Salary Trade off

Revenue Minister Peter Dunne announced on 3 October 2012 that Cabinet had made its final decisions on the suggestions outlined in the April 2012 issues paper Recognising salary trade-offs as income. As a result the proposed new rules are now narrower than originally suggested, focusing predominantly on employer-provided car parks,” Mr Dunne said.

Specifically, Cabinet has agreed on the following changes:

  • A wider set of car parks provided to employees are to be taxed, through the FBT (Fringe Benefit Tax) rules. The new FBT rules will focus predominantly on car parks provided to employees in the Auckland and Wellington CBDs (the areas where the benefits to the employee are greatest). There will be certain exclusions, for example, for car parks used by work vehicles, for late night shifts and disabled car parks. To reduce compliance costs, standard values will apply when the car park is not provided through a commercial car park operator.

FIF: Shares held in Guiness Peat Group Plc (GPG)

  • Shares held in GPG are no longer covered by exemption from FIF rules. If you have previously applied the exemption, you will have to determine whether the FIF rules apply to you, effective 2013 year. If the value of your foreign investments is less than $50,000 you may choose to continue to apply the exemption or apply the FIF rules.
  • For the purposes of determining the cost base of the GPG shares, you use the original cost price. Alternatively for every GPG interest acquired before 01 January 2005, you can choose to use the opening market value of the GPG interest at the beginning of 2012-13 year.
  •  If FIF rules apply to you will use the Fair Dividend Method (FDR) which levies tax on 5% of market value of your shares at the beginning of the income tax year.

Taxation of Lease Inducement Payments

On 27 September 2012, the Minister of Revenue, the Hon Peter Dunne, released details of the Government’s decisions on lease inducement payments. Although lease inducement payments by commercial landlords to tenants will be taxable, some important changes have been made as a result of the recent consultation process.

The initial proposal to tax lease inducement payments was contained in the officials’ issues paper released in July 2012. Changes to the initial proposal include the following:

  • The changes will apply to lease inducement payments on commercial leases entered into on or after 1 April 2013.
  • The proposed changes will make lease inducement payments tax deductible by overriding the “capital limitation” on deductions. In the original proposal these were not automatically deductible.
  • Income and expenditure arising from the lease inducement payments will be spread evenly over the term of the lease.

The proposed changes will also apply to lease surrender payments made by tenants to exit a lease early. Currently these are taxable to the landlord, but non-deductible to the tenant. The purpose of these changes is to create a level playing field, thus the lease surrender payments made on or after 1 April 2013 will be tax deductible to the payer and taxable to the recipient.

The reform will not affect residential tenants.

The reform package will be included in a tax Bill scheduled for introduction later this year.

Depreciation of Commercial Fit-outs

Whilst the changes were made to the depreciation of commercial fit-outs effective from the 2011/2012 tax year we still receive a fair bit of enquiries as to how the new rules apply.

The items of commercial fit-out that can be depreciated are listed in the Commissioner’s table of depreciation rates   “Building Fit-Out” category.

The new rules deny a depreciation claim to building structures. Building structures include: foundations, floors, roof, building structure, external walls, stairs, cladding, load bearing internal walls, pillars and partitions, etc. Items that were previously separated such as electrical reticulation, pipes, etc that form part of the walls will no longer be depreciable. Such previously depreciable items will have their depreciation rate reduced to 0% from the beginning of 2011/2012 income tax year. This will result in certain items being carried in the fixed asset schedules that can no longer be depreciated. The disposal of a building that had commercial fit-out split out may still result in depreciation recovered which will be taxable.

Transitional Rules

New transitional rules were introduced for those who have chosen not to split out the commercial fit-out from the building and as a result have been depreciating the commercial fit-out as part of the building at the building default depreciation rate.  These transitional rules provide an opportunity for these taxpayers to take an advantage of a concessionary depreciation of commercial fit-out.

These rules apply to commercial buildings acquired in the 2010/2011 year or earlier, where the commercial building fit-out was not itemised, at the time of acquisition of the building. Any subsequent acquisitions of commercial fit-out that has been separately recognised in a fixed asset register and depreciated after the date the building was acquired will reduce the amount of deduction allowed under the transitional rules.

The amount of the deduction is worked out as 2% straight line of the starting pool. The opening value of the pool is 15% of the building’s adjusted tax value at the end of 2010/2011 tax year adjusted tax book value of any fit out that has been acquired separately from the building and depreciated separately. This can be best illustrated by following example:

Example ABC Ltd

ABC ltd has acquired a commercial building for $ 4 Million. Items of commercial fit-out were not separately identified and depreciated at the time the building was acquired.  12 months later a refurbishment was done. Items of refurbishment were separately identified and depreciated .

At the end of 2010/11 tax year the adjusted tax value of the Building was $ 3.2 Million and the adjusted tax value of Fit-out was $ 100K.

The starting pool is:                (15% x $ 3,200,000) – $ 100,000 =  $ 380,000

Depreciation allowed is:            $ 380,000 x 2% x 12/12 months = $ 7,600

Furthermore, to reduce the complexity, depreciation recovery rules will not apply to the commercial fit-out depreciation, nor a loss on disposal of the commercial fit-out will be allowed as a deduction, under the transitional rules, in the above example once the building is sold. Depreciation recovery will apply to the actual building depreciation that was claimed prior to the 2011/2012 income tax year.

Abusive Tax Position Penalty

The New Zealand Inland Revenue Department released an item on the 25th September which discusses whether the abusive tax position penalty under s 141D of the Tax Administration Act 1994 applies automatically where there is a “tax avoidance arrangement” under s BG 1 of the Income Tax Act 2007. The item outlines that:

“The abusive tax position penalty under s 141D does not apply automatically where there is a “tax avoidance arrangement”. This is because:

  • Section BG 1 requires the tax avoidance purpose or effect of the arrangement to be more than merely incidental. Section 141D requires the dominant purpose to be avoiding tax. Therefore, the tests in the two provisions are fundamentally different.
  • The intention expressed in the pre-legislative material was that the abusive tax position penalty would only apply to “abusive avoidance”.
  • The courts have identified that there is a different test under s 141D than under s BG 1.

To determine whether the abusive tax position penalty applies it is necessary to decide whether the dominant purpose of the arrangement is avoiding tax. In order to determine that, the tax purposes must be weighed against any other purposes of the arrangement (such as commercial or family purposes) with reference to the specific structure of the arrangement. The factors that may be considered may include artificiality, contrivance, circularity of funding, concealment of information and non-availability of evidence, and spurious interpretations of tax laws”.

For more information refer to: http://www.ird.govt.nz/technical-tax/questions/questions-shortfall/