11 May, 2020 | The Week in Tax
- Inland Revenue guidance on how FBT applies during the Lockdown.
- Is the wage subsidy scheme available for landlords?
- A look ahead to next week’s Budget.
Transcript
Inland Revenue has been working pretty hard to bring out material addressing questions raised by the Covid-19 pandemic. I discussed last week the new determination in relation to payments made to employees working from home.
Part of Inland Revenue’s website now specifically covers the various tax responses and policy initiatives made in response to the pandemic.
One of these addresses the issue of whether fringe benefit tax (FBT) applies to motor vehicles during the Level Four lockdown period.
By way of background, as people are probably aware, an FBT liability arises if a motor vehicle is “made available to an employee for their private use”. And what not unreasonably has been suggested to Inland Revenue is that during Level Four a motor vehicle is not available for an employee’s private use because the only private use permitted is for local travel to access essential services. In other words, such are the restrictions around a vehicles use in Level Four that to all intents and purposes, it’s not available for private use.
The Commissioner of Inland Revenue’s response to that is that the motor vehicle will still attract FBT in the usual way during Level Four. Yes, the opportunities to use a vehicle for private use have been restricted, but the test under the law is whether the vehicle has been made available for private use, not whether any private use has occurred.
And under case-law law, the position is a vehicle is made available to an employee when they have access to the vehicle and permission to use it for private purposes. Actual use is irrelevant for FBT purposes. Inland Revenue’s conclusion is therefore if a vehicle has been made available to an employee for their private use, then a FBT liability will arise for the Level Four days in lockdown.
There is a little ray of hope in that Inland Revenue go on to say that at present there’s no legislative scope for the Commissioner to exercise her discretion in these circumstances. However, Inland Revenue Policy “is currently considering this matter and whether any legislative relief should be made available”.
Now, FBT returns for the period to 31 March 2020 do not need to be filed until 31st May. So it’s possible we’ll hear more on what Inland Revenue have decided as to the treatment during the lockdown shortly. And then of course, FBT returns for the periods from 1st of April onwards won’t need to be filed until after 30th of June. So in both cases, hopefully we’ll get some clarity around that shortly. At present it’s a bit of the classic “Yeah, nah, definitely, maybe.”
Now usefully Inland Revenue have also gone on to address the question of travel between home and work. Now normally travel between home and work is treated as private use. But it’s clearly established law that no private benefit arises from travel between home and work if the home is also used as a workplace. In those circumstances travel between home and work is not private use of a motor vehicle.
Obviously, during Level Four many employees have been required to work from home because their place of work has been closed. Given the unique circumstances of Level Four, Inland Revenue will accept that there are sound business reasons arising from the nature of the work for the work to be performed at home. Therefore, there is a need to travel from work to home and back again. This means that home to work travel such as driving a pool vehicle home before level four and returning it when the employee can go back to work is not subject to FBT.
Taxpayers do need to ensure that the facts of their case support this approach. In other words, the employee must be actually working from home. There also needs to be a genuine private use restriction in place. If the employee is free to use the vehicle for private purposes, then FBT will be payable. Even though the employee is working from home which is accepted as being a place of work for Inland Revenue purposes.
The important thing to pick out here is that if you want to avoid FBT on the private use of vehicles, there must be a specific written restriction into either a separate agreement or in the terms of an employment agreement. The restriction must specify that an employee is provided with vehicle may not use it privately. This is a longstanding policy.
Still it’s some useful guidance from Inland Revenue on the matter. It’s probably not of great comfort perhaps to some employers who are hoping to avoid an FBT liability. But possibly if cars had to be taken home because there wasn’t a secure place for keeping them during the lockdown, an exemption could apply. But that would also need the employee to have been careful to make sure they didn’t use the vehicle privately. I expect we’ll hear more on this matter from Inland Revenue.
Can landlords apply for a wage subsidy?
Moving on, the government’s wage subsidy scheme has paid out almost $10 billion since it was launched in March. In recent days there’s been some criticism of firms that have been taking the subsidy who apparently may not have needed to do so. Several law firms have recently paid back a wage subsidy on the basis that when they applied for it, they expected to see a significant 30% drop in the revenue. But as things turned out in April, that didn’t happen.
