For help with tax matters contact Kris Morrison (348 8480)

Thinking of going overseas, or currently overseas and about to come back? Looking for advice on recent tax law changes affecting property developers? Wanting specialist tax advice for your accounting firm?  Seeking advice as a business owner on restructuring or planning for the future? Or do you have other general tax issues?

The May 2010 Budget contained some initial indications of what to expect from the changes to the LAQC rules.  The law has now been finalised, and introduces look through companies ("LTCs") as a new concept. This short update points out some of the differences that  result from the introduction of LTCs.  For background on the changes, listen to/read our interview with Craig Macalister from the New Zealand Institute of Chartered accountants on the LAQC changes.   

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We have previously, and on our blog, given some extensive coverage to the LAQC changes that were confirmed by Parliament before Christmas.  In this article we briefly summarise the new look through company ("LTC") rules that were introduced.

What is a Look Through Company

An LTC is a company that is effectively disregarded for income tax purposes.  The Income Tax Act looks to the owners rather than the company as the "person" to tax.  The treatment applies only for tax purposes, and for general law purposes all the same rules that apply to a normal company apply.  It is generally only available where there is a small number of shareholders.

How are LTCs treated for tax purposes?

- LTCs are flow through for tax purposes.  That means, that generally speaking, the shareholders are taxed as if they were the owners of the business.  However, there are some important exceptions.
- The first major exception relates to situations where the LTC makes losses.  In that case specific loss limitation rules apply.  These are detailed, and not covered in this article.
- The second major exception is that the LTC is still treated as a separate company for the purposes of GST, PAYE and certain administrative or other withholding tax purposes.
- There are other important rules as well that deal with entry and exit from the regime, as well as more detailed rules that are not discussed here.  For example, establishing how many shareholders there are to meet the shareholding requirements.

When do the rules apply?

The LTC rules are available for income years starting on or after 1 April 2011.  However, the IRD must receive the election before the start of the income year in which the company wishes to be an LTC.  Therefore, for ordinary companies wishing to become an LTC, make sure the election is filed on or before 31 March 2011, if you have a standard balance date of 31 March.  There are special transitional rules for qualifying companies, who will have till 30 September 2011 to elect into the LTC rules with effect from 1 April 2011.  However, some other conditions apply here and care should be taken to meet all of these in good time.

Where can I find more information?

The IRD Policy Advice division has provided a very useful guide on the changes which can be accessed here.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have.

Please contact GRant Adams at Parry Field's Christchurch office (348 8480) for help with tax matters.  Please note that this is only a high level overview of the rules, and there may be specific situations where a different outcome is reached.  Therefore, please don’t rely on this as legal advice.

GST on the sale of land between registered persons is being reduced from 15% to 0%.  What are the transitional rules that registered persons should be aware of?

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For help with tax matters contact Kris Morrison (348 8480)

The rules relating to GST on the supply of land between registered persons is being changed.  Broadly, rather than charging GST at 15%, the rate is being changed to 0%.  There is much by way of technical detail to understand regarding these changes.  This article very briefly considers the transitional provisions that will need to be taken into account.  It is necessarily technical.  If you have any questions about it, please contact your usual Parry Field lawyer.

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The Finance and Expenditure Select Committee (“FEC”) recently reported back on the Taxation (GST and Remedial Matters) Bill.  This Bill contains significant amendments to the GST Act, perhaps the most significant since the changes made in the year 2000.  It is important to be aware of the provisions relating to the zero rating of land contained in the Bill.

This article focuses on some of the transitional issues that advisors should be aware of.

What is being proposed?

From a conceptual level what is happening is that the rate of tax on a specific supply is being reduced from the standard rate (of 15%) to the zero rate; the supply in question relates to most supplies involving some land (but there are some exclusions).  Now, many of you will be familiar with the general transitional rules.  We have just been through a rate change from 12.5% to 15%, and it is similar transitional issues that arise in the present context.  But first, let us start with the draft law as it stands after the FEC amendments.

The draft Bill after FEC amendments

New section 11(1)(mb) is being inserted.  This provides that where there is a supply of land from a registered person to another registered person, then the supply can be zero-rated for GST purposes.  However, the section does not apply if the person acquiring the land or a close relative of theirs intends to use the land for their principal place of residence.  Also, the definition of land has been narrowed, and the intention is to exclude commercial rental payments.  There is much detail in these provisions that I won’t go into in this blog.

New transitional provisions

In addition, a new transitional provision has been included in the Bill.  A supplier may choose to standard rate ( at 15%) the supply if a binding agreement was entered into before 1 April 2011 for which the time of supply is triggered after that date.  If no such choice is made the transaction is automatically zero-rated.

Note that if the time of supply is triggered before 1 April 2011, then there is no option to zero rate (unless the supply is of a going concern).  The new zero rating provision will only apply to situations where the time of supply is triggered after 1 April 2011.  This can be quite confusing, because the new section 11(1)(mb) will apply if at the time of settlement the requirements of the section are complied with.  However, this will only apply to transactions where the time of supply was triggered after 1 April 2011, as the changes only apply to transactions on or after that date.  Care should therefore be taken when advising on these types of transactions, as the law advisors would be looking at post 1 April 2011 would not necessarily be the law applying at the time of supply.

Before going any further, note that new section 11(1)(mb) only impacts on supplies between registered persons.  Therefore any questions that arise should relate to cash flow only, rather than a final GST cost.  Or so it would seem.

If the supplier opts to standard rate the supply, then very little should go awry.  Essentially the current rules will apply, with some modifications for nominees etc. 

This does raise one issue, and that is, as the recipient, one would not be aware of the GST treatment of the supply until a settlement statement is provided.  This may be close to the time of settlement, and if it turns out that the supply is actually standard rated, and the contract is a “plus GST” contract, then the purchaser will need to come up with the extra cash.  It is therefore advisable to establish exactly the footing of the contract from a GST perspective well before settlement. 

It may be prudent to include in your contract a clause as follows:

“The Parties agree that the vendor will elect to apply GST at the standard rate pursuant to the Goods and Services Tax Act 1985, if that Act allows for such election.”

What if the new transitional rule does not apply?

Leaving this issue aside, what happens if the supplier makes no election?  The position is that at the time the contract was entered into both parties believed that GST will apply at 15%.  However, by the time of settlement the law has changed, and GST therefore applies at 0% (assuming the time of supply is triggered on or after 1 April 2011).  Note, the transitional rules are only relevant where a contract is entered into before the end of June 2011, and the time of supply is triggered on or after 1 April 2011.

The old transitional rules in a “plus GST” contract

Assuming the contract was “plus GST, if any” then there should not be too much of a problem.  The GST charged will be 0%, and the purchaser will need to come up with a lower purchase price than expected.  The vendor will receive less than expected, and if the vendor was banking on using the amount to clear the mortgage, and then later return the GST from other funding, then this may cause some problems for the vendor.  However, that is an unlikely scenario.

The old transitional rules in an “inclusive of GST” contract

If the contract is expressed as inclusive of GST, then this creates a bit of a quandary for the GST registered purchaser.  Before, they thought they were paying 15% GST, and presumably, were going to recover that GST from the IRD.  Now the GST is 0%, but if the price was GST inclusive, then they still have to pay the same amount.  The purchaser is out of pocket by the amount of GST, and the vendor gains this as a windfall.Enter section 78 of the GST Act.  This section provides that where there is an alteration in the law reducing or increasing GST on any supply of goods and services, then its provisions would apply.  Note, this is not the same as an amendment to the rate of tax charged under section 8.  If there was a rate change then sections 78A etc would come into play, as these apply specifically when there is a rate change only. 

Section 78 applies when “…the rate of tax in relation to a supply of goods and services is … reduced.”  In the present situation the rate is going from 15% to 0%, and the section therefore applies.  

Section 78 further provides that where the rate is reduced then either the supplier or the recipient may deduct from the agreed price the amount of the reduction of that tax.  This makes good sense, and allows the unfair situation that arose in the GST inclusive context to be ameliorated.

