nz-tax-desk

Cash Basis Person Changes

Thu, 23 Apr 2026 21:57:38 GMT

Some Common Sense for Taxpayers

The Taxation (Annual Rates for 2025–26, Compliance Simplification, and Remedial Measures) Act has now been enacted.

While it includes the usual mix of annual rates, remedial fixes and tidy-ups, one area stands out to us from a practical perspective – changes to the cash basis person rules.

What is the cash basis person exemption?

Under the financial arrangement rules, taxpayers are generally required to recognise income and expenditure on an accrual basis – spreading income or expenditure over time regardless of when cash is received or paid.

For smaller taxpayers, this can be unnecessarily complex. The cash basis person exemption is designed to allow qualifying taxpayers to instead account for financial arrangements on a cash (receipts and payments) basis (in theory) avoiding most of the spreading and wash-up calculations.

Pre-2026 Rules

Before the recent changes, a person qualified as a cash basis person if they satisfied all three of the following tests:

Income threshold:
Total income from all financial arrangements was $100,000 or less for the income year; OR
Financial arrangements threshold:
The absolute value of all financial arrangements (e.g. loans, mortgages, shareholder current accounts) was $1 million or less
AND meet the Deferral test:
The difference between income calculated under the accrual rules and the cash basis did not exceed $40,000. This was a cumulative calculation and had to be monitored from year to year.

If these thresholds were breached, the taxpayer was required to apply the full financial arrangements regime.

In practice, it was often the $1 million threshold and the deferral test that caused the real issues. Even where a taxpayer ultimately qualified as a cash basis person, they still had to perform accrual calculations simply to test whether they breached the deferral threshold. In effect, they were required to do the full financial arrangements calculations just to confirm they did not need to do them.

What Has Changed?

The 2026 Act makes three key changes to how the cash basis person regime operates:

Income threshold doubled
The income threshold has been increased from $100,000 to $200,000.
This brings more individuals and small businesses within the regime and better reflects current income levels in practice.
Financial arrangements threshold doubled
The absolute value threshold for financial arrangements has increased from $1 million to $2 million.
The deferral test has been abolished
The deferral test has been removed entirely. In our view, this is the best change of all and very welcome.

The deferral test was:

Difficult to explain
Often overlooked in practice
A source of technical risk
In many cases, added compliance cost without affecting the outcome

Its removal significantly simplifies the analysis. In most cases now, eligibility will come down to the income threshold and the financial arrangements threshold.

When Do These Changes Apply?

These changes apply from the 2026 income year (FY26).

A Key Watchpoint: Switching Between Accrual and Cash Basis

One of the most important (and often overlooked) aspects of these changes is what happens when a taxpayer moves between methods.

If a taxpayer:

Previously did not qualify and was applying accrual rules, but
Now qualifies as a cash basis person under the new thresholds

There is no simple “switch over”.

A wash-up adjustment (effectively a base price adjustment type calculation) is required to ensure that:

Income and expenditure are not omitted or double counted
Timing differences are correctly recognised

That adjustment can result in:

Additional taxable income, or
Deductions being brought forward or deferred

In some cases, the adjustment can be material. So while moving to a cash basis will often reduce compliance going forward, it is not automatically beneficial from a tax payable perspective in the year of transition.

Practical Implication

For clients who now fall within the expanded thresholds:

It is worth reassessing whether they can move to a cash basis
But it is equally important to assess whether they should

In particular:

Clients already on accrual accounting may face a one-off tax cost on transition
The benefit of simplification needs to be weighed against that cost

This is a case where running the numbers before making a decision is essential. We are happy to work through the calculations with you and advise on the most appropriate approach.

Variable Principal Debt Instruments: Threshold Increase

Alongside the cash basis person changes, the Act also makes a useful update to the variable principal debt instrument (VPDI) rules.

What Has Changed?

The threshold for VPDIs has been increased from $50,000 to $100,000. Remember this threshold applies to all of a taxpayer’s VPDIs (the cumulative total), not on an individual basis.

This expands the range of smaller foreign currency bank accounts and loans that can fall within this simplified treatment.

What is a Variable Principal Debt Instrument?

A variable principal debt instrument is, broadly, a loan where:

The account or loan is denominated in a foreign currency, and
The New Zealand dollar value of the principal varies as exchange rates move

A common example is a client with a USD bank account. Under the standard financial arrangements rules, any FX movements may result in foreign exchange gains or losses that need to be calculated annually and recognised for tax purposes.

Why the VPDI Rules Matter

Where a loan qualifies as a VPDI within the threshold, it is treated as an excepted financial arrangement.

This is an important distinction. It is not just a timing difference, it is a full exclusion from the financial arrangement rules for that instrument.

What Should You Do Now?

This is a good opportunity to:

Revisit clients previously just outside the thresholds
Simplify financial arrangement treatments where possible
Ensure no one is continuing to apply rules they no longer need to

If you are unsure whether a client now qualifies as a cash basis person, it is worth revisiting - the answer may have changed.

If you would like to understand how these changes could affect your business or existing financial arrangements, please get in touch with us.

Disclaimer:
The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with New Zealand tax rules before making decisions based on this content.

Preparing For Your Year End Financial Reports

Sun, 08 Feb 2026 22:07:03 GMT

How To Prepare For Your Year-End Accounting.

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.

Throughout The Year:

Staying on top of things during the year is still the biggest time-saver at year-end.

Keep your Xero file reconciled regularly so bank balances, credit cards and loans are always up to date. Where possible, attach invoices, receipts and agreements directly to transactions in Xero, as this significantly reduces the time needed to verify balances and expenses later.

Before 31 March:

As balance date approaches, it’s a good time to step back and review a few key areas.

Review your Fixed Asset Register and identify any assets that are no longer in use, have been scrapped, or sold during the year so these can be written off or disposed of correctly.

Consider whether there are any debts that are unlikely to be recovered and should be written off as bad debts before year-end.

Consider whether dividends should be declared before 31 March, taking into account imputation credits and cash flow.

If you hold trading stock, complete a stock take at close of business on 31 March 2026 and update your inventory records in Xero to reflect actual quantities and values on hand.

After Balance Date:

Once 31 March has passed, there are a few final steps to complete.

Issue any invoices for work performed or goods supplied before 31 March 2026 and ensure these are recorded in Xero, so income is recognised in the correct year.

If you have received payments in advance for services or work to be carried out after 31 March, let us know so we can treat this correctly as income in advance.

Reconcile all bank feeds in Xero up to 31 March 2026 and make sure balances agree to your bank statements for all bank accounts, credit cards and loans.

Accrue any loan interest that relates to the year ended 31 March 2026 but has not yet been paid. If you’re unsure how to do this, just flag it for us.

Please complete and file your March 2026 GST and PAYE returns as soon as they are due and ensure these are correctly recorded in Xero.

Documents We Will Need:

When it is time to start on your financial statements we will send you a link to our electronic workpapers file, where you can upload documents we request. If you would like to get started in the meantime, you can create a folder in your Xero file called “2026 Accounts Information” and upload the following documents where applicable:

- PDF bank statement showing the balance on 31 March 2026 for all your bank accounts and loans.

- Copy of loan statements for the full year ended 31 March 2026.

- 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.

Please Also Confirm the Following:

Let us know if there were any transactions during the year that you were unsure how to record in Xero, and point us to the relevant invoices or entries..

Confirm that all travel and motor vehicle expenses recorded are business-related, or advise us if any private use adjustments are required.

Advise us of any related-party transactions during the year, including transactions with associated companies, shareholders or directors, shareholder salaries, or shareholder current account movements.

Confirm that accounts receivable and accounts payable balances are accurate as at 31 March 2026, or let us know if there are any disputes or amounts that may not be recoverable or payable.

Tell us about any transactions that occurred outside of Xero, such as personal payments for business expenses, business payments made privately, or cash transactions.

Finally, advise us of any capital commitments, contingent liabilities, or significant events after balance date that could impact your financial position or results for the year.

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.

Shareholder Loans: Deemed Income to Shareholders, and the Problems

Tue, 27 Jan 2026 02:34:05 GMT

The Government has recently released a proposal that would fundamentally change how shareholder loans are taxed in New Zealand (Officials’ Issues Paper Improving taxation of loans made by companies to shareholders).

At its core, the proposal could turn loans from a company to shareholders into a deemed dividend. Broadly, where a company advances funds to a shareholder and that loan is not repaid within a specified period, the outstanding balance would be treated as taxable income to the shareholder, most likely as a deemed dividend. This would apply to new loans made on or after 4 December 2025, with a proposed $50,000 de minimis per company (not per loan).

This would mean that, for example, money taken out of a company by shareholders and left in an overdrawn current account could be treated as taxable income for the shareholders.

Alongside this, Inland Revenue proposes a separate rule for companies that are removed from the Companies Register. Any shareholder loan still outstanding at the time of removal would be taxed at that point, on the basis that these loans are frequently never repaid and Inland Revenue has no practical way to recover tax once the company no longer exists.

The stated problem: large loans that are never repaid

Inland Revenue’s explanation for these changes relies on the concern that shareholders are taking funds out of the company, not declaring dividends, and not paying the funds back. The concern is not ordinary short-term lending. It is large shareholder loan balances that:

build up over many years,
fund private consumption,
are never realistically repaid, and
are often abandoned when a company is liquidated or removed from the register.

From Inland Revenue’s perspective, these arrangements allow shareholders to enjoy company profits without ever paying shareholder-level tax, while IRD has (apparently) no effective recovery mechanism once the company disappears.

That concern is understandable. However, the difficulty lies in how far the proposed solution strays from that original framing and the practical reality of how to implement the proposal.

The $50,000 de minimis tells a different story

Despite repeated references to very large balances and long-term non-repayment, the proposed rules would apply once shareholder loans exceed a $50,000 de minimis. This threshold applies to the company, so it will include all shareholder loans, not on a loan-by-loan basis.

That threshold is not particularly high in the context of owner-managed businesses and does little to confine the rules to the behaviour Inland Revenue says it is targeting. In practice, the proposals could capture many ordinary commercial arrangements that bear little resemblance to the “never repaid” loans highlighted in IRD’s communications.

New Zealand’s deliberate departure from Australia

This tension becomes clearer when compared with Australia.

Australia is cited as a model for taxing shareholder loans, but the Australian regime includes a critical safeguard: a commercial loan exemption. Where a shareholder loan is structured and documented on commercial terms, it is not treated as a disguised (or deemed) dividend.

Inland Revenue has rejected adopting a similar exemption for New Zealand. The Issues Paper states that a commercial loan carve-out would be too easy to manipulate and would undermine the integrity of the regime.

That decision has far-reaching consequences. It means that even a genuinely commercial loan, indistinguishable from third-party debt, remains exposed to the proposed deemed dividend rules purely because the borrower is also a shareholder.

When a “loan” is taxed like income but still behaves like a loan

Rejecting a commercial loan exemption also creates a series of unresolved technical and practical issues.

If a shareholder loan is deemed to be income for tax purposes, but continues to exist legally, several questions follow:

What happens to interest? Is this still taxable income for the company? Remember that, for tax purposes, the loan has been repaid via a deemed dividend.
How are repayments treated? If the shareholder later repays the principal, should there be a deduction available to the shareholder for that repayment? i.e., to reverse the tax impact of the deemed dividend?
What about future dividends? At this stage, the deemed dividend appears to be a tax fiction. The retained earnings remain in the company for accounting purposes. Unless the deemed dividend is matched by a reduction in retained earnings or tracked some other way, the same underlying profits could be distributed again later as an actual dividend — and taxed again in the ordinary way.

What this would mean in practice

From a practical perspective, the proposals would mean that overdrawn shareholder current accounts could be treated as taxable income for the shareholder, rather than simply being viewed as loans that remain outstanding.

Inland Revenue has framed the changes around situations where large shareholder loans are not repaid, and shareholder-level tax is not ultimately collected. The proposed rules would apply more broadly than those scenarios, including to loans that are documented, interest-bearing, and intended to be repaid.

As the proposals currently stand, further guidance will be needed on how deemed income amounts interact with ongoing loan balances, interest payments, repayments of principal, and future dividends funded from the same company profits. These interactions will be important in determining the overall tax outcome.

If you would like to understand how these proposed changes could affect your business or existing shareholder loan arrangements, please get in touch with the team at NZ Tax Desk.

Disclaimer:
The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both New Zealand tax rules and any relevant overseas tax systems before making decisions based on this content.

RDTI Five-Year Evaluation

Wed, 26 Nov 2025 01:41:09 GMT

RDTI delivers billions in value – but many firms still miss out.

Here’s how to fix that.

The Research and Development Tax Incentive (RDTI) recently reached a major milestone with the release of its first statutory five-year independent evaluation. Introduced in 2019 to replace the Callaghan Innovation Growth Grants, the RDTI provides a 15% tax credit for eligible R&D expenditure and was designed to broaden access and stimulate innovation across the economy.

The evaluation confirms that the RDTI is working, that it is generating material additional R&D, and that it provides a better economic return than the former Growth Grants regime. It also highlights friction points, particularly for smaller innovators, where the compliance burden can be disproportionately high.

1.0 What the Evaluation Found: A strong case for retaining (and refining) the RDTI

Over its first five years:

1,752 firms received support.
$1.074 billion in tax credits was provided (nominal value).
By 2023, RDTI-supported firms accounted for 65% of all measured R&D expenditure, compared with a 44% peak under Growth Grants.

Just over half of entrants had never received any Callaghan Innovation support, potentially demonstrating a broadening of access.

2.0 Additionality and macro-economic return: compelling evidence

The evaluation found that:

The RDTI generated additional R&D spend of approximately $274k per firm per year.
Total additional R&D created was $1.833 billion (present value).
The “bang for buck” is 1.4, meaning each dollar of government support generated ~$1.40 in additional R&D, comparable to strong OECD performers.
Economy-wide impact is estimated at 4.2x the government investment, or approximately $6.8 billion in GDP return.

These findings strongly support continuing the RDTI as one of the anchors of New Zealand’s R&D support system.

3.0 Innovation and productivity impacts

The evaluation found:

Innovation rates increased after two+ years of RDTI support (average uplift 6.1 percentage points).
No clear productivity effect yet, likely because productivity gains from R&D take much longer to materialise.

4.0 Where the System Struggles: High complexity

The evaluation makes clear that understanding RDTI eligibility, documentation rules, and expenditure tests remains a significant challenge, even for moderate-spend or technically sophisticated firms.

One of the most important passages in the evaluation states:

“Many firms found the in-depth description of eligible activities (IR1240) difficult to navigate, making tax consultants a valuable resource in interpreting scheme requirements. It was common for businesses to struggle to understand what was required without external advice.”

A firm interviewed summarised the challenge:

“It’s hard enough to understand [expenditure eligibility] when someone’s drip-feeding it to you… If we had to go and work out what we have to record, what is the difference between supporting and something else, and what percentage of total salaries can be claimed, we’d really struggle.”

From our experience advising clients across multiple sectors, these difficulties are familiar. Even highly capable taxpayers often:

Misinterpret the scientific/technological uncertainty test.
Misclassify supporting vs core activities.
Misallocate expenditure categories.
Under-claim eligible salaries and overheads.
Overlook small R&D projects entirely due to documentation effort.
Struggle to reconcile GA approvals with SR expenditure requirements.

5.0 Administrative inefficiencies

Although approval processes have improved, the evaluation continues to identify issues with Supplementary Return processing delays.

6.0 Software development: a systematic grey area

The evaluation identifies software R&D eligibility as one of the most contested and inconsistently assessed components of the scheme. Firms frequently encounter:

Difficulty documenting uncertainty within agile methodologies.
Confusion around what constitutes scientific/technological uncertainty.
Different interpretations and conflicting guidance between agencies and reviewers.

This is expected to be a major reform focus.

7.0 Compliance costs: the biggest pain point – especially for low spenders

A recurring theme in the evaluation is that the RDTI is disproportionately expensive for low-spend firms. Many businesses reported needing $300k–$500k in annual R&D spending before the incentive became financially worthwhile.

This is at odds with the scheme’s intent, which was to support early-stage innovators and firms with low or irregular R&D expenditure. Instead, smaller firms often:

Choose not to claim, even when eligible.
Face documentation requirements that outweigh the 15% credit.
Encounter heightened friction in software-related claims.

For precisely the firms the scheme seeks to support, the RDTI can be economically unattractive in practice, despite being available in theory.

Our fixed-fee model directly solves this problem:

NZ Tax Desk offers fixed-fee RDTI and RDTLC engagements, ensuring:

Claims are viable even for firms spending far less than $300k.
Early-stage and loss-making innovators can claim without fear of runaway costs.
R&D documentation systems are set up correctly from day one.
Clients maintain compliance confidence through complex SR reviews.

The evaluation makes clear that external advice is not just beneficial – it is often essential. Our structured, predictable pricing ensures smaller innovators are not locked out of the incentive. We don’t take a percentage of your claim, because R&D funding is for your innovation, not our commission.

8.0 What R&D-performing businesses should be considering now

The five-year evaluation of the RDTI makes one point very clear: navigating New Zealand’s R&D tax regime is complex, especially for smaller firms, software developers, and businesses without specialist tax capability. Many businesses interviewed for the evaluation reported that they struggled to interpret the rules, document uncertainty, and often needed external advice simply to understand what to record and how to present their R&D activities.

NZ Tax Desk can help. We offer fixed-fee RDTI and RDTLC advisory services, making claims viable even for low-spend businesses. We can draft all documentation (including General Approval submissions, activity descriptions, and Supplementary Returns), and ensure your claims are accurate, defensible, and optimised.

Contact us now to turn your innovation into tangible financial benefit.

Disclaimer:
The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both New Zealand tax rules and any relevant overseas tax systems before making decisions based on this content.

New Employee Share Option Rules

Thu, 23 Oct 2025 19:48:34 GMT

Why You Can Now Trigger Tax Without Exercising

New Zealand’s latest tax bill makes major changes to how Employee Share Schemes (ESS) are taxed, especially for options and deferred shares.

While the new rules are designed to help employees of unlisted and start-up companies manage cashflow and valuation difficulties, there is also a sting in the tail in these rules. It’s now clear that employees can suffer a tax cost on options, even if they are never exercised.

Current Rules: The Starting Point
Employees who receive shares under an ESS are taxed on the market value of the shares less any amount they pay for them.

That market value is measured at the “Share Scheme Taxing Date”, which is generally when:

The employee effectively owns the shares unconditionally, equivalent to other shareholders.
There is no material risk that beneficial ownership will change or that the shares could be transferred or cancelled.
The employee is not protected from a fall in share value.
There is no material risk that the terms of the shares will change in a way that impacts their value.

In short: it’s essentially the date the employee’s ownership becomes unconditional.

However, this causes practical problems:

Difficulty measuring the market value of unlisted shares.
Cashflow issues when employees must pay tax but cannot sell shares.
Employer reporting obligations under PAYE/ESS rules.

In terms of options, the historic shorthand has been “taxed when exercised, not when vested.”
That assumption no longer always holds true.

The 2025 Bill – New Deferral Election for Unlisted Companies
From 1 April 2026, it will be possible for employees of unlisted companies to elect to defer tax on ESS benefits until a liquidity event, when, in theory, the shares can be valued and sold more easily.

How it works:

The employer makes an election for certain shares to be “Employee Deferred Shares”.
The election is made at the time the shares are issued or transferred to the employee.
The Share Scheme Taxing Date is deferred to the earliest liquidity event, namely:
a listing of the company;
a sale or cancellation of the share; or
the payment of a dividend on that share.

At that point, the employee is taxed on the market value of the shares minus any amount paid for them.

Employer reporting and withholding obligations remain the same, the only change is the timing of the taxing date. Employers must also notify Inland Revenue when shares are designated as Employee Deferred Shares.

The key advantage of deferring the Share Scheme Taxing Date to a liquidity event is to align with cashflow. Employees are taxed when they can access funds — for example, on sale or IPO — rather than at an earlier point when the shares are illiquid and difficult to value. This also reduces the need for costly private valuations at vesting.

