September was a busy month. I went to Auckland to visit clients and celebrate the arrival of a new nephew. My family also adopted an abandoned lamb, whom Isaac named Jennifer. I read ‘Humankind’ by Rutger Bregman, which I thoroughly enjoyed, and I completed the first of many lawn mowings for spring.
It was a less eventful month in the world of tax. The bill which was introduced in August has now gone through its first reading but is still a while away from enactment. As always, Inland Revenue has been busy producing guidance and consultation documents on a variety of topics, including:
- The treatment of costs to travel between home and work
- Forestry activities registered in the Emissions Trading Scheme
- The income tax treatment of short-stay accommodation (Airbnbs)
- Carrying losses forward under the business continuity rules
- Company amalgamations.
We are also seeing a lot more investigations activity, as Inland Revenue has hired more staff and made it to the end of the covid-related subsidy and loan checks they have been focused on.
For more on these, please read on.
– Alex
Most employees who travel to their place of work daily do so in their own vehicle. This is generally accepted as a private expense and a tax deduction is unavailable to the employee or their employer. However, there are situations which are less clear including when an employee is required by their employer to take a company vehicle home to safely store or charge it, or when an employee or sole trader may travel straight from their home to a worksite.
Inland Revenue is seeking feedback on a draft interpretation statement (PUB00453) setting out how they will apply the relevant laws. In summary, the base position in the statement is that travel between home and work will be private and non-deductible, but with four exceptions:
- A vehicle is necessary for the taxpayer to transport equipment or instruments (goods) that are essential to their work between their home and workplace for use at both their home and their workplace.
- The taxpayer’s work is itinerant. It requires, broadly, that the taxpayer works at different locations during a workday.
- The taxpayer responds to emergency calls from home.
- The taxpayer’s home is a workplace or base of operations for the purposes of travel between home and work. For this exception to apply, it requires more than that the taxpayer does some work at home.
If these situations apply, the owner of the vehicle (employer or business) may be able to claim a tax deduction for running cost of vehicles they own, or for a reimbursement paid to an employee for using their private vehicle.
This is a complex topic, and Inland Revenue has issued some helpful guidance for consultation (PUB00452) on the tax implications of the ETS. You should know if you are in the ETS and it is not an area many advisors deal with, but if you are interested in it, here is a summary.
If a person deforests land that was a forest before 1990, or post-1990 forest land that is ETS-registered, there is a requirement to surrender one emissions unit (NZUs) per tonne of emissions from the deforestation.
Similarly, by planting and holding forestry, a person may receive NZUs for no cost, which could be sold at the current market price of $61.78, or kept for surrender on deforestation. If they choose to sell the NZUs, they may need to later purchase them back before they deforest the land, deregister from the ETS, or sell a forest or forestry interest.
For GST purposes, all transfers of NZUs are zero-rated (GST at 0%) so there shouldn’t be GST implications. For income tax purposes, NZUs are revenue account property so a sale can result in taxable income.
That is certainly an oversimplification, and there are several forms of NZUs and iterations to the ETS. Therefore, if you are purchasing forestry and/or considering entering the ETS, this document is a good starting point to understanding how it all works.
“Short-stay accommodation”, “visitor accommodation”, or an “Airbnb” all refer to accommodation where the guest does not stay on a permanent basis and does not have “quiet enjoyment” of the premises.
It is a common form of supplementary income for many in Queenstown Lakes but can bring with it some rather complex tax issues. To help operators meet their tax compliance, Inland Revenue has issued some question-and-answer documents covering:
- Renting a part of your home, or a dwelling on the same property (PUB00487a).
- Renting your home when it is also used privately (PUB00487b).
- Renting a home that is held in a trust (PUB00487e).
My guess is that Inland Revenue is publishing these before starting investigations using information gathered from booking platforms. This is likely to target hosts who may have rental income which hasn’t found its way into tax returns, or who have coincidentally begun reporting rental income now that information is being provided to Inland Revenue by the booking platforms.
When tax losses are incurred by a company, they can be carried forward to be offset against profits in a future tax year. This is subject to a condition that, at the time the losses are offset against profits, the shareholding has not changed by more than 51% since the losses were incurred (a shareholder continuity of 49% has been maintained).
However, there is an exception to this which allows losses to be kept even when there is a shareholding change of more 51% if the business continuity test (BCT) has been met.
To meet the BCT, the losses must arise after the 2014 tax year, the company must continue its business activities, and there must be no major change in the nature of the business activities unless that change is to increase efficiency, keep up to date with technology, increase the scale of the business via entering a new market, or provide a new type of product or service using the same assets.
This leaves quite a bit of room for interpretation and inevitably has led to situations involving a change in shareholding to enable a person to utilise tax losses they weren’t entitled to through injecting new income streams into an old company with losses.
To address this, Inland Revenue has issued PUB00461 setting out features of arrangements that may be considered tax avoidance and subject to reversal. It is a bit of a minefield, so if you or a client have a company with losses and are considering a shareholding change, get in touch first.
Inland Revenue is seeking feedback on a guidance document (PUB00457) containing information around the treatment of company amalgamations.
Like forestry and the ETS, this is a heavy topic but in summary an amalgamation is the joining of two companies’ so that they may continue as one ‘amalgamated’ company with the other ‘amalgamating’ company ceasing to exist. Amalgamations are often motivated by shareholders who want to pool resources or reduce the number of legal entities under their ownership.
From a tax perspective, there are some concessionary outcomes to be gain from an amalgamation as tax credits or losses of the companies can be combined without income being realised from the transfer of depreciable assets or trading stock.
However, in my experience, amalgamations are often perceived as a simpler way to remove unwanted companies than performing a liquidation. Some advisors don’t realise that the continuing ‘amalgamated’ company will inherit the liabilities of the company it amalgamates with, and often many of the tax benefits of an amalgamation can be obtained under the commonly-owned company rules. Therefore, my preference is to transfer assets and liquidate, unless there are valuable tax losses or imputation credits that would be forfeited through a liquidation.
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.