Further, it has been clarified that this section applies even in a GST inclusive context by the removal of the words “or where the alteration in the law has been taken into account” during the rate change amendments.

Therefore, unless the contract specifically provides otherwise, the purchaser can ask the vendor to reduce the price by the amount of GST.  Of course, there is nothing stopping the vendor from inserting a provision in the contract stating that the price cannot be reduced notwithstanding section 78.  Persons acting for purchasers should be aware of this issue, and should carefully review contracts to see if there is such a clause contained in the contract.  Missing the clause could cost your client 15% of the purchase price, so care needs to be taken.  Also note that this section could apply until the end of June, three months after the rate change law comes into force.

Conclusion

The above discussed issues caused by the transitional rules are not the only changes that advisors should be aware of in relation to the supply of land.  The rules are also being amended to ensure that where nominees are being used that the GST Act will follow the economic substance of the supply, rather than the contractual reality.  This can cause issues, but they are beyond the scope of this article.

Finally, please note that this is only intended as a general guide, and should not be relied on as legal or other advice in specific circumstances.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have.  Please contact Kris at Parry Field's Christchurch office (348 8480) for help with tax matters.  Please note that this is only a high level overview of the rules, and there may be specific situations where a different outcome is reached.  Therefore, please don’t rely on this as legal advice.

The May 2010 Budget contained some initial indications of what to expect from the changes to the QC and LAQC rules.  In this short youtube video Sybrand van Schalkwyk discusses at a very high level the issues to consider and the important dates to keep in mind. 

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A Transcript of the video follows:

In the May Budget the government announced that loss attributing qualifying companies and qualify companies will be reviewed. Now more details have come to light of what they are planning to do.  Suffice to say that everyone is asking what should I do with my LAQC. Its not possible to answer that question in this short video, but it is possible to say that if you have a LAQC you should seriously consider consulting with your advisor. Now the reason is that there is going to be a limited time frame where people can transition from their LAQC into other forms of doing business. One of those is a limited partnership.  There is also a new flow through company which is being established which is an entirely new vehicle specifically being designed to deal with LAQC and QC [transitional] problems.

One thing you should know is that come April 2011 you will not be able to stream your losses through your LAQC to yourself. Therefore you need to take this into account.  You are going to need to pay more tax and also pay someone some money to structure out of your current situation if that is required.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have.  Please contact Ken Lord at Parry Field's Christchurch office (348 8480) for help with tax matters.  Please note that this is only a high level overview of the rules, and there may be specific situations where a different outcome is reached.  Therefore, please don’t rely on this as legal advice.

QC and LAQC Reforms - New Announcement by the Minister of Revenue?

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For help with tax matters contact Ken Lord (348 8480)

Most readers will know of the changes to the QC and LAQC regimes foreshadowed in the May 2010 Budget.  The details announced in the the Budget were very brief.  However, a series of questions and answers on the upcoming changes have been released, as well as draft legislation encapsulating the changes.  This article explores what these changes mean for those interested in QCs and LAQCs. 

Have a look at our podcast discussion on the QC and LAQC changes with Craig Macalister from the Institute of Chartered Accountants of New Zealand.

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For help with tax matters contact Kris Morrison (348 8480)

Please refer to our New Zealand Lawyers blog - www.parryfieldblog.com for a post on important tax issues surrounding the earthquake 

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Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have.  Please contact Kris at Parry Field's Christchurch office (348 8480) for help with tax matters.  Please note that this is only a high level overview of the rules, and there may be specific situations where a different outcome is reached.  Therefore, please don’t rely on this as legal advice.

What are the transitional rules for the GST rate increase if I account for GST on a payments basis?

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For help with tax matters contact Kris Morrison (348 8480)

What are the transitional rules for moving to the 15% GST rate in New Zealand from 1 October 2010 if you account for GST on a payments basis? The transition rules applying to those on a payments basis are arguably the most complex part of the change to the GST rate. This article helps explain these specific aspects of the transitional rules.

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What are the transitional rules for?

Whenever there is a GST rate change the Government will try to make sure all supplies before the date the rate changes have GST at the old rate, and all supplies after that date have GST at the new rate.  The amount of GST paid should match the rate payable at the time of supply.  However, as you know, when you account for GST on a payments basis, the time of supply is usually not directly connected with when you have to account for GST.  The transitional rules aim to ensure that a special return is made so that you apply the correct GST rate even if the time of supply is before the rate change, but you only account for it to IRD after the rate change.

How do the rules work?

The GST transitional rules require those on a payments basis to make one-off adjustment on the day before GST comes in where the time of supply has been triggered but no payment has been made or received.  It then requires all supplies on or after that date to be accounted for at the new rate.  There are three basic steps:

1. On 30 September 2010 there will be an end to your GST period, whether or not it falls normally at that time.  If not, then you have to file another GST return for the remaining time in your normal GST return cycle
2. In the return for the period ending 30 September 2010 a special adjustment is made to offset anticipated later overpaid or overclaimed GST.  This adjustment applies in addition to accounting for GST as normal on supplies and purchases during that period. Below I give an example of how the special adjustment is calculated.
3. When you account for GST after 1 October 2010, you need to charge GST at the new rate and return that to the IRD, and similarly, when you claim input tax credits, you claim these at the new rate.

Generally speaking once these steps are completed, you will have accounted for GST at the old rate on all supplies where the time of supply was triggered before 1 October 2010, and at the new rate where the time of supply is triggered on or after 1 October 2010.

Example:

A supplier, on a payments basis, makes a supply of shoes for $112.50 (including GST) on 20 September 2010, but only gets paid for them on 20 October 2010.

Under the old rate of 12.5%, only $12.50 GST would have been returned to the IRD.  However, because payment was received after 1 October 2010 the GST to be returned is actually $112.50 divided by 7.6 repeating.  Therefore, GST of $14.67 should be returned.  If the matter ended there the supplier would be $2.17 out of pocket.

(I can hear you say, but what about the impact of section 78(2), which allows the price to be increased where there is a rate change.  I don’t think that section applies, because it only applies where the tax is increased.  The effect of the adjustment is to keep the tax the same, so there is no place for section 78(2)).  

The special GST return for the period to 30 September 2010 provides that the $2.17 will be refunded to the supplier though a special adjustment.  The total GST paid is therefore $12.50, which accords with the policy intention, and is also consistent with accounting for GST on an invoice basis over the transitional period.  The adjustment works the same way for inputs, and the outputs and inputs adjustments are offset against each other.

Here I have to make a correction in relation to a point I made in the budget day podcast published on www.talktax.co.nz.  There I said that you would face a one-off GST cost if your outputs were bigger than your inputs.  Well, actually, it is the other way around, because the special return attempts to refund to you early the GST that you will have to pay later.  It does the opposite for inputs, and therefore the outputs and inputs are offset against each other.  So if your inputs were greater than your outputs you could face a one-off GST hit.

What are the practical implications?

• If your supplies do not fluctuate much from month to month, and you pay some GST, then you should get a small GST refund as a result of the transition (although you may still be in an overall payment position).  Most taxpayers with profitable businesses should be in this position.
• However, you might have cashflow issues if you are going to have a big expense where the time of supply is triggered before the rate change and you will only pay for after the rate change.  This is because your return for the period ending 30 September 2010 will include a large transitional adjustment that you have to pay to the IRD.  This will be offset by the credit you receive when you actually pay for the item, but in the meantime you will have to cover the adjustment from your own funds.
• Also, if you are on a payments basis you do not always account for GST when the payment is made or received.  For example, where you have an associated supply you may have to account for GST earlier.  These costs won’t be taken into account in the return adjusting the GST if they are triggered before the rate change, as it should have already been accounted for.
• You will need to keep a list of debtors and creditors as at 1 October 2010.  This is so that you can justify the transitional adjustment you are making.
• There may be other complicating factors if there are bad debt reversals after the rate change, or credit/debit notes are issued, and these were taken into account when doing the transitional adjustment.  Good records will need to be kept to ensure that these rules are complied with.
• Although the above is rather complex, and it is expected that most taxpayers on the payments basis will not be sophisticated nor have access to expensive advice, the IRD will likely publish a form that makes this very easy to comply with.
  