One of the successes of this policy, is that the process for claiming the subsidy and its payment administration has been very, very swift and exemplary in that regard. But obviously around the fringes, some interesting questions pop up and one is emerging now among tax agents about whether in fact landlords can apply for a wage subsidy.
The
position on this according to the Ministry of Social Development and Inland Revenue is that it applies to employers, sole traders, contractors, shareholder employees and a partner in the business.
But note that it does not specifically mention landlords. The position would appear to be that they are covered by the sole trader option. Even so it’s not going to apply to every landlord. The position we’ve reached at the moment is that if the landlord is running something that would actually meet the wider common law definition of business, then they should qualify for the subsidy.
They also have to show there’s been a 30% drop in revenue. This may well happen for commercial landlords in particular who have been offering rent holidays to retail outlets and cafes who can’t open during the lockdown. Similarly, residential landlords who have had tenants who’ve been laid off have probably met that criteria.
But the key thing there is meeting the definition of ‘business.’ It seems to me, that the sort of ‘Mum and Dad’ investor with maybe only one or two residential investment properties is not eligible to claim the wage subsidy even if they meet all the other criteria because they’re not really running a business. The nature of their activities is not sufficient to be treated as a business. That obviously will be a matter of some debate among those landlords who are suffering a loss of revenue.
On the other hand, people running an Airbnb may meet the definition of a business because there’s quite a bit involved in maintenance, cleaning, etc in providing furnished accommodation. Anyone GST registered is probably running a business, which would cover every commercial landlord. It would be helpful if Inland Revenue and the Ministry of Social Development between them could clarify this position.
A lot remains at stake and there are businesses struggling all up and down the country, so it’s only right that they get the right support. But equally, we don’t want people to be playing the system and this is one area where it’s a grey one and needs clarification.
Overall, I think that a commercial landlord and a residential investment property managing several properties are really running a small business and should qualify. How tenants might view that if they haven’t seen relief from a particular landlord is, of course, another matter. Societal pressure is perhaps one of the reasons behind several companies paying back their wage subsidy anyway.
What can we expect from the Budget?
Now this week is the Budget. This is unquestionably going to be the most important in recent years from the point of indicating the direction that this government wants to see the post pandemic economy take. From a tax perspective, I’d be surprised to see many – if any – new tax measures. As I’ve said previously, I think the income tax thresholds are long overdue for adjustment and there’s an argument for doing that now, as a measure of support during a recession. However my understanding si it’s probably not going to happen.
What that indicates is the short-term way of using wage inflation (if we have any wage inflation) to quietly raise additional tax revenue without anyone noticing, will continue. This ‘fiscal drag’ is worth about $400 million annually. Now, that said, past governments of both hues have done this down the ages.
It being an election year, directly addressing the issue of tax changes to fund the response to the pandemic is probably also off the table. We might hear some general commentary about, well, we’re going to need to look at the shape of the tax system.
I would expect Inland Revenue to get some additional funding to help with auditing the wage subsidy scheme and managing the small business cash flow scheme, details of which are still pretty thin. But as everyone knows, that policy was enacted in haste, although I understand some work had been going on in the background for some time. This was going to be rolled out sooner or later but probably not as soon as actually happened.
A bit of a personal disappointment is there’s no formal Budget lockup this year where the analysts and journalists get to have a look at the Budget before the Finance Minister presents it to Parliament. This year only press gallery journalists will be in the lockup. As I said, disappointing but understandable. The problem is, so many people would want to be in there and it’s difficult to be representative about who could be there given the conditions. The security involved in emailing it out and the potential for leaks was – given what happened last year -was probably a risk the Government didn’t want to take. Anyway, I will have a full wrap up of the Budget in next week’s podcast.
So that’s it for this week. I’m Terry Baucher and you can find his podcast on my website or wherever you get your podcasts. Thank you for listening please send me your feedback and tell your friends and clients until next time. Kia Kaha. Stay strong.
4 May, 2020 | The Week in Tax
- Inland Revenue releases a determination on payments to employees for working from home
- COVID-19 tax measures legislation is introduced
- Provisional tax is due 7th May
Transcript
This week, Inland Revenue releases a determination on payments to employees for working from home. The COVID-19 tax measures legislation is introduced and in case you forgot, Provisional tax is due Thursday 7 May.
