The ins and outs of the new 39% Trust tax rate

The government has finally introduced the Bill with the proposed changes to the Brightline test, and interest deductibility for residential rental property owners. The Annual Rates for 2023-24, Multinational Tax, and Remedial Matters Bill proposes significant changes. Key Features of the Proposed Amendments: Repeal of Current Bright-line Tests The proposals repeal the existing 10-year and 5-year new build bright-line tests and replace them with the new 2-year bright-line test. Simplification of Main Home Exclusion The exclusion would apply if the land has been predominantly used as the person’s main home for most of the ownership period. Extension of Rollover Relief Rollover relief rules would be extended to cover all transfers between associated persons, provided they have been associated for at least two years prior to the transfer. Proposed Changes – Brightline Rules Proposed Changes: The amendment proposes to repeal the current bright-line tests and replace them with a new 2-year bright-line test. This shift aims to return the bright-line test to its original purpose of taxing income from property sales within a specified period, particularly targeting land speculators. Application Date: The proposed changes would come into effect for disposals of residential land occurring on or after 1 July 2024. This means that any property sale after this date would be subject to the new 2-year bright-line test. Remembering that the brightline period ends when an Agreement to Sell the property is signed. It is critical that vendors do not sign any sales agreement prior to 1 July 2024. If they do, they will fall within the existing rules and could be caught. Extension of Rollover Relief – Finally! The proposed amendment to the bright-line test also includes a significant expansion of rollover relief provisions. Rollover relief aims to mitigate the tax consequences of certain property transfers, particularly between associated persons or entities, by deferring taxation until a later date. Under the current legislation, rollover relief is limited to specific circumstances, such as transfers involving relationship property, inherited property, or into a related Trust. However, the proposed amendment seeks to broaden the scope of rollover relief to cover a wider range of transactions. The key expansion involves extending rollover relief to apply to all transfers between associated persons , provided they have been associated for at least two years prior to the transfer. By extending rollover relief to all associated person transfers, the amendment aims to provide tax relief for genuine transactions that do not involve speculative behaviour. This extension acknowledges that not all transfers between associated persons are driven by profit-seeking motives and should not be subject to immediate taxation under the bright-line test. It recognizes the importance of facilitating transfers within family units or between closely connected entities without imposing unnecessary tax liabilities. Critically, it could finally resolve the issue with parents being taxed on imaginary gains when trying to help their children into their first homes. The proposed amendment to the bright-line test in New Zealand represents a significant shift in property taxation policy. If implemented, it would have implications for property investors and speculators, as well as homeowners. Stay informed about these changes to ensure compliance and understand their impact on property transactions. *This publication contains generic information only. NZ Tax Desk Ltd is not responsible for any loss sustained by anyone relying on the contents of this publication. We recommend you obtain specific taxation advice for your circumstances.

In a significant move aimed at providing relief (and fairness) to property investors, the Government has finally released the draft legislation to reinstate the ability to claim interest deductions for residential investment properties. The proposed changes are scheduled to come into effect from April 1, 2024, one year from the previously proposed implementation date – but better late than never. The interest limitation rules, initially introduced in 2021, aimed to curtail interest deductions for residential investment properties. Under these rules, interest deductions were gradually phased out based on the acquisition date of the property. However, recognizing the need for a balanced approach, the government is now proposing to reintroduce interest deductibility in a phased manner. The Annual Rates for 2023-24, Multinational Tax, and Remedial Matters Bill proposes a phased reintroduction of interest deductibility for residential investment properties. From 1 April 2024 to 31 March 2025, taxpayers will be allowed to claim 80% of interest deductions. Subsequently, from 1 April 2025, onwards, 100% deduction of interest will be permitted. Importantly, this phased approach applies to all taxpayers . This will provide some immediate relief (from 1 April this year anyway) to those taxpayers who acquired their properties after 27 March 2021. Key Features Phased Reintroduction Interest deductibility will be phased back in, with taxpayers allowed 80% deductions from April 2024 to March 2025, followed by 100% deductions thereafter. Universality The reintroduction of interest deductibility applies universally to all taxpayers, irrespective of the acquisition date of their properties. Scope Retention The rules governing the types of properties and taxpayers subject to interest limitation will remain unchanged during the phased reintroduction period. Any taxpayers, or types of land, that are currently exempt from the interest limitation rules will continue to be exempt. Sunset Clause The interest limitation rules are proposed to be repealed from April 1, 2025, once full deductibility is restored. Deductions on Sale Rules allowing taxpayers to deduct previously disallowed interest upon the sale of the property will be retained. Details Application The reintroduction of interest deductibility will apply universally to all taxpayers, including those with non-standard balance dates. Scope No changes are proposed regarding the types of properties and taxpayers subject to interest limitation rules, ensuring continuity. The interposed entity and other anti-avoidance rules will continue to apply while the interest limitation rules are being phased out. Deductions on Sale Rules allowing deductions for disallowed interest upon property sale will continue. This means that where a sale of the property is taxed, the denied interest can be added to the cost of the property and taxed on sale (subject to loss ring-fencing). From a practical perspective you may wish to consider capitalising the denied interest each year so that this is tracked in the financial statements. Effective date The proposed interest limitation phasing rules will apply based on interest incurred for the period 1 April to 31 March each year. For most taxpayers this will be the same as their income year. However, for taxpayers with non-standard balance dates they will need to calculate the denied interest for each part of the income year. Although somewhat controversial in the media, the proposed amendments merely reinstate the same right to deduct interest that every other taxpayer in business has.  *This publication contains generic information only. NZ Tax Desk Ltd is not responsible for any loss sustained by anyone relying on the contents of this publication. We recommend you obtain specific taxation advice for your circumstances.

