Welcome to the updated Staples Rodway Tax Talk.
In this edition we discuss:
Capital gains tax and investment decisions
FBT on Motor Vehicles
Directors’ fees and withholding tax
Planning for tax vacuum
The election has turned out to be more interesting than otherwise expected and, as usual, tax and possible tax changes are getting a lot of attention.
National are not proposing any particular changes other than the already announced tax cuts from 1 April next year. Meanwhile Labour are saying they will, if they lead a government, defer fundamental changes until a working group has met, the government selected its desired recommendations, and then, with an election mandate, implement changes no earlier than 2021.
Tax Working Groups are a relatively regular occurrence but, in most cases, their recommendations tend to be politely ignored. Part of this is caused by working groups either coming up with complex ways around existing tax anomalies or, alternatively, proposing simple but radical new taxes, such as a tax on land values. The last Tax Working Group reported in January 2010, but few recommendations were enacted.
Despite this, Labour does have specific measures ready to go to attempt to deal with (at least in the last decade) some spectacular increases in the price of property. One change is to “ring-fence” losses from rental properties so that it cannot shelter income. Another is to increase the number of years that the residential property “brightline test” from two years to five years (excluding, in most cases, for the family home).
If Labour and the Greens get in it seems inevitable that there will be a wider capital gains tax of some description – but there are still a lot of open questions including when will it start and what will it apply to. While media focus, as always, is on residential house price growth, there is capital appreciation for other assets, including farms, shares and other business assets. Other unknowns include:
- Will it apply to the original cost price of assets or will it be based on market values at the time CGT commences?
- Will CGT take account of inflationary movements?
- What tax rate will apply?
- Is CGT intended to only modify tax behaviours? If so, will other taxes be reduced and, if so, which ones?
For those in business making investment decisions that are for the long term, this could create uncertainty over what shape capital gains tax could have. In effect usual paralysis caused by election uncertainty could be extended from the usual 3 months to 3 years.
FBT on Motor Vehicles - IRD's complete position
Inland Revenue have recently released Interpretation Statement IS 17/07 – Fringe Benefit Tax – Motor Vehicles. The interpretation statement is largely a consolidation of previous guidance provided by Inland Revenue in relation to the work-related vehicle exemption, the emergency call exemption and the business travel exemption and is a relatively user-friendly document.
Inland Revenue have taken the opportunity to tighten up guidance in relation to the business travel exemption and the definition of “made available”. This primarily affects employees with company cars that are travelling and are either utilising their vehicle or parking their vehicle at the airport.
Much emphasis has been placed on the words “made available”, with the decision on whether a vehicle has been made available depending on the actions of the employer and not the actions of the employee. Accordingly, if a member of staff is travelling on business and parks a company car at the airport (or leaves it at home); the employer does not need to account for FBT on the whole days that the employee is absent (that is, the vehicle is not available for private use). However, if a member of staff is travelling for leisure and parks a company car at the airport (or leaves it at home); the employer must continue to account for FBT during the time that the employee is absent.
The specific business travel exemption requires employees to be absent from home with the vehicle for at least 24 hours. Accordingly, if a member of staff is travelling on business and using the company car, then the business travel exemption should apply (subject to the other criteria), and the employer would not need to account for FBT. If a member of staff is travelling on business but parks a company car at the airport (or leaves it at home), then the business travel exemption does not apply, but as the vehicle is not available for private use (see above), the employer would not need to account for FBT on the whole days that the employee is absent.
FBT is an area of tax rife with misunderstandings and common errors, and as a result, Inland Revenue is paying closer attention to this area. Accordingly, it is prudent to ensure that the FBT procedures of your business are in order. A Staples Rodway FBT Review is based on the questions that an Inland Revenue inspector would ask and gives your business this opportunity to check your FBT procedures, but with a friendly face. We might even identify opportunities that are available under the legislation to your business that will please both you and your employees. Please contact your Staples Rodway advisor if you are interested in having an FBT Review.
Directors' fees and withholding tax
Inland Revenue have recently released an interpretation statement outlining the application of schedular payment rules to directors’ fees where the recipient of the payment is a New Zealand resident. The interpretation statement considers what the payer of directors’ fees needs to know prior to deciding whether tax should be withheld and at what rate, and then the obligations of payers with respect to withholding.
The interpretation statement commences by considering the party to whom payment of the directors’ fees is made. While the Companies Act requires the person holding the office of director to be a natural person, for income tax purposes, the answer depends on the contract for providing directorship services. Generally, withholding tax (at a standard rate of 33%) is only applicable to payments of directors’ fees to individual contractors and partnerships. Payments of directors’ fees to other parties (for example, employees or companies) either are subject to tax under other regimes (for example PAYE) or not subject to any form of withholding. Inland Revenue have provided a handy flowchart at page 13 of the interpretation statement that considers this further.
The interpretation statement then considers what a payer of directors’ fees must do when they have determined that a requirement to deduct withholding tax exists. This is particularly important because of changes last April, which mean that recipients can elect a rate of withholding in their IR330C form. Inland Revenue makes it clear that GST exclusive amounts must be used when determining the amount of withholding tax, and that withholding tax should not be withheld on reimbursement payments.
Baker Tilly Staples Rodway comment
Inland Revenue have provided much needed clarity in this interpretation statement, and it helps that this statement is designed to complement a 2015 interpretation statement on the GST treatment of directors’ fees.
Given changes to the schedular payments rules in April, now is a good time to examine directors fees, both for recipients and payers. For payers, where the fees are subject to withholding, it is important to get it right. This means ensuring that you have IR330C forms for each person that you are paying, and withholding at 45% if not. For recipients, there are now opportunities to ensure that the tax withheld is much closer to your anticipated actual tax liability. Recipients in many cases are able to apply a withholding rate as low as 10% as of right.
We can assist you in all these areas, whether it is with budgeted tax calculations to ensure that you have tax withheld at an appropriate rate, whether it is a PAYE review (which includes consideration of schedular payments) or Human Resources reviews.