Articles by Matthew Gilligan

New Tax Rules Proposed for Holiday Homes

The IRD has recently released an issues paper in relation to the tax treatment of mixed-use assets.  Whilst the issues paper will apply to a range of assets including yachts, launches, aircraft for example, its application to holiday homes is likely most relevant to readers and clearly the main intended target of these proposed changes.

Current Rules

Currently one is entitled to a tax deduction for expenses incurred in deriving taxable income.  In the case of a holiday home where there are periods during which the property is rented the law is very clear in that the income is taxable and the expenses incurred during that period deductible.  When the holiday home is used privately the law is equally clear in that no expenses are deductible during that period.  In between the holiday home may well be available for rent and the current IRD position in relation to expenditure during this period is that a deduction may be available if genuine attempts are made to rent the property. 

Proposed Changes

The IRD want to change the rules in relation deductibility of expenditure during periods in which a holiday home is available for rent but not actually rented.  The proposed rules will apply to holiday homes that are unused for at least two months of the year and owned by individuals, trusts, companies that are close companies, qualifying companies, look through companies and where the holiday home is used both privately and for income earning purposes.

If these criteria are satisfied the IRD are then proposing one of two methodologies for determining whether expenditure will be deductible.

First option is something of an all or nothing option in that either all expenditure during the downtime will be deductible or none of it will.  In order for all of the expenditure to be deductible the holiday home would have to have been used for income earning purposes for 62 or more days during the income year and the actual personal use be less than 15% of the income earning use.  For example, if a holiday home were rented for 80 days during the year then provided the private use were no more than 11 days all expenditure during the remaining days of the year would be deductible provided there was genuine efforts to earn income during that period. 

The second option includes a more complicated formula that allows for a partial deduction of expenditure during the downtime periods based on the proportion that the income earning use of the property bears to the private use.  Under this test in order to get a deduction for all of the expenditure, once again the asset will have to be used for 62 days or more in a year, but the threshold of private use to income earning use drops to 10%. 

GRA Comment

The first point to note that these rules are at proposal stage only.  Public submissions on the rules can be made to the Inland Revenue before 30 September 2011.  A link to the issues paper can be found by clicking HERE.

Whilst the rationale for this overhaul of the rules is relatively sound in that the desired outcome is to tighten deductibility of expenditure in relation to assets that ultimately are more about private than investment use, the proposed thresholds will likely have a significant consequence for owners of property that are genuine investments but used privately from time to time.  A typical holiday home investment may well produce more rent on an annual basis if rented periodically to short-term stay occupants rather than on a long term lease.  In such a case there may not be a large number of days where the property is occupied meaning that the private use threshold whether it be set at 10% or 15% is relatively low.  It seems unfair to us to then disallow deductibility of all expenditure during downtimes on the basis that it is essentially of a private nature when the asset arguably has a predominant business use. 

It was also interesting to note that the IRD issues paper referred to the fact that there are 15,000 holiday homes available for rent in New Zealand based on a survey of eight leading New Zealand websites.  One would not be surprised if you had a property advertised on such a site that you attract the attention of the taxman in the future. 

As always if you have a holiday home and are concerned about the application of the current rules to you please contact us.  Once again these rule changes are proposed only and if you feel strongly about them we encourage you to make a submission or provide GRA feedback and we can accumulate your feedback and submit on your behalf. Please send feedback to info@gra.co.nz

Matthew Gilligan
Director

Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.  Also what about joining us on Facebook.

GST Issues for People Buying and Selling Property/Property Traders

Whilst it has almost been six months since the new zero rating provisions for land transactions came into force, at GRA we are still seeing quirks and issues emerge as practitioners and property traders / investors come to grips with the new rules.  In today’s article I want to examine two scenarios that those of you who are property trading should be wary of.

Scenario One

In scenario one a property trader has identified a potential trade property that is on the market for $200,000 including GST (if any).  The trader thinks that they could spend $20,000 making renovations and then sell it for $260,000.  The trader understands that they will need to return GST on the $260,000 but anticipates making GST claims on the $200,000 purchase price and the $20,000 renovation costs leaving a margin of circa $35,000 after GST and before income tax. 

Following this the trader submits an offer for $200,000 including GST.  The offer is accepted and our trader starts to look forward to renovating and making the $35,000. 