A little earlier this month, I outlined the rules regarding employees claiming a deduction for home office expenditure, and I suggested that Inland Revenue should issue a ruling on the matter to help clarify the position. It was quite clear that many employees were unaware of the position. And likewise, employers were not sure of their own obligations.
Therefore, I’m very pleased to see that Inland Revenue has followed through and on Wednesday issued Determination EE002: Payments to employees- for working from home costs during the COVID-19 pandemic.
Now this Determination is described as a temporary response to the COVID-19 pandemic and applies to payments made for the period from 17th of March to 17th of September 2020.
What the Determination does is explain the rules that apply where employers have either made or intend to make payments to employees to reimburse costs incurred by their employees as a result of having to work from home during the pandemic. And it notes that realistically
…many employers will not be in a financial position to make additional payments to employees during the COVID-19 pandemic. This Determination is not intended to suggest that employers make such payments to employees.
The Determination explains only the employer can claim a deduction for such expenditure, but they can reimburse employees for their costs and such payments would be exempt income for the employee. It’s not binding on employees and employers who can work out their own allocations and allowances within the rules.
Critically, and very usefully, the Determination sets out the amounts Inland Revenue regards as acceptable. Under the Determination an employer who pays an allowance that covers general expenditure to an employee working from under because of the pandemic, can treat up to $15 per week of the amount as exempt income of the employee. And this amount applies on a pro-rata basis if the payment is made fortnightly i.e. $30 per fortnight or $65 per month if you make a single monthly payment. Anything above that $15 per week threshold, unless they can prove that the actual costs are higher, the excess would be taxable Income and subject to PAYE.
Additional payments can also be made for the cost of furniture and equipment, and that’s to recognise the fact that an employee might incur a depreciation loss on furniture and equipment used in a home office, which because of the employee limitation, they’re not allowed to claim that deduction.
The Determination actually offers two options: a safe harbour option in which an employer can pay up to $400 to an employee and it would be treated as exempt income. Alternatively, the employer can reimburse employees for the actual cost of furniture and equipment purchased for use in a home office.
The Determination also usefully summarises the impact of a previous Determination EE001 relating to telecommunication usage plan costs under which to $5 per week can be paid is exempt income if the plan is used for the job. Otherwise, then you take an apportionment basis depending on the amount of business use involved.
Finally, the Determination sets out what evidence is needed to support the payments. For the safe harbour option of $400 reimbursing for home office equipment and furniture, no evidence is required if that’s the only amount paid. In relation to the $15 per week for other expenditure (such as additional heating and power costs), again, no evidence is required. And similarly, for the telecommunications usage plan costs of $5 per week. In every other instance you would need to provide evidence or have evidence available to support the payment made.
Now this is a temporary measure, it was signed off on April 24th and released on April 29th and it only applies for payments between 17th March up until 17th September. But it’s a good measure and helps clarify a position with a lot of uncertainty around it. Inland Revenue would have been working flat out behind the scenes on this one.
Tax loss carry-back legislation
Moving on, the legislation for the tax and other COVID-19 related measures was introduced into Parliament on Thursday. Now, the tax part of this covers the temporary loss carry-back regime and also gives the Commissioner of Inland Revenue a temporary discretionary power to modify where appropriate due dates and timeframes or other procedural requirements under the various Inland Revenue acts.
The tax loss carry-back regime ad inserts a new section IZ 8 into the Income Tax Act 2007 and the legislation on this amounts to nearly 5 ½ pages, so it’s quite involved. They’ve also put in an anti-avoidance provision, section GB 3B to counter any possible tax avoidance or abusive use of the loss carry-back measure.
As previously discussed, small businesses with a 31st March balance date are probably not going to really benefit from this scheme, but let’s wait and see. Obviously, if you’ve got a balance state, which is not to 31st March, say, for example, to 30th September 2020, this measure is more likely to be of greater use. So, it’s almost a question of suck it and see what we can do around that. But at least we now know the relevant legislation.
Intriguingly, some have suggested that maybe an alternative position might have been to have an extended income tax year or double tax year that is treat the period from 1st of April 219 through to 31st March 2021 as a single tax year. That’s an interesting response. I have seen something similar in the UK when a loss carry-back regime was introduced. How much use is made of it we’ll just have to wait and see.