However, the trade-off is that tax is calculated on the market value of the shares at the time of the liquidity event (the new Share Scheme Taxing Date). If the company’s value has significantly increased, the taxable benefit, and therefore the tax liability, will also be higher.

This is an important trade-off for employees to consider. Employees may face a larger tax bill later, but they should have cash available from the liquidity event to fund that tax payment.

The Stinger – Change to the Definition of the Share Scheme Taxing Date
The legislation also includes a key change to the Employee Share Scheme Taxing Date, which could have a significant impact on companies with employees sitting on options.

From 1 April 2026, the Share Scheme Taxing Date occurs when:

Shares are held by or for the benefit of the ESS beneficiary; or
The beneficiary has an unconditional right to presently receive the shares.

The phrase “unconditional right to presently receive shares” refers to a point where the employee’s entitlement to the shares is no longer contingent on any remaining conditions, approvals, or future events — even if the legal transfer of the shares has not yet taken place.

In other words, the employee has done everything required under the scheme to earn the shares, and the employer (or trustee) is obliged to deliver them.

At that point, the employee’s right to the shares is enforceable, and Inland Revenue considers that they have effectively derived the economic benefit. This will trigger a tax obligation for the employee in respect of these options, even when they have not been exercised.

Inland Revenue’s reasoning is that once the right is unconditional, the employee has economic ownership of the shares and has effectively derived the ESS benefit, even if the paperwork or share register update follows later.

Employers should review their vesting and exercise provisions carefully.

Where the plan gives employees a present, unconditional right (for example, after a time-based vesting date with no further performance or employment conditions), the taxing point may occur automatically, even if the shares are not yet transferred.

These rules are intended to apply from 1 April 2026. If you have options in place now, or are designing an Employee Share Scheme, we recommend reviewing the terms prior to 1 April 2026.

Contact us to discuss how these changes could affect your tax position as a new or returning New Zealand resident with overseas investments.

Disclaimer:
The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both New Zealand tax rules and any relevant overseas tax systems before making decisions based on this content.

The New RAM and Extended RAM

Wed, 24 Sep 2025 20:48:49 GMT

What you need to know for new residents

The Taxation (Annual Rates for 2025−26, Compliance Simplification, and Remedial Measures) Bill includes the long-awaited proposed new taxation method for foreign investment fund (FIF) income: the Revenue Account Method (RAM). Alongside that is an expanded version, called Extended RAM. We outlined these changes back in March , and it is good to see they are now going through Parliament.

The new RAM options are intended to address valuation, liquidity, and double-taxation difficulties for new or returning migrants with overseas investments, or dual tax obligations.

Background
New Zealand’s Foreign Investment Fund (FIF) regime, introduced in the early 1990s to compensate for the absence of a general capital gains tax, was designed to prevent residents from escaping tax when they invested in offshore companies (notably US companies) that retained earnings rather than paying dividends. By taxing a deemed return on such investments regardless of whether income was received, New Zealand became an international outlier with a uniquely complex and often punitive system.

Over the decades, the FIF rules have created major problems for new residents, particularly US citizens who face double taxation because New Zealand taxes unrealised FIF income while the US taxes realised gains, without credit relief. These outcomes have repeatedly discouraged skilled migrants from relocating to New Zealand, highlighting the need for reform.

What is RAM?
The RAM (Revenue Account Method) is a method to calculate FIF income that is designed to be simpler and more familiar to many migrants: more akin to a realised gains model rather than taxing unrealised gains annually (as under some current methods). Its main features:

Effective from 1 April 2025 , eligible persons may elect RAM on an all-or-portfolio basis for eligible FIF investments.
Under RAM:
Taxpayers are taxed on 70% of realised gains (or losses). Gains on disposal of eligible FIF investments are discounted by 30%, then taxed at the individual’s marginal tax rate.
Taxpayers are taxed on dividend income in the year paid.
Losses on disposal can be claimed, but they are ring-fenced; i.e., they can be used only to offset gains under RAM, not other income. Excess losses can be carried forward.
Cash flow : Tax is only triggered when there is actual cash flow, through dividends or sale proceeds. This approach aligns more closely with common international tax practices, where tax is typically levied on actual gains or income.
Cost base / Valuation : When first applying RAM, the taxpayer must get a market valuation of the eligible shares at a particular date: the later of 12 months after acquisition, or when the FIF rules started applying, or the due date of their first return under which they use RAM. If obtaining a market valuation is very difficult or costly, a time-based apportionment method may be used.
Election and exit :
The taxpayer must elect RAM in the first year in which they have FIF income and want to use RAM. There are strict timeframes for this election. If no election is made, the default remains one of the existing methods (e.g. Fair Dividend Rate).
If they later choose to stop using RAM, there is a deemed disposal of all shares under RAM at market value. Once they switch out, they cannot re-elect to RAM.
Exit tax : If a RAM taxpayer ceases to be a New Zealand tax resident, they are deemed to dispose of all their RAM-eligible investments at market value just before departure. If the actual disposal happens within three years of becoming non-resident, New Zealand will continue to tax the disposal under RAM. It remains to be seen how this will work in practice.

Who can use RAM (Ordinary RAM taxpayers)
Not everyone will meet the eligibility criteria. To be an Ordinary RAM taxpayer:

The person must have become a New Zealand tax resident (excluding transitional residence) on or after 1 April 2024.
Before becoming resident, they must have been non-resident for at least five years.
Family trusts may also apply, if their principal settlor meets the above.

Also, not all FIF investments count under Ordinary RAM. Eligibility of each investment depends on factors like when it was acquired, whether it is listed or unlisted, and whether there is a redemption facility. Only those investments acquired pre-residency will be eligible. Investments must be in non-listed entities to be eligible under the Ordinary RAM Method. There are also restrictions if there is a redemption facility available, and anti-avoidance provisions apply.

What is Extended RAM?
Extended RAM builds on Ordinary RAM but offers greater flexibility, designed for taxpayers who are taxed in another country on the basis of citizenship or right of residence/work. It is aimed at reducing double taxation and making New Zealand’s tax treatment more attractive to globally mobile persons.

Eligibility for Extended RAM
To qualify as an Extended RAM taxpayer, one must:

Be eligible under Ordinary RAM (as above).
Also be liable to tax in another country on the disposal of shares (or similar investments) because of their citizenship or a legal right to live or work there. Importantly:
That other country must have a Double Tax Agreement (DTA) with New Zealand.
The liability in the other country must be on the basis of citizenship or right to work/live there (for example, US citizens or green card holders).
Family trusts: as with Ordinary RAM, a trust whose principal settlor meets the above may be eligible.

How Extended RAM differs from Ordinary RAM
Extended RAM provides additional benefits to eligible investors:

Broader class of FIF investments : Extended RAM taxpayers can apply RAM to all their FIF interests, regardless of when the investment was acquired and regardless of certain constraints (like whether the share is listed, whether there is a redemption facility, etc.). Ordinary RAM is more restrictive in this regard.
Transition and loss of eligibility : If Extended RAM eligibility is lost (for example, the person is no longer taxed overseas, or renounces the foreign citizenship/citizenship-based tax requirement), then there is a deemed disposal of investments that no longer qualify under Extended RAM. Those investments move into the Ordinary RAM regime (if they meet its criteria), or fall back to other FIF methods otherwise.

Comparison: Ordinary RAM vs Extended RAM
Here is a comparative table summarising the main differences:

Implications & Considerations

Double-taxation risk reduced : Extended RAM is particularly valuable for people who are taxed abroad or whose countries tax on citizenship (e.g. U.S.). This method is designed to align NZ’s tax system more closely with what, and when, these taxpayers are required to return as income elsewhere.
Attractiveness for migrants : These rules are intended to remove one disincentive for new migrants or returning New Zealanders with foreign investments, particularly investments that are hard to value or illiquid.
Complexity remains : While RAMs reduce some issues (e.g. annual valuation, liquidity pressure), there are still costs: obtaining valuations or applying apportionment, election process, tracking eligibility, managing deemed disposals when eligibility changes.
Expiry and switching : Once someone opts out of RAM, they cannot return. Likewise, extended RAM status can change (or be lost) triggering disposals and transitions.

Summary

These changes should better align tax with actual cash flows and investment outcomes, especially for early-stage or private equity-style investments, which are often held by professionals in the tech and start-up sectors.

However, it is important to remember that ultimately this method will still tax capital gains on these offshore investments, as well as taxing dividends. The Revenue Account Method should not be a default go-to for new residents, as some taxpayers may have more favourable outcomes with the existing FIF methods.

Contact us to discuss how these changes could affect your tax position as a new or returning New Zealand resident with overseas investments.

Disclaimer:
The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both New Zealand tax rules and any relevant overseas tax systems before making decisions based on this content.

Significant tax changes proposed for Digital Nomads in New Zealand

Fri, 29 Aug 2025 03:49:09 GMT

The recently introduced Tax Bill includes significant tax changes for remote workers, including surprising tax reforms granting digital nomads a brand-new tax concession intended to reflect the visitor visa conditions.

A New Tax Exemption for “Non Resident Visitors”
Currently the NZ tax residency rules are not aligned with immigration visa conditions, which has led to unexpected tax consequences for many visitors. Individuals who spend 183 days or more in NZ may be deemed tax resident from the first day of their stay. Likewise, salary earned from a non-resident employer could be taxable in NZ, without a foreign tax credit recognising tax paid offshore. We have worked with many individuals who have had significant and unexpected tax liabilities because of these rules.

The Proposal
A pivotal change is the introduction of a new “non-resident visitor” tax status which will provide an exemption from the 183-day test. Under the proposed law, individuals who meet the following requirements should not become NZ tax residents, despite their extended stay:
• are in NZ for 275 days or fewer within any 18 month period,
• were not NZ tax residents or transitional residents immediately before arrival,
• are lawfully present,
• are not receiving a family scheme entitlement, and
• remain tax residents of a foreign jurisdiction that imposes an income tax substantially similar to NZ’s.

This exemption lifts them out of the 183-day rule that would traditionally trigger tax residency.

Key Conditions:
• Work must be exclusively for overseas clients or employers.
• No on-site services to NZ individuals/businesses.
• Work must not require the person to be physically present in NZ.
• Must not undertake promotional work in NZ for NZ businesses.

Interestingly, the carve-out for work that requires a person to be physically present in NZ uses an example of an influencer. The influencer is required to be physically present in NZ for her work, for example, a travel blogger. Such a person would not qualify for the exemption.

Income Exemptions Clarified
Under the proposed rules, certain categories of income are explicitly exempt for non-resident visitors:
• Personal or professional services income earned while in NZ, provided it meets the non-resident visitor criteria.
• Business income earned by a non-resident business or self-employed person that might otherwise be sourced in NZ due to a visitor’s presence is also exempt, unless it arises from a permanent establishment.
• Income earned by a public entertainer is not covered by the proposed tax exemptions.

Importantly, the activities of a non-resident visitor will be disregarded when determining whether a foreign entity has a permanent establishment in NZ.

These proposals should ensure that remote work for foreign clients doesn’t inadvertently trigger NZ tax or permanent establishment issues.

GST Registration Becomes Optional
The Bill also proposes making GST registration optional for remote workers providing zero-rated services to overseas clients, even if their (zero-rated) turnover exceeds NZD 60,000.

Looking Ahead
If enacted from 1 April 2026, these proposals represent a significant shift in how New Zealand taxes visiting individuals and their non-resident employers. By aligning the tax rules with the conditions of visitor visas, the reforms introduce a welcome simplification and surprising tax relief.

If you’re a remote worker, digital nomad, or employer wanting to understand how these changes may affect you, get in touch.

Disclaimer:

The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both US and NZ tax systems before making any decisions based on this content.

FBT Reform: Where Are We At Now?

Mon, 28 Jul 2025 08:29:33 GMT

Double Cab Utes, Perk Vehicles, and the End of the Exemption Era

As outlined in our earlier article , the Government advised in the Budget it intended to proceed with the proposed reforms to Fringe Benefit Tax (FBT), with the most headline-grabbing change being the removal of the work-related vehicle exemption, commonly referred to as the “double cab ute exemption.” These changes are part of a broader FBT overhaul first signalled in Inland Revenue’s consultation paper and later confirmed in the fine print of Budget 2025.

In an interview with Ryan Bridge on The AM Show *, I highlighted the practical implications for employers, particularly fleet owners, tradies, and small business owners, who have long relied on the exemption for vehicles used for business but also driven home. Since then, Inland Revenue has advised that they have been working to refine the proposals, seeking a balance between administrative simplicity and policy integrity. In my view, the proposed tweaks, if adopted in legislation, should work well to address the issues, bring the FBT rules up to date with how businesses own and run vehicles today, and compensate for the loss of the work-related vehicle exemption.

What’s Changing?
The current FBT regime is widely regarded as outdated, overly complex, and out of step with how modern businesses operate. The key focus of reform is motor vehicle benefits, where the treatment of “availability for private use” rather than actual use has led to disputes, confusion, and avoidance opportunities.

The proposals included:

The work-related vehicle exemption will be repealed, ending a long-standing concession that allowed certain business vehicles, most notably double cab utes, to be largely excluded from FBT.
FBT will shift to a usage-based framework, categorising vehicles into four tiers based on their level of private use, with set FBT rates for each.
The PERC threshold (Private Employee-Related Car rule) is being discussed, providing clarity for major shareholder-employees who use high-value utes for legitimate business needs (e.g. towing equipment).
The introduction of the incidental travel rule.

Valuation and Reporting Changes
Other important shifts include:

Logbooks are out. Instead of maintaining day-to-day records, vehicle use will be reassessed every four years using market valuation data (e.g. AA reports).
Tax book value methods will be scrapped, with external valuations now forming the basis of FBT.
Fuel-type differentials will apply — EVs and hybrids may attract reduced FBT rates due to their lower running costs.
A new weight threshold of 4,500 kg (up from 3,500 kg) will better reflect modern ute and SUV sizes.

Refined Category Structure
One of the biggest issues was with the proposed Category Structures. The proposals categorised vehicle use into three groups, but there were two key issues with these categories:

A vehicle driven by a shareholder-employee, with a cost of $80K or more (a PERK vehicle), could only be a category 1 vehicle, meaning it would be subject to FBT 100% of the time.
As soon as a vehicle is available for use in the weekend, it would be a category 1 vehicle, meaning it would be subject to FBT 100% of the time.

Although not publicly available, I believe the Inland Revenue has made progress on these issues and I’m confident they will be resolved, provided the Revenue’s current recommendations are adopted in legislation.

Political Uncertainty
While the proposals have been well-signalled, there is still no clear implementation date. Following a media storm, the Government has commented that the reforms are still under ministerial consideration. We understand that legislation is being drafted, but ministers are reviewing whether and when to proceed.

Final Thoughts
The removal of the work-related vehicle exemption will fundamentally change how many businesses approach vehicle use, procurement, and remuneration. While the aim is simplification, there is potential for confusion as businesses adjust to the new rules — particularly around what constitutes Category 2 vs. Category 3 use, and whether vehicles require signwriting.

Employers should start preparing now by reviewing their vehicle fleets, identifying potential exposure, and considering whether adjustments (e.g. branding, usage policies, or vehicle pooling) might be required to maintain compliance or reduce FBT costs.

For further advice or help modelling the impacts of these changes, feel free to get in touch.

*Interview at 1:08-1:13 in the recording.

Disclaimer:

R&D Tax Incentive (RDTI) - Deadline Approaching

Wed, 04 Jun 2025 22:03:12 GMT

The Deadline is Approaching for FY25 General Approval Applications

If your business is undertaking research and development activities and has a 31 March 2025 balance date, then 30 June 2025 is the final deadline to submit your General Approval (GA) application for the Research and Development Tax Incentive (RDTI). This deadline is now just around the corner.

What Is the R&D Tax Incentive?

The RDTI is a government initiative that offers a 15% tax credit on eligible R&D expenditure. Its purpose is to support innovation by helping New Zealand businesses offset the cost of developing new or improved products, processes, or technologies.

The regime applies to a wide range of industries — including software development, engineering, manufacturing, agritech, life sciences, and more — provided the activities meet the legislative definition of eligible R&D.

Key features include:

15% tax credit on eligible R&D expenditure
Refundable credit for businesses in loss (subject to caps and criteria)
Applies to R&D conducted in New Zealand

Why You Need a General Approval

To claim the RDTI, you must have a General Approval (GA) in place. This application outlines your core and supporting R&D activities and is reviewed by Callaghan Innovation and Inland Revenue.

Having this in place before or during the income year gives your business certainty — you can proceed with your investment in innovation knowing the activities will qualify for the tax credit.

If you haven’t yet submitted a GA application for the 2025 income year, you still have time — but the 30 June 2025 deadline is final for businesses with a 31 March balance date. If approved, the General Approval can apply for up to three years, allowing you to streamline future claims.

GA application deadline for 31 March 2025 year-end: 30 June 2025

Note: If you have a non-standard balance date, your GA deadline may differ. Please contact us to confirm your specific due date.

Our Advice

If you’ve invested in innovation, product development, software, or scientific experimentation in FY25 — or if you’re planning to — now is the time to ensure you’re eligible to claim under the RDTI.

We are a specialist R&D tax team with deep expertise in New Zealand’s RDTI regime. We’ve helped businesses across a wide range of industries — from engineering to biotech to SaaS — secure substantial R&D funding, often in the hundreds of thousands of dollars.

Our clients choose us for our:

Technical depth and understanding of IRD’s eligibility criteria
Ethical, fixed-fee pricing model — no % of your claim
Flexible, low-touch process — so you can stay focused on growing your business

Whether you need end-to-end support or just help with the General Approval, we can tailor our involvement to suit your needs. We’ll handle the complexity, engage with your team as required, and ensure your application is accurate, compliant, and optimised for success.

If you think your business may qualify for the RDTI but haven’t yet submitted your General Approval — contact us today. We’ll help you assess eligibility, prepare your application, and unlock the full benefit of the incentive.

Disclaimer:
The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both US and NZ tax systems before making any decisions based on this content.

FBT Reform: Government Confirms FBT Changes for Motor Vehicle Benefits Will Proceed

Wed, 28 May 2025 03:04:33 GMT

The end of the Work Related Vehicle FBT Exemption.

Last week’s Budget included in the fine print an intention to go ahead with the proposed FBT changes. Those proposals were announced recently in an Inland Revenue consultation document and signalled a significant overhaul of the FBT regime. The proposed changes, particularly around motor vehicles, represent a major shift in how FBT will be calculated and reported.

While the fine print is still pending, one headline change is already sending ripples through the business and accounting communities: the removal of the work-related vehicle exemption — a rule that has been extensively used (and loved) for decades.

Another significant issue raised by the proposals is the potentially punitive treatment of major shareholders of close companies with vehicles costing over $80,000.

What Was Announced?

The proposed changes represent a significant overhaul of a regime widely considered overdue for reform.

These proposals follow the 2022 FBT regulatory stewardship review, which found the current rules overly complicated, overly punitive in their anti-avoidance goals, and out of step with modern business practices, particularly when it comes to motor vehicles, a key focus of the reform.

A Key Casualty: The Work-Related Vehicle Exemption

The removal of the work-related vehicle exemption is potentially one of the most consequential aspects of the reform. Inland Revenue has noted widespread misconceptions about this exemption, often referred to as the “double cab Ute exemption”, which many assumed provided full FBT relief for such vehicles.

What remains unclear is how employers will now calculate FBT on the private use component of these vehicles. Will these vehicles now be treated as Category 1, with FBT applied to 100% of their value? The reforms aim to simplify, but this change may create new grey areas and complexities for employers.

That said, the proposals do hint at some relief: vehicles with genuinely minimal private use, such as pool vehicles, could be exempt or taxed under a concessionary approach, possibly removing many low-risk arrangements from the FBT net.

Recap: Key Motor Vehicle FBT Proposals

Among the most complex and widely criticised areas of the FBT regime is the treatment of motor vehicles. The current system taxes employers based on a vehicle’s availability for private use, not actual usage, requiring logbooks, declarations, and complex calculations.

Key proposed changes include:

1. Increased Vehicle Weight Threshold:

Reflecting the increased weight of modern vehicles, the FBT weight threshold for defining a car will rise from 3,500 kg to 4,500 kg.

