Lease Inducement and Surrender Payments

The Taxation (Livestock Valuation, assets expenditure, and remedial matters) Act was enacted on 17 July 2013.  Amongst other things this Act changed the law in relation to land related lease inducement and surrender payments.

In short, for leases entered into on or after the date of royal ascent, lease inducements will be taxable and lease surrender payments deductible.  There are specific sections covering these but in effect they will be spread for both income and deduction over the term of the lease up to the point that the tenant can actually exit the lease (usually when the first right of renewal exists).  In terms of Lease Inducement Payments a tenant also has the option of offsetting the amount of the inducement against the cost base of fixed assets acquired.

A special report has been issued by the Policy and Strategy division of the IRD which sets out the application of the new rules and some very useful examples.  If you are affected in any way by these new provisions, don’t hesitate to contact us.

Tax consequences for De-registered Charities

The IRD has also issued a discussion paper dealing with the tax consequences of charities that are de-registered.  The consequence of this is that a charity which is de-registered will typically lose its income tax exemption, often retrospectively.  This therefore has taxation consequences.

The discussion paper deals with the various situations and consequences surrounding de-registration and provides that certain legislative amendments should be made to clarify the tax consequences.

What is interesting is that since the charities register opened, 3,902 charities have actually been de-registered!  The majority of these were either for failure to file their annual return with the Charities Commission (now called Department of Internal Affairs – Charities Services) or alternatively voluntary de-registration.  However, as we have outlined in a number of previous newsletters, there have also been some high profile cases where the Charities Commission has sought to de-register charities where they have amongst other things political lobbying as one of their aims.

While this won’t apply to many charities, it is worthwhile noting it has been prepared by the IRD.

R & D and Tax Losses

Another policy advice discussion paper – basically what this discussion paper is suggesting is that for small start-up businesses which incur qualifying R & D expenditure, that any resultant tax loss can be cashed up.  There are certain criteria which are proposed being:

  1. A company’s (and also the group if a company is part of a group), total R & D expenditure on wages must be at least 20% of their total expenditure on wages and salaries (the wage intensity threshold).
  2. The company (and also group if it is part of a group) must be in a tax loss position for the applicable year (logical if it is trying to cash up its losses).
  3. The company must be resident in New Zealand; it cannot be dual resident nor a look through company, qualifying company or listed company.
  4. Definitions of R & D will be based on NZIAS 38.  However, certain costs will be removed from the definition.
  5. The amount of the loss that can be cashed out will be the lesser of:

a       1.5 x the company’s eligible R & D salary and wage expenditure in the relevant year;

b       the total qualifying R & D expenditure in the relevant year; and

c       Total tax losses incurred in the relevant year.

6. Initially the suggested maximum cap to be cashed out will be $500,000, which equates to cash out of around $140,000 at the current 28% company tax rate.  This is proposed to increase to a maximum cap on eligible losses of $2m, being $560,000.

7. While there is no date for the implementation of this, it is likely any changes would apply with effect from 1 April 2014 on at the earliest.