The Commissioner of Inland Revenue has also been given a temporary discretionary power for the period from 17th March 2020 until 30th September 2021. These are included in new sections 6H and 6I of the Tax Administration Act 1994. Now those temporary sections may be extended in duration, but they give Inland Revenue the ability to do as we’ve discussed in recent weeks and extend the timelines for filing tax returns or clarify what are the COVID-19 implications for tax residency.
I still think we probably may finish up with some specific legislation on these issues, but at least Inland Revenue now has the tools it needs to respond quickly to issues as they arise.
Looking ahead to the Budget
What next? Well, the Budget is in two weeks on the 14th of May. We may see some more tax measures but probably it will focus on Government spending, over the next four-year period and what measures it plans to apply to start paying for all of this. My understanding is that the long overdue income tax threshold changes I’ve previously suggested are now off the table. No doubt people will be making submissions behind the scenes on what they would like to see.
Intriguingly, the COVID-19 legislation released on Thursday included reference to a Small Business Cashflow Scheme which is to be administered by Inland Revenue. [As has been reported elsewhere this was a mistake although I was aware beforehand that something might be in the pipeline.] The scheme is probably a counter to complaints that small businesses have been making about the difficulties of accessing bank finance under the Business Guarantee Finance Scheme, which was announced a couple of weeks ago. We’ll soon see, and I’ll report further if there’s any interesting tax matters which come out of it.
Provisional tax is due
Finally, a reminder that the third instalment of Provisional tax for the March 2020 income tax year is due Thursday, 7th of May. Now, if you can pay that, you should do so. Hopefully, businesses will be in a position to do so as well those with regular sources of income, such as overseas pension schemes.
But if you can’t pay your provisional tax tell Inland Revenue quickly so that it will then apply the concession relating to use of money interest. And if you’ve got any issues around what you think your tax bill is going to be or how you’re going to manage it, get in touch with your tax agent or contact Inland Revenue directly through your myIR account and let them know what’s going on.
29 Apr, 2020 | The Week in Tax
- Latest guidance from Inland Revenue on Covid-19 tax measures
- Draft guidance from Inland Revenue on tax implications of owning overseas rental property and application of financial arrangements rules
- DIA ruling on AML-CFT
Transcript.
This week, the latest from Inland Revenue on its response to the Covid-19 pandemic. Inland Revenue releases draft guidance for consultation on the tax implications of owning overseas rental property, and the Department of Internal Affairs isn’t really helping.
Inland Revenue has been releasing updates on its interpretation of various tax issues arising out of the Covid-19 pandemic. The latest release on Wednesday was a public statement regarding residency issues.
In a previous podcast I raised the question of what is going to happen to people who may inadvertently become tax resident of New Zealand either because they fell sick or were unable to leave when they intended to because of border closures. Subsequently, they then become tax resident under the days present test, that is they’ve been present in New Zealand for more than 183 days in any twelve-month period.
In this instance what the Inland Revenue guidance says is that an individual will not become tax resident in New Zealand under the days present test just because they become stranded here. They will be treated as non-resident if they leave New Zealand within a “reasonable time after they are no longer practically restricted in travelling. Then extra days when that person was unable to leave will be disregarded. The day tests are based on normal circumstances when people are free to move.”
Now this is good to hear. But I’d feel more comfortable advising clients on this if we had some form of statutory basis to this interpretation. As it stands this is at Inland Revenue’s discretion. And I do know of pre-Covid-19 instances where a person has been deemed to be tax resident even though they fell sick and were unable to travel. In my view there’s no difference between not being able to travel because of the Covid-19 pandemic and the resulting travel restrictions around that, and not being able to travel because you’re physically sick.
The United Kingdom has a specific clause in its legislation excluding days where someone is not able to travel because of sickness or ill health, either of themselves or of a relative. I think it would ensure future clarity if a similar provision was actually legislated for, maybe later on in the year. But anyway, as a temporary measure, it’s good to see the Inland Revenue has taken this approach.