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have.  Please contact Kris at Parry Field's Christchurch office (348 8480) for help with tax matters.  Please note that this is only a high level overview of the rules, and there may be specific situations where a different outcome is reached.  Therefore, please don’t rely on this as legal advice.

For help with tax matters contact Grant Adams (348 8480)

In the recent Court of Appeal decision Commissioner of Inland Revenue v Penny and Hooper [2010] NZCA 231 (4 June 2010) it was held that Mr Penny and Mr Hooper entered into a tax avoidance agreement when structuring their affairs in such a way as to avoid paying tax at 39% on the majority of their income.  The surgeons have now decided to appeal the case, but if not successful it will have significant implications for a broad sector of the New Zealand public.

What are the facts of the case?

The main point the Court of Appeal took issue with was that the surgeons were being paid very little for their very valuable services.  Expert evidence suggested that the surgeons should have been earning in the order of $500,000 - $600,000.  However, the company they worked for paid them around $100,000.  The rest of the money was retained in the company, and then paid out to a family trust as shareholder.  The trust would pay tax on the income at 33%, and no further tax would be paid when the money was finally distributed to the surgeons.
If the surgeons had paid themselves the higher salary, then they would have paid tax at the higher rate of 39% on the majority of that salary.

Why is this case so important?

The case is important because it has the potential to impact on many New Zealand businesses that are structured in exactly the same fashion, and for exactly the same reasons.  It is important to note that it is not the structure that the Court of Appeal took issue with, but rather the level of remuneration paid. 

Randerson J says in the leading majority judgement: “I am conscious of the practical consequences which may flow from this decision, including the uncertainty which may be created for the Commissioner as well as for taxpayers and their advisors.  To what extent and in what circumstances will it be necessary to review the salary levels of employees (particularly in family companies) to determine on which side of the line their salary may fall? It is important to recognize, however, that this decision should not be regarded as establishing a principle that salary levels in family companies which are below the levels which could be expected in an arms-length situation, are necessarily to be regarded, without more, as evidence of a tax avoidance arrangement.”

However, the IRD issued a Revenue Alert on the 22 June 2010 setting out its interpretation of the case.  Although the Revenue Alert echoes Randerson J’s sentiments, the case has certainly given the IRD carte blanche to investigate any situation where the facts are broadly in line with the Penny and Hooper cases.

What should you do?

Considering the impending appeal, it may be prudent to await its outcome before any action is taken.  However, if you are unsure what to do, then the most prudent course of action would be to talk to your tax advisor before the IRD talks to you.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any New Zealand tax questions that you might have.  Please contact Grant at Parry Field's Christchurch office (348 8480) for help with tax matters.  Please note that this is only a high level overview of the case, and there may be specific situations where a different outcome is reached.  Therefore, please don’t rely on this as legal advice.

For help with tax matters contact Grant Adams (348 8480)

New Zealand Exempt Trusts, or NZETs for short, are an international wealth management tool, and can be useful in many situations. NZETs are available to settlors who are not New Zealand resident. This article gives a brief general introduction to how they work, and where they can be of use.

Wealth transfer and other benefits of Trusts

The main benefits of trusts are that they allow funds to be held in one jurisdiction, when beneficiaries may be in several different jurisdictions.  Further, trusts can provide for inter-generational wealth transfer in a much better way than wills can, or lifetime gifts.

What is a New Zealand Exempt Trust?

Internationally, trusts are taxable in the country of residence of the trustees.  However, New Zealand’s trust rules differ from the international norm, because they are taxed in the country of residence of the settlor.  This mismatch between New Zealand and the rest of the world makes New Zealand Exempt Trusts potentially useful as a mechanism for ensuring that tax is paid only once on income.  However, trusts should not be primarily used as a tool for tax planning, rather, it is their significant wealth management potential that should be the driver of the establishment of an New Zealand Exempt Trust.

For example, a high net worth individual resident in Jersey wants to establish an offshore trust.  That individual could use a New Zealand Exempt Trust to do so.  The trust would be set up with a New Zealand resident trustee company, and would have only offshore sourced income.  The beneficiaries would all be outside New Zealand.  In these circumstances New Zealand would not tax any income derived by the trust, and it may be that the beneficiaries are only taxed on income once it is paid to them.  The settlor is unlikely to be taxed in Jersey.  Other jurisdictions, Australia, for example, have rules that will tax settlors on any income accrued in the foreign trust.

A New Zealand Exempt Trust structure looks like this:

The New Zealand tax authorities impose disclosure requirements on the New Zealand resident trustee.  The main information to be disclosed is the name of the trust, the details of the trustee, and whether the settlor is resident in Australia.  There are also record keeping requirements, but a well-managed trust should comply with these in any event as a matter of good practice.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have. Please contact Grant at Parry Field's Christchurch office (348 8480) for help with tax matters.

Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide.  Reliance should not be placed on this article where any specific issues are concerned.

For help with tax matters contact Kris Morrison (348 8480)

GST is a hazardous tax, not only for taxpayers, but also for the Government. Unlike income tax, the Government has a commitment to refunding GST, and this part of the GST mechanism leaves the tax open to manipulation.  The hazard is greatest where the assets sold are largest.  The domestic reverse charge mechanism will to an extent reduce the risk the Government faces from being ripped off through the GST system.

What is a domestic reverse charge?

For those familiar with GST, it is the domestic version of the international reverse charge.  For those not familiar with GST, the reverse charge is a mechanism whereby the normal charge of GST is reversed.  

In the normal GST scenario the supplier will charge the purchaser GST, and return this GST to the IRD.  If the purchaser is registered for GST, that purchaser will be able to claim the GST so paid as a refund.  The reverse charge works by substituting the normal treatment where the supplier charges GST with the purchaser charging itself GST as if it were the supplier.  So, from a GST perspective, the same person is treated as making and receiving the supply.  If that person were able to get all its input tax credits back then the GST position is neutral.

The proposal is for this domestic reverse charge to replace the current going concern zero rating provisions, and in addition apply to the supply of land and high value goods or services.

Is a domestic reverse charge a good or bad idea and why is this important?

It is important because it is likely that this will form part of the New Zealand GST landscape in the future.  The recently released Government discussion document “GST: Accounting for land and other high value assets” proposes a domestic reverse charge for supplies of land, going concerns and the supply of assets in excess of $50m.

It is also a good idea, because the law relating to the supplies of going concerns is unfortunately not as clear as it could be.  The domestic reverse charge is likely to remove this uncertainty.

The domestic reverse charge would remove some of the current uncertainty with sales of going concerns.

In relation to going concerns, we would still have the problem of deciding what qualifies and what does not, as we have with the current going concern provisions.  However, these definitional issues will be ameliorated by the provisions also applying to sales of land and other high value assets. 

The problem most frequently encountered is where there is a mistake of fact about a going concern transaction.  This mistake causes a transaction that would otherwise fall within the zero rating provisions to fall within the standard rating provisions, and consequently result in an underpayment of GST.  This is most acute where the sale of land takes place, and it is not clear whether that land forms part of a business and can therefore be zero-rated as the supply of a going concern. 

Treating the supplies of land and going concerns in the same way would remove the potential risk of the mistake about fact from having any impact on the taxpayer’s GST position.  This part of the proposals should be applauded.

The domestic reverse charge also benefits the Government, because it reduces the Government’s risk of being ripped off. 

In Europe recent experience has proved that the indirect tax systems are particularly prone to fraud, for example refer to the very well publicised carousel fraud or missing trader fraud experienced there.  The inherent problem with indirect tax is that it is collected by taxpayers on behalf of the Government, and as such, taxpayers are often tempted not to hand over the tax collected.  This is what happens with carousel fraud, and a domestic reverse charge essentially removes this inherent risk from the GST system.