2. Valuation Method Reforms:

The option to use the tax book value to determine the value of a motor vehicle would be removed.
Instead, the vehicle's FBT value would be calculated using external sources (e.g. data from the Automobile Association).
These values would be re-calculated every four years to reflect depreciation and market conditions.

3. Optional Fuel Type-Based Valuation – Vehicle Categories with Fixed Rates:

New fringe benefit rates will apply depending on the fuel type of the vehicle, reflecting the vehicle’s environmental and economic characteristics, and calculated as a percentage of the vehicle’s cost price:

Standard ICE vehicles would attract one rate
Hybrids and electric vehicles may receive discounted rates to reflect lower operating costs.

4. Simplified Accounting for Private Use:

The requirement to maintain logbooks to track days when a vehicle is unavailable for private use would be removed. This would instead be captured during the vehicle's four-year valuation recalculation cycle.

5. Usage-Based FBT Categories:

A major change is the introduction of a new method to determine taxable value based on how the vehicle is used, rather than its type. The proposal categorises vehicle use into three groups.

Category 2 and 3 vehicles may display employer branding, and Category 3 must have it.

For major shareholders of close companies, use of Category 2 or 3 would only be allowed for vehicles with a cost base under $80,000. Vehicles over $80,000 would have to use Category 1 – 100%.

6. New Concept – Incidental Travel:
The proposals introduce "incidental travel", defined as ad hoc, short-duration, non-remunerative, and irregular vehicle use, which may be ignored for FBT purposes, reducing unnecessary reporting for minor, one-off use cases.

What This Means for Accountants
The Government is moving forward with a landmark FBT reform, with motor vehicle benefits front and centre. The long-standing work-related vehicle exemption, particularly the commonly used double cab ute exemption, is set to be scrapped, marking a fundamental shift in how business vehicles are taxed.

Accountants will need to:

Assist clients with the transition and possible revaluation of existing vehicles.
Evaluate which method (prescribed or current) delivers the best tax outcome under the new rules.
Review internal systems for data capture and reporting, especially if IR proceeds with proposed enhancements to digital reporting via myIR.

If you’d like to understand how these FBT changes may impact your business or clients, please contact us .

Disclaimer:
The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both US and NZ tax systems before making any decisions based on this content.

R&D Tax Loss Cash-Out Deadline Approaching

Mon, 14 Apr 2025 00:05:55 GMT

If your business is carrying out research and development (R&D) work, you may be eligible to receive a cash payment from Inland Revenue— however there is limited time to act if you want to claim this for FY24.

The deadline to apply for the R&D Tax Loss Cash-Out for the 2024 income year is 30 April 2025 (assuming you have a March balance date and an Extension of Time). If you miss this date, you lose the opportunity to turn your tax losses into cash—even if you fully qualify.

We’ve had clients successfully claim up to $500,000 in cash refunds under this regime—don’t miss the opportunity to access funding that could support your next stage of innovation.

What is the R&D Tax Loss Cash-Out?

The R&D Tax Loss Cash-Out allows qualifying companies to receive a cash refund of up to 28% of their eligible R&D-related tax losses instead of carrying those losses forward. It's designed to support innovative New Zealand businesses who are investing heavily in new ideas but are not yet making a profit.

This incentive has already helped many of our clients unlock early-stage cash flow, including:

An engineering firm developing a new kind of feed wagon with enhanced efficiency and modular design.
A technology company applying nanobubble technology in a novel, previously untested way to enhance system performance and efficiency.
A dairy equipment manufacturer creating a new mastitis spray system to reduce labour and increase effectiveness.
A biotech start-up researching new cancer drug candidates.
A company designing cutting-edge scientific research equipment.

If your business is involved in resolving scientific or technological uncertainty—for example, testing whether something will work in practice, or building a prototype you can't yet confidently replicate—there’s a good chance you're conducting eligible R&D.

Key R&D Criteria (Do You Qualify?)

To qualify, the R&D activity must:

Be aimed at creating or improving products, processes, or services.
Involve uncertainty—you must not already know how to achieve the result using existing knowledge.
Be conducted by a New Zealand tax-resident company that is loss-making.

Eligible expenses may include R&D labour, materials used in trials, prototype costs, testing, and certain overheads.

Don’t Miss Out – Here’s What Needs to Happen

To claim the R&D Tax Loss Cash-Out for the year ending 31 March 2024 the R&D tax loss cash-out application must be submitted by 30 April 2025.

If you miss this deadline, you forfeit the right to claim—even if you fully meet the criteria.

How We Can Help

We’ve helped a wide range of clients—from tech start-ups to farmers and engineers—successfully claim the R&D tax loss cash-out. When it comes to R&D claims, experience matters, we’ve seen first-hand the costly mistakes made by less experienced or overly aggressive advisers. We are genuine R&D tax specialists, and we take the time to get it right, ensuring your claim is both compliant and optimised.

We can assist you with:

Confirming whether your activity qualifies as eligible R&D.
Reviewing and categorising your R&D expenditure correctly.
Completing and lodging your income tax return and application on time.
Ensuring your documentation and labour records meet IRD requirements.
Planning for future claims under both the R&D Tax Loss Cash Out and the R&D Tax Incentive regimes.

Final Reminder: Applications must be submitted by 30 April 2025

We recommend getting in touch with us before the deadline, so we have time to assess your eligibility, prepare your records, and lodge your claim with Inland Revenue.

If you think your business is doing innovative or technical work—even if you’re not sure it qualifies— contact us today. We’d love to help you make the most of this opportunity.

FIF Reform Brings Relief for US Citizens Living in NZ

Tue, 25 Mar 2025 04:56:13 GMT

Among the biggest winners from the Government’s proposed Foreign Investment Fund (FIF) reforms are likely to be US citizens living in New Zealand. The proposed Revenue Account Method, which is set to take effect from 1 April 2025, offers significant relief from the sometimes harsh and often unfair outcomes created when the US and NZ tax systems collide.

The Double Tax Problem for US Citizens

Unlike most countries, the United States taxes individuals based on citizenship, not residency. This means that US citizens remain fully taxable by the IRS no matter where in the world they live. When they become New Zealand tax residents, they are subject to NZ’s FIF rules – which tax unrealised gains each year.

The problem is that these deemed gains are not recognised by the US tax system, which only taxes actual income or realised gains. This mismatch creates a common scenario where a US citizen in NZ pays tax to New Zealand on phantom FIF income (including unrealised capital gains) but then pays US tax again when the investment is eventually sold – with no US tax credit for the NZ tax already paid. The result is real, permanent double taxation.

How the Revenue Account Method Helps

The proposed Revenue Account Method addresses these challenges by bringing New Zealand’s tax treatment of FIF investments more in line with the US tax system, as it only taxes:

Tax is only triggered when dividends are received or capital gains are realised, allowing US citizens to align taxable events across both jurisdictions.
Capital gains are only partially taxed in NZ (70%), and foreign tax credits may be available in the US when realisation occurs (US tax advice will be required).

For example, under current rules, FIF income is often calculated using the Fair Dividend Rate (FDR) method – which taxes 5% of the opening value of most foreign shares annually, even if no income is actually received. While this is straightforward from a compliance perspective, it does not align well with US capital gains tax rules, which only tax gains when they are realised.

This mismatch can lead to several problems:

Double taxation : US citizens in New Zealand can be taxed on notional income under the FIF regime that doesn’t correspond to any US tax liability, meaning no foreign tax credit is available in the US.
Compliance complexity : The requirement to use different tax bases (realisation for US purposes, deemed accrual/unrealised gains in NZ) creates extra complexity for reporting and record-keeping.
Cash flow issues : As no cash is received under FDR (and potentially CV), taxpayers may be forced to fund NZ tax from other sources or liquidate investments earlier than intended.
For US citizens holding private equity, start-up shares, or unlisted interests acquired prior to NZ tax residency, this new method could make a substantial difference. It removes the need to fund NZ tax liabilities out of pocket for income never actually received.

The new Revenue Account Method should be especially attractive to US citizens holding equity in start-ups, employee share schemes, or private investment vehicles, where growth potential is high but cash flow is minimal.

See our more detailed article on the new Revenue Account Method here.

Planning Tips for US Citizens and Advisors

If you or your clients are US citizens becoming NZ tax residents, consider the following planning steps:

Document asset values on entry : For investments eligible for the Revenue Account Method, the cost base will be the value at the time NZ tax residence begins. A formal valuation may be required to substantiate this.
Review eligibility : Confirm that the taxpayer became fully tax resident in NZ on or after 1 April 2024 and that investments were acquired before residency (or pursuant to pre-residency arrangements).
Coordinate with US tax advisors : Cross-border alignment is key. A coordinated strategy that considers both US and NZ tax consequences will reduce surprises and improve outcomes.

Disclaimer:
The information provided in this article is general in nature and does not constitute personalised tax advice. You should consult with a qualified tax adviser familiar with both US and NZ tax systems before making any decisions based on this content.

Proposed Foreign Investment Fund (FIF) Changes

Tue, 25 Mar 2025 04:47:11 GMT

A Welcome Boost for Migrants and Returning Kiwis

The Government has recently announced proposed changes to modernise the Foreign Investment Fund (FIF) rules, aiming to make New Zealand a more attractive place to live and invest for skilled migrants, returning New Zealanders, and internationally mobile professionals. Announced on 12 March 2025, the proposed changes are designed to ease tax burdens that have previously acted as a barrier to relocation.

Why does NZ have FIF Rules?
New Zealand introduced the Foreign Investment Fund (FIF) regime in the early 1990s as a response to a structural gap in our tax system — the absence of a general capital gains tax. The concern was that New Zealand tax residents investing in offshore companies, particularly US-based ones known for retaining earnings rather than paying dividends, could effectively escape tax altogether: no tax on dividends (because none were paid) and no tax on capital gains (because we don’t generally tax gains on sale). To plug this gap, the FIF rules were brought in to tax a deemed return on these investments, regardless of whether income was actually received.

New Zealand was something of a guinea pig - the idea was that other countries would follow suit, but they didn’t, leaving us with a complex and often punitive regime unique in the world. The rules have remained largely unchanged for decades and have caused significant issues for globally mobile individuals. In particular, US citizens have borne the brunt, as they continue to be taxed by the US on realised capital gains, but without being able to claim a credit for the tax they’ve already paid to New Zealand on unrealised FIF income — often leading to costly double taxation outcomes.

It is fair to say these rules have proved an impediment to migration to New Zealand time and time again.

Policy Context and Ministerial Commentary
Speaking at the NZX Investment Summit, Revenue Minister Simon Watts acknowledged that current FIF rules have deterred international talent and capital from relocating to New Zealand. The existing regime, which often taxes unrealised gains, was seen as penalising migrants simply for choosing to settle here.

The changes are part of a broader government strategy to support innovation, retain talent, and create a globally competitive tax environment that can keep pace with modern economic realities. The proposed changes are expected to apply from 1 April 2025, subject to legislative process.

What’s Changing – The Revenue Account Method
At the centre of the reform is a new Revenue Account Method. This method is designed to be a more cash-flow-aligned way of taxing offshore investments.

Under the proposed rules, eligible individuals will be able to elect into the Revenue Account Method, which calculates taxable income from FIF interests as:

Dividends received, plus
70% of any realised capital gains

Key features:

Losses can also be recognised, with 70% of any realised loss available to offset taxable income (ring-fenced)
Tax is only triggered when there is actual cash flow – through dividends or sale proceeds
It is an optional method – existing methods such as FDR and comparative value can still be used

This approach aligns more closely with common international tax practices, where tax is typically levied on actual gains or income.
These changes should better align tax with actual cash flows and investment outcomes, especially for early-stage or private-equity-style investments, which are often held by professionals in the tech and start-up sectors.

Who Can Use the Revenue Account Method?
The method will be available to:

New migrants who become fully New Zealand tax resident on or after 1 April 2024
Returning New Zealanders who have been non-resident for a minimum period (likely less than 10 years, but exact timeframe to be confirmed)
Trusts, where the principal settlor would meet the above eligibility

Which Investments Are Covered?
In most cases, the Revenue Account Method can only apply to:

Unlisted FIF interests, and
Interests that were either acquired before becoming New Zealand resident, or under arrangements entered into pre-residency

However, individuals who remain subject to citizenship-based taxation (such as US citizens) will be able to apply the method to all their FIF investments. This is especially beneficial for US taxpayers living in New Zealand, who often face complex interactions and double taxation between US and NZ tax rules.

If a Taxpayer Leaves New Zealand
If someone using the Revenue Account Method ceases to be a New Zealand tax resident, an exit tax may apply. This would deem a disposal of their qualifying FIF interests at market value immediately before departure. This mechanism is consistent with international practices and captures tax on gains accrued while the individual was resident.

Example – Bart: A Returning Kiwi in Tech
Scenario: Adam, a 37-year-old Kiwi, is the CTO of a successful US-based start-up. He owns a 1% stake (worth NZ$2 million) in the company, acquired under an employee share scheme. He also holds a portfolio of US-listed shares worth NZ$50,000. Adam is considering relocating back to New Zealand but continuing to work remotely.

Current Rules: Under the FIF regime, Adam would be taxed annually on 5% of the opening value of his foreign shares. In the 2026–27 income year, this would result in NZ$100,000 of notional income, despite no dividends or realisation. At a 39% tax rate, he would face a tax bill of NZ$39,000, likely requiring him to use his salary or borrow to fund the liability.

Proposed Method: Under the Revenue Account Method, Adam would only be taxed if his shares pay dividends or are sold. If sold, he would be taxed on 70% of the capital gain, with the cost base reset to the share value when he became NZ tax resident. This approach proves to be helpful for individuals holding equity in growth-stage businesses.

What the Professional Community Is Saying
There is general agreement that the proposal represents a positive and necessary shift in how New Zealand taxes foreign investments for new residents.

The introduction of a method that taxes actual income – rather than notional returns – should be particularly useful for clients with illiquid or high-growth equity holdings, where the value may be significant on paper but difficult to monetise in the short term.

At the same time, the FIF regime remains a complex beast. There is still work to do to simplify the FIF regime overall and ensure that New Zealand’s tax system is fully aligned with the realities of a globally mobile workforce and investor base.

Next Steps
The proposed changes are expected to be included in a tax Bill introduced in the second half of 2025.
We expect the Inland Revenue will release more detailed guidance closer to the time, including technical aspects such as valuation requirements, transitional rules, and application processes.

If you have questions about how these proposed changes may affect you, please get in touch with the team at NZ Tax Desk — we’re here to help.

Disclaimer: The information in this article is provided for general informational purposes only and does not constitute tax, legal, or financial advice. While every effort has been made to ensure accuracy at the time of publication, the content may be subject to change as legislation develops. We recommend seeking professional advice specific to your circumstances before making any decisions or taking action in relation to the matters discussed.

GST Net Deadline Approaching

Mon, 24 Feb 2025 20:48:35 GMT

Act Now: Help Your Clients Remove Properties from the GST Net Before the Deadline

We all know clients that have wanted to register for GST to either claim the input tax credit, or to ensure a purchase can be zero rated. But there are plenty of examples of grey areas where those assets may not have been fully utilised in the taxable activity. Any asset used in a taxable activity is subject to GST on sale in full. And previously, there was no ability to elect to keep an asset out of the GST net.

This position caused a raft of headaches for taxpayers, advisors, and even the IRD. When this issue was finally resolved, enabling taxpayers acquiring new land to elect to keep it out of the GST net, the Government also included a transitional rule. The transitional rule allows taxpayers, who may have relied on this earlier position, or in any case claimed GST or zero rated a purchase, to repay the GST and elect to get the asset out of the GST net before 1 April 2025.

If they haven’t claimed GST, or had a zero-rated purchase, they can simply elect to keep the asset out of the GST net.

Who to consider?

Are your clients GST registered for an activity that directly or indirectly involves their holiday home, lifestyle block, home, or another appreciating asset? If so, they may need to act before 1 April 2025 to remove these assets from the GST net and avoid a significant future tax bill.

Some clients may have registered for GST because they provide short-stay accommodation, lease land, or use part of their home for business purposes. Whether they claimed all, or part, of the GST when they purchased the asset, if the asset has been used in the Taxable Activity, the Inland Revenue will treat the future sale as a GST taxable supply, potentially leading to a large and unexpected tax liability.

Adding to these concerns, the App Tax, introduced on 1 April 2024, now requires online platforms such as Airbnb to charge and account for GST on short-term rental bookings—even if the homeowner is not GST registered. Unfortunately, we have heard that some platforms are now requiring homeowners to register for GST to continue listing their properties, which could unintentionally bring appreciating assets into the GST.

There is an ability to repay the GST and remove the assets from the GST net, however the deadline is fast approaching. The client will need to repay the GST and notify the IRD by 31 March 2025.

Eligibility Criteria:

In order to make this election, the client must meet the following requirements:
The asset was acquired before 1 April 2023.
The asset was not acquired for the principal purpose of making taxable supplies.
The asset was not primarily used for making taxable supplies.
GST input tax credits were previously claimed, or the asset was acquired as a zero-rated supply.

Who could this help?

Accountants should help clients assess whether this rule applies to:

Holiday homes that generate short-stay rental income but are primarily used for private purposes.
Lifestyle blocks used partly for private purposes but also for GST-taxable activities.
Homes with a home office where GST was claimed on the purchase price or improvements.
Mixed-use properties , such as businesses that own residential land within a larger holding.

How to Make the Election

To remove these assets from the GST system, clients must formally elect to do so before 1 April 2025 by notifying Inland Revenue. The best way to do this is to submit a letter via myIR no later than 31 March 2025.

Urgent Action Required

The window to act is closing, and no extensions will be granted.

If your client’s holiday home, lifestyle blocks, home offices, or other appreciating asset is caught in the GST net, now is the time to act. Once the deadline passes, these properties will remain subject to GST on sale.

Income tax treatment of loyalty points and rebates

Wed, 15 Jan 2025 23:29:54 GMT

As tax advisors, we know there has long been contention around the tax treatment of loyalty points and rewards. We have seen numerous times how large these benefits can actually be. It’s an issue that has largely been overlooked, and something that clients have certainly not wanted to know about.

The Inland Revenue (IRD) on its Questions We've Been Asked page, (QBA) has recently released one on “What is the income tax treatment of gift cards and products provided as trade rebates or promotions” [PUB 00462]. And it appears the free for all may be over.

Trade Customers:

Trade customers will often spend large sums of money with a supplier. In return, the supplier may provide gift cards or products under a trade loyalty scheme. The QBA includes Inland Revenue guidance on the tax treatment of these gift cards and products provided.

Gift Cards:

The face value of gift cards received is considered income, and taxable to the recipient (‘Trade Customers’).

The cards may be used by the company, however they are often used by shareholders, or “gifted” to employees.

• Tax treatment when gifted to employees:

Here there is a distinction been “open-loop cards” and “closed-loop cards”. This distinction determines the tax treatment when these benefits are provided to employees.
An open loop card is a payment card that is part of a widely accepted financial network, such as Visa. It can be used at any merchant or location that accepts the card’s payment network. For example, a Visa Pressie Card is a prepaid Visa gift card that can be used anywhere Visa is accepted. For tax purposes, an open-looped card is generally treated as the equivalent to cash.
Closed-loop cards are cards that are restricted to specific merchants, or groups of merchants. They can only be used within a defined system, such as a specific store, chain or brand. For example, a gift card for a particular retailer, like a Starbucks or Warehouse gift card. For tax purposes, these are generally not considered as an equivalent to “money” as their use is limited. They are typically treated as a non-cash benefit for tax purposes.
Open Loop Cards: These are treated as money. When provided to non-shareholder employees, they are considered employment income, subject to PAYE. In most instances this will be treated as extra-pay. The Trade Customer (employer) will need to gross up the face value of the open-loop card (as the face value is the amount of money actually received by the employees) by the applicable PAYE rate and pay the PAYE on that value to the IRD.
For shareholder-employees, the tax treatment depends on specific elections made regarding their income. If they are paid via shareholder salaries (non PAYE), the amount received should not be subject to the PAYE and will instead be taxable in the shareholder-employee’s tax return. Alternatively, if the shareholder has not elected to be paid via a shareholder salary, the open-loop card will be subject to the PAYE rules.
Closed Loop Cards: These are not considered money. When provided to non-shareholder employees, they are classified as unclassified fringe benefits, subject to Fringe Benefit Tax (FBT), considering applicable thresholds. For shareholder-employees, they are treated similarly unless designated as dividends.

