DON T LET THE IRD NAIL YOU

Transcription

1 Tax- DON T LET THE IRD NAIL YOU Published by The Small Business Institute Limited ISSUE 1304 Child support Amendment Act passed Most of the Act comes into force on 1 April However, the part dealing with adjusted taxable income is not effective until 1 April From that date you will need to bring in most of the adjustments in Subpart MB of the ITA 2007 to determine adjusted taxable income of a liable parent. There are a few exceptions see attachment 1. Subpart MB is the one which applies to WFF. Please look up the sections to get the details. A liable parent may estimate their taxable income. There s a 10% penalty if the estimate turns out to be less than 80% of the actual income. The Commissioner has to accept an estimate if the income is going to be 85% or less than the current amount, after adjusting for inflation. The Act sets out, in considerable detail, how contributions are to be calculated. Foreigners to be allowed to register for GST A Bill before parliament is to allow foreign businesses to register for GST, even if they are not carrying out a taxable activity here. The overseas business will get a rebate of GST when they buy in New Zealand. For example, an overseas company hires a NZ courier company to deliver goods in NZ. The NZ company must charge GST as the services are not exported. If the foreign company registers for GST, it can get the GST refunded. The proposed start date for this law change is 1 April IRD tightening up on charity wroughts Charities, which are not in business, are not usually subject to FBT. However, the IRD considers vouchers given in substitution for salaries are taxable. These vouchers were not subject to the fringe benefit regime due to specific exemptions applicable to charities. IRD is specifically looking at vouchers for groceries etc issued to staff in lieu of paying them. If you have a client which has been adopting this practice, we suggest you show them IRD s Revenue Alert RA 13/01 see attachment 2. Australian shares and FIF regime IRD publication 871 sets out the names of the companies which qualify for exemption from the FIF rules. Every so often, a company is added to the list and another one is removed. FIF rules apply to the time for which the company is not listed on the IR871. Therefore, if a company was not listed at the beginning of the financial year, FDR/CV applies. On the other hand, if a company was on the IR871 at the beginning of the year but off by the end of the year you have a notional purchase of shares during the year at market value. Any dividends received after the date on which the company has been removed are not taxable because FDR/CV applies. At the beginning of the next year, you take the market value of the investment, in the usual way. Rental property repairs viewed differently Now there is no depreciation on buildings, you should look at repairs in a new light. For example, a kitchen forms part of the house structure and you cannot claim depreciation. The kitchen is a small part of the total cost of a house. Therefore replacing it could be considered to be a fully tax deductible cost assuming the basic configuration is the same and any improvement is merely due to technological advancement. On the other hand, IRD views carpets as separate stand alone assets and their purchase should always be capitalised as a new asset. Not everyone agrees with this interpretation, especially when the carpet was never identified as a separate asset when the property was purchased. For commercial property the law is being amended to remove this doubt. This draft legislation will impact on repair treatment for commercial property. The proposal is that even where an item is not a separate stand alone asset, if it has been separated in the depreciation schedule sometime in the past, it will be treated for repair purposes as a separate asset. For example electrical reticulation. We will report further on this with an example when the legislation is enacted. In future, be careful splitting out the assets like reticulation, as separate items. If they are getting near the end of their useful life and are going to need to be replaced in a few years, it could be better to forego the depreciation and leave them as part of the building. Lease inducement payments updated In TEM 1207 we told you about proposed changes to taxation of lease inducement payments by commercial landlords. These proposals have been modified: 1. The start date is to be 1 April The payments will be tax deductible for the lessee and taxable to the lessor. 3. Income and expenditure will be spread evenly over the term of the lease. 4. Lease surrender payments are currently not tax deductible for a tenant. In future they will be tax deductible and also taxable to the landlord. Tax deductible legal expenses - property As you will be aware the preferred view is that legal expenses incurred in buying or selling real estate property up to a total of $10,000 in any year, are tax deductible. What about courier fees, registration fees and similar non legal expenses. It is currently considered these form part of legal expenses for this purpose. The information supplied in this publication has been researched with care. However, the author and the company accept no responsibility to anyone for any error which may occur in the information provided. Readers are advised to consult their normal source of expert advice before acting on anything they read in Tacks Fax. 127 Queens Drive, Lower Hutt, Ph , fax , mail@smallbusinessinst.co.nz

