval be given for balance dates of 31 January or 28 February, and the industry specific balance dates of 30 April, 31 May and 30 June would no longer be available. Existing kiwifruit orchardists with alternative non-standard balance dates would be able to retain those balance dates.
The IRD is inviting people with an interest in the kiwifruit industry to provide feedback on the proposed changes.
If you have comments they may be emailed to consultation@ird.govt.nz or posted to:
Team Manager, Technical Services
Office of the Chief Tax Counsel
National Office
Inland Revenue Department
PO Box 2198
Wellington

15. PUBLIC HOLIDAYS 2010 / 2011

The general rule for public holidays is that they are taken on the day they fall. There are four public holidays that are treated differently, and these are Christmas Day, Boxing Day, New Year’s Day and 2 January.
We outline this year’s position in the table below:



An employee cannot be entitled to more than four public holidays over the Christmas and New Year period.

CLIENT QUERIES

16. LOSSES AND PAYMENT OF INCOME TAX

Question

Can outstanding income tax liability of a taxpayer be satisfied by, or written off in return for, extinguishing tax losses of the taxpayer and/or of another taxpayer?

Answer

The Income Tax Act 2007 doesn’t allow an outstanding income tax liability to be satisfied by extinguishing the taxpayer’s tax losses (or another taxpayer’s tax losses). Nor does the Tax Administration Act 1994 provide for the write-off of tax in return for extinguishing a taxpayer’s tax losses (or another taxpayer’s tax losses). If the Commissioner writes off outstanding tax for a taxpayer with net losses, he must divide the amount written off by 33% and reduce the tax loss by that amount. In that case extinguishing the losses is a consequence of the decision to write off the tax as opposed to the reason for it. In practice the Commissioner will consider write off of losses carried forward to pay outstanding taxes where certain circumstances exist and there is no prospect of recovery of any of those taxes.
The taxpayer may use tax losses to pay that shortfall penalty if certain requirements are met.

TAX CASE

17. TAXPAYER NOT ALLOWED TO DEREGISTER FOR GST RETROSPECTIVELY

The Taxation Review Authority (TRA) has held that the Commissioner was correct to decline to retrospectively cancel a taxpayer’s GST registration.

Background

The taxpayer was a family trust. On behalf of the trust, the trustees sought and obtained GST registration on 17 February 2006 on the basis that it was to purchase a commercial (farming) property for lease. In the taxpayer’s September 2006 GST return, it made an input tax credit claim for the property purchase on 29 September 2006. However, it was agreed that the GST input tax credit claim should not be allowed, because the property was purchased from associated persons and there was no GST charged on the supply.
In March 2007, the taxpayer asked the Commissioner to cancel its GST registration, with a retrospective effective date of 17 February 2006. The taxpayer was of the view that it was not conducting a taxable activity as at March 2007. The Commissioner declined to cancel the registration. The taxpayer challenged the Commissioner’s decision and sought an order from the TRA supplanting the Commissioner’s decision by cancelling the GST registration as sought by the taxpayer.
The taxpayer also challenged the imposition of a 20% shortfall penalty (reduced to 10% for previous good behaviour) that was charged on the incorrect tax position taken.

Taxation Review Authority

The TRA found that the taxpayer had been carrying on a taxable activity, although the taxable activity was below the then GST registration threshold of $40,000. The TRA noted that, while the taxpayer may regret registering for GST, the Commissioner did not accept that it would be appropriate to retrospectively cancel the taxpayer’s GST registration when there was clear evidence of ongoing taxable activity.
The TRA dismissed the taxpayer’s challenge. The TRA found that there was no element of unfairness in relation the Commissioner’s actions. The taxpayer made a conscious decision to register for GST, with an aim of claiming the GST input tax credit for a property purchase. The TRA said that this claim was made by the taxpayer after being advised by the Commissioner that a GST input tax claim could not be made. The Commissioner had, therefore, acted appropriately in the circumstances.

18. NEWS ABOUT THE OFFICE

Christmas Hours:
We will be closing for the Christmas break 3.00 pm Wednesday 22 December 2010 and reopening again 8.30 am Monday 17 January 2011.
The office will attend to preparation of GST returns and 2011 provisional tax prior to 23 December. The filing date for GST and payment date for both provisional tax and GST is 15 January 2011. Because this is a Saturday it is permissible to pay on Monday 17 January.
Should you require urgent advice during the closure period please email Margaret margaret@woodwalton.co.nz and she will relay your request to the person that you need to talk to or can best attend to the query.
The Partners and staff wish you a wonderful holiday season.