Products:

Income Treatment: The realisable value of products received is considered income, and taxable. The IRD uses the example of a microwave provided as a trade rebate which can be sold by the Trade Customer. In that instance the money’s worth of the microwave is the price the Trade customer would receive for the microwave if sold, i.e. this may be its value on the second-hand market.
Depreciation: No depreciation deduction is available for these products, even when used in the business.
Gifted to employees:
When provided to non-shareholder employees, products are unclassified fringe benefits, with FBT payable based on market value, subject to thresholds.
For shareholder-employees, they are treated similarly unless designated as dividends.

Deductions:

Unfortunately, the QBA states the Trade customer cannot claim a deduction for the trade rebate products (or gift cards) because they incur no direct expenditure to obtain these rebates. Deductions are allowed only for the cost of the goods and services purchased from trade suppliers, not for the rebates received.

Likewise, there is no depreciation deduction for products received. Even if the trade rebate products would otherwise qualify as depreciable property, the Trade Customer cannot claim a depreciation deduction. This on the same basis, because the Trade Customer incurs no acquisition cost for the products, there is no ability to depreciate the product.

The IRD concept seems aligned to a rebate or discount scenario. For example, where the Trade Customer has paid $100 for a product, but receives a benefit back of $10, they should only be taking a net deduction of $90 for the product purchase, being the net economic cost to the business. As the Trade Customer has already taken a deduction for the $100, then they would not get another deduction for the $10 benefit used in the business.

However, I’m concerned about the accuracy of this position where the Trade Customer uses the benefit or product in the business. Using this same example:

The Trade Customer has already taken the deduction for the $100 purchase, but the economic cost was $90 (and likely the benefit received from the initial purchase).
Instead of reducing the cost/deductible expense, the $10 has come in as income to offset the $100, thus reducing their “cost” (net deduction) to $90.
Therefore, when they then use that $10 benefit in the business, they should get the deduction for the extra $10.
i.e. they have incurred $100 of business expenditure and should therefore get a deduction for the full $100 (being the actual expenses incurred, and likely the true value of the benefits received).

A deduction is available for FBT and PAYE paid.

Thoughts

Not addressed specifically in the QBA is the treatment of rewards “points”, but presumably the tax treatment would follow.

I’m concerned that the Trade Customer is required to treat the benefits received as taxable income but does not get a deduction. Where this benefit is then passed on to e.g. a shareholder employee – that shareholder employee also receives a taxable benefit. Not only is this resulting in double tax, but the IRD examples explicitly refer to a liability for shortfall penalties on “the omitted business income”, and also for non-payment of FBT, PAYE.

There is also a need for guidance on the GST treatment.

IRD’s next steps?

Although the QBA refers to an “increasing practice” of trade suppliers providing rebates and cards, these arrangements have been around for a very long time. In the last building boom, the value of these benefits paid out was eye watering.

I saw an audit of this type of arrangement well over ten years ago. At that time, the IRD determined the value of the benefits received were taxable. Luckily, in that case although the shareholder had “used” the benefit, the value could be put through their current account as drawings.

The IRD's next step could be a fully-fledged project to find these benefits. We know they have previously been through Reward Provider databases, so finding this information will not be difficult.

If you have a potential issue or concern, or have a client with a potential issue, 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.

Common FBT and GST Questions

Thu, 28 Nov 2024 22:14:40 GMT

As accountants, you're often confronted with specific scenarios regarding Fringe Benefit Tax (FBT) and Goods and Services Tax (GST) that can present challenges for clients, particularly close companies and businesses providing non-monetary benefits. Below are answers to some common questions, aimed at clarifying these situations.

1. FBT on Company Vehicles Provided to Shareholders

For many close company clients, a common practice involves making a company vehicle available to shareholders, which triggers FBT liability. It is common to put through a shareholder reimbursement that effectively eliminates the fringe benefit, i.e. the calculation is generally 20% of the purchase price of the vehicle. A typical journal entry for each GST period might include:

Debit : Current account (shareholder contribution)
Credit : Company income (equal value of the benefit)

This structure arguably ensures no net benefit exists for FBT purposes.

Question: Is it necessary to file a NIL FBT return, and can it be filed annually if the criteria are met?

Yes, even if shareholder contributions reduce the FBT liability to zero, an FBT return is still required as there is technically a fringe benefit being provided. If the client qualifies, this can be done annually, provided the company meets the IRD’s filing criteria.

Many businesses overlook this technical requirement, making it a potential area of compliance focus for the IRD.

2. Gift Vouchers for Employees

Question: Are gift vouchers 100% deductible for the employer, subject to FBT? Can GST be claimed on the cost of the vouchers?

Deductibility : Yes, gift vouchers are fully deductible to the employer for income tax purposes.
FBT Liability : FBT applies to non-cashable gift vouchers. You may also consider whether they fall under the de minimis exemption for FBT. However, if a gift voucher can be exchanged for cash, it is treated as a PAYE payment rather than FBT.
GST : GST is generally not claimable on the purchase of vouchers because the GST supply occurs when the voucher is redeemed, which is typically for private purposes. As such, the issuer of the voucher does not charge GST to the employer, so there is no GST to claim.

3. Gift Vouchers for Business Contacts

Question: Are gift vouchers for business contacts 100% deductible unless they are for food and drink? Can GST be claimed in either case?

Income Tax Deduction : Yes, gift vouchers for business contacts are generally deductible unless they include food or drink, in which case the entertainment rules apply, reducing deductibility to 50%. While some tax advisors argue that entertainment rules should only apply if there is a private benefit or ‘entertainment’ element for the taxpayer, the IRD’s position remains firm: any gift of food or drink is subject to the entertainment rules, regardless of the taxpayer’s enjoyment or consumption of the benefit. I do question this as the entertainment rules are designed to make the private portion of any ‘entertainment’ non-deductible. If you are making gifts to clients and not and not ‘enjoying’ or ‘consuming’ any of the benefit, arguably the entertainment rules should not apply. However – that is clearly not the IRD position, the IRD expects any client gift that comprises food or drink to be subject to the entertainment rules.
GST Treatment : Similar to the employee voucher scenario, GST is generally not claimable on gift vouchers at the time of purchase because no GST is charged by the issuer of the voucher. The GST supply occurs when the voucher is redeemed, which means there is typically no GST to claim upfront.

These scenarios illustrate common issues that arise regarding FBT and GST, especially for close companies and businesses offering employee benefits or client gifts. Ensuring that clients are aware of their filing obligations and clarifying tax positions on deductions and GST will help prevent compliance issues and optimise their tax outcomes.

Simplifying the Flat Rate Tax Credit System - In Time For Our First Year End Reporting?

angela.hodges@nztaxdesk.co.nz (Angela Hodges) — Sun, 29 Sep 2024 20:59:14 GMT

How Upcoming Tax Changes Could Streamline Reporting for Short-Stay Accommodation Providers

When we presented on the new flat rate tax credit system earlier this year, we quickly worked out the income tax implications were going to be complicated – and costly for clients.

For income tax purposes, the flat-rate GST credit for non-GST registered suppliers of short-stay accommodation, such as those using platforms like Airbnb, was treated as excluded income for income tax purposes.

While this approach provided a simplified treatment on the income side, it led to considerable complexity when it came to expense deductions. Suppliers were required to apportion their expenses between GST-exclusive and GST-inclusive costs, depending on how their income was earned.

Income Tax Treatment of the Flat-Rate Credit:

Under the current rules, the flat-rate GST credit received by non-registered suppliers is excluded income for income tax purposes. This means that any expenses incurred in relation to this income have to be treated accordingly.

For suppliers who rented their property both through online platforms and privately, this meant that costs such as cleaning, maintenance, and utilities had to be apportioned based on how the property was used. This apportionment could be complex and time-consuming, as suppliers needed to calculate which expenses applied to online marketplace bookings and which applied to other types of bookings.

Specifically:

Marketplace rentals: Expenses associated with nights rented via an online marketplace were deductible on a GST-exclusive basis. E.g. expenses related to AirBnB bookings.
Non-marketplace rentals: Expenses associated with other rental nights were deductible on a GST-inclusive basis, as no flat-rate credit applied. E.g. expenses related to bookings directly from the supplier’s own website.

When expenses were shared across both types of rental nights, suppliers had to allocate or apportion their expenses proportionally, adding a layer of complexity to their year-end tax filings.

A New Option:

To simplify this process, the Taxation (Annual Rates for 2024–2025, Emergency Response, and Remedial Measures) Bill proposes an amendment that would allow non-registered suppliers to treat the flat-rate GST credit as assessable income for income tax purposes.

If a supplier elects this option, they will no longer need to apportion their costs. Instead, all expenses related to short-stay accommodation, including those booked through online platforms, can be deducted on a GST-inclusive basis. It eliminates the need to apportion costs, which many short-stay providers and advisors found difficult and confusing.

If enacted, this proposal will remove the need for apportionment and allow for more straightforward tax filings. Draft rulings have already been prepared by Inland Revenue based on the assumption that this amendment will be passed into law.

Why This Sounds Familiar:

The proposed approach bears a strong resemblance to our original discussions to treat the flat-rate GST credit as a negative expense. This suggestion was based on the understanding that the flat-rate credit serves as a pseudo-GST component, reflecting the portion of expenses related to the supply on which GST is effectively being paid. By treating it as a negative expense for income tax purposes, or now as assessable income, it should align the GST component of income and expenses, making tax reporting much simpler for non-registered suppliers.

This treatment is optional, and some taxpayers may prefer to treat the flat rate tax credit as non-assessable income and complete any apportionment of expenses required.

My Perspective:

Had these changes not been introduced, many short-stay accommodation providers might have struggled to comply with the existing rules. The cost and effort involved in meeting the detailed requirements for apportioning expenses would have been a significant burden, particularly for smaller operators. This simplification is a practical solution. By making the system easier to navigate, it increases the likelihood that providers will comply with the new flat rate tax credit rules.

Overdrawn Shareholder Current Accounts

Sun, 30 Jun 2024 23:27:19 GMT

The Inland Revenue has recently released a new draft Interpretation Statement, PUB 0040: Income tax – overdrawn shareholder loan account balances . This statement is currently open for consultation until 2 August 2024.

Family-owned small businesses often operate through close companies. Given the significant control shareholders have over these companies, it is common for them to withdraw company funds for personal use. These amounts are commonly transacted through the Shareholder Current Account. The issue is when these Shareholder Current Accounts become overdrawn. In practice, the reasoning behind an overdrawn Shareholder Current Account can often be the sale of a capital asset and the withdrawal of those funds by the shareholder (without declaring a dividend). Unfortunately, we also commonly see this when a company, or the shareholders, are struggling financially.

In this context it is perhaps timely, given the struggles businesses have been going through, for the Inland Revenue to issue a reminder about the potential tax issues these overdrawn Shareholder Current Accounts can present.

Understanding Shareholder Loan Accounts and Their Tax Implications

Firstly, the Inland Revenue refers to a Shareholder Loan Account. In practice, this is often a Shareholder Current Account, thus I have used the terminology interchangeably.

Shareholder Current Accounts are generally informal arrangements between close companies and their shareholders, documenting any advances made between the two. When a shareholder withdraws more money from the company than they have advanced, the account becomes overdrawn, leading to several potential tax issues.

The following tax issues apply equally to a Shareholder Loan balance, where the shareholder owes the company funds.

Tax Issues Arising from Overdrawn Shareholder Loan Accounts

1. Dividend Income:

If a shareholder pays no or low interest on an overdrawn loan account, dividend income may arise. For this reason, the company will generally charge the shareholders interest on the overdrawn shareholder current account.

2. Fringe Benefit Tax (FBT):

Shareholder-employees who pay no or low interest on their overdrawn accounts may face FBT liabilities.

3. Interest Income:

Companies charging interest on overdrawn accounts generate interest income. This interest will be taxable income to the company and may be non-deductible to the shareholder (discussed further below).

4. Resident Withholding Tax (RWT):

Companies can claim a tax credit for RWT withheld from interest payable. The credit is claimable in the year the interest is derived, provided the RWT has been paid to Inland Revenue.

5. Interest Deductibility:

Interest paid by shareholders on overdrawn accounts is typically not deductible as it often funds private expenditure. However, if the borrowed money is used for income-earning activities or businesses, a deduction may be available, subject to documentation and general limitations.

6. Withholding and Reporting Requirements:

Shareholders paying RWT may have obligations to deduct RWT on interest paid to the company on the balance of the current account (or loan).

7. Debt Forgiveness:

If a shareholder is relieved of their obligation to repay an overdrawn loan balance, this typically results in taxable debt remission income for the shareholder. For this reason, the company cannot simply forgive the loan or overdrawn balance. Importantly, the company should never be wound up with the shareholders owing the company funds, as this could also trigger taxable debt remission income.

Beyond the scope of the Interpretation Statement, there are additional potential tax issues to consider with Shareholder Current Accounts:

8. Salary:

If the shareholder is taking regular drawings to meet their living costs, there is support for the Inland Revenue to reconstitute these drawings as taxable salary or personal services income in some circumstances. This is particularly where the company has not paid the shareholder a reasonable market salary or met the personal services or attribution rules.

9. Documentation:

There is caselaw in which loan repayments have been reconstituted as taxable income to the shareholder, however those are extreme examples involving an absence of documentation. It is always important to document all loans to the company. Any transactions between the company and the shareholder should include clear narrations e.g. on the bank transfer. Take care in those narrations, if something is labelled “salary”, chances are the IRD would argue it should be taxed as such.

Understanding these tax implications is crucial for both companies and shareholders to ensure compliance and optimize their tax positions.

Employee Share Schemes

angela.hodges@nztaxdesk.co.nz (Angela Hodges) — Tue, 28 May 2024 03:43:55 GMT

With the popularity of ESS, and the recent focus by the Inland Revenue, in this article, we’ll explore the key tax rules governing Employee Share Schemes (ESS) in New Zealand.

Employee Share Schemes

Employee share schemes (ESS) are popular incentives offered by companies to motivate Employees and align their interests with those of shareholders. However, these schemes come with specific tax rules that Employees must understand to manage their tax obligations effectively.

ESS are also an area the Inland Revenue has been focusing on recently, particularly in the SME market.

Recent Technical Decision TDS 24/08 focuses on the tax treatment of an Employee’s rights to shares under an Employee Share Scheme. The decision centres around when the shares should be taxed (the Share Scheme Taxing Date) —either when the rights vested, or when the Employee exercised the Rights (i.e. shares were issued).

"What is an Employee Share Scheme?

An Employee Share Scheme (ESS) allows Employees to acquire shares in their employer’s company, often at a discount or as part of their remuneration package. The aim is to incentivise Employees by giving them a stake in the company’s future success.

Any benefit received by an Employee under a ESS is treated as taxable income to them. There is contention around when that benefit is measured. Legislation was introduced a number of years ago that states the benefit must be measured on the “Share Scheme Taxing Date”.

What is the Share Scheme Taxing Date?

The "Share Scheme Taxing Date" is a critical concept in the taxation of ESS. Under Income Tax Act, this is essentially the first date on which there are no longer any substantive restrictions on the Employee's legal or beneficial interest in the shares. This generally means the date when the Employee gains unrestricted access to the shares, free from any conditions that limit their legal or beneficial ownership.

Why is the Share Scheme Taxing Date Important?

The Share Scheme Taxing Date is significant because it determines when the Employee must measure and recognize income from the share scheme for tax purposes.

How is the Taxable Benefit Calculated?

On the Share Scheme Taxing Date, the taxable benefit is calculated as the difference between the market value of the shares received, and any amount the Employee paid for them.

For example, if an Employee acquires shares worth $10,000 on the Share Scheme Taxing Date, but they paid only $2,000, the taxable benefit is $8,000. This amount is considered employment income and subject to income tax.

Tax Reporting and Payment

Employees must include the taxable benefit in their income tax returns for the year in which the share scheme taxing date falls. Employers typically report this benefit through the PAYE system. Although tax can be paid by the Employer at that time, common practice is that this liability falls to the Employee.

Technical Decision 24/08

In recent TDS 24/08, the Employee received rights to receive shares in the company. The rights vested approximately three years after they were granted, and provided the taxpayer remained an Employee at that time, they could then exercise the rights and receive the shares. The Employee/Taxpayer had until the end of the second fiscal year following the year in which the Rights vested to exercise the Rights. Key concepts here (general):

Vesting Date: When the Employee earns the right to the shares but does not yet own them. Vesting typically depends on continued employment or meeting performance targets. At this point, while the Employee has the right to acquire shares in the future, they do not have actual ownership or the ability to benefit from selling these shares.
Exercise Date: This occurs when the Employee acts on their vested rights to actually purchase or claim the shares. Once exercised, the Employee owns the shares outright and can sell them. The exercise date is critical because it transforms the right into actual share ownership.

The Tax Counsel Office decided in TDS 24/08 that the Share Scheme Taxing Date was the earlier date, when the rights vested. The reasoning focused on the concept of "beneficial ownership," determining that once the rights vested, there was no significant risk that the taxpayer's ownership would change, effectively making them the owner for tax purposes.

Our view:

In my view, it was critical to this case that the Employee did not have to pay anything for the Shares. Once the rights vested, it was a foregone conclusion the Employee would exercise them – the Employee/taxpayer did not have to pay anything for the shares the shares were listed on a stock exchange where there was a liquid market for the shares. The Employee/Taxpayer forfeiting the Rights by failing to exercise them was highly unlikely. Although the Shares had to reach a specified minimum value before the Employee could exercise the Rights, the Shares exceed that value at all times, and it was not suggested that this requirement posted any material risk to the Taxpayer’s beneficial ownership of the shares.

Although this may be the correct conclusion in this particular fact scenario, there is a risk it will be applied in other situations where the vesting date precedes the exercise date.

Other Structures

There are a number of ways Employee Share Schemes can be structured.

The Tax Counsel Office in TDS 24/08 also discussed the tax implications of issuing Employee Share Options. In the context of Employee benefits, share options can be a useful structure to offer Employees an ownership interest, but protect them from downside risk.

The Commentary in the TDS clarified that no changes were proposed to the tax treatment of straightforward Employee share options, as their taxing principles already align with when an Employee owns shares like any other shareholder. The Tax Counsel Office explained that a share option is a right to purchase shares at a specified price within a set period, meaning ownership of the shares generally only begins upon exercising the option.

Conclusion

Employee Share Schemes can be a valuable part of an Employee’s remuneration package, providing both financial rewards and a stake in the company’s success. However, it’s essential to understand the tax implications, particularly the concept of the Share Scheme Taxing Date. This date determines when the Employee is taxed on the benefit of the shares, based on the difference between their market value and any amount paid. By understanding and planning for this, Employees can make the most of their share schemes while managing their tax obligations effectively.

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

Tue, 16 Apr 2024 03:51:38 GMT

The new 39% tax rate has finally been enacted, however there have been a few tweaks along the way, including a new concept – the De Minimis Trust. The De Minimis Trust is a welcome addition where a Trust can continue to be taxed at 33%.

Increased Trustee Tax Rate

The Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (the Act) was enacted at the end of March.

Central to the Act is the increase of the Trustee tax rate from 33% to 39% from the 2024–25 income year.

Measures to Mitigate Over-Taxation

Recognizing that the increased rate could lead to over-taxation in some cases, the Act now includes several mitigating measures:

· Retaining the 33% rate for Trusts with Trustee income not exceeding $10,000 (after deductible expenses).

· Special rules for deceased estates within the first four income years, Trusts settled for disabled people, and exclusions for energy consumer Trusts and legacy superannuation funds.