However, prior to settlement the trader seeks advice in relation to the GST treatment of the purchase and discovers that the vendor is a GST registered trader themselves.  This means the transaction of selling the land from the GST registered vendor to our GST registered trader is a zero rated transaction for GST purposes.  The $200,000 purchase price "inclusive of GST (if any)" now includes GST applying at a rate of 0%.  As a result our trader who anticipated having a GST refund of $26,000 in relation to the purchase of the property now has no GST refund.  Suddenly the $35,000 pre-tax profit is eroded because GST still has to be accounted for on the sale (note that we are assuming that the sale here does not occur to yet another GST registered party but it is a retail sale to an owner occupier / residential investor).

Possible Solutions

The moral of the story here is know your vendor.  If the vendor is GST registered and selling the property as part of their taxable activity and you are similarly GST registered and buying it for a taxable activity the GST component is zero.  In such a scenario you need to offer what you perceive as the GST exclusive value of the property to you - which in this case is $174,000 (being the $200,000 less the anticipated $26,000 refund that you are now not getting).  You can also consider including a clause in a contract making them warrant that not only are they not registered now but they will not be at the time of settlement and should they breach that warranty then the purchase price is reduced to reflect the fact that you will not get your GST input claim.

Scenario Two

In scenario two we are looking at a property trader whom is selling a property bought for trading purposes.  Our property trader is approached by a prospective purchaser who explains that they are GST registered and looking to buy the property in order to apply it towards a taxable activity (for example use as a commercial premises).  The purchaser therefore explains that they are willing to offer $400,000 inclusive of GST.  Our property trading vendor wants to clear $400,000 excluding GST and therefore had anticipated selling it to a retail investor for circa $460,000 so that after they had paid their $60,000 GST they still had $400,000.  This GST registered purchaser convinces our vendor that because its going to be a zero rated transaction they can sell it for $400,000 "including GST" because the GST component will be zero and our vendor will clear $400,000.  The vendor accepts the purchaser’s overtures and enters into the sale and purchase agreement.

Subsequently the purchaser changes their mind in terms of the use of the property they advise the vendor that they are now nominating a non-GST registered entity that will be buying the property for non-GST purposes (i.e. residential rental or to occupy as a residence).  This is disastrous for the vendor because now the $400,000 which was anticipated to include zero GST in fact includes GST at a standard rate meaning that our vendor has to account to the IRD for $52,000 in GST out of the $400,000 sale price.

Possible Solutions

If you are a vendor you could make the price “plus GST” instead of “inclusive of GST”.  If the contract is plus GST then a purchaser will have to pay GST at the standard rate if they change their mind (having initially said they will be GST registered).  Another strategy is to include a clause in the sale and purchase agreement whereby the purchaser warrants that they will remain GST registered at settlement and the transaction will be a zero rated transaction, and if they breach that warranty then the sale price is increased by 15% to compensate you as vendor for the fact that you will now need to account for GST.

Both of these scenarios illustrate the importance of understanding the circumstances of the other party in land transactions.  They also show that if circumstances change you can be placed at a disadvantage. 

As always we recommend you seek advice on your particular transaction.  Every transaction is different and you need to be vigilant in checking the terms of your sale and purchase agreement.  The above is comment of a generic nature only and should not be mistaken for specific advice in relation to any transactions you are involved in.  Contact us at GRA for advice on 09 522 7955.

If you are worried about any of these issues I have mentioned email or come and see me.

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

RECENT GST CHANGES

In our last newsletter I talked about the new zero rating rules that apply to land transactions between two GST registered parties.  In this edition I’m going to look at the new apportionment rules that were brought in at the same time and apply from 1 April 2011 with certain exceptions.  First a bit of background.

"Old" Rules

Historically the GST rules that apply to claiming GST on purchase have applied on a principal use test.  If the principal purpose in acquiring the asset was to apply it towards a taxable activity then a GST claim on the full purchase price was permitted.  For example if a car was being acquired with the intention of it being used 51% of the time for business purposes then full GST could be claimed.  The sting in the tail of the old regime then came in as the car was applied towards non business purposes as there were then relatively complicated adjustment rules that required GST output adjustments (i.e. payments to be made) each GST return period. 

