News > Our Newsletters > September 2010
 At Wood Walton we are recognised by our clients as the preferred supplier of chartered accounting services and by our staff as an enjoyable and excellent environment in which to work  Read our testimonials
|
September 2010  1. Post Budget-Proposed GST Changes For Transition To The New GST Rate 2. Post Budget 2010-Depreciation Issues On Building Fit Outs 3. Post Budget 2010-Working For Families Tax Credits 4. Qualifying Companies (QC) & Loss Attributing Qualifying Companies (LAQC)-NZICA Submission 5. GST Bill-Taxation (GST And Remedial Matters) 6. Taxation (Income-Sharing Tax Credit) Bill 2010 7. KiwiSaver Contribution Rates Extended 8. KiwiSaver First Home Deposit Subsidy 9. IRD Targets Hidden Economy 10. Charities Commission Cracks Down On Charities 11. FBT Rate Up For Low-Interest Loans 12. GST Invoice Issued Prior To Performance Of Service 13. Agreement Providing For Vacant Possession Not Transfer Of Leasing Business As Going Concern 14. Supreme Court Grants Leave To Appeal Tax Avoidance Decision 15. News About The Office 16. September 2010 Tax Take 
1. POST BUDGET-PROPOSED GST CHANGES FOR TRANSITION TO THE NEW GST RATEThe Government released further changes to the Goods and Services Tax Act 1985 on 10 August 2010 to assist with the transition to the new 15% GST rate on 1 October 2010.Our September 2010 issue of Tax Take (refer page 10) outlines the basic changes. The announcements in this Bill should be read in conjunction with that tax update and these should provide better understanding of the general application of the new rules. The changes are summarised as follows: ANNUAL CONTRACTS INVOLVING SUCCESSIVE SUPPLIESMany contracts, particularly in the general and health insurance area, are for a period of one year or are at least reviewed annually. In some cases the customer pays the premium in one payment while in other cases the premiums are paid progressively, say by monthly instalment. Most of these arrangements will straddle the GST rate change date of 1 October 2010 so that, in the absence of legislative change, some instalments will be at the new GST rate and some at the old. Businesses may be able to seek additional payment from customers to cover the additional GST, but in many cases the compliance cost to them of doing so is excessive relative to the amounts of GST involved.The proposed amendment would allow insurers and others the option of applying the 12.5% rate for the rest of the insured period up to the next annual review date (or less if the contract is for a lesser period) provided certain criteria are satisfied. The key criteria are that all the remaining GST is accounted for in the return period ending before 1 October 2010 and GST registered recipients only claim back GST at the 12.5% rate. That would be achieved by treating the remaining supplies to have been made on 30 September 2010. In the event that an insurance policy or other contract subject to the transitional rule is cancelled and, therefore the supply is not fully provided, businesses would need to issue credit notes to adjust for the change in consideration and the GST incorrectly paid. SUBROGATION PAYMENTSA subrogation payment is the recovery income received by an insurer for the damages caused by a third party to their insured party. The GST Act deems the time of supply to be the day on which the insurer receives the payment. That means subrogation payments received on or after 1 October 2010 will be subject to the new 15% GST rate, even when the underlying claim to which the payment relates was at 12.5%. The proposed change would allow the rate of GST to remain at 12.5% for subrogation payments received on or after 1 October 2010 provided the underlying claims are agreed and settled before 1 October 2010.FINANCE LEASESIn agreements to hire that are finance leases, GST is applied to the supply of the goods in question (a photocopier lease or motor vehicle lease, for example) but not to the finance component of the transaction as financial services are GST-exempt. In finance leases the interest and principal components are calculated actuarially but to ease compliance GST payments are able to be based on a straight-line approach over the term of the lease. A square-up adjustment is normally only done when the lease terminates, to reflect any difference between the actual and expected residual value of the leased asset. With a rate change occurring during the contract term, the new rate would apply to the remaining payments under the finance lease contract. The subsequent reconciliation that would have to be undertaken on those existing contracts is complex, and as most contracts are with GST registered businesses there is no GST lost in the change.The proposed change would allow finance leases entered into before 1 October 2010 for a maximum term of five years to continue to be able to be accounted for at the 12.5% rate, provided GST registered lessees were advised by the lessors to deduct input tax at the 12.5% rate on payments made after 1 October 2010. ALIGNING LEGISLATION AND PRACTICEThe Bill addresses other instances where there could be confusion in practice.The issuing of tax invoices for pre-October supplies Goods or services that are supplied on or before 30 September 2010 and the invoice is not issued until early October even though dated before 1 October 2010. Under the GST Act, it is the date when the invoice is issued that is relevant for determining the time of the supply, so those invoices could technically be considered subject to the higher rate even though the goods or services are provided, and the invoice is dated when the rate was 12.5%. The suppliers in that situation