2 Attachment 1 35 Adjusted taxable income (1) A person's adjusted taxable income for a child support year is the person's taxable income for the relevant tax year adjusted by the adjustments (if any) that would be made to the person's taxable income to determine the person's family scheme income under subpart MB of the Income Tax Act 2007, except that the following are not to be treated as being part of the person's family scheme income for this purpose: (a) income that is exempt income under section CW 32 of the Income Tax Act 2007 (child support and spousal maintenance): (b) income referred to in section MB 11 of the Income Tax Act 2007 (income derived by dependent children): (c) income referred to in section MB 12 of the Income Tax Act 2007 (non-residents' foreign-sourced income of the person's spouse or partner). (2) However, in relation to any period before the close of the day before 1 April 2015, a person's adjusted taxable income for a child support year is the person's taxable income without the adjustments referred to in subsection (1). (3) A person's taxable income must be taken to be their income from employment for the calendar year immediately preceding the start of the child support year if (a) it was derived solely from withholding income; and (b) no adjustments of the sort referred to in subsection (1) are made. (4) If subsection (3) does not apply, a person's taxable income for a child support year must be taken to be their taxable income in the tax year immediately preceding the most recent tax year, inflated by the inflation percentage for the child support year. (5) The adjustments under subsection (1) that must be applied are those that applied in the tax year immediately preceding the most recent tax year. (6) If a person's taxable income for a tax year has not been assessed, the Commissioner must determine the person's taxable income, (a) if an income statement has been issued, on that basis; and (b) in any other case, on the basis of the income and any other particulars known to the Commissioner. (7) Subsections (3) to (6) are subject to sections 38 to 39A. Attachment 2 Technical tax area: Revenue Alerts Revenue Alert RA 13/01 Salary Packaging - reducing income from employment by replacing part of salary or wages with vouchers Explanation: Status of Release A Revenue Alert is issued by the Commissioner of Inland Revenue, and provides information about a significant and/or emerging tax planning issue that is of concern to Inland Revenue. At the time an Alert is issued risk assessments will already be underway to determine the level of risk and to consider appropriate responses. A Revenue Alert will identify: the issue (which may be a scheme, arrangement, or particular transaction) which the Commissioner believes may be contrary to the law or is inconsistent with policy the common features of the issue

3 our current view, and our current approach. An Alert should not be interpreted as being Inland Revenue's final position. Rather, an Alert outlines the Commissioner's current view on how the law should be applied. For any Alert we issue it is likely that some investigatory work has already been carried out. If people have entered into an arrangement similar to the one described or are thinking about it, they should talk to their tax advisor and/or to Inland Revenue for advice about tax implications. ISSUE: Salary Packaging - reducing income from employment by replacing part of salary or wages with vouchers New Zealand tax law requires a New Zealand tax resident to return and pay tax on their worldwide income. Inland Revenue is aware of arrangements being entered into by some employers where an employee selects an amount of salary or wage that is substituted for vouchers (for example, supermarket and petrol vouchers) which are very similar to the cash equivalent of the salary or wage. A "voucher" in this context may take many forms but includes paper vouchers and electronic vouchers on stored value cards. Under the arrangements in question an employee can elect to substitute part of the salary or wages they are entitled to receive in cash with vouchers to the same value. The employer provides the vouchers to the employee who typically redeems them on private expenditure, such as motor vehicle expenses, groceries and other common household expenses, which would previously have been paid using their tax-paid income. The amount of the vouchers will be equivalent to the salary substituted by the employee. Under this "repackaging" the vouchers are not being treated as income of the employee and no PAYE is deducted by the employer. The employee's income is treated as being reduced by the amount of the salary substituted with vouchers. As well as paying less income tax, employees who seek to reduce their income in this way pay less child support; decrease their student loan repayment obligation; reduce their KiwiSaver contributions and may claim a larger entitlement to Working for Families Tax Credit (WfFTC) than they should. In addition, repackaging in this way has the effect of reducing the contribution that their employer is required to make to the employee's KiwiSaver scheme. Usually, the employer also does not treat the provision of the vouchers as a fringe benefit subject to FBT. For instance, many of the employers offering this arrangement are charities who treat the provision of the vouchers as being exempt for FBT purposes under section CX 25 of the Income Tax Act 2007 (the ITA 2007). In addition, some employers are claiming GST input tax credits on the purchase of the vouchers that they provide to employees, but are not returning output tax when the vouchers are provided to the employees. In some cases, the salary packaging scheme is administered by a third party provider who runs the scheme and provides the vouchers and administration services such as invoicing, in return for a fee. Current view Income tax It is Inland Revenue's view that in some of the arrangements we have seen, the vouchers issued by the employer to the employees in substitution for salary or wages is income in the hands of the employee. This is because the overall level of salary does not change, it is merely partially paid in a different form. As such, PAYE should be withheld by the employer on the full amount of the salary/wages including the value of the vouchers. Inland Revenue considers that the commercial reality of these arrangements is that employees elect to receive part of their salary by way of vouchers. The vouchers are often in the form of a stored value card that is loaded with the amount equivalent to the salary or wages the employee has elected to substitute. The employee can use the card to purchase goods and services from certain retail outlets. The amount of the vouchers or the amount added to such a stored value card, does not have PAYE deducted. This means that the employee has greater spending power as part of their total remuneration (salary or wages) is not taxed. The employee is effectively being paid more for undertaking the same job, but the increase is only possible due to the tax effects rather than an increase in their salary or wages.

