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Richard’s May 2022 – June 2022 tax updates
Richard has had over 30 years’ experience with New Zealand and International taxation. His team provide services including:
- Q&A service for accountants
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Below are articles from Richard’s weekly email ‘A Week in Review’ over the last month. You can sign up for his ‘A Week in Review’ newsletter here and get the updates weekly, directly to your inbox.
- Budget 2022 comes and goes, 23 May
- Request for your input, 23 May
- FIF deemed rate of return set, 30 May
- 2022-kilometre rates released, 30 May
- Fringe Benefit Tax (FBT) exclusion for charitable & donee organisations, 7 June
- Employees additional transport costs tax free, 13 June
- Special reports on various interest rates, 20 June
- Co-ownership changes – land sales rules, 20 June
- Are you a CBP?, 27 June
Budget 2022 comes and goes
Well for those of us in the tax world, who were eagerly awaiting Budget 2022 in anticipation of anything we could get our teeth into, it was a bit like bread-and-butter pudding without the raisins in it. 2pm Thursday came and went, and while the automated applause continued (surely that can’t have been real people clapping), the only item that had a sniff of being tax related (unless you count the extension of the fuel excise duty reductions), was the Government’s cost of living payment of $350.
Post the announcement, the Taxation (Cost of Living Payments) Bill was introduced into the House, which passed through all stages and was read a third time on 19 May 2022. The Bill now awaits the Royal assent. Under the scheme, cost-of-living payments totalling $350 will provide short-term support for low-to-middle income individuals earning up to $70,000 per annum and who are not eligible for the winter energy payment. The payments will be made in three monthly instalments from 1 August 2022.
To qualify for the payments, you must satisfy the following criteria:
- net income of $70,000 or less for the 2021–22 tax year,
- not eligible to receive a qualifying benefit for the winter energy payments (sole parent support, supported living payment, jobseeker support, jobseeker support student hardship, emergency benefit, emergency maintenance allowance, youth payment, young parent payment, New Zealand superannuation, or veteran’s pension) during the payment period,
- be aged 18 or over,
- be both a New Zealand tax resident and present in New Zealand, and
- not be incarcerated.
Inland Revenue (IR) will administer the payments and will determine eligibility based on the information it holds for individuals. Individuals will not need to apply for the payments.
Request for your input
In previous editions of AWIR, I’ve often mentioned the latest updates to IR’s Tax Council Office public guidance work programme.
If you’re now looking for something to do post Budget 2022’s exciting announcements, you are in luck, as the TCO is starting work on drafting the 2022-23 work programme and would like to hear from you, if you have any interpretative issues you would like guidance to be published on.
If you wish to contribute, you should include a short description of the issue, why you think it is important, and include legislative references and case names (where available).
The closing date for submissions is 31st May 2022.
FIF deemed rate of return set
For those of you who use the deemed rate of return method to calculate FIF income for the year, the Income Tax (Deemed Rate of Return on Attributing Interests in Foreign Investment Funds, 2021–22 Income Year) Order 2022 (SL 2022/151) was notified in the New Zealand Gazette on the 26th of May, confirming the rate of 6.01% for the 2021-22 income year. The rate for the 2020-21 income year was 4.43%.
The calculation method, is in essence a backup for the comparative value method, coming into application when there is insufficient market value information for the relevant FIF. Usually, like most FIF calculation methods, income returned under the deemed rate of return method is the only taxable income to be returned for FIF, other receipts such as dividends and realised disposal gains, are not subject to taxation.
There is, however, a potential for a top-up additional FIF income amount, should actual income be greater than the FIF income calculated under the method. Equally, unlike a number of the other FIF calculation methods, it is possible to recognise a FIF loss, if the loss is the product of the calculation.
