As always, just before Christmas the government released the annual repairs & maintenance type tax bill whereby the Income Tax Act and other acts have a combination of minor tweaks and remedial fixes made to them. The major policy issues are generally released in a Bill around June each year. The Bill before Christmas basically is notable for a number of reasons.
1. Employer provided living accommodation
The Christchurch earthquakes created a new population shift in New Zealand. We now have a large number of people living on an ongoing basis away from their homes and families. While this was on the IRD’s radar for some time, it has certainly come to the forefront now. The IRD has turned its mind to when and how much employer provided accommodation becomes taxable to an employee. The proposals below are due to come in from 1 April 2015, however employers and employees will have the choice of applying the new rules retrospectively to apply to accommodation arrangements put in place on or after 1 January 2011. There are some provisos around this however.
There is also, in the case of the Canterbury earthquake recovery projects, a retrospective date of 4 September 2010.
Basically employer provided accommodation or an accommodation payment provided because an employee needs to work at a new work location and that location is not within reasonable daily travelling distance of their home, will be tax exempt provided:
- There is either a reasonable expectation that the employee secondment to that work location will be for a period of 2 years or less, in which case the payment will be exempt for up to 2 years (or when the employee no longer expects the period to be less than 2 years whichever comes first);
- The move is to work on a project of limited duration whose principal purpose is the creation, enhancement or demolition of a capital asset and the employee’s involvement in that project is expected to be for no more than 3 years, in which case the maximum period of 3 years (or when the expectation is that it exceeds 3 years whichever arises first); and
- If the move is to work on Canterbury earthquake recovery project, the maximum period is extended to 5 years. There are some different start dates around this depending on when the employee started work.
The key here is that there is a fixed duration exemption. This is on the basis that the employee expects to be away for less than a certain period of time and that exemption ceases when they expect to exceed that period. You don’t automatically get the full length of the time exemption.
There will also be some anti-avoidance rules to ensure that people cannot basically create ongoing multiple out of town assignments to get around the time period.
Similarly, where an employee has to work at more than one work place on an ongoing basis the accommodation itself or the accommodation payment to the employee will be tax exempt without an upper time limited. This is the case where people actually spend time going to a whole lot of different locations.
The amount that is taxable to the employee will be the market rental value and accommodation as provided by the employer less any rent paid by the employee and any adjustment for business/work use of the premises. There is however a specific rule for religious bodies who provide accommodation for their ministers. This caps the benefit of church supplied accommodation at 10% of the ministers’ stipend. This long standing practice is going to be incorporated into the legislation.
There are also specific rules for the New Zealand defence force whereby a new system is going to assist to put a value on such accommodation.
The taxable value of employee funded accommodation to provide to employees as part of an overseas posting will be capped at the average or median rental value for accommodation in the vicinity that the employee would live if in New Zealand. This cap, which is of significance to employees who remain tax resident in New Zealand (particularly those on government service), recognises that the market rental value of accommodation in overseas locations can be disproportionately high compared with that which an employee might occupy if working in New Zealand.
While the law is open to submission input, don’t expect any major changes.
2. Distinctive Clothing
While there is already an exemption on FBT for employer provided uniforms and allowances provided to employees to acquire uniforms, there is some grey area around the situation where an employee might need to have say a plain white shirt as part of an overall suit or image. An amendment is to be made to provide that where say an ordinary item of clothing is either supplied or subject to a clothing allowance which forms part over the overall uniform then effectively this is going to be both exempt from Income tax and FBT. There are again a number of provisos around this but this is a welcomed change.
3. Thin Capitalisation
Thin Capitalisation is basically designed to stop foreign owners of New Zealand companies or businesses stripping profits out of New Zealand as tax deductible interest. It places limits on the amount of interest a business can claim on all of the debt which a business may have where it is controlled by a single non-resident. New rules are to be put into place to catch the situation where a New Zealand business is owned by two or more foreign owners who habitually act in concert. To date, the existing rules do not necessarily catch this situation.
The New Zealand government has basically acceded to the requests of the US government to have New Zealand based financial institutions obtain information on US citizens and repatriated to the US. This is basically what is known as the Foreign Account Tax Compliance act (FATCA) in the US.
The US can request New Zealand to provide this information under its double tax agreement, and now all that is effectively happening is the New Zealand IRD is imposing on financial institutions in New Zealand the requirement to collect this information and provide to the provide it to the New Zealand IRD, so they can then in turn pass it on to the US IRS. Given that Uncle Sam thinks he owns everyone everywhere, it is hardly a surprising move. We do already undertake some specific information gathering for the Australian tax office in relation to foreign trusts.
5. De-registration of charities
Strangely enough, with many thousands of charities in New Zealand, from time to time one or more of them get de-registered by the Charities Commission (now called the Department of Internal Affairs – Charities Services) because they no longer meet the requirements to be a charity. When this occurs, a whole host of tax issues arise such as when are they taxable from, what are the tax bases of their assets and the like. The Income Tax Act will be amended to provide some guidance around this.
8. Further Amendments to the taxation of land related lease payments
This has been an ongoing work in progress by the IRD who have seen it as an opportunity to stop asymmetrical tax treatment where payments are effectively deductible but receipts are non-taxable. The IRD continues to bolster the area by taking the next steps in a series to achieve a coherent and consistent tax treatment of all land related lease payments. This has been well signalled company in effect basically means that any payments in relation to the grant or transfer of a lease will be assessable /deductible.
One particular point to note is that the granting of a permanent easement will no longer be taxable under section CC1. In effect the granting of a permanent easement isn’t a lease in nature it is in effect a disposal of an interest in the land.
Similarly, perpetually renewable leases (Glasgow leases) will no longer be depreciable property and section EE7 will be amended.
9. Acquisition date of land
In a recent newsletter we commented on the fact the government was looking at specifically enacting the date on which a taxpayer would be deemed to have acquired an interest in land. The Bill now includes this by way of a new provision CB15B which will provide that the date a person acquires land for the purposes of subpart CB (income derived from land) is the date that begins a period in which the person has an estate or interest in land. What this basically means is when a person has an enforceable right under the sale and purchase agreement and gain an equitable interest in the land. Generally this will be when a contract goes unconditional although there can be variations in this. Moreover, when an option is granted an equitable interest is obtained at the auction is granted not when the option is exercised.
The amendment will apply to disposals of land from the date the Bill is introduced into parliament. Therefore it will apply to disposals of land from now on. The good news is that generally in terms of the 10 year rule, this will push the acquisition date back. The bad news is that in terms of particularly section CB6 and intention, it may be that it also has the effect of capturing more land transactions than was previously the case. Whatever the case may be, this change is welcome and anything that gives more certainty around this is a good thing. We have been involved in a number of disputes with the IRD over this and to be fair the law has been difficult apply for both the IRD and taxpayers.
If you would like to discuss any of these Tax Changes further please email or call Nigel Smith.