Business and Tax Updates August 2024: IBBZ Accounting

Summary:

As we bid farewell to winter, we're excited to welcome the arrival of spring! This season of renewal brings fresh opportunities for growth, both in nature and in business. 

Let's embrace the new beginnings that spring brings and look forward to a season full of growth, prosperity, and success! As we enter spring, we are reminded of the importance of growth and renewal in both life and business. Just as nature blossoms with new energy, we too should take this time to plant the seeds for future success.

Tax Updates

Claiming depreciation for the relatable items of the depreciable property

Based on the latest consultation from IRD under the Income Tax Act 2007, depreciation on property can be complex to determine whether based on an item is part of a depreciable property or a separate entity. To claim depreciation or a full deduction in the year of acquisition, the property must meet specific requirements: it must be used to generate income, owned by the taxpayer, and classified as depreciable. The decision to depreciate an item or deduct it as an expense depends on indicators such as physical and functional distinctness, functional completeness, and whether it serves a different function from other items. If an item is related to a depreciable property, it should be depreciated with that property; otherwise, it can be deducted as an expense.

Tax obligation of individuals who invest in share investment

As an individual investor, it’s crucial to be aware of your tax obligations, particularly when it comes to dividends, share sales, and interest from foreign investment funds (FIFs). The FIF rules differ from standard tax regulations, and if you’re a New Zealand tax resident holding FIF investments exceeding $50,000 (based on the acquisition cost, not market value), these rules will apply to you. You are required to declare your FIF investments in your tax return, including an overseas income summary with the source of the income. Depending on the FIF calculation method used, you might need to report income even if no actual returns or gains were received.

Disclosure requirements under FIF can vary, especially if the foreign company is in a country with a double tax agreement with New Zealand or if you hold less than 10% of the shares. In such cases, using methods like the fair dividend or comparative value might still require you to report income.

Look-through companies and the Bright-line test

Inland Revenue has released a draft statement on how the bright-line test applies to residential land transactions involving Look-Through Companies (LTC), effective from 1 July 2024. If the property has been transferred from individual to LTC owners, LTC transfers residential to LTC owners, or company that owns residential land transferred or ceased to be LTC and LTC owner disposed some or all their shares to owns residential land then the application of brightline test would vary. Moreover, the application of brightline test is determined based on the factors such like the disposal of residential land, main home exclusion and rollover relief under s FD1.

Income Tax: Deductibility of bonus payments and share-funded bonuses

A recent ruling addressed the deductibility of bonuses paid by companies using funds from share issues. It was determined that such bonus payments are deductible under section DA 1 of the Income Tax Act 2007, if they are incurred during business operations. The ruling confirmed that these payments were not capital in nature, nor were they part of a tax avoidance arrangement. This ensures that bonus payments are aligned with business operations and qualify for tax deductions.

Compulsory Zero Rating (CZR) rules: Supply of standing timber and unserved crops

Supplies of Standing timber and unsevered crops qualify as land under the compulsory zero-rating (CZR) rules for GST under section 11(1) (mb) of the Goods and Services Tax Act 1985. Supplies of standing timber and other unsevered crops are subject to GST rules depending on several factors. If the supply is for crops that will benefit from future growth, such as a long-term timber contract, it qualifies as land and is zero-rated under the compulsory zero-rating (CZR) rules. However, if the crop is ready for immediate harvest or the growth process is complete, it is treated as a supply of goods and is standard rated. This distinction is crucial for determining the correct GST treatment. 

Business Updates

Cost of Living Relief: OCR cut brings positive change

Finance Minister Nicola Willis has welcomed the Reserve Bank's decision to lower the Official Cash Rate (OCR) to 5.25%, marking a significant step in addressing New Zealand’s cost-of-living crisis. This reduction is expected to ease financial pressures on families and businesses by lowering mortgage and credit card interest rates. Along with recent tax relief measures, the OCR cut aims to further reduce living costs and boost confidence in economic recovery. The move reflects progress in managing inflation and supports the Government's ongoing efforts to stabilize the economy.

New national infrastructure agency to launch on 1 December

Starting 1 December 2024, the National Infrastructure Agency (NIA) will replace Crown Infrastructure Partners (CIP) to enhance New Zealand’s infrastructure development. The NIA will facilitate private sector investment, manage central government infrastructure funds, and administer complex financing and procurement models. Besides, New Zealand's Government is developing a 30-year National Infrastructure Plan, set to be delivered by December 2025. This comprehensive plan aims to guide the country’s infrastructure development by identifying long-term needs, planned investments for the next 10-15 years, and priority projects and reforms. According to Infrastructure Commission, the plan will include an Infrastructure Needs Assessment, a National Infrastructure Pipeline, and an Infrastructure Priorities Programme (IPP).

Government’s new employment action plan

The Government's new Employment Action Plan, released on 28 August 2024, aims to enhance employment outcomes by integrating welfare, education, and immigration systems to better equip New Zealanders with the skills needed for the workforce. This plan focuses on quickly getting people into work and helping them stay employed, supporting skill development, and improving job matching for employers and employees. It includes 12 actions across various portfolios, replacing the previous strategy and population-based plans.

ACC Regulatory changes to improve treatment access

Starting 1 December 2024, new regulatory changes will enhance ACC claimants' access to treatment by expanding the list of approved medical professionals. Paramedics and audio metrists will now be included as treatment providers, facilitating easier access to care, especially in rural areas and urgent care clinics. The updates also involve refining the definitions of acupuncturists, audiologists, and nurses to align with current standards and regulatory bodies. 

Government lifts loan affordability assessment rules

As of today, the Government has removed prescriptive requirements from the Credit Contracts and Consumer Finance Act (CCCFA) regulations regarding loan affordability assessments. While lenders are still required to make reasonable inquiries to assess a loan's affordability, the detailed rules have been lifted. The revised Responsible Lending Code provides updated guidance to help lenders manage risks associated with unaffordable lending and support the responsible use of new flexibility. Lenders must continue to keep accurate records of their assessments to comply with the CCCFA. This change is part of broader financial services reforms aimed at streamlining regulations and reducing compliance costs.