As the end of the financial year approaches, you may be wondering what you need to do to get your Xero accounts ready for us. Here are some tips and tasks to help you streamline the process and avoid any delays or errors. During the year Keep your Xero file reconciled and tidy. Attach invoices to transactions, this can save a lot of time when it comes to preparing your financial statements. Before 31 March Review your Fixed Asset Register and write off any assets that are no longer in use or have been disposed of. Identify any bad debts that are unlikely to be recovered and write them off in Xero. Consider declaring dividends. Conduct a stock take on 31 March and update your inventory records in Xero accordingly. After balance date Issue any invoices for work done or goods sold before 31 March and record them in Xero. If you have received any payments in advance for services that will be delivered after 31 March, let your accountant know so they can adjust your income accordingly. Reconcile your bank feeds in Xero up to 31 March and make sure they match your bank statements for all your bank accounts and loans. Accrue any interest on loans that is due but not paid as at 31 March, or ask your accountant for help if you are not sure how to do this. Complete and file your March GST and PAYE returns as soon as possible and record them in Xero. Create a folder in your Xero account named ‘2024 Accounts Information’ and upload the following documents PDF bank statement showing the balance on 31 March 2024 for all your bank accounts and loans. Copy of loan statements for the full year ended 31 March 2024. Any new loans or finance arrangements, including Convertible Notes – please include a copy of the agreements. Any shareholder changes, please include a copy of the agreements. If you received any grants during the year, please include a copy of the agreements or grant documentation. Any major transactions, such as acquisitions, disposals, investments, etc. – please include relevant documents. Copies of any ACC invoices. Copies of any insurance invoices.  Confirm or advise us of the following information: Please provide details of any transactions that you were unsure of how to record in Xero during the year, including the invoice. Confirm that all travel expenses are business related, or advise if there are any personal expenses that need to be adjusted. Advise if there were any related party transactions during the year, such as sales or purchases with associated companies or shareholders, salaries paid to directors or shareholders, etc. Confirm that all accounts receivable and accounts payable balances are correct as at 31 March, or advise if there are any errors or disputes that need to be resolved. Advise if there were any transactions outside of your Xero file, such as personal payments for business expenses or vice versa, cash transactions, etc. Advise if there are any capital commitments, contingent liabilities or major events after balance date that may affect your financial position or performance. By following these steps, you will make it easier for us to prepare your financial statements and tax returns, and ensure that they are accurate and compliant. If you have any questions or need any assistance, please contact us. *This publication contains generic information only. NZ Tax Desk Ltd is not responsible for any loss sustained by anyone relying on the contents of this publication. We recommend you obtain specific taxation advice for your circumstances.

Your client was affected by the recent floods and their insurance company has decided to pay them out. Your clients decided to sell instead of getting the repairs done on their property. They forget that the property would be subject to the Brightline rules. How do you treat the insurance payout?

As tax advisors, we see major issues with brightline applying where parents help their children into home ownership. Traditionally we have argue d that the parent may be holding that land as Bare Trustee for the child. When the parent eventually transfers the title to the child, that transaction is ignored for brightline tax purposes. The IRD has just released an Exposure Draft that effectively kills this argument.

A qualifying company is an ordinary company with a specific taxation status. Although you can no longer create a new QC, and these entities are becoming rare, they are still around, and they do have unique tax advantages as well as many potential pitfalls.

A look-through company is similar to a limited liability/standard company set up under the Companies Act 1993. However, the laws differ regarding the taxation of the company’s income. An LTC is a separate legal entity, but, for income tax purposes, it’s treated like a partnership. It has flow through treatment for tax purposes. The income and expenses are returned as income in the shareholder’s tax return. The shareholder is also treated as owning a proportionate share in the LTC’s underlying assets.

The usual company we think of is a standard, or limited liability company.

A real estate agent recently told us that bright-line tax is simple – it is far from it! We now have multiple iterations of the bright-line rules and multiple different exemptions. In this article, we try to simplify how these rules may affect you. We also outline examples where landowners have been tripped up by the unknown!