Government addresses housing affordability - Turboweb
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NEWSLETTER WINTER 2021
Government addresses housing affordability
On the 23rd March 2021 the Government referred to this as
Government announced that ‘closing a loophole’, even though
it would make a number of being able to deduct expenditure
changes to the taxation of incurred to derive taxable income
residential property to address is a fundamental and basic feature
housing affordability. Legislation of New Zealand’s tax system.
has been enacted implementing The Government intends to deny
some of the announced changes, interest deductions for residential
whilst the balance are to be rental properties acquired on or
consulted upon before further after 27 March 2021.
legislation is drafted. home it was not taxable on sale. For properties acquired before 27
Legislated changes This exclusion has been amended. March 2021, the ability to claim
The bright-line test taxes the sale For property acquired interest will be progressively
of residential property if it is sold from 27 March 2021, if the main phased out over four income
within a prescribed period of home is not used as the owner’s years starting from 1 October
time, subject to specific main home for more than 12 2021 (i.e. by 25% each year until
exclusions such as for the family months at a time during the bright the 2025-26 income year). An
home and farmland. The new -line period, the profit on sale will exemption is to be introduced for
legislation prescribes that a be partly taxable based on the new builds. However, as
residential property acquired on period it was not a main mentioned the definition of what
or after 27 March 2021 will be home. If the property was comprises a new build has not yet
subject to a 10 year bright line purchased before 27 March been defined.
test, i.e. if it is disposed within 10 2021 the main home exclusion Over recent years a number of
years of acquisition (generally continues to apply on an all or changes to the taxation of
the date a binding sale and nothing basis. residential property have been
purchase agreement is entered Changes to be implemented made that did not appear to slow
into) any capital gain will be Although legislation has been house price inflation, such as
subject to income tax. For passed increasing the bright-line rental losses being ring fenced,
transactions part way through period to10 years, as outlined depreciation deductions being
completion as at 27 March 2021, above, it has been proposed that denied, the bright line test being
guidance has been released by the preexisting period of five first introduced and then being
Inland Revenue to assist in years will continue to apply to extended to five years. But this is
determining whether the new 10- ‘new builds’. However, at this the first time a distinction is being
year period applies or not. stage what comprises a new build created within the residential
The exclusion for the ‘main has not been defined. market itself by treating new
home’ has also been modified. The Government also proposed to builds differently. This could
Under the old rules the bright- introduce new legislation to prove to fuel the price of new
line test applied on an all or disallow interest deductions houses even more, particularly if
nothing basis, i.e. if the property relating to income from residential the underlying issue of low
was ‘predominantly’ a main investment properties. The supply has not been addressed.
Supply Shortages
COVID-19 has fundamentally a shortage of containers, let container shortage.
disrupted global trade to the point alone the products that fill them. • Marmite: The popular but polariz-
there are a number of product • Toilet paper: At this stage, most ing spread has also been in short-
shortages starting to play out, and people are aware of the high supply due to a lack of brewer’s
in some cases of some surprising demand for toilet paper – with yeast amidst pub closures.
items: countless people stockpiling and • Ketchup packets: The US is facing
• The shipping containers them- panic-buying rolls to ensure that a shortage of ketchup packets be-
selves: With only two makers of they don’t run out during a lock- cause of the increased demand due
shipping containers globally and down. However, the risk now to the change from dine-in to take-
containers being trapped in the exists that manufacturers will away and delivery.
congestion at ports, there is now run low on wood pulp due to the
WINTER 2021 p2
Know the bright line test Contractor or
The last National Government Some people will have put in employee?
introduced a so-called “bright tenders before this magical date
line test” for people who sold and have no right to withdraw Recently, Inland Revenue has
residential property after them. If the tender is successful produced an eNewsletter in
owning it for only a short the five-year rule applies. which it reminds readers of
time. What if you rent your home? the legal tests required to
They said the property had to Two lots of rules apply. If the determine whether someone
be owned for two years or the five-year bright line test applies, working for you is an
profit would be taxable. The last you look at the percentage of independent contractor.