Practical Implications of introducing a domestic reverse charge

Some practical implications of the introduction of the domestic reverse charge are that the well known and understood GST clauses of the ADLS contracts would have to be re-written, and re-interpreted.  The time of supply rules will become more complex as special rules are needed to ensure GST is accounted for correctly.  In addition, the mortgagee sale provisions will be excluded from the application of the reverse charge, and some new provisions will apply for debit and credit noting purposes.

Conclusion

Is the domestic reverse charge a step in the right direction?  On balance, it would appear so.  The addition of the land and high value assets will increase the scope of what is now the zero rating provisions, and this will in turn allow for better operation and less uncertainty regarding these provisions.  In tax policy the trade-offs are usually between fairness and complexity.  This proposal will certainly result in a fairer treatment for taxpayers and the Government, but as a trade-off, the complexity of the whole GST Act is likely to increase.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any PIE tax questions or income tax and GST questions that you might have. Please contact Kris at Parry Field's Christchurch office (348 8480) for help with tax matters.

Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide.  Reliance should not be placed on this article where any specific issues are concerned.

For help with tax matters contact Ken Lord (348 8480)

On 11 December 2009 the Government released an issues paper on income splitting.  The paper fleshed out the UnitedFuture proposal, which has support from the Government to first reading as part of the coalition agreement.

What is the proposal?

Under the income splitting proposal, married, civil union and de facto couples would be able to split their income 50/50 to take advantage of lower marginal tax rates.  The lower rate will be delivered by way of a credit through the Working for Families system.

Eligibility

• The couples must have the care of at least one child aged 18 years or under;
• The couples have to register with IRD for the privilege, i.e., it is not automatic;
• The credit will not apply if families have not been resident for tax and immigration purposes for the whole year;
• The credit can’t be claimed in the year of birth or adoption, but will apply to the end of the year of dependency;
• The couples must be married, civil union, or de facto for the whole year before the credit applies.

PIE Rate Misalignment

The paper does not consider the position of couples with investments in PIEs.  This means that PIE rates and marginal tax rates of some people will be out of line, thereby discouraging investments through PIEs.  For example, a couple with one parent on $80k pa and the other on $0 pa, will pay tax on PIE income at 30%, but will have an effective tax rate on other income of around 19% if the proposals go through in their present form.

Other Issues

The proposal not to give the credit in the year of birth of one’s firstborn or first arrival into the country may seem curious.  It is in the first year of a new birth or arrival that one’s budget is usually tightest, and therefore, the greatest need for the credit.  The reason for the rule is to make it consistent with other social policy initiatives delivered through the tax system.  In addition, marginal tax rates are usually very low in the first year of migration, because migrants may arrive halfway through the tax year.

The tax credit will apply the first time in the tax year beginning 1 April 2012.  It is interesting to think that timing may be everything!  Thinking of entering parenthood?  It could make a big difference whether baby is born on the 31st of March 2012, or the 1st of April 2012.  The same goes for those thinking of striking up a relationship, or breaking one off, although I guess tax is the last thing on one’s mind with all of these significant life events.

For help with tax matters contact Ken Lord (348 8480)

Many New Zealand based charities also support overseas causes – this is often a result of donations being “ear-marked” by donors as being for support of a particular overseas-based person or purpose.  Although these amounts usually make up a small percentage of the charity’s total spending, there appears to be some confusion as to the status of these donations.  Shedding light on this issue may help charities to increase the support base for persons they wish to support overseas.

What is the status of donations made to charities for overseas purposes?

A charity that is registered with the Charities Commission can issue receipts for donations made to it where its funds are applied wholly or mainly to charitable purposes within New Zealand.

Why does the IRD recommend charities keep separate accounts for funds spent outside New Zealand?

When approving a charity for donee status (the ability to issue receipts enabling the donor to claim a tax credit/deduction for up to one third of their donation), the IRD usually recommend that charities maintain separate accounts which clearly identify funds applied or spent outside New Zealand. This has led to some charities believing that these overseas bound funds are ineligible for tax credits.

“Wholly or mainly” has been interpreted as meaning 51% or more. So, provided a charity applies 51% or more of its funds to its New Zealand based charitable purposes, it can issue receipts to all of its donors, even those whose giving has been earmarked for the support of persons serving overseas.  Our view is that the IRD advice to keep separate accounts is merely reiterating that this is a good idea to help the charity measure what percentage of funds are being applied toward NZ purposes vs overseas purposes.  This is so that, when the charity’s annual return is completed, it can accurately state the proportions as required.

We have found that shedding some clarity on this issue has enabled charities to increase the support base for persons they wish to support overseas, as potential donors are more likely to give to the charity if they can claim a tax credit/deduction.

What tax credits are donors entitled to?

Generally speaking, an individual can get a third of the donation as a credit, so long as the donation is not more than their taxable income, and a company can claim the donation as a tax deduction, to the extent that the donation is not more than its taxable income.

One warning however is that when accepting a donation, while it is acceptable for the donor to express a ‘wish’ as to its allocation, the charity needs to retain a discretion in relation to the ultimate application of funds, rather than being bound by an absolute condition attached to the gift – otherwise, it is possible that the charity is only an agent for those funds, and that the donation is not really to the charity at all, but directly to the overseas person.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have.  Please contact Tim Rankin (timrankin@parryfield.com) or Ken Lord (kenlord@parryfield.com) if you would like further advice on these issues or any other tax or compliance issue affecting your charity.

For help with tax matters contact Kris Morrison (348 8480)

The Associated Persons rules in the Income Tax Act 2007 were amended in 2009 with a view to broadening and rationalising the rules.

According to the Policy Advice Division of Inland Revenue, the changes address a number of weaknesses in the previous definitions that posed a risk to the tax base with significant base maintenance implications in areas such as the taxation of land sales, dividends and fringe benefits.

In IRD's view, the main changes:

• deal with the weaknesses in the previous definitions in relation to trusts. In particular, there are new tests focusing on a trust’s settlor (that is, the person who provides the trust property);
• provide more robust rules aggregating the interests of associates to prevent the tests relating to companies being circumvented by the fragmentation of interests among close associates; and
• implement a tripartite test associating two persons if they are each associated with the same third person, thereby making the associated persons tests as a whole more difficult to circumvent.

Parry Field has advised a number of clients on the implications of the 2009 Associated Persons rules.  The following presentation gives a brief summary of some of the key implications of the changes:

• Associated Persons Presentation
• Associated Persons Examples

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any PIE tax questions or income tax and GST questions that you might have. Please contact Kris at Parry Field's Christchurch office (348 8480) for help with tax matters.

Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide.  Reliance should not be placed on this article where any specific issues are concerned.

For help with tax matters contact Grant Adams (348 8480)

You may have seen the term Portfolio Investment Entity or PIE used in the local newspapers and wondered what it was all about.  In this article we explain the reason for the provisions, and what they to do.

The Before-PIE Problem

New Zealand's PIE rules attempt to make the tax system more neutral.  In the before-PIE world a tax disadvantage existed between investing in shares directly and investing through managed funds.

Before the PIE rules, if a person invested directly in domestic shares, and held their shares on capital account, those persons would only be taxed on the dividend income generated by the investment.  [Note, for the purposes of this article we assume all investment is in domestic equities.]

By contrast, if a person invested in domestic equities through a managed fund they were often taxed on both the dividend income and the gain in the value of the shares.  This is because managed funds are usually in the business of trading in shares in order to generate returns.  However, in doing so the managed funds will almost always hold their shares on revenue account.  The managed fund will therefore be taxed on the dividend income, as well as the gain on the value of the shares. 

The New Zealand Government considered that this created adverse incentives for investors, and attempted to remove the perceived unfairness.

The solution

The solution to the above problem is to introduce a special type of “tax advantaged entity”.  This entity is known as the Portfolio Investment Entity or PIE.  The main aim of this entity is to put investors through a managed fund on the same footing from a tax perspective as those investors intending to go it alone.

Investing through a PIE has the following advantages:

• Gains on trading in New Zealand shares and listed Australian shares are not taxed;
• A final withholding tax applies based on the investors’ Prescribed Investor Rate (this could be 19.5% or 30% and means that the income does not have to be included in the investor’s tax return if all conditions are satisfied).