The same rules applied in respect of property, whereby if a property was bought with the principal purpose of trading a full GST claim was available.  If the property was then rented residentially (which is an exempt use for GST purposes) adjustments were made each GST return period based on the rules set out in a judgment known as the Lundy case.

New Apportionment Approach

The new approach applying from 1 April 2011 allows for proportionate claims of GST.  Intuitively this does seem sensible.  If a car, for example, is going to be used 75% for business purposes and 25% for private purposes it makes sense that 75% of the GST be claimed at the outset rather than applying the old principal use test.  Where the complication in the new rules comes into play is that you then need to monitor the use of the car over time and if it transpires that it is only used 50% for business purposes then an adjustment will need to be made to repay some of the GST claimed so that the net amount claim equates to 50% of the GST paid originally so that it reconciles to the 50% business use.

Bob & His Car

To illustrate by way of example let's take Bob whom is a plumber and buys a vehicle that he expects will be 75% used for business purposes.  He pays $23,000 including GST.  The GST component of this is $3,000.  Initially Bob claims a refund of $2,250 being 75% of the GST paid reflecting the intended 75% business use.  The car was bought in June 2011. 

Bob now needs to monitor the actual use of the car over time and potentially make an adjustment in what is known as his first adjustment period.  The first adjustment period is either the end of the financial year in which the car is acquired or at the end of the next financial year.  For example Bob could choose his first adjustment period to either the period that ends 31 March 2012 or 31 March 2013.  Whatever adjustment period he chooses, as at that date he will need to calculate the actual business use for the adjustment period and compare it to the intended use.  If the actual business use at the end of the first adjustment period turned out to be 50% rather than 75% then Bob would have $750 GST to pay which then effectively means his net GST claimed is $1,500 (being the $2,250 originally claimed less the $750 adjustment paid back) which in turn equates to 50% of the original GST paid.

Application to Land

Many readers will be interested to know how these rules apply to property bought for dealing and development purposes where 100% of the GST has been claimed initially but the property is then rented residentially because an appropriate buyer cannot be found.  The first point to note is that these new rules only apply to property acquired on or after 1 April 2011.  If you own property at present in a GST registered trading entity and you are renting that residentially you make adjustments according to the old rules if acquired pre 1 April 2011.  In other words, if you have historically been making GST adjustments according to the formula set out in the Lundy case then you continue to do so. 

If you have acquired the property on or after 1 April 2011 and after claiming GST have not been successful in finding a buyer then you apply these new rules.  The starting point to apply the new rules is to determine what your first adjustment period is going to be.  Assuming a 31 March balance date this will either be the period that ends 31 March 2012 or 31 March 2013.  In short, if you have acquired a trading property on or after 1 April 2011 and end up renting it residentially you do not make periodic adjustments each GST return but rather will assess the actual use of the property as at 31 March 2012 or 31 March 2013.  If at that time the property has not sold you will look back and determine during the period of ownership how long it was rented for and how long it was applied towards the intended activity of property dealing (in other words how long was it on the market for).  Without going into detail if the property has been rented and not marketed for sale then its business use in terms of a percentage will be very low which will mean at the first adjustment period a potentially significant amount of GST will need to be repaid. 

To illustrate by way of example let us say that a property is bought in June 2011 for $460,000 with a $60,000 GST claim being made in the period covering the purchase.  The client decides that their first adjustment period will be period that ends 31 March 2012.  At that point the property has been owned for nine months.  Outside of the first two months of ownership where the property was renovated and then marketed for sale the property has been rented.  Without going into the detail of the calculation applying the formula shows that the property has only been 20% applied towards the taxable activity and 80% applied towards the exempt activity of residential rental.  The result of this is that there will be GST to pay of $48,000 for the adjustment period (being 80% of the GST claimed).

For those who are familiar with the far smaller but regular adjustments that are made in applying the Lundy calculation, you will immediately recognise that the adjustments under the new rules are going to be far more significant if a property is rented residentially for a significant period of time.

Conclusion

In summary, new apportionment rules mean that GST is not always claimed in full when an asset is acquired.  Rather you will need to ascertain what the business use percentage is and then claim that relevant percentage.  You will then need to monitor the actual use of the asset over time and decide on what period of time you are going to choose to be your first adjustment period.  At the end of the first adjustment period you will compare the actual use to the intended use and there may be GST to pay (or to claim) as a result.  In relation to property this GST adjustment could be very significant if the property is rented residentially.  Those with property acquired prior to 1 April 2011 can ignore these rules and continue to apply the existing rule.