Next week we should see the legislation relating to the loss carry-back provisions. The general consensus forming around small business advisers and fellow tax agents is that although it’s a measure which is useful in the long term, right now because of the timing of how everything has happened, it’s probably not terribly significant for a lot of small businesses.
That said, people are considering tweaks to make it more user friendly for small businesses. One of the issues that’s being addressed during consultation with Inland Revenue, which is going on at the moment, is about possibly allowing shareholder-employee salaries to be reduced too.
At present if a shareholder has an overdrawn current account, i.e owes the company money, then interest of 5.77% is chargeable on the overdrawn balance. The problem is, revising the shareholder-employee salary to utilise the loss carry-back rules may worsen the shareholder current account balance. So people have been suggesting if some sort of a workaround could be introduced to resolve that matter. We’ll see what comes out when the legislation is released on Tuesday or Wednesday next week.
Moving on, the normal everyday compliance matters and consultation programme for Inland Revenue still continue to run along, even though right now Inland Revenue policy resources are very much focused on producing answers to the Covid-19 pandemic. And so it’s easy to have overlooked a couple of draft Interpretation Statements which were released just before the country went into lockdown.
The first of these is an Interpretation Statement on tax issues arising from the ownership of overseas rental property. The Interpretation Statement begins with a reminder that New Zealand tax residents are taxed on their worldwide income and gives a quick overview of the residency rules. It outlines the New Zealand principles about recognition of income and expenditure as these rules may differ from an overseas country. It goes on to explain what you can do if you are required to prepare tax returns in an overseas to jurisdiction to a balance date other than 31 March and how to calculate the conversion of foreign income into New Zealand dollars.
Apart from covering overseas rental income and income from the sale of the property, the Interpretation Statement also explains the very often frequently overlooked and horrendously complicated financial arrangement rules. These relate to the foreign currency gains on a mortgage that may be taken out to purchase an overseas rental property.
Finally, the Interpretation Statement also covers off a taxpayer’s entitlement to foreign tax credits and the application of double tax agreements. Overall, it’s a very comprehensive document. Submissions are due by the end of the month but given current circumstances, Inland Revenue will take submissions past that date.
A related Interpretation Statement has been issued on the application of the financial arrangements rules to foreign currency loans used to finance overseas rental property.
Regular readers will know that I have discussed these from time to time. These basically are the quantum physics of New Zealand tax. They are mind numbingly complicated and frankly were not, in my view, really intended to apply to Mum and Dad investors with an overseas property.
The Interpretation Statement is a very useful overview of the issues involved. In fact, it’s the first time to my knowledge that Inland Revenue has issued something on this topic that’s quite digestible for the general public. It’s therefore going to be useful for advisors to be able to point out to clients “These are the rules Inland Revenue is applying”.
The Interpretation Statement itself goes into quite a bit of detail about the financial arrangement rules, which as I said previously, are horrendously complicated. It also discusses applying some of the Determinations that Inland Revenue has issued to help interpret the application of the financial arrangements rules.
The Determinations are themselves very complicated and in many cases, some of these Determinations have not been revised to take effect of the updates to the Income Tax Act. In fact, if you read some Determinations, they still refer to the Income Tax Act 1976, i.e. they go back to when the financial arrangements legislation was first introduced in the mid-80’s. It really is odd that such complicated provisions should apply to Mum and Dad investors.
One way that this could be resolved would be to raise the thresholds around the application of the rules and maybe rethink the policy intent and application. Who exactly should be covered by the financial arrangements rules and consequently face a quite hefty compliance burden? The rules often result in an irony in some cases, where for New Zealand tax purposes, the sale of the property should not be taxable, but the redemption of the mortgage may trigger taxable income.
And finally, from the “You really aren’t helping” files, a ruling from the Ministry of Justice and the Department of Internal Affairs relating to their administration of the Anti-Money Laundering and Countering Financing of Terrorism Act.
A matter of interpretation for some time was whether the use of tax pooling arrangements such as those made through companies such as Tax Management New Zealand would be subject to these rules.
Apparently on April 20th, the Ministry of Justice advised the Chartered Accountants Australia and New Zealand that it would deny an application for an the exemption because there was a “medium risk” of money laundering and terrorism financing being associated with tax transfers.
