Residential rental losses now restricted
As forewarned in our previous tax publications, the government has now passed the law which will restrict...
We all know that cars and companies don’t mix – if you operate via a company and that company provides a vehicle to an employee (that includes you as a shareholder employee) Fringe Benefit Tax (FBT) is payable. On a typical $50,000 sedan car the rate at which FBT is levied is 20% of the GST inclusive value. FBT is usually calculated at 49.25% of that. Thus FBT comes out at something like $5,000 per annum. Sure you also get a tax deduction for the FBT you pay and that reduces your cash cost by 28%, but then there’s the GST to pay on the “supply” to the shareholder employee. So overall, it still costs you somewhere around that $5,000 mark in FBT to have a $50,000 car in a company. Push the value of the car over the $100,000 mark and the FBT costs certainly get ugly. For this reason we’ve normally kept higher priced vehicles out of companies.
If you contrast this with someone who operates exactly the same business as you but as a sole trader or partnership, FBT doesn’t apply. However, you are exposed to unlimited personal liability if you operate on your own or in a partnership, so there is a trade-off.
From 1 April this year IRD has decided that if you operate via a company then, as long as the company shares are owned by natural persons (no trust, for instance) and there are 5 or fewer shareholders, the company can purchase up to 2 vehicles and no FBT is payable. Companies with 5 or fewer natural person shareholders (Close Companies) are now treated much like sole traders and partnerships for FBT purposes when it comes to vehicle ownership.
The upshot is that after you’ve determined the percentage of business use the company will use the car for, you claim that portion of the GST on acquisition, and that portion of the various running costs, including depreciation. And that’s it. If that business percentage changes from year to year, you adjust the GST claim every balance date, and alter what percentage of business expenses you claim the following year. Your Staples Rodway tax adviser will be all over this, so make contact if you think there might be some opportunities for you to put your existing vehicle into your company or, who knows, you might want to treat yourself to a new car.
The Commissioner has issued a statement to help us work out the taxable value where an employer providers accommodation to an employee. As ever, the basic tenet is that the value of accommodation needs to be a market rate as if the employer was providing the accommodation to an arms-length tenant. So, nothing new here. We need to take into consideration location, access to amenities, building value, number of bedrooms, size, parking, condition, and anything that inhibits the tenant from full use. However we cannot take into consideration factors like the employee having to live in and on the employer’s property and thereby be available 24/7. IRD’s view is that those factors are personal to the employee and do not affect the market value of the rent. I’ve always wondered what value IRD attributes to the rented house attached to the local Police Station in which the poor copper and their family are forced to live among the graffiti, the ever-present threats to safety, and general abuse! I could go on – so I will.
Where a property’s rental cannot be determined with any accuracy (perhaps because it is a farm and it would never be rented to the general public) you need to use the rate that others are using in your area for general public rental. The Commissioner also states that if you provide a number of houses to your employees (farmers do this all the time), you cannot average the rental and attribute that amount to all employees. The market rent for each property must be determined separately.
In future, employers who provide employees with accommodation are going to come under intense scrutiny. This is the point of these new rules. Employers will no longer be able to just roughly estimate the value of the accommodation they provide to employees. Farmers for instance are going to have to get market rental valuations, ask a real estate agent, do some research of comparable properties, go to Trade Me etc. to work out the value of the rent, and document it! Needless to say, any contribution by the employee comes off the taxable value of the accommodation.
There has been no change to how free or subsidised accommodation is taxed. It is still considered to be employee remuneration and it is subject to PAYE. This means the employer “grosses” up the value of the accommodation by the employee’s effective tax rate and pays PAYE to IRD on a monthly basis in the normal way. Remember because employer subsidised accommodation is dealt with under the PAYE rules, it is added into an employee’s taxable income. This means it could push the employee into a higher tax bracket, and it forms part of the child support, student loan and Working for Families calculation. FBT is not payable on employee accommodation even though it is a non-cash benefit and feels like a fringe benefit.
We have recently become aware of a potential problem where a contractor provides an invoice for working to say 31st March, and that invoice is not paid until 20th April when withholding tax (WHT) is deducted by a labour hire firm. That WHT will be reported on the labour hire firm’s April EMS form. The question arises as to whether the contractor accrues income into the March period or operates on a cash basis so their earnings match to their earnings summary. If they accrue their income they cannot request a transfer of the WHT in the April period back to the March accrual period on their own account. This means we are going to have the same mismatch we currently have with interest and RWT. In other words, we will have tax to pay in the current year because the tax credit from April cannot be dragged back to March, and the following year we will receive a refund as we will have paid too much tax.
If “the contractor” is a sole trader with no staff and little capital equipment, we should be able to apply the principle established in FCT v Firstenburg (1977) 6 ATR 297 and FCT v Dunn (1989) 89 ATC 4,141 whereby the contractor accounts for income on a cash basis. In those decisions it was held that for professional taxpayers who earn income as a direct result of their personal exertions and do not have high levels of stock or accounts receivable, and do not use employees or assets in a significant way to generate their income, they could prepare accounts on a cash basis. In this case, their earnings for tax purposes would match their IRD earnings summary. However, if the contractor was a company, the normal rules will apply and you are going to have to accrue the income to balance date. And because you cannot accrue the tax credit, you will have tax to pay this year, and over-pay tax next year. A less than ideal result.
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