How does it affect me?

Investing through a PIE can result in a very tax efficient investment.  In addition, major trading banks have now established cash-PIE funds.  These funds attempt to mirror current accounts, and they give investors with a marginal tax rate of 38% access to the 30% tax rate.  This represents yet another way to get around the 38% rate.  Cash-PIEs can be very useful to reduce tax on interest where deposits are held on current account.  However, clients should consider carefully which cash-PIE they choose, as all cash-PIEs are not equal. 

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any PIE tax questions or income tax and GST questions that you might have. For further assistance please contact Grant Adams (348 8480).

Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide.  Reliance should not be placed on this article where any specific issues are concerned.

For help with tax matters contact Kris Morrison (348 8480)

Set out below is our joint submission with Christchurch law firm Helmores to the Inland Revenue Department on the officials' issues paper "Allowing a zero percent tax rate for investors investing in a PIE" .  The submission is in favour of the underlying principles suggested by the discussion document.  It suggests, however, that instead of designing complex rules for PIEs with resident and non-resident investors, a new PIE should be created with limited partnership tax treatment, and allowed to have only non-resident investors and overseas sourced income.

C/- Deputy Commissioner, Policy
Policy Advice Division
Inland Revenue Department
P O Box 2198
Wellington
6140
By Email To: Policy.webmaster@ird.govt.nz

Allowing a zero percent tax rate for non-residents investing in a PIE

 1. Thank you for this opportunity to comment on your discussion document: “ Allowing a zero-percent tax rate for non-residents investing in a PIE”. We have kept our comments brief for the sake of your time and ours. We would appreciate the opportunity to discuss this with you in further detail in person.

Why we support the proposal 

 2. One may ask, “Why introduce tax rules that would benefit wealthy foreigners?” We think this is the wrong starting point, and the question should rather be: “Why not?”. As long as the rule changes result in benefits to New Zealand then they should in theory be made.

3. There is no loss to the IRD or the average New Zealander because the investment funds would never come to New Zealand otherwise. They would continue to be managed in places like Singapore, Ireland or Luxembourg, which are already set up for this type of business.

4. No New Zealanders would receive any tax breaks or special treatment. The benefits to New Zealanders would come in the form of increased business revenues and improved public services over the long term.

5. The exemptions from New Zealand tax would only benefit people who do not live here and do not earn income in New Zealand. Those people do not use New Zealand public services and so should have no moral obligation to pay tax in New Zealand.

6. In fact the current situation is palpably unfair. Of all OECD member countries New Zealand has the highest number of tertiary qualified citizens who work overseas. All of these people have had their educations subsidised by the New Zealand taxpayer and yet are now paying taxes in other countries.

7. New Zealand is effectively subsidising the education of taxpayers in Australia, the UK and other countries.

8. We consider that positive impacts would result from the changes at very little cost to New Zealand. This is so, because the changes are likely to make New Zealand more attractive to international funds and reduce costs for funds already here.

9. If a global funds management industry were to develop and grow then investment fund managers would pay tax in New Zealand on the income they earn. Fund administrators based in New Zealand would also pay tax at both a corporate and personal level on the fees charged and salaries earned.

10. However, the investment funds themselves would be exempt from tax in New Zealand.

11. A major benefit of this would be that New Zealand advisory firms would no longer be so dependant on the New Zealand domestic economy for revenue. They would further contribute to the economy by employing New Zealanders - from secretaries to office cleaners to senior executives – and purchasing business products and services such as: stationary, software, couriers, client hospitality, hotels, professional advice, book keepers etc.

12. Every employee and the funds management / administration firms that they work for would pay income tax and GST to the IRD in the usual way. However, because of the increased revenues to these firms and their respective employees the overall tax take by the IRD over time will increase and employment rates will fall.

13. There are numerous international examples where this has happened.

There are several other benefits:

• The level of capital investment required by the New Zealand Government is not high.

• The commercial infrastructure is more or less in place. There will need to be some modification and consolidation of systems currently run by law firms, accountancy firms, investment advisory firms, book keepers and the like. Firms will need to invest in marketing and travel. However, generally the capital outlay will be much less than is required to establish other industries where significant physical infrastructure is required.

• The administration and advisory services will be delivered electronically. Therefore this would be an entirely eco-friendly and virtually carbon neutral industry concentrated in urban areas with no impact on conservation estates. It is entirely in keeping with New Zealand's clean green image and far more sensible than an economy reliant entirely on shipping commodities to the far corners of the earth at considerable financial and environmental expense.

• Unemployment rates will fall for the reasons outlined above.

• The trade deficit will be reduced for the reasons outlined above. For the first time in New Zealand's history it will not just be the farmers, manufacturers and tourism operators bringing foreign currency into the country. City dwelling professional advisers will also be exporters.

• It will provide much needed career opportunities for all New Zealanders – especially those with professional qualifications. It will also provide a reason to return to New Zealand for those that have taken their government funded university degrees and are plying their trade (and paying foreign taxes) on high salaries in Sydney, London and elsewhere.

14. According to the CIA World Factbook New Zealand is currently in 51st position in the world in terms of GDP per capita. Of the top 20 countries nearly all of them have a thriving and well developed international financial services industry of the nature described above. The others seem to be well endowed with oil.

15. Many of the countries listed in the top 10 have far less going for them than New Zealand. None of Jersey, Guernsey, Liechtenstein or Luxembourg have the land, minerals, fresh water or population which we have - and yet they immeasurably better off than New Zealand.

16. Despite the fact that the Irish and Icelandic economies have suffered double digit contractions in recent years they are still ranked higher than New Zealand.

17. Australia, with all its commodities, does not even feature in the top 20 – well behind Ireland with a population comparable to New Zealand. That said Australia is still significantly higher than New Zealand in 22nd place.

18. However, a favourable tax and regulatory system will not be the definitive reason for an industry starting-up in New Zealand. This will happen if New Zealand can, over time, distinguish itself as a top class and well regulated financial service provider in the international scene.

19. We do not make detailed submissions on the tax rules. However, we would like to express our preference for a third possible solution not canvassed in the discussion document. That is, we consider that a special regime should be designed for PIEs who have only non-resident investors, and only derive non-NZ sourced income. Investors in these PIEs should be taxed at 0%. The PIE would be afforded the same tax treatment as a limited partnership.

20. Investors can already access this treatment either through a foreign trust or a limited partnership. However, we consider affording this to PIEs would have the extra benefit of providing a unitised vehicle for tax neutral investment. This gives international fund managers a further option to choose when it comes to New Zealand, and it also opens the door for retail funds managed in New Zealand. We do not consider that PIEs in this category would or should get the benefit of New Zealand’s treaty network. If the changes are to succeed they should be made in such a way that they do not fall foul of New Zealand’s international commitments and tax policy. If limited partnership treatment is afforded to the PIEs, then this is likely to have the least impact on New Zealand’s international standing.

21. Furthermore it is entirely in keeping with the long-standing policy that the IRD will only tax New Zealand residents and/or New Zealand sourced income. This type of industry is not the sole domain of "offshore financial centres" or "tax havens". London, New York, Singapore, Dublin and numerous other international financial centres around the world offer similar regimes to attract international finance business.

22. Limited partnership treatment would afford the funds everything that is required, while at the same time not requiring any complex or detailed rules that would make compliance difficult for the fund managers. Any complexity in this area is likely to drive up costs, and to make New Zealand less competitive with the rest of the world.  Other jurisdictions, and certainly the ones New Zealand would be competing with, tailor their regulatory regimes specifically for these funds.

23. Another option is to simply establish an "exempt fund regime" where fund managers go through a rigourous and responsible licensing process with the result that they may eventually be issued with a special license by the newly established Financial Markets Regulatory Authority. This license will then allow them to establish funds in NZ, which can be offered to non-New Zealand residents using whatever type of legal vehicle they desire. Potentially the fund could be a legal structure established in another jurisdiction but the administration is carried out in New Zealand. Provided always that the fund holds the appropriate license then it will be exempted from paying tax in New Zealand.