As always please contact the team at GRA with any queries in relation to the above on 09 522 7955 or click here.

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

Sunday Rant....

Labour intend to ring fence property losses to future property income. This will send thousands of investors broke fast. Take investors tax refunds away, property values crash. This is well documented overseas. Sweden property values dropped 35% when they ring fenced losses and the following govt reversed the policy, with values immediately there after recovering.

 Accountants would get a mountain of pre change planning work and we would have years of work to do.  While lots of New Zealanders will go broke with ring fenced losses and inolvency revenue will grow to. I'm not going to sit by and have to charge my clients for work that is going to make them go broke.  Labour are you thinking this through?
 

I would not want to be a banker though with losses ring fenced...will make an already difficult environment treacherous and property investors would want to be selling sooner than later.

This really is playing with fire by labour with little short term upside, given the global backdrop of deleveraging, and capital growth prospects in NZ with higher interest rates on their way, - next year or sooner, and potential for major problems globally as Asia and Aussie come off the boil and Europe and the USA choke on their indebtedness. This must put pressure on interbank lending rates within 2 years, especially if we see sovereign default in the PIIGS or USA.

The massive bureaucracy they built and squandered our money on, the buy back of kiwi rail,  now CGT, to name but a few blunders. 
  

Back on Tax

If you want instant cash flow targeted on property - it's simple. Introduce stamp duty like the rest of the world. Instant 3- 5% tax on the turnover in the property sector dampening speculation and raising major govt revenue, without the complexity of CGT.

If you are worried about any of these issues I have mentioned email or come and see me.

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

Capital Gains Tax

Once again the topic of capital gains tax (CGT) has reared its ugly head.  Speculation is that Labour will unveil a property investment targeted capital gains tax when it announces its tax policy in the next two weeks.  The Greens have thrown their not so considerable economic muscle behind the proposed tax.  In light of this, let’s examine some of the arguments that proponents of CGT put forth:

• Capital gains should be taxed because there should be no difference in outcome between a taxpayer whom generates a gain of $50,000 through the sale of a capital asset and one whom earns $50,000 through salary.  In other words, taxing capital gains is fair and would create a more “pure” tax system with less incentive to direct investment into assets where there will be no tax to pay on gains.  This argument falters, however, when it seems inevitable that if there is a capital gains tax it will exclude one’s private residence and furthermore it seems as though Labour have their gun sights fairly and squarely set on property investors as opposed to share investors, for example.  There are also suggestions that there will be a threshold so that smaller capital gains are exempt.  Where is the fairness and purity in the tax system if the tax does not apply across all investment classes and furthermore there are exemptions within property?

• Capital gains tax will generate revenue to allow for tax cuts, possibly a tax free threshold.  The difficulty here is that a proposed capital gains tax may not generate the revenue expected and certainly not in the short term.  Again there is suggestion that property acquired prior to the introduction of the tax will not be subject to tax.  Furthermore, a capital gains tax may create a “lock in” effect whereby investors defer selling assets in order to avoid triggering the gain. 

• Capital gains tax will make property more affordable particularly for first home buyers.  It seems a bit defeatist to me to seek to solve the housing affordability problem by depressing house prices rather than raising real incomes.

• A capital gains tax will rebalance investment and redirect investment away from property and into more productive forms of investment.  In response to this may be tax is not the answer?  With finance companies failing and questionable practices from some in the financial advisor industry in the past, it is perhaps little wonder that property is such a popular form of investment.  Obviously there have been recent changes in relation to the regulation of financial markets, and it will be interesting to see what impact this has on investment biases of Kiwis moving forward. 

Some other points of concern in relation to the introduction of a capital gains tax include the fact that it is inevitably complex.  Once you move to exempt private homes or other classes of assets (for example, farms?) you exponentially increase the complexity of the proposed law.  You create incentives for people to structure their affairs to work around the capital gains tax.  There is also the issue of an immediate impact on property values.  This point often raised how desirable would it be for property values to take a material hit when off the back of a global recession many property owners are already heavily geared and would end up with negative equity.  What would be the knock on effects for lenders?

In the end, I can’t see how a capital gains tax will produce the outcomes that its proponents seek.  However, one outcome which I do see as a certainty is defeat for Labour at the ballot box if they proceed. 