Detailed Analysis and Special Rules

The Act provides detailed analysis and rules for various aspects of Trust taxation:

· De Minimis Trusts : Trusts with net income of $10,000 or less are subject to a 33% tax rate, aimed at small Trusts. Minor beneficiary income and corporate beneficiary income distributions are ignored when considering the $10,000 threshold. If the Trust’s net income is $10,001 – the entire $10,001 is taxed at 39%, not just the $1 over $10,000.

· Corporate Beneficiary Rule : The Act introduces a measure to tax beneficiary income derived by certain close companies at the 39% Trustee tax rate (taxed in the Trust). This is an anti-avoidance provision to prevent the use of corporate beneficiaries to avoid higher tax rates. This income is treated as excluded income and capital gains in the company.

· Minor Beneficiary Rule : The minor beneficiary rule, which taxes income derived by minors from a Trust at the Trustee tax rate if it exceeds $1,000, is retained but is now explicitly subject to the 39% rate to limit tax benefits that could otherwise be exploited. The Act maintains specific exclusions from the minor beneficiary rule, e.g. for income below $1,000.

· Exclusions and Special Cases : The Act outlines exclusions and special rules for deceased estates, disabled beneficiary Trusts, energy consumer Trusts, and legacy superannuation funds, each with tailored provisions to address specific concerns.

Proposed Amendment to Brightline Test: What You Need to Know

Tue, 19 Mar 2024 01:29:18 GMT

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.

Reintroducing Interest Deductibility – the Rules are finally here!

Wed, 13 Mar 2024 01:27:57 GMT

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.

How to prepare for your year-end accounting

Tue, 05 Mar 2024 01:26:17 GMT

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.

Selling a flood-affected property subject to the Brightline rules

Fri, 22 Sep 2023 21:33:00 GMT

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?

This will depend on whether the property can be repaired or not.

If the building is not repairable

The insurance proceeds would be treated as consideration received for the loss of the building. This assumes the proceeds related solely to the building. If the building was held on capital account, arguably all the proceeds would be capital in nature and not taxable. The building would be removed from the Fixed Asset Register.

If the building had been depreciated, that depreciation would be recovered as taxable depreciation recovered income. Note that the taxable income is capped at the amount of depreciation claimed, although this will still present a cashflow issue for cash strapped businesses who need to start again.

This would leave the cost base of the land as the tax book value. A future sale could then use that tax book value of the land as a cost base.

Tax Concessions for Flood Hit Businesses

There is currently draft legislation containing tax relief for qualifying flood-hit North Island businesses. Proposed tax relief means that if your client has received insurance proceeds for a destroyed business asset, they may be able to access rollover relief that will defer the recognition of this income for tax purposes, provided there is a commitment to rebuild or replace the destroyed buildings or plant. This deferral of tax on the insurance receipt allows time for businesses to rebuild or purchase replacement assets (within a maximum five year period). The concession also recognises that the Government is considering a managed retreat from some locations. Because of that, there is no requirement that the replacement buildings be located in the same region.

Generally, these concessionary rules will mean that instead of calculating depreciation recovered on the loss of the building (or plant), you could adjust the tax book value of the replacement asset. However, a couple of key points:

Your client must be in business. Generally, the IRD does not accept a rental property as being a business.

The asset must be destroyed. This concession does not apply if the asset is repairable.

The rules are not yet signed off.

If the building can be repaired

The key difference is that if the asset is repairable, the cap on depreciation recovered does not apply.

To the extent that the insurance proceeds exceed the cost of repairs, the insurance proceeds need to be deducted from the tax book value of the asset. Where the excess insurance proceeds exceed the tax book value of the asset, that amount is treated as depreciation recovery income. There is no cap on the depreciation recovered – so even if this is more than any depreciation claimed on the building – it is still taxable income.

The reasoning behind this appears to be that if your client received an insurance pay out and used it for the repairs, those repairs would have been tax deductible, and so the insurance payout would have been taxable income. As the building was not rendered useless or marked for demolition, the pay-out wasn’t for the capital loss of that building and so the insurance proceeds wouldn’t be capital proceeds/non-taxable income.

An Example

Here is an example of how this could work in real terms. Let’s say that the house/building had a cost base of $173K. The owner was paid out $265K.

This will be the case where no tax concessions for adverse events apply – for example, a fire damaged building. However, there are tax concessions planned for qualifying businesses hit by the 2023 North Island Floods.

Tax Concessions for Flood Hit Businesses

The Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill also includes a concession for qualifying flood hit North Island taxpayers. New section EZ 84 applies to depreciable assets (remembering buildings are depreciable assets, even if they have a depreciation rate of 0%) that have been damaged by a North Island flooding event but are repairable, and limits depreciation recovery income to the amount of depreciation deductions previously taken. There are also timing rules in new section EZ 87.

This means that if your client qualifies for this relief, the depreciation recovered on damaged assets should be capped at the previous depreciation claimed.

Brightline Gains

The Government has recently confirmed plans for tax concessions for owners of flood and cyclone-damaged properties that take up buy-out offers. This concession is to ensure that they are not inadvertently caught by the Brightline Rules.

Outside of Government buy-outs we are not aware of any planned concessions for taxable Brightline gains.

If you need further advice, reach out to Angela and her team, they’re happy to help.

IRD focusing on family transactions – Brightline tax grab?

Tue, 17 Jan 2023 01:26:00 GMT

As tax advisors, we see major issues with brightline applying where parents help their children into home ownership. Traditionally we have argued 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.

This is a major change to the position adopted by many clients and tax advisors, and also previously approved by the IRD in individual circumstances. And there is a risk here that the IRD could apply this argument retrospectively.

How did we get here?

Historically many parents have assisted their children to purchase properties. However, with the change of bank policy in the last few years, the Banks often insist these parents are registered as owners.

Once the child can support the full mortgage, the parents often transfer their interest in the property to the child. This is usually at cost, or at an amount equivalent to the remaining mortgage balance. In most of these scenarios, the parents are just trying to help their child onto the property ladder.

The Brightline Rules generally mean that the transfer from the parents to the child within 10 years (or the applicable brightline period) will be taxed on the gain in value. This gain will be based on the market value at the time of the transfer. The actual value used for this transfer is disregarded.

Remember the main home exemption will not apply for the parents, as they have not lived in the home.

Typically there have been options available in these situations so that the parents are able to assist their children into home ownership without incurring a tax liability as a result, if the transaction is structured correctly from the start. One of the key options was to treat the parents as Bare Trustee/s for the child. These structures worked because the parents were only purchasing on behalf of the child.

The IRD’s view

The IRD has now released Exposure Draft PUB00351 outlining its view on how they would treat these transactions. IRD has concluded there would be no nominee or Bare Trust relationship when the parent is included as a borrower in relation to the property. This is because the parent is personally liable under the terms of the loan. Thus the IRD argument is that the arrangement goes beyond the passive duties required of a Bare Trustee Arrangement. The parent is treated as owning a portion of that property for tax purposes.

Essentially the IRD’s view is if a parent has assisted their child into home ownership by being included on the mortgage for the Bank then they will have a tax liability if they transfer their share to the child (or sell) within the applicable brightline period. The tax will apply to the gain on the sale of their “share” of the property, based on market value, at the time of transfer, regardless of any amount actually received.

IRD has also indicated that this will be the case regardless of whether the parents have acted in their own names, as trustees of a trust or as shareholders of a company.

The IRD presented on this issue at the 2022 CAANZ Tax Conference held in Christchurch late last year. The recommended solutions were:

What is the tax advice we give to clients in this situation?

Unfortunately, this latest Exposure Draft leaves us with very few options to help our clients in this scenario.

The tax advice appears to be:

Unless of course, the property decreases in value…..

Is this a technical issue or a tax grab?

We do not believe the Brightline Rules were intended to apply to parents helping their children into homes, particularly when there is no economic, or real, gain derived by the parents. The Government has been asked to remedy this issue on numerous occasions. These amendments have not been made. And now we also have the IRD’s new position looking very much like a tax grab on imaginary gains made by parents just trying to help their children into home ownership.

If you wish to discuss these issues with us please get in touch .

How a Qualifying Company (QC) works

Mon, 05 Dec 2022 05:26:00 GMT

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.

The tax

QC’s have certain tax benefits that relate only to them:

The technical

However, to remain a qualifying company, it must continue to meet a number of requirements, including:

If a QC does not meet any of these requirements, its QC status will be revoked.

Change of Shareholding

There is a unique shareholder continuity requirement for qualifying companies. This rule was introduced to force the phase out of QCs. Very broadly, if the shareholders interests change by more than 50%, it ceases being a QC. There are exemptions for some family transactions.

Provided you meet these shareholding requirements, then the shareholding may be changed without breaching continuity for imputation credits – the shareholder continuity requirement for imputation credits is turned off. However, if the company later falls out of the QC regime, a debit is entered into the ICA at that time.

Just as with an LTC, there are significant administrative requirements, such as ongoing elections and monitoring of shareholder numbers which can be onerous. The consequences of breaching the QC requirements can be significant.

The risk of breaching the QC requirements remains a key risk of a QC. However, although there are a number of disadvantages, these are generally be outweighed by the taxation benefits and it is worthwhile keeping a QC around.

What are we seeing in practice?

Qualifying companies are unique and are not generally well understood. It is very easy to inadvertently revoke a QC status, which could lead to significant adverse tax implications. For example, if a Trust receives a dividend, and that Trust has a non-natural person beneficiary, the distribution could breach the QC requirements and the company could cease being a QC. There can also be a breach if there is a variation in voting and distribution rights attached to shares, or if its foreign non-dividend income exceeds NZD$100 in any year.

These are particularly unique fishhooks. We advise you get specialist tax advice when dealing with a qualifying company.

What is a Look-through Company (LTC)

Sat, 12 Nov 2022 05:18:00 GMT

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 tax

This flow through tax treatment has been one of the primary advantages of using an LTC. It allows the company to transfer its income and expenditure to its shareholders directly. This enables shareholders to either offset their personal income, or to be taxed at their personal tax rate. By off-setting any losses in the company, against the shareholder’s income from other sources, you can reduce the rate of tax payable, and save money. Unfortunately, this generally no longer works for rental investments.

The technical

According to Inland Revenue, to become, and remain, an LTC, a company must meet the following criteria for the whole of each income year:

If an LTC does not meet these criteria it automatically stops being an LTC. There is a deemed disposal of all assets – with the corresponding tax implications!

Change of ownership?

The shareholders are deemed to have ownership of the underlying assets of the LTC for taxation purposes. Any sale of these shares is deemed to be a sale of those underlying assets (potentially triggering any tax consequences). From a purchaser’s perspective, this can be positive or negative. It may result in an increased or decreased tax base (as opposed to taking on unrealised tax liabilities). From a vendor’s perspective, this can be an issue as this may result in tax being realised on the disposal of the shares where this would not have occurred in a standard company.

In summary, the LTC rules are relatively complex and require ongoing management to ensure the criteria are continually met. However, a LTC offers a useful tax structure for a wide range of potential uses. This includes:

Aside from tax, an LTC is just an ordinary company. This means that from all other legal perspectives you have a company with limited liability and subject to the ordinary company legal framework.

What are the common issues we are seeing in practice?

Limited Liability Company – Standard Company

Thu, 06 Oct 2022 05:06:00 GMT

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

This is the most common type of company incorporated under the Companies Act 1993, and it is a separate legal entity. This means that it has a legal personality distinct from the directors and the shareholders. The company has full responsibility for all of its legal and financial obligations. It must take care with the implementation and administration of all the company’s business and compliance matters. The business activities of the company are separate from the individuals – and can provide the benefit of limited liability for the shareholders.

The technical

The shareholders are generally only liable for any money they owe on their shares, or to the company. As well as any personal guarantees they have given to lenders or creditors, such as banks or suppliers. For many operating entities, this is very important as it ensures that the only assets at risk are those within the company (assuming external assets are not used to guarantee liabilities).

A limited liability company is the most commonly used business vehicle in New Zealand. It is easily understood by most people in business. This means, contractual transactions, such as obtaining a line of credit, become reasonably straight forward whether that is from a bank or a supplier. The company should always maintain a separate bank account and keep separate records for evidentiary purposes.

The legislative framework means that with the benefits there are also limitations. Companies in New Zealand must follow strict regulations, legislation, and guidelines, or face severe consequences. Companies are required by law to record shareholder meetings and other business activities. They must also file returns with the Companies office as and when necessary.

The tax

Incorporating a company in New Zealand means that you can take advantage of tax benefits. Whilst the income is retained in the company, the current tax rate for companies in New Zealand is 28% . Where tax paid income is paid out to shareholders, imputation credits can be attached to eliminate double taxation. Shareholders are generally not liable for company tax debts.

If the company has more than one investment or business venture, accessing cash may be difficult to do tax effectively. Accessing capital gains accrued within the company is generally only able to be achieved tax effectively on liquidation. There can also be additional difficulties accessing capital gains for any shareholders who are non-residents. Growth using capital gains may leave the shareholders exposed to overdrawn advance accounts. This can occur when income allocated is unable to keep up with drawings over time.

Transactions between associated persons (persons with common economic interests or family relationships) can create “tainted” capital gains. These tainted capital gains can still be taxable on distribution, even on liquidation. Under the amended rules, tainted capital gains will still arise when a company transfers an asset to another company with 85% commonality of shareholding and ownership of the asset remains at 85% at the time the company is liquidated.

Fringe Benefit Tax may be payable on private use of company assets (e.g., motor vehicle) by a shareholder. In addition, associated entity transactions (e.g., between businesses or other bodies that are connected to each other in some way) generally need to be made at market value. Otherwise a deemed dividend may arise, creating a potential tax headache.

Change of ownership?

It is a simple process to change ownership in a company. However, there are some things to be aware of. Shareholder continuity must be maintained to protect tax losses and imputation credits for use in future income years. Although there are new business continuity rules that can preserve the tax losses following a change of shareholding, these rules do not apply to imputation credits.

On the sale of shares, unless the shares were acquired with the intention to dispose, or as part of a share trading business, proceeds from the sale should be capital (tax free) in nature. Any unrealised tax liabilities within the company will be transferred to the purchaser.

From a purchaser’s perspective, any unrealised tax liabilities existing with the company will be transferred to them as the new owner. Any liabilities existing within the company will also remain within the company and transfer with the sale of shares. Thus, there is always a word of warning when clients are considering purchasing shares.

What are the common issues we are seeing in practice?

We are continuing to see numerous companies with significantly overdrawn shareholder current accounts. As companies are required to charge interest on these amounts, this results in taxable income in the company and large tax liabilities.

These overdrawn shareholder current accounts have come about time and time again because the shareholders have outgrown their structures. The company may have been accumulating capital gains over time, and now the shareholders want to return and live off those capital gains. Or the company may have invested in a share portfolio, and the shareholders want to access those gains. Or the company may have sold a business or a property, and although the company wants to continue to operate, the shareholders have withdrawn those funds.

Although there is pain involved in restructuring, it is generally needed in these circumstances and can result in significant tax savings over time.

Bright-line tax – does it affect you?

Mon, 08 Aug 2022 00:17:00 GMT

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!

What is bright-line tax?

What is Bright-line tax? If you acquired a property on or after 27 March 2021, and dispose of it within 10 years, the bright-line rules will apply to the sale of that property, and any gains you made will be taxable unless an exemption applies. If you acquired a property before this date, the bright-line rules may still apply, but they are slightly different.

Basically, the bright-line rules mean if you sell a residential property you have owned for less than 10 years you may have to pay tax it. This is the bright-line property rule and it also applies to New Zealand tax residents who buy overseas residential properties. You could say it’s New Zealand’s version of a capital gains tax.

The bright-line test does not apply to your family home or inherited property, or to residential properties used for business or for farmland (provided you meet the criteria). If you used your property as your main home 100% of the time during the bright-line period, the main home exclusion should apply. When you sell, you will not pay tax on any gain on the sale.

Under the new rules, a transfer of your main family home may continue to be exempt in certain circumstances, however, ‘change-of use’ rules have been introduced. This means that gains on a sale may be taxed if you haven’t used the property as your home for the entire time.

Let’s look at some real-life examples where we have advised clients. These examples show just how complicated the bright-line rules can be, and why it is so important to get advice.

Example One – A lifestyle block

A lifestyle block of 2 ha. Approximately 1.5ha of the land is used for grazing cattle and the remainder for the main home. The lifestyle block doesn’t qualify for the main home exemption because it was not used predominantly as the main home (1.5ha used for grazing). It doesn’t qualify for farmland exemption because the amount of land is not big enough to support a farming business. Under the new main home exemption, you may be able to claim the main home exemption on that area that is used for the main home. However, the main home exemption is not available where home is owned in a company. The balance of the land would still be taxed under the bright-line rules.

Example Two – Multiple lifestyle blocks – how does brightline tax apply?

Multiple lifestyle blocks are used in a kiwifruit operation. The kiwifruit orchard business is held in one company, the land in another company. The kiwifruit orchard business company leased the land from the land-owning company.

Issue: Lifestyle blocks with small orchards (approx. 1ha each) were not used in a farming operation carried on by the landowner, i.e., the landowner was carrying on a leasing business in that it leased the land to the orchard company.

Because the lifestyle blocks were not individually capable of being used in a farming operation, nor used in a farming business by the landowner, they were not treated as farmland for the purpose of the farmland exemption. The exemption did not apply.

Sale of the blocks were taxable under the Bright-line Rules.

Example Three – House bought through trust

A family was gifted $2m to purchase a home. They set up a trust to buy the home. The person making the gift gifted the funds directly to the trust. By doing this, the donor became the “Principal Settlor”. Because the Principal Settlor had their own home, the trust could not qualify for a main home exemption.

If the family sold their home within the ten year bright-line period, the gain would be taxed. They could not qualify for the main home exemption, even though they lived in their home the entire time. This is because of the way the original purchase was structured.

Example Four – Transfer of shares in a look-through company (LTC)

A client, with rental income, wanted to minimise their tax bill so it went onto the Companies Office website and changed the shareholding percentages in the LTC. This directed the income to one half of the married couple and reduced the overall tax bill on the rental income. However, this triggered tax on the change in percentage of ownership of the residential rental owned by the LTC and restarted the bright-line date for that share.

We have also seen clients do this where there are matrimonial issues – resulting in the forfeiture of a significant number of imputation credits.

The lesson here – never change shareholding without getting tax advice first.

Example Five – Sale of shareholding in an ordinary company

Sale of 50% of the shares in an ordinary company that owned residential rental property. Because more than 50% of the company assets were residential land, this was treated as a residential land rich company. The change of 50% of the shareholding triggered a tax liability for the selling shareholder. Then we had to work through what this meant for the company.

Example Six – Small thoroughbred operation – exempt from brightline-tax?

A small thoroughbred operation on a 2.5ha block. Again, couldn’t qualify for the main home exemption because the land was not predominantly used for the main home. The question was whether the thoroughbred operation was sufficient to be treated as a farming business so as to qualify for the farmland exemption.

Example Seven – Mixed use commercial property

A client purchased a commercial property with commercial on the ground floor and a residential apartment upstairs. The residential apartment was rented out.

The question was whether a sale of this property, within the bright-line period, would be taxed under the bright-line rules. Remember there are exemptions for both the family home, and for business premises.

The business premises exemption requires the property to be used predominantly as a business premises. In this example, because the stairway and entrance were used exclusively for the residential apartment, more than 50% of the property was used as a residential rental property.

This property did not qualify for the business premises exemption.

The main home exemption would not apply because the apartment was rented out.

If the property is sold within the bright-line period, the entire property sale would be taxed under the bright-line rules.

Example Eight – Parents helping children to buy homes – a bright-line tax trap!

Many parents help their children buy their first homes. Banks are now largely insisting that these parents are registered on the title as owners along with their children.

Once the property has increased in value, and the children can support the full mortgage, the parents often transfer their interest in the property to the children at their original cost. Generally, the parents are not trying to earn a capital gain on the property. They are just trying to help their child onto the property ladder. Properties jointly owned by parents and their children are being caught when they “transfer” their share of the property to the child. Even if they transfer it at cost, there is a deemed market value transaction. The parents are unable to apply the main home exemption because they did not live in it. Thus, the IRD is asking where the tax is on the transfer to the children.