24. We consider that New Zealand’s time difference is a significant competitive advantage. At a high level this is so because it would allow New Zealand to price funds overnight, while the rest of the world, specifically the US and Europe, can only price this one day later. This advantage is one that is not easily matched by other jurisdictions.

25. There are opportunities to use New Zealand as a process centre for hedge fund administration (in particular) as our business day begins just as Wall Street closes which means that net asset values of individual fund holdings can be processed during the US evening and then sent to say Hong Kong for reporting to worldwide investors (Hong Kong is 4 hours behind New Zealand in time). This can speed up the administration process by a whole business day as compared to having an administrator is say Luxembourg (currently the world's most prevalent fund administration centre).

26. The costs of doing business in New Zealand are lower than Singapore, Ireland and Luxembourg – and certainly much lower than London, New York, Tokyo or even Sydney.

27. The level of commercial and professional expertise and quality of infrastructure is generally high.

28. Time zone issues and physical isolation can nowadays be managed through effective IT systems.

29. Regulations imposed by the European Union and other supra-national bodies are making life increasingly difficult for the traditional financial centres.

30. New Zealand is also strategically placed in the Asia-Pacific rim where it is projected that most of the world's wealth will be generated in the next few decades.

31. There are many other reasons why New Zealand would be a good choice. We do not exhaustively list these here, but consider the main ones to be: New Zealand’s reputation for ease of doing business, New Zealand’s standing in the OECD, high

standard of English, good infrastructure and stable political system.

32. There is virtually no opportunity cost to New Zealand. There is a risk that unscrupulous financial service providers could exploit New Zealand for nefarious purposes such as money laundering and terrorist financing. There is a further risk that sub-prime financial service providers could offer sub-prime financial services from New Zealand and thereby tarnish our international reputation.

33. These risks can be managed by effective regulation from the Financial Markets Regulatory Authority, which will need to:

a. enforce New Zealand's existing OECD grade anti-money laundering and counter-terrorist financing laws; and

b. licence, monitor and supervise the registered financial service providers (and their directors and employees) providing these services from New Zealand.

34. Before any institution can obtain a license there will need to be a stringent due diligence process to ensure that the directors are fit and proper persons. Systems, processes and best practice will be supervised and audited. Such regulatory regimes are well established in other jurisdictions and could be replicated in New Zealand.

Logically a competent and qualified person should be headhunted from the regulatory authority of somewhere such as Singapore or Ireland to oversee the initial start up phase.

35. This will not be a silver bullet to everlasting economic prosperity and will not supersede the traditional planks in New Zealand's economy such as farming. However, it would provide a much-needed stimulus and greater opportunities for New Zealanders by keeping them here and attracting them back to New Zealand from other countries where career opportunities are currently more alluring.

36. We look forward to hearing from you regarding a possible meeting to discuss this further. Please contact either of the authors if you wish to liaise regarding a meeting.

Kind regards

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any New Zealand tax questions that you might have.  Please contact Kris Morrison at Parry Field's Christchurch office (348 8480) for help with tax matters.  Please note that this is only a high level overview of the case, and there may be specific situations where a different outcome is reached.  Therefore, please don’t rely on this as legal advice.

For help with tax matters contact Kris Morrison (348 8480)

In New Zealand, we love investing in property. With interest rates down and the share market looking shaky, some may think that now is the time to snap up a cheap investment property in the Gold Coast. Beware! If this is not done correctly, an effective tax rate of just under 60% may be faced. This article investigates some common tax issues Kiwi investors may face when investing in Australia.

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Where a New Zealand investor buys property in Australia, the investor has to be aware that Australia has some taxes that are not applicable in New Zealand.

Stamp Duty - This is often payable by the purchaser of property and can range from 1.25% to 7%.

Land Tax - This may range from 0% to 3.7% per annum.

Capital Gains Tax - If the property is sold at a capital gain, the gain will be taxed at the normal Australian income tax rates that can vary from 29% to 45% depending on the income earned.

Income Tax - Income tax is payable on any rental income produced by the investment.  Expenses can be claimed, and an Australian tax return will need to be filed. Generally speaking, if the investment is funded with no more than three parts debt and one part equity, an interest deduction can be claimed.  For example, if the investment is 90% debt funded and 10% equity funded there may be restrictions on the amount of interest deduction that can be claimed.

GST - The rules are similar to New Zealand, and generally speaking no GST will be charged.  In addition, if the property is being rented out for domestic housing purposes no GST is charged and neither is registration required. 

There may be other Australian tax issues that could arise. 

Investment Structures
From a business perspective Kiwis will have to decide how they want to structure their investment.  The following methods may be contemplated.

Investing directly
This could be the best option open to Kiwis, if they can live with the lack of limited liability.  Australian rental income will be taxable in New Zealand and Australia.  However New Zealand will give a credit for the tax paid in Australia, as long as the tax paid is similar to New Zealand tax.  If Kiwis take out an Australian dollar loan, they should be aware that the financial arrangement rules might apply to any exchange gain.  Also, Kiwis will be required to withhold Non Resident Withholding Tax on interest paid.  There may be ways to mitigate this, and it is essential that good advice is taken before the loan is entered into.

Similar advantages may also be available where limited partnerships are used.

Using a company
This may not be the best option from a tax perspective.  Because of the interaction of the Australian and New Zealand tax rules investors could face tax of just under 60%, and might even be taxed twice on capital gains. 

Property investment funds
This may be the simplest investment from a tax perspective.  If the fund is listed on the ASX it is likely that investors will only pay tax on dividends that are distributed from the fund.  However, even this option is not as simple as it seems.  It is difficult to find property funds that meet the criteria for dividend only taxation in New Zealand.

Conclusion
From a tax perspective it is not straightforward to make investments overseas, and investing in Australia is no exception.  If you are willing to live with unlimited liability, then it is possible that investing directly is the best option for you.  Alternatively, a limited partnership may give you all that is required.  However, this comes with significant compliance costs.  The simplest type of investment from a tax perspective in Australian property is through a property fund listed on the Australian Stock Exchange that meets all the requirements for dividend only taxation.  Unfortunately, it may be hard to find an Australian listed property fund that meets the criteria.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any PIE tax questions or income tax and GST questions that you might have. Please contact Kris at Parry Field's Christchurch office (348 8480) for help with tax matters.

Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide.  Reliance should not be placed on this article where any specific issues are concerned.

For help with tax matters contact Kris Morrison (348 8480)

If you are thinking of moving to New Zealand then here are a few tax issues to consider .

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Tax Rates (for year ending 31 March 2011)

Individuals
	$0 - $14,000	10.5%
	$14,001 - $48,000	17.5%
	$48,001 - $70,000	30%
	$70,001 upwards	33%
Companies (Taxable Income)		28%
Trustees  (Taxable Income)		33%

(Note: Split rates apply for the year ending 31 March 2010, as the rates changes on 1 October 2010 to the above rates).

Save if you plan.  If you don’t – prepare to pay the cost.

• The international tax rules are very well developed, and generally speaking, a New Zealand resident will be taxable on their worldwide income.
• New Zealand has a transparent, bribe-free system, and it has a, comparatively speaking, aggressive Tax Regime.  It therefore pays to take advice to get things right.  Any mistakes can attract significant penalties and/or criminal liability.
• New Zealand’s double tax treaty network with other countries is fairly well developed, with 35 currently in place.  Refer to the following page to see if your country is listed: http://www.taxpolicy.ird.govt.nz/international/DTA/index.html.  Double tax treaties are very useful as they attempt to reduce double taxation.  They are not always effective, but for the most part they work very well.
• New Zealand does not have a general capital gains tax, although some of the income tax provisions essentially tax capital gains.  For example, generally speaking, if one is not in the business of dealing in property or subdividing or developing land etc, the gain on the sale of the land will not be taxable income.
• Gift duty applies to gifts made totalling in excess of $27,000 in any 12-month period (although the Government has announced that this will be abolished from 1 October 2011).  This is an important tax to keep in mind, and it is relatively easy to plan around it.  You will have to plan for this well before you arrive in New Zealand, however.
• New Zealand does not have death or stamp duties.
• Special rules have been developed to tax income from financial arrangements.  Broadly speaking the rules may tax income even in cases where no actual cash has been received.

