• What’s the tax treatment of gold?
  • What deductions are available for residential property investors in respect of expenditure to meet Healthy Homes standards
  • Big changes to Trust law coming – are you ready?
  • Tax avoidance and Eric Watson and Kidicorp


Unsurprisingly, the price of gold has been on a rise throughout the year in the wake of the pandemic and its current price of USD 1,953 per ounce is close to its all-time high.  But what are the tax implications of holding gold?

As it transpires Inland Revenue looked at this matter in a Question We’ve Been Asked (QWBA) released in September 2017. Inland Revenue’s conclusion was that a disposal of gold would be taxable under Section CB 4 of the Income Tax Act 2007 if the gold was acquired for the dominant purpose of disposal.

Actually, that was a little bit of a walk back from the draft position that was put out by Inland Revenue, which was categoric that any disposal of gold would be taxable. In the wake of submissions on its draft position, Inland Revenue walked back the position. But in general, the position remains that if the gold was acquired for dominant purpose of disposal, it will be taxable.

Now, what led Inland Revenue to conclude initially that any disposal of gold bullion would be taxable was its nature. Bullion does not provide any annual returns and it doesn’t confer any other benefits. So therefore the Commissioner of Inland Revenue’s view is that the nature of the asset is a factor that strongly indicates that generally speaking, you’re acquiring gold for a dominant purpose of ultimately disposing of it. How else are you going to realise any value from it?

However, the QWBA does recognise that in some cases people might hold bullion not so much as a means of realising funds by disposal, but perhaps as a hedge against inflation or, as we are right now, in highly uncertain times.  Also, in any diversified investment portfolio perhaps there’s a role for something like bullion. So that’s why the final QWBA issued in September 2017 walked back the initial draft position.

Now, one of the problems with our lack of a formal capital gains tax regime is that section CB 4 is very subjective. What is dominant purpose? So, this is an area where people need to be very fact specific about why they’ve acquired the gold and keep records of their intentions. I would say that even though Inland Revenue have taken a view where dominant position is to be required to establish taxability, its default position will be that anyone who’s bought gold recently only did so as a means of making a quick gain.

It’s also worth noting that this bullion QWBA is actually quite an important factor in the cryptocurrency determinations that Inland Revenue subsequently released. https://www.ird.govt.nz/cryptocurrency/taxing-cryptocurrency/public-rulings-on-crypto-assets  And, of course, for real tax nerds anything looking at bullion brings us back to one of my favourite tax cases, the British case of Norman Wisdom versus Chamberlain, H.M. Inspector of Taxes from the 1960s. Wisdom, was a comic, but a very shrewd investor and made a substantial gain on holding silver bullion as a hedge against devaluation which was ultimately found to be taxable. So anyway, there’s opportunities obviously with gold bullion investing, but be prepared to be taxed on your gains.

No longer deductable

Moving on. Inland Revenue has recently issued another Question We’ve Been AskedQB 20/01, which covers the issue of whether owners of existing residential rental properties can claim deductions for costs incurred to meet healthy home standards.

So, this is very important Inland Revenue guidance. What it does is going back to basics, costs of a revenue nature are generally deductible when they’re incurred.  That could include, for example, repairing items that would otherwise meet the healthy home standards if they were in a reasonable condition.  It also could include minor additions or alterations which do not change the character of the building, for example, meeting the draught stopping standards and those blocking unused chimneys or fireplaces, and making various ventilation systems compliant. And some, that’s the key word there, costs of meeting moisture and ingress and drainage standards around ground moisture barriers. Finally, replacing items on a like for like basis where they’ve already been treated as part of the building.

And this is the key part, which I think owners need to be very careful about – determining what is part of the building. And there are one or two surprises in here. Inland Revenue says that smoke alarms are part of the building now, even though often they’re physically separately attached and are generally of relatively low-cost.  Insulation very obviously. Ducted or multi-unit heat pumps, new or replacement openable windows, new exterior doors, extractor fans and drainage systems. These items Inland Revenue view as all part of the building, which means that they would not be deductible. So, I think people need to be very careful about that.

Then there are items which Inland Revenue considers would be separately depreciable. For example, that includes electric panel heaters, some single-split heat pumps, through window extractor fans, various door opens and stops, external door draught extruders and some other devices for blocking fireplaces.

The QWBA it sets out the reasoning for why it considers items are non-deductible/capital or capital and depreciable or maybe a flat-out repair. So it’s a very important guidance for residential property investors. It won’t be welcome everywhere.

And it does touch on an issue which is probably in some ways hindering getting homes up to standard. That is if the expenditure is deemed to be part of the building, it’s not depreciable. Remember depreciation was only reintroduced for commercial buildings, not residential buildings.