Example Nine – Main home exemption ?

You can use the main home exemption up to twice in a two-year period, but not if you have a regular pattern of doing so. We are starting to see questions from our clients as to whether the main home exemption will be available. Although the client may have spread the transactions out so that they do not have more than two sales in a two-year period, where they have already used the main home exemption a number of times it is starting to look like a regular pattern. In this instance the Inland Revenue may question entitlement to the exemption. We recommend you discuss this with us prior to selling.

As you can see, it is a complex area with no simple answer – it depends on your circumstances each time. The good news is that we are using the new rollover exemptions a lot to allow restructuring of properties into and out of trusts that we couldn’t previously do!

Please get in contact with us to discuss your circumstances and how we may be able to help you.

Brightline Rollover Relief Issues

Sun, 31 Jul 2022 00:08:00 GMT

The new Brightline Rules include ‘rollover relief’ which will allow you, in certain circumstances, to change how you hold a property without triggering brightline tax. When the legal ownership of property changes but the effective ownership is the same, the transfer may be ignored for Brightline purposes, if it meets the prescribed criteria.

For example, under the new Brightline Rollover Rules, you may be able to move a property into a Family Trust without triggering tax on the transfer, and without restarting the Brightline Period. This makes sense, as it allows people to put their valuable assets into Trusts for safe keeping etc.

Certain conditions need to be met, and we complete a full review prior to every transfer to confirm if the rollover relief is available. So far this has been working well, and there have been quite a few restructures.

Brightline Tax Issues?

However, it appears there is a technical issue. Although the Brightline Period is not ‘restarted’ in the Trust, the Trust is now under the new Brightline Rules . You may recall that the new Brightline Rules include a ten-year Brightline Period. Under the wording of the current Rollover Relief, it appears the Trust is now also subject to a ten-year Brightline Period on that property instead of the old five-year period (albeit it commences at the date of original acquisition). This appears to be contrary to the intention behind the rollover relief.

We believe this is a drafting error. Inland Revenue has signalled they are looking to fix this. We hope the ‘fix’ will be retrospective. In the meantime, be aware that if you are completing a transfer that qualifies for rollover relief, we strongly recommend you check with us first.

If you wish to discuss any property transfers with us please get in touch .

*This publication contains general 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.

2022 – Financial Year End

Tue, 22 Mar 2022 00:25:00 GMT

The end of the financial year is fast approaching for many New Zealanders. 2021 was, again, another tough year for a lot of businesses due to the COVID-19 pandemic with some scraping by and others, sadly, not surviving. The wage subsidy helped many businesses but there was a threshold that needed to be met. There were also some notable legislative changes during the year which have an impact on tax, some of which are discussed below.

COVID-19 – Wage Subsidy

Now is a good time to check that the position your business took regarding the wage subsidy to confirm that it met the criteria. Remember that the first round of subsidies required a 30% decline in revenue between January and June of the year prior but that the second round required a higher threshold.

Interest Deductibility Rules

With the new Interest Deductibility Rules coming into effect from 1 October 2021 there may be an impact on your income in the 2022 financial year. If you have a rental property, that is not a new build, you may find yourself with far fewer expenses that you can claim than in prior years. That means more tax to pay. This could also result in you becoming a provisional taxpayer or needing to recalculate your provisional tax liabilities, talk to us to see if there is anything we can do to lessen the pain.

The Bright-line Test

The bright-line period has been extended to 10 years for residential property acquired on or after 27 March 2021. The rules relating to the exemption for the main family home have also been amended.

If you acquired a property on or after 27 March 2021, and dispose of it within 10 years, the bright-line rules may apply to the sale of that property and any gains you made will be taxable unless an exemption applies. The exemptions relating to transfer on the death of an owner, and transfers under a relationship property agreement will continue to apply. Properties which are ‘new builds’ will continue to be subject to the 5-year time period.

The current exemption relating to a sale of your main family home will also continue to apply in certain circumstances, however, ‘change-of use’ rules have been introduced, which will mean that tax on gains made on the sale of the property may apply if the property is not used as your main home for the entire time it is owned. Contact us if you have any questions on what these changes mean for you.

Trusts – Beneficiary Current Accounts

Trusts should review the balances of beneficiary current accounts. The Inland Revenue has taken the position that a beneficiary with a current account balance over $25,000 becomes a settlor of that Trust. This has many implications including for the land taxing rules and working for families’ entitlements. Charging interest and ensuring all transactions are accurately recorded can help to reduce this risk.

Once a person is considered a settlor of a Trust this cannot be revoked so get in touch today so we can ensure you don’t have unexpected settlors in your Trust.

Domestic Trust Disclosure Requirements

There are new reporting requirements for Trusts. Domestic Trusts will be required to provide additional information to Inland Revenue (IRD) when filing their 2022 Tax Returns so now is a good time to make sure you are prepared to provide this information. The required information (which must meet the minimum IRD-prescribed standards) will include profit and loss statements, statements of financial position and the details of settlors and beneficiaries and their associated settlements and distributions.

The usual year-end considerations

As with every end of financial year, there are a raft of issues to consider. However, with an economic environment impacted by a global pandemic, and war, some of these issues are more critical than ever.

Bad Debtors – Could be worse … again

Review your debtors. If you think you are unlikely to get paid, write the debt off before the end of the financial year. That way, at least it should be tax-deductible.

Repairs and Maintenance

You may want to consider undertaking any necessary repairs and maintenance prior to the end of the financial year, but please talk to us to check that you can get a full deduction for tax.

Take Stock

The value of your stock affects your business’s taxable profit position. Do a thorough stocktake before year-end and get rid of any damaged, out-of-date or obsolete stock – then write it off to save tax.

Know when to ask for help

Get in touch with us as early as possible. We can talk about what you can claim for and what you can’t.

The Parent Tax Trap

Wed, 16 Mar 2022 21:10:00 GMT

This week I have been working on a presentation for CAANZ about land tax issues and the many, many new rules in this area. However, there is one key issue that we are seeing again and again in practice – the Parent Tax.

The realities of getting a mortgage – first home buyers

With the housing boom that has occurred in New Zealand over the last few years, we are experiencing incredibly high house prices. This, coupled with the increasing difficulty to secure a mortgage, has meant that more and more parents are helping their children into their first homes.

Traditionally these parents would have either gifted their children part of the deposit or acted as Guarantors with the Bank. However, the Banks are now largely insisting that these parents are included in the mortgage as owners of the property, and as such, they are registered on the Title as owners.

Once the property has increased in value, and the child can support the full mortgage, the parents often transfer their interest in the property to the child at their original cost. In most of these scenarios, the parents are not trying to earn a capital gain on the property, just trying to help their child onto the property ladder.

The Parent Tax Trap

This is where the commercial reality of securing that mortgage doesn’t align with the tax rules. This is because of New Zealand’s Brightline Tax – a pseudo capital gains tax. The Brightline Rules generally mean that if you buy a residential property, and sell that again within ten years, you will be taxed on the gain, unless it is your home (or another exemption applies).

These tax rules mean that when the parent transfers their share of the property to the child within ten years, they will get taxed on any gain in value. This is because they have been treated as owners of a share of that property.

Because the parents didn’t live in the property, they cannot claim the main home exemption – they will be taxed on the sale or transfer to their child.

It doesn’t matter that the parents didn’t sell (or transfer) their share of the property to their child at market value, the IRD will deem it to be sold at market value, and tax them on any gain in value regardless.

And now that the Brightline Period has been extended to ten years, this tax is catching more and more transactions.

What is the industry doing?

Chartered Accountants Australia NZ (CAANZ) raised this issue with the Government in the latest round of discussions for the upcoming Brightline Tax changes. CAANZ had recommended a carve-out from the Brightline Rules for family-related transactions. This proposal was denied. The IRD helpfully suggested the parents act as Guarantors and not go on the Title as owners.

Another example of the IRD being out of touch with reality?

We can help

If you are a parent trying to help your child buy their first home, there are ways we can help structure this purchase to avoid this Parent Tax Trap. However, this should be done at the start.

Please get in contact , I’d love to help you get your child into their first home without you falling for the Parent Tax Trap.

Christmas Hope, 2021

Fri, 10 Dec 2021 01:28:00 GMT

Well, it’s been another interesting year for us and many of our clients with Covid-19 now in the community, ongoing lockdowns, and the introduction of the new “Traffic Light” system. But despite these disruptions, we still have a lot to be thankful for. Our business is another year older, our team is growing, we have amazing and supportive clients, and our family and friends remain happy and safe.

Once again we wanted to reach out and say thank you for supporting us through this unusual and difficult year.

We have enjoyed working with all of you, and wish you a Merry Christmas, a fantastic holiday period, and a prosperous New Year!

This year we have again chosen to support the Salvation Army Christmas Appeal in your honour. Below is a bit more information about the Salvation Army’s cause, and how the donation will benefit those most in need.

Arohanui,

Angela and the team

Originally posted on the Salvation Army website:

This Christmas give Hope, it is the greatest gift…

Even in the worst of times, and there have been plenty of those this past year, there’s something that never fails to give us heart, and that is the wonderful generosity of New Zealanders willing to reach out to their fellow Kiwis who have fallen on hard times—especially at Christmas.

You are in an extraordinary position to be part of the solution. We invite and encourage you to give that hope again today and consider the immense impact your giving has made, and could further make, for your ‘New Zealand family’. You may never meet them, but they are part of our extended family of 5 million.

For anyone battling tough circumstances, there’s one thing that can turn the tide. And that’s a sense of hope—so precious, so uplifting, so needed. A little bit of hope goes a long way.

Each gift you choose can be so much more. With your donation, you also give hope to individuals and families on the edge of despair. Hope is a small word, but it means a lot, especially when it comes with wraparound support and encouragement.

So please, this Christmas be part of the difference and choose a gift of hope today and help people feel hopeful again. Selecting a ‘gift of hope’ starts something positive and a little bit of hope goes a long way…

Please help Kiwis in need by supporting this Christmas Appeal. A little Hope goes a long way…

How would you use R&D Tax Credits to develop your product further?

Wed, 10 Nov 2021 22:47:00 GMT

A successful start-up company will typically have a five-stage journey:

Along the way, there will be many challenges and problems to resolve, including accessing grants and managing cash flow, undertaking capital raises, and a potential final stage – an exit.

You need the right expertise in your camp, fighting your fight and looking out for what you don’t know you need to look out for. A team that works together to get your business to the end goal.

HOW CAN WE HELP WITH YOUR R&D JOURNEY?

Accessing R&D Tax Credits

With an R&D tax specialist, you can put your confidence in an experienced professional who has developed knowledge of the complexities of this notoriously difficult area. Technical knowledge concerning R&D tax goes a long way to ensure your claims are successful, so by working with us, you can approach making a claim with greater confidence.

There are two options for R&D tax credits, both outlined below. We are happy to meet with you, discuss these options and work out the best path for you and your business.

R&D Tax Incentive

Summary

The Detailed Process

Step One – Confirm Eligibility

The first step is to confirm whether your organisation qualifies for the RDTI. The core concept here is whether you are a taxpayer in New Zealand and whether you either own the results of the R&D or can use the results without payment.

Your R&D activities must also meet the defined criteria. We will work closely with you to review your R&D activities and advise whether they are likely to qualify for the RDTI. The RDTI regime has its own definition of R&D, which goes beyond whether something is “new”.

Your R&D activity must:

We also consider your R&D expenditure, as there are specific rules around what expenditure will or won’t qualify for the RDTI.

Step Two – Application for General Approval

We then lodge an Application for General Approval. To do this we need to break down your R&D activities into core and supporting activities and calculate the relative costs. The Application for General Approval is due 7 May (for a 31 March balance date). For example, the Application for General Approval for the year ending 31 March 2022 is due on 7 May 2022.

Once the IRD grants its approval, it gives you certainty around whether you will be able to claim this 15% tax credit for your R&D expenses. This Application can be valid for up to three years, so think of it as providing an ongoing benefit for your business.

We recommend we complete the Application for General Approval as soon as possible so you can spend with confidence.

Step Three – Supplementary Return

Each year, we need to submit the Supplementary Return. This is essentially the tax return that calculates the RDTI each year, based on actual costs and revenue. We go beyond what a computer algorithm can do here, as we will hunt through your P&L, and work with you to identify as much eligible R&D expenditure as we can.

We also calculate what portion of the RDTI is refundable. The Supplementary Return is due on 30 April of the following year (for a 31 March balance date). For example, the Supplementary Return for the year ending 31 March 2022, is due on 30 April 2023.

R&D Tax Loss Cash Out

The R&D Tax Loss Cash Out process has been around for a few years.As a result, it is reasonably streamlined and more straightforward in terms of IRD processing. However, it is still essential to paint the best picture possible in your application, which is where we come into it. We are experts in dealing with the IRD on these applications. We know the rules. And we also go further – we hunt through your P&L and work with you to identify as much qualifying R&D expenditure as possible.

The R&D Tax Loss Cash Out is essentially an interest-free loan from the government. It allows you to ‘cash’ out your tax losses now, rather than wait to make a future profit to be able to utilise their benefit. The loan is paid back out of your future tax payments. However, there are several scenarios that can also trigger a repayment liability, such as the sale of the IP. We also work with clients looking at an exit to advise on the tax implications of a sale of the IP, and the best timing in terms of triggering an R&D Tax Loss Cash Out Repayment Event. Depending on your future circumstances, the loan may or may not be required to be repaid.

In the meantime, if you qualify for the R&D Tax Loss Cash Out, we strongly recommend going down this path as you can get up to 28% of your R&D expenditure back in cash. We love working with our clients on these applications as we see the positive impact these payments can have in terms of their cash flow and growth, or even just pushing the cap raise out for another year – meaning the R&D development is more complete and the share values have increased.

Compliance – Financial Statements and Income Tax Returns

Understanding the financial complexities of running a successful business is critical to continued growth and sustained performance, so it pays to have access to the very best knowledge and experience. However, when it comes to start-ups and R&D intensive businesses, the difference between a basic understanding and full expertise can be critical to the growth of your business and raising future capital.

There are ongoing questions as to recording details, categorisation of expenses, and the “right” time to recognise the R&D IP on the balance sheet. There are tax losses to protect, and options to defer expenses. These are fundamental questions that need to be answered in the context of your business and your goals.

As such we work with our R&D clients closely, as part of their team. The measure of success is not just whether we can complete financial statements and file your tax returns on time, we strive to ensure we add real value to your team. We love being part of the start-up R&D journey.

GET IN TOUCH

We strive to add value to our clients. We are not just a computer algorithm based overseas, we are local experts that work closely with our clients throughout their start-up journeys

Want to talk about your ideas? Your journey? Get in touch to arrange your complimentary introduction session now.

Interest deductibility changes

Tue, 19 Oct 2021 23:59:00 GMT

New interest deductibility changes mean paying tax on profits that haven’t been earned yet.

The new rules around interest deductibility kick in on the 1st of October, which will effect landlords. These new rules will mean that interest will no longer be able to be deducted on residential property investments.

The effect of these new rules is yet to be seen, however the Inland Revenue has suggested that the rules are unlikely to boost the overall affordability of housing and may reduce the supply of new housing developments in the longer-term. This in turn is likely to put upward pressure on rents. The IRD does not support these changes and has outlined their views in the recent Regulatory Impact Statement.

The new rules limit the deductibility of interest incurred for residential property investments, so let’s take a look on what they impact.

For properties purchased on or after 27 March 2021, no interest is deductible on the mortgage. This essentially means property investors will be paying tax on profits they haven’t earned.

For properties purchased before 27 March 2021 , these may qualify for a phased approach with the percentage of interest that can be claimed attributed to different years. It’s best to seek advice from us around this and what you might be able to claim.

There are some exclusions, which are obviously the main family home, and new builds are exempt too. New builds are defined as self-contained dwellings that receive a compliance certificate on or after the 27th March 2020 (note the change here, it was previously 27 March 2021). It will remain a new build for 20 years from the date of the certificate, regardless of ownership changes.

If you need assistance around interpreting these new rules, and how this will apply to you, give the NZ Tax Desk team a call. There is certainly a lot to take on board, however we can talk you through the new rules and what impact these might have on your individual situation.

Working remotely? How does tax work?

Mon, 20 Sep 2021 03:00:00 GMT

The COVID-19 pandemic has changed the lives of everyone in some way, shape or form. It has also been the catalyst for many New Zealanders living overseas to return home. The good news is that with advances in technology and the ability to work remotely, the move back home has not necessarily meant the need to leave offshore employment.

With the inability to move people around the globe, and a global human resource shortage, we are also starting to see offshore employers hiring staff in New Zealand to work remotely. People living and working in New Zealand could be employed by businesses in the UK, US, Canada or elsewhere.

With these new opportunities to work remotely for offshore businesses, it is important to understand and consider your tax obligations in New Zealand in respect of your salary income.

In short, if you are a New Zealand resident, you are obligated to pay tax in New Zealand on any income earned, unless an exemption applies. There are a few types of exemptions:

Transitional Residents

A new resident may qualify for a Transitional Resident Exemption which means they may not need to pay tax in NZ on their offshore income for approximately 48 months. However, this exemption does not apply to personal services income, i.e. income a person receives as a result of performing services. As a salary or wage is personal services income, the Transitional Resident Exemption will not apply – that income is taxable in New Zealand regardless.

Tax Treaties

If there is a Tax Treaty in place between New Zealand and the country of your employer, this will dictate which country gets the taxing right.

Tax Treaties differ from country to country and apply when both countries are trying to tax the same income. For the most part, employees will have already paid tax in the country of their employment i.e. PAYG in Australia. As New Zealand will also be trying to tax that income, we need to look at the Tax Treaty that the respective Governments have signed. Each is unique.

For example, there is currently a Tax Treaty between New Zealand and Canada that states that income from employment shall be taxed only in the country of tax residence unless the employment is exercised in the other country. If a person is a tax resident in NZ and performs the work in NZ, their salary is taxed only in NZ. As New Zealand has the right to tax the income, and Canada has no right to tax the income, the IRD won’t give this person a tax credit for the tax paid in Canada.

To understand whether an employee can claim a tax credit in New Zealand for this tax already paid offshore, we investigate each individual case and consider the Tax Treaty in place between New Zealand and the relevant country. And, as each Treaty is uniquely worded, bespoke advice for each would be required.

What are my tax obligations? It’s a complicated scenario…

It doesn’t stop with the Tax Treaties, unfortunately. When you are earning income from overseas there are a number of additional complications that we may need to work through, including:

State Taxes differ from Federal Taxes and different rules can apply.
Owning shares in an offshore company.

The bottom line is that working from home is, for many, one of the better things to come out of this pandemic. And having the opportunity to work for offshore companies remotely has opened more employment doors. But there are many complex tax implications if you don’t seek advice from experts in this area. Having to pay tax in one country is painful enough, so don’t get caught out with having to pay it twice!

For more information, help and advice, please get in touch .

Click To Paste

GST on Home Offices and Farmhouses

Tue, 27 Jul 2021 00:12:00 GMT

A hot topic of conversation amongst tax advisors, CAANZ, and the IRD lately has been the IRD’s release of Interpretation Statement 20/05 GST – Supplies of Residences and other Real Property (‘IS 20/05’).

The IRD’s position in the Interpretation Statement means that GST registered land owners, who have used their homes for home-based offices, will likely have to pay GST on the sale of that home.

What does this mean?

In summary, where a person’s home has been used in the person’s taxable activity, the sale of that home may be subject to GST. For example, a GST registered sole trader that uses their private home as an office, or a GST registered farmer who has (legitimately) claimed 20% of the farmhouse for business use.

The rule applies irrespective of how minor the taxable use is.

How did we get here?

In short, the Interpretation Statement takes a wander through time, through the various amendments to the GST Act, and finds a technical discrepancy with the removal of the “principal purpose” test. This means that if a Principal Place of Residence has been used in a taxable activity by a GST registered owner, any sale of that residence is likely to have GST on it

Can the home be zero-rated?