2022-kilometre rates released
Of probably more interest to most of you than the previous article, the 2021-22 income year kilometre rates used to calculate motor vehicle expense claims have been released:
- 83 cents per kilometre, increased from 79 cents due to steeper fuel costs
- 31 cents per kilometre, increased from 27 cents (for petrol & diesel)
- 18 cents per kilometre, increased from 16 cents (for hybrid)
- 10 cents per kilometre, increased from 9 cents (for electric)
The tier 2 rates are only to cover the business portion of running costs for any travel in excess of 14,000 kilometres per year.
You can use the kilometre rates:
- to calculate expenditure claims for the business use of a motor vehicle;
- by employers as a reasonable estimate for reimbursement of expenditure incurred by employees for the use of a private motor vehicle for business purposes.
You can read the detail on both the current release in Operational Statement OS 19/04 (KM 2022), “Kilometre rates for the business use of vehicles for the 2022 income year”, and the expanded commentary on the issue, in OS 19/04A: “Commissioner’s statement on using a kilometre rate for business running of a motor vehicle – deductions” and OS 19/04B: “Commissioner’s statement on using a kilometre rate for employee reimbursement of a motor vehicle.”
However, if you’re short on time, a few key points:
- Under s.DE 2, you have a choice of two methods – a cost method based on actual costs, or a kilometre rate method.
- If you wish to use the kilometre rate method, you must make an election to use this method, otherwise you are deemed to have elected to use the cost method. The election must be made in the year the vehicle is acquired or is first used for business purposes. Importantly note that the election (deemed or otherwise) is irrevocable, and therefore will apply until the vehicle is disposed of.
- You must determine the business use percentage of the vehicle by using a logbook, diary, calendar or another suitable method.
- If you have elected to use the kilometre rate, you must at least record the odometer reading on each balance date for the relevant income year, as you need to be able to show whether the annual total travel in the vehicle has exceeded 14,000 kilometres and consequently any claims for travel in excess of this threshold will be based on the tier 2 rates.
- If you’re using the kilometre rate method, then you will have no deprecation claims for the vehicle, nor potential depreciation recovery income exposures upon the subsequent disposal of the vehicle.
- Since 1st April 2017 (for vehicles acquired or first used for business post this date), a close company whose only provision of a non-cash benefit is the availability of a motor vehicle for the private use of the shareholder, can also make an irrevocable election to use s.DE 2 to calculate motor vehicle claims, thereby avoiding the need to account for FBT on the vehicle.
- The old 5,000-kilometre limitation is gone.
- A logbook should be maintained for a three-month test period and the business use percentage established can then be used for the following three years for the purpose of both the cost method and the kilometre rate method.
- The kilometre rates, while calculated on a GST inclusive basis, do not generate a GST input tax credit claim.
- If you do not retain sufficient records, then any claim can be limited to a maximum of 25% business use – so 3,500 kilometres for the tier 1 claim. This maximum assumes that you can justify at least this percentage, which means if you can’t, your claim could be completely disallowed if there were no records to support business use of the vehicle. I’ve had comments in the past where clients have assumed they can do nothing and still claim 25% – this is not correct.
- Employers may use the kilometre rates set by IR (Inland Revenue) as an acceptable method of calculating a tax-exempt portion of any reimbursement paid to employees as provided under s.CW 17(3). An employer can, however, also use the actual cost method, or in accordance with s.CW 17(3), the employer may make a reasonable estimate of expenditure likely to be incurred by an employee or group of employees. In this latter regard, should the employer wish to use other 3rd party data, IR expects that care must be taken to ensure capital/fixed costs are not overrepresented in the rates applied (i.e., some sort of two-tier system should apply).
Fringe Benefit Tax (FBT) exclusion for charitable & donee organisations
Inland Revenue (IR) has now finalised BR Pub 22/06, which is an update and reissue of BR Pub 17/06, which expires end of June.
The binding ruling discusses the circumstances in which a benefit provided by a charitable organisation falls within the FBT exclusion contained with section CX 25. The arrangement to which the Ruling applies is the provision of a non-monetary benefit by a charitable or other donee organisation, not being a local authority, public authority or university, (the qualifying organisation) to an employee of that organisation.