Labour Government increased the time the house was used as a These tests include:
this to five years, and increased main home. If it’s more than 50 • Intention
it again – to 10 years – for percent, no problem. If the new • The degree of control or
properties bought on or after 27 10-year bright line test applies,
March 2021. independence
you get caught under the bright
The first thing to note is the line test only if you have not • What Inland Revenue calls
period of ownership is not lived in your house for more Integration test
strictly two years, five years or than 12 months, continuously. • Fundamental/economic
10 years because for a sale So if you decide to have an reality test.
which is not off the plan, it is extended period overseas and As you can see these matters
measured from the date of rent your home, you might need are technical. If you have a
transfer of title to the buyer as a to consider the tax implications. borderline case as to whether
starting point, and the date a The new rule is not an “all or someone working for you
sale and purchase agreement is nothing” like the old rule. should be treated as an
signed at the time of selling. If Under the new rule if there is a employee or an independent
it’s a purchase off the plan, it is 12 month period when the home contractor, seek our help.
from the date of signing the sale isn’t used by the owner an If you get it wrong, the
contract. apportionment is required. penalties can hurt. Employers
If you acquired a property However, provided you own can be made to pay the PAYE
before 27 March 2021 and settle the house for more than the 10- and the employee can be denied
after that date, you are subject year period, you don’t have any expense deductions, not to
to the five-year rule. Acquired problems because the bright line mention penalties.
means a written binding test will not apply.
agreement for purchase.
When is a gift Fair Market Salary Reminder
There is a general need for a rangement is tax avoidance
really a gift? business to pay associated em- (released 29 March 2021).
Both of which are aimed at
ployees a fair market salary for
their personal service. Given the warning taxpayers against the
A gift is not really a gift if you implementation of a 39% person- use of associated entities or fam-
get a benefit as a result of it. al marginal income tax rate on ily members, to avoid the high-
Inland Revenue says the income over $180,000 from 1 est personal income tax rate on
payment must be voluntary and April 2021, Inland Revenue’s income from the supply of ser-
there must be no “identifiable scrutiny of such salaries is ex- vices that they personally per-
direct valuable benefit” arising pected to increase. This has been form. For example, surgeons or
or may arise as a result of the confirmed through Inland consultants operating through a
payment. Revenue issuing two related doc- company. We have seen instanc-
If a non-profit body receives a uments in March 2021 in quick es where the same flat salary
true gift then they don’t pay succession, namely: amount is allocated annually to
GST. On the other hand, if it is working shareholders for numer-
not a true gift because there is a • Interpretation Statement 21/02
ous years, without an annual
benefit, GST has to be paid on – Income tax – Calculating review of that salary nor a com-
the money received. income from personal services parison to market. Hence, it is a
If you are involved with any to be attributed to the working
timely reminder to review sala-
organizations that are GST person (released 19 March ries paid to associated employ-
registered, which receives 2021); and ees, to ensure they reflect current
“gifts” of money, make sure • Revenue Alert 21/01 – Di- market conditions.
there isn’t anything given in verting personal services in-
return for the “gift” or you will As with any tax position, best
come by structuring revenue practice would be to document
be liable for GST. earning activities through a the rationale for the allocated
related entity such as a trading salary (e.g. market data or a file
trust or a company: the cir- note), to evidence reasonable
cumstances when Inland Rev- consideration and care has been
enue will consider this ar- taken.WINTER 2021 p3
Employment Recovery
BREIFLY
Over a year on from NZ’s
level four lockdown, businesses construction and roading (43%),
and communities alike have and manufacturing and Interest deductions on
experienced their fair share of operations (40%). Although rental property
highs and lows. Many have prior year figures may show The Government is phasing
had to rapidly adapt to the signs of the economic out interest deductions for
Covid-19 induced restrictions. uncertainty first felt from Covid residential (but not
For some, they have benefited -19, the Q1 figures for 2021 still commercial or industrial)
from unpredictable productivity exceed those of Q1 of 2019 (up rental property. It is being
gains, meanwhile others have 15%) and Q4 of 2020 (29%). reduced progressively so that
struggled to regain pre- Interestingly, despite the at 1 April 2025, there will no
pandemic momentum. increase in job listings, Seek NZ longer be a claim. Those who
Employment levels slumped to data shows that applications per buy after 26 March 2021 get
an eight year low in September job are actually down. With an a deduction for interest paid
2020, with over 150,000 abundance of listings, job only up to 1 October 2021.
