Nigel’s 2012 Review

Well it’s hard to believe that 2012 is over so quickly. We again want to thank you for the opportunity to work with you. We still love coming to work and doing what we do, and long may that continue. In a large part that is because of the frequently changing and interesting things that we work on with you.

There have been many highlights in 2012, including some good wins over the IRD. We also continue to do a lot of interesting international assignments as well.

Covisory Partners has two main aspects to its business: the first thing being advisory which are generally one off assignments either for individuals / families or other professionals. The second is private clientele, being a combination of taxation, structuring, succession (both wealth and business) and increasingly private / family office.  2012 has shown us that our clients appreciate our ability to look after or oversee all aspects of their financial affairs, right from paying bills to ensuring their children are educated to be able to manage the significant inheritances they will receive.

2012 has also seen a lot of work around charitable giving. Clients are becoming more interested in philanthropy and the aiding of charities they feel a connection with both now and in the future. For a large number, they don’t want to see all of their wealth go to their children upon their deaths, so working out how the remaining wealth will be applied to charitable purposes is often not as easy as it sounds as there are more permutations than you would realise.

The aim for 2013 is to continue to develop the private clientele area into a true family / private office offering.

The team at Private Accounting, our associated Chartered Accounting practice, have also had a very good and enjoyable year. With Megan at the helm we have added Philippa and Michelle to the team so it is going from strength to strength.

The economy did not improve like we had hoped or expected in 2012, although the outlook for 2013 is better with a slow but continued lift in overall economic activity. Many clients also remain heavily invested in cash, waiting for some stability in the world financial markets and needing more confidence in order to be encouraged to invest their funds away from cash. 2013 will likely be another tough year for investors wary of risk.

We look forward to working with you all again in 2013. In the meanwhile have a safe and enjoyable Christmas and holiday with your families. There is still nothing better than the Kiwi Christmas Break.

Keeping you up to date

We wanted to share with you how our ongoing review of our services is coming along.

When you became our client we made a commitment to you to provide a high quality service that you value. That the work we undertake for you is consistent with your priorities both now and in the future.

As part of this commitment we will regularly take the opportunity to reflect on the services we provide our clients. Are we effectively communicating how we can be of service and that all our work meets the standard we set ourselves? To this end we felt our Website, and our direct communications to you, such as newsletters and brochures were not reflecting where we have now positioned ourselves.

As a result we:

  • Updated our website look and moved over to a Word Press environment. When you have an opportunity, take a look around the website and let us know what you think. You will find us at www.covisory.com .
  • Re-branded our newsletter. You will find previous editions on our Download page or use the following link: https://covisory.com/info-centre/
  • have made it easier for you to join on to our mailing lists. Our sign up form is on the right hand side bar of all our website pages.
  • Have put together a Private Client and a Consulting brochure that provide an overview of the range of services we can help you with. You would have receive a copy of the brochure in the mail; for a softcopy version, the following link will take you to our downloads page: https://covisory.com/info-centre/

If you would like to make an appointment to talk with us about any of our services, please call us on 09 307 1777 or email Nigel on nigel@covisory.com or Martina on martina@covisory.com .

Taxation of Foreign Superannuation

NZ tax residents who have interests in foreign superannuation are often presented with the headache of taxation. There are different tax rules that can be applied to foreign superannuation.

Depending on which set of rules apply, the foreign superannuation may be taxed either on the change in the value of the investment in NZ$ on an annual basis under the FIF rules or at the time the individual receives income (i.e. lump sum, regular pension payment, withdrawal or transfer to another scheme). This creates complexity and uncertainty for the tax payers.

An issue paper was released in July 2012 by the NZ Inland Revenue Department in which new simple taxation rules were proposed. It is proposed that the FIF rules will no longer apply to the foreign superannuation and that the liability to taxation be determined at the time the pension payment or a lump sum is received or when the foreign superannuation is transferred to another scheme.

In simple terms it is proposed that a foreign pension payment will be taxed at the time it is received at the recipient’s marginal tax rate (ranging 10.5% to 33%). A lump sum withdrawal or a transfer from a foreign superannuation will be apportioned, based on how long the person has been in New Zealand before a withdrawal or a transfer was made, and taxed accordingly. This means that a lump sum withdrawal and a transfer will be apportioned and only a certain portion of the amount will be taxable in New Zealand. The longer the person spent in New Zealand the greater the proportion of the amount that will be included in the taxable income.  The proportion of the lump sum that will be included in the taxable income will range from 0% (in first two years) to 100% (after 25 years).

The effect of these proposals on Transitional Residents & Australian Superannuation:

Transitional Residents

  • There will be no adverse effect on Transitional residents, as their foreign superannuation, including withdrawals or transfers are not taxed while they are Transitional Residents, which is basically 4 years from when they first become a transitional resident.

Transfers from Australian Superannuation Scheme to NZ

  • An interest in Australian superannuation scheme, in general, would not be taxable under the FIF rules.
  • For the purposes of New Zealand / Australia Double Tax Agreement, lump sum payments received from Australian retirement benefit schemes are not taxable in New Zealand. Therefore a person would not be taxable in New Zealand under the new rules.
  • Should the New Zealand/ Australia Double Tax Agreement not apply to the individual, transfers from Australian superannuation scheme to a NZ Kiwisaver scheme may still be tax free under the agreement on the portability of savings between New Zealand and Australia (which should come into effect shortly).