The bread and butter of the Ruling is:
- Where a short-term charge card facility (as defined in s CX 25(3)) is provided to an employee of a qualifying organisation and the value of that benefit for the employee in a tax year is more than the lesser of 5% of the employee’s salary or wages or $1,200, that benefit is a fringe benefit and the exclusion in s CX 25(1) does not apply.
- Where any other non-monetary benefit is provided to an employee of a qualifying organisation:
- A fringe benefit is not provided where the benefit is not received mainly in connection with their employment.
- A fringe benefit is not provided where the benefit is received mainly in connection with their employment to the extent that:
a) the employee is employed in carrying out the qualifying organisation’s benevolent, charitable, cultural or philanthropic purposes; or,
b) the employee is employed in a business carried on by the qualifying organisation, where the business activity is within (i.e. carries out) the organisation’s benevolent, charitable, cultural or philanthropic purposes.
- A fringe benefit is provided where the benefit is received mainly in connection with the employee’s employment, to the extent that the employee is employed in a business carried on by the qualifying organisation, where the business activity is outside (i.e. does not carry out) the organisation’s benevolent, charitable, cultural, or philanthropic purposes, regardless of whether business profits are applied to the organisation’s benevolent, charitable, cultural or philanthropic purposes.
The focus of the Ruling is on the potential application of the FBT exclusion contained in section CX 25, which in essence, is triggered when a qualifying organisation provides a benefit to an employee mainly in connection with their employment, in an activity carried on within the organisation’s specified purposes.
Figure 1 on page seven provides quick guidance on whether the employer is likely to be considered a qualifying organisation, with Figure 2 then providing a snapshot of the difference in the application of the exclusion to a business carried on within the specified purpose of the organisation, to one where the business is carried on outside the specified purpose. Finally, Figure 3 on page 19 reflects a flowchart summarising the FBT exclusion. (Read the Ruling here).
Overall the Ruling is a 28 page document, and contains half a dozen examples to explain the commentary towards its end. Unlike the earlier Ruling, BR Pub 22/06 applies indefinitely from 1st July 2022.
Have they finally listened for once?
Back in a mid-March edition of AWIR, I outlined the Government’s latest proposals targeted towards taxpayers who were supposedly using a company structure to avoid predominantly the 39% personal tax rate, but also the 33% rate.
The discussion document was titled ‘Dividend integrity and personal services income attribution’, and suggested:
- That if you had a controlling interest in a company, and the company had retained earnings when you sold your shares to another party, then a portion of your historically tax-free capital gain will be treated as a taxable dividend;
- That all companies be required to maintain a record of their ASC (available subscribed capital) and ACDA (available capital distribution amount) balances, so that the Revenue could easily verify the non-taxable amount when either shares are repurchased by a company or the company is liquidated; and,
- That the PSI thresholds should be modified to the extent that the 80% single customer rule would disappear, and the working person threshold should reduce from 80% to 50%.
As you can imagine, the proposals triggered a public outcry and a raft of negative submissions accordingly, including from MBIE who waded in with concerns that an unintended consequence of the policy may be to dis-incentivise the establishment of, and investment in, start-ups by founders and investors, and further, that this policy may have high compliance costs for small business around record keeping and reporting of ASC and capital gains.
Now those of you who have been around the track as long as I have, probably appreciate that more often than not (I have to be a little kind to them I guess?), these types of submissions usually fall on deaf ears, and the Government simply charges on like a bull in a china shop, introduces the changes as proposed, and then has to use band-aids for the next ten years or so to repair the carnage they’ve created due to legislative over-reach.
However, I almost spilled my morning coffee (which would have been a crime in itself!) when I read that the Government has actually taken a breath, and asked its officials to do some more work on the proposals as a result of some of the concerns raised.
Now I’ve also been around long enough not to get overly excited when I see these types of media releases, considering that the Government has not dropped the proposals outright, but has simply requested “more work be done”. So let’s just give them some credit for now, and wait and see what comes out in the wash in a few months’ time.