This is an issue that I think isn’t going to go away. There was always something a little odd about the decision to remove depreciation on buildings back in 2010. It looked at the time to me and still does as it very much a matter of ‘We’re putting these tax cuts through and we have to balance the books somewhere and therefore we’ll remove depreciation.’ There was also an argument, by the way, that maybe these buildings weren’t actually depreciating, and this is a pretty micro detailed economic argument, that perhaps the rate of depreciation was excessive. Anyway, the guidance is there. And people will need pay attention to it. I think the smoke alarms one is one which will raise a few eyebrows. But that’s the way it plays at the moment.

The tax implications of the new Trusts Act

In six months’ time, the Trusts Act 2019 comes into force.

If you have any involvement with a trust, you may well have been recently contacted by your lawyer about how the new Trusts Act is going to significantly change the dynamic about how trusts operate. In particular, what information trustees should be disclosing to beneficiaries. It’s now clearly set out that beneficiaries will be entitled to receive some of the financial information of the trust, as well as knowledge that they are a beneficiary. That is something that has been a matter of debate and various court cases for the past 20 years or more. So, it’s very important to finally get some statutory guidance and clear rules on the matter.

Anyway, if you’re involved with a trust you should either have been contacted or shortly will be contacted by your lawyer to discuss these changes. “Do we actually need this trust anymore?” is a question I’m going through with clients and obviously the tax consequences of winding it up. And if the purposes for holding assets in trust are still valid, what needs to change?

There’s a lot of work going to be needed to be done on this. And probably in many cases a lot of trusts will be quietly wound up and the assets distributed because they really don’t serve any purpose any longer.


Finally, because I wasn’t able to record last week’s episode, here’s a couple of items from the last few weeks I thought I’d mention in passing.

There will be no tears shed at the news that Eric Watson’s Cullen group has abandoned its appeal against Inland Revenue assessment for $112 million of non-resident withholding tax and interest on the basis the arrangement under which the Watson structured his exit from New Zealand to be tax avoidance.

The only thing that we should perhaps be concerned about is the timeline involved. The original transaction happened in 2003. The assessment, which led to the just abandoned case, was made in 2010 when Inland Revenue assessed Cullen Group Ltd was due to pay non-resident withholding tax at 15% instead of the 2% Approved Issuer Levy.  After taking into consideration the Approved Issuer Levy paid the resulting liability was $51.5 million. The actual amount now due is $112 million. And the sixty-odd million dollars difference represents use of money interest charged on the original debt.

Now I’ve not heard many good words about Eric Watson. But I think we should be concerned that this case took so long to work its way through the system when interest is running all the time. So that basically weights everything in favour of Inland Revenue. And I think we should be asking questions to whether the processes are fair enough, whether or not you like what he did. That is a matter we should be concerned about because as the old saying goes ‘Justice delayed is justice denied”.

Another interesting case which also involves tax planning and touches on a topic which attracted a lot of commentary for the Tax Working Group, was the issue of the charitable exemption from income tax for charities with trading income.

And this point has come up in relation to Kidicorp. The redoubtable Matt Nippert of the New Zealand Herald has picked up on the fact that following a quite complex restructure in 2015, Kidicorp’s childcare centres are now owned by a charity Best Start Educare.

What happened was Kidicorp sold its whole business to a charitable foundation Best Start Educare for $332 million.  The purchase was settled by way of a no-interest related party loan which is being repaid at about $20 million a year.  This pretty much uses up most of the childcare operation’s surplus cashflow from its untaxed earnings.

This has raised a few eyebrows. What caught my eye about this story is that two people who were involved with the Tax Working Group, have come out and said that this is one of the matters where the group was concerned at what was going on. The Tax Working Group received a lot of submissions around the issue of the charitable exemption.  Professor Craig Elliffe, who was on the Tax Working Group, commented about the Kidicorp transaction

“This is the very thing we were looking at and we were worried about. The bigger policy question is whether this is an appropriate use of charitable structures.”

Furthermore, Andrea Black, who was the independent tax adviser to the Tax Working Group, also commented that what was concerning about Best Start Educare was the small amount of donations it’s making and the fact that the business was sold rather than gifted with a loan back and therefore otherwise taxable profit is being used to pay back some of the loan. She concluded “It’s hard to see the benefit to the New Zealand community”.

We might see more on this although Inland Revenue might have already run its eyes over this and given it the tick. But this was the sort of structure the Tax Working Group was concerned about. There was a lot of public interest in the matter and a lot of the criticism involved Sanitarium and what the public saw as sometimes unfair benefits between it and its competitors who had to pay tax. The Tax Working Group took the view that if the profits in the charity were being distributed, then that was fine. However, if they weren’t or something odd was happening, then that was an issue.

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, ka kite anō.