unemployed people. So nearly hopefuls should feel optimistic We don’t have all the
six months on, how does the job that their career or job search is details but the Government
market stack up now? looking up. However, have indicated “new builds”
Statistics released by Seek NZ employers may be feeling the will be exempt from these
reveal that March 2021 saw the pressure to find the right fit. It is rules but at this stage we
highest number of jobs ever not uncommon for hiring have no definition of what
advertised on the site. Listings managers to have post hire constitutes a “new build”
for jobs were up 11% on the regrets when they find their new
prior month and up 55% on hire is not fit for the role, and In-Work Tax Credit
March 2020. Every region in this inevitably comes at a cost. Taxpayers will be able to
NZ saw istings increase, with New Zealand employers have keep receiving the In-Work
Bay of Plenty, Otago and the cited increased stress on Tax Credit for up to two
West Coast experiencing the colleagues, increased workload weeks when taking an unpaid
largest growth (22%). for existing team members and break from work. This could
Perhaps in response to the increased stress on managers as arise when transitioning to a
expectation of a NZ / AU travel the three top consequences of a new job. Taxpayers will need
bubble, hospitality and tourism bad hire. However, the ripple to let IRD know if their work
showed one of the most effect doesn’t stop there with situation changes to ensure
significant increases, with lost productivity, higher they receive the correct
listings up 32% compared with recruitment costs and low staff entitlement. If a person starts
February. Retail and consumer morale also arising as a result of receiving an income-tested
products followed closely recruiting the wrong person. benefit or student allowance,
behind with a 29% increase. Despite the above, the current the In-Work Tax Credit will
Trade Me Jobs paints a similar state of the job market shows be stopped.
picture with over 70k jobs listed positive signs for NZ’s ongoing
for the quarter ending 31 March recovery in response to Covid- GST reform
2021, representing a 22% 19. A resurgence in listings for
hospitality and tourism provides Inland Revenue has come
increase in Q1 compared to up with some proposals for
prior year. The sectors with the a spark of optimism for a sector
which has been hit particularly improving the GST system.
largest year-on-year increase Among these are reducing
were automotive (50%), hard.
some of the requirements for
a tax invoice:
• There shouldn’t be a need
Change afoot for losses carried forward to detail quantity and
volume of goods.
New Zealand has had one of the harshest tax schemes in
the OECD when it comes to allowing company losses to be • Do away with the
carried forward. requirement to write “copy
The rule used to be, there must be at least a 49 percent only” on any copy
continuity of ownership of the shares. This presented a big supplied. It’s a nonsense in
problem for some start-up companies, which wanted to get an electronic environment.
capital from new shareholders by issuing new shares. The law • Buyer-created tax invoices
placed an unreasonable limit on their ability to raise more share would not need Inland
capital. Revenue approval.
The law was changed at the end of March. The idea now is to
allow losses to be carried forward provided the nature of the
business has not changed.WINTER 2021 p4
Penalising R & M
Classifying expenditure as either creates a substantially new or modernise the building and could
deductible repairs and maintenance improved asset, then it is likely to not be apportioned. The TRA also
(R&M) or non-deductible capital be capital. considered the question of whether
expenditure is not clear cut. It is a A recent Taxation Review the taxpayer was liable for a
question of fact and no two Authority case (TRA 015/19 shortfall penalty, which are
situations are the same. But it is [2020]) is one such example and charged based on the
advantageous from a tax serves to highlight the risk of circumstances and the severity of
perspective to classify as much getting it wrong. the actions by the taxpayer. The
expenditure as possible as R&M, The taxpayer in the TRA case TRA commented: “…the position
which gives rise to the risk of incurred $680k carrying out taken by the disputant lacked any
pushing ‘the line’ too far. There works at two adjacent properties. particular merit.”