may treat tax invoices issued on or before 11 October 2010 for goods or services provided on or before 30 September 2010 as having been issued on the date of the invoice. That is provided the invoice is dated on or before 30 September and payment is due no later than 60 days from the invoice date. Option of general time of supply or successive supplies rule Some supplies are successive supplies (for example, utilities and phone line rentals) and require GST to be accounted for on the basis of when the invoice is issued rather than when payment is due or received. Technically, the GST rate on a successive supply should be determined by when the payment is due or received rather than when the invoice is issued. Suppliers of supplies of that kind have the choice of using either the invoice or the “payment due or received” rule on the condition that the goods or services are provided before 1 October 2010, the invoice for the supply is dated on or before 30 September 2010, the invoice is issued by 11 October 2010 and payment is due not later than 60 days from the invoice date. Replacement invoicesLegally, a supplier cannot issue two tax invoices for the same supply and should be instead issuing credit or debit notes when goods are returned or additional GST is due as a result of the GST rate increase. However there are concessions for the GST rate transition period:• rather than a credit note, replacement tax invoices can be issued to replace pre-1 October 2010 invoices for supplies that are provided successively, to cover the amended GST payable on the remaining services provided from 1 October; and, • there is also an option of allowing the issue of a new invoice at the previous GST rate of 12.5% if it relates to revising an invoice issued before 1 October 2010, as an alternative to issuing a credit note. That overcomes the time of supply issue with the change in rate. Layby salesFor GST purposes, a layby sale is only recognised as taking place when the goods are delivered, which is normally after the last instalment payment. Goods uplifted after 30 September will, therefore, attract the new 15% GST rate. Although paying all of the layby instalments and collecting the layby item before 1 October would preserve the old 12.5% GST rate, this will not always be possible because of the costs involved or the goods simply not being able to be delivered before that date. Suppliers can elect to apply the old 12.5% GST rate for any payments received before 1 October 2010 for layby contracts that span the GST rate change date and that are in place before Budget night (20 May 2010). The supplier is required to return those payments in their September 2010 GST return as there is a deemed supply to the extent of these payments. This is in effect an apportionment, with payments made from 1 October 2010 at 15%.
2. POST BUDGET 2010-DEPRECIATION ISSUES ON BUILDING FIT OUTSThe Government released tax policy issues paper “Post-budget depreciation issues” on 11 August 2010 which outlines suggested changes to depreciation of non-residential building fit-outs and changes to grandparenting of depreciation loading for assets acquired before 20 May 2010. The proposal allows non-residential fit-out to be depreciated separately from the building provided the item is described in the IRD depreciation determination asset category “Building Fit-out (when in books separately from building cost)” or if the item is an item of plant. It also proposes that people who have not separately identified items of fit-out in their non-residential building will be allowed to continue to depreciate a portion of their building’s tax book value at the old building depreciation rate.The Budget 2010 tax package removes depreciation loading on assets purchased after 20 May 2010. The rules state that an item would be eligible for depreciation loading if it was acquired, or there was a binding contract for its purchase or construction, on or before 20 May 2010. The application of the rules is unclear in situations where a person builds an asset themselves. A new grandparenting rule is proposed that would allow owners in those situations to use the loading if the item was acquired on or before 20 May 2010, or alternatively, the owner had both intended to and actually begun purchasing or constructing the item on or before 20 May 2010. 
3. POST BUDGET 2010-WORKING FOR FAMILIES TAX CREDITSThe Government released tax policy issues paper Social assistance integrity: defining family income on 30 August 2010 that proposes a change to the definition of family scheme income used for determining entitlements to certain social assistance programmes, namely, Working for Families (WFF) tax credits, student allowances and community services cards.Currently, people can arrange their affairs and minimise family scheme income to qualify for social assistance entitlements. The Taxation (Budget Measures) Act 2010 was enacted on 27 May 2010 to prevent investment losses, such as rental losses, being used to increase taxpayer’s Working for Families tax credits. The issues paper takes the process a step further and proposes to include in the definition of family scheme income amounts involving:
the amended definition of family scheme income for WFF apply from 1 April 2011; the amended definition of family scheme income be used to determine parental income for the purposes of student allowances and apply to all new applications for student allowances from 1 January 2012; and, the amended definition of family scheme income be used to determine income for WFF recipients who apply for the community services card and apply to all new applications for the community services card from 1 April 2011. 
