Tax Updates: 18 March 2024

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at [email protected].

Trustee tax rate increase to proceed

Well, last week, our dreams were crushed when the FEC reported back earlier than their due date of March 29and confirmed that the proposed increase in the trustee tax rate to 39% contained within the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Bill would proceed as planned.

However, the FEC did tinker slightly with the proposal, recommending a de minimis threshold, whereby trusts with trustee income up to and including $10,000 (post deductible expenses) would remain taxed at 33%.

So, from April 1, the new rate will apply to the majority of trusts in relation to income years ending 31March 2025. However, if I think of our own trusts, we file for clients, arguably applying to the minority, as the increase is only likely to be felt by those trusts, where all the entitled beneficiaries already have personal incomes in excess of $180,000.

Consequently, there is a non-tax-related reason for the trustees not wishing to distribute their income to beneficiaries on lower marginal tax rates. I’d expect to see higher levels of beneficiary income allocations reflected in March 2025 income tax returns but no actual increase in the level of taxes paid by the trust and those closely associated with it as a collective single entity.

As Easter approaches… last-minute eggs added to the basket

Hard on the heels of the FEC report back last week and making for some relatively pleasant reading over the weekend was an Amendment Paper to the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Bill.

The Amendment Paper proposes to:

Phase back in the deductibility of interest costs incurred in relation to residential land (disallowed residential property (“DRP”)):

  • Proposed amendment effective from April 1 2024.
  • Changes the previously proposed rate of deduction for the March 2025 income year from 25% to 80%.
  • Applies to all taxpayers whether they acquired their property or drew down their lending before or after 27 March 2021.
  • Current rules for determining DRP etc, will continue during the phasing-in period.
  • Deductibility returns to 100% for the March 2026 income year and onwards.
  • Current rules for allowing previously disallowed deductions to be claimed where a land disposal is subject to taxation, remain, and;
  • Taxpayers with non-standard balance dates would be required to calculate interest claims based on different percentages for different parts of the income year.

Reduction of residential land bright-line period to two years:

  • Proposal would apply to disposals of residential land where the bright-line end date (generally the date the binding agreement to sell entered into (even if still subject to conditions) occurs on or after July 12024.
  • Disposal will only be subject to bright-line taxation if the bright-line end date is within two years of the bright-line start date – generally the date of title transfer.
  • Reverts the main home exclusion test to that applying pre-27March 2021—so the use of more than 50% of the land, for more than 50% of the time owned, for main home purposes—so the all-or-nothing test: either you satisfy it, or you don’t.
  • However, it removes any construction period from the testing period (construction is considered complete usually when CCC is issued), which the old test did not factor in but the new test did allow for.
  • Best of all, it finally aligns with the other land tax provisions, where any transfer of the land to any associated person (s.YB 2 to YB 13), provided the association has existed for at least two years, will be subject to roll-over relief. Thus, the transferee will simply step into the shoes of the transferor with respect to both acquisition date and cost base (and the transferee will be attributed any main home use by the transferor).
  • Roll-over relief will also apply where the transferor transfers to a trust, and all beneficiaries are persons who have been associated with the transferor for at least two years.
  • You will, however, only be able to claim the roll-over relief once within a two-year period.

Depreciation deductions for commercial and industrial buildings removed:

  • Effective for the 2024-25 and later income years.
  • 0% rate means buildings remain depreciable property and, therefore, retain potential depreciation recovery income exposures upon disposal.
  • New transitional provision for commercial fit-out for buildings acquired in or before the 2010-11 income year, although depreciation deduction will reduce from previous 2% straight-line to 1.5% straight-line.
  • Proposed that the definition of a “building” exclude commercial fit-out, thereby enabling fit-out to continue to be separately depreciated.
  • Definitions of “residential building” and “non-residential building” should be repealed as they are no longer considered necessary.
  • Where a building was acquired in the 2020-21 to 2023-24 period, and fit-out was simply depreciated as part of the building (so not split-out), section 113 application can be made to amend assessments so that fit-out acquired with the building can be depreciated separately; and,
  • Proposed annual deduction for fit-out would be 1.5% of the “starting pool” – a defined term too complicated to list here.

Disposals of trading stock at below market value:

  • Proposal to fix present overreach of section GC 1.
  • Effective to disposals occurring on or after April 1, 2024.
  • Going forward, section GC 1 would only apply to scenarios where – trading stock is disposed of to an associated person; a person disposes of trading stock to themselves for their own use or consumption; trading stock is not disposed of in the course of carrying on a business for the purpose of deriving assessable income or excluded income, or a combination or both.
  • Sections FC 1 and FC 2 (which deal with gifts of property) would be amended to remove any reference to trading stock to the extent that section GC 1 would entirely govern such gifts going forward; and,
  • Under the purchase price allocation rules in section GC 20, where the parties to a disposal are associated with each other, any trading stock is always deemed to be disposed of for market value.

Transitional rule for “listed services”

You should be aware that certain supplies of “taxable accommodation” by operators of electronic marketplaces and listing intermediaries post April 1 2024 will now be subject to GST.

It was noted, however, that a transitional rule was required to accommodate (no pun intended) situations where taxable accommodation booked pre-April 1, in relation to a non-GST registered underlying supplier, would not trigger the time of supply (earlier of invoice issued, payment received) until post-April 1. The parties (guest/host) would have contracted on the basis that GST would not have applied to the transaction. Consequently, there is a need to ensure that the marketplace operator/listing intermediary did not account for GST and issue the flat-rate credit where the time of supply occurred post-April 1.

The transitional rule will enable the marketplace operator/listing intermediary to effectively “switch off” the requirements of section 60C (2) (ab). Any GST liability in relation to the transaction would remain with the underlying supplier—which would only apply if they were a registered person.

The transitional rule can only be used where the marketplace operator/listing intermediary has informed the underlying supplier within a reasonable timeframe that they will not be liable for GST on the transitional booking and that this liability will remain with the underlying supplier.

Last note

While the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Bill—which includes all of this week’s AWIR content—has yet to pass a second reading, I expect it will now proceed without further change and may even be enacted before March 31.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.

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