4 Inland Revenue considers that the nature of the goods that can be purchased by the employees, and the fact that the vouchers are essentially a substitute for salary and wages, means that in reality these arrangements are salary substitution arrangements which the parties have entered into for the purpose of avoiding tax. Inland Revenue considers that the arrangements may be tax avoidance arrangements in terms of section BG 1 and potentially section GB 44 of the ITA Where neither PAYE nor FBT have been paid in relation to the provision of vouchers in these circumstances, Inland Revenue is likely to seek further information, potentially leading to audit activity. GST There is a view that output tax does not need to be paid when the vouchers are given to the employee. Inland Revenue's view is that the provision of the vouchers to the employee is a supply which is subject to GST under section 8 of the GST Act 1985 (the GST Act). Therefore, output tax should be returned by the employer on that supply. Examples The following are examples based on some of the arrangements that have been identified so far. There may be other arrangements which involve salary packaging and vouchers. Example 1 An employer offers their employees the opportunity to replace some of their salary with supermarket vouchers. The employee receives vouchers from their employer to the face value of the amount of salary they have elected to substitute and they subsequently redeem the vouchers at the local supermarket. For example, an employee elects to receive $800 of vouchers per month loaded on to a stored value card in return for electing to substitute $800 per month of their gross salary. The $800 per month on the stored value card is not treated as income and no PAYE is deducted. Also, the employer does not pay any FBT. The employer claims GST input tax credits on the purchase of the vouchers but does not return any output tax on the provision of the vouchers to the employees. It is considered that the provision of the vouchers is income from which PAYE should be deducted. It is also considered that the provision of the vouchers to the employee by the employer is a supply that is subject to GST. Inland Revenue considers that the arrangement is a tax avoidance arrangement under sections BG 1 (and potentially section GB 44) of the ITA Example 2 Inland Revenue is also seeing examples of salary or wages substitution where the arrangement is administered by a third party provider who runs the scheme. In such a case the third party sells the vouchers to the employer who in turn provides the vouchers to the employee who has elected to substitute an amount of gross salary or wages with the vouchers. The vouchers are stored on an electronic card provided by the third party which is then able to be used for purchases at particular retail outlets, for example supermarkets and petrol stations. In this example it is the third party provider who pays the retail outlets for the goods purchased with the vouchers. Inland Revenue considers that the provision of the vouchers to the employee in this example is income from which PAYE should be deducted. It is also considered that the provision of the vouchers to the employee by the employer is a supply which is subject to GST. Finally, Inland Revenue considers that the arrangement is a tax avoidance arrangement under sections BG 1 (and potentially section GB 44) of the ITA Current status Inland Revenue has commenced investigations into a number of taxpayers who have entered into salary packaging schemes like those described above.

5 If an employer or an employee has taken a position which is incorrect, either for tax (including GST) or social assistance purposes, that position will be corrected. Late payment penalties and use of money interest may be applied to taxpayers entering into the types of arrangement described in this Revenue Alert. Shortfall penalties may also apply, although these may be reduced where a voluntary disclosure is made. If you consider that our concerns may apply to your situation, we recommend you discuss the matter with your tax advisor or with us, and consider making a voluntary disclosure Guidelines for making a voluntary disclosure are contained in our booklet Putting your tax returns right (IR280) and Standard Practice Statement 09/02 Voluntary disclosures (May 2009).