4. QUALIFYING COMPANIES (QC) & LOSS ATTRIBUTING QUALIFYING COMPANIES (LAQC)-NZICA SUBMISSIONThe New Zealand Institute of Chartered Accountants (NZICA) indicates in it’s submission of 20 May 2010 on official’s issues paper Qualifying Companies Implementation of flow-through tax treatment that it does not support the proposals in that report.The paper proposes that qualifying companies (QCs) and loss attributing qualifying companies (LAQCs) effectively be treated as limited partnerships for tax purposes. The key proposals are summarised as follows: No distinction between QC & LAQC. QCs will be taxed similarly to limited partnerships with taxable income and losses flowing through to shareholders in proportion to their effective interests. There will be a loss limitation imposed on shareholders that will limit loss attribution to the value of the person’s interest. Excess losses can be carried forward and utilized when the shareholder’s investment in the company increases. Amounts derived by QCs will retain their integrity in the hands of the shareholder. Capital distributions will be treated as capital receipts and revenue distributions income in the hands of the shareholders. Dividend and imputation rules will not apply to QCs. Shareholders in QCs will no longer be personally liable for company income tax when electing to become a QC. Shareholders will only be required to account for tax on disposing of their share of interests in a QC if the value of the proceeds exceeds the total net book value of their share of the company property by more than $50,000. The same exception rules apply to both partners in a partnership and shareholders in a QC. There will be a deemed disposition and requisition of the company’s assets at market value when the company ceases to be a QC. Shareholders will therefore be required to account for tax on the disposal of their share of the QC’s property. On liquidation, a shareholder of a QC will be treated as having disposed of and reacquired their interest in the company at market value. QCs will be required to file an IR 7 partnership tax return. There will be no tax cost associated with the transition of existing QCs into the new QC rules. The NZICA opposes the proposals on the grounds that partnership tax rules involve significant compliance costs on entry or exit to the structure, and potentially contain higher compliance costs and tax risks in getting the new rules wrong in application. The NZICA submission offers refinements to existing rules to address a key concern of tax rate arbitrage, and to resolve complications with the current election rules for QCs and LAQCs. Officials are concerned that arbitrage opportunities arise from qualifying company profits being taxed at the company rate while the losses of LAQCs are allowed as a deduction from a shareholder’s annual gross income, which may be taxed at a higher rate. The NZICA refinements are broadly outlined below: The QC rules should remain; The LAQC rules should be amended to attribute both losses and profits; The criteria for electing into the QC and LAQC rules and staying in the regimes should be overhauled and simplified; The basis of shareholding to attribute losses in a LAQC should not change. To use shareholder economic risk as a basis would create planning opportunities which could be counter productive; and, Taxpayers should be given the option of rollover relief to allow them to migrate to another entity type with no tax cost arising from the transition. The NZICA oppose any change that discourages taxpayers from entering into the QC and LAQC regime. 
5. GST BILL-TAXATION (GST AND REMEDIAL MATTERS)The Taxation (GST and Remedial Matters) Bill 2010 had its first reading in Parliament on 19 August 2010. The major feature in the Bill is the change in GST charged, on supplies of land in transactions between registered persons, to 0%.The amendments made to GST are outlined as follows: Zero-rating transactions involving land: The Bill requires GST-registered vendors to charge, subject to certain conditions, GST at the rate of 0% on any supply to a registered person involving land or in which land is a component. This measure is intended to prevent “phoenix” fraud schemes that involve the Inland Revenue Department (IRD) refunding GST to the purchaser with no corresponding payment being made by the vendor because the supplying company deliberately winds up before making payment. A transaction between a registered supplier and a non-registered purchaser remains subject to the existing rules. It is intended that the new provisions apply from 1 April 2011. Transactions involving nominations: The Bill provides that in transactions involving nominations, when a contractual purchaser nominates another person to receive the goods or services from the contractual vendor, the GST treatment should be determined on the basis of the transaction’s economic substance. The GST consequences of the transaction, such as an entitlement to an input tax deduction, will depend on the nature of the particular transaction and who provides the consideration for the supply (i.e. the real purchaser and the real buyer). It is intended that the new provisions apply from 1 April 2011. Supplies of accommodation: The Bill further defines “dwelling” and “commercial dwelling” to clarify when the supply of accommodation should be treated as a taxable or exempt supply for GST purposes. The definition of dwelling is narrowed, thereby ensuring that the exemption from GST applies only in situations with a reasonable level of substitutability between renting and owning a house. The list of commercial dwellings is also revised and now includes types of accommodation such as homestays, farmstays and serviced apartments. It is intended that the new provisions apply from 1 April 2011. Input tax and change-in-use adjustments: The Bill replaces the existing change-in-use adjustment provisions that deal with the mixed use of goods and services. A registered person apportions their initial input tax deduction according to the intended use of the asset. Adjustments are made in later years if records show the actual use of the asset is different from its intended use. It is intended that the new provisions apply from 1 April 2011. GST reverse charge rules: The Bill amends the GST reverse charge apportionment rules for imported services. The reverse charge rules operate on the assumption that output tax should be accounted for any non-taxable use of imported services consumed in New Zealand. The new rules will apply where a registered person imports services that are not subject to the reverse charge and later uses those services for non-taxable purposes. They incorporate apportionment to the reverse charge rules. It is intended that the new provisions apply from 1 April 2011. Non-profit bodies: The Bill excludes non-profit bodies from the requirement that GST-registered suppliers accounting for GST using the invoice basis when the consideration payable for a supply of goods and services is $225,000 or more, and payment by the recipient is deferred. The new rate will apply when the risk of tax avoidance is low. The non-profit bodies must determine that the recipient is not a registered person and is not intending to use the goods and services at least until the full consideration is paid for the supply. It is intended that the new provisions apply from the date of enactment. 