I really cannot express how mind numbingly exasperating this decision is. It’s going to affect a lot of taxpayers going forward. As a result of what’s going on right now with the Covid-19 pandemic tax transfers are going to become quite important. So basically, we have Inland Revenue doing its best to try and make matters as easy as possible and the Government’s general policy trying to assist taxpayers through this pandemic.
And then we have the Ministry of Justice and the Department of Internal Affairs taking a very juristic approach to the matter and completely contrary to the wider policy going on. I really can’t express how frustrating this decision is. This was something that really should have been sorted out way, way before. Accountants have been subject to the AML legislation since 1st of October 2018, and 18 months on we are only just getting a decision like this.
I said way back that I thought the DIA and the Police Financial Intelligence Units were under-resourced. I consider the whole AML approach was needlessly bureaucratic with a lot of duplication and frankly, probably not really achieving very much. And in a nutshell, this decision actually exemplifies all those points.
Anyway, that’s it for this week. I’m Terry Baucher and you can find his podcast on my website. www.baucher.tax or wherever you get your podcasts, please send me your feedback and tell your friends and clients. And until next time Kia Kaha stay strong and be kind.
20 Apr, 2020 | The Week in Tax
- New temporary loss carry-back regime – will it help small businesses?
- The inherent flaw in the foreign investment fund regime; and
- The rules around claiming deductions for working at home
Transcript
In today’s podcast, will the latest government tax measures help small businesses? The inherent flaw in the foreign investment fund regime. And we look at claiming deductions for working at home.
The temporary loss carry-back scheme announced by the Government last Wednesday was one of the most significant tax measures yet.
It enables businesses that were expecting to make a loss in either the 19/20 income year or the 20/21 income year to estimate the loss and use it to offset profits in the previous tax year. In other words, they could carry the loss back one year.
Now, this is a measure I’ve seen before and used when I was working in the United Kingdom. That measure was introduced in the wake of a fairly severe recession in the late 80s, early 90s. It’s a promising measure which is expected to cost up to about $3.1 billion over a two-year period.
However, my tax agent colleagues are concerned that we’ve only just ended the year end 31 March 2020. And right up until 1st March, everything was running reasonably smoothly before the effects of Covid-19 landed with a big thump. Companies with a standard balance date of 31st March 2020 won’t actually have been significantly affected by the Covid-19 pandemic, but it’s quite likely that in the year to 31 March 2021 they will be.
The issue we have is that that’s a long way out to be predicting losses. And what if we get those estimates wrong? The position is that use of money interest would still apply. Although the temptation would be to make a guess at an estimated loss for the coming financial year and then carry that back to the 2020 tax year, it comes with the caveat that use of money interest – currently 8.35% – will apply on any underpaid tax. It’s a very much a dual-edged sword.
So, the main concern that my colleagues have about the loss carry-back proposal is that it’s really not terribly helpful for small businesses that have a standard 31 March balance date because they’re being asked to predict too far ahead and with too many variables.
The better option is, as I’ve said previously, would be to postpone or cancel the 7 May provisional tax payment coming up, let things settle down a bit and then work forward from that.
The loss carry-back measure is going to be introduced as a permanent feature with effect from the start of the 2021/2022 income year and the Government will take consultation later this year on the proposal. It is a measure that I’ve thought for some time would be useful.
The problem is its timing is not terribly convenient for many small businesses right now. And this points to a dichotomy in our tax legislation and tax policy.
The majority of taxpayers and small businesses prepare their financial statements, their tax returns to 31 March. But the majority of provisional tax, however, is paid by bigger companies, and many of those have different balance dates. The Government SOEs have a 30 June balance date and then overseas companies might have a 31 December or 30 September balance date.
Now, if you’ve got a 31 December balance date, you’ve got to wait a bit of time ahead, but you’ll probably get a better handle on what’s going to be happening. That’s even truer of those with a 30 September balance date because this has happened halfway through their tax year.
So larger businesses are probably going to be the primary beneficiaries of this measure. It’s not to say it’s of little use to small businesses. It’s just that they’re going to need to proceed with caution because the use of money interest provisions will apply.
I think that this measure will need to be fine-tuned. As I said earlier, I do wonder whether it might just be easier to simply say forget about paying provisional tax on 7 May.
