It is common for trade suppliers to provide gift cards and products to trade customers as a rebate of promotions. These may be received by the trade customer (business) or the employee of the trade customer. Some of gift cards may be classified as ‘open loop’, meaning that the prepaid card is accepted only by specific merchant(s), or ‘closed loop’ where the prepaid card is co-branded with a credit card and may be accepted anywhere the credit card brand is accepted.
Inland Revenue has released draft guidance (PUB00462) on the income tax treatment of gift cards and products provided as trade rebates or promotions to businesses and employees. In summary, it provides that:
- Any gift cards received by the trade customer (the business) are taxable income equal to the face value of the card.
- Products received by the trade customer (business) are taxable income in the amount of their realisable (second hand) value, and not depreciable.
- ‘Open loop’ gift cards received by employees of the trade customer are taxable as employment income (with PAYE obligations) as they are cash.
- ‘Closed loop’ gift cards received by employees of the trade customer are taxable as unclassified fringe benefits (with FBT obligations).
- Products received by employees of the trade customer are taxable as unclassified fringe benefits (with FBT obligations).
I expect the compliance with this is extremely low and this draft guidance is most likely a shot across the bow to many trade businesses whose employees receive fast food vouchers, clothing, appliances, travel and other perks from their trade suppliers. I think we will see more audit activity in this area.
On a similar theme to the trade rebates/gifts discussed above, employees often collect personal Airpoints Dollars for work-related travel paid for by their employer. The Airpoints Dollars can then be used by an employee to subsidise personal travel, upgrade personal flights/baggage allowances, or purchase goods at the Airpoints Store.
Inland Revenue has considered the treatment of the benefit to the employees in a binding product ruling (BR Prd 24/05).
Oddly, unlike the trade rebates above, the receipt of Airpoints Dollars and rewards are not considered taxable income or fringe benefits for employees. This appears to be due to the Airpoints Dollars not being convertible into cash or redeemed, sold, assigned or otherwise transferred by a Member for cash or any other form of consideration.
The ruling however does not provide guidance on whether the receipt of Airpoints Dollars is taxable when received by business owners.
Migrants arrive in NZ with offshore assets. In some cases, they are entitled to a four-year transitional residency exemption from NZ income tax on overseas-sourced passive income. However, there has been uncertainty around whether gains derived from crypto assets held in overseas centralised and decentralised exchanges would be considered to have a NZ-source (and therefore result in income being taxed during the four-year exemption period).
To provide guidance on this, Inland Revenue has released a technical decision summary concluding that, income from cryptoasset sales held in overseas exchanges should not have a source in NZ. While there is a contract involving a NZ tax resident, the actions that constitute acceptance and performance will be carried out over the exchange and outside of NZ, such that there should be no NZ source. However, this may not be the case where the NZ holder of the cryptoassets is actively conducting a business or trading activity in NZ that involves the sale of cryptoassets.
The foreign investment fund (FIF) rules apply when a NZ resident has more than $50,000 of foreign equity investments (shares or units).
In a nutshell, the rules require the investor to ignore dividend income and instead pay tax on fictitious income which is generally calculated based on 5% of the value of the investments at the beginning of a tax year, or the total return across the year (appreciation + dividends).
A well-known issue with the rules is that they tax unrealised gains and, when the investments are ultimately sold, the investor may face a capital gains tax in the source country in addition to the tax they have paid early under the FIF rules. For some migrants who acquire these investments pre-migration, such as through employee share schemes, the FIF rules can present a significant barrier to making NZ their home.
In December, an officials’ issues paper was released focused on reducing barriers for migrants. The key proposals considered other methods for taxing FIF investments. The main two methods considered include:
- Revenue Account Method – Migrants’ pre-migration illiquid foreign shares would be taxed only on dividends and gains at disposal, rather than annual deemed income.
- Deferral Method – FIF tax would be delayed until shares are sold, with a deemed 5% annual return applied retrospectively.
These methods are currently being considered only in relation to migrants who become subject to the FIF rules after a specified date, rather than all NZ resident FIF investors. Further, the finer details of the methods being considered mean they may have only limited application. At this stage, the Government has not committed to the changes.
As always, don’t hesitate to reach out if you’d like help to work through the implications of any of these changes.
Alex Cull, Tax Partner
[email protected]
Tax law is always changing.
If you’re reading this long after the published date, please get in touch to see if it’s still relevant.