isn’t a rigid test to be applied, but Of this, R&M deductions of over Accordingly, a shortfall penalty
the courts have identified a two- $408k were claimed. The for ‘unacceptable interpretation’
stage approach for determining the expenditure related to alterations was imposed, subject to a 50%
nature of the expenditure and to a building used as a bar and reduction for good behaviour.
whether it comprises R&M: restaurant. Two building consent There are five categories of
1. Identify the relevant asset being applications reflected the floor penalty that can apply to a ‘tax
repaired or worked on. area of the relevant building shortfall’ on a graduated scale,
2. Consider the nature and extent would increase from 250m2 to specifically:
of the work done to that asset. 592m2 and described the work as • 20% for not taking a reasonable
Repair and maintenance of assets the addition of a covered veranda tax position,
can be achieved in several ways. and extra toilets. A fire • 20% for taking an unacceptable
For example, the asset may simply consultant’s report described the tax position,
be patched up or it could be work as internal refurbishment
restored to “as new” condition or • 40% for gross carelessness,
and the creation of an external
substantial parts of the asset may dining and recreation area that • 100% for taking an abusive tax
be replaced. If the expenditure included the construction of trellis position, and
results in the reconstruction, and PVC roofing. The taxpayer • 150% in the case of tax evasion
replacement or renewal of the asset tried to argue the work comprised or similar.
it is likely to be capital two separate projects that could In practice, some discretion is
expenditure. Whereas, expenditure be apportioned between R&M exercised by Inland Revenue when
incurred to repair or maintain the versus capital expenditure. deciding whether a shortfall
asset to its original condition is The TRA disagreed with the penalty is charged and what type.
generally deductible in the year it taxpayer and took the view it was However, in cases like this where a
is incurred. If the expenditure one capital project to extend and taxpayer is pushing the line too far,
a penalty is more likely than not.
Protect your online privacy Factor sick leave
Privacy has become a huge Duckduckgo, do offer privacy
into pricing
issue in recent years, as more because they don’t store your
and more is being revealed data, or track your search Unfortunately, some staff will
about how big companies habits and history. Third abuse sick leave.
analyse our behaviour. parties don’t get data from your If you have a large number of staff
Knowing what we do and what browsing. your costs are going to increase as a
we spend creates vast sums of It’s worth noting that these result of the doubling of the sick
money for them. If they know browsers offer privacy, but leave entitlement to 10 days.
from our browsing that we’re they don’t protect you from You might wish to calculate how
interested in photography or other online threats. Individual much this is going to cost you and
travel, for example, the data is websites and social media try to factor it into price
sold on to other companies who platforms can still track you negotiations, otherwise it will come
want to sell us cameras or and collect your data. straight out of your profit. Those
holidays. We’re then targeted That’s where a good VPN involved in labour-intensive
with ads and promotions. (virtual private network) adds industries such as cleaning, will
Can we do anything? Yes, we another level of safety. Good need to consider the implications of
can, and it’s more than just VPN providers offer the 10 days sick leave.
turning on the browser privacy encryption on all your online You will have to start granting the
mode or using Incognito on our traffic, and your IP is hidden so extra five days two months after the
smartphone. These just stop no one can find your location. legislation is enacted, which is
others who use your device from Most VPN providers charge, so expected to be about mid year. Each
seeing our internet history. It look online for one that suits time an employee gets to their
doesn’t block internet spies. you. anniversary of sick leave
Some web browsers, such as entitlement, it will go up to 10 days.WINTER 2021 p5
Business interruption due to
COVID-19
The onset of the Covid-19 pan- warehouse, which the owner
demic had an immediate impact visits weekly to maintain, he
on businesses nationwide. Lock- checks emails daily for new
downs and the border closure orders and continues to pay a
have caused massive disruption.