Alternatively, maybe do as the Canadians have done. They’ve introduced a measure where a business can borrow up to 40,000 Canadian dollars from the Government, and if they repay it by 31 December 2022, 25% of the amount borrowed will be written off. Such a measure will help companies with their cash flow, which is the critical matter for small business at the moment.
But still this loss carry-back measure is going to be of use. It’s something that will become part of the tax landscape and we should never look a gift horse in the mouth.
There’s a couple of other things the Government measures announced as well, which are also important for small businesses. One is the changes to tax loss continuity rules.
Currently, if you have a tax loss and you want to continue to carry forward that loss, you must maintain 49% of the same shareholders, what we call the shareholder continuity rule. What has been an issue for some time for growing businesses is that a significant investor wants to come onboard and they want to have more than 51% of the company, maybe a 60- 70% stake. If they do that, then under the current rules, the losses accumulated to that point are forfeited.
This is something we in the Small Business Council recommended be reviewed. It’s therefore good to see this proposal. With effect from this income year – 1 April for most people – if you can show that you’re continuing to carry on a same or similar business as that prior to the change of shareholding, you can continue to carry forward losses. This is a test modelled on what happens in Australia. It’s a welcome move for fast growing companies who want to attract capital but don’t want to lose the value of the tax losses.
The other tax measure announced gives Inland Revenue discretion to temporarily change due dates and other procedural requirements outlined in the various Inland Revenue acts. This is for businesses and individuals affected by Covid-19. This will enable Inland Revenue to extend the filing date for elections and filing tax returns or defer the due date for payment of tax.
This is a good move. It gives Inland Revenue flexibility, which it probably should’ve always had, but it never really managed to see a need for such a measure beforehand. That said, I still think there’s one or two other things that legislative changes will be needed around. For example, accidental overstayers becoming tax resident. But on the whole, this proposal is a good move, and we’ll look forward to seeing that in operation very quickly.
KiwiSaver and the Foreign Investment Fund regime rules
Moving on, the foreign investment fund regime was introduced with effect from 1 April 2007. Those who know this rule should also know it applies to KiwiSaver account holders if their KiwiSaver fund is invested overseas.
Basically, the rules say that for KiwiSaver funds, the income to be determined is calculated using what is called a fair dividend rate, that is 5% of the portfolio’s opening market value at the start of the tax year.
Now for individuals, they have the option to take the actual accrued gains/losses over the tax year. And that means that when there was a significant fall in the markets, individuals are protected against that and don’t have to pay tax on a portfolio which has just suddenly depreciated in value.
But unfortunately for KiwiSaver accounts, they don’t have an alternative. And this is also a big problem for the New Zealand Superannuation Fund, the country’s largest taxpayer, because it has a huge portfolio of overseas investments.
Now, the FIF regime has been in place, as I said, for 13 years now. And Covid-19 is the second such financial crisis to have hit financial markets since the regime was introduced. The flaw in the regime is it’s predicated on markets continually going up or being stable.
Events such as we are seeing right now and in the Global Financial Crisis are anomalies which the FIF regime really doesn’t manage well. Particularly if portfolios are significantly devalued for a period of time to come, and if you look at the overall economic return, sometimes too much tax will be paid.
The Tax Working Group recommended reviewing the 5% fair dividend rate and possibly reducing it perhaps to maybe 3 or 4%. And I think that’s something the Government really need to look at. But – there’s always a but – it’s going to need the revenue going forward. So, whether in fact that measure, which I believe is needed and the Tax Working Group recommended, will actually come to pass, we’ll have to wait and see.
Home office deductions
And finally, many listeners and readers will be working from home and will continue to do so when we go to alert Level 3. So what are the rules around claiming expenses for working from home? Well, I did an article on this. The basic rules are as an employee, you can’t claim a deduction.
Instead you are able to be reimbursed by your employer who can make a reasonable estimate of the amount that you should be claiming based on a number of factors such as area of the place you’re working in – your home office – rates, power, Internet usage, etc. A reimbursement based on this is tax free to the employee and deductible to the employer.
If the employer decides to simply pay a flat rate, it might in fact be more than what is actually a reasonable calculation of expenses. Instead, PAYE will apply.
