CHRISTMAS .....cheers and office holidays
From everyone at Withers Tsang & Co, we would like to take this opportunity to wish you a very joyous festive season and a Prosperous 2010!!!
Our office hours over the Christmas and New Year period will be as follows:
Wednesday 23 December
Our office will be closed from midday
Thursday 24 December
Our office will be closed for holiday period
Monday 11 January
Our office will re-open with skeleton staff only
Monday 18 January
Full services will resume
WT .....on Property
PROPERTY TAX CHANGES
The government seems determined to target property investors with tax changes in 2010.
The tax workings group is set to report recommendations to government in January and it is expected the budget next year might reveal what is in store.
We have had our ear close to the ground on this and suspect that capital gains tax and ring fencing tax losses won’t be the preferred options.
Our pick for the changes will be from these three options:
- Land Tax, perhaps a 1% or ½% tax on the GV of investment land each year. A front runner because of its highly predictable tax take but still politically problematic with farm land and Maori land settlements.
- Change depreciation claims, really only a timing issue given depreciation is subject to recovery and would seem unfair to simply target buildings. Just ask someone with a leaky home if it would be fair to do away with depreciation.
- Risk free rate of return, an interesting option that would require tax to be paid on a set percentage of equity in an investment property regardless of whether it runs at a profit or not. May not provide much incentive to build equity through debt reduction though and it is supposedly the debt the government wants to see fall.
CHANGES TO TAINTING RULES – SOME FREQUENTLY ASKED QUESTIONS
- What happened?
On October 6 this year, legislation passed into law that significantly strengthened the “tainting rules” for those engaged in property dealing, developing or building.
- What’s the history?
Previously, it was possible to create entities that were not associated with each other so as to ensure buy and hold investment properties were not tainted by dealing, developing or building activities.
- What are the specific changes?
The new definition of associated persons introduces tests that associate two trusts. The existing tests that associate people to companies and companies to companies have also been strengthened.
A universal tripartite test has also been introduced, where two entities can be associated by a common entity to which they are both associated.
- What will it mean?
Any gain on sale of investment property by people engaged in dealing, developing, or building, or those associated with them, will be taxable unless the properties have been held 10 years.
Note: In the case of builders, the 10-year count starts from the day improvements were completed, not acquisition date of the land.
- Will the structures I set up to avoid tainting prior to October 6, 2009 still work?
Almost certainly not.
- Should I scrap them?
If you remain active, probably not, because they may well still serve to give you the lowest rate of tax.
If you are no longer active, your trading entities should be wound up to end tainting.
- Can I structure around this?
The new definition is so “belts and braces” that any attempt to structure around it would probably be tax avoidance.
- Does it affect what I already own?
No, it only affects property acquired after October 6, 2009.
- Does this mean that if I buy or flick a single property I’m “tainted” for all my investing?
No, the buy and flick will certainly be a taxable transaction but these rules apply to entities “in the business of” dealing, developing or building.
Much argument may emerge over the threshold to determine if someone is “in the business of”.
- So what is your advice?
- Close trading structures if your dealing, developing or building has effectively ceased and you wish to focus on investing.
- Structure to minimise the tax rate and development risk rather than avoid tainting.
- Ask yourself: is this buy and hold really good enough to warrant retention for 10 years?
- If it is, stick to your plan and keep it.
- If not, accept that a gain or sale is taxable.
- Compliance challenges
Perhaps the greatest challenge with the new rules is actually understanding if you are in fact tainted by association. The net is much wider now and past associations that were not a problem may now well be.
OFF THE PLAN SALES
IRD have raised eyebrows by publishing a pamphlet, IR368, entitled “Sold or thinking of selling property you purchased ‘off the plan’?.
In this pamphlet, IRD states it will presume an intention of sale for all property sold prior to a contract going unconditional. This ignores the fact that most of these contracts remain conditional until practical completion and many apartment projects have suffered long delays. In many cases people’s purpose or intention may have changed during this time.
The IRD’s property compliance division has also been busy data matching evidence of these sales to tax returns and is starting to write to taxpayers who they consider to be “most likely to require individual attention”. Anyone receiving one of these “fishing letters” should contact us prior to replying.
Interestingly, the IRD have confirmed to us that people who did buy with an intent to on sell may be entitled to claim a loss if the property has been subsequently settled then sold for a loss. There are two sides to every coin!
The IR368 pamphlet is available on www.ird.govt.nz
WT .....on Business
ACCOUNTING SOFTWARE
As chartered accountants, we are trained to work with different accounting packages to extract necessary information for year end compilation.
If you are currently on a manual bookkeeping system and are thinking of computerising, the month of April is an excellent time to do this.
Withers Tsang is an Approved MYOB training centre and authorised dealer for XERO accounting software. We have fully trained MYOB & XERO staff to assist with your needs.
Please contact any of our senior accountants to discuss your needs.
WT .....on Tax
PLAN AHEAD
Amidst the usual holiday pay and creditors commitments during the festive period, for the first time, taxpayers have been lumbered the burden to pay the 2nd instalment provisional tax during or soon after the festive season.
It may be cliché but the message is planning…….plan your cashflow now……here are a few of the key items to consider
- Provisional Tax
The 2nd Instalment for 2010 Provisional Tax is due on 15 January 2010.
(Note: We have already prepared and sent IRD payment slips to all provisional tax clients. Please contact us if you have not received yours.)
- GST due dates
If you are GST registered, your October/November 2009 GST return will also be due on 15th January 2010.
(Please remember to complete your GST return before you go on your holidays!!)
- PAYE due dates
Fortnightly PAYE clients
- The fortnight ending 31 December 2009 will be due on 15 January 2010
- The fortnight ending 15 January 2010 will be due on 20 January 2010.
Monthly PAYE clients
- The due date for month ending 31 December 2009 will be 20 January 2010.
- Set up bill payments
If you are going away for the holiday period OR you will not be back before 15th January, to avoid being charged late payment and late filing penalties, please remember to:
Either
Post your cheque & payment slip before you go on holidays to
Inland Revenue Department
PO Box 1535
Hamilton
(DO NOT send post dated cheques to IRD as they will still bank it regardless and if it bounces, they may not represent it.)
Or
Set up internet bill payment (post dated to go on 14th January 2010)
WT .....on Annual Gifting
TRUSTS
If you have a family trust, the festive season is a good time to check that your annual gifting for 2009 is done and up to date. If you are not sure, please contact your lawyer straight away.
WT .....on Travelling or living overseas
GOING OVERSEAS?
If you have a LAQC company and you’re planning to settle overseas, this can affect the LAQC status of your company. One of the criteria that must be satisfied for a company to be a qualifying company is that it cannot be a foreign company. As the effective management of the company is situated overseas, the company could lose its’ qualifying company status. Contact us prior to departure so that this can be managed if you are working abroad.
NON-RESIDENT STATUS
Contrary to IRD literature, it is not as straight forward as they put out to be.
Please contact us prior to your departure as there will be issues surrounding tax on overseas & New Zealand derived income.
STUDENT LOANS
You're generally not eligible for an interest-free student loan if you're away for 6 months (184 days) or more. But you may be entitled to a repayment holiday.
The current interest rate for the 2010 tax year is 6.8%. Interest will be applied to your student loan from the day after you leave, and won't be written off. However, you may be eligible for an interest-free student loan while you're overseas if some special circumstances apply to you.
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