For many this was temporary, for
security guard service to moni- TAX CALENDAR
tor and patrol the building. In-
some, permanent. land Revenue take the view that
Inland Revenue has released a
draft Interpretation Statement
“it is no longer possible to make 31 May 2021
a profit in the current climate”
“Income tax and GST – deduc- and that the pattern of activity,
Deadline for Fringe
tions for businesses disrupted by commitment of time and effort Benefit Tax returns
Covid-19 pandemic”. The state-
ment sets out Inland Revenue’s
etc. do not suggest an existence
of a business. A different inter-
30 June 2021
‘draft’ view on to what extent pretation could suggest that a Last day to apply for
businesses can claim tax deduc- business continues to operate as annual FBT returns
tions for expenditure incurred
whilst impacted by Covid-19.
resources, time, money and ef-
fort, remain committed with the
28 July 2021
The deadline for comment is 28 view to profit in the future. 3rd instalment 2021
May 2021. There appears to be a lack of Provisional Tax
Within the draft document Inland acknowledgement by Inland (June balance date)
Revenue first covers the technical Revenue that the current global
principles governing whether an
expense is deductible or not and
situation created by Covid-19 is
more likely to be temporary Nowhere to run
then covers a number of exam-
ples to demonstrate how the prin-
than permanent and therefore if
a business has not literally
for tax evaders
ciples apply in practice. It ap- closed its doors, the owners will Unfortunately, tax evaders
pears Inland Revenue is taking a be doing everything possible to create an unfair playing field in
hard line. reopen once life returns to nor- their industry.
Broadly, an expense is deductible Those who obey tax law
mal. As stated in Grieve: experience unfair competition from
if it is incurred to derive assessa- The legislation sensibly allows
ble income or in the course of those who don’t. As cash
for deductions and allowances disappears due to the increasing
carrying on a business. The lead- to be claimed even where the
ing case on whether a business use of debit and credit cards, it is
overall result is a trading loss. It becoming more difficult for some
exists was decided by the Court is not for the Courts or the Com- businesses to evade tax.
of Appeal in Grieve v CIR missioner to confine the recog- The net is also getting tighter for
(1984). Inland Revenue revisits nition of businesses to those that those who think they can hide
the principles of that case and are always profitable or to do so money overseas. Cooperation
outlines: whether a business ex- only so long as they operate at a between the New Zealand
ists or not is based on a two-fold profit. government and a large number of
assessment as to the nature of the Inland Revenue also makes no other governments around the
activities carried on and the in- allowance for whether the ex- world is increasing by means of
tention of the taxpayer in engag- pense has been incurred to de- the OECD. Not only does
ing in those activities. The end rive income in the future, nor information pass between the
result being that if a business how the need for the expense governments but also there is
does not exist, then expenditure arose. For example, Australian cooperation in finding those who
that is incurred post cessation is case law supports the view that would dodge their responsibilities,
non-deductible. if the obligation to incur an ex- such as childcare.
Whether a business has ceased is pense arose as part of operating
determined by the facts in each a business, it continues to be
Cheque Payments
scenario and the nature of activi- deductible after the business has Due to the removal of cheques by
ties that continue to be carried ceased, e.g. interest on debt. all banks we can no longer accept
on. The example is provided of a In the past Inland Revenue has any cheques.
small international tourism busi- cast doubt on whether the New Payment Methods Accepted:
ness that has had to stop making Zealand courts would take a • Internet Banking Transfer
sales while the borders are similar view. However, that • Eftpos/Credit Card payment in
closed. To minimise costs it uncertainty appears to have now the office
holds $100,000 of stock at its been squashed. • Credit Card payment via re-
mittance or phone
All information in this newsletter is, to the best of the author’s knowledge, true and accurate. No liability is
assumed by the author or the publisher for any losses suffered by any person relying directly or indirectly
upon this newsletter. You are advised to consult professionals before acting upon this information.You can also read