Tax Residents and Temporary Residents

Persons Who Have Been New Zealand Tax Resident In The Past 10 Years

New Zealand taxes its tax residents on their worldwide income.  Generally speaking, a person becomes tax resident in New Zealand from the first day of presence if:

1. they stay for longer than 183 days in a 12-month period; or
2. they have a permanent place of abode in New Zealand.

New Residents (Transitional Residents)

New Residents (“transitional residents”) are able to take advantage of an exemption from tax on their offshore income.  The exemption is intended to attract Kiwis back to New Zealand who have been away for more than 10 years, as well as encourage other people to come and live in New Zealand.  If you do fall within the exemption then it will apply to you for 48 months after your arrival.  Broadly speaking it means that you will not have to pay tax on your offshore generated income.

Tax Traps for People Moving to New Zealand

People moving to New Zealand often do not realise that the following tax rules will apply to them:

• If you come for an LSD trip (Look, See and Decide) then you may be resident in New Zealand from the date of the trip, and not the date you actually come to New Zealand.  This will be the case if you exceed the 183 days in New Zealand in a 12 month period;
• If you hold foreign currency with the equivalent value of more than NZ$50,000, then you will be taxed on realised gains on those currencies.  Alternatively, if you leave again before realising the gains, any unrealised gains will be taxable when you leave;
• If you are not a transitional resident then you have to consider how the foreign investment fund rules and controlled foreign company rules will affect you.
• If you are the settlor/trustee/beneficiary of an offshore trust you have to consider the New Zealand tax impact on that trust.
• If you are shifting your business to New Zealand then GST (Goods and Services Tax) could apply to you.  You may be able to claim a refund of GST paid on goods imported into the country if you use the goods for business purposes.
• If you are a contractor that comes to New Zealand to work for a few days, on say, an oil-rig, then your employer will withhold tax on your salary unless you have a valid certificate of exemption.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any PIE tax questions or income tax and GST questions that you might have. For further assistance please contact Kris Morrison (348 8480).  (Don’t structure your affairs based on free background reading like this article.  It is not legal advice.)

For help with tax matters contact Kris Morrison (348 8480)

Here are a few things to think about when you are in the process of leaving New Zealand. If you do not plan your move correctly, you may have to pay tax twice, or even three times on the same income. Your only insurance is to plan it right.

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New Zealand Tax Residence

The first thing to consider when you are leaving New Zealand is whether you will remain a tax resident of New Zealand when you are away.  This is important, because New Zealand taxes its tax residents on all income they generate anywhere in the world.  Note that tax residence is quite separate from citizenship or permanent residence for New Zealand immigration purposes.

How do you know whether you are a New Zealand tax resident?

If,

1. you leave New Zealand for more than 325 days in a 12 month period; and
2. you break all your connections with New Zealand;

then it is likely that you will break your New Zealand tax residence. 

You will likely have broken your connections with New Zealand if you:

• Have no house or other place to live in New Zealand;
• Close your New Zealand bank account as soon as you leave;
• Don’t have your employer keep your job open for you;
• Take all your belongings with you;
• Take your family with you;
• Close your Kiwisaver account;
• Close any investments accounts you hold in New Zealand;
• Stay away for at least two years;
• Essentially, try to break all economic contact with New Zealand.

If you can do all this, then it is likely that you don’t have to pay tax in New Zealand while you are away.  We suggest you fill in IRD form IR886, which can be obtained from the IRD website at: www.ird.govt.nz. The IRD will then give you a ruling about your residence.

Your circumstances will be unique, and may not be as clear-cut as above.  The rules become a bit murky in borderline cases.  The greater connection you have with New Zealand the more likely it is that you will not break your residence.  It is not easy to make general rules about this, as each situation will depend on its peculiar facts.  The IRD procedure should give you the greatest amount of certainty in these circumstances.

One other point to remember is that if you are moving to a country with which New Zealand has a double tax agreement, then residence will be less of an issue.  New Zealand has double tax agreements with 35 other countries, and a list of these can be obtained at the following website: http://taxpolicy.ird.govt.nz/international/DTA/index.html.

Traps for people leaving New Zealand

Don’t think you can escape the IRD by merely leaving New Zealand.  Government exchange of information networks are getting better and better all the time, and it is likely that the IRD will be able to get information about you if you are moving to a developed country.  Other things to watch are:

• Have you been a salary or wage earner in New Zealand?  If so you are likely to get a tax refund, as Pay As You Earn (PAYE) will have been deducted on your salary and wages on the basis that you will have worked for the whole year.
• Do you hold shares in a Loss Attributing Qualifying Company (LAQC), and will leaving New Zealand impact on the status of the LAQC? 
• Are you a partner in a GST (Goods and Services Tax) registered business, or are you registered for GST in your own right?  If so, your GST registration may cease, giving rise to GST to pay.
• Do you hold foreign currency reserves in excess of NZ$50,000 on any day in the income year?  If so, you may have to pay tax on unrealised foreign currency gains when you leave.
• Are you the settlor/trustee/beneficiary of a New Zealand trust? If so, you have to consider how the migration will impact on the tax status of the trust.

When you get to your destination

It is well worth getting professional advice on the tax consequences of moving to a new country.  For example:

• The United Kingdom tax laws favour individuals who have not lived in the UK all their lives, and do not intend to either (although there have been some recent developments that reduce this benefit).
• Singapore and Hong Kong, and some other countries have territorial tax systems.  This means they generally tax profits generated from within their borders, and they do not tax profits generated overseas.
• Australia offers special rules for temporary migrants and if these rules apply to you then you may be exempt from income tax on your offshore income.

If you are retaining a New Zealand share portfolio it is worth letting your investment advisor know.  Non-residents are able to get favourable treatment on the taxation of dividends and interest derived from New Zealand.  Broadly speaking though, you will still be paying tax in New Zealand on company generated profits at 30% because of the application of the imputation rules.

In conclusion, it is important to think of the tax consequences of any big relocation event in your life.  Getting it wrong can be very costly, and not to mention, extremely stressful.  Be sure to get it right and get some good advice.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any PIE tax questions or income tax and GST questions that you might have. For further assistance please contact Kris Morrison (348 8480).  (Don’t structure your affairs based on free background reading like this article.  It is not legal advice.)

For help with tax matters contact Ken Lord (348 8480)

Unlike the naked Archimedes’s joyful exclamation, the recent expose of the Eureka Trust comes as a more serious warning for those working in the charitable sector. Charities never need to bother with tax issues do they? Actually, yes ...

In recent weeks, the newspapers have been filled with articles on Eureka Trust for all the wrong reasons.  It is alleged that Eureka Trust, a charitable trust, has been giving donations to sporting organisations in the mistaken belief that these were valid gifts to charity when they were possibly not.  Eureka has suspended all grants to sporting bodies while the matter is cleared up, and it may mean that a good source of funding for sport will now be directed to other charities.

The story has broken as the full effect of the changes to the regulation of charities starts to bite.  The Charities Commission was set up in 2008, and this body is charged with the regulation of charities in New Zealand.  Previously charities were able to carry on virtually unmonitored, and the aim of the Charities Commission is to cast light in dark places.  Hopefully no monsters are found in these dark places, but as the charity reporting season heats up, public scrutiny may prove to be all that is needed to shake up this part of our society. That has certainly been the experience of the UK after their charities sector reform.

Donations for non-charitable purposes may attract gift duty

Things can go badly wrong for charities if they make errors.  All the facts are not available in Eureka’s case, so it is not possible to say whether it has in fact made any mistake.  In principle however, donations for non-charitable purposes will be exposed to gift duty on those donations.

