Categories: Previous Articles
      Date: Jul  7, 2013
     Title: July 2013 Tax Update

In this issue:

• Overseas Exchange Gains are Taxable
• Foreign Superannuation & Pensions
• Mixed-use assets
• Land-related lease payments
• Benefits of Look-Through Companies

Overseas Exchange Gains are Taxable

Most gains derived by NZ tax residents on the following foreign-denominated instruments are taxable in NZ:

• Overseas bank accounts
• Overseas term deposits
• Overseas bonds
• Overseas loans and mortgages e.g. borrowings from a foreign bank

The gains will either be taxable on an unrealised basis (based on exchange rate movements from year to year) or on a realised basis i.e. when the investment matures or loan is paid off.

In some cases, exchange losses on these instruments may be tax deductible.

If you believe these issues may affect you, please contact us to discuss.

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Foreign Superannuation & Pensions

The Government has issued a tax Bill proposing to make significant changes to the taxation of interests in foreign superannuation schemes and pensions held by New Zealand tax residents.

The key proposals are:

• From 1 April 2014, these interests will be taxed on a cash basis(*)
  
• From 1 April 2014, the FIF regime, company regime and trust regime will cease to apply to these interests(*)
• Regular pension payments will be taxed on a cash basis
• Lump sum withdrawals will also be taxed on a cash basis.  There are two taxing methods that may apply, but the default method taxes a portion of the lump sum depending on how long the person has been in NZ.  For example, if a person has been in NZ for 5 years, 23.07% of the lump sum is deemed to be income.  If the person has been in NZ for 20 years, 82.28% of the lump sum is deemed to be income.
• The 4 year tax exemption for new migrants and certain returning ex-patriates will continue to apply, so any cash amounts paid from the overseas fund during that 4 year exemption period will not be taxable
• A concessionary measure is proposed which allows a person to either pay 15% on a lump sum withdrawal occurring before 1 April 2014, or apply the current rules
  

(*Unless the FIF regime has always been used and the taxpayer elects to keep using the FIF regime)

If you have an interest in an overseas superannuation or pension scheme, it is critical that you consider your NZ tax position and whether it is possible and tax effective to transfer the overseas fund to a NZ equivalent, given the tax cost of any transfers after 1 April 2014 is likely to be significantly higher than transfers occurring prior to 1 April 2014.

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Mixed-Use Assets

The draft legislation proposing changes to the taxation of higher-value assets used for both income-earning and private purposes (mixed-use assets) has been reported back.  The recommended changes include:

• The new rules will apply to boats and aircraft from 1 April 2014
• The new rules will apply to holiday houses/baches from 1 April 2013
• The new rules will only apply to houses, boats and aircraft

As the new rules are likely to be retrospective for holiday homes and baches, the tax deductions previously available for these assets in the current year will significantly reduce.  If you have a holiday home or bach used for both income-earning and private purposes, you should consider the effect of the proposed rules on your 2013/2014 tax year.

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Land-Related Lease Payments

The Inland Revenue have released an Issues Paper proposing further changes to the taxation of land-related lease payments.

Under the new proposals:

• payments for leases or licences of land for a term of less than 50 years would be treated as deductible to the payer and taxable to the recipient.
• A separate timing rule would spread the income and deductions over the term of the land right
• Payments derived by tenants of residential premises are excluded from the proposals
• Lease modification payments made by commercial tenants that are currently non-deductible would become deductible
• Payments for a permanent easement would become non-taxable to the landowner (currently taxable)
• The timing rules for income from key money would also be rationalised and spread over the term of the lease rather than the current 6 year period.

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Benefits of Look-Through Companies

A Look-Through Company (LTC) is a normal company for company law purposes, but one which has made a tax election to become tax transparent.  This means all of its income, deductions, tax credits, assets and liabilities are deemed to be derived, incurred and held by the shareholders for income tax purposes.

The LTC regime is a very useful regime, which can offer numerous benefits and advantages including:

• Taxable income can flow through to shareholders on marginal tax rates of 10.5% (incomes between $0-$14,000) and 17.5% (incomes between $14,001 and $48,000), rather than being taxed at the company tax rate of 28%. 
  
• Tax losses can flow through to shareholders and be used by shareholders, rather than being trapped in the company
• Where shareholders are individuals in the safe harbour, the shareholders will not incur use of money interest whereas the company would.
• If the company trades overseas and pays overseas taxes, double taxation will not generally arise where the company elects to be an LTC.  However, if the company does not make the LTC election, double taxation of overseas profits will arise where overseas tax is paid.
• In a restructuring, assets can be sold by an LTC to related parties without creating adverse income tax implications.  Such a sale by a non-LTC company would likely create taxable associated person capital gain amounts.
• If a capital asset or business is sold by an LTC, the capital gain can be distributed to shareholders without having to wind up the LTC company.  A non-LTC company would usually have to wind up for the gains to be distributed tax-free.
  

If you are planning to make an investment, purchase a business or believe your existing company would benefit from the LTC regime, please contact us to discuss.