Draft Interpretation Statement – Application of the s CZ 39 bright-line test to certain family and close relationship transactions
On 31 August 2022, the Inland Revenue published PUB00351 – Income Tax – Application of the s CZ 39 bright-line test to certain family and close relationship transactions and accompanying fact sheet. The Interpretation Statement considers the requirements of the bright-line test for residential land in s CZ 39 of the Income Tax Act 2007 and how it applies to certain family and close relationship transactions, where the ownership of residential land changes from:
- Parents to child to assist the child with buying their first home;
- One partner to themselves and their new partner; and
- All the beneficiaries who inherit the land under a will or rules of intestacy to some of the beneficiaries.
The test under s CZ 39 requires income tax to be paid on amounts derived from the disposal of residential land acquired and disposed of within the bright-line period of 5 years (s CZ 39 applies if a person first acquired an estate or interest in residential land on 29 March 2018 to 26 March 2021 inclusive).
The s CZ 39 bright-line test does not apply if the main home exclusion (s CZ 40 applies). The transactions considered in this statement are not the main home of the person disposing of it or a beneficiary of a trust, therefore the main home exclusion is not considered.
The Commissioner of Inland Revenue has determined that the s CZ 39 bright-line test applies to the following family and close relationship transactions because a person has derived an amount from disposing of residential land (assuming all other requirements of s CZ 39 are met):
- A disposal from parents, as individuals, to their child;
- A disposal from a company (which is not a Look-through-company) where the parents are shareholders, to their child;
- A disposal from parents, who are the trustees of a trust, to their child who is a beneficiary of the trust;
- A disposal from one partner to themselves and their new partner, to the extent of the new partner’s share in the land;
- A subsequent disposal from the two partners to a third party; and
- A disposal from beneficiaries under a will or rules governing intestacy to a third party to the extent that the disposal interests are not their original shares acquired under a will or rules of intestacy.
If the amount derived from the disposal is below market value, it is treated as being the market value.
The Commissioner of Inland Revenue has determined that s CZ 29 does not apply to the following family and close relationship transactions involving residential land:
- A disposal from parents who are nominees or bare trustees for their child to their child;
- A disposal from a person who dies to an executor or administrator;
- A disposal from an executor or administrator to the beneficiaries under a will or rules governing intestacy;
- A disposal from some of the beneficiaries under a will or rules governing intestacy to the other beneficiaries; and
- A disposal from beneficiaries under a will or rules governing intestacy to a third party to the extent of their original shares in the land acquired under the will or rules governing intestacy.
The outcomes in the scenarios apply regardless of the relationships of the parties.
While the scope of the draft statement focuses on s CZ 39, the Commissioner of Inland Revenue notes that the same conclusions are likely to apply to s CB 6A. A separate interpretation statement on the application of the 10-year bright-line test in s CB 6A is intended to be released at a later date.
Deadline for comment is 12 October 2022.
QWBA – Deductibility of overseas expenses
On 30 August 2022, Inland Revenue published Question’s We’ve Been Asked (QWBA) QB 22/06 - Deductibility of overseas travel expenses. This considers whether income tax deductions can be claimed for overseas travel costs (other than meal costs) and how to apportion costs when only part of the total amount incurred is deductible. The Commissioner of Inland Revenue’s view is that income tax deductions can be claimed for overseas travel costs (other than meal costs) but only to the extent that they have a connection with deriving assessable income or carrying on a business. Deductions cannot be claimed for any part of the costs that are of a private or domestic nature, of a capital nature, or incurred in deriving exempt income or income from employment. If the costs need to be apportioned between deductible and non-deductible amounts, then this must be done on a basis that is reasonable in the circumstances. The QWBA discusses previous Tax Review Authority cases and provides several examples.
Draft Determination – Depreciation Rates for automated ship mooring systems
On 30 August 2022, the Inland Revenue published draft determination ED00244 - Tax Depreciation Rates for automated ship mooring systems for consultation. This determination sets depreciation rates for automated ship mooring systems (AMS) that are used for mooring ships at wharves and port facilities. A generic asset class description is introduced to cover the varied designs for AMS technology with the proposed estimated useful life and depreciation rates of:
- Estimated useful life: 10 years
- DV Rate: 20%
- SL Rate: 13.5%
Deadline for comment is on 13 October 2022.