If a charity gives the money to a non-charitable entity, there will be tax consequences.  The charity has to consider whether gift duty is payable, whether the income tax exemptions still apply, and importantly, whether there are any GST considerations that need to be taken into account.  If non charity gifts are significant there is also a risk that the Charities Commission revokes charitable status, and if that happens the charity will lose all the tax benefits that applies.

Gift duty is an archaic tax, and usually is very easy to minimize.  The Government collects about $1million per year from this tax.  However, if structuring is not done correctly gift duty may apply to the value of the gift at 25% in some cases.  Gifts to charity are exempt from gift duty.  However, if gifts are made to non-charitable entities, and the gifts are not excluded for other reasons, then gift duty will apply.

Where charities do err the one thing they (or the trustees) and Archimedes might have in common is that both will be remembered for losing their shirts.  Givers punish charities that waste funds on too much admin- it is likely however that the IRD will punish charities that do not do enough.

For help with tax matters contact Ken Lord (348 8480)

Are you an international charity that has recently applied for listing on Schedule 32 of the Income Tax Act 2007?  Or do you have a client in this position?  If so, we would like to hear from you.

What is Schedule 32 Status?

Very briefly, Schedule 32 status gives qualifying charities the ability to issue receipts to their donees for donations made to the charity. The donees can use those receipts to claim a credit or deduction against their income tax.  If they are an individual they can get a third of the donation as a credit, just as long as the donation was not more than their taxable income.  If a company, they can claim a deduction, as long as the donation was not more than their taxable income in the absence of that deduction.

Schedule 32 status is granted to a select few international charities, and with the lifting of the caps on donations credits and deductions, there has been a flood of applications to be listed.

The Government was so inundated with requests that it even published special guidelines to charities on how to make the application.  The issue is very simple, if a charity does not have its charitable purposes principally in New Zealand, then that charity cannot qualify as a donee organization unless it is listed on Schedule 32.

In addition, the whole area is currently under consideration, and the Government is likely to produce new guidelines on how to apply for this status.  If you are interested in helping influence policy in this area then please contact the author at the contact details provided under the author profile.

Don’t get tripped up by confusing IRD correspondence on donee status!

International charities, or their advisors, can easily get tripped up as to their tax status in New Zealand.  This is so because the application for donee status as part of registration with the Charities Commission is not very clear, and possibly not correct.

Briefly the problem is as follows:  the law provides that donee organizations are those organizations with their charitable purposes principally in New Zealand.  Now there is no case law on this, but it is accepted that if your purposes are more than 50% in New Zealand then you will qualify.  Note that it is where your purposes are, not where you spend your money that is the important question.

Your purposes could all be overseas, and you can spend all your money in New Zealand.  For example, where you send blankets purchased in New Zealand to the poor in Romania.

When charities are applying with the Charities Commission for registration, Form 1 question 22 asks:

“What percentage of New Zealand sourced funds did you spend overseas in the last financial year? If the entity has not been operating for a year, what percentage of New Zealand sourced funds does it intend to spend overseas in the next financial year?”

The explanation of this questions attempts to clarify the point regarding where charitable purposes are, but our experience is that this question still confuses some charities.

We understand that IRD practice is to send out a “donee letter” if the charity puts down anything less than 50%.  If you are a charity that spends your money in New Zealand, but your purposes are restricted to purely overseas purposes, you may think that this letter allows you to give tax-deductible receipts.  It does not.  You need to apply to be listed on Schedule 32 before you can get donee status.  You don’t qualify under the normal provisions for donee status.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have. Please contact Ken at Parry Field's Christchurch office (348 8480) for help with tax matters.

Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide.  Reliance should not be placed on this article where any specific issues are concerned.

For help with tax matters contact Kris Morrison (348 8480)

Please note that we have posted a new article on our blog regarding the above issue.  To read more follow this link http://www.parryfieldblog.com/new-zealand-gst-transitional-rules-lan/

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For help with tax matters contact Kris Morrison (348 8480)

Experience usually comes too late.  When you need it, you don't have it, and when you have it, you often don't need it.  This article gives ten tips to take into account if you have an IRD Dispute or Audit on the horizon, and tries to give you the experience you need to make wise decisions early on.  The Government has recently pledged more money to allow the IRD to increase its audit activity.  The chances of being audited have therefore increased.  If you are in this position, we hope you find our article useful.

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Top Tip Number One:  The IRD is not your Friend

The first contact with the IRD is crucially important.  Errors at this point cannot be fixed later on.  If your affairs are in disarray, but you have acted honestly, do not send your papers to the IRD thinking that you will come off lightly.  They will see this as a distress signal and go in for the kill.  Do not engage in small talk with the IRD auditor, no matter how friendly they are.  They are collecting information that they may use against you.

Top Tip Number Two: Good Advice from the Start is Crucial

If the IRD is investigating, and they find any errors, then it is likely that you or your accountant made the error.  Using your accountant to help you correct this may not be the best option, especially if it was his/her error that caused the problem.  Using an independent lawyer may give you the perspective needed.  It may also get the IRD to understand that you are not going to be a pushover.

Top Tip Number Three: Tell Your Loved Ones

IRD audits are stressful and you will need all the support you can get.  There is no point in doing this on your own. If it turns out that you have not paid enough tax, as it often does, then there could be a raft of family issues that arise.  For example, you may need to sell your house to pay any back taxes, action may need to be taken to protect your assets as far as legally possible.

Top Tip Number Four: Use Voluntary Disclosures if Possible

There are generous deductions in the penalties regime that apply if a voluntary disclosure is made in time.  In addition, these disclosures can protect you from prosecution if they are made early enough.  If you know you have taken an incorrect position, it is usually best to come clean with this early on.

Top Tip Number Five: The IRD may not be friendly, but they are generally fair

The people who work for the IRD are just doing their job.  They are generally not out to get you as long as you are honest and organised.  However, they will do their best to enforce the tax laws of the country.  If your response to the audit is professional and you use professional advisers to help with responding, the outcome is likely to be more favourable, and the audit is likely to be over sooner.

Top Tip Number Six: GST is a weak link

The IRD starts most of their general audits by looking at your GST position.  Because GST returns are generally very easy, businesses often miss the more complex details that can arise with high value supplies or purchases.  In addition, where GST errors occur they generally have a flow on effect into other taxes, and the IRD audit is likely to branch out into those areas if they are not satisfied with the level of your GST returns.  Therefore, if you are doing your own GST returns, ensure you get advice on difficult high value transactions, such as the sale of land or businesses.

Top Tip Number Seven: Keep your Options Open

As the audit progresses the IRD will ask for information and impose deadlines.  It is important to meet these deadlines.  In the event that there is a dispute a further set of deadlines will apply.  It is crucial that these deadlines are met, as missing them could lead to you losing your right to take the dispute further.  You generally get a two-month period to respond.

Top Tip Number Eight: If the Tax Amount is Large Litigate

If the amount of tax in question is more than $200,000, and there is any uncertainty about the law, then it can be worth litigating.  This means taking the case to the Taxation Review Authority (TRA) as a first step, and further if required.  The TRA case could cost $15,000 to $20,000 to run, depending on the complexity and issues involved.

Top Tip Number Nine: If errors are rife reconsider

If the IRD picks up many errors, and the tax underpaid is large, you may need to reconsider whether you are in the right place.  If you are running your own business, you may need to take courses to up-skill in business management.  Either that, or give it up altogether.  If it is your accountant who was responsible for the errors, you may need to get a new one.  Take stock of your affairs to ensure that next time the IRD audits you the same mistakes are not made.

Top Tip Number Ten: Do not Lose Heart – There is life after a Tax Audit

Many clients think an IRD audit is the end of the world.  This is because everything else also seems to go wrong at exactly the same time as the IRD audit.  The IRD audit will eventually end.  In less serious cases, the most the IRD can do is take your money.  Ensure you stay strong in your relationships throughout this period and the IRD audit will be over before you know it.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have.  Please contact Kris at Parry Field's Christchurch office (348 8480) for help with tax matters.  Please note that this is only a high level overview of the issues.  Therefore, please don’t rely on this as legal advice.