Family Business ~ Insight | Do you know the Tax Implications of Seismic Upgrades to Buildings?

We are receiving a lot of queries about the deductibility of seismic upgrade costs to buildings. Sadly these will almost always be capital and no deductible, and no depreciable give the repeal of building depreciation.

There have been calls for the government to provide some tax relief for these costs given the number of people affected and, if you will excuse the pun, the magnitude of the costs. To date these calls have fallen on deaf ears. However, with an election next year there may be some hope. However, any law changes will not be retrospective, so it may pay to wait 12 months if you can before incurring the upgrade costs just in case.

Family Business ~ Insight | What is the impact to you on the latest IRD Interpretation Statement on Tax Avoidance?

In June 2013 the IRD issued an interpretation statement on tax avoidance and the interpretation of sections BG1 and GA1 of the Income Tax 2007 Act.  The last time the IRD put out a document on anti-avoidance was around 20 years ago and despite some drafts that came out about 7 or 8 years ago, this document has been a long time coming.  At 133 pages, it is not light bedtime reading.

As can be expected, it is certainly comprehensive and it does review all of the relevant law on tax avoidance in New Zealand.  However, it is sadly lacking because there are no examples.  Any inferences are drawn from cases alone without the IRD then applying examples to expand on how it will interpret provisions.

The reality is that while the document is a useful summary of the law, it provides little real practical guidance on how the section is to be applied.  Statements like Parliamentary Intention is to be determined from the Act itself where it can’t be divined from actual parliament notes or the like, is of little relevance.  In practice the IRD takes the view on what a section is supposed to do, and often there is little if any justification for that, nor is there any easy counter to that for taxpayers forced to fight anti-avoidance discussion.

Sadly also the IRD has been wheeling out anti-avoidance as its stop gap measure when it is concerned technically that it may not otherwise win a dispute.  In some cases, it simply applies anti-avoidance without even considering the technical provisions in the first place.

The statement and the recent Alesco decision do however show just how far the pendulum of tax avoidance has swung in favour of the IRD. Historically we have relied upon cases like the Duke of Westminster to justify that that taxpayers were entitled to arrange their affairs so as to legitimately reduce their taxation liability. In short, unless the law said you could not do something, you could.

The cases of Ben Nevis, Glen Harrow and Penny and Hooper moved the ground significantly, probably like a 9.0 magnitude earthquake would! The law became that it is now necessary to determine Parliamentary intention to see if it had intended that you could do something. In short, now we have to show that the law contemplates that you can do something, otherwise you cannot.

Alesco moved the goal posts even further away. Arguably Alesco did do exactly what Parliament had intended, as it clearly complied with the requirements of the Income Tax Act in a way that was contemplated. The Court however decided that as there had been no economic loss, it was still Tax Avoidance.

So one could argue, that we have actually returned to the Challenge & Tax Investigation concept, despite strong views from the IRD that we have not.

So if you are having trouble sleeping, I can guarantee that this one is better drugs.  However, if you are involved in a fight, while it is relevant to consider, I don’t think necessarily it is going to be a lot of use to taxpayers and their advisers in the fights against the IRD as to what is and what isn’t anti-avoidance.

Family Business ~ Insight | Are you aware of the Tax Consequences arising from the latest IRD Publications?

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.

Family Business ~ Insight | How Important is your Brand Value to your Business?

It is hard to go past the milk powder contamination and its effect on New Zealand as this month’s lead story.  There have been few other instances over the years where brand value has been destroyed or harmed in such a major way so quickly.  The last one that comes to mind was Arthur Anderson where the international accounting firm simply imploded overnight and ceased to exist.  The survivors clung to the life rafts sent out by other firms and ultimately a few were bought to account for their actions which had destroyed the brand built up by many thousands of people over many years.

The problem with the Fonterra scandal appears to be two fold.  Firstly, that they did not act quickly enough and strongly enough.  Secondly, the impact that it had not only on its own brand, but on ‘Brand New Zealand’.

The government has been right to be interested in the result, but again may have some egg on its face if it transpires that the Ministry for Primary Industries has actually reduced its testing and in part that could be one of the reasons why the contamination wasn’t picked up.  All in all, it simply shows that if you have a brand, all your actions may impact upon the value of the brand.  Too often we have people complaining about customer service or product quality.  We all need to be careful that whatever we are doing, it reflects on the brand and values that we believe in.

As a professional dealing in the services industry, this applies not only to the services that we offer to you, but also to the other professionals that we introduce you to when you need assistance.  We have to be careful to vet these to ensure that they are of the highest standard and able to meet your needs and requirements in a most professional and trusting way.  If we did not do this, whatever they do will ultimately impact upon the brand value of not only their business, but ours as well.

It will be interesting to see where all this Fonterra business goes, as ultimately it could have a significant impact on New Zealand’s export sales.

Farewell to Martina

It is with sadness that we advise that Martina Evans has moved on to bigger and better opportunities.  Martina was with us for 2.5 years in total and was a valued member of our team.  We are hoping, in the future, to have Martina become part of our external consultant team.

As usual we continue to have a team to look after you and your needs so don’t hesitate to contact myself or Sally in the first instance if you have any issues.

Kind regards,

Nigel