Section 5(15) of the GST Act means that the supply of a dwelling is generally treated separately from the supply of the rest of the land. As a supply of a dwelling, it is unlikely to be zero-rated under the compulsory zero-rating rules. Also, as a supply on its own, it is unlikely to be meet the requirements of a going concern.

Can we apportion the sale price between taxable and non-taxable use?

In short, no! The rule applies irrespective of how minor the taxable use is. The entire sale is subject to GST. Although a taxpayer may have only claimed 20% of the expenses, as the house has been used in a taxable activity, the IRD’s position is that GST is payable on the full house, not just 20%.

What if the taxpayer has only claimed the costs of running the home?

Unfortunately it is irrelevant whether the taxpayer has claimed merely the expenses of running the house/home office, as opposed to the actual cost of the house/home office. It is a question of use, not what expenses have been claimed.

Can you claim GST on the original cost of the home?

An input tax adjustment may be available under s 21 F, but as there is a cap on this claim (i.e. up to 15% of the cost of the home), this may be of little benefit. If there has been an associated party transaction in the meantime, this may be of no benefit.

For example:

Discussions with the IRD – where are they at?

The IRD is expecting a Bill to be introduced to Parliament in September 2021 which should remove the cap on input tax deductions. If this allows a taxpayer to claim GST on the market value of the farmhouse, this should go some way to mitigate the unfairness of a one-sided tax grab. But the IRD recognises this still does not solve the problem.

The IRD have stated they are “not dedicating resources to police this”. But in the meantime, their current interpretation of the law stands. If you have a transaction, the IRD has suggested applying for a Short Process Ruling.

Our thoughts:

Whilst the IRD has finalised its position in IS 20/05, there are a several areas where we don’t necessarily agree. Some key issue and questions have arisen:

If you have any questions relating to the above, please give us a call.

Celebrating R&D with Fieldays!

Tue, 15 Jun 2021 04:39:00 GMT

Fieldays is on – and in person this time! So once again it’s time to celebrate the innovative R&D that is happening in New Zealand in the Agritech space. The Innovation Hub at Fieldays is filled with exhibitors that represent the wider Agritech industry in NZ. These exhibitors work to provide alternative farming methods and revolutionary practices. They also create huge opportunities for jobs and growth. It’s definitely an exciting space to explore.

NZ Tax Desk work with a number of R&D businesses that operate in the Agritech space, and beyond. We really love being part of the R&D journey and can offer expertise in this area. This month we celebrate our R&D clients in this space, and start with a client profile of Ruatech.

CLIENT PROFILE

RUATECH

Ruatech was founded by a group of local scientists and experts in the wake of the COVID-19 Pandemic. Ruatech’s foundation idea is to harness nature’s method of early immune protection. Antibody transfer through milk is a critical part of our own immune development. RuaTech is using this principle to establish an immune milk platform for production of natural milk products with bioactivity against human pathogens. In essence, they are developing technology for protection against COVID-19 infection based on immune milk .

The RUATECH Solution

RuaTech aims to enhance the natural immune supportive effects of milk to provide protection against human pathogens. The company is designing a range of immune milk-based consumer products, including a milk product containing enhanced levels of natural antibodies for use as a preventative treatment for COVID-19.

Key points of difference:

• Ruatech’s milk product would complement conventional vaccines.

• It will provide immediate protection.

• Production is readily scalable and inexpensive.

Critically, the immune milk platform being developed by Ruatech is adaptable to many viral and microbial pathogens. Ruatech’s initial target is COVID-19 however that is just the beginning.

You can follow Ruatech’s progress here .

HOW CAN WE HELP WITH YOUR R&D JOURNEY?

Need funding?

There are a number of opportunities where we can assist R&D businesses to access financial support from either the IRD, or Callaghan. We have outlined a few of the opportunities below.

R&D Tax Incentive

R&D Tax Loss Cash Out

Callaghan Innovation

Budget 2021

The Government’s 2021 Budget includes funding that could also assist those in the Agritech space. This assistance includes $300m to accelerate investment in low-carbon technology, $24m to boost research and development for agricultural greenhouse gas mitigation and $37m for the development of a national farm planning system for farmers and growers. We will wait to see how these funds are allocated and how you can access them.

GET IN TOUCH

Want to talk about your ideas? Your journey? Get in touch to arrange your complimentary introduction session now.

Angela Hodges (CA)

NZ Tax Desk Ltd

Web: www.nztaxdesk.co.nz

email: angela.hodges@nztaxdesk.co.nz

phone: +64 021 023 08149

Post Budget Update, and the impact on the New Zealand economy

Fri, 21 May 2021 02:15:00 GMT

I’ve just watched Tony Alexander’s post Budget Update. As always, Tony is informative and interesting. But the key point for me this year, following yesterday’s Budget announcements by the Government, is that we are not an economy short of customers or opportunity. The economy seems to be in a good spot. However, we are seriously constrained by our access to labour. And that is not going to get any easier:

How does this impact on you in business in New Zealand?

Resource Planning

We need to reconsider our approach to Strategic Planning. Traditionally we would work out where a business needs to invest to get the desired customers and return. We would then look at how we resource that growth. We need to reverse this approach. Start with analysing what resources you already have. How do you better utilise those resources? Training? Investing in technology to boost productivity? Then – work out the best route forward for your business to utilise those existing resources. The challenge is that this could mean cutting output, or culling your lowest yielding clients…

Pay-rises

Tony made an interesting comment about what to do if your staff are asking for pay-rises, and you cannot afford them. He suggested:

Infrastructure

The Government has made huge promises to build infrastructure and allocated billions in successive Government Budgets. The reality is they are unlikely to be able to resource these projects with labour and construction materials. And the likelihood is that they already know this…

Listen to Tony Alexander’s Budget Review, as sponsored by TMNZ, in full here:

Let’s talk.

Want to discuss how these announcements will impact your business? We are happy to help.

Angela Hodges (CA)

NZ Tax Desk Ltd

Web: www.nztaxdesk.co.nz

email: angela.hodges@nztaxdesk.co.nz

phone: +64 021 023 08149

*This publication contains generic information and opinion 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 advice for your circumstances.

The new tax rules – will you pay more tax?

Tue, 18 May 2021 01:34:00 GMT

the new Tax rules, provisional tax and cash flow. How the changes could impact you.

The new tax rules recently introduced by the Government will mean more tax to pay for many taxpayers. The impact of these changes needs to be understood and considered when planning your cash flow.

What changes?

Since I last updated you about the tax changes commencing from 1 April 2021, there has been another raft of changes to our tax legislation. Some of these new tax rules were anticipated, but some were certainly surprising, and could be significant.

Now we are in the 2022 income year, we not only have the higher income tax rate, which is supported by higher FBT and RWT rates, we still have the residential rental loss tax ring-fencing carrying forward and applying in new and challenging situations, and the complicated mixed-use asset rules to really mystify the tax landscape.

We now also have an extended Brightline Test, with changes to the main home exemption. And the removal of an ability to deduct interest by owners of residential rental properties. The changes can apply retrospectively and are bundled with transitional measures to guarantee a continuously changing landscape over the next five years.

You’ve probably got the point – we need to talk.

However, in the meantime, I wanted to give you a high-level overview of things you should be thinking about upfront.

Why?

Because you may need to pay more tax. And that is going to impact on your cashflow.

What are the new tax rules, and how will they affect my tax liability?

New personal tax rate

A new 39% income tax rate for individuals earning income over $180,000. Previously New Zealand’s top individual income tax rate was 33%. If you are in this income bracket and paying provisional tax, we need to increase your provisional tax payments to take into account the higher tax rate.

Do you own residential rental properties? Your tax liability is likely to increase:

Brightline changes

The extended Brightline Rules mean that the sale of a property within ten years could be taxed.

Although the Brightline Tax may be a tax on capital gains, at its heart it is an income tax. This means you must pay the tax at your income tax rate and include it in your tax liability for the year. This can create a raft of surprises for provisional tax… particularly now the highest personal income tax rate is 39%. If this could impact you, we need to put a plan in place to address this issue.

The changes to the main home exemption could also mean more homes are taxed on sale. Although your main home continues to be exempt from the Brightline Test, there is a difference in the way you classify it – particularly if there are periods where you are not living in the house. Are you building a house? Are you being seconded elsewhere? Taking an extended break? Not living in your house whilst completing renovations? These scenarios could trigger a taxable period of ownership – even if it is your main home.

Results Better than expected?

There are also non-tax influences that impact on a business profit, and therefore tax liability. We have had record low interest rates and, in some circumstances, higher levels of income. We have seen many sectors out-perform earlier expectations, and some businesses have had record profits. These higher profits need to be factored into provisional tax liability calculations. Easier said than done without a crystal ball I know.

When?

This tax is due for your 2022 income year. If you are paying tax on your terminal tax date, this is likely to be due 7 April 2023 – if you are on our IRD Agency List and have an extension of time.

However, the tax may be due earlier if you fall into the provisional taxpayer criteria:

What is provisional tax?

Over the next 12 months many taxpayers that have never been provisional taxpayers before are likely to find themselves liable as provisional taxpayers. This is a direct result of the tax changes that mean they will have more tax to pay. So, what do you need to know about provisional tax?

Got it wrong?

Inadvertently become a provisional taxpayer? Find yourself with a large tax bill? Talk to us now, we have options to minimise the penalties and interest if you act fast.

Angela Hodges (CA)

NZ Tax Desk Ltd

Web: www.nztaxdesk.co.nz

email: angela.hodges@nztaxdesk.co.nz

phone: +64 021 023 08149

Trans Tasman business structures.

Mon, 03 May 2021 00:12:00 GMT

Expanding your business to New Zealand? Today we are discussing Trans Tasman business structures – opportunities and pitfalls.

With the opening of the Trans-Tasman bubble, we are seeing an increasing number of Australian businesses looking to set up in New Zealand. This is fuelled not only by the delay in expansion plans over the previous 12 months whilst businesses waited out the Covid travel restrictions, but also the difficulties Australian businesses are facing with the Chinese export market. Australian businesses have always seen New Zealand as a great ‘test’ market before they expand to other destinations. Now New Zealand is becoming more of an opportunity in its own right.

However, as similar as New Zealand may be in many things, it still has its differences. Tax is one of those areas that can trip you up.

The first question we usually get from clients is “how do we set up a presence in New Zealand?”.

The most common options are a branch of your Australian business, or a separate New Zealand subsidiary company. Each has its own pros and cons. You will need specific advice for your situation, to ensure your structure fits your requirements and your plans for the future. There are also difficult questions about tax residency and dual resident companies. And you should also consider alternative structures, such as a Limited Partnership, a General Partnership, a Trading Trust or a Sole Trader which could suit your businesses better.

Today we discuss, at a very high level, your options to set up a branch, versus a subsidiary. If you are looking to establish a presence in New Zealand, we are happy to discuss these options, and more, with you.

Trans Tasman Business Structures – Option One: Branch of Australian company

Pros and cons

Trans Tasman Business Structures -Option Two: Incorporate a subsidiary company in New Zealand

Pros and cons

Other considerations

Of course, tax is only one consideration when you are looking to set up a business in New Zealand. There is a myriad of other things to consider, and people to talk to. We work closely with Austrade in New Zealand. Austrade can put you in touch with numerous experts who can help your business set up go smoothly.

Contact:

Contact us now to discuss your specific needs. We can provide you with recommendations for your business, and also set up your New Zealand structure. Lets talk!

Angela Hodges (CA)

NZ Tax Desk Ltd

Web: www.nztaxdesk.co.nz

email: angela.hodges@nztaxdesk.co.nz

phone: +64 021 023 08149

The role of a Chartered Accountant in 2037?

Wed, 07 Apr 2021 02:57:00 GMT

A Chartered Accountant is an expert in what they do. They have significant training and experience and operate under a Code of Ethics which means they can only offer services and advice when they know what they are talking about. A Chartered Accountant is an expert and a trusted advisor for their clients.

But times are changing and it is becoming increasingly difficult to keep up with the new demands on our profession.

The changing world of Accounting

Nigel Latta famously predicted in 2017 that accountants will be out of a job within 20 years. He suggested their numbers would be slashed from 17,669 in 2017, to as few as 19 by 2037, because accountants will have been replaced by robots and algorithms.

Latta is correct in terms of the increase in automation we have already seen in the profession since 2017. Accounting functions have increasingly been moving into “the cloud”, and we are certainly witnessing the rise of artificial intelligence; machine learning; robotic process automation; and the adoption of various other accounting technologies.

However, I think Latta has forgotten to factor in the human side of accountancy – the side that cannot be replicated by robots or technology. The fact that accountants are actually pretty smart and are not just going to put their heads in the sand and be replaced by automation. Instead the accounting profession has been evolving.

The days of sitting down with clients and going through a set of accounts that could be 18 months old is quickly being replaced with regular catch ups, where accountants are using new technology to provide real time data and forward looking KPIs to clients. Accountants are taking their knowledge of working across a range of businesses and industries and are honing their skills to provide valuable business advice. This new, forward looking Business Advisor part of the role, is meeting increased demand from clients who want more from their accountant: – more advice; more information; on a more timely basis.

Behind the scenes things are changing too. Accountants have to keep up with both accounting regulations, and the ever-changing world of tax. In addition to the compounding legislative requirements of CRS, AML, and XPV – I made up XPV, but you get the picture. Accountants are now expected to be an all-round business superhero. And if we get it wrong – the penalties can be severe.

What about Tax Advisors?

As a Chartered Accountant who specialises in tax advice, I can’t sit in my glasshouse and throw stones. The changes don’t stop with BAS accountants. Tax advice is a key area that could be replaced with algorithms and artificial intelligence with predictive technology over the next twenty years – meaning tax advisors are not immune to future changes either. But, in the same way it does for BAS Accountancy, the future lies in using new technology as a tool. Using these tools, combined with our business knowledge and people skills to provide valuable advice to clients into the future.

A good Tax Advisor not only needs to be able to understand a set of accounts, but also a client’s business. Plus, they need to ensure their advice is practical and commercial. They must also understand the political and economic world they operate in, and the drivers of upcoming changes.

They need to be able to have a conversation about the real-world impact of those super clever technical tax solutions they come up with – and to have the skills to communicate their knowledge in a way a client can easily understand. These are people skills and involve the intricacies of human interaction. Aspects a robot just wouldn’t understand.

The solution?

Increasingly, accountants will need to be able to have a conversation with their clients about the impacts of a broad spectrum of legislation. Accountants need to know enough about tax rules and changes to tax legislation to be able to identify issues for their clients. And in turn, be able to discuss these tax issues with their clients .

But no-one is expected to be an in-depth expert across all fields. This is where an accountant may find they need to bring in, and rely on, trusted independent experts. The tax team the Big Four and other large players have long had access to. For the hard questions – “The Too Hard Box”.

We want to help you to be an all-round business superhero.

We want to free you up to be the best trusted advisor you can be to your clients. We want you to be able to focus on providing fantastic advice and support for your clients. You do what you do best, and delegate those niggly tax questions to us. And we do what we do best, provide specialist tax advice.

But not just any tax advice. Tax advice that will take on Nigel Latta’s predictions and show his robots up for what they are … walking, talking legislation (well maybe not walking…).

As a team, we strive to be commercial. We understand you need answers and recommendations – not maybes. We speak English, not technical tax lingo. And we know our solutions need to work in the real world – there is no such thing as a one-sided journal.

How we have helped our clients with the “The Too Hard Basket”:

Just a sample of issues we have looked at for other advisors over the past few months:

If you want to know more on how we can help you please get in touch on 021 023 08149

2021 financial year-end – opportunities to save tax?

Sun, 21 Feb 2021 21:03:00 GMT

It’s a matter of weeks until the financial year-end for many taxpayers in New Zealand. But this 31 March isn’t just any year-end. For some, it marks the end of an incredibly tough year, both personally and for their businesses. For others, 2020 was a year of new beginnings.

From a tax perspective, however, there are a number of unique opportunities, introduced to bolster an economy facing a once in a lifetime downturn. And of course, 1 April marks the introduction of a higher personal tax rate.

This year, it is more important than ever to take a breather from working in your business, to consider what needs to be done to take advantage of the opportunities these changes present.

Buying things? Covid rules end 16 March 2021 – save tax now.

If you are in business or have investment properties, we have probably talked to you about this temporary tax concession. But to recap, the Government introduced a concession to encourage you to get out there and spend up.

Previously, if you purchased an asset which cost $500 or less, we could generally deduct the cost, rather than capitalising it. This meant it reduced your taxable income and gave you a bit of a drop in your tax bill. The catch is, of course, it needs to be a business-related asset.

During the initial Covid lockdown, the Government passed legislation that temporarily increased the low-value asset threshold from $500 to $5,000. This allows you to deduct the full cost of business assets where they cost less than $5,000 – an opportunity to save tax.

The Government has only raised this threshold for a short time until 16 March 2021 .

For assets purchased on or after 17 March 2021, the threshold will be $1,000.

So, if there is anything you need to purchase for your business, we recommend you consider doing this before 17 March 2021.

New Tax Rate

From 1 April 2021 the top personal tax rate increases from 33% to 39% for income over $180,000. A range of taxes will be increased in line with this (e.g. FBT, RWT), to ensure an individual in the top tax bracket will be paying the new 39% tax rate across the board. This effectively eliminates opportunities to structure an income package to avoid this additional tax, and also, in some cases, penalises lower-income earners. But that’s a topic for another day.

However, there are still opportunities if you are quick.

Dividends

If your company has retained earnings, and individual shareholders, you should consider paying a dividend before 31 March (subject to cashflow of course!). This should ensure the income is taxed at 33%, rather than the 39% that will apply from 1 April. Talk to us now.

Structuring

Likewise, there may be an opportunity to restructure your business or shareholding.

Talk to us about how to do this.

Reward your staff

If you are considering rewarding your staff after an incredibly difficult year, it is best before the financial year-end. Particularly if their income is over $180,000.

The usual year-end considerations

As with every end of financial year, there are a raft of issues to consider. However, with an economic environment impacted by a global pandemic, some of these issues are more critical than ever.

Bad debtors – could be worse with Covid

Review your debtors. If you think you are unlikely to get paid, write the debt off before the end of the financial year. That way, at least it should be tax-deductible.

Repairs and maintenance

You may want to consider undertaking any necessary repairs and maintenance prior to the end of the financial year, but please talk to us to check that you can get a full deduction for tax.

Take stock

Know when to ask for help

Get in touch with us as early as possible. We can talk about what you can claim for and what you can’t.

Set some goals – what does success look like?

Whilst 31 March marks financial year-end for many taxpayers, it is also the Eve of a new financial year. And it’s a great time to get clear on what success looks like for your year ahead.

Although 2020 may have been a write-off that you wish to erase from memory… now you have an opportunity to reflect on your learnings, achievements, and the things you’re grateful for. Whilst there’s a lot of uncertainty about what the year will bring, we can take our 2020 learnings and plan for a better 2021/2022.

And of course, in this covid environment planning is more than just factoring in seasonal trends and considering cashflow needs. It’s considering our new working environment. Factoring in contingencies that were previously inconceivable. And reconsidering the measures of success in a new world.

Having defined goals is one of the most important things you can do as a business owner – helping you plan, prioritise and innovate throughout the year.

Here’s to a New Year…

Let’s stay connected this year, we are here to support you in any way we can. Get in touch to talk about planning, opportunities and strategies.

No matter what the year brings, we know it will be better if we work together.

Contact Angela at NZ Tax Desk Ltd:

E: angela.hodges@nztaxdesk.co.nz
P: 021 023 08149

*This publication contains generic information and opinion. New Zealand Tax Desk 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.

Let’s plan for a better 2021!

Wed, 17 Feb 2021 23:58:00 GMT

2020 may have been a write-off that you wish to erase from memory… but let’s take a moment to reflect on your learnings, achievements, and the things you’re grateful for. Let’s use what we have learnt from 2020 to set our goals for a better 2021.

2020, a year of firsts.

What a year 2020 was… none of us saw that coming! While there’s a lot of uncertainty about what 2021 will bring, we can take our 2020 learnings and plan for a better 2021.

