Lawmakers improve upon Tax Bill

The Finance and Expenditure Committee (FEC) of Parliament has considered the submissions made on the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill (the Tax Bill) and submitted its report to the House.

The original September 2012 Bill contained new deductibility rules for property used both privately and to derive income (mixed-use assets).

A December 2012 Supplementary Order Paper proposed to tax car parks and certain other non-cash benefits provided as salary trade-offs, as well as new rules for taxing certain lease-related payments.

The Tax Bill contains a number of changes to both parts.

Main issues

A key change is confirmation that the proposal to tax certain car park benefits (in Auckland and Wellington CBD) will not proceed.

However, changes would include vouchers (e.g. for groceries and petrol) provided by charities as a taxable fringe benefit and their value will proceed from April 1, 2014.

We welcome the FEC’s recommendation that the FBT on car parks proposal should not proceed, following an earlier Government announcement. This reflects the submissions made by KPMG and others, highlighting the excessive compliance costs of the proposal on employers.

The proposal to restrict expense deductibility for mixed-use assets will proceed, but with a number of improvements (again in response to submissions made to the FEC). The key changes are contained in the Table

The changes to treat lease incentives and surrender payments on revenue account (i.e. taxable to the recipient and deductible to the payer), effective from April 1, 2013, will proceed.

The lease tax changes introduced in December are reasonably straightforward. It is therefore not surprising that the FEC has only recommended some minor tweaks to the draft legislation.

Chandan Ohri and Dinesh Naik are respectively Advisory Partner and Tax Partner at KPMG based in Auckland. The above is an extract from ‘Tax Mail,’ a regular KPMG publication. KPMG is the Sponsor of the ‘Business Excellence in ICT’ Category of the Indian Newslink Indian Business Awards 2013.

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Original proposal

FEC’s recommendations

KPMG comment

Mixed-use asset is an asset used privately and to derive income (subject to certain other qualifying criteria).

The measure should be specifically targeted to holiday homes, and boats and aircraft with a cost of $50,000 or more.

The FEC’s change is a useful targeting of the rules. It will mean that primarily business assets (such as tractors) and private residential properties that change use to rentals will not be caught

Private use for the purposes of determining that the rules apply, is use by the owner (or an associate) or where the asset is let for less than its market rate.

Private use definition for both purposes should be any use by the owner or an associate, or if the asset is let for less than 80% of its market rate.

The consistent definition is welcome as the original proposal led to unintended results. Confirmation that income relating to private use will be non-taxable is a significant improvement.

Private use includes days when the asset is being repaired or moved to a location to earn income.

Private use should exclude days when the asset is being repaired for damage incurred.

This is a welcome clarification. However, there is devil in the detail that will need to be considered.

For mixed-use assets held in close-companies (i.e. 5 or fewer shareholders holding more than 50%), the new rules apply from 2013/14.

For boats and aircraft, the new rules should apply from the 2014/15 income year to allow a transition period for these assets to be transferred from close-company structures.

The 2014/15 deferral is acknowledgement of the additional compliance costs from holding mixed-use assets through close-companies. This is due to the special interest apportionment and deduction quarantining rules that will apply to the company and its shareholders

Ability to opt out of the mixed-use asset rules if the asset makes a loss, or less than $1000 gross income.

The income threshold should be raised to $4000. However, the opt out should not be available for close-companies.

The increase in the income threshold for opting out (i.e. treating the income as non-taxable/expenses as non-deductible) is welcome, but needs to be significantly higher to be effective.

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