If you require help with your property portfolio or tax return please get in contact with us at GRA we are here to help, CLICK HERE and fill in the form and we will be in touch otherwise call 09 5227955.

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

New GST Regime

On 1 April 2011 new GST rules came into force.  Perhaps the change of most significance to many of our clients are the new rules around zero rating of land transactions.  These rules were brought in to address concerns the Government had about GST leakage where land was being sold from one GST registered party to another, with the GST registered purchaser making a GST claim that was funded by the IRD, only for the GST registered vendor to turn out to be insolvent meaning the IRD were not able to collect the GST from them.

As a result new rules now apply to transactions involving the supply of land between GST registered parties.  Put simply, any supply which involves land is zero rated for GST purposes which means that GST applies at a rate of 0%.  A registered purchaser does not pay nor claim GST and the registered vendor does not return it.  This prevents the IRD from ending up in a situation where they are out of pocket.

If you are a vendor or purchaser of land you need to be very careful.  Consider the following situation from a purchaser's perspective:

• You are buying a property for trading purposes.  You are an experienced trader and have a GST registered Trading Trust through which you conduct your trading activity.  You generally buy properties for around circa $230,000 and are accustomed to claiming GST in respect of these purchases which then means the net cost to you after your GST claim of $30,000 is $200,000.

• You find a new property that fits your criteria and eventually negotiate a price of $230,000 inclusive of GST anticipating a refund of $30,000.  However, it transpires that the vendor is GST registered and themselves selling the property as part of their trading activity.  Under the new rules you are not able to claim $30,000 GST as the transaction is zero rated, meaning that the applicable GST rate is 0%.  As the purchase price was $230,000 including GST and the GST is nil, the net cost to you is $230,000 and you will still have to account for GST on sale – unless you sell to another GST registered party buying the property for taxable purposes.

There is an addendum that has been added to the standard sale and purchase agreement but we are aware of instances where vendors are not filling this out or it is being filled out when it isn’t required to be. 

The result of all of this is that you should act with the upmost caution if you are a GST registered purchaser or vendor of land.  Please contact us at GRA for specific advice on your transactions as required.  Make sure you do this before contracts go unconditional so that you have certainty around the GST treatment before you are committed.

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

Firstly our hearts go out to those in Christchurch who have had to endure the earthquakes and aftershocks of recent time. Many of our staff have family in Christchurch and we have been hearing first hand the events of 22nd February and the flow on effects from this major earthquake.

We at GRA want to do our bit as well. We are donating to 'Paw Justice' a charity that has organised a pet-food bank to donate essential supplies to the many affected animal shelters in Christchurch. If you would like to donate please follow through to this link.

With Christchurch being the second largest city in New Zealand we are aware that many of our clients are based in Christchurch, have investments or business interests in Christchurch. Here at GRA we thought it would be useful if we can assist you, find below a brief guide of financial matters that you may want to consider.

If you are a Christchurch resident and you have yet to file your income tax return we have taken the liberty to inform the IRD that you will be late in filing this return.

Financial Guide To Quake Victims

Filing and Payments to IRD

If your business was damaged in the earthquake it may be unrealistic to meet your filing and payments to the IRD for all the variety of taxes you may be set up to pay.

In these instances we can contact the IRD on your behalf and let them know that you have been affected.  Doing so will give the IRD the ability to use their discretion and reverse any interest and penalties that may be imposed.

Cashflow will be uncertain during these times and making tax payments may not be an option also. Let us know if this is the case and we can communicate this through to the IRD at the same time.

The IRD will want to know a timeframe for when payment can be made. In these early days following the earthquake analyzing your cashflow may be very difficult and as such a month or two would not be unrealistic. This will give you the breathing space to sort out your affairs.

All outcomes with the IRD will be on a case by case basis as the IRD has the final discretion on whether to undertake such actions. Communicating with them early is likely to yield the best results.

Provisional Tax

If you are a provisional tax payer and your business is affected by the earthquake then it is likely your profits will suffer. The next provisional tax installment is 7th May, if you receive a provisional tax advice letter from us during April and you are affected please contact us and we can discuss options for modifying the amount that may need to be paid.

