FBT rate for low interest loans to increase from 1 January

The FBT rate for low interest loans will increase from 4.78% to 6.71% from 1 January 2023. This will affect low or no interest loans provided to employees as well as loans from companies to their shareholders and shareholder associates.

Use Of Money Interest rates

On 30 August 2022, the interest rate on overpaid (credit interest) and underpaid (debit interest) tax changed to the following:

• Debit interest – 7.96% (up from 7.28%)
• Credit interest – 1.22% (up from 0%)

Claiming depreciation on non-residential buildings

With the reintroduction of depreciation on certain buildings in 2020, it was inevitable that Inland Revenue's 2010 guidance on buildings would be revisited and updated. This has come in the form of IS 22/04, which provides guidance on when building owners can claim depreciation. It considers the meaning of “building” for depreciation purposes and the distinction between residential and non-residential buildings. It also sets out that deductions for depreciation losses are available for non-residential buildings and for some building fit-outs. Depreciation deductions are not available for residential buildings.

The below table summarises the difference between non-residential and residential buildings, including some examples.

Mixed-use buildings

A building owner cannot apportion a mixed-use building for depreciation purposes. A mixed-use building will either be fully depreciable or not depreciable at all based on its predominant use. For example, if most of the building is used for residential purposes, depreciation cannot be claimed on the whole building. This means, it is an all-or-nothing test.

Building improvements

Building improvements must be treated separately to the building in the first year so depreciation loss for the improvement can be claimed. In the second year, the appropriate depreciation rate is the building rate (even if the improvement is still treated as a separate item to the building).

Building fit-outs

Depreciation can be claimed depending on the nature of the building and fit-out. Fit-outs that are structural to the building or used for weatherproofing are treated as part of the building. Otherwise, they are separately depreciable.

Building disposals and change of use

Depreciation recovery income or depreciation loss can arise if a building is sold or the building use changes. Change of use includes situations where a non-residential building's use is amended to residential use, or where a building has suffered damage and been demolished or abandoned.

Additional depreciation loss can only be claimed where a building is rendered useless and demolished or abandoned for demolition. The cause of the damage needs to have been a natural event and beyond the control of the building owner (or their agent or a person associated with them).

Please contact your local Baker Tilly Staples Rodway advisor if you have any queries.

More information heading Inland Revenue’s way

A law change in 2019 gave Inland Revenue more general powers to collect bulk data. For specific bulk data to be collected, a regulation needs to be passed by Order in Council, and this occurred on 14 November in relation to bulk information from payment service providers.

Those providers (including banks, credit card providers and similar) must provide Inland Revenue with the following bulk data on a six-monthly basis, with the first reporting period from 1 April 2023 to 30 September 2023:

• The name and contact information of the merchant, including legal and trading names
• The name and contact details of any individual who acts as a contact person for the merchant in relation to the payment service provider
• The unique identifier for the merchant in the payment service provider’s system
• Other identity information about the merchant, including their date of birth (if the merchant is an individual); and, if held by the payment systems provider, the merchant’s IRD number, GST number, New Zealand Business Number and Companies Office company registration number
• Bank account numbers used by the merchant
• Details of payments processed on behalf of the merchant

Inland Revenue will use this data to detect parties operating in the “hidden economy”. Such regulations and further pending law changes will make it increasingly difficult to hide from Inland Revenue.

Charities and donee organisations

On 10 October 2022, Inland Revenue published the OS 22/04 – Charities and Donee Organisations operational statement. It came in two parts, with Part 1 covering Charities and Part 2 covering Donee Organisations. This is designed to be a go-to guide for entities in the not-for-profit sector and brings together previous guidance into one document.

Charities

Part 1 of OS 22/04 commences with a background look at what a charity is, and the role Charities Services plays in the charitable sector. The operational statement discusses the tax treatment available to charities, including the income tax exemptions, RWT exemption, FBT exclusion and GST concessions. This discussion is comprehensive and designed to be easily read by laypeople on the board of smaller charitable organisations such as churches.

The charitable role played by Māori organisations is also covered, in particular marae and certain trusts established under the Te Ture Whenua Maori Act 1993.

The statement then explains non-resident charities, what happens when an organisation ceases to be a tax charity, and administrative requirements.

Donee Organisations

Part 2 of OS 22/04 covers the donee organisations subset of charities. Donors to donee organisations benefit from donation tax credits, payroll giving tax credits and income tax gift deductions. Part 2 commences by defining donee organisations and which organisations require Inland Revenue approval to obtain donee status.

For an organisation to qualify for and maintain donee status, an entity’s funds must be applied “wholly or mainly” to charitable, benevolent, philanthropic or cultural purposes within New Zealand. The operational statement covers this in some depth, but again in such a way that it is easily read by the layperson.

The operational statement also explains schedule 32 entities (these are approved to be donee organisations by inclusion in schedule 32 of the Income Tax Act by Act of Parliament), and the tax benefits of charitable giving and administrative requirements associated with this.

Payments parents make to their children’s private schools

Inland Revenue has recently issued two "Questions We’ve Been Asked" (QB 22/08 and QB 22/09) that explain the GST treatment of payments parents make to private schools and when a parent’s payment to their child’s private school will qualify for a donation tax credit.

We summarise them here:

GST treatment of payments parents make to private schools

In most cases, payments by a parent, guardian or caregiver to their child’s private school will be subject to GST. This is because the payments are fees paid in return for the supply of education and education-related goods and services by the school. Therefore, in most cases:

• Fees will have GST charged on them; and
• They will not be claimable for donation tax credit purposes

There are, however, limited exceptions, being:

• Any unconditional gifts that parents make to their child’s private school are not subject to GST. Payments are unconditional gifts if the payment has been voluntarily made for the school to carry out its purposes and the payer gets no identifiable direct valuable benefit in return

• Where a private school provides accommodation for a student in a school boarding house, the GST charged in respect of that lodging is subject to a reduced rate of 9%. Generally, the lower rate of GST is only chargeable for the supply of boarding accommodation where the students stay there for more than four weeks in total. This includes ancillary supplies such as power and cleaning, but does not include supplies such as meals, personal care and personal laundry services

Payments made by parents to private schools and donation tax credits

Payments parents make to private schools can be gifts for donation tax credit purposes and exempt from GST where:

• The school is a donee organisation
• The payment is money of $5 or more
• The parent makes the payment voluntarily to benefit the school generally or for a specific purpose or project (payment has not been made under a contract or some other legal arrangement between the school and parent); and
• The parent or child gains no material benefit or advantage in return for making the payment

If any of the above do not apply, then the payment is a fee and is subject to GST.

In the past, some parents have made payments incorrectly called “donations” to private schools in substitution for paying no or low school fees. Inland Revenue’s view is that these are not donations for tax purposes.

A fact sheet to accompany these two Questions We've Been Asked can be found here.

Comment

Inland Revenue has done an excellent job with this two-part commentary. Many charities are run by laypeople who do not have a sophisticated level of tax and charity knowledge yet need to ensure that their charities are compliant with tax and charity legislation. Sufficient information is provided to educate and make compliance much easier.

The only danger with accessible information is that subtleties can be missed. The Baker Tilly Staples Rodway team can assist with your queries regarding charities. Not only do our team act for many charities, but many of our people are involved with charities in their spare time and understand issues at the coal face.