Before we completely erase 2020 from our minds, let’s take some time to reflect on all we achieved. Ask yourself the following questions and write down your answers, storing them somewhere safe to revisit at the end of the year.

Here’s to 2021… what goals will you be smashing?

Let’s stay connected this year, we are here to support you in any way we can. Get in touch for a catch-up, or book a planning session. Write down your 2021 goals, and send them through to us. We can go through your 2021 goals, and your progress, at our annual check-in.

These are just some of the ways we can help.

No matter what 2021 brings us, we know it will be better if we work together.

Here’s to 2021!

Christmas hope

Tue, 15 Dec 2020 23:23:00 GMT

We here at NZ Tax Desk have a lot to be thankful for. We wanted to reach out and say ‘thanks’ to you for supporting us in this unusual and difficult year.

We have enjoyed working with all of you, and wish you a Merry Christmas, a fantastic holiday period, and a prosperous New Year!

This year we have chosen to support the Salvation Army 2020 Christmas Appeal in your honor. Below is a bit more information about the Salvation Army’s cause, and how the donation will benefit those most in need.

Originally posted on the Salvation Army website:

What are you hoping for this Christmas?

The closeness of your family coming together, good food and festive cheer?

Maybe you are hoping to receive a special present.

Or perhaps you just hope you can find a way to care for your young kids over the school holidays while you struggle with two jobs.

Perhaps your hope this year is for a Christmas dinner that’s more than just two-minute noodles.

Perhaps your hope is for peace for your whānau and a chance to put the stresses of 2020 behind you.

For some, Christmas will be a welcome end to a difficult year. But for many, it will mark the first time they have had to reach out for support from the Salvation Army.

Most of us know someone who has been hard hit by the Covid-19 pandemic. But there are many others who you don’t know personally. They could be in your street, your neighbourhood, without you knowing it.

Families who previously felt secure, now find themselves in dire situations—financially, emotionally and mentally. The Salvation Army sees these people every day and we are expecting even more over the coming weeks.

The Army offers a suite of services to wrap around vulnerable people and help them up and out of poverty. From budgeting advice to positive lifestyle programmes, housing support to addiction services, social work to advocacy, The Salvation Army has a history of offering hope and creating resilience.

Right now, we’re already facing unprecedented demand for our wraparound services. Recruitment and training of an additional 15 Budget Advisors is needed to cope with financial mentoring over the next months. We’ve also seen a 35 percent increase in the need for support with wellbeing. And this is likely to increase as Christmas gets closer.

This makes the need for support greater than ever before, as we see many new families in crisis coming to The Salvation Army.

“For too many New Zealanders, the only gift they want this Christmas is ‘hope’. Hope to regain stability; hope to get back their dignity and self-esteem; hope that Christmas Day will bring even a little joy; hope of regaining their emotional wellbeing; hope for the future,” says Jono Bell, Territorial Director for Community Ministries.

In 2020 we’re asking New Zealanders to share their hope for the future by contributing to our work. Help The Salvation Army restore hope and transform lives. Help us to bring a brighter future. Give the gift of hope.

The Christmas present New Zealand really needs is sitting in Santa’s sleigh but…

Tue, 15 Dec 2020 22:27:00 GMT

New Zealand’s profile throughout the world has been raised by the collective endeavor and success of the “team of 5 million” in combatting the Covid crisis. This deserved profile, and the shenanigans that is US politics, has seen New Zealand rise in the ranking of the world’s most desirable countries to live – and particularly amongst those families who have achieved the business success and financial standing to actually contemplate and make such a move.

The Investor residence category, which caters for these families, comprises two streams:

The past 6 months has seen unprecedented demand from families applying for New Zealand investor residence but New Zealand’s border restrictions are now proving a major, and potentially fatal, obstacle. Firstly, we have some $500 million which has already been transferred and invested in New Zealand by applicants who have previously been approved for residence but who are now not allowed to actually enter the country. Then we have newly lodged applications, representing about $1.5 billion in investment, whose applications cannot be decided (apart from those applicants who are now in New Zealand) because of the current border restrictions. And so we have these visa applications, representing $2 billion in investment and less than 1,000 family members in total, effectively stuck in no man’s land (and there is at least another $1 billion “incoming”).

Even though the $2 billion would provide a very welcome impetus to aid New Zealand’s economic recovery it is really just the wrapping. The Xmas present that New Zealand really wants, and would benefit most from, are the families who would make New Zealand their new home. These families are largely self-made, highly motivated to succeed, are from truly diverse backgrounds, widely and internationally “connected”, and are keen to seek out new opportunities. Their individual stories are truly amazing. They are energized go-getters who have the drive, capital and where-with-all to make big things happen, and quickly, and are one of the best Xmas presents New Zealand could hope for. In nearly every case they have visited and spent time in New Zealand, some enjoyed their honeymoon here, others have walked our native tracks and many have friends and family here. They know what they want, and have taken their first step in lodging their visa application – but with no action on our border, and the world moving on from Covid, that may be their last step!

The US election is now (almost!) over and the motivation of Americans to relocate is not as urgent as before. The Covid vaccines are very close to being rolled out and New Zealand’s safe-haven status is not as much of a draw card as it has been. Australia has recognised that migrant investors are “an important part of Australia’s economic recovery and will create jobs and bring high value investment to help Australia” and has increased its investor migrant program to 13,500 places – AND investor migrants in Australia are being actively approved and given immediate border entry. The world is moving on while New Zealand focusses inwardly, and goes on holiday..

Our Christmas present is sitting in Santa’s sleigh postmarked for Aotearoa – but will it be delivered?

Richard Howard

NZ Tax Desk is a preferred supplier of New Zealand tax advice for new residents and works closely with Pathways to New Zealand .

Richard is the Managing Director of Pathways to New Zealand Ltd, one of New Zealand’s longest established and foremost immigration advisory companies.

Moving to NZ. Keeping your home overseas?

Tue, 15 Dec 2020 22:17:00 GMT

Having an overseas rental property could cost you more than you think. But we can help you to manage that cost.

We have many clients that, when moving to New Zealand, decide to keep their home offshore. This can be a great back-up if you want to return, and of course, your home may contain many happy memories, and you just may not want to part with it. However, you need to be aware of the New Zealand tax implications if you keep your overseas property and rent it out.

Firstly, most new residents should qualify for the Transitional Resident Exemption. This is a four-year tax exemption on certain categories of overseas income. Whilst you are Transitional Resident, you generally should not need to worry about New Zealand tax on the overseas property. However, you need to know how keeping this property is going to impact your New Zealand tax position, after your Transitional Resident period.

The following discussion relates to someone who has become a New Zealand tax resident, who is not a Transitional Resident.

Overseas Rental Income

Let’s start with overseas rental income. Once you are a New Zealand tax resident, and your Transitional Resident period has expired, you will need to include any overseas rental income in your New Zealand tax return. Where you have paid tax offshore, you are likely to receive a credit for that tax paid. However, there are a number of discrepancies which mean there is often more tax to be paid in New Zealand.

Firstly, your overseas rental income must be re-calculated in accordance with New Zealand tax legislation. Unfortunately, we can’t simply use the rental income in your overseas tax return. Re-calculating the rental income under New Zealand’s tax rules is likely to result in a different rental income figure.

We particularly see issues with countries where there is a tax-free threshold, such as the United Kingdom. Or countries which have large deductions available for property owners, that New Zealand doesn’t recognise, such as the United States. These issues often mean that when we re-calculate the rental income under the New Zealand tax rules, the client has additional tax to pay in New Zealand.

Conversion into New Zealand dollars

The overseas income needs to be converted into New Zealand dollars. Specific rules apply.

Foreign loans on your overseas rental property

Foreign loans or mortgages can create nasty surprises for new residents.

It is common for clients to still have an overseas loan in relation to the rental property (a mortgage). However, these loans can create issues under both the Non-Resident Withholding Tax and Financial Arrangement rules. These regimes add further complexity, time, and costs to owning an overseas rental property. We discuss these rules further below.

Non-Resident Withholding Tax (NRWT) issues

NRWT is a form of withholding tax. This means the payer deducts an amount from the payment. The payer then pays this to the IRD rather than the intended recipient of the payment.

Where a New Zealand tax resident pays interest to an overseas bank, that person may need to first deduct NRWT from the payment, and instead, pay this to Inland Revenue. However, as most banks will not let you deduct any payments from their interest charge, chances are you will be paying the NRWT on top of your mortgage payment.

NRWT is generally deducted at 15% (of the payment). This can be reduced in some cases, depending on whether there is a Double Tax Agreement in place.

There is an alternative to NRWT. If you qualify, the Approved Issuer Levy (AIL) regime requires a payment of a 2% levy, rather than the 15% NRWT. However, as this registration cannot be back-dated, you need to ensure you are set up ready to go before the end of your Transitional Resident Exemption.

Gains and losses on overseas loans

The Financial Arrangement (FA) rules are complex (and particularly nasty). However, you need to consider them if you have an overseas loan or mortgage.

Essentially the calculations will tax any gain or loss incurred in relation to the mortgage. This includes any foreign exchange gain or loss. For example, if you start with a mortgage equivalent to NZD500,000, and you make no principal repayments, and at the end of the period the mortgage is revalued, according to the exchange rate at that time, at NZD400,000, you have effectively made a gain of NZD100,000. This is because your liability, in NZD, has reduced.

New Zealand may tax this gain under the Financial Arrangement regime. You could be taxed annually, or at the end of the loan period (generally when it is repaid), depending on the applicable rules. This calculation can be particularly complicated and can result in a tax liability, despite the absence of any realised cash gain available to pay that liability.

Selling your overseas rental property

Finally, when the time comes to sell your overseas property, you may also be caught by New Zealand’s “bright-line test”. The “bright-line test” can tax a gain on the sale of rental properties that are bought and sold within ten years, regardless of where the property is located and irrespective of whether tax is paid in that overseas country.

You may qualify for a foreign tax credit in New Zealand if you have also paid tax in the overseas country. Where available, a foreign tax credit can effectively reduce any double tax impact. Unfortunately, this can be difficult. We strongly advise you get specialist New Zealand tax advice before you sign an Agreement to sell the property. We are happy to help.

Overall, there are a number of fish-hooks if you own overseas properties once you become tax resident in New Zealand. However, we can help you to manage this risk. If you wish to keep your overseas home we recommend you talk to us as soon as possible, and ideally before you move to New Zealand.

If you have any questions, or would like further advice regarding your overseas property, please contact Angela now.

Post Election Update

Sun, 08 Nov 2020 23:34:00 GMT

The Election is over, and the Labour Party has taken a historical win. Now, with another term of Labour Government, are we up for further tax changes?

As with most elections, there were a range of tax policies on the table in the lead up to New Zealand’s Election on Saturday. With the Labour Party taking the majority of seats they are capable of governing alone. So what do we expect in terms of tax changes?

Wealth and capital gains taxes – Election promises put to bed?

One of the biggest concerns leading up to the Election was the Green Party’s Wealth Tax. The Green Party heralded its Wealth Tax as its bottom line in any negotiations to form a Government, which made it a very real possibility. The proposed Wealth Tax would tax net wealth at 1% over $1m and 2% over $2m.

With the Labour Party having won enough of the votes to govern alone, it does not need the support of a minor party, i.e. the Green Party. However, Labour has not yet confirmed it will govern alone and has entered into discussions with the Green Party. That said, Jacinda Ardern has confirmed, categorically, that she will not impose a capital gains tax, or a wealth tax. With the Green Party lacking the leverage to get their new tax across the line, hopefully, this is the end of the proposed Wealth Tax in New Zealand. Until the next election at least.

Income tax

The Labour Government will introduce a new, higher, income tax bracket of 39% for individuals on income over $180,000. The Labour Government’s approach to the post-Covid economy has been to subsidise and spend, with borrowed money. The higher tax rate is a proposal to repay that debt.

However, where company and trust tax rates remain at 33%, the reality is that this new higher tax bracket is likely to impact salary and wage earners the most, and is highly unlikely to return any real revenue to the Government.

We will be working with our clients to manage these changes.

Property

From a property perspective, the Labour Government has already introduced tax changes for residential property investors.

The theory behind these tax changes was to “disincentivize” investment in residential rental property, in order to address New Zealand’s housing crisis and encourage personal home-ownership. Although the percentage of first home buyers has increased, the housing crisis has also increased dramatically making it extremely difficult to secure rental houses in New Zealand. Unfortunately, disincentivizing investment in good quality rental homes with punitive tax rules appears to be counterproductive.

Not surprisingly, with the Labour Party back in Government, we are not expecting any changes in this area:

The current five-year Bright Line Test will remain. In English, the Bright Line Test means that if you buy and sell a residential property within five years, you will be taxed on the gain. A pseudo capital gains tax. There is an exemption for your family home.

Labour’s ring-fencing rules for Residential Property Tax Losses will also remain. These Rules mean that an owner of a residential rental property that incurs a loss cannot offset that loss against other income. So if I own a rental property and I have to top it up each year, I have probably made a tax loss. Where I am paying tax on my salary, or business income, I cannot offset the tax loss against my income to reduce my overall tax bill. Instead, I still pay full tax on my salary or business income, and my tax loss from my rental property sits off to the side. These ring-fencing rules do not apply to any other business in New Zealand.

Should you need help with the new tax rules, please get in touch with Angela .

E: angela.hodges@nztaxdesk.co.nz
P: 021 023 08149

New Zealand in demand by migrant investors

NZ Tax Desk is a preferred supplier of New Zealand tax advice for new residents and works closely with Pathways to New Zealand Limited, one of New Zealand’s leading immigration advisory firms. With the world in turmoil, Richard Howard has provided an update below on immigration in New Zealand and his thoughts on any post Election changes.

The level of interest in the New Zealand investor residence categories since the COVID crisis descended on the world as surpassed anything seen before – and this interest is continuing. While there have been times in the past which have seen high levels of investor inquiry these have not followed through into actual applications and investment. But it is a different world now!

Over the past four months, we have contracted more investor residence visa casework than we have had in the previous four years. There are two investor categories one of which requires an investment of NZ$10 million over 3 years, and the other requires an investment of NZ$3 million over 4 years. Each category has different eligibility criteria and while there is a range of qualifying investments these investments remain under the full ownership and control of the applicant throughout the investment term. Expectations are that between NZ$2 – $3 billion of investment is possible from investor resident visa applicants to aid New Zealand’s economic recovery in the next year alone.

While most of the interest we are seeing is from the USA we also have significant interest from Hong Kong, Singapore, the Philippines, Indonesia, South Africa, and Europe. It is very apparent this interest is being driven by COVID and New Zealand’s successful management of this epidemic by comparison with other countries – and by the forthcoming USA election.

There is no doubt New Zealand is now a very attractive country to live, study, work, and invest in and the new Labour Government will be taking time to consider an “across the board” reset of all its immigration settings and while border restrictions remain in place. The likelihood is that this reset will see a focus on smaller numbers of migrants, students, workers, and investors and on those who are best matched to, and most desired for, New Zealand’s requirements in this new and changing world. New Zealand’s ranking as a preferred migrant destination is on the rise!

Richard Howard

Richard is the Managing Director of Pathways to New Zealand Ltd, one of New Zealand’s longest established and foremost immigration advisory companies.

Traveling New Zealand during Covid

As many of you know, we spent most of our winter traveling the South Island of New Zealand with the family, in a caravan! I have enjoyed the flexibility to start a new business, whilst developing meaningful relationships with clients throughout the world, and exploring New Zealand, spending quality time with my family.

We had originally intended to travel Europe for nine months, and still own a campervan sitting in the Netherlands. Although Covid clearly meant a change of plans, New Zealand in winter has been stunning. In the absence of a global pandemic, I probably would never have signed up to travel the South Island during winter, which meant I would never have seen the stunning skies, woken up to fresh snow, or experienced the crisp mountain air.

Every cloud has a silver lining, and New Zealand in winter was our covid cloud’s silver lining.

October 2021

Tax residency rules and the lockdown

Mon, 30 Mar 2020 00:29:00 GMT

If you are in the process of moving to or from New Zealand, or you are spending regular periods in New Zealand, you are probably carefully managing your tax residency status. With the advent of the Covid-19 pandemic, I’ve had enquiries from people who are now either stuck in or out of, New Zealand. Specifically, what this will mean from a tax perspective?

New Zealand Tax Residency Rules

Generally speaking, you can be considered a tax resident in New Zealand if you:

In particular, the 183-day test can cause issues here. If you are physically present in New Zealand for more than 183 days in any 12-month period, you will be treated as a tax resident from the first day you were present here. If you earnt any overseas income during this time, it could be taxed in New Zealand. Your tax residency will also impact the timeframe you have to deal with other overseas investments.

Tax Residency and Companies

Companies are often deemed tax resident in the country where the ultimate management and control takes place. If you have an interest in an overseas company, and are acting as a Director or otherwise influencing that company, these controls can influence where the company is tax resident. If you are no longer able to travel to attend meetings, you need to consider whether this could impact on where the company is tax resident.

Your tax residency implications for offshore Trusts

Your tax residency also needs to be carefully managed in terms of offshore Trusts. You have 12 months to elect for these Trusts to become Complying Trusts with the Inland Revenue. If you miss this timeframe, there is no second chance.

The election to become a Complying Trust in itself needs to be carefully managed, as the Inland Revenue could have a claim to any earnings already sitting in that Trust.

Double Tax Agreements can provide tax relief in certain circumstances. However, our tax rules are intricate, and Double Tax Agreements can be of limited relief in certain circumstances. This can be particularly relevant for offshore Trusts.

If you find yourself stranded in New Zealand, you should talk to us for specialist tax advice. The cost of getting it wrong could be significant.

*This publication contains generic information only. New Zealand Tax Desk 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.

Useful links

New Zealand tax, an introduction for new residents

Inland Revenue – Trusts and tax residency

Lockdown

Thu, 26 Mar 2020 23:21:00 GMT

Having recently resigned from my corporate career with the intention to travel the world and spend time with my family, we are now in lockdown. Covid-19 has meant all of New Zealand, with the exception of essential services, must ‘stay home’ for at least four weeks.

My husband and I have always dreamed of traveling with our children. We finally decided now was the time, and given our girls’ ages, it was really now or never. We sold a rental property, resigned from our jobs, and purchased a campervan in the Netherlands. Right now, I’m not even sure where the campervan is, as the Netherlands is also in Lockdown!

When Covid-19 started to hit Europe, and the borders closed, we decided to delay our trip. We looked at purchasing a caravan in New Zealand, to explore the South Island in the meantime. But the virus and the controls put in place to fight it ramped up pretty quickly here. We were placed in lockdown before we could head out on our domestic travels.

So our dreams are on hold, but I remind myself, I still have many things to be grateful for. For one, I am grateful for being in a country with natural borders where we have managed to keep the virus out for long enough to learn from the reactions of other countries.

Being in lockdown also means I can dedicate more time to growing this new practice.

Finally, I remind myself that when we traveled to the US and Canada for six weeks a few years ago, many people asked me what was my favorite part. My answer – spending six weeks full time with my children. I’m trying to remember that now as we are locked inside for a month with grumpy teenagers!

I hope you are all well out there and taking care of yourself and your loved ones.

Take care.

What is a Tax Desk?

Tue, 25 Feb 2020 07:30:00 GMT

A Tax Desk, or an International Desk, traditionally refers to a Tax Specialist operating across borders. It’s a specialist Tax Advisor on a temporary assignment away from their home jurisdiction, offering expert advice in their seconded home.

As a New Zealand Tax Desk, our primary objective is to advise international clients about tax risks and opportunities in New Zealand.

At the same time, I will be on assignment away from my home jurisdiction of New Zealand. For the remainder of 2020, I will be traveling throughout Europe with my family and operating from a mobile office.

For you, this provides the unique benefit that I am located in Europe, in a compatible timezone to discuss your requirements and obligations. Having recently stepped away from the corporate environment, my smaller client base also means I can personally be available when you need assistance.

I’m looking forward to discovering Europe, spending time with my children, and working closely with clients on a more personal level. I’ll also be taking time to meet with my European based clients face to face, and to meet with specialist advisors in this space.

I look forward to meeting you!

Angela