Cashflow Management and Bank Financing

Managing cashflow through a crisis is an art. If your business or investments have been severely affected your financiers will want to know the effect on their positions. Engaging in communication with them will be critical to ensure a positive outcome. We can assist you with cashflow forecasting where required. We are also aware that many of the banks are offering repayment holidays for a period of time whilst you get yourself back on your feet.

EQC Payouts/Insurance

Repairs

If you own residential rental property or business assets and the insurance is used to repair these assets, you will be entitled to a deduction for the repair, but you will also include the amount of insurance compensation as income.  The end result is that is there is no tax loss or profit from undertaking repairs. If you have excess insurance monies beyond the repairs this will not be assessable for tax.

Replace/Full Loss

If property or assets have been completely destroyed, any insurance payments will be considered as a deemed sale of that property or asset. The effect is that you may have depreciation recovery on depreciable assets if the amount received exceeds the depreciated book value.  Depreciation recovery is income for tax purposes.

Other Insurances

Any business interruption or loss of profit insurance is recognised as income for income tax purposes.

• Draft legislation is before Parliament to repeal gift duty from 1 October 2011.  Once this rule is finalised we will spend more time advising you as to what the appropriate course of action is.  At this point it would seem highly likely that this will be enacted as is so one can expect gift duty to be no more from 1 October 2011.

• A number of significant changes are programmed to take effect in relation to GST from 1 April 2011.  Some of the key ones are:

• Land transactions entered into after 1 April 2011 are zero rated for GST purposes if the transaction is between two GST registered parties.  In the past the vendor would collect GST from the purchaser and remit that to the IRD and in turn the purchaser would claim the GST back.  From 1 April 2011 such transactions will be subject to a GST rate of 0% meaning no GST is charged and collected and no GST is claimed by the purchaser.  This is a rule change designed to prevent so-called "phoenix" arrangements whereby land was sold out of one GST registered entity to another, at which time the purchaser made a GST claim and the IRD were left out of pocket because the vendor entity was insolvent and could not pay the GST back.

• New apportionment rules replace the current adjustment rules.  Under current GST rules you claim GST on 100% of the purchase price of an asset if the principal purpose in acquiring the asset is to apply it towards a taxable activity.  You then make adjustments if the asset is subsequently applied towards exempt purposes.  The apportionment rules replace this approach by requiring you to determine up front what portion of the assets use is intended to be for taxable purposes and then claiming GST on that basis.  For example, say 75% of the use of an asset is expected to be in relation to the taxable activity, you will claim 75% of the GST.  You then make adjustments over time if the actual use of the asset differs from the original estimate.

• In relation to land transactions many of you may already be making GST adjustments as a result of a property being bought for dealing or development purposes being rented.  Despite the enactment of these new rules on 1 April 2011 you will still continue to apply your existing rules for land acquired prior to this date.

• The position in relation to nominee transactions has been clarified.  There has historically been debate around whether nomination arrangements triggered a second supply for GST purposes.  The new provisions by and large confirm that there is a single supply from the vendor to the nominee and provided all other criteria met, the nominee is entitled to make the GST claim.

• The definition of commercial property has been broadened to explicitly include home stays, farm stays, bed and breakfast accommodation and certain serviced apartments.  Broadly speaking there is almost a presumption that property is commercial unless you fit within the definition of dwelling, which is essentially a dwelling used by its occupants as their principal place of residence.

• In relation to Family Assistance the definition of income in order to determine one’s eligibility is being broadened to include trustee and company income.  This applies to Trust's where the applicants are settlors and companies owned by these Trusts.  Various other items of otherwise exempt taxable income are also now included in the assessment.  This was a change signalled when the budget was read in May.  It represents an attempt to address the Government’s concerns about the integrity of the social assistance regime. 

Naturally the above is merely a broad brush summary of the changes.  If you have concerns particularly in relation to GST and eligibility for Family Assistance then please contact us.

LAQC / LTC TAX CHANGES

As you will now be well aware the LAQC / LTC tax changes are fast approaching.  They take effect 1 April 2011.  If you have an LAQC and you have not yet discussed with us what course of action to take you need to contact us urgently and book an LAQC/LTC review meeting.  As a recap some of the key points to note in respect of the rule changes are as follows:

• If you do nothing your LAQC will remain an LAQC, but a rule change from 1 April 2011 means shareholders of LAQCs can no longer claim tax losses.  In other words the LAQC loses the ability to attribute its losses to shareholders.  In most cases doing nothing is not an option.