6. TAXATION (INCOME-SHARING TAX CREDIT) BILL 2010The Taxation (Income-sharing Tax Credit) Bill 2010 tabled in Parliament on 16 August 2010, provides for an annual tax credit for couples who are married, or are partners in a de facto relationship or a civil union for a full tax year, and who have responsibility for a dependent child. Both must be New Zealand tax residents for the entire year. The credit is called the income-sharing tax credit and is intended to be available from 1 April 2012.Eligible couples with dependent children can choose to apply for the tax credit at the end of each tax year. The amount they receive will depend on the relative amounts of tax payable by each partner on individual incomes. The tax credit will be the difference between the tax that is payable by each partner on their own incomes, and the amount of tax they would have paid if they each had an equal share in the couple’s combined income. The tax credit could be used to meet any tax owing or be refunded to the couple. Under the current tax rates and thresholds, the maximum amount of an income sharing tax credit would be $9,080. If a partner has a tax loss, it will be ignored for the purpose of the calculation and they will be treated as if they earned no income. A person who receives an income-sharing tax credit, or a portion of it, will not be eligible for the Independent Earners Tax Credit. 
7. KIWISAVER CONTRIBUTION RATES EXTENDEDThere are amendments to the KiwiSaver Act 2006 in the final enactment stages to extend the contribution rates to include 6% and 10% contribution rates in addition to the 2%, 4% and 8% rates currently in place. Those changes will enable KiwiSaver members to contribute the amount that is right for them. The 6% rate is a logical step to the current rates while the 10% rate will give older savers an opportunity to contribute more near their retirement or enable younger savers to contribute more in saving for a first home deposit.8. KIWISAVER FIRST HOME DEPOSIT SUBSIDYThe KiwiSaver first home deposit subsidy is designed to help first home buyers and previous home owners (who are in a similar financial position to first home buyers), who would be able to sustain a commercial mortgage but face difficulties saving for a deposit. KiwiSavers may be eligible for the deposit subsidy after three years of contributing to the scheme. The subsidy is $1,000 for each year of contribution, up to a maximum of $5,000, and is available from 1 July 2010. The deposit subsidies are able to be paid out in 2010 to people who started KiwiSaver contributions in 2007.The deposit subsidy is provided as a suspensory loan from Housing New Zealand to the recipient. For the purposes of the deposit subsidy, a recipient must live in the home for at least six months. After this time there is no longer a requirement to repay the loan. Normally, when a debt is forgiven, the amount becomes “income” for the purposes of the Income Tax Act 2007 but classified as a subsidy it is not treated as debt forgiven for tax purposes. In addition to the subsidy, KiwiSaver members can make a one-off withdrawal of contributions (excluding the Government kick start of $1000) towards a deposit on their first home after they have been contributing for three years. 9. IRD TARGETS HIDDEN ECONOMYThe Inland Revenue Department (IRD) indicated in a media release dated 1 July 2010 that it intends to focus attention on New Zealand residents with undeclared taxable income from the hidden economy. New Zealand tax residents are required to declare all income. Those in the hidden economy usually deal mainly in cash so have greater opportunity to understate income, overstate expenses and operate outside of the tax system.The hidden economy includes:
The IRD is particularly targeting the non-disclosure of offshore bank accounts, the use of foreign credit/debit cards, overseas life insurance policies and superannuation funds. The IRD is using its network of tax treaties with other international tax authorities to support its audit activities, as well as actively participating in bilateral and multilateral compliance projects. In addition, the use of Tax Information Exchange Agreements (TIEAs) with offshore finance centres will enable the IRD to obtain even more details of offshore accounts and assets of New Zealanders. |