What was interesting to see about that article was the reaction to it – several employers are applying the rules clearly. Others are completely oblivious to it, and others are simply ignoring the fact that their employees have an expense and are just simply expecting them to bear the costs. It will be interesting to see how this shakes down. All employers will need to be looking at this matter and determining some form of allowance to help their employees.
Well, that’s it for this week. Thank you for listening. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you find your podcasts. Please send me your feedback and tell your friends and clients. Until next time Kia Kaha. Stay strong and be kind.
14 Apr, 2020 | Tax News
Are extra expenses and use of personal assets to work from home deductible against your taxable income? As usual with tax, its complicated.
We’re in week three of the Lockdown, and although the Prime Minister has indicated there may be a possible shift to Level 3 from 22nd April, a majority of employees may still be required to work from home even after that shift.
Naturally, employees will be incurring expenses in carrying out their employment duties. And the question arises, can they claim a deduction for these expenses? And the short answer is no. The Income Tax Act specifically precludes a deduction for “An amount of expenditure or loss to the extent to which it is incurred in deriving income from employment. This rule is called the employment limitation.”
This is a longstanding prohibition which has been in place since the mid-1990s. It was introduced as part of a simplification of tax return filing requirements. Instead, what is to happen is that the employer needs to reimburse employees for such expenditure. The employer will be given a deduction for the relevant expenditure and it will be treated as exempt income of the employee.
But what potentially could be deductible? The Inland Revenue guidelines for businesses with home offices are equally applicable for employees working remotely.
These guidelines allow a deduction of 50% for the rental of a telephone line, if it is also a private line which is used for business. Obviously specific business calls would be deductible. With regard to Internet costs this depends on the plan and the business proportion. How that is determined is a matter of some judgement. In addition to these costs, the business proportion of household expenses such as rates, power, rent or mortgage interest expense could be claimed.
Generally, the business proportion is calculated as the area set aside for use as an office over the total area of the house. For example, if an employee has an office which is say, 10 square metres of a 100 square metre house, then the deductible proportion is 10%.
There’s an alternative option of using a fixed rate as determined by Inland Revenue based on the average cost of utilities per square meter of housing for an average New Zealand household and applying it per square metre of the office area.
For the 2018-19 income year the rate was $41.70 per square metre so in the example above the deduction would be $41.70 x 10 or $417. It does not include the costs of mortgage interest rates or rent and rates. These must be calculated based on the percentage of floor area used for business purposes.
All of the above is perhaps easy enough where a person has a dedicated office at home, but as no doubt is happening all over New Zealand right now, employees are working on kitchen tops, dinner tables and out of bedrooms. What happens in these instances?
As the area being used cannot be said to be entirely dedicated to office use, a full deduction based on these apportionments is probably not available. The area of the room used for non-business purposes for example a bed or other furniture should be excluded. Arguably the deduction would be time-limited (for example, if it was only in office use for 8 hours a day, then only one-third could be claimed).
For the employer, they may be able to claim GST on the relevant proportion of GST expenditure claimed using the standard apportionment methodology, if the employee provides invoices. At this point the employer is probably thinking this is getting needlessly complicated.
A more practical approach would be for the employer to simply pay a flat rate allowance to employees. This is allowable if the allowance is based on a “reasonable estimate”.
The other potential issue is fringe benefit tax. Theoretically, FBT applies on the private use of tools such as mobile phones and laptops. Fortunately, there is an FBT exemption if the laptop or mobile phone is provided mainly for business use and the cost of those laptops and mobile phones is no more than $5,000 including GST.
All of the above represents a compliance nightmare for employee employers and possibly a target rich environment for Inland Revenue in a future date where it considers that the allowances paid, or deductions claimed for home office expenditure, have been excessive. In this instance the employer will be liable for the PAYE which should have been deducted from the amount determined to be excessive/non-deductible.
In practical terms, Inland Revenue might simplify clarify a lot of issues for employers and employees alike by issuing a determination setting out a flat rate amount of expenditure it would consider acceptable. An employer could pay above that amount but then PAYE would be applicable.
Of course, all of the above is somewhat hypothetical, if the employer has no cash flow to pay any such allowances. I suspect that is the matter employers are most concerned about right now. In the meantime, let’s hope we can return to a new normality soon.
This article was first published on www.interest.co.nz
