New Finance Bill tries to plug loopholes

Circumvention of rules relating to direct and indirect tax, student allowance and Working for Families may become impossible with changes proposed by the Government to the laws in force.

As we wrote this piece, Parliament was debating the GST and Remedial Matters Bill on urgency, and with its assured numbers, the Government would be able to obtain ample support to make the changes effective from April 1, 2011.

Among the proposed changes is reduction of Corporate Tax to 28% (form 30%) which would have no argument from any quarter, expect perhaps Labour.

Finance Minister Bill English and Revenue Minister Peter Dunne introduced the Standard Order Paper (SOP) to Parliament, intending to broaden the definition of income for social assistance and prevent people structuring their income to increase entitlements.

It disables attribution of losses from Loss Attributing Qualifying Companies (LAQCs) and introduction of a New Look-Through Company (LTC) option.

According to the SOP, non-residential building fit-out is still depreciable.

KPMG Tax Partners Paul Dunne and John Cantin described the changes as substantial (the SOP was of the same size as the Tax Bill) and that they would affect many taxpayers including businesses.

“While the amendments have received some public consultation, their introduction at this late stage of the Tax Bill means that the normal legislative process, including consideration by Select Committee and public submissions on the draft legislation, will not be followed.

“Taxpayers and officials should be wary of unintended consequences,” they said.

Qualifying companies

In terms of the new Bill, shareholders in LAQCs cannot claim losses of the company against their personal income.

Existing qualifying companies and LAQCs can continue to use the current rules (other than the attribution of losses) pending a review of the dividend rules for closely held companies.

Editor’s Note: Our Tax Expert Vijay Talekar had provided a detailed analysis on this subject (No thoroughfare to Look Through Regime) in his regular column in our November 1, 2010 issue.

Paul Dunne said the key concern was the ability for shareholders in LAQCs to have losses attributed at their marginal rates with income “trapped” at the (usually lower) company rate.

“The issue was exacerbated by common use of LAQCs for holding rental property investments and Government’s concerns with the tax losses incurred by this sector. The changes in the SOP broadly reflect the proposals on which consultations were held earlier,” he said.

Income determination

Entitlements for social assistance will also change with the addition of a number of items for assessment of qualifications.

Mr Cantin said the changes were in response to concerns that people can currently structure their tax affairs to maximise entitlements to Working For Families credits and other social assistance benefits, by minimising the income, which counts towards their entitlement.

“We support changes to improve the integrity of the tax and social assistance systems. However, the changes are wide ranging and go beyond the information that would normally be maintained by individuals to calculate their tax position,” he said.

Paul Dunne agreed, saying that taxpayers will face the problem of compliance and IRD will find it difficult to audit.

“The cost-benefit trade-off, despite the commentary in the regulatory impact statement on the changes, appears skewed.

“There also appear to be some mismatches between the fact sheet and the draft legislation. For example, it will be trustee income that is attributed and not trustee distribution. These inconsistencies need to be resolved,” he said.

Social Assistance Entitlement

Additional items included

  • Trustee income (including attributed income from trust-owned companies) attributed to settlors of a trust. The definition of a Settlor would exclude those who provide services to administer the trust or maintain its property
  • Fringe benefits that are easily substitutable for cash, such as motor vehicles and low interest loans, if derived by a shareholder-employee of a company
  • Passive income of over $500 derived by children
  • Income from “unlocked” Portfolio Investment Entities (PIEs) such as Cash PIEs (KiwiSaver PIE income will not be counted)
  • Income from a non-resident spouse
  • Tax exempt salary and wages
  • Deposits into income equalisation schemes
  • 50% of private pensions and annuities
  • Payments used to replace income or to meet living expenses if they exceed $5000.

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