The new rules are to apply to income received from a foreign superannuation scheme including pension payments, withdrawals and transfers to another scheme) on or after 01 April 2011. FIF rules will continue to apply if foreign superannuation was taxed under the FIF rules in 2010/11 income year. Special rules may apply to transfers or withdrawals of foreign superannuation made between 01 Jan 2000 – 31 Mar 2011

IRD releases statement on Repairs and Maintenance

The IRD recently released an interpretation statement on the topic of R & M, IS 12/03.  Overall there is nothing ground breaking in what it states, with one exception.  It is however a very good summary of the issues to be addressed in considering whether R & M expenditure is deductible or not.  With the removal of depreciation on buildings, there is now even more pressure to claim costs as being deductible.

The one exception is that the IRD has released some guidance on leaky building repair claims which is very welcome and long overdue.

The R&M Deductibility Process

Step 1
  • What is the asset?
  • Need to identify it
  • Is it the whole or a part
Step 2
  • Nature and extent of the work done
  • Repair or replacement, improved materials
  • Part or whole
  • Does it improve the asset
Step 3
  • Specific issues
  • Purchase of dilapidated assets
  • Accumulation of repairs effected at once

 

While we do not intend to cover the detail of the 53 page paper in full, we consider it is an accurate summary of the law, and how small changes in facts can alter the answer with often two apparently identical cases giving opposing answers/decisions.

Leaky Building Claims

The lack of assistance by the IRD to date has been very concerning.  The paper does however set out some examples which are more than useful in at least confirming that decided case law is still the correct basis to determining the question of deductibility for leaky building claims.

The three examples they set out are as follows:

Example 12 – leaky home repairs (no change in character or substantial reconstruction, replacement or renewal) Cath and Simon own a residential rental property. A few years ago they added a two room extension to the property. The extension has been leaking. The timber framing within the extension is rotten and needs replacing. To make the repairs the cladding and windows need to be removed from the extension and refitted. The cost of the repairs is revenue in nature. The work done to the house does not amount to a reconstruction, replacement or renewal of substantially the whole of the house. Nor do the repairs change the character of the house.

 

Example 13 – leaky home improvements (change in character) Cath and Simon are unlucky and have discovered that another of the rental properties they own is a “leaky home”. In this case the solution is not as straightforward as in Example 12 above and the remedial work required is extensive. Cath and Simon decide to re-clad all the house’s exterior walls using a superior concrete block construction system rather than the equivalent substitute cladding system. While the concrete block construction system is more expensive, it should be more durable, and require less maintenance. The cost of repairs will be capital expenditure. The work done goes beyond repairing the house and the character of the house is changed. This is the outcome in this case regardless of whether the work done results in the reconstruction, replacement or renewal of the house or substantially the whole of the house.

 

Example 14 – major repairs to leaky building (substantial reconstruction) Stuart owns a stand-alone single-storey commercial building in Onehunga that he leases to a small manufacturing business. The building has been leaking badly and the walls and timber framing are extensively damaged. To rectify the damage and prevent it recurring, extensive work is undertaken. All the exterior wall cladding is removed and replaced with an equivalent recommended product. Large sections of the buildings framing are  replaced with treated timber.  Also, damaged sections of the floor are replaced.  New flashings are installed around the windows, and portions of the interior walls are relined.  The cost of the work done to the building is significant.  The cost is capital expenditure.  This is because the remedial work done is so extensive it has resulted in the reconstruction of substantially the whole of the building.

In summary therefore for a rental asset:

1. If the repairs are to make good the leaky building issues, but not to improve the building, then it will be a deductible repair.

2. If there are new or better components (eg double glazing over single, additional rooms added), there will be capital costs.

3. If the repair is so extensive that the asset is significantly replaced, even if not improved, this will be capital as it is no longer a repair but a replacement.

As always it will be a question of degree, but at least we have some points to measure it against.

Refer www.ird.govt.nz – key word IS 12/03

IRD continues to focus on mixed use personal assets.

While the IRD has been busy reviewing submissions on its discussion paper on Mixed Use Assets, its audit division has embarked on a major new initiative this year by either risk reviewing or auditing a large number of taxpayers.

The typical scenario involves the claiming of expenses or losses arising from mixed use assets like baches, boats and planes.  The mixed use arises from these assets being made available for third parties to rent, as well as being used by the “owner” (often the asset will have been owned in a look through company, loss attributing qualifying company (LAQC) or a trust) for private purposes.

While the IRD discussion document is more focused around the issue of apportionment of costs between private and third party use, the audits and risk reviews are focused more around disallowing some or all of the losses that usually arise.

In effect the IRD is saying that to the extent that a loss arises, the portion of the loss that relates to the private use percentage should be disallowed.  This applies even where the owners have paid full arms length market rates on their use of the asset.  This argument is based on a Taxation Review Authority (TRA) decision that found a taxpayer who bought their own family home in an LAQC and rented it off them, and claimed the resulting loss (interest and depreciation costs exceeded market rents) against other taxable income.  The IRD is applying the TRA decision logic to the partial use of assets, with the loss being reduced by the private use percentage.

Naturally, there is always the additional problem that the IRD will also seek to impose shortfall penalties of at least 20% but often 100% plus interest!

In some cases the IRD is going one step further, and arguing that there is no actual business and that in reality the limited third party use is really just an adjunct to the private ownership or use of the asset.  The consequence of this is that the IRD then sets out to deny the whole of the loss that arises, while again looking for shortfall penalties and interest.  GST may also be more of an issue in such cases, as usually the IRD will also seek to retrospectively deregister the activity for GST.

So what should you do?  If you do have assets which are used both by you and third parties we recommend that you review whether it is worth continuing to claim all of the resultant losses, or even if you continue to argue it is a business activity at all.  Post Penny & Hooper the IRD has been very aggressive in its audits, and sadly we can’t see that subsiding any time soon.