Employees additional transport costs tax free
Inland Revenue (IR) has issued a draft operational statement for comment titled ‘When employee allowances for additional transport costs are exempt from tax’. The OS has the reference ED0243, and is a 17 page document issued to provide guidance on the potential application of section CW 18 of the ITA07, which can exempt from tax an allowance paid to an employee for additional transport costs.
The general rule is that home to work travel by an employee is private expenditure of the employee, primarily because:
- employee’s private choices (about where to live and how to get to work) are the key factor in determining the cost of home-to-work travel; and,
- an expense of starting work is distinguished from expenses while ‘on work’, and employees are expected to bear the cost of starting work.
Consequently, the starting position is that any allowance paid to the employee for their home to work travel will be a taxable allowance subject to PAYE deductions. However, where the allowance is paid to the employee to reimburse them for ‘additional’ transport costs incurred in getting from home to work, then section CW 18 may apply to exempt the allowance from taxation where the following three tests can be satisfied:
Step One – one or more of the factors contained with section CW 18(3) is present – if none of these factors is present, then the additional transport costs exemption cannot apply.
Step Two – did the employee incur the additional transport costs in connection with their employment and for the employer’s benefit or convenience? The example given in the OS is in relation to a temporary change in workplace for the employee. If it was at the employers request, then step two would be satisfied, however if the employee instead requested the change due to their own personal circumstances, then the allowance paid is likely to remain taxable.
Step Three – How much of a travel allowance is exempt under the additional transport costs exemption? Calculate the additional transport costs and compare them with the allowance paid. So note here that it is only the additional quantum of the travel costs that is tax free, which may not necessary equate to the full amount being paid therefore. Also, there is a cap of 70km’s per day, so if the employee’s round trip exceeds this threshold, any costs in relation to the excess distance travelled must be ignored for the purpose of the calculation.
The factors contained within section CW 18(3) are:
a) the day or time of day when the work duties are performed:
b) the need to transport any goods or material for use or disposal in the course of the employee’s work:
c) the requirement to fulfil a statutory obligation:
d) a temporary change in the employee’s place of work while in the same employment:
e) any other condition of the employee’s work:
f) the absence of an adequate public passenger transport service that operates fixed routes and a regular timetable for the employee’s place of work.
The OS provides commentary on each of the six factors, so I would recommend reading them as some of the factors are possibly not as accommodating as you may think at first glance.
If you would like to make a submission on the draft OS, the deadline is 22nd July.
Special reports on various interest rates
Inland Revenue (IR) has released three special reports in respect of Orders in Council which have recently been updated:
- Use of money interest rates increasing the taxpayers paying rate from 7.00% to 7.28%, effective from 10th May 2022 – notably the Commissioners paying rate remained at 0%,
- FBT interest on loans rate from 4.50% to 4.78%, with application from the quarter commencing 1st July 2022; and,
- FIF deemed rate of return rate for the 2021-22 income year at 6.01%, up from the previous income year’s rate of 4.43%.
You can locate the special reports here.
Co-ownership changes – land sales rules
IS 22/03 is a good read for those of you advising on the potential application of the various land taxing rules (particularly bright-line) to co-ownership changes with respect to a land title, including changes to the trustees of a trust.
I suspect most of us already appreciate with respect to the latter, that a trustee change would not amount to a “disposal” for the purpose of the land sales rules, and IS 22/03 certainly confirms that view.
Potentially not so understood are the taxation consequences triggered by a change in co-owners, particularly where the existing co-owners simply adjust their respective ownership interests in the property and there is no new co-owner added to the ownership pool, nor a reduction in the existing number of co-owners.