Inland Revenue – Long-term insights briefing
Public service agencies are required to publish a long-term insights briefing at least once every three years. These aim to provide information on medium and long-term trends, risks and opportunities and impartial analysis on possible policy options.
Inland Revenue’s final briefing Tax, foreign investment and productivity – long-term insights briefing and it’s technical appendices were presented to the House of Representatives on 30 August 2022. The briefing examines how New Zealand’s tax settings are likely to affect costs of capital (or hurdle rates of return) for investment into New Zealand and the implications for productivity and economic performance. It also considers the pros and cons of a set of policy reform options that could affect cost of capital. Some points from the briefing are:
- Compared to other OECD countries, New Zealand appears to have relatively high taxes on inbound investment. These taxes are likely to mean higher costs of capital (or hurdle rates of return) for investment into New Zealand than for investment in most other OECD countries.
- High taxes on inbound investment have the potential to reduce economic efficiency and be costly to New Zealanders by reducing New Zealand’s capital stock and labour productivity.
- The briefing suggests that, despite New Zealand’s broad-based income tax settings, there is likely to be considerable variability in costs of capital. This variability is increased significantly by quite small levels of inflation, especially while real interest rates are low.
- The briefing considers several possible tax changes;
- A cut in the company tax rate;
- Accelerated depreciation provisions;
- Inflation indexation of the tax base;
- A higher thin capitalisation rule safe harbour;
- An allowance for corporate equity;
- Special industry-specific or firm-specific incentives; and
- A dual income tax system.
Inland Revenue also released the Public submissions and external reviews received on the draft long-term insights briefing.
Draft QWBA’s: Payments made by parents to private schools
On 15 August 2002, Inland Revenue published PUB00341 which is two draft Questions We’ve Been Asked (QWBA) QB 22/XX Income Tax – Payments made by parents to private schools and donation tax credits and QB 22/XX Goods and Services Tax – Payments made by parents to private schools. The draft QWBA’s are accompanied by a fact sheet.
When will a parent’s payment to their child’s private school qualify for a donation tax credit?
Payments parents make to private schools are gifts for donation tax credit purposes where:
- The school is a donee organisation;
- The payment is money of $5 or more;
- The parent makes the payment voluntarily to benefit the school either generally or for a specific purpose or project; and
- The parent or child gains no material benefit or advantage in return for making the payment.
There are no donation tax credits for any payments paid by parents to private schools incorrectly described as “donations” (Revenue Alert 14/01).
When will a parent’s payment to their child’s private school be subject to GST?
In most cases, a parent’s payment to their child’s private school will be subject to GST. Private schools make taxable supplies of education and education-related goods and services to parents. Usually, schools will charge GST on these supplies at the standard rate of 15%. However, there can be exceptions, in particular:
An “unconditional gift” a parent makes to their child’s private school is not subject to GST; and
Some of the boarding fees a parent pays to their child’s private school can be subject to GST at what is, in effect, a reduced rate of 9%.
Consultation closes 26 September 2022.
Draft Interpretation Statement – Company losses – ownership continuity and losses
On 12 August 2022, Inland Revenue published a draft IS PUB00398 – Company losses – ownership continuity, sharing and measurement which considers the rules applying to company losses, including carrying forward losses, sharing losses and the measurement of ownership interests.
This draft statement includes examples and diagrams and is accompanied by a fact sheet that summarises key requirements for carrying forward a loss to a later year and for sharing a loss with a profit company.
Deadline for consultation is on 23 September 2022.
Interpretation Statement – Attributing interest in a foreign investment fund and the fair dividend rate method
On 1 August 2022, Inland Revenue published FDR 2022/01 - A type of attributing interest in a foreign investment fund for which a person may use the fair dividend rate method (Units in the Two Trees Global Equity Macro Fund – Class Z).
Any investment by a New Zealand resident investor in units in the Two Trees Global Equity Macro Fund — Class Z, to which none of the exemptions in ss EX 29 to EX 43 of the Income Tax Act 2007 apply, is a type of attributing interest for which the investor may use the fair dividend rate method to calculate foreign investment fund income for the interest.
The determination applies for the 2023 and subsequent income years.