• In conjunction with the LAQC/LTC changes, depreciation can no longer be claimed on buildings.  In many cases this means that tax losses that are currently being experienced will turn to tax profits.  This means you need to ask the question as to whether your current structure is appropriate given this change in tax result?

Broadly speaking if you have an LAQC at present you have a number of options available to you including the following:

• Do nothing and remain in the LAQC regime - although as noted you will not be able to attribute losses to shareholders.

• Convert the LAQC to an LTC, but leave everything else the same.

• Convert the LAQC to an LTC, but at the same time examine whether the shareholding structure in relation to the company is appropriate.

• Convert the LAQC into an ordinary company and potentially restructure the shares as well.

In summary, the changes to the LAQC rules and the implementation of the LTC regime means that all existing LAQC clients need to have their affairs reviewed to determine what the best structure is for them from 1 April 2011 onwards.  We are offering LAQC/LTC review meetings at a discounted cost of $150 plus GST.  Do not delay in setting this meeting up as you need to have the advice in advance of 31 March 2011.

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

GIFT DUTY TO BE ABOLISHED
On Monday Revenue Minister Peter Dunn confirmed that the government intends to abolish gift duty.  Earlier this year the Minister had signalled that a review was being undertaken as to whether or not the gift duty regime should be repealed or amended.  Subsequently that review has occurred with the Inland Revenue producing a report assessing the impact of a repeal of gift duty across other governmental and legislative areas.  One of the prime concerns that was raised when the review was announced earlier in the year was whether or not repealing gift duty would have an adverse affect on creditor protection and rules in relation to qualification for social assistance. Contact Us at GRA.

The Review

The outcome of this review is that the various governmental bodies have concluded that there is little or no risk to their areas of operation if gift duty were to be repealed.  The Inland Revenue have confirmed that approximately $1m of revenue is collected annually in terms of gift duty.  Interestingly they note that much of that revenue collection seems to be a result of timing mistakes where donors accidentally gift more than the $27,000 allowable in the 12 month timeframe.

From our perspective the areas that we were most interested in was whether a repeal of the gift duty regime would lead to any suggestions for new legislation in respect of creditor protection or access to social assistance such as residential care subsidies, family assistance, student allowances etc.  In short the review has concluded that existing legislation is adequate and no changes are proposed as a result. 

As a result of the above legislation is to be introduced later this month which will see gift duty abolished from 1 October 2011. 

The Outcome

Overall we see this as positive development for taxpayers.  Abolishing gift duty will reduce compliance costs in that those of you that have outstanding gifting programmes will be able to bring those to an end post 1 October 2011 and thereafter not have to worry about the annual gifting process.  We also think it is encouraging that rules in relation to eligibility for residential care subsidies for example are not proposed to be altered so that there is at least some degree of certainty as to how those will apply.

What Should You Do Now?

The obvious question that arises out of this is – what do you do if you have annual gifting due between now and 1 October 2011.  Although it depends on the circumstances, in general we recommend that gifting continues as usual. 

Certainly we note that any transfers of assets to Trust prior to 1 October 2011 will still have to take place at market value with the usual sale and purchase agreement and deeds of acknowledgement of debt in place.  Gift duty still applies up until that date so still needs to be dealt with.  In terms of forgiving any outstanding debt our inclination is to encourage our clients to continue to execute gifts between now and then on the basis legislative provisions in terms of the creditor clawback apply such that gifting inside certain time frames is automatically reversed.  Thus the sooner a gift is executed the sooner it falls outside the timeframe.  We also note that until the legislation is drafted and passed into law there is always the prospect of it being amended or altered although we do see this as likely.

Summary

In summary, when transferring assets to a Trust at present it is business as usual at this point as gift duty will apply if the assets are not transferred at market value so there still needs to be valuations, sale and purchase agreements and deeds of acknowledgement of debt in place.  If you are currently gifting and have a gift due in between now and 1 October 2011 we encourage you to complete that gift, particularly if it is in the immediate future.  Post 1 October 2011 we will be contacting clients with existing outstanding gifting programmes and putting in place documentation to bring those gifting programmes to an end. 

Please contact us at Gilligan Rowe with any queries in relation to the above by clicking HERE

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz
or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.