The 40-page interpretation statement sets out IR’s view on the tax effects of co-ownership changes, and arguably a simple read of pages 2–4 of the document will be sufficient to guide you forward. So, in summary:
- A change to the form of co-ownership, (e.g., joint tenant to tenants in common) where the proportional shares or notional shares do not change, will not be a ‘disposal’ for the purposes of the land sale rules;
- If there is a transfer between co-owners where neither’s interest is fully alienated but the proportional share or notional share of a co-owner is reduced, there would be a ‘disposal’ for the purposes of the land sale rules by that person to the extent their interest is reduced;
- If there is a transfer that adds a new co-owner, there would be a ‘disposal’ for the purposes of the land sale rules to the extent the share (or notional share) of the original owner(s) in the land is reduced; and,
- If there is a transfer that removes a co-owner, there would be a ‘disposal’ by the departing co-owner of their share (or notional share) in the land.
And just in case that summary is not clear enough, Table one immediately follows to provide additional clarity to the interpretation of the rules.
Are you a CBP?
I appreciate it is everyone’s favourite topic – the financial arrangement or ‘FA’ rules – and consequently, you will all be overjoyed to hear that IR has released a draft interpretation statement titled ‘Cash basis persons under the financial arrangements rules’, with a reference of PUB00396.
The purpose of the latest IS draft is to explain when a person can account for income and expenditure from FA’s on a cash basis instead of an accrual basis, and to provide some clarity around the adjustment that must usually be made when a person ceases to be a cash basis person and must account for their FA’s using the accrual basis.
You may or may not recall an IS released in 2020 titled IS 20/07 ‘Income tax – Application of the financial arrangements rules to foreign currency loans used to finance foreign residential rental property.’ That document explained who qualified as a CBP, but did not expand on the adjustment calculations required, which the present statement looks to do.
I expect that most of you already understand the difference between cash basis and accrual basis when dealing with the FA rules. Accounting on a cash basis is arguably the simpler of the two methodologies, where the income/expenditure relating to the FA is accounted for during the life of the arrangement, based on when an amount is received or paid. Under an accrual basis, however, an appropriate spreading methodology must be used.
Now to qualify as a CBP, you must not hold FA’s which exceed the following thresholds:
- NZD$100,000 for the income and expenditure threshold (s EW 57(1)); or,
- NZD$1 million for the financial arrangement threshold (s EW 57(2)); and,
- NZD$40,000 for the deferral threshold (s EW 57(3)).
It should be noted here that you only have to satisfy one of the first two tests, and not both tests, to qualify as a CBP. In other words, if for example the total income/expense (absolute number) for all of the person’s FA’s for the income year was $60,000, but they held $3,000,000 of FA’s, then the person could use the cash basis for accounting purposes, provided they also satisfied the $40,000 deferral threshold. Unfortunately, it is this latter threshold which is quite often overlooked or its basis of calculation is misunderstood.
And just remember when undertaking your first two threshold calculations, that it is an absolute number – so you add the two numbers together (income/expense) or (asset/liability), you do not subtract one from the other to obtain a net amount.
Once the person has qualified as a CBP, there are then two potential adjustment calculations which could be triggered each income year (so annual reviews must be undertaken). A base price or BPA is triggered when the FA either matures or comes to an end, and a cash basis adjustment is triggered when the person loses their CBP status for whatever reason.
PUB00396 contains a number of detailed examples which in my view are well worth a look, to understand exactly how the rules operate in practical scenarios.
Finally of important note is a comment on the application of the $40,000 deferral threshold. You have to perform the calculation over the entire period that the FA has existed – so from the income year in which the FA commenced, through until the income year you are reviewing a person’s CBP status – so it is not a single-year calculation. Due to the complexity of the calculation that may be required, therefore (or simply the likely time period for which the FA may exist), there is an option to elect to use the accruals basis to calculate annual FA income/expense, even though the person may qualify as a CBP. However, once you make an election to use a spreading method, that method must then be used for:
- all financial arrangements you are a party to at the time of making the election; and,
- all financial arrangements you enter into after the income year in which you make the election.
You can subsequently revoke the election by giving notice to IR with a return of income within the prescribed timeframe, however, the revocation only applies to all FA’s entered into after the income year in which you give the notice, and you must continue to use a spreading method for those arrangements covered by the election even though you may qualify to be a CBP.
Should you wish to make a comment on the draft IS, the deadline is July 15th.
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